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 June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-11599
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:
48,795,514 shares of common stock, $.05 par value per share, as of
August 2, 1999.
AMRESCO, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1999 and
December 31, 1998 3
Consolidated Statements of Income - Three and Six
Months Ended June 30, 1999 and 1998 4
Consolidated Statement of Shareholders' Equity -
Six Months Ended June 30, 1999 5
Consolidated Statements of Cash Flows - Six
Months Ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURE 21
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
AMRESCO, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share amounts)
June 30, December 31
1999 1998
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 59,818 $ 66,422
Loans and asset portfolios, net 1,008,175 943,119
Loans held for sale, net 387,423 694,397
Retained interests in securitizations - trading (at fair value) 382,504 538,977
Asset-backed securities - available for sale (at fair value) 134,650 141,181
Mortgage servicing rights, net of accumulated
amortization of $9,685 and $3,872 84,768 49,387
Intangible assets, net of accumulated amortization of
$48,428 and $34,470 365,491 262,815
Deferred income taxes 6,253 30,755
Premises and equipment, net of accumulated
depreciation of $19,354 and $16,769 24,834 23,223
Accounts receivable, net of reserves of $515 and $696 19,967 20,683
Income taxes receivable 65,937
Other assets 98,294 81,814
TOTAL ASSETS $2,572,177 $2,918,710
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 25,388 $ 43,280
Accrued employee compensation and benefits 17,765 28,420
Income taxes payable 3,539
Notes payable 822,455 957,871
Senior subordinated notes 580,122 580,179
Senior notes 57,214 57,500
Warehouse loans payable 286,513 587,426
Other liabilities 81,665 78,627
Total liabilities 1,874,661 2,333,303
SHAREHOLDERS' EQUITY:
Common stock, $0.05 par value, authorized 150,000,000
shares; 49,819,853 and 49,099,135 shares issued 2,492 2,456
Capital in excess of par 546,793 543,871
Common stock to be issued for earnouts 87,548
Treasury stock, $0.05 par value, 1,024,339 shares in
1999 and 1998 (17,363) (17,363)
Accumulated other comprehensive loss (10,381) (12,651)
Unamortized stock compensation (7,990) (4,981)
Retained earnings 96,417 74,075
Total shareholders' equity 697,516 585,407
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,572,177 $2,918,710
</TABLE>
See notes to consolidated financial statements.
<TABLE>
(CAPTION)
AMRESCO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
REVENUES:
<S> <C> <C> <C> <C>
Interest and other investment income $ 61,928 $101,902 $135,305 $184,951
Gain on sale of loans and investments, net 58,105 34,917 122,474 59,683
Mortgage banking and servicing fees 38,175 31,319 64,782 55,980
Asset management and resolution fees 4,343 4,175 9,180 6,832
Other revenues 1,534 2,929 2,678 8,594
Total revenues 164,085 175,242 334,419 316,040
EXPENSES:
Personnel 63,494 51,928 131,035 93,276
Interest 41,658 62,150 84,481 111,993
Other general and administrative 28,107 17,062 56,830 32,639
Provision for loan and asset portfolio losses (3,882) 6,718 (164) 13,565
Depreciation and amortization 13,495 5,155 24,040 9,431
Total expenses 142,872 143,013 296,222 260,904
Income before income taxes 21,213 32,229 38,197 55,136
Income tax expense 9,109 12,569 15,855 21,427
NET INCOME $ 12,104 $ 19,660 $ 22,342 $ 33,709
Earnings per share:
Basic $ 0.25 $ 0.46 $ 0.47 $ 0.83
Diluted 0.20 0.45 0.41 0.80
Weighted average number of common shares
outstanding
Basic 47,847 42,457 47,762 40,742
Diluted 60,955 44,003 55,059 42,224
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
AMRESCO, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Six Months Ended June 30, 1999
(In thousands)
(Unaudited)
Common Stock
$0.05 par Value
Accumulated
Number Capital in Other Total
of Excess of Treaury Comprehen. Retained Compr. Sharehoders'
Shares Amount Par Other Stock Income(Loss) Earnings Income Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1999 49,099 $2,456 $543,871 $(4,981) $(17,363) $(12,651) $74,075 $585,407
Comprehensive income:
Net income 22,342 $22,342
Other comprehensive income,
net of tax:
Unrealized gain on securities
(net of $445 tax) 684 684
Realized loss on securities
(net of $234 tax) 367 367
Foreign currency translation
adjustments (net of $747 tax) 1,219 1,219
Other comprehensive income 2,270
Comprehensive income $24,612 24,612
Issuance of common stock for
earnout 27 1 194 195
Exercise of stock options
(including tax benefit) 4 33 33
Issuance of common stock for
unearned stock compensation 708 36 6,598 (6,634)
Purchase of subsidiary
- - adjustment related to stock
price change (4,049) (4,049)
Amortization of unearned
stock compensation 3,412 3,412
Common stock to be issued for
earnouts 87,548 87,548
Other (18) (1) 146 213 358
JUNE 30, 1999 49,820 $2,492 $546,793 $79,558 $(17,363) $(10,381) $96,417 $697,516
</TABLE>
See notes to consolidated financial statements.
AMRESCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
1999 1998
OPERATING ACTIVITIES:
Net income $ 22,342 $ 33,709
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on sale of loans and investments (122,474) (59,683)
Depreciation and amortization 24,040 9,431
Accretion of interest income, net 1,802 (10,915)
Provisions for loan and asset portfolio losses (164) 13,565
Deferred income taxes 24,502 (6,525)
Other 8,372 253
Increase (decrease) in cash for changes in
(exclusive of assets and liabilities acquired in
business combinations):
Loans held for sale, net 381,724 (548,403)
Retained interests in securitizations 182,581 (65,644)
Accounts receivable, net 711 3,015
Other assets (22,839) (25,499)
Accounts payable (17,892) 14,507
Income taxes payable/receivable 69,476 (9,303)
Warehouse loans payable (300,913) 453,028
Other liabilities and accrued compensation and
benefits (15,398) 24,469
Net cash provided by (used in) operating activities 235,870 (173,995)
INVESTING ACTIVITIES:
Origination of loans and purchase of asset portfolios (346,210) (476,141)
Collections on loans and asset portfolios 299,285 288,767
Purchase of asset-backed securities - available
for sale (103,891)
Proceeds from sale of and collections on asset-
backed securities - available for sale 6,251 18,653
Origination and purchase of mortgage servicing rights (38,422) (14,489)
Purchase of subsidiaries (23,965) (19,700)
Investment in and advances to equity affiliate (27,580)
Distribution from equity affiliate 1,577 21,439
Purchase of premises and equipment (5,254) (5,879)
Net cash used in investing activities (106,738) (318,821)
FINANCING ACTIVITIES:
Net proceeds from notes payable and other debt 559,131 892,608
Repayment of notes payable and other debt (694,875) (864,427)
Proceeds from issuance of senior subordinated
notes, net of issuance costs 320,828
Proceeds from common stock offering 147,532
Other 8 5,460
Net cash provided by (used in) financing activities (135,736) 502,001
Net increase (decrease) in cash and cash equivalents (6,604) 9,185
Cash and cash equivalents, beginning of period 66,422 25,866
Cash and cash equivalents, end of period $ 59,818 $ 35,051
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 87,649 $ 87,267
Common stock to be issued for earnouts 87,548
Common stock issued for unearned stock
compensation, net 6,421 4,850
Income taxes paid 1,608 27,224
Common stock issued for the purchase of
subsidiaries and earnouts 195 20,968
See notes to consolidated financial statements
AMRESCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
1. Basis of Presentation
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 six month periods
ended June 30, 1999 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, 1998. Certain reclassifications of
prior period amounts have been made to conform to the current period
presentation.
2. Notes Payable and Other Debt
Revolving Credit Agreement
On February 28, 1999, the Company entered into a Third
Modification of the Credit Agreement (the "Credit Agreement") with a
syndicate of lenders led by NationsBank, N.A., as administrative
agent and Credit Suisse First Boston, as syndication agent, to modify
certain financial covenants and to make certain other changes. The
maximum amount available under the Credit Agreement is $737.5 million
(subject to certain requirements such as a contractually determined
advance percentage applied to each asset that is pledged as
collateral under the Credit Agreement). The short and long term
revolving facilities of $167.5 million and $502.5 million terminate
August 11, 1999 and August 12, 2001, respectively, and the term loan
commitment of $67.5 million terminates August 12, 2003. Based on the
current agreement, on August 11, 1999, any amount of the Credit
Agreement drawn on in excess of $570.0 million (the sum of long term
revolving facility and the term loan commitment) would need to be
repaid. At June 30, 1999, $498.0 million was outstanding under the
Credit Agreement.
Notes Payable
On May 1, 1999, a wholly-owned subsidiary of the Company entered
into a Financing Agreement (the "Financing Agreement") in which
approximately $111.4 million of loans made by the Company to small-to-
medium sized local and regional home building companies were financed
by Adjustable Rate Home Builder Loan Notes issued through the means
of a private securitization. The notes bear interest at LIBOR plus
0.95% to 1.30% depending upon classification with the outstanding
principal amount, if any, payable in full on May 25, 2007. At June
30, 1999, $111.4 million was outstanding under the Financing
Agreement.
Senior Notes
On July 1, 1999, the Company repaid the entire $57.2 million
balance of its 8.75% Senior Notes.
Warehouse Loans Payable
On January 11, 1999, a wholly-owned subsidiary of the Company
entered into a Master Repurchase Agreement (the "Repurchase
Agreement") with Bear Stearns Home Equity Trust ("Bear Stearns") for
an amount not to exceed $250.0 million for the sale and repurchase of
certain home equity loans. At June 30, 1999, $42.7 million was
outstanding under the Repurchase Agreement.
On March 31, 1999, a wholly-owned subsidiary of the Company
entered into an amendment of a Secured Note (the "Small Business
Facility") to redefine the maturity date of the Small Business
Facility as December 31, 1999. At June 30, 1999, $67.8 million was
outstanding under the Small Business Facility.
On March 31, 1999, a wholly-owned subsidiary of the Company
entered into an amendment of a Secured Note (the "Franchise
Facility") to redefine the maturity date of the Franchise Facility as
December 31, 1999. At June 30, 1999, $49.8 million was outstanding
under the Franchise Facility.
On March 31, 1999, a wholly-owned subsidiary of the Company
entered into an amendment of a Secured Note (the "Leasing Facility")
to redefine the maturity date of the Leasing Facility as December 31,
1999. At June 30, 1999, there was no amount outstanding under the
Leasing Facility.
On March 31, 1999, a wholly-owned subsidiary of the Company
entered into an Amended and Restated Master Repurchase Agreement (the
"Master Repurchase Agreement") with Prudential Securities Credit
Corporation ("Prudential") to redefine the termination date as
December 31, 1999. At June 30, 1999, there was no amount outstanding
under the Repurchase Agreement.
On April 14, 1999, a wholly owned subsidiary of the Company
entered into a Fifth Amendment to Amended and Restated Warehousing
Credit and Security Agreement (the "Security Agreement") with
Residential Funding Corporation ("RFC") to redefine the commitment
amount as $300.0 million. At June 30, 1999, $29.6 million was
outstanding under the Security Agreement.
3. Shareholders' Equity
On January 15, 1999, February 23, 1999, March 15, 1999, and May
19, 1999, the Company issued options to purchase approximately
255,000, 25,000, 40,000 and 88,000 shares, respectively, of common
stock at market price at the date of issuance. On March 15, 1999,
May 19, 1999 and June 7, 1999, the Company issued approximately
674,000, 27,000 and 7,000 restricted shares of the Company's common
stock (the March 15, 1999 issuance vests over a two year term and the
May 19, 1999 and the June 7, 1999 issuances vest over a three year
term) to employees.
The Company has accrued the value of common stock to be issued
related to certain business acquisition purchase contracts. The
number of shares included in weighted average diluted shares
outstanding related to such purchase contracts is determined at the
end of each reporting period based upon the then current market price
until the shares are actually issued. The value of the common stock
to be issued, which totaled $87.5 million, was accrued at June 30,
1999.
Under the original Agreement and Plan of Merger (the "Original
Agreement") to purchase Mortgage Investors Corporation ("MIC"), the
former owners of MIC were to receive an earnout payment of between
$70.0 million and $105.0 million over a three year period with the
payments structured to be paid 82% in the Company's common stock and
18% in cash. Effective April 12, 1999, the Original Agreement was
amended (the "Amended Agreement") to fix the earnout payment at
$105.0 million with payments remaining at 82% in the Company's common
stock and 18% in cash. Additionally, under the Amended Agreement,
the Company may effect a redemption of the earnout prior to September
30, 1999. In the event the Company elects to redeem the earnout
obligation, a cash payment of $44.3 million would be due on September
30, 1999 and a further cash payment of $51.0 million would be due on
March 31, 2000, with the obligation to make such payments evidenced
by short-term promissory notes. The Original Agreement called for
the issuance of a portion of the common stock consideration on April
30, 1999, which is now delayed until at least September 30, 1999 with
a final installment anticipated on March 31, 2000; provided that the
issuance of common stock in respect of the earnout may be deferred
under certain circumstances. As of June 30, 1999, $86.1 million was
accrued as common stock to be issued for the stock portion of the
earnout related to the Amended Agreement.
4. Segments
The following represents the Company's reportable segment
position as of and for the three and six months ended June 30, 1999
and 1998 (unaudited, in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
1999
Commercial Residential Home
Asset Mortgage Commercial Mortgage Equity
Management Banking Finance Banking(1) Lending(2) All Other Eliminations Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues from external sources $28,450 $41,199 $57,969 $ 14,832 $ 19,553 (3) $2,082 $ - $164,085
Gain on sale of loans and
investments, net 5,048 3,392 24,827 14,148 10,842 (152) 58,105
Interest expense 7,609 1,872 15,977 879 10,156 5,165 41,658
Depreciation and
amortization 196 4,079 2,329 3,810 2,202 879 13,495
Operating income (loss) 10,961 7,090 32,869 (10,826) (12,201) (3) (6,680) 21,213
1998
Commercial Residential Home
Asset Mortgage Commercial Mortgage Equity
Management Banking Finance Banking(1) Lending(2) All Other Eliminations Total
Revenues from external sources $28,740 $47,012 $32,329 $ - $64,448 $ 2,713 $ - $175,242
Gain (loss) on sale of loans
and investments, net 4,188 (1,086) 15,397 16,418 34,917
Interest expense 8,607 11,520 8,595 29,475 3,953 62,150
Depreciation and amortization 199 1,863 887 1,486 720 5,155
Operating income (loss) 11,824 6,518 16,302 10,073 (12,488) 32,229
Six Months Ended June 30,
1999
Commercial Residential Home
Asset Mortgage Commercial Mortgage Equity
Management Banking Finance Banking(1) Lending(2) All Other Eliminations Total
Revenues from external sources $ 59,306 $ 69,931 $ 92,621 $ 53,612 $ 54,632 (3) $ 4,317 $ - $ 334,419
Gain on sale of loans and
investments, net 10,618 4,338 32,109 51,168 24,393 (152) 122,474
Interest expense 15,356 3,543 30,206 2,193 22,436 10,747 84,481
Depreciation and amortization 391 7,055 4,646 5,856 4,167 1,925 24,040
Operating income (loss) 24,368 5,713 40,801 601 (14,995)(3) (18,291) 38,197
Segment assets 568,967 198,385 1,064,410 168,303 424,513 824,313 (676,714) 2,572,177
1998
Commercial Residential Home
Asset Mortgage Commercial Mortgage Equity
Management Banking Finance Banking(1) Lending(2) All Other Eliminations Total
Revenues from external sources $ 55,069 $ 88,432 $ 47,753 $ - $ 119,656 $ 5,130 $ - $ 316,040
Gain on sale of loans and
investments, net 10,801 (430) 17,039 32,273 59,683
Interest expense 15,079 21,444 14,356 52,916 8,198 111,993
Depreciation and amortization 394 3,249 1,617 2,681 1,490 9,431
Operating income (loss) 25,135 13,750 19,246 19,858 (22,853) 55,136
Segment assets 608,164 784,991 560,532 1,582,207 462,515 (317,411) 3,680,998
</TABLE>
(1) Acquired operations August 11, 1998. In July 1999, the Company
ceased its VA refinancing activities and shifted production to FHA
streamlined refinancing.
(2) Discontinued bulk purchases and correspondent operations in late 1998.
(3) Includes a $9.2 million write-down of retained interests in
securitizations due primarily to increased prepayment speeds.
5. Comprehensive Income
The Company's total comprehensive earnings were as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
NET INCOME $12,104 $19,660 $22,342 $33,709
Other comprehensive income
(loss), net of tax:
Unrealized gains (losses) on
securities:
Unrealized gains (losses) on
securities, net of taxes of
$2,132, ($451), $445 and
($524), respectively 3,334 (706) 684 (819)
Realized losses (gains) on
securities , net of taxes of
$234, ($1,367), $234 and
($3,126), respectively 367 (2,138) 367 (4,889)
Foreign currency translation
adjustments, net of taxes of
$259, ($404), $747 and ($338),
respectively 423 (632) 1,219 (528)
Other comprehensive income
(loss), net of tax 4,124 (3,476) 2,270 (6,236)
COMPREHENSIVE INCOME $16,228 $16,184 $24,612 $27,473
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
The Company is a diversified financial services company with
five principal segments: asset management, commercial mortgage
banking, commercial finance, residential mortgage banking and home
equity lending. The asset management segment involves acquiring
asset portfolios at a discount to face value and managing and
resolving such asset portfolios to maximize cash recoveries. In
addition, in its asset management segment, 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 segment involves fee-based origination and servicing of
commercial real estate mortgages and commercial real estate
brokerage. In its commercial finance segment, the Company focuses on
(i) loans to franchisees of nationally recognized restaurant,
hospitality and service organizations, (ii) loans to small business
owners, (iii) real estate structured finance, (iv) communications
finance and (v) single family residential construction lending. The
residential mortgage banking segment, consisting of the acquired
operations of Mortgage Investors Corporation ("MIC"), originates and
sells Federal Housing Administration ("FHA") and Veterans
Administration ("VA") streamlined refinanced loans. The home equity
lending segment involves originating, selling and servicing
nonconforming first mortgage loans.
Revenues from the Company's asset management activities
primarily consist of earnings on asset portfolios, gains on sale of
investments, and fees charged for the management of asset portfolios
and for the successful resolution of the assets within such asset
portfolios. The Company's revenues from its commercial mortgage
banking activities are primarily earned from interest earned on loans
held for sale, gain on sale of loans and fees generated by the (i)
origination and underwriting of commercial real estate mortgage
loans, (ii) servicing of loans and (iii) placement of commercial real
estate mortgage loans with permanent investors. Revenues from the
Company's commercial finance business are primarily earned from (i)
interest and fees on real estate structured finance activities,
communications finance activities, loans to franchisees of nationally
recognized restaurant, hospitality, service organizations and other
small business owners and loans to single family residential
contractors, (ii) accrued earnings on retained interests in
securitizations and (iii) gains on the securitization and sale of
loans. Revenues from the Company's residential mortgage banking
activities consist primarily of cash gains from sales of FHA and VA
streamlined re-financed loans. Revenues from the Company's home
equity lending activities primarily consist of interest earned on
originated home equity loans, accrued earnings on retained interests
in securitizations, cash gains from whole-loan sales of home equity
loans and fees generated by the origination, underwriting and
servicing of home equity loans. Corporate and other revenues
primarily consist of interest earned on investments in residential
mortgage backed securities and other miscellaneous income. Corporate
and other expenses primarily include corporate personnel, overhead
and unallocated interest expense.
Results of Operations
The following discussion and analysis presents the significant
changes in results of operations of the Company for the three and six
months ended June 30, 1999 and 1998 by segment. 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 Six Months Ended
(in thousands, except per share data) June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues:
Asset management $ 28,450 $ 28,740 $ 59,306 $ 55,069
Commercial mortgage banking 41,199 47,012 69,931 88,432
Commercial finance 57,969 32,329 92,621 47,753
Residential mortgage banking 14,832 53,612
Home equity lending 19,553 64,448 54,632 119,656
Corporate, other and intercompany eliminations 2,082 2,713 4,317 5,130
Total revenues 164,085 175,242 334,419 316,040
Operating expenses:
Asset management 17,489 16,916 34,938 29,934
Commercial mortgage banking 34,109 40,494 64,218 74,682
Commercial finance 25,100 16,027 51,820 28,507
Residential mortgage banking 25,658 53,011
Home equity lending 31,754 54,375 69,627 99,798
Corporate, other and intercompany eliminations 8,762 15,201 22,608 27,983
Total operating expenses 142,872 143,013 296,222 260,904
Operating income (loss):
Asset management 10,961 11,824 24,368 25,135
Commercial mortgage banking 7,090 6,518 5,713 13,750
Commercial finance 32,869 16,302 40,801 19,246
Residential mortgage banking (10,826) 601
Home equity lending (12,201) 10,073 (14,995) 19,858
Corporate, other and intercompany eliminations (6,680) (12,488) (18,291) (22,853)
Total operating income 21,213 32,229 38,197 55,136
Income tax expense 9,109 12,569 15,855 21,427
Net income $ 12,104 $ 19,660 $ 22,342 $ 33,709
Earnings per share:
Basic $ 0.25 $ 0.46 $ 0.47 $ 0.83
Diluted 0.20 0.45 0.41 0.80
Weighted average shares outstanding:
Basic 47,847 42,457 47,762 40,742
Diluted 60,955 44,003 55,059 42,224
</TABLE>
Three Months Ended June 30, 1999 Compared to Three Months Ended June
30, 1998
The Company reported a 6% decrease in revenues from $175.2
million to $164.1 million. The decrease in revenues was due
primarily to a decrease in interest income resulting from the Company
holding reduced balances of mortgage loans held for sale as a result
of the discontinuance of the home equity lending capital markets
operation, offset, in part, by increases in gain on sale of loans
generated by residential mortgage banking (the acquired MIC
operation) and commercial finance. Operating income decreased from
$32.2 million for the second quarter of 1998 to $21.2 million for the
second quarter of 1999, or 34%, and net income decreased from $19.7
million to $12.1 million, or 38%. The decreases in operating income
and net income were due primarily to the discontinuance of the home
equity lending capital markets operation, discontinuance of the
commercial mortgage conduit operations as a principal, a write-down
of home equity lending retained interests in securitizations and
losses in residential mortgage banking. These decreases were offset,
in part, by a gain on securitization by commercial finance and a
reversal of loan loss provisions as a result of an in depth analysis
of our loan portfolios based upon additional guidance published by
the Financial Accounting Standards Board ("FASB"). Diluted weighted
average common shares outstanding increased 39% due primarily to
common shares accrued for earnouts and stock issued in acquisitions
offset, partially, by share repurchases. Diluted earnings per share
decreased 56% from $0.45 for the second quarter of 1998 to $0.20 for
the second quarter of 1999.
Asset Management. Revenues for the three months ended June 30,
1999 primarily consisted of $18.4 million in interest and other
investment income, $5.0 million in gain on sale of investments and
$4.3 million in asset management and resolution fees. The $0.2
million decrease in revenues from $28.7 million for the second
quarter of 1998 to $28.5 million for the second quarter of 1999 was
primarily comprised of a $1.6 million decrease in interest and other
investment revenue offset, in part, by a $0.9 million increase in
gain on sale and a $0.4 million increase in asset management and
resolution fees. The decrease in interest and other investment
revenue was due primarily to a decreased aggregate investment
balance. The increase in gain on sale of loans and investments was
due primarily to additional sales of assets. The increase in asset
management and resolution fees was due primarily to increased special
servicing and asset management contracts (primarily foreign
management contracts).
Operating expenses for the quarter ended June 30, 1999 primarily
consisted of $7.6 million in interest expense, $5.1 million in
personnel cost and $3.8 million in other general and administrative
expenses. The $0.6 million increase in expenses from $16.9 million
for the prior year period to $17.5 million for the quarter ended June
30, 1999 was due primarily to a $1.4 million increase in personnel
expense and a $0.6 million increase in other general and
administrative expenses related to business growth offset, in part,
by a $1.0 million decrease in interest expense related to financing
decreased investment balances.
Commercial Mortgage Banking. Revenues for the quarter ended
June 30, 1999 primarily consisted of $34.0 million in origination,
underwriting and servicing revenues, $3.8 million in interest income
and $3.4 million in gain on sale of loans. The $5.8 million decrease
in revenues from $47.0 million for the prior year period to $41.2
million for the quarter ended June 30, 1999 related primarily to a
$12.4 million decrease in interest income as a result of exiting the
conduit operation as a principal thereby, holding reduced balances of
mortgage loans held for sale and a $1.6 million decrease in other
revenues as a result of exiting the AMRESCO Capital conduit joint
venture. The decreases were offset, in part, by a $4.5 million
increase in gain on sale of loans and a $3.7 million increase in
origination, underwriting and servicing revenues due primarily to
increased Holliday Fenoglio Fowler transaction volumes.
Operating expenses for the quarter ended June 30, 1999 consisted
of $21.6 million in personnel expense, $6.5 million of other general
and administrative expense, $4.1 million of depreciation and
amortization and $1.9 million of interest expense. The $6.4 million
decrease in expenses from $40.5 million for the prior year quarter to
$34.1 million for the quarter ended June 30, 1999 was due primarily
to a $9.6 million reduction of interest expense related to financing
reduced balances of commercial loans held for sale offset, in part,
by a $2.2 million increase in depreciation and amortization due
primarily to amortization of increased balances of mortgage servicing
rights and a $1.4 million increase in personnel expense due primarily
to acquisitions.
Commercial Finance. Revenues for the three months ended June
30, 1999 primarily consisted of $31.7 million of interest income and
$24.8 million of gain on securitization and sale of loans. The $25.7
million increase in revenues from $32.3 million for the prior year
period to $58.0 million for the three months ended June 30, 1999
related primarily to a $14.5 million increase in interest and other
investment income and a $9.4 million increase in gain on sale of
loans. The increase in interest and other investment income was due
primarily to increased balances of loans held by the real estate,
communication and builder groups and loans held for sale by
Independence Funding Company L.L.P. ("Independence Funding") and
TeleCapital L.P. ("TeleCapital") (both businesses were acquired in
mid-1998). The increase in gain on sale of loans was due primarily
to an approximate $220.9 million small business loan securitization.
Operating expenses for the quarter ended June 30, 1999 primarily
consisted of $16.0 million of interest expense, $7.4 million of
personnel expense, $4.4 million of other general and administrative
expense and $2.3 million of depreciation and amortization offset, in
part, by a $5.0 million provision for loan loss reversal. The $9.1
million increase in expenses from $16.0 million for the prior year
period to $25.1 million for the quarter ended June 30, 1999 was due
primarily to an increase of $7.4 million of interest expense related
to the financing for increased levels of loans and loans held for
sale, $3.8 million of personnel expense, $3.2 million of other
general and administrative expenses and $1.4 million of depreciation
and amortization related primarily to acquisitions. The increases
were offset, in part, by a $6.8 million decrease in provision for
loan losses primarily related to real estate and communications loans
after the Company completed a review of its allowance for loan
losses.
Residential Mortgage Banking. Revenues of $14.8 million
primarily consisted of cash gain on sale of loans of $14.1 million.
Operating expenses of $25.7 million primarily consisted of $14.7
million of personnel expense (primarily commissions), $6.3 million of
other general and administrative expenses and $3.8 million of
depreciation and amortization.
The VA has amended its rules to allow borrowers to refinance
under the Interest Rate Reduction Refinance Loan ("IRRRL") program
only if they are 30 days or less past due as compared to the previous
rule of 90 days or less. If a borrower is greater than 30 days past
due, the application must be submitted to the VA for underwriting.
The Company has ceased its VA lending activities and began offering a
fixed rate FHA product in June.
Home Equity Lending. Revenues for the three months ended June
30, 1999 primarily consisted of $10.8 million of gains on whole loan
sales, $5.2 million in interest income and $2.8 million in mortgage
banking and servicing fees. The $44.8 million decrease in revenues
from $64.4 million for the prior year period to $19.6 million for the
quarter ended June 30, 1999 was due primarily to a $41.1 million
decrease in interest income related to (i) holding reduced balances
of loans held for sale and (ii) a $9.2 million write-down of retained
interests in securitizations due to increased prepayment speeds and a
$5.6 million decrease in gain on sale due to the discontinuance of
the capital markets operation in late 1998.
Operating expenses for the quarter ended June 30, 1999 primarily
consisted of $10.4 million of personnel expense, $10.2 million of
interest expense, $8.7 million of other general and administrative
expense and $2.2 million of depreciation and amortization. Operating
expenses decreased by $22.6 million from $54.4 million for the prior
year period to $31.8 million for the quarter ended June 30, 1999.
This decrease primarily consisted of $19.3 million of reduced
interest expense, $3.6 million of reduced personnel expense and $3.5
million in reduced provision for loan and investment losses due
primarily to holding reduced balances of mortgage loans held for sale
and the discontinuance of the capital markets operation offset, in
part, by a $3.1 million increase in other general and administrative
expenses due primarily to AMRESCO Residential Mortgage Corporation
retail expansion.
Corporate, Other and Intercompany Eliminations. Revenues of
$2.1 million for the three months ended June 30, 1999 primarily
consisted of interest income from investments in residential mortgage
backed securities. The $6.4 million decrease in expenses from $15.2
million for the prior year period to $8.8 million for the quarter
ended June 30, 1999 was due primarily to decreased personnel and
other general and administrative costs.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30,
1998
The Company reported a 6% increase in revenues from $316.0
million to $334.4 million due primarily to an increase in cash gain
on sale of loans in residential mortgage banking (the acquired MIC
operation). Operating income decreased from $55.1 million for the
first six months of 1998 to $38.2 million for the first six months of
1999, or 31%, and net income decreased from $33.7 million to $22.3
million, or 34%. The decreases in operating income and net income
were due primarily to the discontinuance of the home equity lending
capital markets operation, discontinuance of the commercial mortgage
conduit operations as a principal and a write-down of home equity
lending retained interests in securitizations offset, in part, by a
larger commercial finance gain on sale of loans and earnings from
1998 acquisitions. Diluted weighted average common shares
outstanding increased 30% due primarily to an accrued stock earnout
primarily related the Company's purchase of MIC and stock issued in
acquisitions offset, partially, by share repurchases. Diluted
earnings per share decreased 49% from $0.80 for the first six months
of 1998 to $0.41 for the first six months of 1999.
Asset Management. Revenues for the six months ended June 30,
1999 primarily consisted of $38.2 million in interest income, $10.6
million in gain on sale of investments and $9.2 million in asset
management and resolution fees. The $4.2 million increase in
revenues from $55.1 million for the first six months of 1998 to $59.3
million for the first six months of 1999 was primarily comprised of a
$3.0 million increase in asset management and resolution fees. The
increase in asset management and resolution fees was due primarily to
increased special servicing and asset management contracts (primarily
foreign management contracts).
Operating expenses for the period ended June 30, 1999 primarily
consisted of $15.4 million in interest expense, $9.9 million in
personnel cost and $8.3 million in other general and administrative
expenses. The $5.0 million increase in expenses from $29.9 million
for the prior year period to $34.9 million for the six months ended
June 30, 1999 was due primarily to a $3.3 million increase in
personnel expense and a $2.1 million increase in other general and
administrative expenses related to business growth.
Commercial Mortgage Banking. Revenues for the six months ended
June 30, 1999 primarily consisted of $56.6 million in origination,
underwriting and servicing revenues, $9.0 million in interest income
and $4.3 million in gain on sale of assets. The $18.5 million
decrease in revenues from $88.4 million for the prior year period to
$69.9 million for the six months ended June 30, 1999 relates
primarily to a $20.2 million decrease in interest income as a result
of exiting the conduit operation as a principal thereby holding
reduced balances of mortgage loans held for sale and a $6.4 million
decrease in other revenues as a result of exiting the AMRESCO Capital
conduit joint venture offset, in part, by a $4.8 million increase in
gain on sale of loans and a $3.4 million increase in origination,
underwriting and servicing revenues due primarily to increased
transaction volumes over the prior year period.
Operating expenses for the six months ended June 30, 1999
consisted of $40.7 million in personnel expense, $12.9 million of
other general and administrative expense, $7.1 million of
depreciation and amortization and $3.5 million of interest expense.
The $10.5 million decrease in expenses from $74.7 million for the
prior year period to $64.2 million for the six months ended June 30,
1999 was due primarily to a $17.9 million reduction of interest
expense related to financing reduced balances of commercial loans
held for sale offset, in part, by a $3.8 million increase in
depreciation and amortization due primarily to amortization of
increased balances of mortgage servicing rights and a $3.1 million
increase in personnel expense due primarily to expanded operations.
Commercial Finance. Revenues for the six months ended June 30,
1999 primarily consisted of $57.9 million of interest income and
$32.1 million of gain on securitization and sale of loans. The $44.8
million increase in revenues from $47.8 million for the prior year
period to $92.6 million for the three months ended June 30, 1999
related primarily to a $27.9 million increase in interest and other
investment income and a $15.1 million increase in gain on sale of
loans. The increase in interest and other investment income was due
primarily to increased balances of loans held by the real estate,
communication and builder groups and loans held for sale by
Independence Funding and TeleCapital (both businesses were acquired
in mid-1998). The increase in gain on sale of loans was due
primarily to $262.1 million of small business loan securitizations
completed in the first six months of 1999.
Operating expenses for the six months ended June 30, 1999
primarily consisted of $30.2 million of interest expense, $13.6
million of personnel expense, $7.6 million of other general and
administrative expense and $4.6 million in depreciation and
amortization. The $23.3 million increase in expenses from $28.5
million for the prior year period to $51.8 million for the six months
ended June 30, 1999 was due primarily to an increase of $15.9 million
of interest expense related to the financing for increased levels of
loans held for sale and $7.2 million of personnel expense, $4.7
million of other general and administrative expenses and $3.0 million
of depreciation and amortization related primarily to expanded
operations. The expense increases were offset, in part, by a $7.5
million decrease in the provision for loan losses.
Residential Mortgage Banking. Revenues of $53.6 million
consisted primarily of cash gain on sale of loans of $51.2 million.
Operating expenses of $53.0 million primarily consisted of $33.2
million in personnel expense (primarily commissions), $11.8 million
in other general and administrative expenses and $5.8 million in
depreciation and amortization.
Home Equity Lending. Revenues for the six months ended June 30,
1999 primarily consisted of $24.4 million of gains on whole loan
sales, $23.4 million in interest income and $5.6 million in mortgage
banking and servicing fees. The $65.1 million decrease in revenues
from $119.7 million for the prior year period to $54.6 million for
the six months ended June 30, 1999 was due primarily to a $60.8
million decrease in interest income related to holding reduced
balances of loans held for sale due to the discontinuance of the
capital markets operation and a $7.9 million decrease in gain on sale
also due to the discontinuance of the capital markets operation in
late 1998.
Operating expenses for the six months ended June 30, 1999
primarily consisted of $22.4 million of interest expense, $21.4
million of personnel expense, $18.6 million of other general and
administrative expense, $4.2 million of depreciation and amortization
and $3.1 million of provisions for loan losses. Operating expenses
decreased by $30.2 million from $99.8 million for the prior year
period to $69.6 million for the six months ended June 30, 1999. This
decrease primarily consisted of $30.5 million of reduced interest
expense and a $5.5 million decrease in provision for loan and
investment losses due primarily to holding reduced balances of
mortgage loans held for sale and a $3.6 million decrease in personnel
expenses due primarily to the discontinuance of the capital markets
operation offset, in part, by a $7.9 million increase in other
general and administrative expenses and a $1.5 million increase in
depreciation and amortization due primarily to AMRESCO Residential
Mortgage Corporation expansion.
Corporate, Other and Intercompany Eliminations. Revenues of
$4.3 million for the six months ended June 30, 1999 primarily
consisted of interest income from investments in residential mortgage
backed securities. The $5.4 million decrease in expenses from $28.0
million for the prior year period to $22.6 million for the six months
ended June 30, 1999 was due primarily to a $5.5 million decrease in
personnel expense and a $2.9 million decrease in general and
administrative expenses.
Liquidity and Capital Resources
Cash and cash equivalents totaled $59.8 million at June 30,
1999. Cash flows provided by operating activities plus principal
collections on loans, asset portfolios and asset-backed securities
totaled $541.4 million for the first six months of 1999 compared to
$133.4 million for the same period in 1998. The variance from the
prior period was due primarily to net cash receipts from retained
interests in securitizations of $182.6 million ($138.0 million was
received from a net interest margin transaction, the proceeds of
which were used to pay down existing debt) as compared to a prior
year period use of cash for retained interests in securitizations of
$65.6 million, a lower balance of loans held for sale and related
warehouse debt due primarily to the Company exiting the capital
intensive home equity lending capital markets operation and a $79.3
million income tax receivable receipt related to 1998 losses. The
following table is a summary of selected cash flow activity and debt
ratios during the first six months of 1999 and 1998 (dollars in
thousands):
1999 1998
Net cash provided by (used in) operating activities $ 235,870 $(173,995)
Net cash used in investing activities (106,738) (318,821)
Net cash provided by (used in) financing activities (135,736) 502,001
Other financial measures:
Cash flow from operations and collections on
loans, asset portfolios and asset-backed securities 541,406 133,425
Cash provided by new capital and borrowings (used
in repayment), net (excluding warehouse loans
payable) (135,769) 496,541
Cash used for purchase of asset portfolios,
asset-backed securities, mortgage servicing rights
and originations of loans (384,632) (594,521)
EBITDA (1) 146,718 176,560
Interest coverage ratio (2) 1.7x 1.6x
The following table is a summary of selected debt ratios as of June
30, 1999 and December 31, 1998:
1999 1998
Ratio of total debt to equity 2.5:1 3.7:1
Ratio of core debt to equity (3) 2.1:1 2.7:1
(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 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 June 30,
1999 and December 31, 1998 (dollars in millions):
1999 1998
% of % of
Dollars Total Dollars Total
Shareholders' equity $ 697.5 29% $ 585.4 21%
Senior notes 57.2 (1) 2 57.5 2
Senior subordinated notes 580.1 24 580.2 21
Mortgage warehouse loans 286.5 11 587.4 21
Notes payable 822.5 34 957.9 35
Total $2,443.8 100% $2,768.4 100%
(1) Repaid in full July 1, 1999.
Total assets decreased $0.3 billion to $2.6 billion at June 30,
1999 from $2.9 billion at December 31, 1998. The decrease was due
primarily to sales of loans held for sale and a sale of retained
interests in securitization through a net interest margin transaction
offset, in part, by an increase in intangibles due to acquisition
earnouts.
On July 1, 1999, the Company repaid the entire $57.2 million
balance of its 8.75% Senior Notes Due July 1, 1999. The Company
believes it has sufficient liquidity to meet its obligations,
including any then outstanding obligation related to the short-term
portion ($167.5 million) of the Credit Agreement due in August 1999
and funding requirements to maintain its operations at the currently
reduced investment pace. The primary sources of liquidity currently
include internally generated funds, additional availability under the
Credit Agreement, to the extent described above, the warehouse
facilities and cash balances. In addition, the Company is seeking to
renew a portion of the short-term facility and to obtain third party
financing for certain assets which, if successful, would result in
additional capacity under the Credit Agreement.
See Note 2, "Notes Payable and Other Debt", included in "Item 1.
Financial Statements" for a discussion of changes in the Company's
debt facilities since December 31, 1998.
The Company has historically accessed the capital markets as an
important part of its capital raising activities, which included
raising funds in debt and equity offerings, to finance the
acquisition of assets, the origination and accumulation of loans and
to securitize and sell mortgage loans originated by its different
business lines. Due to current market conditions related to the
Company's securities, debt and equity, and debt constraints placed
upon the Company through certain debt agreements, the Company
believes its access to the capital markets will continue to be
significantly limited for the foreseeable future and that other
sources of third party financing will also be limited.
Other Matters
The actual weighted average annual prepayment rate on the
Company's home equity securitizations was 27.2% for the period from
inception of each security through May 31, 1999, which is higher than
originally projected and resulted in a $9.2 million write-down of
home equity retained interests in securitizations during the second
quarter of 1999. The weighted average annual prepayment rate on the
Company's home equity securitizations is modeled to be 28.6% for the
next twelve months. Prepayment rates on the Company's franchise and
small business loan securitizations are in line with expectations.
Current valuations take into account the change in prepayment
assumptions as well as other assumptions influenced by market
conditions. The discount rate used to value the retained interests
is influenced primarily by volatility and predictability of the
underlying cash flows which generally become more certain as the
securities season. The weighted-average discount rate used to value
the Company's retained interests at June 30, 1999 was 17.4%. The
Company has utilized, for initial valuation purposes, a 20% discount
rate on its home equity securitizations, discount rates ranging from
18% - 20% for its commercial finance franchise loan securitizations
and a 15% discount rate on its commercial finance small business loan
securitizations. The lower discount rates on the commercial finance
securitizations were due to the reduced risk resulting from a
borrower cross-collateralization feature in these securitizations.
Retained interests in securitizations at June 30, 1999 consisted of
$275.4 million of home equity loan interests, $105.7 million of
commercial finance loan interests and $1.4 million related to a
commercial mortgage whole loan sale.
In June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 137,
"Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133 - an
amendment of FASB Statement No. 133". This statement has delayed the
effective date for SFAS 133 for one year, to fiscal years beginning
after June 15, 2000 and the Company does not foresee early adoption
of the standard.
Year 2000 Issue
General
Many of the world's computers, software programs and other
equipment using microprocessors or embedded chips currently have date
fields that use two digits rather than four digits to define the
applicable year. These computers, programs and chips may be unable
to properly interpret dates beyond the year 1999; for example,
computer software that has date sensitive programming using a two-
digit format may recognize a date using "00" as the year 1900 rather
than the year 2000. Such errors could potentially result in a system
failure or miscalculation causing disruptions of operations,
including, among other things, a temporary inability to process
transactions or engage in similar normal business activities, which,
in turn, could lead to disruptions in the Company's operations or
performance.
The Company's assessments of the cost and timeliness of
completion of Year 2000 modifications set forth below are based on
management's best estimates, which were derived using numerous
assumptions relating to future events, including, without limitation,
the continued availability of certain internal and external resources
and third party readiness plans. Furthermore, as the Company's Year
2000 initiative (described below) progresses, the Company continues
to revise its estimates of the likely problems and costs associated
with the Year 2000 problem and to adapt its contingency plan.
However, there can be no assurance that any estimate or assumption
will prove to be accurate.
The Company's Year 2000 Initiative
The Company has been conducting a comprehensive Year 2000
initiative with respect to its internal business-critical systems
since mid-1997. This initiative encompasses information technology
("IT") systems and applications, as well as non-IT systems and
equipment with embedded technology, such as fax machines and
telephone systems, which may be impacted by the Year 2000 problem.
Business-critical systems encompass internal accounting systems,
including general ledger, accounts payable and financial reporting
applications; cash management systems; loan servicing systems; and
decision support systems; as well as the underlying technology
required to support the software. The initiative includes assessing,
remediating or replacing, testing and upgrading the Company's
business-critical IT systems with the assistance of a consulting firm
that specializes in Year 2000 readiness. Based upon a review of the
completed and planned stages of the initiative, and the testing done
to date, the Company does not anticipate any material difficulties in
achieving Year 2000 readiness with respect to its internal business-
critical systems, and the Company achieved that Year 2000 readiness
with respect to virtually all its internal business-critical systems
by March 31, 1999.
In addition to its own internal IT systems and non-IT systems,
the Company may be at risk from Year 2000 failures caused by or
occurring to third parties. These third parties can be classified
into two groups. The first group includes borrowers, significant
business partners, lenders, vendors and other service providers with
whom the Company has a direct contractual relationship. The second
group, while encompassing certain members of the first group, is
comprised of third parties providing services or functions to large
segments of society, both domestically and internationally such as
airlines, utilities and national stock exchanges.
As is the case with most other companies, the actions the
Company can take to avoid any adverse effects from the failure of
companies, particularly those in the second group, to become Year
2000 ready is extremely limited. However, the Company has
communicated with those companies that have significant business
relationships with the Company, particularly those in the first
group, to determine their Year 2000 readiness status and the extent
to which the Company could be affected by any of their Year 2000
readiness issues. In connection with this process, the Company has
sought to obtain written representations and other independent
confirmations of Year 2000 readiness from the third parties with whom
the Company has material contracts. Responses from all third parties
having material contracts with the Company have not been received.
In addition to contacting these third parties, where there are direct
interfaces between the Company's systems and the systems of these
third parties in the first group, the Company conducted testing in
the second quarter of 1999 in conformance with the guidelines of the
Federal Financial Institutions Examination Council. Based on
responses received and testing to date, it is not currently
anticipated that the Company will be materially affected by any third
party Year 2000 readiness issues.
For all business-critical systems interfaces, readiness was
achieved by June 30, 1999. Replacement providers believed to be
compliant have been identified for significant third party providers
that did not complete their Year 2000 initiatives.
There can be no assurance that the systems of the Company or
those of third parties will not experience adverse effects after
December 31, 1999. Furthermore, there can be no assurance that a
failure to convert by another company, or a conversion that is not
compatible with the Company's systems or those of other companies on
which the Company's systems rely, would not have a material adverse
effect on the Company.
The Company does not anticipate that it will incur material
expenditures in connection with any modifications necessary to
achieve Year 2000 readiness. The Company incurred approximately $1.0
million of costs related to its Year 2000 initiative through June 30,
1999 and does not anticipate incurring any significant additional
costs in the future with respect to the initiative. These cost
estimates do not include costs associated with internal resources
assigned to the initiative.
Potential Risks
In addition to the Company's internal systems and the systems
and embedded technology of third parties with whom the Company does
business, there is a general uncertainty regarding the overall
success of global remediation efforts relating to the Year 2000
problem, including those efforts of providers of services to large
segments of society, as described above in the second group. Due to
the interrelationships on a global scale that may be impacted by the
Year 2000 problem, there could be short-term disruptions in the
capital or real estate markets or longer-term disruptions that would
affect the overall economy.
Due to the general uncertainty with respect to how this issue
will affect businesses and governments, it is not possible to list
all potential problems or risks associated with the Year 2000
problem. However, some examples of problems or risks to the Company
that could result from the failure by third parties to adequately
deal with the Year 2000 problem include:
in the case of lenders, the potential for liquidity stress due
to disruptions in funding flows;
in the case of exchanges and clearing agents, the potential for
funding disruptions and settlement failures; and
in the case of vendors or providers, service failures or
interruptions, such as failures of power, telecommunications and the
embedded technology of building systems (such as HVAC, sprinkler and
fire suppression, elevators, alarm monitoring and security, and
building and parking garage access).
With respect to the Company's loan portfolios, risks due to the
potential failure of third parties to be ready to deal with the Year
2000 problem include:
potential borrower defaults resulting from computer failures of
retail systems of major tenants in retail commercial real estate
properties such as shopping malls and strip shopping centers;
potential borrower defaults resulting from increased expenses or
legal claims related to failures of embedded technology in building
systems, such as HVAC, sprinkler and fire suppression, elevators,
alarm monitoring and security, and building and parking garage
access; and
delays in reaching projected occupancy levels due to
construction delays, interruptions in service or other market
factors.
These risks are also applicable to the Company's portfolios of
mortgage backed securities, as these securities are dependent upon
the pool of mortgage loans underlying them. If the investors in
these types of securities demand higher returns in recognition of
these potential risks, the market value of any future MBS portfolios
of the Company also could be adversely affected.
Other problems that could result from the failure of the Company
or third parties to achieve Year 2000 readiness include impairment of
the Company's ability to report to investors and owners with respect
to portfolio performance and collect and remit payments, including
those with respect to return on investments, taxes and insurance.
Furthermore, the Company's loan servicing operations rely on
computers to process and manage loans. These operations are of such
a volume and nature that manual processing would be time consuming
and expensive. Therefore, a failure of the Company's own systems or
the systems provided by third parties and used by the Company to be
timely compliant could have a material adverse effect on the
Company's loan servicing operations.
The Company believes that the risks most likely to affect the
Company adversely relate to the failure of third parties, including
its borrowers and sources of capital, to achieve Year 2000 readiness.
If its borrowers' systems fail, the result could be a delay in making
payments to the Company or the complete business failure of such
borrowers. The failure, although believed to be unlikely, of the
Company's sources of capital to achieve Year 2000 readiness could
result in the Company being unable to obtain the funds necessary to
continue its normal business operations.
Some of the risks associated with the Year 2000 problem may be
mitigated through insurance maintained or purchased by the Company,
its business partners, borrowers and vendors. However, the scope of
insurance coverage in addressing these potential issues under
existing policies has yet to be tested, and the economic impact on
the solvency of the insurers has not been explored. Therefore, no
assurance can be given that insurance coverage will be available or,
if it is available, that it will be available on a cost-effective
basis or that it will cover all or a significant portion of any
potential loss.
Business Continuity/Disaster Recovery Plan
The Company currently has a business continuity/disaster
recovery plan that includes business resumption processes that do not
rely on computer systems and the maintenance of hard copy files,
where appropriate. The business continuity/disaster recovery plan is
monitored and updated as potential Year 2000 readiness issues of the
Company and third parties are specifically identified. Due to the
inability to predict all of the potential problems that may arise in
connection with the Year 2000 problem, there can be no assurance that
all contingencies will be adequately addressed by such plan.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosure
The Company is subject to interest rate risk due to the
Company's balance sheet being primarily comprised of loans and
interest bearing investments primarily financed by LIBOR based notes
payable and warehouse loans payable and fixed rate subordinated debt.
The Company manages this risk by striving to balance its origination
and mortgage banking activities with its asset management and
servicing operations which are generally counter cyclical in nature.
In addition, the Company is a party to financial instruments with off-
balance sheet risk entered into in the normal course of business to
hedge against changes in interest rates. The Company may reduce its
exposure to fluctuations in interest rates by creating offsetting
positions through the use of derivative financial instruments.
Derivatives are used to lower funding costs, to diversify sources of
funding or to alter interest rate exposures arising from mismatches
between assets and liabilities. The Company does not use derivative
financial instruments for trading or speculative purposes, nor is the
Company party to highly leveraged derivatives. These financial
instruments include interest rate cap agreements, put options and
forward and futures contracts. The instruments involve, to varying
degrees, elements of interest rate risk in excess of the amount
recognized in the consolidated statements of financial condition.
The Company controls the risk of its hedging agreements, interest
rate cap agreements and forward and futures contracts through
approvals, limits and monitoring procedures.
As part of its interest rate risk management process, the
Company performs various sensitivity analyses that quantify the net
financial impact of changes in interest rates on its interest rate
sensitive assets, liabilities and derivative portfolio. The analyses
incorporate scenarios under which the assets, liabilities and
derivatives are valued based upon their projected discounted cash
flows or market values as provided by Bloomberg quotations adjusted
for certain selected hypothetical changes in interest rates.
Included in the analyses are pre-payment rates, discount rates,
credit losses and effects related to re-pricing. The following are
the Company's interest rate sensitivity analyses as of June 30, 1999:
Retained Interests in Securitization (trading):
Change in Hypothetical Hypothetical
Interest Rates Fair Value Change($) Change (%)
10% $395.4 $ 12.9 3.4%
0 382.5 - -
(10) 365.6 (16.9) (4.4)
A hypothetical increase in interest rates is projected to
decrease loan pre-payments increasing the fair value of the retained
interests. This increase is projected to more than offset a decrease
in fair value of the retained interests caused by higher market
interest rates.
Other than Trading:
Change in Hypothetical Hypothetical
Interest Rates Fair Value Change($) Change(%)
10% $621.7 $(0.5) (0.1)%
0 622.2 - -
(10) 622.9 0.7 0.1
The other than trading category includes loans held for sale,
loans and asset portfolios, asset backed securities, mortgage backed
securities, derivative positions, senior notes, senior subordinated
notes and the amount outstanding under the Company's Credit Agreement
to the extent the fair value could be affected by a widening of
spreads. In an increasing interest rate environment, the Company
projects the fair value of its asset and derivative portfolio to
decrease offset, in part, by a fair value reduction in its debt
obligations.
Foreign Exchange Risk
Foreign exchange risk arises from the possibility that changes
in foreign exchange rates will impact the value of financial
instruments. When the Company buys or sells a foreign currency or a
financial instrument denominated in a currency other than US dollars,
exposure exists from a net open currency position. Until the
position is covered by selling or buying an equivalent amount of the
same currency or by entering into a financing arrangement denominated
in the same currency, the Company is exposed to a risk that the
exchange rate may move against it. As of June 30, 1999, the Company
has offset any material exposure to foreign exchange risk by entering
into financing arrangements denominated in the currency of its
foreign investments.
Any market interest rate change would adjust the Company's
projected cash flows from its variable rate assets and liabilities.
Such changes in cash flows are not reflected in the above analysis as
the fair values of variable assets and liabilities would not
materially be affected by a 10% change in interest rates. As with
any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table.
For example, although certain assets and liabilities may have similar
maturities or periods to re-pricing, they may react in different
degrees to changes in interest rates. Changes in interest rates
related to certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates while changes in interest
rates related to other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as variable
rate loans, have features which restrict changes in interest rates on
a short-term basis and over the life of the asset. Additionally,
changes in market interest rates may increase or decrease due to pre-
payments and defaults influenced by changes in market interest rates
affecting the valuation of certain assets. Accordingly, the data
presented in the above table should not be relied upon as indicative
of actual results in the event of changes in interest rates.
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a vote of Security Holders.
On May 19, 1999, the Company held its 1999 Annual Meeting of
stockholders at which the following matters were considered and voted
upon:
(a) Election of Directors
Three persons were elected as Class III Directors for a
three year term ending at the Annual Meeting of
Stockholders after the close of the fiscal year ending in
2001 or until their successors have been duly elected.
SHARES SHARES
NOMINEE VOTED FOR WITHHELD
Richard L. Cravey 39,730,692 1,001,274
Gerald E. Eickhoff 39,717,327 1,014,639
Robert H. Lutz, Jr. 39,717,058 1,014,908
(b) Appointment of Deloitte & Touche LLP
A proposal to appoint Deloitte & Touche LLP as the
Company's independent public accountants for 1999 was
approved. The number of shares voting for the proposal:
40,548,686; shares against the proposal: 97,741; shares
abstaining: 86,139.
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: August 9, 1999 By: /s/Barry L. Edwards
Barry L. Edwards
Executive Vice President
and Chief Financial Officer
<TABLE>
<CAPTION>
AMRESCO, INC.
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Basic:
<S> <C> <C> <C> <C>
Net income $12,104,000 $19,660,000 $22,342,000 $33,709,000
Weighted average common shares outstanding 48,781,316 42,840,145 48,491,266 40,983,662
Contingently issuable shares 109,448
Restricted shares (934,653) (383,005) (729,251) (350,919)
Total 47,846,663 42,457,140 47,762,015 40,742,191
Earnings per share $0.25 $0.46 $0.47 $0.83
Diluted:
Net income $12,104,000 $19,660,000 $22,342,000 $33,709,000
Weighted average common shares outstanding 48,781,316 42,840,145 48,491,266 40,983,662
Contingently issuable shares 12,841,595 6,420,797 109,448
Net effect of non-vested restricted stock
based on the Treasury stock method using
the average market price (934,653) (467,327)
Net effect of dilutive stock options based
on the Treasury stock method using the
average market price 266,915 1,162,838 614,035 1,131,164
Total 60,955,173 44,002,983 55,058,771 42,224,274
Earnings per share $0.20 $0.45 $0.41 $0.80
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> $ 59,818
<SECURITIES> 0
<RECEIVABLES> 20,482
<ALLOWANCES> 515
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 44,188
<DEPRECIATION> 19,354
<TOTAL-ASSETS> 2,572,177
<CURRENT-LIABILITIES> 0
<BONDS> 1,459,791
0
0
<COMMON> 2,492
<OTHER-SE> 695,024
<TOTAL-LIABILITY-AND-EQUITY> 2,572,177
<SALES> 0
<TOTAL-REVENUES> 334,419
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 211,905
<LOSS-PROVISION> (164)
<INTEREST-EXPENSE> 84,481
<INCOME-PRETAX> 38,197
<INCOME-TAX> 15,855
<INCOME-CONTINUING> 22,342
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,342
<EPS-BASIC> 0.47
<EPS-DILUTED> $ 0.41
</TABLE>
