UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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:
50,196,562 shares of common stock, $.05 par value per share,
as of July 31, 2000.
AMRESCO, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations - Three and
Six Months Ended June 30, 2000 and 1999 4
Consolidated Statement of Shareholders' Equity -
Six Months Ended June 30, 2000 5
Consolidated Statements of Cash Flows - Six
Months Ended June 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 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURE 19
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
AMRESCO, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share amounts)
June 30, December 31,
2000 1999
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 17,975 $ 36,709
Loans held for sale, net 250,302 295,041
Loans and asset portfolios, net 481,781 705,353
Retained interests in securitizations - trading (at fair value) 213,755 299,311
Asset-backed securities - available for sale (at fair value) 69,918 107,005
Accounts receivable, net of reserves of $541 and $605 10,294 15,394
Income taxes receivable 2,480
Deferred income taxes 71,481 73,983
Premises and equipment, net of accumulated
depreciation of $9,023 and $15,680 3,937 10,408
Intangible assets, net of accumulated amortization of $28,429 and $30,216 164,262 138,762
Mortgage servicing rights, net of accumulated amortization of $1,444 and $939 6,252 6,283
Other assets 93,745 68,967
Net assets (liabilities) of discontinued operations (1,090) 173,115
TOTAL ASSETS $1,382,612 $1,932,811
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 20,188 $ 9,068
Accrued employee compensation and benefits 5,135 14,830
Income taxes payable 1,000
Notes payable 243,484 708,611
Senior subordinated notes 579,972 580,033
Warehouse loans payable 204,648 101,894
Other liabilities 40,103 58,656
Total liabilities 1,094,530 1,473,092
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $0.05 par value, authorized 150,000,000 shares;
51,217,901 and 49,792,788 shares issued 2,562 2,490
Preferred stock, $1.00 par value, authorized 5,000,000 shares; none issued
Capital in excess of par 547,067 546,762
Common stock to be issued for earn-outs 87,548
Treasury stock, $0.05 par value, 1,024,339 shares (17,363) (17,363)
Accumulated other comprehensive loss (4,423) (8,848)
Unamortized stock compensation (1,420) (4,096)
Accumulated deficit (238,341) (146,774)
TOTAL SHAREHOLDERS' EQUITY 288,082 459,719
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,382,612 $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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
REVENUES:
<S> <C> <C> <C> <C>
Interest and other investment income $ 37,223 $ 69,413 $ 71,378 $135,873
Mortgage banking and servicing fees 3,233 4,199 5,237 8,177
Gain on sale of loans and investments, net 3,616 40,565 5,038 66,968
Asset management and resolution fees 945 4,343 4,829 9,180
Other revenues 1,062 1,534 2,628 2,678
Total revenues 46,079 120,054 89,110 222,876
EXPENSES:
Personnel 11,143 27,212 29,239 57,124
Interest 28,351 38,907 60,261 78,745
Loss on retained interests in securitizations 79,564 12,000 79,564 12,000
Loss on disposal and impairment of assets 3,409 41,840
Other general and administrative 7,989 15,262 20,508 32,159
Depreciation and amortization 3,528 5,606 8,281 11,129
Provisions for loan and asset portfolio losses 5,468 (3,882) 7,723 (164)
Total expenses 139,452 95,105 247,416 190,993
Income (loss) from continuing operations before income taxes (93,373) 24,949 (158,306) 31,883
Income tax expense (benefit) (921) 10,741 (20,509) 13,627
Income (loss) from continuing operations (92,452) 14,208 (137,797) 18,256
Income (loss) from discontinued operations, net of income taxes (1,116) (2,104) 46,230 4,086
NET INCOME (LOSS) $ (93,568) $ 12,104 $ (91,567) $ 22,342
Weighted average earnings (loss) per common share - basic:
Income (loss) from continuing operations $(1.91) $ 0.30 $(2.85) $0.38
Income (loss) from discontinued operations, net of income taxes (0.02) (0.05) 0.96 0.09
Net income (loss) $(1.93) $ 0.25 $(1.89) $0.47
Weighted average earnings (loss) per common share - diluted:
Income (loss) from continuing operations $(1.91) $ 0.23 $(2.85) $0.33
Income (loss) from discontinued operations, net of income taxes (0.02) (0.03) 0.96 0.08
Net income (loss) $(1.93) $ 0.20 $(1.89) $0.41
Weighted average number of common shares outstanding:
Basic 48,561 47,847 48,410 47,762
Diluted 48,561 60,955 48,410 55,059
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
AMRESCO, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Six Months Ended June 30, 2000
(In thousands)
(Unaudited)
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 loss:
Net loss (91,567) $(91,567)
Other comprehensive income (loss):
Unrealized gain on securities 621 621
Reclassification of losses included
in net income 9,151 9,151
Foreign currency translation
adjustments (2,518) (2,518)
Tax effects of other comprehensive
income (2,829) (2,829)
Other comprehensive income 4,425
Comprehensive loss $(87,142) (87,142)
Amortization of unearned stock
compensation 2,940 2,940
Issuance of common stock for
unearned stock compensation 1,458 73 752 (825)
Cancellation of common stock to
be issued for earn-outs (87,548) (87,548)
Other (33) (1) (447) 561 113
JUNE 30, 2000 51,218 $2,562 $547,067 $(1,420) $(17,363) $(4,423) $(238,341) $288,082
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
AMRESCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
2000 1999
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (91,567) $ 22,342
(Income) from discontinued operations (46,230) (4,086)
Income (loss) from continuing operations (137,797) 18,256
Adjustments to reconcile net income to net cash provided by
(used in) operating activities of continuing operations:
Gain on sale of loans and investments (5,038) (66,968)
Loss on retained interests in securitizaions 79,564 12,000
Loss on disposal and impairment of assets 41,840
Depreciation and amortization 8,281 11,129
Accretion of interest income, net (9,264) (10,198)
Provisions for loan and asset portfolio losses 7,723 (164)
Deferred income taxes 2,502 24,526
Other 10,833 9,912
Changes in assets and liabilities (exclusive of such
acquired in business combinations):
Loans held for sale, net 43,353 23,234
Retained interests in securitizations 22,238 160,461
Other assets (35,030) (18,797)
Accounts payable 11,120 (18,758)
Income taxes payable/receivable 3,480 24,990
Warehouse loans payable 102,754 (19,390)
Other liabilities and accrued compensation and benefits (29,784) (16,782)
Net cash provided by operating activities of continuing operations 116,775 133,451
INVESTING ACTIVITIES:
Origination of loans and purchase of asset portfolios (253,094) (319,351)
Collections on loans and asset portfolios 446,113 277,736
Proceeds from sale of and collections on asset-
backed securities - available for sale 34,354 6,251
Origination and purchase of mortgage servicing rights (37) (364)
Proceeds from sale of mortgage servicing rights 1,828
Cash used for purchase of subsidiaries including earn-out payments (6,000) (4,049)
Other 5,114 (2,982)
Net cash provided by (used in) investing activities of
continuing operations 228,278 (42,759)
FINANCING ACTIVITIES:
Net proceeds from notes payable and other debt 249,451 526,673
Repayment of notes payable and other debt (746,125) (661,545)
Other 8
Net cash (used in) financing activities of
continuing operations (496,674) (134,864)
Net cash provided by discontinued operations 132,887 61,170
Net increase (decrease) in cash and cash equivalents (18,734) 16,998
Cash and cash equivalents, beginning of period 36,709 32,005
Cash and cash equivalents, end of period $ 17,975 $ 49,003
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 65,102 $ 81,774
Income taxes paid 311 1,608
Common stock issued for the purchase of subsidiaries
and earn-outs 195
Common stock issued for unearned stock compensation, net 264 6,421
Common stock to be issued for earn-outs (87,548) 87,548
</TABLE>
See notes to consolidated financial statement
AMRESCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 six month periods ended June 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 and were initially 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 recorded additional gains in the second
quarter of $6.9 million in continuing operations and $3.3 million in
discontinued operations when additional proceeds of such sale were
received. The Company anticipates obtaining an additional $2.5
million in cash 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 June 30, 2000 June 30, 1999
Data:
CMB RMB Total CMB RMB Total
<S> <C> <C> <C> <C> <C> <C>
Revenues from external sources $ 378 $ 146 $ 524 $41,199 $ 14,832 $56,031
Gain on sale of loans and investments, net 79 138 217 3,392 14,148 17,540
Gain (loss) on disposal of assets 3,296 (3,098) 198
Interest expense 7 211 218 1,872 879 2,751
Depreciation and amortization (1) 52 51 4,079 3,810 7,889
Operating income (loss) 2,517 (4,438) (1,921) 7,090 (10,826) (3,736)
Income tax expense (benefit) 881 (1,686) (805) 2,482 (4,114) (1,632)
Income (loss) from discontinued operations 1,636 (2,752) (1,116) 4,608 (6,712) (2,104)
Six Months Ended Six Months Ended
Operations Statement June 30, 2000 June 30, 1999
Data:
CMB RMB Total CMB RMB Total
Revenues from external sources $28,250 $ 2,189 $30,439 $69,931 $53,612 $123,543
Gain on sale of loans and investments, net 3,642 1,921 5,563 4,338 51,168 55,506
Gain (loss) on disposal of assets 84,271 (3,098) 81,173
Interest expense 1,836 559 2,395 3,543 2,193 5,736
Depreciation and amortization 3,122 280 3,402 7,055 5,856 12,911
Operating income (loss) 85,470 (15,040) 70,430 5,713 601 6,314
Income tax expense (benefit) 29,915 (5,715) 24,200 2,000 228 2,228
Income (loss) from discontinued operations 55,555 (9,325) 46,230 3,713 373 4,086
Balance Sheet Data: June 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 1 1 8,567 9,957 18,524
Accounts and other payables (1,091) (1,091) (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 $(1,090) $ - $(1,090) $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 June 14, 2000, the Credit Agreement was
amended and restated. The amended and restated Credit Agreement
provided for an initial revolving commitment of $50.0 million with
mandatory reductions in the commitment amount upon the sale of
certain assets and a maturity date of July 31, 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 June 30, 2000, $42.9 million was
committed and $33.2 million was outstanding under the Credit
Agreement. On July 28, 2000 the Credit Agreement was amended to
extend the maturity date to August 18, 2000 and the commitment amount
was reduced to $7.2 million.
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 June 30,
2000, $127.0 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 June 30, 2000,
$9.9 million was outstanding under the Franchise Agreement.
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 June 30, 2000, $67.6 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 June 30,
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 June 30, 2000, $5.7 million was outstanding
under the Transfer and Administration Agreement.
Non-recourse Debt - The Company has non-recourse debt which is
used primarily to fund purchases of real estate mortgage backed
securities and under-performing loan portfolios and is secured by the
specific assets purchased. At June 30, 2000, $14.3 million in non-
recourse debt was outstanding secured by assets totaling $29.1
million.
Note Payable - The Company has a note payable representing the
balance of earn-out payments due to the former shareholders of
Commercial Lending Corporation ("CLC"). As of June 30, 2000, $31.5
million was outstanding under the note payable. The note matures on
December 29, 2000. It is secured by certain retained interests from
previous securitizations of CLC.
Interest - The breakout of the Company's related interest for
the respective periods is reflected below (in thousands):
Three Months Six Months
Ended Ended
June 30, June 30,
2000 1999 2000 1999
Interest expense $23,797 $36,097 $51,874 $74,800
Debt issuance costs 4,554 2,810 8,387 3,945
Interest $28,351 $38,907 $60,261 $78,745
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. On April 20, 2000, the
option was exercised and the $86.1 million stock payment was
cancelled.
On May 31, 2000 the Company issued options to purchase
approximately 110,000 shares of common stock at a price in excess of
market price at the date of issuance. On June 14, 2000 and June 27,
2000, the Company issued approximately 1,296,000 and 162,000
restricted shares, respectively, of the Company's common stock (the
June 14, 2000 issuance vests over a seven month term and the June 27,
2000 issuance vests over a one year term) to an employee and
directors.
5. Segments
The following represents the Company's reportable segment
position as of and for the three and six months ended June 30, 2000
and 1999 (unaudited, in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000
Home
Commercial Asset Equity
Finance Management Lending All Other Eliminations Total
<S> <C> <C> <C> <C> <C> <C>
Revenues from external sources $27,624 $9,558 $ 6,188 $ 2,709 - $ 46,079
Gain (loss) on sale of loans and
investments, net 4,460 (853) 9 3,616
Interest expense 11,591 2,155 8,204 6,401 28,351
Loss on disposal and impairment
of assets 2,953 456 3,409
Loss on retained interests in securitizations 79,564 79,564
Depreciation and amortization 2,414 5 530 579 3,528
Operating income (loss) (682) 2,446 (83,154) (11,983) (93,373)
1999
Home
Commercial Asset Equity
Finance Management Lending All Other Eliminations Total
Revenues from external sources $57,969 $28,450 $ 31,553 $ 2,082 - $120,054
Gain (loss) on sale of loans and
investments, net 24,827 5,048 10,842 (152) 40,565
Interest expense 15,977 7,609 10,156 5,165 38,907
Loss on retained interests in securitizations 12,000 12,000
Depreciation and amortization 2,329 196 2,202 879 5,606
Operating income (loss) 32,869 10,961 (12,201) (6,680) 24,949
Six Months Ended June 30,
2000
Home
Commercial Asset Equity
Finance Management Lending All Other Eliminations Total
Revenues from external sources $ 51,440 $ 21,649 $ 10,435 $ 5,586 $ - $ 89,110
Gain (loss) on sale of loans and
investments, net 7,708 (2,717) 47 5,038
Interest expense 22,269 7,644 16,047 14,301 60,261
Loss (gain) on disposal and impairment of
assets (531) 23,350 19,021 41,840
Loss on retained interests in securitizations 79,564 79,564
Depreciation and amortization 5,272 180 1,374 1,455 8,281
Operating income (loss) (433) (21,440) (90,765) (45,668) (158,306)
Segment assets (liabilities) 586,300 129,229 (95,584) 1,160,392 (397,725) 1,382,612
1999
Home
Commercial Asset Equity
Finance Management Lending All Other Eliminations Total
Revenues from external sources $ 92,621 $ 59,306 $ 66,632 $ 4,317 $ - $ 222,876
Gain (loss) on sale of loans and
investments, net 32,109 10,618 24,393 (152) 66,968
Interest expense 30,206 15,356 22,436 10,747 78,745
Loss on retained interest in securitizations 12,000 12,000
Depreciation and amortization 4,646 391 4,167 1,925 11,129
Operating income (loss) 40,801 24,368 (14,995) (18,291) 31,883
Segment assets (liabilities) 601,992 331,623 196,926 1,914,733 (545,238) 2,500,036
</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, (ii) loans to small business owners and (iii)
single family residential construction lending. The asset management
segment owns asset portfolios which are managed by Lend Lease to
maximize cash recoveries. The home equity lending segment represents
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 received additional proceeds from such sale in the second
quarter and recorded additional gains on disposal of assets of $6.9
million in continuing operations and a gain on disposal of assets of
$3.3 million in discontinued operations. The Company anticipates
obtaining an additional $2.5 million in cash 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 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, including the
assumption of 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 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. 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.
Results of Operations
The following discussion and analysis presents the significant
changes in results of operations of the Company for the three and six
months ended June 30, 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 Six Months Ended
(in thousands) June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues:
Commercial finance $ 27,624 $ 57,969 $ 51,440 $ 92,621
Asset management 9,558 28,450 21,649 59,306
Home equity lending 6,188 31,553 10,435 66,632
Corporate, other and intercompany eliminations 2,709 2,082 5,586 4,317
Total revenues 46,079 120,054 89,110 222,876
Operating expenses:
Commercial finance 28,306 25,100 51,873 51,820
Asset management 7,112 17,489 43,089 34,938
Home equity lending 89,342 43,754 101,200 81,627
Corporate, other and intercompany eliminations 14,692 8,762 51,254 22,608
Total operating expenses 139,452 95,105 247,416 190,993
Operating income (loss):
Commercial finance (682) 32,869 (433) 40,801
Asset management 2,446 10,961 (21,440) 24,368
Home equity lending (83,154) (12,201) (90,765) (14,995)
Corporate, other and intercompany eliminations (11,983) (6,680) (45,668) (18,291)
Total operating income (loss) (93,373) 24,949 (158,306) 31,883
Income tax expense (benefit) (921) 10,741 (20,509) 13,627
Income (loss) from continuing operations (92,452) 14,208 (137,797) 18,256
Income (loss) from discontinued operations, net of taxes (1,116) (2,104) 46,230 4,086
Net income (loss) $(93,568) $ 12,104 $ (91,567) $ 22,342
</TABLE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June
30, 1999
The Company reported a 62% decrease in revenues from $120.1
million to $46.1 million. The decrease in revenues was due primarily
to a decrease of $36.9 million in gain on sale of loans and a
decrease of $32.2 million in interest and other investment income.
Operating income decreased from $24.9 million for the second quarter
of 1999 to a loss of $93.4 million for the second quarter of 2000 and
net income decreased from $12.1 million to a net loss of $93.6
million. The decreases in operating income from continuing
operations was due primarily to the decreases in revenue noted above
and the write-down and loss on sale of retained interests in
securitizations. Decreases in personnel, interest and general and
administrative expenses partially offset these decreases.
Commercial Finance. Revenues for the three months ended June
30, 2000 primarily consisted of $20.9 million of interest income,
$4.5 million of gain on sale of loans and $2.1 million in
origination and servicing fees. The $30.3 million decrease in
revenues from $58.0 million for the prior year period to $27.6
million for the three months ended June 30, 2000 related primarily to
a $20.4 million decrease in gain on sale of loans and investments and
a $10.8 million decrease in interest and other investment income.
The decrease in gain on sale of loans was due primarily to an
approximate $220.9 million small business loan securitization in the
prior period compared to no gain because there was no securitization
in the current year second quarter. The decrease in interest and
other investment income was due primarily to decreased balances of
loans held by the real estate and communication groups.
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 June 30, 2000 primarily
consisted of $11.6 million of interest expense, $6.4 million of
personnel expense, $5.7 million in provision for loan losses, $2.4
million of depreciation and amortization and $2.2 million of other
general and administrative expense. The $3.2 million increase in
expenses from $25.1 million for the prior year period to $28.3
million for the quarter ended June 30, 2000 was due primarily to an
increase of $10.7 million in provision for loan losses resulting from
an increase in current year provisions for real estate loans and a
reversal of provision in the prior year quarter. This increase was
partially offset by decreases of $4.4 million of interest expense
related to the financing for decreased levels of loans, $2.2 million
of other general and administrative expenses and $1.0 million of
personnel expense.
Asset Management. Revenues for the three months ended June 30,
2000 primarily consisted of $8.8 million of interest and other
investment income and $0.9 million of asset management and resolution
fees offset, in part, by a $0.9 million loss on sale of investments.
The $18.9 million decrease in revenues from $28.5 million for the
second quarter of 1999 to $9.6 million for the second quarter of 2000
was primarily comprised of a $9.6 million decrease in interest and
other investment revenue, $5.9 million in gain on sale and a $3.4
million in asset management and resolution fees. The decreases noted
above were due primarily to the reduction in the amount of such
assets resulting from 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 June 30, 2000 primarily
consisted of $3.0 million in loss on disposal and impairment of
assets, $2.2 million in interest expense, $1.8 million in other
general and administrative expenses and $0.5 million in personnel
cost. The $10.4 million decrease in expenses from $17.5 million for
the prior year period to $7.1 million for the quarter ended June 30,
2000 was due primarily to a $5.5 million decrease in interest
expense, a $4.6 million decrease in personnel cost, a $2.1 million
decrease in other general and administrative expenses and a $1.0
million decrease in provision for loan losses offset, in part, by a
$3.0 million increase in loss on disposal and impairment of assets.
The decreases noted above were due primarily to the reduction in the
amount of such assets resulting from the sale of the asset management
platform to Lend Lease and the sale of the United Kingdom assets in
the first quarter of 2000.
Home Equity Lending. Revenues for the three months ended June
30, 2000 primarily consisted of $5.2 million of interest income and
$1.1 million in mortgage banking and servicing fees. The $25.4
million decrease in revenues from $31.6 million for the prior year
period to $6.2 million for the quarter ended June 30, 2000 was due
primarily to a $12.0 million decrease in interest income, a $10.8
million decrease in gain on sale and a $1.7 million decrease in
mortgage banking and servicing fees. The decreases in revenues were
due primarily to the transfer of this business to Finance America, a
joint venture in which the Company has a 36% interest, in the first
quarter of this year.
Operating expenses for the quarter ended June 30, 2000 primarily
consisted of $70.0 million of write-down of retained interests in
securitizations, $9.6 million loss on the sale of retained interests
in securitizations, $8.2 million of interest expense, $1.0 million of
other general and administrative expense and $0.5 million of
depreciation and amortization. Operating expenses increased by $45.6
million from $43.8 million for the prior year period to $89.3 million
for the quarter ended June 30, 2000. The increase was due primarily
to $67.6 million increase in loss on retained interests in
securitization due to write-downs and the loss on sale. This
increase was partially offset by decreases of $10.3 million in
personnel cost, $7.7 million in other general and administrative
expenses, $2.0 million in interest expense and $1.7 million in
depreciation and amortization 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
$2.7 million for the three months ended June 30, 2000 primarily
consisted of interest income from investments in residential mortgage
backed securities. The $5.9 million increase in expenses from $8.8
million for the prior year period to $14.7 million for the quarter
ended June 30, 2000 was due primarily to increases of $4.8 million in
unallocated other general and administrative costs and $1.2 million
in unallocated interest expense and a $0.5 million loss on disposal
of assets related to the Lend Lease transaction. The Company has not
recognized any tax benefit in the current quarter as management
believes its best estimate of deferred tax assets has already been
reflected in the accompanying financial statements.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30,
1999
The Company reported a 60% decrease in revenues from $222.9
million to $89.1 million due primarily to a $64.5 million decrease in
interest and other investment income and a $61.9 million decrease in
gain on sale of loans and investments. Operating income from
continuing operations decreased from $31.9 million for the first six
months of 1999 to a loss of $158.3 million for the first six months
of 2000 and net income decreased from $22.3 million to a loss of
$91.6 million. The decreases in operating income was due primarily
to (i) the decreases in revenues noted above, (ii) the write-down and
loss on sale of retained interests in securitizations, (iii) losses
on the Lend Lease transaction primarily driven by the allocation of
the purchase price to specific assets purchased, (iv) increased
provisions for loan and asset portfolio losses and (v) the sale of
the United Kingdom assets and operations. These decreases were
offset, in part, by lower personnel, interest, other general and
administrative and depreciation and amortization expenses.
Commercial Finance. Revenues for the six months ended June 30,
2000 primarily consisted of $39.2 million of interest income, $7.7
million of gain on securitization and sale of loans and $3.8 million
in mortgage banking and servicing fees. The $41.2 million decrease
in revenues from $92.6 million for the prior year period to $51.4
million for the six months ended June 30, 2000 related primarily to a
$24.4 million decrease in gain on sale of loans and a $18.7 million
decrease in interest and other investment income. The decrease in
gain on sale of loans was due primarily to $262.1 million of small
business loan securitizations completed in the first six months of
1999 compared to only a small prefund gain on a December 1999
securitization in the first six months of 2000. 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 six months ended June 30, 2000
primarily consisted of $22.3 million of interest expense, $12.2
million of personnel expense, $7.7 million of provisions for loan
losses, $5.3 million of depreciation and amortization and $4.9
million of other general and administrative expense. Expenses
increased slightly from $51.8 million for the prior year period to
$51.9 million for the six months ended June 30, 2000. Increases of
$11.9 million in provision for loan losses and $0.6 million in
depreciation and amortization were mostly offset by decreases of $7.9
million in interest expense related to the financing of lower
balances of loans and loans held for sale, $2.7 million in other
general and administrative expense and $1.3 million in personnel cost
and a $0.5 million gain on the sale of the real estate structured
finance platform to Lend Lease.
Asset Management. Revenues for the six months ended June 30,
2000 primarily consisted of $18.4 million in interest income and $4.8
million in asset management and resolution fees offset, in part, by
$2.7 million of loss on sale of investments. The $37.7 million
decrease in revenues from $59.3 million for the first six months of
1999 to $21.6 million for the first six months of 2000 was primarily
comprised of a $19.8 million decrease in interest income, a $13.3
million decrease in gain on sale of investments and a $4.4 million
decrease in asset management and resolution fees. These decreases
were due primarily to 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 period ended June 30, 2000 primarily
consisted of $23.4 million of loss on disposal and impairment of
assets, $7.6 million in interest expense, $6.5 million in other
general and administrative expenses and $5.4 million in personnel
cost. The $8.2 million increase in expenses from $34.9 million for
the prior year period to $43.1 million for the six months ended June
30, 2000 was due primarily to the loss on disposal and impairment of
assets of $23.5 million offset, in part, by decreases of $7.7
million in interest expense, $4.5 million in personnel expense and
$1.9 million in other general and administrative expenses primarily
as a result of the sale to Lend Lease and the United Kingdom asset
sale. The loss on disposal and impairment of assets is comprised of
a $7.7 million loss on the Lend Lease transaction, a $7.6 million
impairment of asset backed securities, a $5.4 million loss on the
sale of the UK operation and a $2.8 million impairment of the
Company's investment in AMRESCO Capital Trust.
Home Equity Lending. Revenues for the six months ended June 30,
2000 primarily consisted of $8.6 million of interest income and $1.4
million in mortgage banking and servicing fees. The $56.2 million
decrease in revenues from $66.6 million for the prior year period to
$10.4 million for the six months ended June 30, 2000 was due
primarily to a $26.9 million decrease in interest income related to
holding reduced balances of loans held for sale due to the transfer
of this business to Finance America, a $24.4 million decrease in gain
on sale of loans and a $4.2 million decrease in mortgage banking and
servicing fees also due to the transfer to Finance America.
Operating expenses for the six months ended June 30, 2000
primarily consisted of $79.6 million of write-downs and loss on sale
of retained interests in securitizations, $16.0 million of interest
expense, $3.8 million of other general and administrative expense and
$1.4 million of depreciation and amortization. Operating expenses
increased by $19.6 million from $81.6 million for the prior year
period to $101.2 million for the six months ended June 30, 2000.
This increase was due primarily to an increase of $67.6 million in
loss on retained interests in securitizations offset, in part, by
decreases of $21.0 million in personnel expense, $14.8 million in
other general and administrative expense, $6.4 million in interest
expense and a $3.1 million decrease in provision for loan and
investment losses and $2.8 million in depreciation and amortization.
The $79.6 million loss on retained interests consists of a $70.0
million write-down and a $9.6 million loss on the sale of retained
interests. The decreases in other expenses was primarily due to the
aforementioned transfer to Finance America.
Corporate, Other and Intercompany Eliminations. Revenues of
$5.6 million for the six months ended June 30, 2000 primarily
consisted of interest income from investments in residential mortgage
backed securities. The $28.6 million increase in expenses from $22.6
million for the prior year period to $51.3 million for the six months
ended June 30, 2000 was due primarily to the $19.0 million loss on
the disposal of assets and related expenses on the Lend Lease
transaction, a $7.6 million increase in general and administrative
expenses and a $3.6 million increase in interest expense due
primarily to decreased allocations of interest and general and
administrative expenses. The Company has not recognized any tax
benefit in the current quarter as management believes its best
estimate of deferred tax assets has already been reflected in the
accompanying financial statements.
Liquidity and Capital Resources
Cash and cash equivalents totaled $18.0 million at June 30,
2000. Cash flows provided by operating activities plus principal
collections on loans, asset portfolios and asset-backed securities
totaled $597.2 million for the first six months of 2000 compared to
$417.4 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, the sale of the real estate structured
finance portfolio for $170.2, increased cash receipts from the asset
management investment portfolio and an increase in warehouse loans
payable, offset, in part, by cash receipts in the prior year period
from retained interests in securitizations primarily from $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 six months of 2000 and 1999 (dollars in thousands):
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Net cash provided by operating activities of continuing operations $ 116,775 $ 133,451
Net cash provided by (used in) investing activities of continuing operations 228,278 (42,759)
Net cash (used in) financing activities of continuing operations (496,674) (134,864)
Net cash provided by discontinued operations 132,887 61,170
Other financial measures:
Cash flow from operations and collections on loans, asset portfolios
and asset-backed securities 597,242 417,438
Cash provided by new capital and borrowings (used in repayment), net
(excluding warehouse loans payable) (496,674) (134,872)
Cash used for purchase of asset portfolios, asset-backed securities,
mortgage servicing rights and originations of loans (253,131) (319,715)
</TABLE>
The following table is a summary of selected debt ratios as of June
30, 2000 and December 31, 1999:
2000 1999
Ratio of total debt to equity 3.6:1 3.0:1
Ratio of core debt to equity (Excludes
indebtedness under warehouse lines of credit) 2.9:1 2.8:1
The following table shows the components of the Company's
capital structure, including certain short-term debt, as of June 30,
2000 and December 31, 1999 (dollars in millions):
2000 1999
% of % of
Dollars Total Dollars Total
Shareholders' equity $ 288.1 22% $ 459.7 25%
Senior subordinated notes 580.0 44 580.0 31
Warehouse loans payable 204.6 16 101.9 6
Notes payable 243.5 18 708.6 38
Total $1,316.2 100% $1,850.2 100%
Total assets decreased $0.5 billion to $1.4 billion at June 30,
2000 from $1.9 billion at December 31, 1999. The decrease was due
primarily to sales of the real estate structured finance portfolio,
the assets of the United Kingdom operation 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 Amended Credit
Agreement or new agreement, as well as, to the extent described
above, the warehouse facilities and cash balances. However, no
assurance can be given that the warehouse agreement can be extended
or a new agreement put in place. 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,
repayment of the existing Credit Facility or new agreement, payment
of CLC note payable and repurchasing 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, pay the CLC note payable or repurchase
any 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.
Other Matters
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 actual constant default rate on the Company's home equity
securitizations from inception to date is 1.7% and is projected to be
5.4% for the next twelve months. The actual loss severity rate from
inception to date is 40.4% and is projected to be 41.8% over the next
twelve months. These rates are higher than originally projected.
Through June 30, 2000, the weighted average annual prepayment rate
was 26.6% for the period from inception of each security and is
modeled to be 24.8% for the next twelve months. Based upon actual
performance and the Company's valuation model which projects future
performance, a non-cash write down of $70.0 million during the second
quarter of 2000 was recorded.
The weighted-average discount rates used to value the Company's
retained interests from commercial finance and from home equity
securitizations at June 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 June 30, 2000 consisted of
$142.6 million of commercial finance loan interests and $71.2 million
of home equity loan interests.
Recent Developments
Proposed Reverse Stock Split
The Board of Directors, subject to shareholders' approval, has
authorized a one-for-five reverse stock split. If the proposal is
approved at the special shareholders' meeting scheduled for August
25, 2000, the authorized shares of the Company's common stock will be
reduced to 30,000,000 with a par value of $0.25. The Company believes
the completion of the reverse stock split will cause the minimum bid
price of the Common Stock to increase proportionately and thereby
permit the Company to meet the minimum bid price requirements of the
Nasdaq National Market.
Commercial Finance Securitization
A securitization of $210.0 million small business and franchise
loans, including a $22.0 million pre-fund, was closed on August 1,
2000.
Senior Credit Facility
On July 28, 2000 the Credit Agreement was amended to extend the
maturity date to August 18, 2000 and the commitment amount was
reduced to $7.2 million.
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 June 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 June 30, 2000 (dollars in millions):
Retained Interests in Securitization (trading):
Change in Hypothetical Hypothetical
Interest Rates Fair Value Change ($) Change (%)
10% $210.0 $(3.8) (1.8)%
0 213.8 - -
(10)% 213.5 (0.3) (0.1)
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% $428.0 $(0.6) (0.1)%
0 428.6 - -
(10)% 429.4 0.8 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 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 June 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% $40.0 $(4.2) (9.5)%
0 44.2 - -
(10)% 49.0 4.8 10.9
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 6. Exhibits and Reports on Form 8-K.
(a) Exhibits and Exhibit Index
Exhibit No.
3 Amended and Restated Bylaws of the Registrant.
11 Computation of Per Share Earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
May 30, 2000 - Second Modification of Amended and Restated
Credit Agreement and Unaudited Pro forma
Consolidated Financial Statements showing the
effect of the transaction with 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: August 4, 2000 By: /s/ Jonathan S. Pettee
Jonathan S. Pettee
Executive Vice President
and Chief Financial Officer
