UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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 1900, LB 342, Dallas, Texas 75201-7424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 953-7700
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
10,039,071 shares of common stock, $.25 par value per share,
as of October 31, 2000.
AMRESCO, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2000
and December 31, 1999 3
Consolidated Statements of Operations - Three and
Nine Months Ended September 30, 2000 and 1999 4
Consolidated Statement of Shareholders' Equity -
Nine Months Ended September 30, 2000 5
Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 2000 and 1999 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 18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURE 20
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
AMRESCO, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share amounts)
September 30, December 31,
2000 1999
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 128,328 $ 36,709
Loans held for sale, net 85,949 295,041
Loans and asset portfolios, net 280,524 705,353
Retained interests in securitizations - trading (at fair value) 216,070 299,311
Asset-backed securities - available for sale (at fair value) 63,626 107,005
Notes receivable 61,078
Accounts receivable, net of reserves of $498 and $605 15,579 15,394
Income taxes receivable 2,480
Deferred income taxes 70,595 73,983
Premises and equipment, net of accumulated depreciation of
$9,308 and $15,680 3,455 10,408
Intangible assets, net of accumulated amortization
of $32,388 and $30,216 160,073 138,762
Mortgage servicing rights, net of accumulated amortization
of $1,801 and $939 5,629 6,283
Other assets 33,512 68,967
Net assets (liabilities) of discontinued operations (995) 173,115
TOTAL ASSETS $1,123,423 $1,932,811
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 16,261 $ 9,068
Accrued employee compensation and benefits 8,303 14,830
Income taxes payable 1,205
Notes payable 172,727 708,611
Senior subordinated notes 569,930 580,033
Warehouse loans payable 63,552 101,894
Other liabilities 21,472 58,656
Total liabilities 853,450 1,473,092
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $0.25 par value, authorized
30,000,000 shares; 10,243,368 and 9,958,558 shares issued 2,561 2,490
Preferred stock, $1.00 par value, authorized 1,000,000 shares:
none issued
Capital in excess of par 547,122 546,762
Common stock to be issued for earn-outs 87,548
Treasury stock, $0.25 par value, 204,867 shares (17,363) (17,363)
Accumulated other comprehensive loss (4,641) (8,848)
Unamortized stock compensation (942) (4,096)
Accumulated deficit (256,764) (146,774)
TOTAL SHAREHOLDERS' EQUITY 269,973 459,719
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,123,423 $1,932,811
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
AMRESCO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUES:
Interest and other investment income $ 34,265 $ 65,091 $105,643 $200,964
Mortgage banking and servicing fees 2,064 3,936 7,301 12,113
Gain (loss) on sale of loans and investments, net 22,938 (5,399) 27,976 61,569
Asset management and resolution fees 676 5,863 5,505 15,043
Other revenues (expense) 360 (247) 2,988 2,431
Total revenues 60,303 69,244 149,413 292,120
EXPENSES:
Personnel 11,451 34,358 40,690 91,482
Interest 24,475 38,317 84,736 117,062
Loss on retained interests in securitizations 29,662 78,000 109,226 90,000
Loss on disposal and impairment of assets 3,066 8,651 44,906 8,651
Other general and administrative 8,776 21,309 29,284 53,468
Depreciation and amortization 5,165 5,547 13,446 16,676
Provisions for loan and asset portfolio losses 1,680 146 9,403 (18)
Total expenses 84,275 186,328 331,691 377,321
Income (loss) from continuing operations before income taxes (23,972) (117,084) (182,278) (85,201)
Income tax expense (benefit) (2,125) (40,605) (22,634) (26,978)
Income (loss) from continuing operations (21,847) (76,479) (159,644) (58,223)
Income (loss) from discontinued operations, net of income taxes (46) (5,530) 46,184 (1,444)
Income (loss) before extraordinary gain (21,893) (82,009) (113,460) (59,667)
Extraordinary gain on early retirement of debt, net of income taxes 3,470 3,470
NET INCOME (LOSS) $(18,423) $(82,009) $(109,990) $(59,667)
Weighted average earnings (loss) per common share - basic and diluted
Income (loss) from continuing operations $(2.25) $(7.98) $(16.47) $(6.09)
Income (loss) from discontinued operations, net of income taxes (0.01) (0.57) 4.76 (0.15)
Extraordinary gain on early retirement of debt, net of income taxes 0.36 0.36
Net income (loss) $(1.90) $(8.55) $(11.35) $(6.24)
Weighted average number of common shares outstanding:
Basic and diluted 9,716 9,586 9,693 9,564
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
AMRESCO, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Nine Months Ended September 30, 2000
(In thousands)
(Unaudited)
Accumulated
Common Stock Capital in Other Compr.
$0.25 par value Excess of Treasury Compr. Accumulated Income
Shares Amount Par Other Stock Income(Loss) Deficit (Loss) Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
JANUARY 1, 2000 9,959 $2,490 $546,762 $ 83,452 $(17,363) $(8,848) $(146,774) $459,719
Comprehensive loss:
Net loss (109,990) $(109,990)
Other comprehensive income (loss):
Unrealized loss on securities (675) (675)
Reclassification of losses
included in net income 12,728 12,728
Foreign currency translation
adjustments (5,156) (5,156)
Tax effects of other comprehensive
income (2,690) (2,690)
Other comprehensive income 4,207
Comprehensive loss $(105,783)(105,783)
Amortization of unearned stock
compensation 3,472 3,472
Issuance of common stock for
unearned stock compensation 292 73 752 (825)
Cancellation of common stock
to be issued for earn-outs (87,548) (87,548)
Other (8) (2) (392) 507 113
SEPTEMBER 30, 2000 10,243 $2,561 $547,122 $ (942) $(17,363) $(4,641) $(256,764) $269,973
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
AMRESCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
2000 1999
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(109,990) $ (59,667)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities of continuing operations:
(Income) loss from discontinued operations (46,184) 1,444
Gain on sale of loans and investments (27,976) (61,569)
Extraordinary gain on early retirement of debt (5,650)
Loss on retained interests in securitizations 109,226 90,000
Loss on disposal and impairment of assets 44,906 8,651
Depreciation and amortization 13,446 16,676
Accretion of interest income, net (12,013) (19,153)
Provisions for loan and asset portfolio losses 9,403 (18)
Deferred income taxes 3,388 (17,399)
Other 13,640 11,436
Changes in assets and liabilities (excl. such acquired in business compinations):
Loans held for sale, net 207,816 (82,215)
Retained interests in securitizations 14,240 157,829
Other assets (56,824) (9,116)
Accounts payable 7,193 (23,659)
Income taxes payable/receivable 3,685 34,316
Warehouse loans payable (38,342) 134,752
Other liabilities and accrued compensation and benefits (46,856) (12,743)
Net cash provided by operating activities of continuing operations 83,108 169,565
INVESTING ACTIVITIES:
Origination of loans and purchase of asset portfolios (361,164) (492,937)
Collections on loans and asset portfolios 444,699 440,302
Proceeds from sales of loans and asset portfolios 309,930
Proceeds from sale of and collections on asset-backed securities 39,747 13,995
Origination and purchase of mortgage servicing rights (304) (741)
Proceeds from sale of mortgage servicing rights 3,186 4,761
Cash used for purchase of subsidiaries including earn-out payments (37,500) (4,049)
Other 17,487 313
Net cash provided by (used in) investing activities of continuing operations 416,081 (38,356)
FINANCING ACTIVITIES:
Net proceeds from notes payable and other debt 278,813 812,753
Repayment of notes payable and other debt (819,129) (952,322)
Other 54
Net cash (used in) financing activities of continuing operations (540,316) (139,515)
Net cash provided by discontinued operations 132,746 60,973
Net increase (decrease) in cash and cash equivalents 91,619 52,667
Cash and cash equivalents, beginning of period 36,709 32,005
Cash and cash equivalents, end of period $ 128,328 $ 84,672
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 102,612 $ 132,769
Income taxes paid 598 4,948
Common stock issued for the purchase of subsidiaries and earn-outs 195
Common stock issued for unearned stock compensation, net 318 6,128
Common stock to be issued for earn-outs (87,548) 87,548
</TABLE>
See notes to consolidated financial statements.
AMRESCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(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 accounting principles generally
accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the
three and nine month periods ended September 30, 2000 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,
1999. Certain reclassifications of prior period amounts have been
made to conform to the current period presentation.
2. Discontinued Operations
In December 1999, the Company announced that it had reached
an agreement to sell its commercial mortgage banking ("CMB") business
and asset management and real estate structured finance platforms to
Lend Lease (US) Services, Inc. Accordingly, the results from the CMB
business have been shown as discontinued operations with all prior
periods restated. The Company completed the sale of its CMB business
and its asset management and real estate structured finance platforms
to Lend Lease (US) Services, Inc. on March 17, 2000. The proceeds
from this sale were allocated between continuing and discontinued
operations resulting in a pre-tax loss on disposal of assets of $23.7
million in continuing operations and a pre-tax gain on disposal of
assets of $84.3 million in discontinued operations. This includes
additional gains in continuing operations of $2.5 million from cash
received in the third quarter.
During January 2000, the Company obtained an option to return
Mortgage Investors Corporation ("MIC") and its related assets and
liabilities to its previous owners for a cash payment of $25.0
million and forgiveness of a $17.0 million note instead of the
issuance of $86.1 million of common stock. The Company exercised
this option on April 20, 2000 and accordingly, the operations of
Residential Mortgage Banking ("RMB") business have been discontinued
and all prior periods restated. The Company recorded a pre-tax loss
of $3.1 million on the disposal of the assets for the six months
ended June 30, 2000. Components of amounts reflected in the
statement of operations and balance sheets of the discontinued
operations are presented in the following tables (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
Operations Statement September 30, 2000 September 30, 1999
Data:
CMB RMB Total CMB RMB Total
<S> <C> <C> <C> <C> <C> <C>
Revenues from external sources $ 3 $ $ 3 $41,266 $ 7,401 $48,667
Gain on sale of loans and investments, net 1,218 7,220 8,438
Interest expense 1,652 467 2,119
Depreciation and amortization 4,212 4,207 8,419
Operating income (loss) (71) (71) 4,189 (13,311) (9,122)
Income tax expense (benefit) (25) (25) 1,466 (5,058) (3,592)
Income (loss) from discontinued operations (46) (46) 2,723 (8,253) (5,530)
Nine Months Ended Nine Months Ended
Operations Statement September 30, 2000 September 30, 1999
Data:
CMB RMB Total CMB RMB Total
Revenues from external sources $28,253 $ 2,189 $30,442 $111,197 $ 61,013 $172,210
Gain on sale of loans and investments, net 3,642 1,921 5,563 5,556 58,387 63,943
Gain (loss) on disposal of assets 84,271 (3,098) 81,173
Interest expense 1,836 559 2,395 5,195 2,660 7,855
Depreciation and amortization 3,122 280 3,402 11,268 10,063 21,331
Operating income (loss) 85,399 (15,040) 70,359 9,902 (12,710) (2,808)
Income tax expense (benefit) 29,890 (5,715) 24,175 3,466 (4,830) (1,364)
Income (loss) from discontinued operations 55,509 (9,325) 46,184 6,436 (7,880) (1,444)
Balance Sheet Data: September 30, 2000 December 31, 1999
CMB RMB Total CMB RMB Total
Cash and equivalents $ - $ - $ - $ 11,898 $ 5,643 $ 17,541
Loans held for sale, net 11,513 11,513
Loan and asset portfolios, net 9,771 9,771
Deferred income tax 2,385 2,385
Intangibles 57,771 41,377 99,148
Mortgage servicing rights 69,708 69,708
Other assets 2 2 8,567 9,957 18,524
Accounts and other payables (997) (997) (3,382) (11,030) (14,412)
Warehouse loans (12,675) (12,675)
Income taxes payable
Other liabilities (27,803) (585) (28,388)
Net assets of discontinued operations $(995) $ $ (995) $127,753 $ 45,362 $173,115
3. Notes Payable and Other Debt
Notes payable:
Senior Credit Facility - There were no amounts outstanding under
the senior credit facility as of September 30, 2000. The Credit
Agreement was terminated on October 16, 2000, pending release of lien
on the related assets.
Earn-out Notes - The promissory notes totaling $37.5 million
issued to the former owners of Commercial Lending Corporation for the
final earn-out payment were paid off in the second and third quarters
of 2000.
Builder Note Payable - On May 1, 1999, a wholly-owned subsidiary
of the Company entered into a Financing Agreement (the "Financing
Agreement") in which approximately $130.6 million of loans made by
such subsidiary 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
Financing Agreement's final maturity is May 25, 2007. At September
30, 2000, $111.4 million was outstanding under the Financing
Agreement.
Non-recourse Debt - The Company has non-recourse debt which is
used primarily to fund purchases of real estate mortgage backed
securities, under-performing loan portfolios and retained interests
in securitizations and is secured by the specific assets. At
September 30, 2000, $14.4 million in non-recourse debt was
outstanding secured by assets totaling $54.6 million. This includes
a $12.0 million repurchase agreement that matures December 8, 2000.
Other debt:
Warehouse Debt - The Interim Warehouse and Security Agreement
(the "Small Business Facility") dated February 26, 1998, between a
wholly-owned subsidiary of the Company and Prudential Securities
Credit Corporation ("Prudential") provides financing in an amount not
to exceed $200.0 million for the origination and purchase of small
business loans. On March 1, 2000, the Small Business Facility was
amended to extend the Maturity Date to March 31, 2001. At September
30, 2000, $26.6 million was outstanding under the Small Business
Facility. The Interim Warehouse and Security Agreement (the
"Franchise Agreement") dated March 17, 1998, between a wholly-owned
subsidiary of the Company and Prudential provides financing in an
amount not to exceed $150.0 million for the origination and purchase
of certain franchise loans. On March 1, 2000, the Franchise Facility
was amended to extend the Maturity Date to March 31, 2001. At
September 30, 2000, nothing was outstanding under the Franchise
Agreement. The total aggregate commitment amount for the Small
Business Facility and Franchise Agreement is limited to $250.0
million.
The Loan Agreement ("Transamerica Loan Agreement") dated
December 18, 1998 between a wholly-owned subsidiary of the Company
and Transamerica Business Credit Corporation provides a working
capital facility in the maximum aggregate principal amount of up to
$75.0 million for the purpose of funding new Small Business
Administration ("SBA") loans. The Transamerica Loan Agreement has a
Maturity Date of December 31, 2001. At September 30, 2000, $36.9
million was outstanding under the Transamerica Loan Agreement.
Senior Subordinated Notes - During the third quarter of 2000,
the Company repurchased $10.0 million of its senior subordinated
notes due 2005. A $3.5 million after tax gain, or $5.7 million
gain before taxes, was recorded as an extraordinary gain in the
accompanying financial statements.
Interest - Interest on the Statements of Operations represents
interest accrued on the various debt facilities of the Company for
the respective periods plus amortization of deferred debt costs as
shown below (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Interest Expense $21,838 $36,472 $73,712 $111,272
Debt issuance costs 2,637 1,845 11,024 5,790
Interest $24,475 $38,317 $84,736 $117,062
4. Shareholders' Equity
The Board of Directors authorized a one-for-five reverse stock
split that was approved at the special shareholders' meeting on
August 25, 2000. The authorized shares of the Company's common stock
was reduced to 30,000,000 with a par value of $0.25. All current and
historical common stock share amounts and earnings per share have
been adjusted to reflect the reverse split.
On May 31, 2000, the Company issued options to purchase
approximately 22,000 shares of common stock at a price in excess of
the market price on that date. On June 14, 2000 and June 27, 2000,
the Company issued approximately 259,200 and 32,400 restricted
shares, respectively, of the Company's common stock to an employee
and directors. The June 14, 2000 issuance vests over a seven month
term and the June 27, 2000 issuance vests over a one year term.
Effective April 12, 1999, the original agreement and plan of
merger to purchase MIC was amended to fix the earnout payment at
$105.0 million, with $18.9 million in cash and $86.1 million in
stock, and to provide the Company with an option to change the stock
portion of the earn-out for cash, subject to certain market
conditions and restrictions. During January 2000, the Company
obtained an option to return MIC and its related assets and
liabilities to its previous owners for a cash payment of $25.0
million and forgiveness of a $17.0 million note in lieu of the
issuance of $86.1 million of common stock. On April 20, 2000, the
option was exercised and the $86.1 million stock payment obligation
was cancelled.
5. Segments
The following represents the Company's reportable segment
position as of and for the three and nine months ended September 30,
2000 and 1999 (unaudited, in thousands):
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000
Home
Commercial Asset Equity
Finance Management Lending All Other Eliminations Total
<S> <C> <C> <C> <C> <C> <C>
Revenues from external sources $43,881 $12,432 $ 1,237 $ 2,753 - $ 60,303
Gain on sale of loans and investments, net 22,299 624 15 22,938
Interest expense 11,980 2,220 8,130 2,145 24,475
Loss on disposal and impairment of assets 5,566 (2,500) 3,066
Loss on retained interests in securizations 2,662 27,000 29,662
Depreciation and amortization 4,064 6 529 566 5,165
Operating income (loss) 9,002 9,191 (34,991) (7,174) (23,972)
1999
Home
Commercial Asset Equity
Finance Management Lending All Other Eliminations Total
Revenues from external sources $39,000 $27,193 $ 9,556 $ (6,505) - $ 69,244
Gain (loss) on sale of loans and
investments, net 3,640 6,512 (7,075) (8,476) (5,399)
Interest expense 15,359 7,437 9,138 6,383 38,317
Loss on impairment of assets 8,651 8,651
Loss on retained interests in securitizations 78,000 78,000
Depreciation and amortization 2,367 213 2,063 904 5,547
Operating income (loss) 10,902 10,295 (114,536) (23,745) (117,084)
Nine Months Ended September 30,
2000
Home
Commercial Asset Equity
Finance Management Lending All Other Eliminations Total
Revenues from external sources $ 95,321 $ 34,081 $ 11,672 $ 8,339 - $ 149,413
Gain (loss) on sale of loans and
investments, net 30,007 (2,093) 47 15 27,976
Interest expense 34,249 9,864 24,177 16,446 84,736
Loss on disposal and impairment of assets 5,035 20,850 19,021 44,906
Loss on retained interests in securitizations 2,662 106,564 109,226
Depreciation and amortization 9,336 186 1,903 2,021 13,446
Operating income (loss) 8,569 (12,249) (125,756) (52,842) (182,278)
Segment assets (liabilities) 452,697 125,372 (132,295) 1,075,979 (398,330) 1,123,423
1999
Home
Commercial Asset Equity
Finance Management Lending All Other Eliminations Total
Revenues from external sources $131,621 $ 86,499 $ 76,188 $ (2,188) - $ 292,120
Gain (loss) on sale of loans and
investments, net 35,750 17,130 17,317 (8,628) 61,569
Interest expense 45,566 22,794 31,574 17,128 117,062
Loss on disposal and impairment of assets 8,651 8,651
Loss on retained interests in securitizations 90,000 90,000
Depreciation and amortization 7,012 603 6,229 2,832 16,676
Operating income (loss) 51,703 34,663 (129,531) (42,036) (85,201)
Segment assets (liabilities) 621,557 373,981 242,489 1,898,610 (568,065) 2,568,572
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
The Company is a small and middle market business lending
company with three principal segments in continuing operations:
commercial finance, asset management and home equity lending. In its
commercial finance segment, the Company focuses on (i) loans to
franchisees of nationally recognized restaurant, hospitality and
service organizations and (ii) loans to small business owners. The
Company ceased operations in its single family residential
construction lending division through the sale of substantially all
of such division's assets and operations in the third quarter. The
asset management segment owns and is in the process of liquidating
asset portfolios which are managed by Lend Lease. The home equity
lending segment consists of a minority interest in a limited
liability company, Finance America LLC ("Finance America"), which
originates, sells and services nonconforming first mortgage loans,
and the management of a portfolio of retained interests from previous
securitizations.
The commercial mortgage banking segment, which was discontinued
during 1999, involved fee-based origination and servicing of
commercial real estate mortgages and commercial real estate
brokerage. On March 17, 2000, the Company completed the sale (the
"Lend Lease Transaction") of the commercial mortgage banking
business, asset management and real estate structured finance
platforms to Lend Lease (US) Services, Inc. ("Lend Lease"). The
proceeds from the Lend Lease Transaction were allocated between
continuing and discontinued operations resulting in a pre-tax loss on
disposal of assets of $23.7 million in continuing operations and a
pre-tax gain on disposal of assets of $84.3 million in discontinued
operations. This includes additional gains in continuing operations
of $2.5 million from cash received in the third quarter.
The residential mortgage banking segment was discontinued during
the first quarter of 2000. This segment consisted of the acquired
operations of Mortgage Investors Corporation ("MIC"), which
originated and sold Federal Housing Administration ("FHA") and
Veterans Administration ("VA") streamlined re-financed loans. The
Company's interest in MIC was terminated with the exercise of its
option to (i) return MIC to its previous owners, (ii) pay $25.0
million to the previous owners of MIC in cash and (iii) forgive $17.0
million notes from the previous owners of MIC in substitution of the
obligation to issue $86.1 million of common stock. The option was
exercised April 20, 2000.
In March 2000, the Company and the former shareholders of
Commercial Finance Corporation ("CLC") agreed to amend the Asset
Purchase Agreement pursuant to which the Company acquired CLC. This
amendment provided that the amount of the final earn-out payment due
on June 30, 2000 was fixed at $37.5 million and that the Company
issue to such former CLC shareholders promissory notes in the
aggregate principal amount of $37.5 million in lieu of the issuance
of shares of the Company's common stock having such value. During
the second and third quarters of 2000, these notes were paid in full.
On March 22, 2000, the Company sold its United Kingdom asset
management assets and operations for $160.0 million, consisting of
the assumption of non-recourse debt of $81.9 million, cash of $47.0
million, which was used to reduce bank debt, and two notes receivable
aggregating $25.0 million. A loss of $5.4 million on this transaction
was recorded as loss on disposal of assets in the accompanying
financial statements.
During the first quarter of 2000, the Company transferred net
assets of $6.2 million of the home equity lending business to Finance
America in exchange for a 36% interest therein. An additional
capital contribution of $1.2 million was made in the second quarter.
The formation of Finance America represented the completion of the
Company's previously announced plan to exit the home equity subprime
mortgage finance business. Finance America took over the subprime
home equity mortgage origination and sale business previously
conducted by the Company's subsidiary, AMRESCO Residential Mortgage
Corporation. This transaction allowed the Company to cap its future
investment in the home equity mortgage business, partner with a major
investment bank that is substantially involved in the home equity
mortgage business, both as a lender and as an investment banker, and
retain an equity upside opportunity.
On September 22, 2000, the Company sold certain of the assets and
operations of its homebuilder finance division (the "Homebuilders
Transaction") for $132.6 million. The Company has received $126.0
million of cash and is scheduled to receive $6.6 million in cash
within eighteen months. A loss of $5.6 million on this transaction
was recorded as loss on disposal of assets in the accompanying
financial statements.
During the third quarter of 2000, the Company repurchased $10.0
million of its senior subordinated notes due 2005. A $3.5 million
after tax gain, or $5.7 million gain before taxes, was recorded as
an extraordinary gain in the accompanying financial statements.
Results of Operations
The following discussion and analysis presents the significant
changes in results of operations of the Company for the three and
nine months ended September 30, 2000 and 1999 by segment. This
discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(in thousands) September 30, September 30,
2000 1999 2000 1999
Revenues:
<C> <C> <C> <C> <C>
Commercial finance $ 43,881 $ 39,000 $ 95,321 $ 131,621
Asset management 12,432 27,193 34,081 86,499
Home equity lending 1,237 9,556 11,672 76,188
Corporate, other and intercompany elininations 2,753 (6,505) 8,339 (2,188)
Total revenues 60,303 69,244 149,413 292,120
Operating expenses:
Commercial finance 34,879 28,098 86,752 79,918
Asset management 3,241 16,898 46,330 51,836
Home equity lending 36,228 124,092 137,428 205,719
Corporate, other and intercompany eliminations 9,927 17,240 61,181 39,848
Total operating expenses 84,275 186,328 331,691 377,321
Operating income (loss):
Commercial finance 9,002 10,902 8,569 51,703
Asset management 9,191 10,295 (12,249) 34,663
Home equity lending (34,991) (114,536) (125,756) (129,531)
Corporate, other and intercompany eliminations (7,174) (23,745) (52,842) (42,036)
Total operating income (loss) (23,972) (117,084) (182,278) (85,201)
Income tax expense (benefit) (2,125) (40,605) (22,634) (26,978)
Income (loss) from continuing operations (21,847) (76,479) (159,644) (58,223)
Income (loss) from discontinued operations, net of taxes (46) (5,530) 46,184 (1,444)
Income (loss) before extraordinary gain (21,893) (82,009) (113,460) (59,667)
Extraordinary gain on early retirement of debt, net of taxes 3,470 3,470
Net income (loss) $(18,423) $(82,009) $(109,990) $(59,667)
</TABLE>
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
The Company reported a 13% decrease in revenues from $69.2
million to $60.3 million. The decrease in revenues was due primarily
to decreases of $30.8 million in interest and other investment income
and $5.2 million in asset management and resolution fees, which
decrease was offset, in part, by an increase of $28.3 million in gain
on sale of loans and investments. Operating loss from continuing
operations decreased from a loss of $117.1 million for the third
quarter of 1999 to a loss $24.0 million for the third quarter of
2000. The decrease in operating loss was due primarily to (i) a
$51.0 million decrease in loss on retained interests in
securitizations in home equity lending, (ii) lower personnel and
general and administrative costs due to the Company's exit from the
home equity subprime mortgage finance business and reduced corporate
headcount and (iii) lower interest expense related to reduced
balances of the senior credit facility and warehouse debt. Net loss
decreased $63.6 million from a loss of $82.0 million in the third
quarter of 1999 to $18.4 million primarily due to the decreases in
expenses noted above, a $5.5 million decrease in loss from
discontinued operations and the $3.5 million extraordinary gain on
the early retirement of senior subordinated notes, net of income
taxes.
Commercial Finance. Revenues for the three months ended
September 30, 2000 primarily consisted of $22.3 million of gain on
sale of loans, $19.2 million of interest income and $2.1 million in
origination and servicing fees. The $4.9 million increase in
revenues from $39.0 million for the prior year period to $43.9
million for the three months ended September 30, 2000 related
primarily to a $18.7 million increase in gain on sale of loans and
investments offset, in part, by a $14.3 million decrease in interest
and other investment income. The increase in gain on sale of loans
was due primarily to third quarter 2000 securitization gains of $17.8
million on a $210.0 million conventional lending securitization and
$3.0 million on a $65.0 million small business administration loan
securitization compared to a gain of $1.8 million on a $62.1 million
small business securitization in the prior year quarter. The
decrease in interest and other investment income was due primarily to
decreased balances of loans held by the real estate and communication
group. Approximately $182.4 million of real estate structured
finance loans were sold in the first quarter of 2000 and $130.0
million of communications loans were sold in the fourth quarter of
1999.
Operating expenses for the quarter ended September 30, 2000
primarily consisted of $12.0 million of interest expense, $5.8
million of personnel expense, $5.6 million of loss on disposal of
assets, $4.1 million of depreciation and amortization, $3.1 million
of other general and administrative expense, $2.7 million of loss on
retained interests in securitizations and $1.7 million of provision
for loan losses. The $6.8 million increase in expenses from $28.1
million for the prior year period to $34.9 million for the quarter
ended September 30, 2000 was primarily due to the $5.6 million loss
relating to the Homebuilders Transaction, the $2.7 million loss on
retained interests in securitizations related to telephone equipment
finance loans, an increase of $1.7 million in depreciation and
amortization due to additional amortization from the $37.5 million
earn-out settlement with the former shareholders of CLC and an
increase of $1.4 million in provision for loan losses resulting from
an increase in current year provisions for real estate loans. This
increase was partially offset by decreases of $3.4 million of
interest expense related to the financing for loans held by the real
estate and communication group and $1.3 million of personnel expense.
Asset Management. Revenues for the three months ended September
30, 2000 primarily consisted of $11.1 million of interest and other
investment income. The $14.8 million decrease in revenues from $27.2
million for the third quarter of 1999 to $12.4 million for the third
quarter of 2000 was primarily comprised of decreases of $5.9 million
in gain on sale, $5.2 million in asset management and resolution fees
and $4.5 million in interest and other investment revenue. These
decreases were primarily due to the reduction in the amount of such
assets and the sale of the United Kingdom assets in the first quarter
of 2000.
Operating expenses for the quarter ended September 30, 2000
primarily consisted of $3.1 million in other general and
administrative expenses and $2.2 million in interest expense, which
expenses were offset, in part, by a $2.5 million gain on disposal of
assets related to the Lend Lease Transaction. The $13.7 million
decrease in expenses from $16.9 million for the prior year period to
$3.2 million for the quarter ended September 30, 2000 was primarily
due to a $5.2 million decrease in interest expense, a $4.7 million
decrease in personnel cost, a $1.0 million decrease in other general
and administrative expenses and $2.5 million increase in gain on
disposal of assets. These decreases were primarily due to the
reduction in the amount of such assets resulting from the Lend Lease
Transaction and the sale of the United Kingdom assets in the first
quarter of 2000.
Home Equity Lending. Revenues for the three months ended
September 30, 2000 primarily consisted of $1.2 million of interest
income. The $8.4 million decrease in revenues from $9.6 million for
the prior year period was primarily due to decreases of $12.9 million
in interest income and $2.1 million in mortgage banking and servicing
fees offset, in part, by a prior year quarter $7.1 million loss on
sale. The decreases in revenues were primarily due to the transfer
of this business to Finance America in the first quarter of this
year.
Operating expenses for the quarter ended September 30, 2000
primarily consisted of $27.0 million of write-down of retained
interests in securitizations and $8.1 million of interest expense.
Operating expenses decreased by $87.9 million from $124.1 million for
the prior year period to $36.2 million for the quarter ended
September 30, 2000 primarily due to decreases of $51.0 million in
loss on retained interests in securitization resulting from smaller
write-downs, $14.7 million in other general and administrative
expenses, $11.2 million in personnel cost, $8.7 million on impairment
of intangible assets, $1.5 million in depreciation and amortization
and $1.0 million in interest expense. The decreases in expenses were
primarily due to the aforementioned transfer of the business to
Finance America.
Corporate, Other and Intercompany Eliminations. Revenues of
$2.8 million for the three months ended September 30, 2000 primarily
consisted of interest income from investments in residential mortgage
backed securities. The $9.3 million increase in revenues from a $6.5
million loss in the prior year quarter was primarily due to a prior
year $8.5 million loss on the sale of a residential mortgage backed
security and an $0.8 million increase in interest income. The $7.3
million decrease in expenses from $17.2 million for the prior year
period to $9.9 million for the quarter ended September 30, 2000 was
primarily due to decreases of $5.7 million in personnel cost and $4.2
million in interest expense offset, in part, by a $3.0 million
increase in unallocated other general and administrative costs.
Personnel cost decreased due to a decrease in corporate employees and
interest expense decreased due to a lower balance outstanding on the
senior credit facility.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
The Company reported a 49% decrease in revenues from $292.1
million to $149.4 million primarily due to decreases of $95.3 million
in interest and other investment income, $33.6 million in gain on
sale of loans and investments and $9.5 million in asset management
and resolution fees. Operating loss from continuing operations
increased from $85.2 million for the first nine months of 1999 to
$182.3 million for the first nine months of 2000 and net loss
increased from $59.7 million to $110.0 million. The increase in
operating loss was primarily due to (i) the decreases in revenues
noted above, (ii) losses on the Lend Lease Transaction primarily
driven by the allocation of the purchase price to specific assets
purchased, (iii) increased write-downs and loss on sale of retained
interests in securitizations, (iv) increased provisions for loan and
asset portfolio losses, (v) the loss on the Homebuilder Transaction
and (vi) the sale of the United Kingdom assets and operations. These
decreases in operating income were offset, in part, by lower
personnel, interest, other general and administrative and
depreciation and amortization expenses.
Commercial Finance. Revenues for the nine months ended
September 30, 2000 primarily consisted of $58.4 million of interest
income, $30.0 million of gain on securitization and sale of loans and
$5.9 million in mortgage banking and servicing fees. The $36.3
million decrease in revenues from $131.6 million for the prior year
period to $95.3 million for the nine months ended September 30, 2000
primarily related to decreases of $33.0 million in interest and other
investment income and $5.7 million in gain on sale of loans. The
decrease in interest and other investment income was due to decreased
balances of loans primarily resulting from the sale of $182.4 real
estate structured finance loans early in the first quarter of 2000
and the sale of $130.0 million of communication loans in the fourth
quarter of 1999. The decrease in gain on sale of loans was primarily
due to $328.7 million of small business and SBA loan securitizations
completed in the first nine months of 1999 compared to $275.0 million
of small business and SBA loan securitization in the first nine
months of 2000.
Operating expenses for the nine months ended September 30, 2000
primarily consisted of $34.2 million of interest expense, $18.1
million of personnel expense, $9.3 million of depreciation and
amortization, $9.4 million of provisions for loan losses and $8.0
million of other general and administrative expense. The increase in
expenses of $6.9 million from $79.9 million for the prior year period
to $86.8 million for the nine months ended September 30, 2000 was
primarily due to a $13.2 million increase in provision for loan
losses, a $5.0 million net loss on the Homebuilder Transaction and
sale of the real estate structured finance platform, a $2.7 million
loss on retained interests in securitizations related to telephone
equipment lending loans and a $2.3 million increase in depreciation
and amortization. These increases were partially offset by decreases
of $11.3 million in interest expense related to the financing of
lower balances of loans and loans held for sale, $2.6 million in
personnel cost related to the sale of loans and reduction in activity
in the real estate structured finance and communication group and
$2.4 million in other general and administrative expense.
Asset Management. Revenues for the nine months ended September
30, 2000 primarily consisted of $29.4 million in interest income,
$5.5 million in asset management and resolution fees and $1.3 million
in other income offset, in part, by $2.1 million of loss on sale of
investments. The $52.4 million decrease in revenues from $86.5
million for the first nine months of 1999 to $34.1 million for the
first nine months of 2000 was primarily comprised of decreases of
$24.3 million in interest income, $19.2 million in gain on sale of
investments and $9.6 million in asset management and resolution fees.
These decreases were primarily due to the sale of the asset
management platform and the sale of the United Kingdom assets in the
first quarter of 2000.
Operating expenses for the period ended September 30, 2000
primarily consisted of $20.9 million of loss on disposal and
impairment of assets, $9.9 million in interest expense, $9.6 million
in other general and administrative expenses and $5.8 million in
personnel cost. The $5.5 million decrease in operating expenses from
$51.8 million for the prior year period to $46.3 million for the nine
months ended September 30, 2000 was primarily due to the loss on
disposal and impairment of assets of $20.9 million offset, in part,
by decreases of $12.9 million in interest expense, $9.2 million in
personnel expense, $2.8 million in other general and administrative
expenses and $1.0 million in provision for loan and asset portfolio
losses primarily as a result of the Lend Lease Transaction and the
United Kingdom asset sale. The loss on disposal and impairment of
assets is comprised of a $7.6 million impairment of asset backed
securities, a $5.4 million loss on the sale of the UK operation, a
$5.2 million loss on the Lend Lease Transaction and a $2.7 million
impairment of the Company's investment in AMRESCO Capital Trust.
Home Equity Lending. Revenues for the nine months ended
September 30, 2000 primarily consisted of $9.8 million of interest
income and $1.4 million in mortgage banking and servicing fees. The
$64.5 million decrease in revenues from $76.2 million for the prior
year period to $11.7 million for the nine months ended September 30,
2000 was primarily due to decreases of $39.8 million in interest
income related to holding reduced balances of loans held for sale due
to the transfer of this business to Finance America, $17.3 million in
gain on sale of loans and $6.3 million in mortgage banking and
servicing fees also due to the transfer to Finance America.
Operating expenses for the nine months ended September 30, 2000
primarily consisted of $106.6 million of write-downs and loss on sale
of retained interests in securitizations, $24.2 million of interest
expense, $4.3 million of other general and administrative expense and
$1.9 million of depreciation and amortization. Operating expenses
decreased by $68.3 million from $205.7 million for the prior year
period to $137.4 million for the nine months ended September 30, 2000
primarily due to decreases of $32.1 million in personnel expense,
$29.5 million in other general and administrative expense, $8.7
million in impairment of assets, $7.4 million in interest expense,
$4.3 million in depreciation and amortization and $2.8 million in
provision for loan and investment losses, which decreases were
offset, in part, by an increase of $16.6 million in loss on retained
interests in securitizations. The $106.6 million loss on retained
interests consisted of a $97.0 million write-down and a $9.6 million
loss on the sale of retained interests. The decrease in impairment
of assets of $8.7 million related to a prior year impairment of
intangible assets and the decreases in other expenses were primarily
due to the aforementioned transfer to Finance America.
Corporate, Other and Intercompany Eliminations. Revenues of
$8.3 million for the nine months ended September 30, 2000 primarily
consisted of interest income from investments in residential mortgage
backed securities. The $21.3 million increase in expenses from $39.9
million for the prior year period to $61.2 million for the nine
months ended September 30, 2000 was primarily due to the $19.0
million loss on the disposal of assets and related expenses on the
Lend Lease Transaction and a $10.6 million increase in general and
administrative expenses primarily due to decreased allocations of and
general and administrative expenses offset, in part, by a $6.8
million decrease in personnel cost related to a reduction in
corporate headcount.
Liquidity and Capital Resources
Cash flows provided by operating activities, principal
collections and sales of loans, asset portfolios and asset-backed
securities totaled $877.5 million for the first nine months of 2000
compared to $623.9 million for the same period in 1999. The variance
from the prior period was primarily due to the sale of the
real estate structured finance portfolio for $170.2, the Lend
Lease Transaction, and the Homebuilder Transaction, offset, in part,
by cash receipts of $138.0 million in the prior year period
from the resecuritization of retained interests in securitizations.
Cash and cash equivalents totaled $128.3 million at September 30,
2000 which included the proceeds of the Homebuilders Transaction.
Subsequent to quarter end the Company utilized a substantial portion
of its cash position to repurchase senior subordinated notes. As of
November 6, 2000, the Company's cash and cash equivalents was $42.5
million. The Company anticipates holding a majority of its current cash
and cash equivalents for future working capital uses, loan repurchase
obligations and other operating and financing needs. The following table
is a summary of selected cash flow activity and debt ratios during the
first nine months of 2000 and 1999 (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Net cash provided by operating activities of continuing operations $ 83,108 $169,565
Net cash provided by (used in)investing activities of continuing operations 416,081 (38,356)
Net cash (used in) financing activities of continuing operations (540,316) (139,515)
Net cash provided by discontinued operations 132,746 60,973
Other financial measures:
Cash flow from operations and collections on and sales of loans,
asset portfolios and asset-backed securities 877,484 623,862
Cash provided by new capital and borrowings (used in repayment),
net (excluding warehouse loans payable) (540,316) (139,569)
Cash used for purchase of asset portfolios, asset-backed securities,
mortgage servicing rights and originations of loans (361,468) (493,678)
</TABLE>
The following table is a summary of selected debt ratios as of
September 30, 2000 and December 31, 1999:
2000 1999
Ratio of total debt to equity 3.0:1 3.0:1
Ratio of core debt to equity (excludes
indebtedness under warehouse lines of credit) 2.8:1 2.8:1
The following table shows the components of the Company's loans
held for sale, loans and asset portfolios, retained interests in
securitizations, notes receivable and asset backed securities and
the corresponding debt as of September 30, 2000 and December 31,
1999 (in millions):
<TABLE>
<CAPTION>
2000 1999
Assets Debt Assets Debt
<S> <C> <C> <C> <C> <C> <C>
Loans held for sale:
SBA $ 46.2 $ 36.9 (a) $ 57.5 $ 47.2 (a)
Conventional lending 31.4 26.6 (b) 63.2 53.3 (b,g,h)
Other 8.3 11.9
Real estate structured finance 162.4
Total loans held for sale 85.9 295.0
Loans:
Homebuilder lending 134.7 111.4 (c) 217.2 142.5 (c,i)
Real estate structured finance and communication 35.9 62.0
Home equity lending servicing advance 9.6
Other 17.7 26.8
Total loans 188.3 315.6
Investments in loan and other asset portfolios:
Loan portfolios 37.9 135.8
Real estate 35.0 2.3 (d) 189.2 125.8 (d)
Partnerships, preferred stock and joint ventures 12.2 52.1
Other 7.1 12.7
Total purchased loan and other asset portfolios 92.2 389.8
Total loans and asset portfolios 280.5 705.4
Asset-backed securities - available for sale
Commercial mortgage backed securities 16.7 59.0
Residential mortgage backed securities 46.9 46.9 (e) 48.0 48.0 (e)
Total asset backed securities 63.6 107.0
Notes receivable:
Lend Lease sale 25.0 -
U.K. asset sale 23.2 -
Builders asset sale 12.9 -
Total notes receivable 61.1 -
Retained interests in securitizations
Conventional lending 145.9 12.1 (f) 127.7
SBA 24.1 16.3
Home equity lending 46.1 155.3 7.6 (j)
Total retained interests in securitizations 216.1 299.3
Other related debt 236.2 424.4
Senior Credit Facility - 384.7
Other - 1.4
Totals $707.2 $236.2 $1,406.7 $810.5
(a) Transamerica SBA warehouse line of credit
(b) Prudential small business warehouse line of credit
(c) Homebuilder lending commercial paper conduit
(d) Other non-recourse debt
(e) Non-recourse debt related to secuirtization of RMBS assets
(f) Repurchase agreement non-recourse financing
(g) Salomon Brothers small CMBS warehouse line of credit
(h) Prudential franchise warehouse line of credit
(i) Kitty Hawk commercial paper conduit
(j) Donaldson Lufkin & Jenrette residual security non-recourse debt
</TABLE>
The following table shows the components of the Company's
capital structure, including certain short-term debt, as of September
30, 2000 and December 31, 1999 (dollars in millions):
2000 1999
% of % of
Dollars Total Dollars Total
Shareholders' equity $ 270.0 25% $ 459.7 25%
Senior subordinated notes 569.9 53 580.0 31
Warehouse loans payable 63.6 6 101.9 6
Notes payable 172.7 16 708.6 38
Total $1,076.2 100% $1,850.2 100%
Total assets decreased $0.8 billion to $1.1 billion at September
30, 2000 from $1.9 billion at December 31, 1999. The decrease was
primarily due to sales of the real estate structured finance
portfolio, the assets of the United Kingdom operation, the assets of
the Homebuilder Transaction and the Lend Lease Transaction.
See Note 3, "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, 1999.
General
The Company believes it has sufficient liquidity to meet its
obligations and funding requirements to maintain its operations at
the currently reduced investment pace. The primary sources of
liquidity currently include internally generated funds, availability
under new agreements, if any, as well as, to the extent described
above, the warehouse facilities, sales of assets and operations and
cash balances. The Company has been informed that the Prudential Small
Business and Franchise Facilities will not be renewed in March 2001 and
that the Transamerica SBA Facility will not be renewed in December 2001.
No assurance can be given that new warehouse facilities can be put in
place. The failure to replace either or both of such warehouse
facilities would have a material adverse effect upon operations and
the financial condition of the Company. Any cash in excess of the
day to day operating needs of the Company may be utilized in
connection with the acquisition of businesses, expansion of existing
businesses and the continued repurchasing of its outstanding
subordinated notes. No assurance can be given that excess cash will
be available or, that if available, could be utilized to acquire any
business, expand existing businesses or repurchase any more of its
outstanding subordinated notes.
The Company 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.
Recent Developments
On October 25, 2000, through a series of simultaneous
transactions, the Company (i) repurchased approximately $130.6
million in loans from the homebuilders securitization resulting in a
payoff of $111.4 million in non-recourse debt and (ii) sold such
loans at par. The Company received net cash proceeds of $22.7
million, after repayment of the non-recourse debt and recovery of
servicing advances. Additional hold back proceeds of $3.4 million
are anticipated to be received within thirty days. The Company
recorded a gain of $0.3 million on this series of transactions.
Through November 6, 2000, the Company continued to repurchase
its outstanding senior subordinated notes. After expensing related
debt issuance costs, an after tax gain of approximately $45.3 million,
or a $73.1 million gain before taxes, was recorded on the repurchase of
an aggregate of $183.7 million of the senior subordinated notes
subsequent to quarter end, decreasing to $386.2 million the
outstanding principal amount thereof.
Other Matters
Prepayment rates on the Company's franchise and small business
loan securitizations are in line with expectations; however, the
default rate on such loans has recently exceeded expectations. If
the default rate does not decrease, write-downs of the Company's
retained interests relating to such securitizations and other assets
may be necessary. Current valuations take into account the 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. Also, certain loans made to
pay phone operators that were a part of the small business
securitization are now projected to have losses which resulted in a
write-down of retained interests in securitizations of $2.7 million
during the quarter.
The actual constant default rate on the Company's home equity
securitizations from inception to date is 1.8% and is projected to be
5.3% for the next twelve months. The actual loss severity rate from
inception to date is 41.7% and is projected to be 42.0% over the next
twelve months. These rates are higher than originally projected.
Through September 30, 2000, the weighted average annual prepayment
rate was 26.5% for the period from inception of each security and is
modeled to be 24.6% for the next twelve months. Based upon actual
default and loss severity performance, which has exceeded projected
levels, and the Company's valuation model which projects future
performance, a non-cash write down of $27.0 million during the third
quarter of 2000 was recorded. Future performance will dictate what
write-downs, if any, will be needed in future periods.
The weighted-average discount rates used to value the Company's
retained interests from commercial finance and from home equity
securitizations at September 30, 2000 were 15.4% and 18.2%,
respectively. The Company utilized, for initial valuation purposes,
discount rates ranging from 14% - 20% for its commercial finance
franchise loan securitizations, an 18% discount rate on its
commercial finance small business loan securitizations and a 20%
discount rate on its home equity 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 September 30, 2000 consisted of $145.9 million of
commercial finance conventional loan interests, $24.1 million of
commercial finance SBA loan interests and $46.1 million of home
equity loan interests.
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 generally represents the risk of loss that may
result from the potential change in the value of a financial
instrument as a result of fluctuations in interest and currency
exchange rates and in equity and commodity prices. Market risk is
inherent to both derivative and non-derivative financial instruments,
and accordingly, the scope of the Company's market risk management
procedures extends beyond derivatives to include all market risk
sensitive financial instruments.
The following is a discussion of the Company's primary market
risk exposures as of September 30, 2000, including a discussion of
how those exposures are managed.
Interest Rate Risk
The Company is subject to interest rate risk through its normal
operating activities. The Company generates and holds fixed rate
loans and investments through its origination and asset management
activities. A substantial portion of these fixed rate loans and
investments are financed by LIBOR based notes payable and warehouse
loans payable. In addition, in the normal course of business, the
Company is a party to financial instruments (including derivatives)
with off-balance sheet risk. These financial instruments help to
hedge against changes in interest rates. 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. From time to time, these
financial instruments include interest rate cap agreements, put
options and forward and futures contracts. The instruments involve,
to varying degrees, elements of 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.
Interest rate sensitivity analyses are used to measure the
Company's interest rate risk related to its trading and other than
trading portfolios by computing hypothetical changes in fair values
of interest rate sensitive assets, liabilities and off balance sheet
items in the event of a hypothetical changes in interest rates. The
following tables summarize the Company's interest rate sensitivity
analyses as of September 30, 2000 (dollars in millions):
Retained Interests in Securitization (trading):
Change in Hypothetical Hypothetical
Interest Rates Fair Value Change ($) Change (%)
10% $212.7 $(3.4) (1.6)%
0 216.1 - -
(10)% 218.7 2.6 1.2
Retained interests in securitization have been generated from
the Home Equity and Commercial Finance divisions. The performance of
the retained interests vary by securitizations based upon numerous
factors, including, loan type, collateral underlying loans, year of
origination, market conditions at origination and changes in market
conditions subsequent to origination. The fair value of each
retained interest and their sensitivity to changes in interest rates
have been determined based upon discounted cash flow analysis of each
securitization, utilizing various discount rates, prepayment rates
and loss assumptions.
Other than Trading:
Change in Hypothetical Hypothetical
Interest Rates Fair Value Change ($) Change (%)
10% $80.6 $ 3.9 5.1%
0 76.7 - -
(10)% 73.0 (3.7) (4.8)
The other than trading category includes loans held for sale,
loans and asset portfolios, asset backed securities, derivative
positions, 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. The fair value of these assets
and liabilities and their sensitivity to changes in interest rates
have been determined based upon discounted cash flow analysis,
historical market variances, mark to market quotes from dealers and
Bloomberg quotations. In an increasing interest rate environment,
the Company projects the fair value of its debt obligations to
decrease offset, in part, by a fair value reduction in its asset and
derivative portfolio.
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the
foregoing tables. 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
that restrict changes in interest rates on a short-term basis and
over the life of the asset. Additionally, current expectations for
market interest rates may, in and of themselves, create further
changes in interest rates in the future as a result of the
revaluation of global assets and liabilities. Accordingly, because
of the inherent limitations of a sensitivity analysis, the data
presented in the above tables should not be relied upon as indicative
of actual results in the event of changes in interest rates.
Foreign Exchange Risk
Foreign exchange risk arises from the possibility that changes
in foreign exchange rates will impact the value of financial
instruments. The Company is subject to foreign exchange risk to the
extent its income bearing assets exceeds its related foreign
denominated debt. The following table summarizes the hypothetical
impact to the Company's financial position as of September 30, 2000,
due to changes in foreign currency exchange rates (dollars in
millions):
Change in
Foreign
Exchange Rates Hypothetical Hypothetical
per Dollar Fair Value Change Change
10% $35.0 $(3.8) (9.8)%
0 38.8 - -
(10)% 43.0 4.2 10.8
Other Market Risks
As with any entity's investment or asset portfolios, the Company
is subject to the risk that certain unpredictable conditions can
exist which combine to have the effect of limiting the Company's
ability to liquidate its assets through sale or securitization. The
Company believes its liquidity risk would not be materially impacted
solely by a 10% change in interest rates without a more substantial
change in spreads.
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
On August 25, 2000 the Company held a special shareholders'
meeting at which the following matters were considered and voted
upon:
(a) One-for-five reverse stock split
A proposal to amend the Company's Restated Certificate of
Incorporation to effect a reverse split of the outstanding
shares of the Company's common stock, whereby every five
shares of common stock outstanding will automatically be
reverse split into one share outstanding and thereby
increasing the par value of the common stock from $0.05 per
share to $0.25 per share was approved. The number of
shares, pre-split, voting for the proposal: 43,222,808;
shares against the proposal: 1,231,452; shares abstaining:
170,621.
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.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
AMRESCO, INC.
Registrant
Date: November 14, 2000 By:/s/ Jonathan S. Pettee
Jonathan S. Pettee
Executive Vice President
and Chief Financial Officer
