UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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 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:
48,735,882 shares of common stock, $.05 par value per share,
as of May 1, 2000.
AMRESCO, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2000 and
December 31, 1999 3
Consolidated Statements of Operations - Three
Months Ended March 31, 2000 and 1999 4
Consolidated Statement of Shareholders' Equity -
Three Months Ended March 31, 2000 5
Consolidated Statements of Cash Flows - Three
Months Ended March 31, 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 14
About Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE 17
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
AMRESCO, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share amounts)
March 31 December 31
2000 1999
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 23,754 $ 36,709
Loans held for sale, net 148,701 295,041
Loans and asset portfolios, net 495,376 705,353
Retained interests in securitizations - trading (at fair value) 305,023 299,311
Asset-backed securities - available for sale (at fair value) 74,781 107,005
Accounts receivable, net of reserves of $541 and $605 21,535 15,394
Income taxes receivable 20,197 2,480
Deferred income taxes 70,949 73,983
Premises and equipment, net of accumulated
depreciation of $8,411 and $15,680 4,342 10,408
Intangible assets, net of accumulated amortization of
$25,795 and $30,216 129,397 138,762
Mortgage servicing rights, net of accumulated amoritzation
of $1,163 and $939 7,342 6,283
Other assets 119,488 68,967
Net assets of discontinued operations 20,889 173,115
TOTAL ASSETS $1,441,774 $1,932,811
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 11,555 $ 9,068
Accrued employee compensation and benefits 6,046 14,830
Notes payable 237,710 708,611
Warehouse loans payable 115,870 101,894
Senior subordinated notes 579,979 580,033
Other liabilities 24,984 58,656
TOTAL LIABILITIES 976,144 1,473,092
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $0.05 par value, authorized 150,000,000
shares; 49,774,495 and 49,792,788 shares issued 2,490 2,490
Capital in excess of par 546,574 546,762
Common stock to be issued for earn-outs 86,100 87,548
Treasury stock, $0.05 par value, 1,024,339 shares (17,363) (17,363)
Accumulated other comprehensive loss (6,176) (8,848)
Unamortized stock compensation (1,222) (4,096)
Accumulated deficit (144,773) (146,774)
TOTAL SHAREHOLDERS' EQUITY 465,630 459,719
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,441,774 $1,932,811
</TABLE>
See notes to consolidated financial statements.
AMRESCO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
REVENUES:
Interest and other investment income $ 34,155 $ 66,460
Asset management and resolution fees 3,884 4,837
Mortgage banking and servicing fees 2,004 3,978
Other revenues 1,566 1,144
Gain on sale of loans and investments, net 1,422 26,403
Total revenues 43,031 102,822
EXPENSES:
Personnel 18,096 29,912
Interest 31,910 39,838
Loss on disposal of assets 38,431
Other general and administrative 12,519 16,897
Depreciation and amortization 4,753 5,523
Provisions for loan and asset portfolio losses 2,255 3,718
Total expenses 107,964 95,888
Income (loss) from continuing operations before income taxes (64,933) 6,934
Income tax expense (benefit) (19,588) 2,886
Income (loss) from continuing operations (45,345) 4,048
Income from discontinued operations, net of income taxes 47,346 6,190
NET INCOME $ 2,001 $ 10,238
Weighted average earnings (loss) per share - basic and diluted:
Income (loss) from continuing operations $(0.94) $0.08
Income from discontinued operations, net of income taxes 0.98 0.13
Net income $ 0.04 $0.21
Weighted average number of common shares outstanding:
Basic 48,259 47,677
Diluted 48,259 49,162
</TABLE>
See notes to consolidated financial statements.
AMRESCO, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Three Months Ended March 31, 2000
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Common Stock Capital in Other
$0.05 par value Excess of Treasury Compr. Accumulated Compr.
Shares Amount Par Other Stock Income(Loss) Deficit Income Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
JANUARY 1, 2000 49,793 $2,490 $546,762 $83,452 $(17,363) $(8,848) $(146,774) $459,719
Comprehensive income:
Net income 2,001 $ 2,001
Other comprehensive income (loss):
Unrealized gain on securities 6,108 6,108
Reclassification of losses included
in net income 157 157
Foreign currency translation
adjustments (1,885) (1,885)
Tax effects of other comprehensive
income (1,708) (1,708)
Other comprehensive income 2,672
Comprehensive income $ 4,673 4,673
Amortization of unearned stock
compensation 2,573 2,573
Elimination of common stock to be
issued for earn-outs (1,448) (1,448)
Other (19) (188) 301 113
MARCH 31, 2000 49,774 $2,490 $546,574 $84,878 $(17,363) $(6,176) $(144,773) $465,630
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
AMRESCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,001 $ 10,238
(Income) from discontinued operations (47,346) (6,190)
Income (loss) from continuing operations (45,345) 4,048
Adjustments to reconcile net income to net cash provided by
(used in) operating activities of continuing operations:
Gain on sale of loans and investments (1,422) (26,403)
Depreciation and amortization 4,753 5,523
Accretion of interest income, net (4,475) 1,116
Provisions for loan and asset portfolio losses 2,255 3,718
Deferred income taxes 3,034 1,743
Other 6,218 5,549
Changes in assets and liabilities (exclusive of such
acquired in business combinations):
Loans held for sale, net 144,784 (27,213)
Retained interests in securitizations 2,153 154,295
Other assets (57,051) 4,543
Accounts payable 2,487 (19,160)
Income taxes payable/receivable (17,717) 34,419
Warehouse loans payable 13,976 7,500
Other liabilities and accrued compensation and benefits (43,606) (26,050)
Net cash provided by operating activities of
continuing operations 10,044 123,628
INVESTING ACTIVITIES:
Origination of loans and purchase of asset portfolios (120,408) (136,011)
Collections on loans and asset portfolios 330,848 119,160
Proceeds from sale of and collections on asset-
backed securities - available for sale 34,177 426
Origination and purchase of mortgage servicing rights (111) (230)
Cash used for purchase of subsidiaries including earn-out payments (4,049)
Other 5,319 (1,357)
Net cash provided by (used in) investing activities of continuing
operations 249,825 (22,061)
FINANCING ACTIVITIES:
Net proceeds from notes payable and other debt 123,674 277,917
Repayment of notes payable and other debt (594,622) (420,929)
Other 31
Net cash used in financing activities of continuing operations (470,948) (142,981)
Net cash provided by discontinued operations 198,124 47,110
Net increase (decrease) in cash and cash equivalents (12,955) 5,696
Cash and cash equivalents, beginning of period 36,709 32,005
Cash and cash equivalents, end of period $ 23,754 $ 37,701
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 49,890 $ 54,896
Income taxes paid 144 339
Common stock issued for the purchase of subsidiaries
and earn-outs 195
Common stock issued for unearned stock compenstaion, net (301) 6,311
Common stock to be issued for earn-outs (1,448) 59,605
</TABLE>
See notes to consolidated financial statements
AMRESCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 month period ended March 31, 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 were 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
and were recorded as a pre-tax loss on disposal of assets of $33.1
million in continuing operations and a pre-tax gain on disposal of
assets of $81.0 million in discontinued operations. The Company
anticipates obtaining an additional $15.0 million cash for consents
in the second quarter and recognizing a gain of $10.0 million in
continuing operations and a gain $5.0 million in discontinued
operations therefrom.
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 operating loss for the first
quarter includes anticipated losses for the first twenty days of
April until the exercise of the option. 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 March 31, 2000 March 31, 1999
Data:
<S> <C> <C> <C> <C> <C> <C>
CMB RMB Total CMB RMB Total
Revenues from external sources $27,872 $ 2,043 $29,915 $28,732 $38,780 $67,512
Gain on sale of loans and investments, net 3,563 1,783 5,346 946 37,020 37,966
Gain on disposal of assets 80,975 80,975
Interest expense 1,829 348 2,177 1,671 1,314 2,985
Depreciation and amortization 3,123 228 3,351 2,976 2,046 5,022
Operating income (loss) 82,953 (10,602) 72,351 (1,377) 11,427 10,050
Income tax (benefit) 29,034 (4,029) 25,005 (482) 4,342 3,860
Income (loss) from discontinued operations 53,919 (6,573) 47,346 (895) 7,085 6,190
Balance Sheet Data: March 31, 2000 December 31, 1999
CMB RMB Total CMB RMB Total
Cash and equivalents $ - $ 2,019 $ 2,019 $ 11,898 $ 5,643 $ 17,541
Loans held for sale, net 1,045 1,045 11,513 11,513
Loan and asset portfolios, net 9,771 9,771
Deferred income tax 2,385 2,385 2,385 2,385
Intangibles 41,377 41,377 57,771 41,377 99,148
Mortgage servicing rights 69,708 69,708
Other assets 1,870 8,318 10,188 8,567 9,957 18,524
Accounts and other payables (1,165) (13,529) (14,694) (3,382) (11,030) (14,412)
Warehouse loans (12,675) (12,675)
Income taxes payable (22,955) 1,749 (21,206)
Other liabilities (90) (135) (225) (27,803) (585) (28,388)
Net assets of discontinued operations $(18,910) $39,799 $ 20,889 $127,753 $45,362 $173,115
</TABLE>
3. Notes Payable and Other Debt
Senior Credit Facility - The Company is party to a Credit
Agreement with a group of lenders led by Bank of America, N.A., as
administrative agent. On March 30, 2000, the Credit Agreement was
amended and restated. The amended and restated Credit Agreement
provides for a revolving commitment of $75.0 million through May 31,
2000 and $55.0 million thereafter to maturity on August 15, 2000.
The maximum amount available under the Credit Agreement is subject to
certain requirements such as a contractually determined advance
percentage applied to each asset pledged to the Credit Agreement as
well as the maximum amount of the agreement. At March 31, 2000, $30.5
million was outstanding under the Credit Agreement.
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 March 31,
2000, $55.0 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 March 31, 2000,
$2.8 million was outstanding under the Franchise Agreement.
The Loan Agreement ("Loan Agreement") dated August 31, 1998,
between a wholly-owned subsidiary of the Company and Salomon Brothers
Realty Corporation provides financing in an amount not to exceed
$200.0 million to provide financing for the origination of commercial
mortgage loans secured by certain real estate properties originated
or acquired. The maturity date of the Loan Agreement is April 30,
2000. At March 31, 2000, $4.0 million was outstanding under the Loan
Agreement. The loan was paid off in April 2000.
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. On November 30, 1999, an amendment of
the Transamerica Loan Agreement changed the mandatory repayment
period applicable to advances from one year to 359 days from the date
of advance. The Transamerica Loan Agreement has a Maturity Date of
December 31, 2001. At March 31, 2000, $54.1 million was outstanding
under the Transamerica Loan Agreement.
Commercial Paper Conduit - 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 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 March 31,
2000, $111.4 million was outstanding under the Financing Agreement.
A wholly owned subsidiary of the Company entered into a Transfer
and Administration Agreement (the "Transfer and Administration
Agreement") with Kitty Hawk Funding Corporation and Bank of America,
N.A., as agent, on June 26, 1998, which was subsequently amended on
November 26, 1999. The Transfer and Administration Agreement
provides financing in an amount not to exceed $55.0 million for
construction financing to various home builders and is secured by the
specific assets funded by such debt. The Transfer and Administration
Agreement commitment terminated on April 30, 2000, with no new
borrowing allowed, but subject to continued amortization of the
outstanding loans. At March 31, 2000, $19.8 million was outstanding
under the Transfer and Administration Agreement.
Retained Interest Financing - The Master Repurchase Agreement
("the Agreement") dated October 17, 1996, between a wholly owned
subsidiary of the Company and Donaldson Lufkin & Jenrette, provides
financing for certain retained interests purchased or created during
the Company's securitization process. As of March 31, 2000, $6.7
million was outstanding under the Agreement.
4. Shareholders' Equity
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. At March 31, 2000, $86.1
million was recorded as common stock to be issued for earn-outs. On
April 20, 2000, the option was exercised and such $86.1 million was
cancelled.
5. Segments
The following represents the Company's reportable segment
position as of and for the periods ended March 31, 2000 and 1999
(unaudited, in thousands):
<TABLE>
<CAPTION>
March 31, 2000
Commercial Asset Home Equity
Finance Management Lending All Other Eliminations Total
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from external sources $ 23,815 $ 12,091 $ 4,247 $ 2,878 $ - $ 43,031
Gain on sale of loans and
investments, net 3,248 (1,864) 38 1,422
Gain (loss) on disposal of assets 532 (20,397) (18,566) (38,431)
Interest expense 10,678 5,489 7,843 7,900 31,910
Depreciation and amortization 2,858 175 844 876 4,753
Operating income (loss) 249 (23,886) (7,611) (33,685) (64,933)
Segment assets 478,896 139,607 9,890 1,182,857 (369,476) 1,441,774
March 31, 1999
Commercial Asset Home Equity
Finance Management Lending All Other Eliminations Total
Revenues from external sources $ 34,652 $ 30,856 $ 35,079 $ 2,235 $ - $ 102,822
Gain on sale of loans and
investments, net 7,282 5,570 13,551 26,403
Interest expense 14,229 7,747 12,280 5,582 39,838
Depreciation and amortization 2,317 195 1,965 1,046 5,523
Operating income (loss) 7,932 13,407 (2,794) (11,611) 6,934
Segment assets 554,592 356,432 213,480 1,825,449 (485,607) 2,464,346
</TABLE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
The Company is a diversified financial services 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, (ii) loans to small business owners and (iii) single
family residential construction lending. The asset management segment
manages and resolves asset portfolios to maximize cash recoveries.
The home equity lending segment has a minority interest in a limited
liability company, Finance America LLC ("Finance America"), which
originates, sells and services nonconforming first mortgage loans.
The segment also manages 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
and 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 and were recorded as loss on disposal of
assets of $33.1 million in continuing operations and a gain on
disposal of assets of $81.0 million in discontinued operations. The
Company anticipates obtaining an additional $15.0 million cash for
consents in the second quarter. The Company expects to recognize a
gain of $10.0 million in continuing operations and $5.0 million in
discontinued operations upon receipt.
The residential mortgage banking segment was discontinued during
the first quarter of 2000. This segment consisted of the acquired
operations of MIC, and 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 in cash and (iii) forgive $17.0 million notes in
substitution of the obligation to issue $86.1 million of common
stock. The option was exercised April 20, 2000.
On March 22, 2000, the Company sold its United Kingdom asset
management assets and operations for $160.0 million. The buyer
assumed non-recourse debt. In addition, the Company received cash
proceeds of $47.0 million which were used to reduce bank debt and a
note receivable for $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 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. 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 allows
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.
Results of Operations
The following discussion and analysis presents the significant
changes in results of continuing operations of the Company for the
three months ended March 31, 2000 and 1999 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 unaudited consolidated
financial statements and notes thereto.
Three Months Ended
(unaudited, in thousands, except per share data) March 31,
2000 1999
Revenues:
Commercial finance $23,815 $ 34,652
Asset management 12,091 30,856
Home equity lending 4,247 35,079
Corporate and other 2,878 2,235
Total revenues 43,031 102,822
Operating expenses:
Commercial finance 23,566 26,720
Asset management 35,977 17,449
Home equity lending 11,858 37,873
Corporate and other 36,563 13,846
Total operating expenses 107,964 95,888
Operating income (loss):
Commercial finance 249 7,932
Asset management (23,886) 13,407
Home equity lending (7,611) (2,794)
Corporate and other (33,685) (11,611)
Total operating income (loss) (64,933) 6,934
Income tax expense (benefit) (19,588) 2,886
Income (loss) from continuing operations (45,345) 4,048
Income from discontinued operations, net of taxes 47,346 6,190
Net income $ 2,001 $ 10,238
Three Months Ended March 31, 2000 Compared to Three Months Ended
March 31, 1999
The Company reported a 58% decrease in revenues from continuing
operations from $102.8 million to $43.0 million due primarily to a
$32.3 million decrease in interest and other investment income and a
decrease of $25.0 in gain on sale of loans. Operating income from
continuing operations decreased from $4.0 million for the first
quarter of 1999 to a loss of $45.3 million for the first quarter of
2000. Net income decreased from $10.2 million to $2.0 million, or
80%, as compared to the prior year period. The decrease in operating
income from continuing operations was primarily due to a $38.4
million loss on disposal of assets related to (i) the Lend Lease
Transaction primarily driven by the allocation of the purchase price
to specific assets purchased, (ii) the sale of the United Kingdom
assets and operations and (iii) the decreases in revenues noted
above. These decreases were offset, in part, by lower personnel,
interest and general and administrative expenses.
Commercial Finance. Revenues for the three months ended March
31, 2000 primarily consisted of $18.3 million of interest income, a
$3.2 million of gain on securitization and sale of loans and $1.7
million in mortgage banking and servicing fees. The $10.9 million
decrease in revenues from $34.7 million for the prior year period to
$23.8 million for the three months ended March 31, 2000 relates
primarily to a $7.9 million decrease in interest and other
investment income and a $4.0 million decrease in gain on sale of
loans, offset in part, by a $0.5 million increase in other revenue
and a $0.5 million increase in mortgage servicing fees. The decrease
in interest and other investment income was due to decreased balances
of loans resulting primarily 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.
Operating expenses for the quarter ended March 31, 2000
primarily consisted of $10.7 million of interest expense, $5.8
million of personnel expense, $2.9 million in depreciation and
amortization, $2.8 million of other general and administrative
expense and $2.0 million in provision for loan losses. The $3.1
million decrease in operating expenses from $26.7 million for the
prior year period to $23.6 million for the quarter ended March 31,
2000 was due primarily to a decrease of $3.6 million of interest
expense related to the financing for decreased levels of loans held
for sale, decreases of $0.4 million in general and administrative
expense and $0.4 million in personnel expense and a $0.5 million gain
on the sale of the real estate structured finance platform to Lend
Lease, offset in part, by an increase of $1.2 million in provision
for loan losses and an increase of $.0.5 million in depreciation and
amortization.
Asset Management. Revenues for the three months ended March 31,
2000 primarily consisted of $9.6 million in interest and other
investment income and $3.9 million in asset management and resolution
fees, offset in part, by a $1.9 million loss on sale of investments.
The $18.8 million decrease in revenues from $30.9 million for the
first quarter of 1999 to $12.1 million for the first quarter of 2000
was primarily comprised of a $10.2 million decrease in interest and
other investment revenue, a decrease in gain on sale of investments
of $7.4 million and a decrease of $1.0 million in asset management
and resolution fees. The decreases in interest and other investment
income and asset management and resolution fees were due primarily to
decreased investments as the Company anticipated the sale of the
asset management platform to Lend Lease and the sale of the United
Kingdom assets in the first quarter of 2000.
Operating expenses for the quarter ended March 31, 2000
primarily consisted of $20.4 million in loss on disposal of assets,
$5.5 million in interest expense, $5.0 million in personnel expense
and $4.7 million in other general and administrative expenses. The
$18.6 million increase in expenses from $17.4 million for the prior
year period to $36.0 million for the quarter ended March 31, 2000 was
due primarily to a $15.0 million loss on the sale to Lend Lease of
the asset management platform and a $5.3 million loss on the sale of
the United Kingdom assets and operations, offset in part, by a $2.3
million decrease in interest expense related to financing decreased
investment balances.
Home Equity Lending. Revenues for the three months ended March
31, 2000 primarily consisted of $3.4 million in interest income, $0.5
million in other revenue and $0.3 million in mortgage banking and
servicing fees. The $30.9 million decrease in revenues from $35.1
million for the prior year period to $4.2 million for the quarter
ended March 31, 2000 was due primarily to a $14.9 million decrease in
interest income, a $13.5 million decrease in gain on sale and a $2.5
million decrease in mortgage servicing fees related to holding
reduced balances of loans held for sale due to only one month of
operations in the first quarter 2000 prior to transferring this
business to a Finance America venture and two months of activity
reflecting the 36% interest in Finance America versus a full three
months of operation in the first quarter 1999.
Operating expenses for the quarter ended March 31, 2000
primarily consisted of $7.8 million of interest expense, $2.9 million
of other general and administrative expense, $0.8 million of
depreciation and amortization and $0.3 million of personnel expense.
Operating expenses decreased by $26.0 million from $37.9 million for
the prior year period to $11.9 million for the quarter ended March
31, 2000. This decrease primarily consisted of $10.7 million
decrease in personnel expense, a $7.0 million decrease in general and
administrative expenses, a $4.4 million decrease in interest expense,
a $2.7 million decrease in provision for loan losses and a $1.1
million reduction in depreciation and amortization. The decrease in
expenses are a result of transferring this business to Finance
America during the first quarter after one month as compared to a
full three months of operations in the first quarter 1999.
Corporate, Other and Intercompany Eliminations. Revenues of
$2.9 million for the three months ended March 31, 2000 primarily
consisted of interest income from investments in residential mortgage
backed securities. The $22.8 million increase in expenses from $13.8
million for the prior year period to $36.6 million for the quarter
ended March 31, 2000 was due primarily to $18.6 million loss on the
disposal of assets and related expenses on the Lend Lease
Transaction, a $2.3 million increase in interest expense and a $2.8
million increase in general and administrative expenses due primarily
to increased unallocated interest and general and administrative
expenses.
Liquidity and Capital Resources
Cash and cash equivalents totaled $23.8 million at March 31,
2000. Cash flows provided by operating activities plus principal
collections on loans, asset portfolios and asset-backed securities
totaled $375.1 million for the first three months of 2000 compared to
$243.2 million for the same period in 1999. The variance from the
prior period was due primarily to the sale of the communications
portfolio for $131.8 million and real estate structured finance
portfolio for $170.2 cash proceeds, offset in part, by the receipt in
the prior period of $138.0 million from a net interest margin
transaction. The following table is a summary of selected cash flow
activity and debt ratios during the first three months of 2000 and
1999 (dollars in thousands):
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
2000 1999
<S> <C> <C>
Net cash provided by operating activities of continuing operations $ 10,044 $ 123,628
Net cash provided by (used in) investing activities of continuing operations 249,825 (22,061)
Net cash used in financing activities of continuing operations (470,948) (142,981)
Net cash provided by discontinued operations 198,124 47,110
Other financial measures:
Cash flow from operations and collections on loans, asset portfolios and
asset-backed securities 375,069 243,214
Cash provided by new capital and borrowings (used in repayment), net
(excluding warehouse loans payable) (470,948) (142,981)
Cash used for purchase of asset portfolios, asset-backed securities,
mortgage servicing rights and originations of loans (120,519) (136,241)
</TABLE>
The following table is a summary of selected debt ratios as of March
31, 2000 and December 31, 1999:
2000 1999
Ratio of total debt to equity 2.0:1 3.0:1
Ratio of core debt to equity (excludes indebtedness
under warehouse lines of credit) 1.8:1 2.8:1
The following table shows the components of the Company's capital
structure, including certain short-term debt, as of March 31, 2000
and December 31, 1999 (dollars in millions):
2000 1999
Amount % Amount %
Shareholders' equity $ 465.6 33% $459.7 25%
Senior subordinated notes 580.0 42 580.0 31
Warehouse loans payable 115.9 8 101.9 6
Notes payable 237.7 17 708.6 38
Total $1,399.2 100% $1,850.2 100%
Total assets decreased $0.5 billion to $1.4 billion at March 31,
2000 from $1.9 billion at December 31, 1999. The decrease was due
primarily to the sale of the real estate structured finance
portfolio, the assets of the United Kingdom operations 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, including its outstanding obligation related to the
Credit Agreement due in August 2000 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.
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.
Other Matters
Through March 31, 2000, the actual weighted average annual
prepayment rate on the Company's home equity securitizations was
26.4% for the period from inception of each security, which is higher
than originally projected, and is modeled to be 25.0% for the next
twelve months. The actual constant default rate from inception to
date is 1.5% and is projected to be 2.8% for the next twelve months.
The actual loss severity rate from inception to date is 39.8% and is
projected to be 33.2% over 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
rates used to value the Company's retained interests from home equity
securitizations and from commercial finance at March 31, 2000 were
18.1% and 15.4%, respectively. 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 March 31, 2000 consisted of $159.5
million of home equity loan interests and $145.5 million of
commercial finance loan interests.
Year 2000 Issue Update
The Company did not experience any significant malfunctions or
errors in its operating or business systems when the date changed
from 1999 to 2000. Based upon operations since January 1, 2000, the
Company does not expect any significant impact to its ongoing
business as a result of the "Year 2000 issue". However, it is
possible that the full impact of the date change, which was of
concern due to computer programs that use two digits instead of four
digits to define years, has not been fully recognized. For example,
it is possible that Year 2000 or similar issues such as leap year-
related problems may occur with billing, payroll or financial
closings at month, quarter, or year-end. The Company believes that
any such problems are likely to be minor and correctable. In
addition, the Company could still be negatively affected if its
borrowers, significant business partners, lenders, vendors and other
service providers are adversely affected by Year 2000 or similar
issues. The Company is not currently aware of any significant Year
2000 or similar problems that have arisen for its borrowers,
significant business partners, lenders or vendors or other service
providers.
The Company expended $1.0 million on Year 2000 readiness efforts
from 1997 to 2000. These efforts included assessing, remediating or
replacing, testing, and upgrading the Company's business critical
systems with the assistance of a consulting firm that specializes in
Year 2000 readiness. These costs do not include costs associated
with internal resources assigned to the initiative.
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 March 31, 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 are the Company's interest rate sensitivity analyses as of
March 31, 2000 (dollars in millions):
Retained Interests in Securitization (trading):
Change in Hypothetical Hypothetical
Interest Rates Fair Value Change ($) Change (%)
10% $307.2 $2.2 0.7%
0 305.0 - -
(10)% 302.4 (2.6) (0.9)
Retained interests in securitization have been generated from
the Home Equity and Commercial Finance divisions. The performance of
the retained interests vary by securitizations based upon numerous
factors, including, loan type, collateral underlying loans, year of
origination, market conditions at origination and changes in market
conditions subsequent to origination. The fair value of each
retained interest and their sensitivity to changes in interest rates
have been determined based upon discounted cash flow analysis of each
securitization, utilizing various discount rates, prepayment rates
and loss assumptions.
Other than Trading:
Change in Hypothetical Hypothetical
Interest Rates Fair Value Change ($) Change (%)
10% $214.3 $(0.3) (0.1)%
0 214.6 - -
(10)% 215.0 0.4 0.2
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 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 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
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 March 31, 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% $53.0 $ (5.3) (9.1)%
0 58.3 - -
(10)% 65.0 6.7 11.5
Other Market Risks
As with any entity's investment or asset portfolio, 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 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
January 11, 2000 - AMRESCO, INC. enters into an asset
purchase agreement to sell certain
businesses to Lend Lease (US) Services, Inc.
March 31, 2000 - Sale of Certain Businesses to Lend Lease
(US) Services, Inc.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
AMRESCO, INC.
Registrant
Date: May 11, 2000 By: /s/ Jonathan S. Pettee
Jonathan S. Pettee
Executive Vice President
and Chief Financial Officer
AMRESCO, INC.
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
Basic:
Income (loss) from continuing operations $(45,345,000) $ 4,048,000
Income from discontinued operations, net of income taxes 47,346,000 6,190,000
Net income $ 2,001,000 $10,238,000
Weighted average common shares outstanding 48,753,806 48,201,216
Restricted shares (494,944) (523,849)
Total 48,258,862 47,677,367
Earnings (loss) from continuing operations $(0.94) $0.08
Earnings from discontinued operations, net of income taxes 0.98 0.13
Earnings per share $ 0.04 $0.21
Diluted:
Income (loss) from continuing operations $(45,345,000) $ 4,048,000
Income from discontinued operations, net of income taxes 47,346,000 6,190,000
Net income $ 2,001,000 $10,238,000
Weighted average common shares outstanding 48,753,806 48,201,216
Restricted shares (494,944)
Contingently issuable shares (1)
Effect of stock options (1) 961,155
Total 48,258,862 49,162,371
Earnings (loss) from continuing operations $(0.94) $0.08
Earnings from discontinued operations, net of income taxes 0.98 0.13
Earnings per share $ 0.04 $0.21
</TABLE>
(1) As of March 31, 2000, the Company had contingently issuable shares
outstanding related to the MIC earn-out. These shares, and the effect of
stock options, have not been included in the computation of diluted
earnings per share. Generally accepted accounting principles do not allow
the inclusion of potentially dilutive items when the company has a loss
from continuing operations. On April 20, 2000, the MIC contingently issuable
shares were cancelled as the Company exercised its option (see Note 4 to
the financial statements).
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> $ 23,754
<SECURITIES> 0
<RECEIVABLES> 22,076
<ALLOWANCES> 541
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 12,753
<DEPRECIATION> 8,411
<TOTAL-ASSETS> 1,441,774
<CURRENT-LIABILITIES> 0
<BONDS> 817,689
0
0
<COMMON> 2,490
<OTHER-SE> 463,140
<TOTAL-LIABILITY-AND-EQUITY> 1,441,774
<SALES> 0
<TOTAL-REVENUES> 43,031
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 73,799
<LOSS-PROVISION> 2,255
<INTEREST-EXPENSE> 31,910
<INCOME-PRETAX> (64,933)
<INCOME-TAX> (19,588)
<INCOME-CONTINUING> (45,345)
<DISCONTINUED> 47,346
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,001
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
