<PAGE>
As Filed With The Securities And Exchange Commission On September 30, 1999
Registration No. 333-82409
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 4
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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American Home Mortgage Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 6162 13-4066303
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction Classification Code Number) Identification Number)
of Incorporation or
Organization)
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12 East 49th Street, New York, NY 10017
(212) 755-8600
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
--------------
Michael Strauss
President and Chief Executive Officer
American Home Mortgage
12 East 49th Street
New York, NY 10017
(212) 755-8600
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
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Copies to:
Louis J. Bevilacqua, Esq. Howard B. Adler, Esq.
Cadwalader, Wickersham & Taft Gibson, Dunn & Crutcher LLP
100 Maiden Lane 1050 Connecticut Avenue, N.W.
New York, NY 10038 Washington, D.C. 20036
(212) 504-6000 (202) 955-8500
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Approximate Date Of Commencement Of Proposed Sale To The Public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement number for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
Subject to Completion, dated September 30, 1999
2,500,000 Shares
[LOGO OF AMERICAN HOME MORTGAGE HOLDINGS, INC.]
American Home Mortgage Holdings, Inc.
Common Stock
$ per share
This is an initial public offering of common stock of American Home Mortgage
Holdings, Inc. We are offering for sale 2,500,000 shares of our common stock.
We are a retail mortgage banking company that originates residential mortgage
loans through the Internet and through more traditional channels and then sells
these loans and the related servicing rights to institutional buyers.
Of the 2,500,000 shares of common stock offered hereby, 89,606 shares
(assuming an initial public offering price of $6.00 per share) are being
offered to Michael Strauss, our President and Chief Executive Officer, at the
initial offering price, net of any underwriting discounts or commissions and
subject to certain resale restrictions. For additional information, please see
the "Underwriting" and "Shares Eligible for Future Sale" sections of this
prospectus.
We anticipate the initial public offering price of our common stock will be
between $5.00 and $7.00 per share. The market price of the shares after the
offering may be higher or lower than the initial offering price.
We expect to list our common stock on the Nasdaq National Market under the
symbol "AHMH."
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Price to public.............................. $ $
Underwriters' discounts and commissions...... $ $
Proceeds to us............................... $ $
</TABLE>
Approximately 61.8% of the net proceeds of the offering will be used to repay
indebtedness incurred to fund an S corporation distribution to Michael Strauss,
our sole existing stockholder.
The underwriters have agreed to underwrite this offering on a firm commitment
basis.
We have granted an over-allotment option to the underwriters. Under this
option, the underwriters may elect to purchase a maximum of 375,000 additional
shares from us within 30 days following the date of this prospectus to cover
over-allotments. As described in the "Underwriting" section of this prospectus,
we have also granted Friedman, Billings, Ramsey & Co., Inc. warrants to
purchase up to 250,000 additional shares of our common stock and have agreed to
reimburse up to $425,000 of underwriters' accountable expenses.
Investing in our common stock involves risks. Please read the "Risk Factors"
section beginning on page 7 before purchasing our common stock.
-----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Friedman Billings Ramsey Advest, Inc.
, 1999
<PAGE>
[MortgageSelect.com logo surrounded by names and logos of companies with whom
we have Web site relationships, with arrows pointing from the names and logos
of those companies to our logo; Images of selected MortgageSelect.com Web site
pages accompanied by text as follows: "Home page--Selected features on our
MortgageSelect.com Web site; Rates of the Week--Consumers can keep updated with
current rates; Pre-Approval--MortgageSelect.com can pre-approve a customer for
a mortgage; Rate Lock-in--MortgageSelect.com will guarantee a lock-in rate for
up to sixty days; and Credit Report--Customers can order a report to check
their credit history." ; Map of the United States indicating states where we
are licensed to do business and locations of offices; Our logo surrounded by
names and logos of institutional buyers that purchase our loans, with arrows
pointing from our logo to the names and logos of those institutional buyers.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 7
Special Notes of Caution................................................. 16
Transactions Related to the Offering..................................... 18
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Financial Data.................................................. 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 36
Management............................................................... 53
Certain Transactions..................................................... 60
Principal Stockholders................................................... 60
Description of Capital Stock............................................. 61
Shares Eligible for Future Sale.......................................... 64
Underwriting............................................................. 65
Legal Matters............................................................ 67
Experts.................................................................. 67
Where You Can Find More Information...................................... 67
Index to Financial Statements............................................ F-1
</TABLE>
-i-
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PROSPECTUS SUMMARY
You should read this Summary section together with the more detailed
information and financial statements and related notes appearing in this
prospectus, including the information under the section "Risk Factors."
THE COMPANY
We are a leading independent retail mortgage banking company focused on
expanding our business of originating residential mortgage loans. We intend to
expand our mortgage origination volume through the Internet and other more
traditional channels. We sell the loans we originate and the related servicing
rights to institutional buyers, rather than hold the loans for investment. In
1998, 64.7% of our $1.2 billion in total loan originations were made to home
buyers rather than to home owners seeking to refinance their mortgages. In the
first six months of 1999, we originated approximately $612.3 million in loans,
61.4% of which were made to home buyers. Our originations generated total
revenues and net income of $20.2 million and $4.9 million for the year ended
December 31, 1998 and generated $12.2 million of total revenues and $2.5
million of net income for the six months ended June 30, 1999.
In January 1999, we began to market our mortgage products over the Internet.
We originate our mortgage products online through arrangements with a number of
popular Web sites and through our own MortgageSelect.com Web site. During July
1999, we received applications over the Internet for $39.5 million in loans,
representing 24.8% of our total application volume. We currently have
relationships with 20 popular Web sites and 65 hyperlinks from other Web sites
to MortgageSelect.com. In addition to an exclusive relationship with Real
Estate Village, an online marketplace of realtors and real estate related
services, we originate mortgage loans through the following Web sites:
. Microsoft HomeAdvisor;
. GetSmart;
. LendingTree;
. Consumer Financial Network;
. RealEstate.com; and
. LoanWeb.
At the core of our traditional business is our retail division. In 1998 and
the first 6 months of 1999, 81.0% and 83.2% of the mortgage loans we originated
were made through this division. Our retail division currently originates
mortgage loans primarily through our 16 community loan offices in the New York
metropolitan area and 5 other eastern states. Additionally, we originate
mortgage loans through direct-to-consumer advertising and joint ventures with
realtors and builders. To a lesser extent, we also originate mortgage loans
through our Corporate Affinity Program, telemarketing and our Real Estate
Direct Program. Our wholesale division, which accounted for 19.0% of the
mortgage loans we originated in 1998 and 16.8% in the first six months of 1999,
makes loans through a network of independent mortgage brokers.
Our Strategies for Growth
Our goal is to continue to expand our retail mortgage banking business
primarily through our Internet origination channel and also through our other
traditional origination channels. To achieve this goal, we are focusing on the
following growth initiatives through the remainder of 1999:
Internet Origination Channel
. Form exclusive and participating relationships with additional Web
sites.
. Open our third Internet call center.
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. Qualify to offer mortgage loans through the Internet in the remaining 15
states in which we are not yet qualified.
. Launch further enhancements to our Web site to allow an applicant to
apply, lock in a rate and receive a commitment, all during one
continuous online session.
. Commence an advertising campaign to increase awareness of, and to direct
potential customers to, our MortgageSelect.com Web site.
Traditional Origination Channels
. Open new community loan offices and expand from our traditional
geographic base.
. Hire additional sales-oriented loan originators.
. Form additional joint ventures with realtors and builders.
. Selectively pursue strategic acquisitions in our industry.
Our Competitive Advantages
We believe that by leveraging the following competitive advantages across
both our Internet and traditional origination channels we will be able to
continue to expand our mortgage origination business:
. Lending to Home Buyers We concentrate our marketing, advertising and
personnel resources on lending to home buyers
rather than to home owners seeking to
refinance their mortgage loans. We believe
home purchase mortgage volume is less
susceptible to interest rate increases. In
1998, 64.7% of our mortgage loans were made
to home buyers as compared to the Mortgage
Bankers Association of America estimate of
the mortgage industry average of
approximately 50% for such year. For the
first 6 months of 1999, 61.4% of our loans
were made to home buyers, compared to an
industry average of approximately 54%.
. Breadth of Product Offering We offer a broad range of loan products which
allows us to meet the needs of a wide variety
of customers.
. Use of Technology We seek to maximize the efficiency of our
operations through the use of advanced
technology.
. Loans Specifically The loans we originate are designed and
Underwritten for Sale to documented specifically to conform to the
Buyers underwriting and credit standards of our
third-party buyers. This helps ensure that
each loan we originate can be sold to one of
our buyers.
. One-Stop Shopping We intend to provide customers with a single
source for mortgages and mortgage-related
products such as title insurance, abstract
services and home equity lines of credit.
. Consultative Sales Strategy Our experienced loan originators focus on
building a rapport with borrowers through
frequent customer contacts and follow ups.
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The Mortgage Industry
The mortgage banking industry is the largest consumer debt-related sector in
the United States. In 1998, mortgage loan origination volume in the United
States reached a record high of $1.5 trillion, compared to $834 billion in 1997
according to the Mortgage Bankers Association of America (MBA). The MBA also
reports that mortgage bankers are the leading group of residential mortgage
lenders, originating approximately 60%, or $880 billion, in mortgage loans in
1998. The MBA estimates that $1.2 trillion in mortgages will be originated in
1999.
Mortgage lending traditionally takes place through the manual exchange of
information from the time of application to the loan closing. This traditional
means of lending is cumbersome and inefficient. We believe that Internet
mortgage lending is the solution to these inefficiencies. Forrester Research
estimates that $91.2 billion, or 9.6%, of all mortgage loans will be originated
online by the year 2003, compared to $18.7 billion, or less than 1.5%, in 1999.
In addition, Killen & Associates predicts online mortgage originations will
account for approximately 30% of total mortgage originations by 2005.
General Information
We are located on the Internet at www.MortgageSelect.com. Our executive
offices are located at 12 East 49th Street, New York, NY 10017 and our
telephone number is (212) 755-8600.
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Unless otherwise indicated, all share and per share data and information in
this prospectus:
. assume that the underwriters will not exercise their over-allotment
option; and
. reflect the exchange of all of the issued and outstanding shares of
common stock of American Home Mortgage Corp. for 4,999,900 shares of our
common stock (the incorporation transaction).
The incorporation transaction was completed on September 29, 1999. This
transaction created a holding company for American Home Mortgage Corp. We are
the holding company, American Home Mortgage Holdings, Inc., and the issuer of
the shares offered pursuant to this prospectus. See the "Transactions Related
to the Offering" section in this prospectus. Unless otherwise stated, "we,"
"our," "American Home Mortgage" and "us" refer to American Home Mortgage
Holdings, Inc. and its wholly-owned subsidiary, American Home Mortgage Corp.
References in this prospectus to mortgage originations include mortgages
that we originated and closed and mortgages brokered by us during the period.
3
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THE OFFERING
Common stock offered............ 2,500,000 shares(/1/)
Common stock to be outstanding
after the offering............. 7,500,000 shares(/1/) (/2/)
Use of proceeds.................
We will use the net proceeds of the offering,
which are estimated to be $12.6 million, (1)
to repay indebtedness incurred to fund an S
corporation distribution to Michael Strauss,
our sole existing stockholder, and (2) for
Internet business expansion and general
corporate and working capital purposes,
including funding of potential acquisitions
of related businesses. For a more detailed
discussion of the S corporation distribution
to the stockholder and the use of proceeds,
please see the "Transactions Related to the
Offering" and "Use of Proceeds" sections of
this prospectus.
Nasdaq National Market symbol... AHMH
For a more detailed description of our capitalization, please see the
"Capitalization" section of this prospectus.
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(/1/) Includes 89,606 shares of common stock (assuming an initial public
offering price of $6.00 per share) to be offered to Michael Strauss.
Does not include 375,000 shares of common stock reserved for issuance
upon exercise of the underwriters' over-allotment option and 250,000
shares reserved for issuance upon exercise of warrants to be issued to
Friedman, Billings, Ramsey & Co., Inc.
(/2/) Does not include 33,334 shares of restricted stock (assuming an initial
public offering price of $6.00 per share) and options to purchase
650,000 shares of common stock (assuming an initial public offering
price of $6.00 per share) under our 1999 Omnibus Stock Incentive Plan to
be granted upon completion of this offering.
4
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SUMMARY FINANCIAL DATA
(in thousands, except per share and operating data)
You should read the summary financial data set forth below in conjunction
with our consolidated financial statements and related notes and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus.
<TABLE>
<CAPTION>
Year Ended December Six Months Ended
31, June 30,
---------------------- -----------------
1996 1997 1998 1998(/1/) 1999
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<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Gain on sale of mortgage loans..... $6,360 $10,597 $18,981 $7,690 $10,822
Other.............................. 225 725 1,236 717 1,345
------ ------- ------- ------ -------
Total revenues................... 6,585 11,321 20,217 8,407 12,167
------ ------- ------- ------ -------
Expenses:
Salaries, commissions and benefits,
net............................... 3,459 5,317 9,430 3,636 5,823
Marketing and promotion............ 814 962 1,236 598 869
Other.............................. 1,668 2,584 4,302 1,820 2,771
------ ------- ------- ------ -------
Total expenses................... 5,941 8,862 14,968 6,054 9,463
------ ------- ------- ------ -------
Income before income taxes and
minority interest................... 644 2,459 5,249 2,353 2,704
State income taxes................. 38 140 328 118 131
Minority interest.................. -- -- 51 (6) 44
------ ------- ------- ------ -------
Net income......................... $ 606 $ 2,319 $ 4,870 $2,241 $ 2,529
====== ======= ======= ====== =======
PRO FORMA DATA (unaudited):
Pro forma provision for income
taxes(/2/).......................... 245 942 1,982 917 1,058
Net income adjusted for pro forma
income tax provision.............. $ 361 $ 1,377 $ 2,888 $1,324 $ 1,471
====== ======= ======= ====== =======
Pro forma net income per share:
Basic.............................. $ 0.39 $ 0.20
Diluted............................ $ 0.39 $ 0.20
======= =======
Pro forma weighted average number of
shares outstanding(/3/):
Basic.............................. 7,500 7,500
Diluted............................ 7,500 7,500
======= =======
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 1999
------------------------
Actual As Adjusted(/4/)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 2,093 $ 7,570
Mortgage loans held for sale, net.................... 42,056 42,056
Total assets......................................... 50,920 56,397
Warehouse lines of credit............................ 25,313 25,313
Other liabilities.................................... 17,965 18,340
Total stockholder's equity........................... $ 7,572 $12,677
</TABLE>
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
---------------- -----------------
1996 1997 1998 1998 1999
---- ---- ------ -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Total mortgage originations (in
millions)................................ $544 $724 $1,158 $ 520 $ 612
Home purchases.......................... 383 562 749 327 376
Refinancings............................ 161 162 409 193 236
</TABLE>
5
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(/1/)June 30, 1998 information is derived from our unaudited financial
statements.
(/2/)Before this offering, we elected to be treated as an S corporation for
federal and state income tax purposes. Pro forma income taxes for the
years ended December 31, 1996, 1997 and 1998 and the six months ended June
30, 1998 and 1999 reflect adjustments for federal and state income taxes
as if we had been taxed as a C corporation rather than an S corporation
for such periods. State income taxes and pro forma provision for income
taxes provide for an effective tax rate of 44%. Please see the
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Termination of S Corporation Status and Income Taxes"
section of this prospectus.
(/3/)The pro forma weighted average number of shares outstanding at December
31, 1998 gives effect to the assumed issuance of 2,500,000 shares of
common stock to generate sufficient cash to pay the S corporation
distribution amount of $5.5 million at December 31, 1998. The pro forma
weighted average number of shares for June 30, 1999 gives effect to the
assumed issuance of 2,500,000 shares of common stock to generate
sufficient cash to pay the S corporation distribution amount of $7.2
million at June 30, 1999. The issuance of common stock was based on an
assumed offering price of $6.00 per share (the midpoint of the range set
forth on the cover page of this prospectus). Please see the "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Termination of S Corporation Status and Income Taxes" section of this
prospectus.
(/4/)As adjusted as of June 30, 1999 to give effect to:
--an assumed S corporation distribution of $7.2 million as of June 30, 1999
(which amount increased to $7.8 million at the actual distribution date,
September 28, 1999);
--our recording of an assumed one-time non-cash reduction to earnings in the
amount of $375,000 as of June 30, 1999 to recognize a deferred income tax
liability as a result of the termination of our S corporation status (which
amount increased to $625,000 at the actual termination date); and
--the issuance and sale of our common stock at an assumed offering price of
$6.00 per share (the midpoint of the range set forth on the cover page of
this prospectus) and application of the net proceeds as described in the
"Use of Proceeds" section of this prospectus.
6
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RISK FACTORS
An investment in our common stock involves a number of risks. Before making
an investment decision, you should carefully consider all of the risks
described in this prospectus. If any of the risks discussed in this prospectus
actually occur, our business, financial condition and results of operations
could be materially adversely affected. If this were to occur, the trading
price of our common stock could decline significantly and you may lose all or
part of your investment.
If we do not manage our growth effectively, our financial performance could be
materiallyadversely affected
We have experienced rapid and substantial growth in our mortgage loan
originations and revenues since 1995. We intend to pursue a growth strategy for
the foreseeable future by enhancing and expanding our Internet business,
expanding our traditional business into new geographic areas, increasing the
market share of our existing community loan offices, entering into additional
joint ventures with realtors and builders, and pursuing selective strategic
acquisitions of mortgage lenders and other mortgage banking-related companies.
We cannot assure you that we will accurately anticipate and respond to the
changing demands our expanding operations will face. We anticipate that future
operations will place a significant strain on our management, loan originators,
information systems and other resources. We must attract and integrate new
personnel, improve existing procedures and controls and implement new ones to
support any future growth. Our inability to meet our future hiring needs and to
adapt our procedures and controls accordingly could have a material adverse
effect on our results of operations, financial condition and business
prospects. In addition, we have re-assigned and will continue to re-assign
personnel from our traditional business to meet the demands of our Internet
business, which may have an adverse effect on our overall business. Further, we
must maintain and expand our relationships with popular Web sites in order to
successfully implement our Internet growth strategy. In addition, if we make
strategic acquisitions, we must successfully integrate the mortgage brokers and
other companies we acquire. We cannot assure you that we will achieve our
growth expectations, and our inability to do so could materially adversely
affect our results of operations and business.
Our historical rapid growth may not reflect our future growth potential and we
may not be able to maintain similarly high levels of growth in the future
Since 1995, our earnings have grown by more than 50% year to year through
December 31, 1998, and 12.9% for the first 6 months of 1999 as compared to the
same period of last year. We may not be able to achieve comparable growth in
the future. Market conditions in the past 5 years have favorably impacted the
mortgage banking industry in general. Our growth rate has benefited from low
interest rates and a long period of economic growth. We do not know whether
these favorable conditions will continue. If they do not, however, it is likely
to adversely affect our earnings growth. Because our historical growth rates
are not likely to accurately reflect our future growth or our ability to grow
in the future, we cannot assure you that we will continue to grow at the same
pace or as profitably as we have in the past.
To expand our Internet business, we intend to expend significant funds
currently without assurance of increased future earnings or profitability
We anticipate expending significant funds to implement our growth strategy.
There may be a significant delay between the timing of these expenditures and
any increase in earnings, which may depress our earnings. Our future plans are
subject to both known and unknown risks and uncertainties that may cause our
actual results in future periods to be materially adversely different than our
prior performance. As a result, we cannot guarantee that our future revenues
will increase or that we will continue to be profitable.
If we are unable to implement our Internet strategy successfully, or our
agreements with Internet mortgage Web sites are terminated, our growth would
be limited
A substantial portion of our planned future growth depends on our ability to
originate loans on the Internet. Our Internet success will depend, in part, on
the development and maintenance of the Internet's infrastructure and consumer
acceptance of the Internet as a distribution channel for mortgages. Internet-
based
7
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mortgage lending is relatively new, and we cannot assure you that consumers
will increase their use of the Internet for obtaining mortgage loans. In order
to increase our loan volume on the Internet, we depend on building and
maintaining relationships with operators of Internet mortgage Web sites,
attracting consumers with our loan terms and service, and controlling our
costs. However, our ability to significantly increase the number of loans we
originate over the Internet and to continue to originate loans profitably over
the Internet remains uncertain. In addition, many of our agreements with
Internet mortgage Web sites can be terminated by either party on short notice.
If any of these agreements were terminated, our business and results of
operations could be materially adversely affected.
A period of rising interest rates, an economic slowdown or a recession could
reduce the demand for mortgages
Rising interest rates generally reduce the demand for consumer credit,
including mortgage loans. Interest rates have been at favorably low levels for
the last several years, generally ranging from 6.5% to 7.5% for conforming
loans. There is no assurance that interest rates will continue at favorably low
rates. In an economic slowdown or recession, real estate values and home sales
decline and the number of borrowers defaulting on their loans increases. In a
period of rising interest rates or an economic slowdown, we will originate and
sell fewer loans and could be required to repurchase more of the loans we have
sold as a result of early payment defaults by borrowers. Accordingly, a period
of rising interest rates, an economic slowdown or a recession would adversely
affect our business and results of operations.
An increase in interest rates could reduce the value of our loan inventory
The value of our loan inventory is based, in part, on market interest rates.
Accordingly, we may experience losses on loan sales if interest rates change
rapidly or unexpectedly. If interest rates rise after we fix a price for a
loan, but before we sell that loan, the value of that loan will decrease. If
the amount we receive from selling the loan is less than our cost of
originating the loan, we may incur net losses, and our business and operating
results could be adversely affected.
Our hedging strategy may not protect us from interest rate risk and may lead to
losses
Although we generally sell our loans within 30 days after funding, there may
be unexpected delays that could increase our interest rate exposure. While we
use hedging and other strategies to minimize our exposure to interest rate
risks, no hedging or other strategy can completely protect us. In addition, the
nature and timing of hedging transactions may influence the effectiveness of
these strategies. Poorly designed strategies or improperly executed
transactions could actually increase our risk and losses. In addition, hedging
strategies involve transaction and other costs. We cannot assure you that our
hedging strategy and the hedges that we make will adequately offset the risks
of interest rate volatility or that our hedges will not result in losses. For
further discussion of our hedging strategy, please see the "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risk
Management" section of this prospectus.
The loss of our key management could result in a material adverse effect on our
business
Our future success depends to a significant extent on the continued services
of our senior management, particularly our President and Chief Executive
Officer, Michael Strauss. The loss of the services of Mr. Strauss, or other key
employees, could have a material adverse effect on our business and results of
operations. We do not maintain "key person" life insurance for any of our
personnel.
The loss of key purchasers of our loans or a reduction in prices paid could
adversely affect our financial condition
We sell substantially all of the mortgages we originate to institutional
buyers. Generally, we sell the servicing rights to our loans at the time we
sell those loans. In the first 6 months of 1999, 78.0% of the loans we
8
<PAGE>
sold were sold to two large national financial institutions and one regional
financial institution, all of which compete with us directly for retail
originations. If these financial institutions or any other significant
purchaser of our loans cease to buy our loans or servicing rights and
equivalent purchasers cannot be found on a timely basis, then our business and
results of operations could be materially adversely affected. Our results of
operations could also be affected if these financial institutions or other
purchasers lower the price they pay to us or adversely change the material
terms of their loan purchases from us.
The prices at which we sell our loans vary over time. A number of factors
determines the price we receive for our loans. These factors include:
. the number of institutions that are willing to buy our loans;
. the amount of comparable loans available for sale;
. the levels of prepayments of, or defaults on, loans;
. the types and volume of loans we sell;
. the level and volatility of interest rates; and
. the quality of our loans.
The prices at which we can sell our mortgage servicing rights vary over time
and may be materially adversely affected by a number of factors, including the
general supply of and demand for mortgage servicing rights and changes in
interest rates. Servicing rights for a particular loan category that was
originated at higher interest rates tend to have a lower value than those
originated with comparatively lower interest rates due to the greater
likelihood that loans with higher interest rates will be prepaid more quickly.
For a more detailed description of our sales strategies, please see the
"Business--Sale of Loans and Servicing Rights" section of this prospectus.
Because our ability to fund mortgage loans depends on the availability of
financing sources, our revenues and business would be negatively affected if
our current financing sources were canceled or not renewed
Our ability to make mortgage loans depends largely on our ability to secure
financing on acceptable terms. Currently, we fund substantially all of our
loans through our warehouse facility and under loan purchase and sale
agreements with 4 institutional investors. Each of these financing arrangements
has a one-year term and is cancelable by the lender at any time. Our financing
facilities require us to observe financial and other covenants. If we are not
able to renew any of these financing arrangements or arrange for new financing
on terms acceptable to us, or if we default on our covenants and are unable to
access funds under any of these arrangements, then we will have to reduce our
mortgage originations, which would reduce our revenues. For a more detailed
description of our financing sources, please see the "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" section of this prospectus.
Our business may suffer if we cannot attract or retain qualified loan
originators
We depend on our loan originators to generate customers by, among other
things, developing relationships with consumers, real estate agents and
brokers, builders, corporations and others, which we believe leads to repeat
and referral business. Accordingly, we must be able to attract, motivate and
retain skilled loan originators. In addition, our growth strategy contemplates
hiring additional loan originators. The market for such persons is highly
competitive and historically has experienced a high rate of turnover.
Competition for qualified loan originators may lead to increased costs to hire
and retain them. We cannot guarantee that we will be able to attract or retain
qualified loan originators. If we cannot attract or retain a sufficient number
of skilled loan originators, or even if we can retain them but at higher costs,
our business and results of operations could be adversely affected.
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We face intense and increasing competition that could adversely impact our
market share and our revenues
We face intense competition from Internet-based lending companies and other
lenders participating on Web sites, as well as from traditional mortgage
lenders, such as commercial banks, savings and loan associations and other
finance and mortgage banking companies. Entry barriers in the mortgage industry
are relatively low and increased competition is likely. As we seek to expand
our business, we will face a greater number of competitors, many of whom will
be well-established in the markets we seek to penetrate. Many of our
competitors are much larger than we are, have better name recognition than we
do and have far greater financial and other resources. We cannot assure you we
will be able to effectively compete against them or any future competitors.
Competition may lower the rates we are able to charge borrowers, thereby
potentially lowering the amount of premium income on future loan sales and
sales of servicing rights. Increased competition also may reduce the volume of
our loan originations and loan sales. We cannot assure you that we will be able
to compete successfully in this evolving market. For additional information on
the competitive environment in which we operate, please see the "Business--
Competition" section of this prospectus.
Changes in existing government sponsored and federal mortgage programs could
negatively affect our business
Our ability to generate revenue through mortgage sales to institutional
investors largely depends on programs administered by Fannie Mae, the Federal
Home Loan Mortgage Corporation and others which facilitate the issuance of
mortgage-backed securities in the secondary market. A portion of our business
also depends on various programs administered by the Federal Housing
Administration and the Veterans Administration. Any discontinuation of, or
significant reduction in, the operation of those programs could have a material
adverse effect on our business and results of operations. Also, any significant
adverse change in the level of activity in the secondary market or the
underwriting criteria of these entities would reduce our revenues.
We conduct a majority of our business in the northeast and may be adversely
affected by a future decline in economic conditions in that region
In 1998, approximately 73.7%, 15.3% and 8.9% of the mortgages we originated
(as measured by principal balances) were secured by property located in New
York, Connecticut and New Jersey. For the first 6 months of 1999, those
percentages were 73.1%, 16.4% and 8.0%. A decline in economic conditions in
these states or the surrounding regions could materially adversely affect our
business and results of operations. Moreover, if the real estate markets in
these states or regions should experience an overall decline in property
values, the overall quality of our loan portfolio may decline and the rates of
delinquency, foreclosure, bankruptcy and loss on loans we originate may
increase. This would negatively affect our ability to originate loans or to
sell our loans and servicing rights.
We may be required to return proceeds obtained from the sale of loans, which
would negatively impact our results of operations
When we sell a loan to an investor, we are required to make unqualified
representations and warranties regarding the loan, the borrower and the
property. These representations are made based in part on our due diligence and
related information provided to us by the borrower and others. If any of these
representations or warranties are later determined not to be true, we may be
required to repurchase the loan, including principal and interest, from the
investor or indemnify the investor for any damages or losses caused by the
breach of such representation or warranty. In connection with some non-prime
loan sales, we may be required to return a portion of the premium paid by the
investor if the loan is prepaid within the first year after its sale. If, to
any significant extent, we are required to repurchase loans, indemnify
investors or return loan premiums, it could have a material adverse effect on
our business and results of operations.
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Our non-prime mortgage business subjects us to greater risks than our prime
business and if we were to increase our non-prime mortgage business in the
future, our business would become less stable
Under our non-prime mortgage loan programs, we make loans to borrowers who
have impaired or limited credit histories or higher debt-to-income ratios than
prime mortgage lenders allow. For the year ended December 31, 1998,
approximately 2.2% of the dollar amount, or 3.7% of the total number, of our
loans originated were categorized as non-prime. For the first 6 months of 1999,
those percentages were 4.3% and 7.2%. The non-prime mortgage banking industry
is riskier than the conforming mortgage business primarily because there is a
greater risk of default and product offerings for non-prime mortgages
frequently change, which may make selling a non-prime loan to our institutional
investors more difficult. Our failure to adequately address the related risks
could have a material adverse effect on our business and results of operations.
Our financial results may fluctuate as a result of seasonality and other
factors, including the demand for mortgage loans, which makes it difficult to
predict our future performance
Our business is generally subject to seasonal trends. These trends reflect
the general pattern of resales of homes, which typically peak during the spring
and summer seasons and decline from January through March. Our quarterly
results have fluctuated in the past and are expected to fluctuate in the
future, reflecting the seasonality of the industry.
Further, if the closing of a sale of loans or servicing rights is postponed,
the recognition of premium income from these sales is also postponed. If such a
delay causes us to recognize income in the next quarter, our results of
operations for the previous quarter could be materially adversely affected.
Unanticipated delays could also increase our exposure to interest rate
fluctuations by lengthening the period during which our variable rate
borrowings under our credit facilities are outstanding. In addition, the
following factors influence our revenues and net earnings:
. the level and volatility of interest rates;
. the demand for mortgage loans; and
. the size and timing of sales of loans and servicing rights.
These and other factors make it very difficult to predict our results of
operations. If our results of operations do not meet the expectations of our
stockholders and securities analysts, then our common stock price may be
materially adversely affected.
Our dependence on information systems may result in computer problems caused by
the Year 2000
We rely on communications and information systems to conduct our business.
As we implement our growth strategy and increase our origination of mortgages
over the Internet, this reliance will also increase. Any failure or
interruption of our computer systems or third-party computer systems on which
we rely could cause underwriting or other delays. Failures or interruptions may
result from the inability of computer systems to recognize a date using "00" as
the Year 2000. Our computer systems may not be Year 2000 ready. We cannot
assure you that these Year 2000 issues have been or will be adequately
addressed by us or the third parties on which we rely, or that any such
failures or interruptions will not occur. The occurrence of any failures or
interruptions could have a material adverse effect on our business and results
of operations. For a more detailed discussion of our Year 2000 readiness
program, please see the "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Readiness" section of this
prospectus.
The success of our online business depends on system integrity and security
The performance of our Web site and the Web sites in which we participate is
important to our reputation, our ability to attract customers and our ability
to achieve market acceptance of our services. Any system failure
that causes an interruption or an increase in response time of our services
could result in fewer loan applications
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through our Web site. System failures, if prolonged, could reduce the
attractiveness of our services to borrowers and clients. Our operations are
susceptible to outages due to fire, floods, power loss, telecommunications
failures, break-ins and similar events. In addition, despite our implementation
of network security measures, our servers are vulnerable to computer viruses,
break-ins and similar disruptions from unauthorized tampering with our computer
systems. We do not carry sufficient insurance to compensate for losses that may
occur as a result of any of these events.
A significant barrier to online commerce is the secure transmission of
confidential information over public networks. We rely on encryption and
authentication technology licensed from third parties to effect secure
transmission of confidential information, such as that required on a mortgage
loan application. Advances in computer capabilities, new discoveries in
cryptography or other developments may result in a breach of the algorithms we
use to protect customer data. If any compromise of our security occurs, it
would injure our reputation, and could adversely impact the success of our
business.
Our online success depends on our ability to adapt to technological changes
The market for Internet products and services is characterized by rapid
technological developments, evolving industry standards and frequent new
products and enhancements. If faster Internet access becomes more widely
available through cable modems or other technologies, we may be required to
make significant changes to the design and content of our Web site to compete
effectively. As the number of Web pages and users increases, we will need to
modify our Internet infrastructure and our Web site to accommodate increased
traffic. If we cannot modify our Internet systems, we may experience:
.system disruptions;
.slower response times;
.impaired quality and speed of application processing; and
.delays in reporting accurate interest rate information.
If we fail to effectively adapt to increased usage of the Internet or new
technological developments, our business will be adversely affected.
We must comply with numerous government regulations and we are subject to
changes in law that could increase our costs and adversely affect our business
Our business is subject to the laws, rules and regulations of various
federal, state and local government agencies regarding the origination,
processing, underwriting, sale and servicing of mortgage loans. These laws,
rules and regulations, among other things, limit the interest rates, finance
charges and other fees we may charge, require us to make extensive disclosure,
prohibit discrimination and impose qualification and licensing obligations on
us. They also impose on us various reporting and net worth requirements. We
also are subject to inspection by these government agencies. Our failure to
comply with these requirements could lead to, among other things, the loss of
approved status, termination of contractual rights without compensation,
demands for indemnification or mortgage loan repurchases, class action lawsuits
and administrative enforcement actions.
Our operations on the Internet are not currently subject to direct
regulation by any government agency in the United States beyond mortgage-
related regulations and regulations applicable to businesses generally. A
number of legislative and regulatory proposals currently under consideration by
federal, state and local governmental organizations may lead to laws or
regulations concerning various aspects of business on the Internet, including:
.user privacy;
.taxation;
.content;
.access charges;
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.liability for third-party activities; and
.jurisdiction.
The adoption of new laws or the application of existing laws may decrease
the use of the Internet, increase our costs or otherwise adversely affect our
business.
Regulatory and legal requirements are subject to change. If such
requirements change and become more restrictive, it would be more difficult and
expensive for us to comply and could affect the way we conduct our business,
which could adversely impact our results of operations. Although we believe we
are currently in material compliance with the laws, rules and regulations to
which we are subject, we cannot assure you that we are, or will be, in full
compliance with applicable laws, rules and regulations.
If we cannot comply with those laws or regulations, or if new laws limit or
eliminate some of the benefits of purchasing a mortgage, our business and
results of operations may be materially adversely affected. For a more detailed
discussion of the types of governmental regulation applicable to our business,
please see the "Business--Government Regulation" section of this prospectus.
As we expand, our inability to trademark the names under which we do business
may subject us to significant legal expenses and impair our marketing efforts
We have conducted our business under the name American Home Mortgage since
1988, and commenced doing business over the Internet under the name
MortgageSelect.com. We cannot obtain trademark protection for either name
because other companies use similar generic terms in their names. As a result,
the use of these names may be challenged in the various states in which we
currently operate or in the states into which we seek to expand by competitors
claiming prior use of a similar name in one or more of those areas. Any
challenges may result in our inability to use those names in such states and
may require us to do business under other names that do not have the goodwill
and name recognition, particularly of American Home Mortgage, associated with
them. It may also prove impractical to do business over the Internet under more
than one name. Our inability to use our names could result in a loss of
business. These challenges may also result in significant legal expenses
arising from the defense of our names and an inability to market our names
nationally.
Our proposed national expansion through the Internet will subject us to laws
and regulations with which we are unfamiliar
As part of the expansion of our Internet business, we intend to offer
mortgage loans in all 50 states through the Internet and are in the process of
obtaining the necessary qualifications or licenses in such states. Because we
currently make loans primarily in the New York metropolitan area and several
other eastern states, we are not familiar with the laws and regulations of
other states and the difficulties of complying with such laws. Moreover, such
laws and regulations were not drafted with the Internet in mind and using the
Internet as an origination channel for mortgage loans may create compliance
issues. Compliance with new laws and regulations may substantially slow our
ability to grow. Our future failure to adequately comply with the laws and
regulations to which we will be subject could result in liability that could
materially adversely affect our business and results of operations.
Pending industry-wide litigation could change the manner in which we do
business and subject us to potential liability
Numerous lawsuits seeking class certification have been filed against
mortgage lenders alleging that certain types of direct and indirect payments
made by those lenders to mortgage brokers are referral fees or unearned fees
prohibited under the Real Estate Settlement Procedures Act. These lawsuits also
allege that consumers were not informed of the brokers' compensation in
violation of law. There is much uncertainty as to the law on this issue because
several federal district courts construing RESPA have reached conflicting
results. If the pending cases on lender payments to brokers are ultimately
resolved against the lenders, it may cause an industry-wide change in the way
independent mortgage brokers are compensated. In addition, future legislation,
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regulatory interpretations or judicial decisions may require us to change our
broker compensation programs or subject us to material monetary judgments or
other penalties. Any changes or penalties may have a material adverse effect on
our business and results of operations. For a more detailed description of
government regulation, please see the "Business--Government Regulation" section
of this prospectus.
We face risks in connection with any potential acquisition that could have a
material adverse impact on our growth or our operations
We may at times consider selective strategic acquisitions of mortgage
lenders and other mortgage banking-related companies. There is substantial
competition for acquisition opportunities in the mortgage industry. This
competition could result in an increase in the price of, and a decrease in the
number of, attractive acquisition candidates. As a result we may not be able to
successfully acquire attractive candidates on terms we deem acceptable. In
addition, we cannot assure you that we will be able to obtain the requisite
financing on terms we deem acceptable. Pursuing acquisitions also involves a
number of special risks, including adverse short-term effects on our results of
operations, dilution resulting from issuances of our common stock, diversion of
management's time, strain on our financial and administrative infrastructure,
difficulties in integrating acquired businesses and personnel, loss of
personnel and unanticipated legal liabilities. We cannot guarantee you that we
will be able to overcome these acquisition risks or that they will not
adversely affect our growth and results of operations.
If we securitize our loans in the future, we will be subject to additional
risks that we do not currently face
We currently do not securitize the loans we originate, but rather sell or
swap them to institutional buyers. Although we do not currently intend to
securitize our loans, we may decide to do so in the future if market conditions
or other considerations justify doing so. Securitizing our loans would subject
us to numerous additional risks, including:
.delayed operating cash flow;
.conditions in the general securities and securitization markets;
.the need to obtain satisfactory credit enhancements;
.retention of credit enhancing residual interests; and
.increased potential for earnings fluctuations.
If we were to securitize our loans, we would have to adequately address
these and other related risks. Our failure to do so could have a material
adverse effect on our business and results of operations.
If we retain the servicing rights to our loans in the future, we would be
subject to additional risks that we do not currently face
Generally, we sell the servicing rights to our loans at the same time that
we sell those loans. Although we currently do not intend to retain the
servicing rights to our loans, we may decide to do so in the future if market
conditions or other considerations justify doing so. If we were to service our
loans ourselves, we would be subject to additional risks, including:
.decreased operating cash flow; and
. the potential of having to write down the value of the servicing rights
through a charge to earnings, particularly as a result of changing
interest rates and alternative financing options that lead to increased
prepayments.
If we were to retain the servicing rights to our loans, we would have to
adequately address these and other related risks. Our failure to do so could
have a material adverse effect on our business and results of operations.
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The loss of our relationship with Fannie Mae would have an adverse effect on
our business
We have an arrangement with Fannie Mae that allows us to use Fannie Mae's
Desktop Underwriter(R) software through our Internet Web site and to provide
mortgage brokers with use of that software. Our contract with Fannie Mae may be
canceled by either party on 90 days' notice. If Fannie Mae terminates the
agreement, our planned Internet growth and mortgage broker business could be
adversely affected, which could reduce our revenues.
We are exposed to environmental liabilities with respect to properties to which
we take title, which could increase our costs of doing business and adversely
impact our results of operations
In the course of our business, at various times, we may foreclose and take
title (for security purposes) to residential properties, and could be subject
to environmental liabilities with respect to such properties. To date, we have
not been required to perform any environmental investigation or remediation
activities, nor have we been subject to any environmental claims relating to
these activities. We cannot assure you that this will remain the case in the
future. We may be held liable to a governmental entity or to third parties for
property damage, personal injury, and investigation and clean up costs incurred
by these parties in connection with environmental contamination, or may be
required to investigate or clean up hazardous or toxic substances or chemical
releases at a property. The costs associated with an environmental
investigation or remediation activities could be substantial. In addition, as
the owner or former owner of a contaminated site, we may be subject to common
law claims by third parties seeking damages and costs resulting from
environmental contamination emanating from such property.
Our stock price may be volatile, which could result in substantial losses for
our stockholders
Before this offering, there had been no public market for our common stock.
We cannot assure you that an active public market for our common stock will
develop or can be sustained after this offering. Even if an active trading
market does develop, the market price of our common stock is likely to be
highly volatile and could be subject to wide fluctuations in response to such
factors as:
.actual or anticipated changes in our future financial performance;
.changes in financial estimates by securities analysts;
.conditions and trends in the Internet and e-commerce business;
. competitive developments, including announcements by us or our
competitors of new products or services or significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
.the operating and stock performance of our competitors;
.changes in interest rates; and
.additions or departures of key personnel.
There may be substantial sales of our common stock after the offering which
would cause a decline in our stock price
Sales of substantial amounts of our common stock in the public market
following this offering, or the perception that such sales could occur, could
have a material adverse effect on the market price of our common stock. We, our
existing stockholder and our employees, officers and directors who will receive
shares of our common stock or options to purchase shares of our common stock,
have agreed not to offer, sell or contract to sell or otherwise dispose of any
common stock for a period of 180 days from the effective date of this
prospectus in the case of us and such employees, officers and directors, and
for a period of 540 days from the effective date in Mr. Strauss' case, without
the prior written consent of Friedman, Billings, Ramsey & Co., Inc., subject to
certain limited exceptions. Upon the expiration of these lock-up agreements, or
if Friedman, Billings, Ramsey & Co., Inc. in its sole discretion determines to
release all or any portion of the shares subject to the lock-ups, these shares
may be sold in the public market. For additional information, please see the
"Shares Eligible for Future Sale" section of this prospectus.
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You will experience immediate and substantial dilution as a result of this
offering
The initial offering price per share will exceed our net tangible book value
per share. As a result, you will incur immediate and substantial dilution of
approximately $4.31 in the net tangible book value per share from the assumed
$6.00 price per share paid for the common stock in this offering (the midpoint
of the range set forth on the cover page of this prospectus). For a more
detailed discussion of dilution, please see the "Dilution" section of this
prospectus.
Our existing stockholder will be able to exercise significant control over our
operations
Upon the closing of this offering, our President and Chief Executive
Officer, Mr. Strauss, will own approximately 67% of our outstanding common
stock. If the underwriters exercise their over-allotment option in full, Mr.
Strauss will own approximately 63% of our outstanding common stock.
Accordingly, Mr. Strauss will have the ability to control our affairs and the
outcome of all matters requiring stockholder approval, including:
.the election and removal of directors;
.amendments to our charter; and
.approval of significant corporate transactions, such as an acquisition of
our company or assets.
Mr. Strauss' control position would prevent a change in control transaction
with respect to our company without his approval. For a more detailed
description of Mr. Strauss' ownership of common stock, please see the
"Management" and "Principal Stockholders" sections of this prospectus.
It may be difficult for a third party to acquire us
Some provisions of our amended and restated certificate of incorporation,
bylaws and Delaware law contain anti-takeover provisions that could make it
more difficult for a third party to acquire us, even if such a transaction
would be beneficial to you as a stockholder. For a more detailed discussion of
these provisions, please see the "Description of Capital Stock" section of this
prospectus.
As a holding company, we depend on dividends and distributions from our
operating subsidiary to fund our operations and may, as a result, be
subordinate to the rights of its existing and future creditors
We are a holding company and our principal assets initially are the shares
of the capital stock of our wholly-owned subsidiary, American Home Mortgage
Corp. As a holding company without independent means of generating operating
revenue, we depend on dividends and other payments from our wholly-owned
subsidiary to fund our obligations and meet our cash needs. Our expenses may
include salaries of our executive officers, insurance, professional fees and
service of indebtedness that may be outstanding at various times. Financial
covenants under the existing or future loan agreements of our wholly-owned
subsidiary, or provisions of the laws of the state where our subsidiary is
organized, may limit its ability to make sufficient dividend or other payments
to us to permit us to fund our obligations or meet our cash needs, in whole or
in part. By virtue of our holding company status, our common stock will be
structurally junior in right of payment to all existing and future liabilities
of our subsidiary.
SPECIAL NOTES OF CAUTION
Regarding Forward-Looking Statements
Some of the information in this prospectus may constitute "forward-looking
statements" within the meaning of the federal securities laws. Forward-looking
statements generally discuss our plans and objectives for future operations.
They also include statements containing a projection of revenues, earnings
(loss), capital
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expenditures, dividends, capital structure or other financial terms. The
following statements particularly are forward-looking in nature:
.our strategy;
.development of our Internet capabilities;
.projected joint ventures or acquisitions;
.the impact of Year 2000 on our information systems and those of our
vendors;
.projected capital expenditures; and
.use of proceeds of this offering.
The forward-looking statements in this prospectus are based on our
management's beliefs, assumptions, and expectations of our future economic
performance, taking into account the information currently available to them.
These statements are not statements of historical fact. Forward-looking
statements involve risks and uncertainties, some of which are not currently
known to us, that may cause our actual results, performance or financial
condition to be materially different from the expectations of future results,
performance or financial condition we express or imply in any forward-looking
statements. Some of the important factors that could cause our actual results,
performance or financial condition to differ materially from our expectations
are:
.general volatility of the capital markets and the market price of our
shares;
. changes in the real estate market, interest rates or the general economy
of the markets in which we operate;
. economic, technological or regulatory changes affecting the use of the
Internet;
. our ability to employ and retain qualified employees;
. our ability, and the ability of our significant vendors, suppliers and
customers, to achieve Year 2000 readiness;
. changes in government regulations that are applicable to our regulated
brokerage and property management businesses;
. our ability to identify and complete acquisitions and successfully
integrate businesses we acquire;
. changes in the demand for our services;
. degree and nature of our competition; and
. the other factors referenced in this prospectus, including, without
limitation, under the captions "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Business."
When used in our documents or in any oral presentation, the words "plan,"
"believe," "anticipate," "estimate," "expect," "objective," "projection,"
"forecast," "goal" or similar words are intended to identify forward-looking
statements. We qualify any and all of our forward-looking statements entirely
by these cautionary factors.
Regarding Additional Information
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock.
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TRANSACTIONS RELATED TO THE OFFERING
Our subsidiary, American Home Mortgage Corp., has been engaged in the
residential mortgage business since its incorporation in 1988. Immediately
before this offering, Michael Strauss, the sole existing stockholder of
American Home Mortgage Corp., exchanged his shares for an aggregate of
4,999,900 shares of our common stock. As a result of this incorporation
transaction, immediately before this offering, Michael Strauss owns all of our
issued and outstanding shares of common stock.
Since 1988, American Home Mortgage Corp. elected to be treated for federal
and certain state income tax purposes as an S corporation under the Internal
Revenue Code of 1986, as amended, and comparable state laws, where permitted
and applicable. As a result, our taxable earnings have been included in the
taxable income of Michael Strauss, our existing stockholder, for federal and
state income tax purposes. American Home Mortgage Corp. has been subject to
certain state income tax on these earnings. Upon receipt of the contribution of
American Home Mortgage Corp. stock from Michael Strauss on September 29, 1999,
the S corporation status of American Home Mortgage Corp. was terminated.
Immediately before such contribution and our conversion to C corporation
status, American Home Mortgage Corp. distributed to Michael Strauss all
previously earned and undistributed taxable S corporation earnings and earnings
subject to deferred taxes, net of such deferred taxes, through the date of such
contribution (the S corporation distribution). That distribution, like previous
distributions to Michael Strauss, represents earnings that have been or will be
taxable to him. The S corporation distribution was made on September 28, 1999,
in the amount of $7.8 million. The S corporation distribution consists of a
promissory note (the S corporation distribution note) bearing interest at the
rate payable on American Home Mortgage Corp.'s principal credit facility, and
it is intended that, on the closing of this offering, we will contribute the
proceeds of the offering to American Home Mortgage Corp. and American Home
Mortgage Corp. will use a portion of this contribution to repay interest and
principal on the S corporation distribution note. Upon consummation of the
incorporation transaction, American Home Mortgage Corp. is no longer treated as
an S corporation and, accordingly, is fully subject to federal and state income
taxes. In connection with the foregoing, we have agreed to indemnify Michael
Strauss, on an after-tax basis, from all liability for our taxes and those of
American Home Mortgage Corp. with respect to the period following the
completion of this offering.
As a result of American Home Mortgage Corp. becoming taxable as a C
corporation, and of the contribution of its stock to us, for the third quarter
of 1999, on a consolidated basis we will record a one-time non-cash reduction
to earnings of $625,000 to recognize a deferred income tax liability. For more
information, please see the "Capitalization" section of this prospectus.
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USE OF PROCEEDS
The primary purposes of this offering are to repay indebtedness in
connection with the incorporation transaction, to expand our Internet business,
to create a public market for our common stock and to facilitate our future
access to the public markets. We estimate that the net proceeds from the sale
of the shares of common stock we are offering will be $12.6 million. If the
underwriters fully exercise their over-allotment option, our net proceeds will
be approximately $14.7 million. Net proceeds is what we expect to receive after
paying underwriting discounts and estimated offering expenses. For the purpose
of estimating net proceeds, we are assuming that the initial public offering
price will be $6.00 per share (the midpoint of the range set forth on the cover
page of this prospectus).
We intend to use approximately $7.8 million of the net proceeds to pay the
aggregate principal and interest outstanding under the S corporation
distribution note.
We intend to use the balance of the net proceeds to expand our Internet
business and for general corporate and working capital purposes, including
funding potential acquisitions of related businesses. While at times we
evaluate potential acquisitions and anticipate continuing to make these
evaluations, we have no present understandings, commitments or agreements with
respect to any acquisitions.
The following table shows how we intend to use the net proceeds (in
thousands):
<TABLE>
<S> <C>
Payment of S corporation distribution note....................... $ 7,806
Expansion of Internet business and general working capital....... 4,824
-------
Estimated net proceeds......................................... $12,630
=======
</TABLE>
19
<PAGE>
DIVIDEND POLICY
Other than the S corporation distribution note, we do not intend to pay any
dividends on our capital stock in the foreseeable future. We currently intend
to retain future earnings, if any, for the development and expansion of our
business. In addition, because we are a holding company, our ability to pay
cash dividends depends in large part on our subsidiary's ability to make
distributions of cash or property to us. Our warehouse facility imposes
limitations on our subsidiary's ability to pay dividends and other
distributions to us. For a more detailed discussion of these limitations,
please see the "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" section of this
prospectus.
Our board of directors will make any further determinations as to our
dividend policy. These determinations will depend on a number of factors,
including our future earnings, capital requirements, financial condition and
future prospects and other factors that our board of directors may deem
relevant.
20
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999 on an
actual basis, assuming the incorporation transaction had occurred on June 30,
1999 and as adjusted to reflect:
(1) the sale of 2,500,000 shares of common stock at an assumed offering
price of $6.00 per share (the midpoint of the range set forth on the cover
page of this prospectus), less underwriting discounts and commissions and
estimated expenses;
(2) an assumed S corporation distribution of $7.2 million, which would
have been the S corporation distribution amount had it been distributed as
of June 30, 1999 (and which amount increased to $7.8 million at the actual
distribution date, September 28, 1999); and
(3) the application of the remaining estimated net proceeds as described
under "Use of Proceeds."
You should read the following table in conjunction with the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section of this prospectus and our consolidated financial statements and
related notes included elsewhere in this prospectus. For more information,
please see the "Transactions Related to the Offering" section of this
prospectus.
<TABLE>
<CAPTION>
June 30, 1999
---------------
As
Actual Adjusted
------ --------
(in thousands)
<S> <C> <C>
Minority interest......................................... $ 70 $ 70
Stockholders' equity:
Preferred stock, $1.00 par value per share, 1,000,000
shares authorized; no shares issued and outstanding.... -- --
Common stock, $.01 par value per share, 19,000,000
shares authorized; 5,000,000 shares issued and
outstanding actual, and 7,500,000 as adjusted.......... 50 75
Additional paid-in capital.............................. 268 12,599
Retained earnings....................................... 7,253 --
------ -------
Total stockholders' equity................................ 7,571 12,674
------ -------
Total capitalization...................................... $7,641 $12,744
====== =======
</TABLE>
21
<PAGE>
DILUTION
Our net tangible book value as of June 30, 1999 was $7.6 million, or $1.51
per share, based on 5,000,000 shares of common stock outstanding, assuming the
incorporation transaction had occurred on June 30, 1999. Net tangible book
value per share represents the amount of our total tangible assets less total
liabilities, divided by the number of shares of our common stock outstanding.
Our pro forma net tangible book value at June 30, 1999 would have been $12.7
million, or $1.69 per share after giving effect to:
. the sale of 2,500,000 shares of common stock at an assumed initial
public offering price of $6.00 per share (the midpoint of the range set
forth on the cover page of this prospectus), less underwriting discounts
and commissions and estimated expenses;
. an assumed S corporation distribution of $7.2 million as of June 30,
1999, which would have been the S corporation distribution amount had it
been distributed as of June 30, 1999 (and which amount increased to
$7.8 million at the actual distribution date, September 28, 1999); and
. the application of the remaining estimated net proceeds as described
under "Use of Proceeds."
This represents an immediate increase in pro forma net tangible book value
of $0.18 per share held prior to the offering by Mr. Strauss, our sole existing
stockholder, and an immediate dilution of $4.31 per share to new investors
purchasing common stock in this offering. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $6.00
Net tangible book value per share as of June 30, 1999........... $1.51
Increase per share attributable to new investors, net of payment
of the
S corporation distribution .................................... 0.18
-----
Pro forma net tangible book value per share after
this offering.................................................. 1.69
-----
Dilution per share to new investors............................. $4.31
=====
</TABLE>
The following table summarizes, on a pro forma basis, as of June 30, 1999,
the number of shares of common stock we have sold, the total consideration paid
to us, and the average price per share paid by our existing stockholder and by
investors purchasing common stock in this offering, before deducting
underwriting discounts and commissions and estimated offering expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
----------------- ------------------- Average Price
Number Percent Amount Percent per share
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholder........ 5,000,000 66.67% $ 319,000 2.08% $0.06
New investors............... 2,500,000 33.33 15,000,000 97.92 6.00
--------- ------- ----------- ------
Total..................... 7,500,000 100.00% $15,319,000 100.00%
</TABLE>
This table does not include any shares that our existing stockholder may
purchase in this offering.
22
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share and operating data)
The following selected financial data as of December 31, 1997 and 1998 and
June 30, 1999 and for the years ended December 31, 1996, 1997 and 1998 and the
six months ended June 30, 1999 have been derived from our consolidated
financial statements, included elsewhere in this prospectus, which have been
audited by Deloitte & Touche LLP, our independent auditors. The selected
financial data for the six months ended June 30, 1998 have been derived from
our unaudited consolidated financial statements, included elsewhere in this
prospectus. The selected financial data as of December 31, 1994, 1995 and 1996
and for the years ended December 31, 1994 and 1995 have been derived from our
unaudited consolidated financial statements, which are not included in this
prospectus. The pro forma data for the year ended December 31, 1998 and the six
months ended June 30, 1999 have been derived from our consolidated financial
data included elsewhere in this prospectus. These financial statements include
all adjustments, consisting of normal recurring adjustments, which we consider
necessary for a fair presentation of our financial position and results of
operations for these periods. Operating results for the six months ended June
30, 1999 are not necessarily indicative of results that may be expected for the
entire year. You should not assume that the results below indicate results that
we will achieve in the future. The operating data are derived from unaudited
financial information that we compiled.
You should read the information below along with all the other financial
information and analysis presented in this prospectus, including our financial
statements and related notes, and the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of this prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------------------- -----------------
1994 1995 1996 1997 1998 1998(/1/) 1999
------ ------ ------ ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues
Gain on sale of
mortgage loans....... $4,169 $6,361 $6,360 $10,597 $18,981 $7,690 $10,822
Interest income
(expense), net....... (319) (610) 204 369 734 448 708
Other................. -- -- 21 356 502 269 637
------ ------ ------ ------- ------- ------ -------
Total revenues...... 3,850 5,751 6,585 11,321 20,217 8,407 12,167
------ ------ ------ ------- ------- ------ -------
Expenses
Salaries, commissions
and benefits, net.... 3,022 3,930 3,459 5,317 9,430 3,636 5,823
Marketing and
promotion............ 494 445 814 962 1,236 598 869
Occupancy and
equipment............ 104 91 501 909 1,654 648 1,023
Data processing and
communications....... 163 203 337 612 952 424 617
Provision for loss.... -- -- -- 117 153 33 28
Other................. 207 715 830 946 1,543 714 1,103
------ ------ ------ ------- ------- ------ -------
Total expenses...... 3,990 5,384 5,941 8,862 14,968 6,054 9,463
------ ------ ------ ------- ------- ------ -------
Income (loss) before
income taxes and
minority interest..... (140) 367 644 2,459 5,249 2,353 2,704
State income taxes.. 1 29 38 140 328 118 131
Minority interest... -- -- -- -- 51 (6) 44
------ ------ ------ ------- ------- ------ -------
Net income
(loss)........... $ (141) $ 338 $ 606 $ 2,319 $ 4,870 $2,241 $ 2,529
====== ====== ====== ======= ======= ====== =======
PRO FORMA DATA:
Pro forma provision for
income taxes(/2/)..... -- 143 245 942 1,982 917 1,058
Net income adjusted
for pro forma income
tax provision........ $ (141) $ 195 $ 361 $ 1,377 $ 2,888 $1,324 $ 1,471
====== ====== ====== ======= ======= ====== =======
Pro forma net income
per share:
Basic................. $ 0.39 $ 0.20
Diluted............... $ 0.39 $ 0.20
======= =======
Pro forma weighted
average number of
shares
outstanding(/3/):
Basic................. 7,500 7,500
Diluted............... 7,500 7,500
======= =======
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------- As of June 30,
1994 1995 1996 1997 1998 1999
------ ------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 649 $ 982 $ 1,226 $ 2,058 $ 2,892 $ 2,093
Mortgage loans held for
sale, net............. 4,454 9,070 9,167 24,676 34,667 42,056
Total assets........... 5,281 10,381 11,487 28,914 42,392 50,920
Warehouse lines of
credit................ 4,411 9,026 9,076 24,454 34,070 25,313
Other liabilities...... 361 509 881 1,886 2,298 17,965
Total stockholder's
equity................ $ 509 $ 886 $ 1,530 $ 2,574 $ 5,924 $ 7,572
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended June
Year Ended December 31, 30,
---------------------------------- -------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total mortgage originations
(in millions).............. $ 220 $ 341 $ 544 $ 724 $1,158 $ 520 $ 612
Home purchases............ 167 264 383 562 749 327 376
Refinancings.............. $ 53 $ 77 $ 161 $ 162 $ 409 $ 193 $ 236
Number of loans originated.. 1,028 1,674 2,915 4,361 6,543 3,191 3,397
Loan originators at period
end........................ 22 28 40 71 76 72 122
Number of branches at period
end........................ 4 5 7 8 12 12 16
</TABLE>
- --------
(/1/)June 30, 1998 information is derived from our unaudited financial
statements.
(/2/)Before this offering, we elected to be treated as an S corporation for
federal and state income tax purposes. Pro forma income taxes for the
years ended December 31, 1996, 1997 and 1998 and the six months ended June
30, 1998 and 1999 reflect adjustments for federal and state income taxes
as if we had been taxed as a C corporation rather than an S corporation
for such periods. State income taxes and pro forma provision for income
taxes provide for an effective tax rate of 44%. Please see the
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Termination of S Corporation Status and Income Taxes"
section of this prospectus.
(/3/)The pro forma weighted average number of shares for December 31, 1998
includes the effect of the assumed issuance of 2,500,000 shares of common
stock to generate sufficient cash to pay the S corporation distribution
amount of $5.5 million at December 31, 1998. The pro forma weighted
average number of shares for June 30, 1999 includes the effect of the
assumed issuance of 2,500,000 shares of common stock to generate
sufficient cash to pay the S corporation distribution amount of $7.2
million at June 30, 1999. The issuance of common stock was based on an
assumed $6.00 offering price (the midpoint of the range set forth on the
cover page of this prospectus). Please see the "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Termination
of S Corporation Status and Income Taxes" section of this prospectus.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We are a leading independent retail mortgage banking company primarily
engaged in the business of originating and selling residential mortgage loans.
In 1998, we originated approximately $1.2 billion in loans, of which 64.7% were
made to home buyers and 35.3% were made to owners seeking to refinance. Of the
approximately $612.3 million in loans we originated in the first 6 months of
1999, 61.4% were made to home buyers, compared to 38.6% to home owners seeking
to refinance. We offer a broad array of residential mortgage products targeted
primarily to high-credit-quality borrowers over the Internet, as well as
through our approximately 122 primarily commission-compensated loan
originators. We operate from 16 community loan offices in the New York
metropolitan area and 5 other eastern states. We operate primarily as a
mortgage banker, underwriting, funding and selling our loan products to more
than 45 different buyers.
Since our founding in 1988, we have focused on growing our origination
volume by building a retail origination network through internal growth and
recently through operators of Internet mortgage Web sites and our own
MortgageSelect.com Web site.
As a mortgage bank, we generate revenues through the origination and
subsequent sale of funded loans. These revenues are made up of net gain on sale
and interest income. Net gain on sale consists of the net gain on the sale of
mortgage loans and mortgage servicing rights, which are sold generally within
30 days of origination. This net gain is recognized based on the difference
between the combined selling price of the loan and its related servicing
rights, and the carrying value of the mortgage loans and servicing rights sold.
Net gain on sale also includes loan-related fees consisting of application,
documentation, commitment and processing fees paid by borrowers. Net interest
income consists of the difference between interest received by us on our
mortgage loans held for sale and interest paid by us under our credit
facilities.
Our expenses largely consist of:
. salaries and benefits paid to employees;
. occupancy and equipment costs;
. Internet-related expenses, including licensing and participation fees
and advertising costs;
. marketing, promotion and advertising costs; and
. data processing and communication costs.
A substantial portion of these expenses is variable in nature. Commissions paid
to loan originators are 100% variable, while other salaries and benefits
fluctuate from quarter to quarter based on our assessment of the appropriate
levels of non-loan originator staffing, which correlates to the current level
of loan origination volume and our perception of future loan origination
volume.
Seasonality affects the mortgage industry as loan originations are typically
at their lowest levels during the first and fourth quarters due to a reduced
level of home buying activity during the winter months. Loan originations
generally increase during the warmer months beginning in March and continuing
through October. As a result, we expect higher earnings in our second and third
quarters and lower earnings in the first and fourth quarters.
Interest rate and economic cycles also affect the mortgage industry, as loan
originations typically fall in rising interest rate environments. During these
periods, refinancing originations decrease, as higher interest rates provide
reduced economic incentives for borrowers to refinance their existing
mortgages. Due to stable and decreasing interest rate environments over recent
years, our historical performance may not be indicative of results in rising
interest rate environments. In addition, our recent and rapid growth may
distort some of our ratios and financial statistics and may make period-to-
period comparisons difficult. In light of this growth, our historical earnings
performance may be of little relevance in predicting future performance.
Furthermore, our financial statistics may not be indicative of our results in
future periods.
25
<PAGE>
Termination of S Corporation Status and Income Taxes
Since April 1, 1988, our subsidiary, American Home Mortgage Corp., has been
subject to taxation under subchapter S of the Internal Revenue Code and
comparable state laws. As a result, our income has primarily been taxed, for
federal, state and local income tax purposes, directly to our stockholder
rather than to the company itself. In connection with the termination of our S
corporation status, we made a distribution to our existing stockholder in the
amount of his undistributed previously taxed S corporation earnings and
earnings subject to deferred taxes, net of such deferred taxes, of $7.8
million. This distribution was made in the form of the S corporation
distribution note. We will repay the S corporation distribution note out of the
net proceeds of this offering. Upon termination of our S corporation status, we
will record a one-time, non-cash reduction to earnings of $625,000 to recognize
a deferred income tax liability. The pro forma provision for income taxes in
the selected consolidated financial data shows results as if we had been
subject to federal and state income taxation at the tax rates effective for the
periods presented as if we were not an S corporation.
Results of Operations
The following table sets forth, for the periods indicated, information
derived from our statement of operations expressed as a percentage of total
revenues. Any trends illustrated in the following table are not necessarily
indicative of future results.
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
------------------- ------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Gain on sale of mortgage loans............ 96.6% 93.6% 93.9% 91.5% 89.0%
Net interest income....................... 3.1 3.3 3.6 5.3 5.8
Other..................................... 0.3 3.1 2.5 3.2 5.2
----- ----- ----- ----- -----
Total revenues.......................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Salaries, commissions and benefits,
net(/1/)................................. 52.5 47.0 46.6 43.2 47.9
Marketing and promotion................... 12.4 8.5 6.1 7.1 7.1
Occupancy and equipment................... 7.6 8.0 8.2 7.7 8.4
Data processing and communications........ 5.1 5.4 4.7 5.0 5.1
Provision for loss........................ -- 1.0 0.8 0.5 0.2
Other..................................... 12.6 8.4 7.6 8.5 9.1
----- ----- ----- ----- -----
Total expenses.......................... 90.2 78.3 74.0 72.0 77.8
----- ----- ----- ----- -----
Net income before taxes and minority
interest............................. 9.8 21.7 26.0 28.0 22.2
State income taxes.................. 0.6 1.2 1.6 1.4 1.1
Minority interest................... -- -- 0.3 (0.1) 0.3
----- ----- ----- ----- -----
Net income as reported.............. 9.2 20.5 24.1 26.7 20.8
----- ----- ----- ----- -----
Net income adjusted for pro forma
income tax provision................. 5.5% 12.2% 14.3% 15.7% 12.1%
----- ----- ----- ----- -----
</TABLE>
- --------
(/1/)In 1996, our sole stockholder, Mr. Strauss, received a $628,000 one-time
bonus resulting in an increase in the percentage which salaries,
commissions and benefits constituted of our total revenues in such year.
26
<PAGE>
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Total Revenues. Our total revenues for the six months ended June 30, 1999
increased to $12.2 million from $8.4 million for the same period in 1998, an
increase of $3.8 million, or 44.7%, primarily as a result of strong origination
growth and the subsequent sale of loans, and improved margins. Loan sales
increased to $608.3 million for the six months ended June 30, 1999 from $520.3
million for the same period in 1998 (which amounts include $20.4 million and
$25.2 million of originations in which we acted as broker, respectively),
resulting from new community loan office expansion and our Internet activity.
During the six months ended June 30, 1999, we opened 4 new branches. In
addition, refinancings accounted for approximately 38.6% of our origination
volume during the six months ended June 30, 1999 compared to approximately
37.1% during the same period in 1998. We originated $26.5 million in loans over
the Internet during the six months ended June 30, 1999, which resulted in
$447,000 in revenues for the period.
Net gain on sale of mortgage loans increased to $10.8 million for the six
months ended June 30, 1999 from $7.7 million for the same period in 1998, an
increase of $3.1 million, or 40.7%. The increase was attributable to the
increase in our origination volume and improved margins.
Net interest income increased to $708,000 for the six months ended June 30,
1999 from $448,000 for the same period in 1998, an increase of $260,000, or
58.0%. This increase was due to more efficient cash management including the
implementation of sweep accounts, which increased interest income.
Other income increased to $637,000 for the six months ended June 30, 1999
from $269,000 for the same period in 1998, an increase of $368,000, or 136.8%.
The increase was due primarily to volume incentive bonuses from various
investors. These bonuses represent payments received by us when we meet certain
volume targets specified in our various agreements with loan purchasers. We
accrue volume incentive income when targets are reached.
Salaries, Commissions and Benefits. Salaries, commissions and benefits
increased to $5.8 million for the six months ended June 30, 1999 from $3.6
million for the same period in 1998, an increase of $2.2 million, or 60.1%. The
increase related primarily to our Internet expansion efforts, increased
staffing levels, both at new and existing community loan offices, and, to a
lesser extent, the non-deferred portion of commissions paid to loan
originators. As of June 30, 1999, we employed 370 people compared to 237 people
at June 30, 1998. These expenses are expected to continue to increase in 1999
as a result of increased loan origination volume and additional employees
expected to be hired in connection with the expansion of existing operations
and new community loan office openings.
Marketing and Promotion Expenses. Marketing and promotion expenses increased
to $869,000 for the six months ended June 30, 1999 from $598,000 for the same
period in 1998, an increase of $271,000, or 45.3%. The increase was primarily
attributable to new community loan office openings. These expenses are expected
to continue to increase in 1999 as a result of expansion of existing
operations, new community loan office openings, and increased expansion of our
Internet division.
Occupancy and Equipment Expenses. Occupancy and equipment expenses increased
to $1.0 million for the six months ended June 30, 1999 from $648,000 for the
same period in 1998, an increase of $375,000, or 57.9%. The increase was due
primarily to an increase in occupancy costs as a result of opening new
community loan offices and depreciation charges for increased computer
networking. These expenses are expected to continue to increase in 1999 as a
result of expansion of existing operations and new community loan office
openings.
Data Processing and Communications. Data processing and communication costs
increased to $617,000 for the six months ended June 30, 1999 from $424,000 for
the same period in 1998, an increase of $193,000, or 45.5%. The increase was
primarily a result of increased staffing levels and the opening of new
community loan offices.
27
<PAGE>
Other Expenses. Other expenses increased to $1.1 million for the six months
ended June 30, 1999 from $714,000 for the same period in 1998, an increase of
$389,000, or 54.5%. These expenses, which consist primarily of office supplies,
travel, insurance and professional fees, have increased with our general
activity and employment levels.
Net Income. Net income increased to $2.5 million for the six months ended
June 30, 1999 from $2.2 million for the same period in 1998, an increase of
$288,000, or 12.9%. If we had been taxed as a C corporation for those periods,
our net income would have been $1.5 million and $1.3 million, respectively.
Year Ended December 31, 1998 Compared To Year Ended December 31, 1997
Total Revenues. Our total revenues increased to $20.2 million in 1998 from
$11.3 million in 1997, an increase of $8.9 million, or 78.6%, primarily as a
result of strong origination growth and the subsequent sale of loans. Loan
sales increased to $1.2 billion in 1998 from $729.6 million in 1997 (which
amounts include $47.5 million and $30.7 million of originations in which we
acted as broker, respectively), resulting from new community loan office
expansion. During 1998, we opened 4 new community loan offices. In addition,
refinancings accounted for approximately 35.3% of our origination volume in
1998 compared to approximately 22.4% in 1997.
Net gain on sale of mortgage loans increased to $19.0 million in 1998 from
$10.6 million in 1997, an increase of $8.4 million, or 79.4%. The increase was
attributable to the increase in our origination volume.
Net interest income increased to $734,000 in 1998 from $369,000 in 1997, an
increase of $365,000, or 98.9%. This increase was due to increased loan
origination volume, as well as increased use of financing agreements or
purchase and sale facilities to increase the interest spread against borrowed
funds.
Other income increased to $502,000 in 1998 from $356,000 in 1997, an
increase of $146,000, or 41.0%. The increase was due primarily to volume
incentive bonuses earned from various purchasers during that period, as well as
to the gain on sale of marketable securities.
Salaries, Commissions and Benefits. Salaries, commissions and benefits
increased to $9.4 million in 1998 from $5.3 million in 1997, an increase of
$4.1 million, or 77.4%. The increase related primarily to increased staffing
levels, both at new and existing community loan offices, and, to a lesser
extent, the non-deferred portion of commissions paid to loan originators. As of
December 31, 1998, we employed 287 people compared to 185 people at December
31, 1997. These expenses are expected to continue to increase in 1999 as a
result of increased loan origination volume and additional employees expected
to be hired in connection with the expansion of existing operations and new
community loan office openings.
Marketing and Promotion Expenses. Marketing and promotion expenses increased
to $1.2 million in 1998 from $962,000 in 1997, an increase of $274,000, or
28.5%. The increase was primarily attributable to new community loan office
openings. These expenses are expected to continue to increase in 1999 as a
result of expansion of existing operations, new community loan office openings
and increased expansion of our Internet division.
Occupancy and Equipment Expenses. Occupancy and equipment expenses increased
to $1.7 million in 1998 from $909,000 in 1997, an increase of $745,000, or
82.0%. The increase was due primarily to an increase in occupancy costs as a
result of opening new community loan offices and depreciation charges for
increased computer networking. These expenses are expected to continue to
increase in 1999 as a result of expansion of existing operations and new
community loan office openings.
Data Processing and Communications. Data processing and communication costs
increased to $952,000 in 1998 from $612,000 in 1997, an increase of $340,000,
or 55.6%. The increase was primarily a result of increased staffing levels and
the opening of new community loan offices.
28
<PAGE>
Other Expenses. Other expenses increased to $1.5 million in 1998 from
$946,000 in 1997, an increase of $597,000, or 63.1%. These expenses, which
consist primarily of office supplies, travel, insurance and professional fees,
have increased with general activity and employment levels.
Net Income. Net income increased to $4.9 million in 1998 from $2.3 million
in 1997, an increase of $2.6 million, or 110.0%. If we had been taxed as a C
corporation for those periods, our net income would have been $2.9 million and
$1.4 million, respectively.
Year Ended December 31, 1997 Compared To Year Ended December 31, 1996
Total Revenues. Our total revenues increased to $11.3 million in 1997 from
$6.6 million in 1996, an increase of $4.7 million, or 71.9%, primarily as a
result of strong origination growth and the subsequent sale of loans. Loan
sales increased to $729.6 million in 1997 from $543.4 million in 1996 (which
amounts include $30.7 million and $52.7 million of originations in which we
acted as broker, respectively), resulting from new community loan office
expansion and recruitment of additional loan originators. During 1997, we
opened one new community loan office. In addition, refinancings accounted for
approximately 22.4% of our origination volume in 1997 compared to approximately
29.6% in 1996.
Net gain on sale of mortgage loans increased to $10.6 million in 1997 from
$6.4 million in 1996, an increase of $4.2 million, or 66.6%. The increase was
attributable to the increase in origination volume.
Net interest income increased to $369,000 in 1997 from $204,000 in 1996, an
increase of $165,000, or 80.9%. This increase was due to increased loan
origination volume, as well as increased use of financing agreements or sale
facilities to increase the interest spread against borrowed funds.
Other income increased to $356,000 in 1997 from $21,000 in 1996, an increase
of $335,000, or 1,595%. The increase was due primarily to volume incentive
bonuses from various investors.
Salaries, Commissions and Benefits. Salaries, commissions and benefits
increased to $5.3 million in 1997 from $3.5 million in 1996, an increase of
$1.8 million, or 53.7%. The increase in personnel expense related primarily to
increased staffing levels, both at new and existing community loan offices,
and, to a lesser extent, the non-deferred portion of commissions paid to loan
originators. In addition, officer's salary was $129,000 in 1997 compared to
$758,000 in 1996. The 1996 figure reflects the $628,000 one-time bonus paid to
our President and Chief Executive Officer, Mr. Strauss. As of December 31,
1997, we employed 185 people compared to 103 people at December 31, 1996.
Marketing and Promotion Expenses. Marketing and promotion expenses increased
to $962,000 in 1997 from $814,000 in 1996, an increase of $148,000, or 18.2%.
The increase was primarily attributable to new community loan office openings.
Occupancy and Equipment Expenses. Occupancy and equipment expenses increased
to $909,000 in 1997 from $501,000 in 1996, an increase of $408,000, or 81.4%.
The increase was due primarily to an increase in occupancy costs as a result of
opening new community loan offices and depreciation charges for increased
computer networking.
Data Processing and Communications. Data processing and communication costs
increased to $612,000 in 1997 from $337,000 in 1996, an increase of $275,000,
or 81.6%. The increase was primarily a result of increased staffing levels.
Other Expenses. Other expenses increased to $946,000 in 1997 from $830,000
in 1996, an increase of $116,000, or 14.0%. These expenses, which consist
primarily of office supplies, travel, insurance and professional fees, have
increased with general activity and employment levels.
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Net Income. Net income increased to $2.3 million in 1997 from $606,000 in
1996, an increase of $1.7 million, or 282.7%. If we had been taxed as a C
corporation for those periods, our net income would have been $1.4 million and
$361,000, respectively.
Liquidity and Capital Resources
To originate a mortgage loan, we draw against a warehouse facility our
subsidiary, American Home Mortgage Corp., has entered into with First Union
National Bank. The First Union warehouse facility was originally for $40
million. First Union has agreed to increase this facility to $50 million
through October 30, 1999, and we are in negotiations to replace this facility
with a new $60 million warehouse facility that will be agented by First Union.
Our existing warehouse facility is secured by the mortgages we originate and
certain of our other assets. Loans under our warehouse facility bear interest
at rates that vary depending on the type of underlying loan, and these loans
are subject to sublimits, advance rates and terms that vary depending on the
type of underlying loan and the ratio of our liabilities to our tangible net
worth. In 1998, we paid a weighted average interest rate on our warehouse
facility borrowings of 6.84%, not including float on checks before they clear
our warehouse facility account, compared with 7.55% in 1997. At September 23,
1999, the outstanding balance under the warehouse facility was $25.2 million
and the outstanding balance in drafts payable was $2.7 million.
The documents governing our warehouse facility contain a number of
compensating balance requirements and restrictive financial and other covenants
that, among other things, require us to maintain a minimum ratio of total
liabilities to tangible net worth and maintain a minimum level of tangible net
worth, liquidity, stockholder's equity and leverage ratios, as well as to
comply with applicable regulatory and investor requirements. The facility also
contains covenants limiting our subsidiary's ability to:
. transfer or sell assets;
. create liens on the collateral;
. pay cash or stock dividends; or
. incur additional indebtedness,
without obtaining the prior consent of First Union, which consent may not be
unreasonably withheld. These limits on American Home Mortgage Corp. may in turn
restrict our ability, as the holding company, to pay cash or stock dividends on
our stock.
In addition, under our warehouse facility, First Union will not continue to
finance a mortgage loan that we hold if:
. the loan is rejected as "unsatisfactory for purchase" by the ultimate
investor and has exceeded its permissible 60-day warehouse period;
. we fail to deliver the applicable mortgage note or other documents
evidencing the loan within the requisite time period;
. the underlying property that secures the loan has sustained a casualty
loss in excess of 5% of its appraised value; or
. the loan ceases to be an eligible loan (as determined pursuant to the
warehousing agreement).
In addition to the First Union warehouse facility, we have purchase and sale
agreements with Fannie Mae, Greenwich Capital Financial Products, Inc.,
Prudential Securities Funding Corp. and Paine Webber Real Estate Securities,
Inc., under which we sell the loans we have originated to these institutions on
an interim basis. Pursuant to these arrangements, we obtain commitments from
the ultimate buyer, which may be a bank, a pension fund or an investment bank,
to purchase our loans. We then sell our loans, together with the commitment
from the ultimate buyer, to one of the 4 institutions with which we have
purchase and sale
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agreements. These institutions in turn sell the loans to the party who gave us
the commitment. These agreements allow us to accelerate the sale of our
inventory of mortgage loans, thereby enabling us to use our warehouse facility
more effectively, because we do not have to wait until the closing of a sale to
the ultimate buyer before we receive the purchase price. Amounts sold and being
held under these agreements at September 23, 1999 and December 31, 1998 were
$42.3 million and $61.4 million, respectively. The combined capacity available
under our purchase and sale agreements is $168 million. These agreements are
not committed facilities and may be terminated at the discretion of the
counterparties.
We make certain representations and warranties under the purchase and sale
agreements regarding, among other things, the loans' compliance with laws and
regulations, their conformity with the ultimate investor's underwriting
standards and the accuracy of information. In the event of a breach of these
representations or warranties or in the event of an early payment default, we
may be required to repurchase the loans and indemnify the investor for damages
caused by that breach. We have implemented strict procedures to ensure quality
control and conformity to underwriting standards, and minimize the risk of
being required to repurchase loans. In addition, an outside firm performs
quality control tests for us. Please see the "Business--Quality Control"
section of this prospectus. To date, we have been required to repurchase fewer
than 20 of the loans we have sold.
As of June 30, 1999, our warehouse facility borrowings were $25.3 million
and our outstanding drafts payable were $15.5 million compared to $34.1 million
in borrowings and no outstanding drafts payable as of December 31, 1998. We had
a maximum of $9.2 million available for additional borrowings as of June 30,
1999. At June 30, 1999, our loans held for sale were $42.1 million compared to
$34.7 million at December 31, 1998.
Cash and cash equivalents decreased to $2.1 million at June 30, 1999 from
$2.9 million at December 31, 1998. In December 1998, we changed our primary
warehouse facility to the First Union facility described above. The First Union
warehouse facility allows less funds to be borrowed on a per loan basis than
our prior warehouse arrangement, resulting in our investing more of our own
funds in loan originations.
Our primary uses of cash and cash equivalents during the six months ended
June 30, 1999 were as follows:
. $5.4 million net increase in mortgage loans held for sale;
. $1.3 million increases in accounts receivable;
. $374,000 to pay the balance of our state and local corporate tax
obligation; and
. $691,000 to purchase furniture and office and computer equipment for new
branch offices.
Cash and cash equivalents increased to $2.9 million at December 31, 1998
from $2.1 million at December 31, 1997. This increase in cash and cash
equivalents was primarily attributable to the increase in our net income to
$5.2 million in 1998, before depreciation and amortization.
Our primary uses of cash and cash equivalents during 1998 were as follows:
. $10.0 million net increase in mortgage loans held for sale;
. $1.9 million increases in accounts receivable;
. $1.5 million to fund a distribution to our stockholder to enable him to
pay income taxes attributable to him as a result of our S corporation
status; and
. $1.2 million to purchase furniture and office and computer equipment for
existing and new branch offices and to upgrade our telecommunications
system.
Our ability to originate loans depends in large part on our ability to sell
these mortgage loans at par or for a premium in the secondary market so that we
may generate cash proceeds to repay borrowings under our warehouse facility.
The value of our loans depends on a number of factors, including:
. interest rates on our loans compared to market interest rates;
. the borrower credit risk classification;
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. loan-to-value ratios; and
. general economic conditions.
Please see the "Risk Factors--The loss of key purchasers of our loans or a
reduction in prices paid could adversely affect our financial condition"
section in this prospectus.
The net proceeds of this offering, together with cash flows from operations,
our existing cash balances and funds available under our working capital credit
facilities, are expected to be sufficient to meet our liquidity requirements
for at least the next 12 months. We do, however, expect to continue our
expansion and expect that eventually we will have to arrange for additional
sources of capital through the issuance of debt or equity or additional bank
borrowings. We have no commitments for any additional financings, and we cannot
assure you that we will be able to obtain any additional financing at the times
required and on terms and conditions acceptable to us. If we fail to obtain
needed additional financing, our growth could slow and operations could be
affected.
Inflation
For the period 1995 to 1998, inflation has been relatively low and we
believe it has not had a material effect on our results of operations. To the
extent inflation increases in the future, interest rates will also likely rise,
which would impact the number of loans we originate. This impact would
adversely affect our future results of operations. Please see the "Risk
Factors--A period of rising interest rates, an economic slowdown or a recession
could reduce the demand for mortgages" section of this prospectus.
Risk Management
Movements in interest rates can pose a major risk to us in either a rising
or declining interest rate environment. When interest rates rise, loans held
for sale and any applications in process with agreed upon rates decrease in
value. To preserve the value of such loans or applications in process with
agreed upon rates, we execute mandatory loan sale agreements (forward sales of
mortgage-backed securities) to be settled at future dates with fixed prices.
However, when interest rates decline, customers may choose to abandon their
applications. In that case, we may be required to purchase loans at current
market prices to fulfill existing mandatory loan sale agreements, thereby
incurring losses upon sale. We use an interest rate hedging program to attempt
to manage these risks. Through this program, we purchase and forward sell
mortgage-backed securities and acquire options on mortgage and treasury
securities.
Our board of directors establishes thresholds, which limit our exposure to
such risk. We perform daily analysis to determine our risk exposures under
various interest rate scenarios and manage these risks through a combination of
forward sales of mortgage-backed securities and options on treasury futures.
All derivatives are obtained for hedging (or other than trading) purposes, and
management evaluates the effectiveness of the hedges on an on-going basis.
The following tables summarize our interest rate sensitive instruments:
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1999
-------------------------- --------------------------
Notional Amount Fair Value Notional Amount Fair Value
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Instruments:
Commitments to fund
mortgages at agreed-
upon rates........... $122,430,687 $2,075,471 $151,910,361 $1,908,706
Forward delivery
commitments.......... 79,841,139 (215,571) 99,730,000 (555,781)
Option contracts to
buy securities....... 4,000,000 -- 18,000,000 --
</TABLE>
In the event that we do not deliver into the forward delivery commitments or
exercise our option contracts, the instruments can be settled on a net basis.
Net settlement entails paying or receiving cash based upon the change
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in market value of the existing instrument. All forward delivery commitments
and option contracts to buy securities are to be contractually settled within
6 months of the balance sheet date.
The following describes the methods and assumptions we use in estimating
fair values of the above financial instruments:
. Fair value estimates are made as of a specific point in time based on
estimates using present value or other valuation techniques. These
techniques involve uncertainties and are significantly affected by the
assumptions used and the judgments made regarding risk characteristics
of various financial instruments, discount rates, estimates of future
cash flows, future expected loss experience, and other factors.
. Changes in assumptions could significantly affect these estimates and
the resulting fair values. Derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in an immediate sale of the instrument. Also,
because of differences in methodologies and assumptions used to estimate
fair values, our fair values should not be compared to those of other
companies.
. The fair value of commitments to fund with agreed upon rates are
estimated using the fees and rates currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed rate loan commitments, fair value also considers the difference
between current market interest rates and the existing committed rates.
. The fair value of these instruments is estimated using current market
prices for dealer or investor commitments relative to our existing
positions.
Our hedging program contains an element of risk because the counterparties to
our mortgage and treasury securities transactions may be unable to meet their
obligations. While we do not anticipate nonperformance by any counterparty, we
are exposed to potential credit losses in the event the counterparty fails to
perform. Our exposure to credit risk in the event of default by a counterparty
is the difference between the contract and the current market price. We
minimize our credit risk exposure by limiting the counterparties to well-
capitalized banks and securities dealers who meet established credit and
capital guidelines.
Year 2000 Readiness
Many existing computer programs use only 2 digits to identify a year. These
programs were designed and developed without addressing the impact of the
upcoming change in century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond, the Year
2000. We are at risk if any of the information technology systems or non-
information technology systems on which we depend to conduct our operations are
not Year 2000 ready. Potential areas of exposure include our business-critical
computerized applications relating to, among others, loan origination,
servicing, hedging, payroll, financing and financial accounting and reporting.
In addition, our other non business-critical systems and services may be
affected.
Our Internal Systems. Most, if not all, of our computer hardware and
software is less than 2 years old and has been certified as Year 2000 ready. In
addition, we have tested all of our hardware and business-function and
networking software platforms using commercially available diagnostics
programs. Based on our testing, we believe these hardware and software
platforms are Year 2000 ready in all material respects. As a result, we believe
that our exposure to Year 2000-related hardware and software problems will not
be significant. We expect to resolve any further internal Year 2000 readiness
issues primarily through normal upgrades of our software or through replacement
of existing software, where necessary.
Costs. The costs of these upgrades or replacements are included in our
capital expenditure budget and we do not expect them to be material to our
financial position or results of operations. To date, we have not
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incurred significant expenses to ensure Year 2000 readiness. We estimate our
total cost to become Year 2000 ready will not exceed $25,000. This is only an
estimate, however, and we cannot assure you that our Year 2000 readiness costs
will not exceed this estimate. Recent experience of other companies has shown
that actual costs could exceed estimates. In addition, these upgrades and
replacements, if necessary, may not be completed on schedule or may not
successfully address our Year 2000 readiness issues. However, our actual total
costs are subject to certain risks and uncertainties including, among others,
the readiness of our service providers, vendors and suppliers, and our
financial institutions and significant customers.
Third Parties. We have confirmed the readiness of our systems in some cases,
either as a result of purchasing Year 2000 ready software and hardware or
through conducting analyses of our systems. In addition, we are requesting the
third party providers, vendors, suppliers, financial institutions and customers
that are material to our operations to certify to us in writing that they are
Year 2000 ready. We have received responses from the supplier of our main
software platform and from several of the financial institutions to which we
sell our loans. Based on those responses, we believe that these institutions
comply with Year 2000 requirements. We are currently unable to predict whether
Year 2000 issues will affect the operations of our customers, suppliers,
vendors or the remaining financial institutions. If our service providers,
vendors and suppliers or our financial institutions and significant customers
are adversely affected by the Year 2000 issue, our operations could face
substantial interruptions and our business and financial condition also could
be materially adversely affected. These third-party risks include possible
interruptions in our ability to fund loans utilizing our warehouse facility,
our ability to sell loans to Fannie Mae and other investors, our ability to
originate mortgages over the Internet and our hedging system's ability to link
to financial data.
The Internet. In the event that the operational facilities that support our
Web site are not Year 2000 ready, our Web site may become unavailable. For
instance, we depend on the integrity and stability of the Internet to provide
demand for our Internet-generated loan services. We also depend on the Year
2000 readiness of third parties' computer systems. The infrastructure required
to support our operations includes a network of computers and
telecommunications systems over which we have little if any control and which
are operated by numerous unrelated entities and individuals, none of which
individually can control or manage the potential Year 2000 issues that may
impact the entire infrastructure as a whole. A significant disruption in third
parties' ability to access the Internet could have an adverse effect on demand
for our Internet-generated loan services and would have a material adverse
effect on us.
Contingency Plans. Although we are currently assessing potential contingency
plans, we have not developed any worst-case scenario contingency plans to deal
with possible interruptions that may occur as a result of the Year 2000. In
addition, we have not yet developed a contingency plan to address the worst-
case scenario that might occur if (1) our systems fail to be Year 2000 ready,
(2) the systems used by third parties on which we rely fail to be Year 2000
ready or (3) Year 2000 issues make the Internet or our Web site unavailable. In
the event that the Internet or our Web site becomes unavailable, we believe our
dependence on the widespread and unrelated entities that maintain the
Internet's infrastructure makes it impossible for us to develop or implement an
adequate contingency plan. Moreover, if our present efforts to address the Year
2000 readiness issues are not successful, or if third parties on which we
depend do not successfully address these issues, our business, operating
results and financial position could be materially adversely affected.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires that all derivatives be
carried on the balance sheet at fair value and that changes in the fair value
of derivatives be recognized in income when they occur, unless the derivatives
qualify as hedges in accordance with the standard. If a derivative qualifies as
a hedge, a company can elect to use hedge accounting. The type of accounting to
be applied varies depending upon whether the nature of the exposure that is
being hedged is classified as one of three hedged risks defined in the
statement: change in fair value, change in cash flows and
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change in foreign-currency. This statement's implementation has been delayed to
be effective for all fiscal quarters of fiscal years beginning after June 15,
2000 and cannot be applied retroactively. We have not yet determined the impact
SFAS No. 133 will have on our financial position or results of operations after
we adopt this statement.
In October 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." Statement of Financial Accounting Standards No.
134 is effective for the first fiscal quarter beginning after December 15,
1998. We believe that the adoption of SFAS No. 134 will not have a material
impact on us or our results of operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed for Internal Use" ("SOP 98-1"), which will become effective for
financial statements for calendar year 1999, with early adoption encouraged.
SOP 98-1 requires the capitalization of eligible costs of specified activities
related to computer software developed or obtained for internal use. We do not
believe that the adoption of this statement will have a material impact on our
financial condition or results of operations.
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BUSINESS
Introduction
American Home Mortgage is a leading independent retail mortgage banking
company that began operations in 1988. We focus on expanding our business of
originating residential mortgage loans by increasing our Internet presence and
through other more traditional channels. We sell the loans we originate and the
related servicing rights to institutional buyers, rather than hold the loans
for investment. In 1998, we originated approximately $1.2 billion in loans
largely through our network of retail branches in the New York metropolitan
area and 5 other eastern states. We primarily lend to home buyers rather than
to home owners seeking to refinance their mortgage loans. In 1998,
approximately 64.7% of our mortgage loans were made to home buyers. For the
first six months of 1999, that percentage was 61.4%.
In January 1999, we began to market our mortgage products over the Internet.
We offer our mortgage products online through arrangements with a number of
popular Web sites and through our MortgageSelect.com Web site. Our recent
Internet activity includes:
. receiving applications over the Internet for approximately $39.5 million
in loans, representing 24.8% of our total application volume for the
month of July 1999;
. entering into an exclusive arrangement with RealEstateVillage.com and a
preferred sponsor relationship with Homefair.com in July 1999, and
expanding our current total number of Web site relationships to 20, of
which 15 are accepting applications;
. expanding to 65 the number of Web sites that hyperlink potential loan
applicants directly to our MortgageSelect.com Web site;
. receiving applications through our relationship with Microsoft's
HomeAdvisor;
. commencing operations at our second Internet call center; and
. releasing a new version of our MortgageSelect.com Web site.
Our planned Internet growth initiatives through 1999 include:
. forming exclusive and participating relationships with additional Web
sites;
. opening our third Internet call center;
. qualifying to offer mortgage loans through the Internet in the remaining
15 states in which we are not yet qualified;
. launching further enhancements to our Web site to allow an applicant to
apply, lock in a rate and receive a commitment all during one continuous
online session; and
. commencing an advertising campaign, initially in selected markets, to
increase awareness of, and direct customers to, our MortgageSelect.com
Web site.
In addition to our Internet growth initiatives, we have expanded our
traditional mortgage product distribution channels. Specifically, since the
beginning of 1998:
. we opened 8 new community loan offices and hired 51 loan originators,
bringing our total number of community loan offices and loan originators
to 16 and 122, respectively;
. we formed 3 joint ventures with realtors and builders to serve the
mortgage needs of their customers;
. we doubled the number of companies participating in our Corporate
Affinity Program from 10 to 20; and
. we were selected by developers as the exclusive, onsite lender for new
residential developments with a potential for mortgage loan originations
in excess of $300 million.
We intend to continue these initiatives and to further expand from our
traditional geographic base by opening new community loan offices in the
eastern United States and possibly other areas. We also intend to selectively
consider strategic acquisitions of related businesses.
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Our retail business focuses on offering a broad range of residential
mortgage products primarily to high credit quality borrowers. Typically, we
sell our mortgage loans on a limited recourse basis to institutional buyers
within approximately 30 days of their origination, which limits our exposure to
interest rate fluctuations and credit risks. In addition, we generally sell the
servicing rights on loans we originate. This allows us to avoid the
administrative and collection expenses of managing and servicing a loan
portfolio and the risk of loss of anticipated future servicing revenue due to
mortgage prepayments in a declining interest rate environment.
Our revenues and net income increased from approximately $5.8 million and
$338,000 in 1995 to approximately $20.2 million and $4.9 million in 1998,
respectively. For the first 6 months of 1999, our revenues and net income were
approximately $12.2 million and $2.5 million, respectively. Substantially all
of our revenues are derived from the profits generated by:
. selling our residential mortgage loans;
. discounts and fees charged to borrowers such as application,
underwriting, commitment and loan processing fees; and
. the interest spread during the period we hold mortgage loans for sale.
Industry Overview
The mortgage banking industry is the largest consumer debt-related sector in
the United States. In 1998, mortgage loan origination volume in the United
States reached a record high of $1.5 trillion, compared to $834 billion in 1997
according to the Mortgage Bankers Association of America (MBA). The MBA also
reports that mortgage bankers are the leading group of residential mortgage
lenders, originating approximately 60%, or $880 billion, in mortgage loans in
1998. The MBA estimates that $1.2 trillion in mortgages will be originated in
1999.
The mortgage banking industry involves primarily two businesses: origination
and servicing. Origination is the process of taking a loan application,
gathering the relevant credit and other information on the borrower, and
obtaining funds. Servicing a loan occurs after the loan has been made and
involves the collection of principal and interest, as well as handling
prepayments and foreclosures.
Mortgage lending traditionally takes place through the manual exchange of
information from the time of application to the underwriting phase. This
traditional means of lending is cumbersome and inefficient. Many mortgage
bankers do not have the technology to automate this system in order to achieve
greater efficiency. We believe that Internet mortgage lending is the solution
to these inefficiencies. Forrester Research estimates that approximately $91.2
billion, or 9.6%, of all mortgage loans will be originated online by the year
2003 compared to $18.7 billion or less than 1.5% in 1999. We have established
our own Internet site, MortgageSelect.com, which we expect will account for a
significant portion of our total originations in 1999.
Furthermore, the retail origination market of the mortgage banking industry
is highly fragmented. According to a report by Wholesale Access, a research and
publishing firm in Columbia, Maryland, there were approximately 36,000
independent mortgage brokerage firms at year-end 1998. In terms of volume
originated by individual firms, the report stated that the average brokerage
firm originated $33 million in mortgage loans. We believe this industry
environment will aid us in implementing our growth strategy of selectively
acquiring other mortgage lenders who share our business philosophy.
Growth Objectives
The value of our loan originations grew from $341 million in 1995 to $1.2
billion in 1998 and from $520.2 million for the first 6 months of 1998 to
$612.3 million for the first 6 months of 1999, primarily through an increase in
the number of our community loan offices and loan originators. Our growth
strategy is to
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continue to increase our loan origination volume by becoming a leader in
Internet mortgage originations, by expanding our traditional, non-Internet
businesses and by pursuing selective strategic acquisitions of mortgage bankers
and other mortgage-banking related companies.
. Enhance and Expand Our Internet Business. We believe the Internet will
be an increasingly important medium to provide mortgage products and
services. We intend to increase our Internet mortgage origination volume
by expanding our business into the remaining 15 states in which we are
not yet qualified and by establishing relationships with additional Web
sites so as to increase the number of sources that refer customers to
us. With part of the proceeds of this offering, we intend to start an
intensive marketing campaign in selected markets to promote our own
MortgageSelect.com Web site and create name recognition. Please see the
"Use of Proceeds" section in this prospectus. Finally, to maximize the
return on our Web site investment, we intend to enter into contracts to
provide private label Internet origination services to thrifts and
smaller banks.
. Expand Our Traditional Business into New Regions. We intend to extend
our business model and expand our traditional lending activities into
new geographic regions. In the first 6 months of 1999, we opened new
community loan offices in suburban Philadelphia and Maryland. We intend
to open 4 additional offices over the next 12 months in the eastern
United States and possibly other areas. In connection with our
geographic expansion, we plan to advertise in related local and regional
print media to create name recognition and create awareness of our
products and services.
. Increase the Market Share of Our Existing Community Loan Offices. We
hope to further penetrate our existing markets by hiring additional loan
originators and production personnel. We are also using new ways to
market mortgage loans, including joint ventures with realtors and
builders and corporate affinity lending.
. Expand Through Selective Strategic Acquisitions. At various times, we
expect to consider acquiring mortgage lenders that share our business
philosophy regarding progressive marketing, innovative use of technology
and sound underwriting. In order to increase core sales, we may also
consider acquiring other mortgage banking related companies to enhance
our product and service offerings. In evaluating acquisition candidates,
we will consider factors such as the accretive impact of the acquisition
on our earnings, our ability to support and retain production personnel
and our ability to enhance and expand the acquired franchise. We believe
our broad and competitive product line and the technical and other back-
up support we offer make us an attractive partner for potential
acquisition candidates.
Operating Strategy
In operating our business, we focus on the following elements:
. Lending to Home Buyers. We focus on making loans to home buyers rather
than to home owners seeking to refinance their mortgages. We believe
this makes our business less susceptible to interest rate increases
because in a rising interest rate environment home purchase volume tends
to be more stable than mortgage refinancing volume, which tends to
decrease dramatically in response to rising interest rates. In 1998,
64.7% of the mortgage loans we originated were made to home buyers,
compared to 35.3% which were made to owners seeking refinancing. For the
first six months of 1999, those percentages were 61.4% and 38.6%,
respectively. In the latter part of 1998, we received a relatively large
number of mortgage refinancing applications as a result of the low
interest rate environment at that time. Most of those applications
closed in the first quarter of 1999, with some carry-over into the
second quarter of 1999. Loans made to home buyers as a percentage of our
total loan origination volume increased to 68.4% in the second quarter
of 1999 from 53.2% in the first quarter of 1999.
. Maximizing Marketing Efficiency by Offering Broad Product Line. We
believe we have one of the broadest and best-priced product offerings in
the industry. Offering a variety of well-priced loan
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products enables us to best serve the largest number of mortgage
customers, each of whom may find different loan characteristics
desirable. For a list of our products, please see the "Business--Our
Mortgage Products" section of this prospectus.
. Using Technology to Maximize Efficiency. In a continuous effort to
increase efficiency, we have dedicated ourselves to maintaining state-
of-the-art information systems. In 1998, we installed an "enterprise"
computer system. This system controls most aspects of our operations,
from the processing of a loan application through the closing of the
loan and our sale of the loan to institutional investors. The system
also performs checks and balances on many aspects of our operations, and
it supports our marketing efforts. We believe this integrated approach
reduces our marginal origination cost per loan. We intend to continually
look for new ways to improve efficiencies through automation.
. Maintaining a Technologically Advanced Web site. In June 1999, we
introduced a new, technologically advanced version of our
MortgageSelect.com Web site that was designed to provide customers with
24-hour access to our interest rates and product terms and the ability
to lock in an interest rate, to file a pre-approval request or
application, to check the status of their pending application and to
obtain their credit report. Our Web site also provides mortgage
customers with an array of "tools" that assist them in determining how
much financing they can afford, what kind of mortgage best suits their
needs and otherwise provides answers to frequently asked questions.
Later in 1999, we intend to introduce a number of enhancements to our
Web site that will enable our customers, in one continuous online
session, to apply for a loan, receive a loan commitment if approved and
lock in an interest rate.
. Underwriting Loans to the Standards of Investors who Buy our Loans. Our
underwriting process is designed to ensure that each loan we originate
can be sold to a third-party investor by conforming the loan to the
underwriting and credit standards of that investor. Whenever possible,
we use "artificial intelligence" underwriting systems, including Fannie
Mae's Desktop Underwriter(R), to ensure consistency with our investors'
predetermined standards. These systems interface with our "enterprise"
computer system. In addition, we have a series of internal and external
quality control procedures in place to ensure compliance with our
underwriting standards.
. Cross Selling and One-Stop Shopping. We have begun offering title
insurance, abstract services and home equity lines of credit to our
mortgage customers. We believe we can enhance the revenues we earn
through the cross-selling of these and other products and services, and
leverage our origination network without significant additional capital
investments.
. Maintaining a Sales-Oriented Culture. Our loan originators are primarily
compensated through sales commissions, which encourages them to be
responsive to our customers. In addition, we foster a consultative sales
strategy that emphasizes proactive and frequent customer assistance. Our
loan originators actively guide customers through the loan application
process, not merely providing information requested by the customer, but
keeping customers informed about rate changes and market conditions.
Business Divisions and Markets
Our business is organized into the following 3 divisions, each of which
focuses on a distinct market segment: our Internet division, our retail
division and our wholesale division.
Our Internet Division
We created our Internet division in January 1999. During that month, we
received 13 loan applications with a total principal amount of $2.5 million.
Our Internet division has been expanding rapidly. In July 1999, we received
225 Internet loan applications with a total principal amount of approximately
$39.5 million, more than a ten-fold increase from January 1999, and
constituting 24.8% of our mortgage loan applications in July. Forrester
Research estimates that approximately $91.2 billion, or 9.6%, of all mortgage
loans will be originated online by the year 2003, compared to $18.7 billion,
or less than 1.5%, in 1998. In addition, Killen & Associates
39
<PAGE>
predicts online mortgage originations will account for approximately 30% of
total mortgage originations by 2005. Our goal is to become one of the nation's
leading Internet mortgage originators.
Internet Industry Overview. The Internet has become a substantial medium for
both communication and electronic commerce. International Data Corporation, or
IDC, estimates the number of Internet users worldwide will increase from 115
million in 1998 to approximately 400 million in 2002. In addition, IDC expects
that the number of U.S. households using the Internet for online banking will
grow from less than 6.6 million in 1998 to more than 32 million in 2003,
showing the growth in reliance on the Internet for financial services.
Consumers have become proficient in using the Internet for finding, evaluating
and purchasing a wide variety of products and services.
Because of its flexibility, the Internet provides companies with additional
ways to reach consumers with the most current information about their products
and services. This information can be updated instantaneously to provide new
features and presentations, or to adjust prices and terms according to market
changes. In addition, the Internet provides a cost-efficient means of
conducting a document-intensive business such as mortgage banking. Consumers
can apply online, have access to their file, update information instantly, and
check the status of their loans 24 hours a day, seven days a week.
Our Web Site Relationships. To market and sell loans on the Internet, we
work with many of the leading Web sites in our industry, including Microsoft
HomeAdvisor, E-Loan, GetSmart, LendingTree and Consumer Financial Network. We
believe a large number of Internet mortgage shoppers will be introduced to
lenders on these and other future Web sites. We believe our inclusion in these
Web sites gives us a strategic advantage because they are developing their
business processes and software in conjunction with their existing
participating lenders and, in some cases, limiting access by additional
lenders.
In July 1999, we entered into an exclusive arrangement with Real Estate
Village, an online community of realtors. We will be featured as the exclusive
mortgage lender on RealEstateVillage.com. In July 1999, we also established a
preferred sponsor relationship with Homefair.com, an online provider of
interactive tools to aid consumers in buying and selling a home.
The following table contains descriptions of our current Web site
relationships. Except as otherwise noted, we are or will be a participating
retail lender on each of these Web sites.
<TABLE>
<CAPTION>
Start
Company Description Date*
------- ----------- -----
<C> <S> <C>
Microsoft HomeAdvisor.. HomeAdvisor.com is part of the Microsoft 5/99
Network of Internet products and services.
HomeAdvisor is an online service providing
home lists and home financial services.
E-Loan................. E-Loan.com is a leading online mortgage 9/99
company. We are a purchaser of closed loans.
Real Estate Village.... RealEstateVillage.com is an online community 10/99
of realtors. We will be the exclusive lender
on this site.
WebSuite.com Inc....... WebSuite.com designs, develops and supports 11/99
Web sites for companies and individuals in the
real estate industry. We will be the exclusive
mortgage lender on realtor and broker sites it
develops.
Homefair.com........... Homefair.com is an online provider of 9/99
interactive tools to aid consumers in buying
or selling a home or relocating.
GetSmart............... GetSmart.com is a leading online provider of 1/99
financial products and services.
LendingTree............ LendingTree.com is a leading online loan 2/99
marketplace that also offers its products and
services through the Priceline.com Web site.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Start
Company Description Date*
------- ----------- -----
<C> <S> <C>
Consumer Financial
Network............................... CFN.com is an e-commerce 3/99
platform for marketing
financial services and
employee benefits over
corporate intranets and the
Internet.
RealEstate.com......................... RealEstate.com is an online 4/99
provider of comprehensive real
estate services in an online
auction format.
LoanWeb................................ LoanWeb.com is a provider of 4/99
online financial services
providing borrower leads to
lenders.
iOwn.com............................... iOwn.com is a leading Internet 8/99
mortgage broker that helps
consumers find both a home and
a low-cost mortgage online. We
accept brokered loan
applications.
America Mortgage Online................ Amo-Mortgage.com is an online 7/99
retail mortgage loan
marketplace wholly-owned by
Lenders Interactive Online
Network, LIONInc.com, a web
site for mortgage
professionals.
Bank Rate Monitor...................... Bankrate.com is an online 8/99
publication that provides the
consumer with objective
financial data, research and
editorial information.
First Entertainment Services........... FirstEntertainment.com is an 11/99
online provider of general
information services. We will
be the exclusive lender on the
mortgage finance section of
this site.
Real Estate Information Services Inc... Real Estate Information 11/99
Services Inc. maintains
several Web sites providing
foreclosure listings to
subscribers interested in
purchasing such properties. We
will be the exclusive mortgage
lender on these sites.
The Mortgage Rate Directory............ InterestRatesOnline.com allows 8/99
consumers to view interest
rates and locate lenders and
appraisers in 50 states.
HSH Associates......................... HSH.com is a publisher of 6/99
consumer loan information,
lender web sites and financial
tools.
Long Island Board of Realtors/Multiple
Listings Service of Long Island....... MLSLIRealtor.com is an online 8/99
source for Long Island, New
York, real estate information
and loan products.
Genesis2000............................ Genesis2000 is a leading 12/99
provider of mortgage
automation software for over
6,400 broker companies with
more than 30,000 users
nationwide. We will be a
charter wholesale lender on
the Genesis2000 ePass network,
an online e-commerce channel
for 30,000 national brokers to
submit loans to lenders.
</TABLE>
- ----------------
* Refers to actual or anticipated online commencement date.
41
<PAGE>
Mortgage shoppers who visit a Web site are prompted by the site's software
to provide information about their loan needs and preferences and about their
income and financial condition. The site's software then compares the
information given by the potential customer with a database of the terms of the
loans of lenders participating on the site. The software selects those loans
for which the customer qualifies that satisfy the potential customer's loan
needs. The site's software then introduces the potential customer to one of the
lenders that participates on the site. The way in which the customer is
introduced varies from site to site, but when customers are connected to us
they are introduced on an exclusive or semi-exclusive basis.
Once a customer is introduced to us, we communicate with that customer
online or through one of our Internet call centers. Our call centers employ
representatives who are trained to work with customers in a consultative
manner. Our consultative sales approach stresses proactive and frequent contact
with customers. For example, our representatives provide customers with written
analysis, comparing the costs of different loan products, showing closing costs
and amortization schedules. The representatives are trained to call customers
frequently, to provide them with updated information about interest rates and
to answer frequently-asked questions. The objective of our call center
representatives is to build a relationship with potential customers, and gain
the confidence and business of those customers.
Our MortgageSelect.com Web Site. In June 1999, we released a new,
technologically advanced version of our Web site. It provides our customers
with 24-hour access to a variety of products and services. In addition to
providing information about interest rates and product terms, our Web site
allows customers to perform a number of functions such as locking in an
interest rate, filing a pre-approval request or application, checking the
status of their pending applications and obtaining their credit report. Later
this year, we intend to further expand the functionality of our Web site by
enabling our customers, in one continuous session, to apply for a loan, receive
a commitment for that loan if approved and lock in their interest rates.
Currently, we primarily use our Web site to help us gain the business of
mortgage shoppers that have been referred to us by our Web site relationships.
As we increase the functionality of our Web site, we will seek to use and
market it in new ways. Initially, we will use our Web site to market loans
directly to Internet mortgage shoppers. We intend to commence an advertising
campaign, initially directed at selected markets, that will aim to increase
mortgage shoppers' awareness of our Web site and establish name recognition for
MortgageSelect.com. In the longer term, we intend to enter into contracts to
provide private label Internet origination services to thrifts and smaller
banks.
Our Internet Growth Strategy. The goal of our Internet marketing efforts is
to both expand our Internet reach and enhance our ability to originate
mortgages over the Internet. To continue the growth of our Internet division,
we must first increase our call center capacity to be able to service all the
referrals we receive from the popular Web sites. Continued growth depends on
our ability to increase the number of referrals from those and other Web sites.
We intend to complement our growth from increased Web site referrals with
growth from marketing our own Web site and from providing, on a contract basis,
Internet origination services to local and regional thrifts and smaller banks.
We intend to use part of the proceeds of this offering to fund the increase of
our Internet capacity and capabilities. Please see the "Use of Proceeds"
section of this prospectus.
Our Internet growth strategy focuses on the following elements:
. Increasing Our Call Center Capabilities. We recently opened our second
Internet call center, and are planning a third center. We believe we can
rapidly increase our call center capacity by transferring experienced
managers and personnel from our traditional origination channels to our
Internet division. We believe we can maximize the number of inquiries
that we convert into loans by limiting the number of sales
representatives in any one call center to 28 persons. Our experience is
that having a number of smaller call centers allows us to best manage
and motivate our sales representatives and create an atmosphere that is
most conducive to our consultative sales approach. To enable several
smaller call centers to work together efficiently, we are installing
"virtual" software so that a representative in any one call center can
service a mortgage shopper regardless of the source that referred that
shopper.
42
<PAGE>
. Expanding Our Territorial Presence. We are currently licensed to conduct
our business in 35 states and the District of Columbia. We are in the
process of meeting the licensing or qualification requirements of, and
otherwise expanding our Internet business to, all 50 states so that we
can accept mortgage applications over the Internet without limitation.
. Establishing a Presence on Additional Web Sites. We employ a dedicated
e-commerce staff that seeks to establish new relationships with both
national and regional Web sites. Our e-commerce staff is headed by a
person with extensive experience in negotiating with popular Web sites
on behalf of lenders. We believe our e-commerce staff has been
successful in achieving our inclusion in many of the popular Web sites
and will continue to expand our Internet presence.
. Continuing to Market Our Own Web Site. In June 1999, we released a new,
technologically advanced version of our Web site. The main criteria in
designing our Web site are functionality and user-friendliness. We are
continuously looking for ways to expand the functions customers can
perform online and reduce the time it takes from initial application to
loan approval and commitment. We also seek to maintain user-
friendliness, through live interaction with loan originators and
immediate telephone assistance from a loan originator. We intend to
commence an advertising campaign, initially directed at selected
markets, that will aim to increase mortgage shoppers' awareness of our
Web site and establish name recognition for MortgageSelect.com.
. Providing Contract Internet Origination Services to Thrifts and Smaller
Banks. We have designed our Web site and call center technology so that
they can be adapted to support the brand names of other lenders. We
intend to offer, on a private label basis, our Internet capabilities and
call center technology to thrifts and smaller banks, effectively
becoming the Internet mortgage presence of those institutions so that
they can offer their loans through our Web site. We believe this
approach will assist us in defraying the cost of the development of our
Web site and call center technology over a greater number of loans.
We believe we have a number of strategic advantages that will enable us to
effectively compete on the Internet, including:
. Our Call Center Culture. Our call centers have a sales culture. Our loan
originators use a consultative sales approach that includes frequent and
repeated customer contacts and follow ups. They do not merely provide
information requested by a customer, but actively assist and guide a
client through the loan application process, furnish written
presentations, pre-approvals and updates on rates and market conditions
and otherwise ensure that a customer's questions are being answered. We
compensate our loan originators primarily on a commission basis to
encourage their responsiveness to customers. We believe our sales
culture sets us apart from many of our competitors and is an important
reason for our success in originating loans over the Internet.
. Our Competitive Adjustable Rate Mortgage Terms. We believe we are able
to offer better terms for adjustable rate mortgages than many of the
large lenders that constitute most of our competition on the popular Web
sites. The reason is that we typically sell the adjustable rate loans we
originate to thrifts while these large lenders often securitize their
adjustable rate originations. Securitizers tend to require a higher
yield for their loans than entities like thrifts that hold their loans
for investment. As a result, thrifts can profitably purchase and hold
adjustable rate mortgage loans with lower rates than securitizers, and
have historically done so. Consequently, we are typically able to offer
better terms than those large lenders that are the majority of our
competitors on the popular Web sites. Many of the mortgage brokers and
mortgage bankers that traditionally compete with us for adjustable rate
borrowers do not participate on the popular Web sites because they do
not have the requisite financial resources and information technology.
. Our Ability to Sell Servicing Rights to the Highest Bidder. We are able
to offer competitive rates for fixed rate mortgages because we can
direct the sale of servicing rights for a particular type of loan to the
servicing rights buyer that places the highest value on that type of
loan. For example, we may sell
43
<PAGE>
the servicing rights to a $100,000 loan in Florida to one buyer, while
we sell the servicing rights to a $150,000 loan in Florida to another
buyer and the servicing rights to a similar loan in New Jersey to yet
another buyer. In each case, we identify and execute a sale to a
servicing buyer whose servicing model places the highest value on the
type of servicing to be sold. This selling strategy is the reason we are
able to offer competitive terms in the fixed rate mortgage market.
. Our Advanced Internet Technology. Our Internet technology is user-
friendly and designed to facilitate interaction with the client. Our
loan originators will soon be able to "share" the computer screen with a
customer and see how a customer is completing an application while the
customer is doing so, allowing them to assist a customer in a more
meaningful manner. In addition, our technology will enable us to give a
customer a commitment letter for certain loans in "real-time." This
means that in one continuous online session, a customer's application
could be submitted to Fannie Mae's Desktop Underwriter(R) and, if
approved, a commitment letter with a set interest rate and other terms
would be returned to the customer.
Our Retail Division
Our retail division is the core of our traditional business. In 1998 and
the first 6 months of 1999, approximately 81.0% and 83.2% of the mortgage
loans we originated were made through our retail division. This division
consists of 16 offices, including our New York City headquarters. Our retail
division has 6 origination channels:
. community loan offices;
. direct-to-consumer advertising;
. realtor and builder joint ventures;
. our Corporate Affinity Program;
. telemarketing; and
. our Real Estate Direct Program.
Community Loan Offices. Our community loan offices serve the regions in
which they operate, and obtain business by developing and nurturing a referral
network of realtors, real estate attorneys, builders and accountants. Many of
our loan originators are highly experienced and, therefore, can provide an
accurate analysis of a potential borrower's options and needs. They also
facilitate the efficient processing and closing of a borrower's loan. Other
reasons customers are referred to our loan originators include our broad and
competitive product line and our high level of customer service, including
pre-approval commitments based on Fannie Mae's Desktop Underwriter(R) and
flexible rate lock-in and extension policies, a willingness to hold escrows
and other accommodations that help a borrower and facilitate a real estate
transaction. Our community loan offices provide special services to builders,
including issuing commitments to lend to buyers in their projects. We have
been selected by several leading builders as their onsite resource for
mortgage financing. For example, we were recently selected to be the sole on-
site lender for a 90-story condominium project in New York City.
We intend to further expand our community loan office originations by
opening offices in new geographic regions, recruiting experienced loan
originators for those offices and hiring additional loan originators in the
markets we currently serve. In order to attract and retain experienced loan
originators, we offer a high level of support that includes a broad product
range, technical help desk support, flexible extension policies, expenditures
on trade shows, educational seminars and other marketing initiatives and
promotional materials. We believe our experience in implementing this strategy
in our current markets will enable us to expand into additional states and
increase our market presence in our home region. In the past 6 months, we have
opened community loan offices in suburban Philadelphia and Maryland. Over the
next 12 months, we expect to open at least 4 additional community loan offices
in the eastern United States and possibly other areas.
44
<PAGE>
Direct to Consumer Advertising. We advertise our products in selected local
and regional print media. Customer calls generated by advertising are handled
by our more experienced loan originators who use our consultative sales
approach. We believe an important part of our success is attributable to the
way our loan originators interact with potential customers.
We intend to expand our direct to consumer business by increasing the number
of publications in which we advertise, including adding publications in regions
into which we expand. As we open additional local offices and expand into new
states, we will seek to build name recognition by advertising in the regional
and local print media. We often start an advertising campaign in the regional
press before, or in conjunction with, the opening of a new community loan
office. In selecting publications, we aim to strike an efficient balance
between the cost of a particular media and the number of leads it generates. We
believe our broad product line maximizes the efficiency of our advertising
budget. The follow-up provided by our loan originators allows us to service a
customer in a personal manner and provides us, we believe, with a competitive
advantage. We believe this strategy complements our geographic expansion
strategy.
Realtor and Builder Joint Ventures. Since the beginning of 1998, we have
established 3 joint ventures with mid-size real estate brokerage firms and
builders, who provide the venture with access to potential customers. We and
our partners each have a 50% interest in the venture. Our joint venture
partners are System One Partners, LLP, a marketing cooperative of many of the
leading realtors in Fairfield County, Connecticut, comprising approximately 40
offices, Spectrum Skanska Inc., a leading builder in the New York tri-state
area, and Country Living Associates, Inc., a purveyor of high-end properties in
Connecticut. Each venture makes loans, retaining the application and processing
fees, points and discounts earned in connection with the mortgages it
originates. The venture then sells the mortgage loans to us at a premium. We
then resell the loans to institutional buyers, earning a profit from those
resale efforts. We believe that this distribution channel provides an
opportunity to cross sell with local realtors and builders.
We intend to expand this part of our business by identifying and entering
into additional joint ventures, and we expect to establish at least 4
additional joint ventures in the next 18 months. We believe joint ventures of
this nature are a fairly new way of doing business. Our flexibility and
willingness to tailor an arrangement to a particular venture, rather than
adhere to a set of model terms, gives us a competitive advantage when competing
with certain larger lenders seeking to enter into a venture with a particular
realtor or builder.
Corporate Affinity Program. Under this program, we make loans to employees
of large companies and firms who are members of our Corporate Affinity Program.
The employees receive special group discounts, service guarantees and other
accommodations. Current Corporate Affinity Program members include Credit
Suisse First Boston Corporation, Deutsche Bank AG, Goldman Sachs Inc. and UBS
Corporation.
We intend to identify and sign up additional companies to participate in our
program. We believe our affinity loan programs are successful because of our
broad product line, our personal approach to dealing with customers and our
ability to be flexible to meet a customer's needs.
Telemarketing. We maintain a staff of loan originators and telemarketers who
place calls to persons identified as having high-interest rate loans due to
poor past credit history, but who have improved their credit history and would
now qualify for lower interest rate mortgages. We intend to expand this part of
our business by hiring additional loan originators and telemarketers.
Real Estate Direct. In 1998, we established our Real Estate Direct Program.
The program's goal is to reach customers at the beginning of the home-buying
process. Under this program, we place advertisements for a particular home that
not only describe the home, but also a package of available mortgage financing
terms. A typical advertisement will feature a picture of the home and will
describe in the headline the downpayment and monthly charges required to carry
that particular home. The advertisement is intended to show how financing terms
offered by us make the home readily purchasable. We believe that we benefit by
having early access to
45
<PAGE>
potential borrowers, many of whom, although they may not buy the particular
property advertised, may become our customers. With the experience gained from
operating this program in our traditional territory, we believe we can expand
this program as part of our overall geographic expansion.
Our Wholesale Division
We have established relationships with more than 75 mortgage brokers. Our
wholesale division actively solicits referrals of borrowers from this network
of independent mortgage brokers. While our strategy focuses primarily on
establishing direct access to borrowers, our mortgage broker channel is an
important source of mortgage loans, accounting for 19.0% of the mortgage loans
we originated in 1998 and 16.8% in the first 6 months of 1999.
A mortgage broker deals directly with the borrower and submits the fully
processed loan application to us for an underwriting determination. We apply
our usual underwriting standards to each wholesale-originated mortgage, issue a
written commitment and, upon satisfaction of all lending conditions, close the
mortgage. We offer mortgage brokers direct access to Fannie Mae's Desktop
Underwriter(R), which enables them to give their clients immediate approvals.
We believe this gives us an advantage over lenders who do not provide that
service. Other reasons we believe we are able to attract mortgage broker
business include our broad and competitive product line, our ability to provide
approval within 24 to 48 hours of receipt of a file, our flexible lock-in and
extension policies, our personalized service, our knowledgeable and experienced
wholesale loan originators and our support of mortgage broker industry events,
such as trade shows and educational seminars.
We conduct due diligence on mortgage brokers with whom we consider doing
business. Our diligence includes verifying their financial statements and
running credit checks of principals, checking business references provided by
the brokers and verifying with the applicable regulators that a broker is in
good standing. Once approved, we require that a mortgage broker sign an
agreement that governs the mechanics of doing business with us and that sets
forth the representations and warranties the broker makes regarding each loan
submitted to us.
Through our wholesale division, we can increase our loan volume without
incurring the higher marketing, labor and other overhead costs associated with
increased retail originations because brokers conduct their own marketing and
employ their own personnel to attract customers, assist the borrower in
completing the loan application and maintain contact with borrowers.
Our Mortgage Products
We offer a broad and competitive range of mortgage products that aim to meet
the mortgage needs of all borrowers. Our product line includes Fannie Mae-
eligible loans, jumbo loans, adjustable rate mortgages, FHA-insured and VA-
guaranteed loans, alternate "A" loans, non-prime loans, home equity and second
mortgage loans, construction loans and bridge loans. Our experience and
expertise in numerous types of mortgages give us the ability to provide our
full product line through each of our 3 divisions.
Our extensive network of loan buyers allows us to identify specific loan
features, to identify a loan buyer who will purchase loans with those specific
features and to select a buyer who will accept the lowest yield for loans with
those features. As a result, we are able to offer a wide range of products that
are well priced and that have many different features to suit a customer's
needs.
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<PAGE>
The following table summarizes information with respect to the most
important categories of mortgage loans we originate.
MORTGAGE LOAN ORIGINATION SUMMARY
<TABLE>
<CAPTION>
% of Total
Mortgage Type Number of Loans Dollar Volume Dollar Volume
- ------------- --------------------- --------------------- ---------------------
Year Ended Six Months Year Ended Six Months Year Ended Six Months
December Ended June December Ended June December Ended June
31, 1998 30, 1999 31, 1998 30, 1999 31, 1998 30, 1999
---------- ---------- ---------- ---------- ---------- ----------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Fannie Mae Eligible
Fixed.................. 3,560 1,928 $ 539.6 $ 287.7 46.6% 47.0%
Jumbo Fixed............. 506 244 171.5 92.5 14.8 15.1
Adjustable Rate (ARMs).. 519 230 177.5 102.5 15.3 16.7
FHA/VA.................. 1,084 487 143.0 70.9 12.4 11.6
Alternate "A" Loans..... 539 114 82.1 23.3 7.1 3.8
Non-Prime Loans......... 240 243 25.8 26.1 2.2 4.3
Home Equity/Second...... 177 147 9.0 7.1 0.8 1.2
Construction Loans...... 20 4 8.4 2.2 0.7 0.4
Bridge Loans............ 9 -- 0.6 -- 0.1 --
----- ----- -------- ------- ----- -----
TOTAL................. 6,654 3,397 $1,157.5 $ 612.3 100.0% 100.0%
</TABLE>
. Conforming and Government-Insured Fixed Rate Loans. These mortgage loans
conform to the underwriting standards established by Fannie Mae or the
Federal Home Loan Mortgage Corporation (commonly referred to as Freddie
Mac). This product is limited to high quality borrowers with good credit
records and involves adequate down payments or mortgage insurance. These
loans may qualify for insurance from the Federal Housing Authority (FHA)
or guarantees from the Veterans Administration (VA). We have been
designated by the U.S. Department of Housing and Urban Development (HUD)
as a direct endorser of loans insured by the FHA and as an automatic
endorser of loans partially guaranteed by the VA, allowing us to offer
so-called FHA or VA mortgages to qualified borrowers. FHA and VA
mortgages must be underwritten within specific governmental guidelines,
which include borrower income verification, asset verification, borrower
credit worthiness, property value and property condition.
. Jumbo Loans. Jumbo loans are considered non-conforming mortgage loans
because they have a principal loan amount in excess of the loan limits
set by Fannie Mae and Freddie Mac (currently, $240,000 for single-
family, one-unit mortgage loans in the continental United States). We
offer jumbo loans with creative financing features, such as the pledging
of security portfolios. Our jumbo loan program is geared to the more
financially sophisticated borrower.
. Adjustable Rate Mortgages (ARM). The ARM's defining feature is a
variable interest rate which fluctuates over the life of the loan,
usually 30 years. Interest rate fluctuations are based on an index that
is related to Treasury bill rates, regional or national average cost of
funds of savings and loan associations, or another widely published rate
such as LIBOR. The period between the rate changes is called an
adjustment period and may change every 6 months, one year, 3 years, 5
years or 10 years. Some of our ARMs may include payment caps, which
limit the interest rate increase for each adjustment period.
. Alternate "A" Loans. From a credit risk standpoint, alternate "A" loan
borrowers present a risk profile comparable to that of conforming loan
borrowers, but entail special underwriting considerations, such as a
higher loan to value ratio or limited income verification.
. Non-Prime Mortgage Loans. The non-prime mortgage loan focuses on
customers whose borrowing needs are not served by traditional financial
institutions. Borrowers of non-prime mortgage loans may have impaired or
limited credit profiles, high levels of debt service to income, or other
factors that
47
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disqualify them for conforming loans. By originating mortgage loans to
borrowers with higher credit risk, we are able to charge higher interest
rates than would be charged for our conventional loans. Offering this
category of mortgage loans on a limited basis allows us to provide loan
products to borrowers with a variety of differing credit profiles.
. Home Equity and Second Mortgage Loans. These loans are generally secured
by second liens on the related property. Home equity mortgage loans can
take the form of a home equity line of credit, which generally bears an
adjustable interest rate, while second mortgage loans are closed-end
loans with fixed interest rates. Both types of loans are designed for
borrowers with high credit profiles. Home equity lines generally provide
for a 5- or 15-year draw period where the borrower withdraws needed cash
and pays interest only, followed by a 10- to 20-year repayment period.
Second mortgage loans are fixed in amount at the time of origination and
typically amortize over 15 to 30 years with a balloon payment due after
15 years.
. Construction Loans. We offer a variety of construction loans for owner-
occupied single-family residences. These loans are available on a
rollover basis, meaning that the borrower can secure funding for the
land purchase and construction of the home, then roll the financing over
into a permanent mortgage loan. During the construction period,
interest-only payments are made. Withdrawals during the construction
period, to cover the costs associated with each stage of completion, are
usually made in 5 to 10 disbursements.
. Bridge Loans. The bridge loans that we make are short-term loans and may
be used in conjunction with our other loan products. Bridge loans
provide a means for a borrower to obtain cash based on the equity of a
current home that is on the market but not yet sold and to use that cash
to purchase a new home.
Loan Funding and Borrowing Arrangements
We draw against our warehouse facility with First Union to originate
mortgage loans. We expect to replace this facility with a $60 million line of
credit that will be agented by First Union. In addition to the First Union
warehouse facility, we have 4 uncommitted purchase and sale agreements under
which we sell the loans we have originated to institutions on an interim
basis. The combined capacity available under our purchase and sale agreements
is $168 million. For a more detailed description of these arrangements, please
see the "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" section of this
prospectus.
Sale of Loans and Servicing Rights
Our business strategy is to sell the loans we make, typically within 30
days of origination, rather than hold them for investment. We sell our loans
to Fannie Mae, large national banks, thrifts and smaller banks, securities
dealers, real estate investment trusts and other institutional loan buyers. We
also swap loans with Fannie Mae for mortgage-backed securities, which we then
sell. We do not currently securitize our loans, although we may decide to do
so in the future if market conditions or other considerations justify doing
so. In most instances, we sell the servicing rights to our loans at the same
time that we sell those loans. When we swap loans for mortgage-backed
securities, at the time of completing the swap, we sell the servicing rights
to the loans to an independent loan servicer.
Typically, we sell or swap the loans with limited recourse to us. This
means that, with some exceptions, we reduce our exposure to default risk at
the time we sell the loan, except that we may be required to repurchase the
loan if we breach the representations or warranties we make in connection with
the sale of the loan, in the event of an early payment default, or if the loan
does not comply with the underwriting standards and other requirements of the
ultimate investor.
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We sell or swap the loans under agreements to the buyers and institutions
described above, many of whom compete directly with us for mortgage
originations. The agreements generally do not have a limit as to the principal
amount of loans that we may sell, and establish an ongoing sale program under
which these investors and institutions stand ready to buy so long as the loans
we offer for sale meet their underwriting standards.
In the first 6 months of 1999, the 3 institutions that bought the most loans
from us were Chase Manhattan Mortgage Corporation, Norwest Funding, Inc. and
Astoria Federal Savings and Loan Association, which accounted for 38.0%, 32.8%
and 7.2% of our total loan sales, respectively. We have brokered or sold loans
to Chase Manhattan Mortgage Corporation since 1988, to Prudential Home Mortgage
or its successor Norwest Funding, Inc. since 1991, and to Astoria Federal
Savings and Loan Association since 1994. We believe we have favorable
relationships with our buyers. The loss of any of these institutions as a buyer
of our loans, or a significant reduction in the prices those buyers are willing
to pay, however, could have a material adverse effect on our business and
results of operations.
Loan Underwriting
Our primary goal in making a decision whether to extend a loan is whether
that loan conforms to the expectations and underwriting standards of the
institution which buys that type of loan. Whenever possible, we use artificial
intelligence underwriting systems to determine whether a particular loan meets
those standards and expectations. In those cases where artificial intelligence
is not available, we rely on our experienced credit officer staff to make the
determination. Our credit officers have an average of 8 years of relevant
experience.
Typically, our buyers focus on a potential borrower's credit history, often
as summarized by credit scores, income and stability of income, liquid assets
and net worth and the value and the condition of the property to be pledged. We
believe our credit officers have the experience and training necessary to
evaluate a potential borrower's conformance to our buyers' requirements based
on these criteria. Historically, we have not had material credit losses and
believe our credit decisions ensure that the loans we originate meet the
standards of our loan buyers and minimize the risk of default.
Compliance
Our compliance efforts are headed by our compliance officer, who is an
experienced attorney in the field. The officer is responsible for staying
current with the lending laws and regulations in each of the jurisdictions in
which we make loans. He is also responsible for assuring that our processes,
disclosures and loan products conform to all applicable federal, state and
local laws and regulations. We are subject to periodic audits by the regulators
in many of the states where we operate. To date, the audits have not found any
material violations. In addition, our "enterprise" computer application assists
us in complying with government regulations by automatically selecting the
requisite loan disclosure documents, calculating permissible fees and charges
and assuring that products offered to a particular borrower meet the
requirements of that borrower's state. Our legal compliance is reviewed as part
of our quality control process, which is performed by an independent contractor
with expertise in these matters.
Quality Control
We have hired an outside firm to perform quality control testing for us. The
firm typically samples, on a random basis, 10% of the loans we originate. It
checks the accuracy of the borrower's income and assets and the credit report
used to make the loan, reviews whether the loan buyer's underwriting standards
were properly applied, whether the loan complies with government regulations
and, for 1% of the loans we originate, it reappraises the underlying property.
The firm issues monthly reports to us, which we use to identify areas that need
corrective action or could use improvement. Historically, those reports have
not identified material quality control concerns.
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Government Regulation
Our business is subject to extensive and complex rules and regulations of,
and examinations by, various federal, state and local government authorities
and government sponsored enterprises, including without limitation HUD, FHA,
VA, Fannie Mae, Freddie Mac, Ginnie Mae and state regulatory authorities. These
rules and regulations impose obligations and restrictions on our loan
origination and credit activities, including without limitation the processing,
underwriting, making, selling, securitizing and servicing of mortgage loans.
Our lending activities also are subject to various federal laws, including
the Federal Truth-in-Lending Act and Regulation Z thereunder, the Homeownership
and Equity Protection Act of 1994, the Federal Equal Credit Opportunity Act and
Regulation B thereunder, the Fair Credit Reporting Act of 1970, the Real Estate
Settlement Procedures Act of 1974 and Regulation X thereunder, the Fair Housing
Act, the Home Mortgage Disclosure Act and Regulation C thereunder and the
Federal Debt Collection Practices Act, as well as other federal statutes and
regulations affecting our activities. Our loan origination activities also are
subject to the laws and regulations of each of the states in which we conduct
our activities.
These laws, rules, regulations and guidelines limit mortgage loan amounts
and the interest rates, finance charges and other fees we may assess, mandate
extensive disclosure and notice to our customers, prohibit discrimination,
impose qualification and licensing obligations on us, establish eligibility
criteria for mortgage loans, provide for inspections and appraisals of
properties, require credit reports on prospective borrowers, regulate payment
features, and prohibit kickbacks and referral fees, among other things. These
rules and requirements also impose on us certain reporting and net worth
requirements. Failure to comply with these requirements can lead to, among
other things, loss of approved status, termination of contractual rights
without compensation, demands for indemnification or mortgage loan repurchases,
certain rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions.
Although we believe that we have systems and procedures in place to ensure
compliance with these requirements and believe that we currently are in
compliance in all material respects with applicable federal, state and local
laws, rules and regulations, there can be no assurance of full compliance with
current laws, rules and regulations, that more restrictive laws, rules and
regulations will not be adopted in the future, or that existing laws, rules and
regulations or the mortgage loan documents with borrowers will not be
interpreted in a different or more restrictive manner. The occurrence of any
such event could make compliance substantially more difficult or expensive,
restrict our ability to originate, purchase, sell or service mortgage loans,
further limit or restrict the amount of interest and other fees and charges
earned from mortgage loans that we originate, purchase or service, expose us to
claims by borrowers and administrative enforcement actions, or otherwise
materially and adversely affect our business, financial condition and
prospects.
Members of Congress, government officials and political candidates have from
time to time suggested the elimination of the mortgage interest deduction for
federal income tax purposes, either entirely or in part, based on borrower
income, type of loan or principal amount. Because many of our loans are made to
borrowers for the purpose of purchasing a home, the competitive advantage of
tax deductible interest, when compared with alternative sources of financing,
could be eliminated or seriously impaired by this type of governmental action.
Accordingly, the reduction or elimination of these tax benefits could have a
material adverse effect on the demand for the kind of mortgage loans we offer.
A multitude of class action lawsuits have been filed against companies in
the mortgage banking industry, which allege, among other things, violations of
the terms of the mortgage loan documents and certain laws, rules and
regulations (including without limitation consumer protection laws). These
lawsuits may result in similar suits being filed against us. In addition, the
publicity generated by such lawsuits may result in legislation that affects the
manner in which we conduct our business and our relationships with mortgage
brokers, correspondents and others. Any of these developments may materially
and adversely affect our business, financial condition and prospects.
50
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We also are performing various mortgage-related operations on the Internet.
The Internet, and the laws, rules and regulations related to it, are new and
still evolving. As such, there exist many opportunities for our business
operations on the Internet to be challenged or to become subject to
legislation, any of which may materially and adversely affect our business,
financial condition and prospects.
Information Systems
In 1998, we installed an enterprise system that supports most of our
business functions. The system is a computer application from Data-Link
Systems, LLC d.b.a. Fiserv Mortgage Products Division, which our programming
staff has modified extensively to meet our specific needs. Our enterprise
system functions on a wide area network that connects all of our branches in
"real time." With our wide area network, a transaction at any one of our
locations is committed centrally and is therefore immediately available to all
personnel at all other locations. An important benefit of our enterprise system
is that it aids us in controlling our business process. For example, the system
assures that our underwriting policies are adhered to, that only loans that are
fully approved are disbursed, and that the correct disclosures and loan
documents are used based on a borrower's state and loan program. Our enterprise
system also provides our management with reports and other key data.
Our MortgageSelect.com Internet Web site is based on the latest software
technology from Microsoft Corporation and resides on high performance Microsoft
NT Servers. MortgageSelect.com has developed proprietary call center and Web
site software programs that integrate the call center, its contact management
system, Fannie Mae's automated underwriting system and the Internet Web site.
Our Internet software programs were developed using in-house personnel and
outside software consulting companies specializing in Internet mortgage
services software.
Competition
Mortgage banking on the Internet is highly competitive. A large number of
mortgage companies currently transact business over the Internet in one form or
another. The sophistication of these companies in the Internet channel varies
from simple one-page information Web sites to Web sites with extensive on-line
content and features. Many of these mortgage companies share a business
strategy and capability similar to ours. The competition includes banks such as
Chase and Bank of America, as well as mortgage originators such as Prism
Financial Corporation, E-Loan and Mortgage.com, all of which are larger and
better capitalized than us. In addition, we also compete on the Internet with
large, national mortgage companies, such as Countrywide Credit Industries, Inc.
and HomeSide Lending, which have greater origination volumes and capitalization
than us.
A large number of mortgage companies also transact business through retail
offices and other traditional channels. Our competitors include other mortgage
bankers (including those noted above), state and national commercial banks,
savings and loan associations (including, for example, Dime Savings Bank of New
York, FSB and Home Federal Savings Bank), credit unions, insurance companies
and other finance companies. Many of these competitors are substantially larger
and have considerably greater financial, technical and marketing resources than
we do.
Competition in the mortgage banking industry is based on many factors,
including convenience in obtaining a loan, customer service, marketing and
distribution channels, amount and term of the loan and interest rates. We
believe that our competitive strengths include a broad product offering, a
variety of distribution channels, providing prompt, responsive service and
flexible underwriting to borrowers as well as independent mortgage brokers. Our
underwriters apply our underwriting guidelines but have the flexibility to
deviate from such guidelines when an exception or upgrade is warranted by a
particular loan applicant's situation, such as evidence of a strong mortgage
repayment history relative to a weaker overall consumer-credit repayment
history. This provides the independent mortgage brokers working with us with
the ability to offer loan programs to a diversified class of borrowers.
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No single lender or group of lenders has, on a national level, achieved a
dominant or even a significant share of the market with respect to loan
originations for first mortgages. We believe that our product offerings,
competitive pricing, advanced technology and business strategies enable us to
compete effectively with these entities.
Training
We focus on recruiting, developing and motivating talented people from
within and outside the consumer finance industry to implement our business
strategies. We are committed to our human resources. To enhance their skills,
we offer and sometimes require our employees to attend training classes.
Through our training programs, we seek to instill in all of our employees our
commitment to provide superior customer service and to be responsive to
customer needs. New sales persons are required to take training classes to
provide them with knowledge of our products and to provide them with extensive
training in sales and marketing techniques, including telephone sales
techniques and customer relations. Sales persons are also provided with
periodic ongoing training to keep their skills and product knowledge up to
date.
Employees
As of June 30, 1999, we had 370 employees, substantially all of whom were
employed full-time. Of these employees, 110 were employed at our New York City
headquarters, and 260 were employed at our other offices. None of our employees
are represented by a union. We consider our relations with our employees to be
satisfactory.
Properties
We do not own any real property, except for our mortgagee's interest in the
properties that are the subject of our mortgage loans in the ordinary course of
business. The following table sets forth the location, approximate size, annual
base rent and lease expiration date of our significant offices.
<TABLE>
<CAPTION>
Annual Lease
Square Base Expiration
Location Footage Rent Date
-------- ------- -------- ----------
<S> <C> <C> <C>
New York, NY.................................. 15,436 $355,020 09/13/99
New York, NY.................................. 4,180 175,560 12/17/07
Plainview, NY................................. 6,188 136,097 08/31/00
Jericho, NY................................... 8,907 175,156 02/27/01
Norwalk, CT................................... 4,900 120,048 08/31/04
</TABLE>
Our primary New York City sublease expired on September 13, 1999. We did not
renew this lease and are currently negotiating to lease alternative space. We
cannot assure you that we will be successful in such negotiations. In any
event, however, we were not able to vacate the premises in a timely manner. As
a result, from the expiration date of the lease until we vacate the premises,
we are required to pay a penalty monthly rent that is two times the amount of
the base monthly rent.
We lease 12 additional offices, with lease expiration dates from 1999 to
2007. With respect to the leases expiring within the next 12 months, we believe
we will be able to renew those leases or find alternative facilities on
commercially reasonable terms. We expect to lease additional offices in
connection with our planned geographic expansion.
Legal Proceedings
In the ordinary course of our business, we are at times subject to various
legal proceedings. We do not believe that any of our current legal proceedings,
individually or in the aggregate, will have a material adverse effect on our
operations or financial condition.
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MANAGEMENT
Directors, Executive Officers and Key Employees
Set forth below is certain information regarding our directors, executive
officers and key employees as of the date of this prospectus.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------ --- ------------------------------------------------------------
<S> <C> <C>
Michael Strauss......... 40 Chairman of the Board, President and Chief Executive Officer
Nicholas P. Rizzetta.... 52 Chief Financial Officer
Robert E. Burke......... 33 Senior Vice President, Treasurer and a director nominee
Mitchell Eininger....... 43 Senior Vice President, Business Development
James P. O'Reilly....... 46 Senior Vice President, Secondary Marketing
Leonard Schoen, Jr...... 34 Senior Vice President, Operations and a director nominee
Leslie E. Tao........... 35 Senior Vice President, Production and Sales
Ronald D. Taylor........ 51 Senior Vice President, Electronic Commerce
Lawrence S. Jones....... 36 Vice President, Quality Control and Compliance
Scott Lare.............. 35 Chief Information Officer
Andrew P. Valentine..... 38 Vice President and Corporate Counsel
Joseph P. Bryant........ 52 Director nominee
C. Cathleen Raffaeli.... 42 Director nominee
</TABLE>
Michael Strauss. Mr. Strauss founded our company in 1988 and currently
serves as the Chairman of our board of directors and our President and Chief
Executive Officer. He is responsible for our strategic direction as well as
overseeing our day-to-day operations. Mr. Strauss is First Vice President and
Director of the Empire State Mortgage Bankers Association and a member of a
number of mortgage advisory councils. He has a B.S. in business administration
from Washington University in St. Louis, Missouri.
Nicholas P. Rizzetta. Mr. Rizzetta joined us in May 1999 as Chief Financial
Officer. He held a similar position at Homerica Mortgage Corporation, a
mortgage banker operating in the New York tri-state area, from 1997 to April
1999. From 1993 to 1997, Mr. Rizzetta was associated with L&M Consulting, a
mortgage banking consulting company founded by Mr. Rizzetta. Before that, Mr.
Rizzetta held a number of positions at various financial institutions,
including Chemical Bank and the Dime Savings Bank. He is a Certified Public
Accountant and has an M.B.A. in finance and B.B.A. in accounting from Iona
College in New Rochelle, New York.
Robert E. Burke. Mr. Burke will serve on our board of directors upon
completion of this offering and has been Senior Vice President, Treasurer since
May 1999. From April 1997 to April 1999, he also served as Chief Financial
Officer. He was a partner with Burke & Company, an independent accounting firm,
from 1995 to 1997, and a Senior Manager at Goldstein Golub Kessler & Company,
P.C., another independent accounting firm, from 1990 to 1995. Mr. Burke is a
Certified Public Accountant and has a B.S. in accounting from Duquesne
University in Pittsburgh, Pennsylvania.
Mitchell Eininger. Mr. Eininger joined us in November 1996 as Vice
President, Business Development. From March 1993 to November 1996, he was an
Assistant Vice President of Norwest Mortgage, where he was responsible for
opening mortgage banking facilities in the New York City area. From 1990 to
1993, Mr. Eininger was the branch manager of the Bardonia, New York, office of
Sears Mortgage Company, responsible for origination, staffing, employee and
customer relation matters. Mr. Eininger has a degree in electronics from E.F.
Johnson Technical School in Wascca, Minnesota, and has an Associates of Science
degree in electrical technology from Rockland Community College in Suffern, New
York.
James P. O'Reilly. Mr. O'Reilly joined us in March 1998 as Senior Vice
President, Secondary Marketing. He was Senior Vice President at Gateway
Funding, a Pennsylvania mortgage banker, from 1996 to March 1998, President of
Secondary Marketing Services, a consulting firm specializing in interest rate
risk
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management, from 1995 to 1996 and Senior Vice President at First Keystone
Mortgage, a Pennsylvania mortgage banker, from 1993 to 1995. Mr. O'Reilly also
was a Senior Bank Examiner for the Federal Home Loan Bank Board, where he was
responsible for the supervisory examinations of thrift institutions. He is a
Certified Public Accountant and has a B.S. in accounting from Saint Francis
College in Loretto, Pennsylvania.
Leonard Schoen, Jr. Mr. Schoen has been with us since 1988. He will serve on
our board of directors upon completion of this offering and has been the Senior
Vice President, Operations since 1995, overseeing all processing and
underwriting functions. Before that, he held various operations and management
positions with our company. Mr. Schoen has a B.S. in business administration
from Hofstra University.
Leslie E. Tao. Ms. Tao has been Senior Vice President, Production and Sales
since 1996. She was a Vice President at Sterling Mortgage Corporation, a
mortgage broker in the New York tri-state area, from 1987 to 1996, responsible
for managing operations and sales. Ms. Tao has an M.B.A. in finance from
Hofstra University in Hempstead, New York, and a B.A. from the State University
of New York at Stony Brook, New York.
Ronald D. Taylor. Mr. Taylor joined American Home Mortgage in January 1999
and is our Senior Vice President, Electronic Commerce. From August 1998 to
January 1999, he was the Chief Information Officer for the Consumer Direct
Group at Mortgage.com, a provider of online mortgage services, responsible for
developing products and business relationships. Mr. Taylor was the Vice
President--Electronic Commerce at Homeside Lending, a mortgage banker in
Jacksonville, Florida, from 1996 to 1998 and Vice President--Mortgage Services
Division at Alltel Corporation, a mortgage service company, from 1992 to 1996.
He has an M.S. in engineering from the University of Texas in Austin, Texas and
an M.B.A from Pepperdine University in Malibu, California.
Lawrence S. Jones. Mr. Jones has been our Vice President, Quality Control
and Compliance since January 1996. Before that, he was Assistant Vice President
of Roosevelt Savings Bank where he was responsible for the Residential Loan
Production Division, from 1986 to 1996. Mr. Jones holds a B.S. from Cortland
University in Cortland, New York.
Scott Lare. Mr. Lare has been our Chief Information Officer since 1997. He
is responsible for all of our computer hardware, software and systems design.
Mr. Lare was the Director of Information Systems for KBS, a circuit board
manufacturing company, from 1995 to 1997. He was Technology Manager for
Certified Vacations, Inc., a vacation package wholesaler, from 1993 to 1994.
Mr. Lare has a B.A. in computer science from the State University of New York
at Oswego, New York.
Andrew P. Valentine. Mr. Valentine joined us in November 1995 as Vice
President and Corporate Counsel. He was the managing attorney at the Law Firm
of Howard W. Newman from 1994 to 1995, where he directed real estate closings
and provided state and federal regulatory counseling to mortgage bankers and
brokers. From 1987 to 1994, he was the managing attorney at Keenan, Powers &
Andrews, P.C., a real estate firm. Mr. Valentine holds a J.D. from Brooklyn Law
School and a B.S. from the State University of New York at Brockport, New York.
Joseph P. Bryant. Mr. Bryant will join our board of directors upon
completion of this offering. Mr. Bryant has been the chairman and chief
executive officer of The Bison Financial Group, Inc., a company involved in
buying, selling and financing distressed commercial real estate, since June
1999. Prior to that, he was chief executive officer and president of Roslyn
National Mortgage Corp., a New York-based multi-state mortgage company, from
March 1998 to June 1999. From September 1997 to March 1998, he was senior vice
president of Home Federal Savings Bank, a bank based in Douglaston, New York,
and a subsidiary of New York Bank Corp., a bank that was acquired in March 1998
by Northfork Bank. From November 1993 to September 1997, Mr. Bryant served as
executive vice president and chief mortgage officer of Long Island Savings
Bank, a New York-based savings bank that was acquired by Astoria Federal
Savings and Loan Association, a subsidiary of Astoria Financial Corp., a Nasdaq
National Market listed bank.
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<PAGE>
C. Cathleen Raffaeli. Ms. Raffaeli will join our board of directors upon
completion of this offering. Since December 1998, Ms. Raffaeli has been the
president and chief operating officer of Consumer Financial Network (CFN), an
e-commerce company, majority owned by IXL Enterprises, a Nasdaq National
Market-listed Internet services company. Prior to joining CFN, Ms. Raffaeli was
the executive director of the commercial credit card division of Citicorp from
1994. From 1992 to 1994, Ms. Raffaeli served as senior vice president of
Chemical Bank where she was responsible for its New York retail mortgage and
national tele-marketing business.
Election of Directors and Executive Officers
Upon completion of this offering our board of directors will consist of 5
members and will be divided into 3 classes. The board will have 2 Class I
directors (Ms. Raffaeli and Mr. Burke), one Class II director (Mr. Schoen), and
2 Class III directors (Messrs. Strauss and Bryant). Each director will serve
for a staggered 3-year term. At each annual meeting of stockholders, a class of
directors will be elected for a 3-year term to succeed the directors of the
same class whose terms are then expiring. The terms of the Class I, Class II
and Class III directors will expire upon the election and qualification of
their successors at the annual meeting of stockholders to be held in 2000, 2001
and 2002, respectively.
We have granted Friedman, Billings, Ramsey & Co., Inc. the right, for a
period of at least two years from the date of this prospectus, to require us to
use our best efforts to elect a mutually acceptable designee to our board of
directors. At the time that Friedman, Billings, Ramsey & Co., Inc. designates a
director, we expect to increase our board of directors to 7 members and to
elect another non-employee director to fill the remaining position.
Each officer serves at the discretion of the board of directors. There are
no family relationships among any of our directors and executive officers.
Board Committees
Audit Committee. As soon as practicable after the closing of this offering,
our board of directors will establish an audit committee which, among other
things, will perform the following functions:
. make recommendations to our board of directors concerning the engagement
of independent public accountants;
. monitor and review the quality and activities of our internal audit
function and those of our independent auditors; and
. monitor the adequacy of our operating and internal controls as reported
by management and the independent or internal auditors.
The initial members of the audit committee will be Mr. Bryant and Ms.
Raffaeli.
Compensation Committee. As soon as practicable after the closing of this
offering, our board of directors will establish a compensation committee which,
among other things, will perform the following functions:
. review salaries, benefits and other compensation of our officers and
other employees;
. make recommendations to our board of directors regarding salaries,
benefits and other compensation; and
. administer our employee benefit plans.
The compensation committee will initially consist of the entire board of
directors.
Director Compensation
Before this offering, Mr. Strauss, our sole stockholder, received no
compensation for his service as our sole director. Upon completion of this
offering, directors who are neither our employees nor those of our subsidiary
will receive $3,000 per board meeting attended. Directors will be reimbursed
for out-of-pocket
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<PAGE>
expenses incurred in connection with their service as directors. In addition,
each non-employee director is eligible to receive non-qualified stock options
and restricted stock awards under our 1999 Omnibus Stock Incentive Plan.
Directors who serve either as our officers or employees or as officers or
employees of our subsidiary will not receive any additional compensation for
their services as directors. Please see the "--Stock Incentive Plan" section of
this prospectus.
Upon completion of this offering, Ms. Raffaeli and Mr. Bryant, our non-
employee director nominees, will each receive, subject to the terms and
conditions of our 1999 Omnibus Stock Incentive Plan, shares of restricted stock
having a value of $100,000. The number of shares of restricted stock to be
received by each of them will be calculated by reference to the initial public
offering price (16,667 shares for each of Ms. Raffaeli and Mr. Bryant, assuming
a $6.00 initial public offering price per share). The restriction period with
respect to the shares of restricted stock shall expire, and the shares may be
sold, transferred or otherwise disposed of, subject to applicable securities
law requirements, after the second anniversary of the completion of this
offering.
Compensation Committee Interlocks and Insider Participation
Before this offering, our board of directors did not have a compensation
committee and all compensation decisions were made by the full board of
directors. In the year ended December 31, 1998, the full board of directors,
which consisted solely of Mr. Strauss, determined the compensation of all
executive officers, including Mr. Strauss in his capacity as President and
Chief Executive Officer. Upon completion of this offering, the compensation
committee will make all compensation decisions. No interlocking relationship
exists between the board of directors or compensation committee and the board
of directors or compensation committee of any other company, nor has any such
interlocking relationship existed in the past.
Executive Compensation
Summary of Compensation. The following summary compensation table sets forth
information concerning compensation earned in the fiscal year ended December
31, 1998, by our Chief Executive Officer and our other 4 most highly
compensated executive officers (the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
------------------- All Other
Name And Principal Position Salary(/1/) ($) Compensation(/2/)($)
--------------------------------- ------------------- --------------------
<S> <C> <C>
Michael Strauss.................. 131,847 --
President and Chief Executive
Officer
Leonard Schoen, Jr. ............. 219,711 13,931
Senior Vice President,
Operations
Leslie E. Tao.................... 176,779 505
Senior Vice President,
Production and Sales
Mitchell Eininger................ 175,000 5,458
Senior Vice President, Business
Development
Robert E. Burke.................. 156,154 9,010
Senior Vice President, Treasurer
</TABLE>
--------
(/1/)Messrs. Schoen, Eininger and Burke, and Ms. Tao will receive base
salaries in 1999 of $260,000, $185,000, $180,000 and $182,500,
respectively. In 1999, Mr. Strauss will receive an annual base
salary of $129,358, pro rated for that portion of the year before
the closing of this offering, and an annual base salary of $350,000
pro rated for the balance of the year. Mr. Rizzetta, who was hired
as our Chief Financial Officer in 1999, will receive a base salary
in 1999 of $140,000 and a bonus of $150,000. Mr. Taylor, who became
our Vice President, Internet Operations, in January 1999, will
receive a base salary in 1999 of $180,000. Mr. Valentine, our Vice
President and Corporate Counsel, will receive a base salary in 1999
of $175,000.
(/2/)Represents commissions earned for loan applicants referred to us,
who subsequently closed a transaction.
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<PAGE>
Stock Incentive Plan
In August 1999, our board of directors adopted and our stockholder approved
the 1999 Omnibus Stock Incentive Plan. We have reserved an aggregate of 750,000
shares of common stock for issuance under this plan. The purpose of the Omnibus
Stock Plan is to promote our long-term growth and profitability by providing
individuals with incentives to improve stockholder value and contribute to our
growth and financial success, and by enabling us to attract, retain and reward
the best available persons for positions of substantial responsibility.
The Omnibus Stock Plan provides for the grant of non-qualified stock
options, incentive stock options within the meaning of Section 422 of the
Internal Revenue Code, stock appreciation rights and restricted and non-
restricted stock awards, each of which may be granted separately or in tandem
with other awards. Participation in the Omnibus Stock Plan is open to all of
our employees, officers and directors. However, only our employees or those of
our subsidiary may receive incentive stock option awards.
To date, no options or other grants have been granted under the Omnibus
Stock Plan. However, 33,334 shares of restricted stock (assuming an initial
public offering price of $6.00 per share) and options to acquire 650,000 shares
of common stock (assuming an initial public offering price of $6.00 per share)
will be granted upon consummation of this offering. The number of shares of
restricted stock will be determined by reference to, and the options will be
exercisable at, the initial public offering price.
The compensation committee of the board of directors will administer the
Omnibus Stock Plan. In doing so, the compensation committee has the authority
to:
. determine the eligible persons to whom, and the time or times at which,
awards shall be granted;
. determine the types of awards to be granted;
. determine the number of shares to be covered by or used for reference
purposes for each award;
. impose terms, limitations, restrictions and conditions on any award as
deemed appropriate;
. modify, amend, extend or renew outstanding awards, or accept the
surrender of outstanding awards and substitute new awards (provided,
however, that except in specified circumstances, any modification that
would materially adversely affect any outstanding award shall not be
made without the consent of the grantee);
. accelerate or otherwise change the time in which an award may be
exercised or becomes payable and to waive or accelerate the lapse, in
whole or in part, of any restriction or condition with respect to such
award, including, without limitation, any restriction or condition with
respect to the vesting or exercisability of an award following
termination of any grantee's employment; and
. establish objectives and conditions, if any, for earning awards and
determining whether awards will be paid after the end of a performance
period.
As the plan's administrator, the compensation committee also is authorized
to make adjustments in the terms and conditions of, and the criteria included
in, awards in recognition of unusual or nonrecurring events affecting us, or
our financial statements or those of our subsidiary, or of changes in
applicable laws, regulations or accounting principles, whenever the
administrator determines that such adjustments are appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Omnibus Stock Plan.
Options intended to qualify as incentive stock options under Section 422 of
the Internal Revenue Code must have an exercise price at least equal to fair
market value on the date of grant. Incentive stock options may not be
exercisable more than 10 years from the date the option is granted. If any of
our employees, or those of our subsidiary, owns or is deemed to own at the date
of grant shares of stock representing in excess of 10% of
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<PAGE>
the combined voting power of all classes of our stock, the exercise price for
the incentive stock options granted to that employee may not be less than 110%
of the fair market value of the underlying shares on that date and the option
may not be exercisable more than 5 years from the date the option is granted.
The option exercise price may be paid in cash, by tender of shares of common
stock, by a combination of cash and shares or by any other means the
administrator approves. Awards of stock appreciation rights, stock and phantom
stock awards and performance awards may be settled in cash, shares of common
stock or a combination of both, in the administrator's discretion.
Our board of directors may terminate, amend or modify the Omnibus Stock Plan
or any portion of it at any time, except that all awards made before the
termination of the plan will remain in effect until they have been satisfied or
terminated in accordance with the terms of the plan and those awards.
Employment Arrangements
We have entered into an employment agreement with Mr. Strauss, our President
and Chief Executive Officer. The employment agreement provides for an annual
base salary of $350,000 and a discretionary bonus. The employment agreement
will become effective upon completion of this offering. The agreement has an
initial term of 3 years and will automatically renew for additional one-year
terms, provided that either party may terminate the agreement upon 12-months
prior notice. The employment agreement contains covenants not to compete for a
period ending on the later of the first anniversary of the termination of Mr.
Strauss' employment and the third anniversary of the closing of this offering.
If (i) we terminate the agreement for any reason other than for cause (as
defined in the agreement) or upon Mr. Strauss' disability, (ii) Mr. Strauss
terminates his employment for good reason (as defined in the agreement), or
(iii) in connection with or following a change in control (as defined in the
agreement), his position is eliminated or Mr. Strauss no longer serves as our
chief executive officer with power, authority and responsibility attendant to
such office, then we must pay him a lump sum payment equal to 299% of his base
salary, plus the average of his annual incentive award over the preceding 5
years.
Our employment agreement with Mr. Rizzetta, our Chief Financial Officer,
provides for an annual base salary of $140,000. We have agreed to pay Mr.
Rizzetta an annual bonus of $150,000 in each of 1999 and 2000. If the annual
pretax income of American Home Mortgage is between 90% and 120% of our business
plan, Mr. Rizzetta is entitled to a corresponding bonus of up to $30,000. Mr.
Rizzetta also may receive an additional bonus of up to $30,000 at the
discretion of our President and Chief Executive Officer. Mr. Rizzetta's
employment agreement is terminable by either party on 3 weeks' written notice
to the other party.
Our employment agreement with Mr. Burke, our Senior Vice President,
Treasurer, provides for an annual base salary of $180,000, and is terminable by
either party on 2 weeks' written notice to the other party.
Our employment agreement with Mr. O'Reilly, our Senior Vice President,
Secondary Marketing, provides for an annual base salary of $135,000, and an
additional amount equal to 10% of the improvement in our margins due to his
utilizing best execution models and other tools that enable us to receive a
greater price for our loans, which additional amount shall not be less than
$15,000. In order to carry out his duties under this agreement, Mr. O'Reilly
uses software of his own design and ownership. We have a 20-year non-exclusive
licensing agreement to use this software. The employment agreement is
terminable by either party on 3 weeks' written notice to the other party.
Our employment agreement with Mr. Schoen, our Senior Vice President,
Operations, provides for an annual base salary of $260,000, and prohibits him
from disclosing certain confidential information regarding American Home
Mortgage during or after the term of his employment. The agreement also
restricts, for a period of one year after termination of employment, certain
employment with mortgage brokerage businesses. The employment agreement is
terminable by either party on 2 weeks' written notice to the other party.
Our employment agreement with Ms. Tao, our Senior Vice President, Production
and Sales, provides for an annual base salary of $182,500, and an annual
production override commission of 1/100 of 1% of the principal amount of all
loans closed. The agreement is terminable by either party on 2 weeks' written
notice to the other party.
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<PAGE>
Our employment agreement with Mr. Taylor, our Senior Vice President,
Electronic Commerce, has an initial term of 3 years and will automatically
renew for additional one-year terms, provided that either party may terminate
the agreement on 60-days notice prior to the end of the then current term. The
agreement provides for an annual base salary of $180,000, and an annual bonus
based on annual Internet loan originations and profitability. If the annual
Internet performance is between 90% and 120% of our business plan, Mr. Taylor
is entitled to a corresponding bonus of up to 25% of his base salary. Mr.
Taylor also is entitled to an additional bonus to be determined by our
President and Chief Executive Officer of at least 10% of Mr. Taylor's base
salary based on overall performance. The agreement also contains covenants not
to compete for a period of one year from the date of Mr. Taylor's termination
if we terminate him for cause (as defined in the agreement) or if he terminates
his employment without good reason (as defined in the agreement). We have also
agreed to pay certain relocation expenses incurred by Mr. Taylor and his
spouse, including a loan, at cost, of $300,000 or less to finance the purchase
of a home.
Upon completion of the offering, Messrs. Rizzetta, Burke, O'Reilly and
Taylor and Ms. Tao each will receive options to purchase 25,000 shares
(assuming an initial public offering of $6.00 per share), and Mr. Schoen will
receive options to purchase 33,334 shares (assuming an initial public offering
price of $6.00 per share). All options will be subject to our 1999 Omnibus
Stock Incentive Plan, will be exercisable at the initial public offering price,
and will vest on the second anniversary of the closing of the offering.
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<PAGE>
CERTAIN TRANSACTIONS
In connection with this offering, we issued the S corporation distribution
note in an amount of $7.8 million to Mr. Strauss, the founder of our
subsidiary, American Home Mortgage Corp. The S corporation distribution note
bears interest at the same rate of interest as our warehouse facility and will
be repaid out of the proceeds of this offering. For a more detailed description
of the S corporation distribution note, please see the "Transactions Related to
the Offering" section of this prospectus. In connection with the foregoing, we
have agreed to indemnify Michael Strauss, on an after-tax basis, from all
liability for our taxes and those of American Home Mortgage Corp. with respect
to the period following the completion of this offering.
In 1998, Mr. Strauss received distributions amounting to approximately $1.5
million from our subsidiary, American Home Mortgage Corp. These distributions
enabled Mr. Strauss to pay taxes on American Home Mortgage Corp.'s earnings
that were attributable to him based on his sole ownership of the S corporation.
Pursuant to a guaranty agreement dated December 8, 1998, Mr. Strauss has
personally guaranteed the performance of all our obligations, liabilities and
indebtedness under our warehouse facility with First Union. Mr. Strauss'
liability under this guaranty is absolute and unconditional.
In 1998, we made a $52,000 interest-free loan to Great Oak Title Agency,
Inc. in connection with its start up. In March 1999, Mr. Strauss repaid the
outstanding balance on this loan. Great Oak is a title agency, 90% owned by Mr.
Strauss, that provides services to our subsidiary's customers. We did not
advance any other funds or expenses to Great Oak in 1998. In addition, during
1998, we made aggregate payments of $503,829 to Automated Information Services,
Inc. in connection with credit reporting services in the normal course of
business. Mr. Strauss holds a 15% interest in Automated Information Services,
Inc., which is a credit agency providing credit history data on borrowers.
In consideration of his employment as Senior Vice President, Secondary
Marketing, and the payment of $100, Mr. O'Reilly has granted us a 20-year non-
exclusive license to use certain interest rate risk management software
developed by Mr. O'Reilly.
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to
beneficial ownership of our common stock as of the date of this prospectus.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Offering Owned After Offering
-----------------------------------------------------
Name of Beneficial Owner Number Percent Number Percent
- ------------------------ ------------- ----------------------- ----------
<S> <C> <C> <C> <C>
Michael Strauss......... 5,000,000 100.0 5,000,000(/1/) 66.7(/1/)
Leonard Schoen, Jr. .... -- -- -- --
Leslie E. Tao........... -- -- -- --
Mitchell Eininger....... -- -- -- --
Robert E. Burke......... -- -- -- --
Joseph P. Bryant........ -- -- 16,667(/2/) *
C. Cathleen Raffaeli.... -- -- 16,667(/2/) *
All directors and
executive
officers as a group (13
persons)............... 5,000,000 100.0 5,033,334(/1/) 67.1(/1/)
</TABLE>
- --------
*Represents less than 1%.
(1) Does not include any shares that Mr. Strauss may purchase in this offering.
If he purchases all of the 89,606 shares (assuming an initial public
offering price of $6.00 per share) offered to him in this offering, Mr.
Strauss would own 5,089,606 shares (67.9%) after the offering, and all
directors and executive officers as a group would own 5,122,940 shares
(68.3%) after the offering.
(2) Represents shares of restricted stock to be issued by reference to an
assumed initial public offering price of $6.00 per share.
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DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and selected provisions of
our Restated Certificate of Incorporation and Bylaws is a summary and is
qualified in its entirety by reference to our Restated Certificate of
Incorporation and Bylaws.
Common Stock
We are authorized to issue up to 19,000,000 shares of common stock, par
value $.01 per share, of which 7,500,000 shares (excluding 33,334 shares of
restricted stock (assuming an initial public offering price of $6.00 per share)
to be issued to our 2 non-employee directors) will be outstanding upon
completion of this offering. Each stockholder is entitled to one vote for each
share of common stock held on all matters submitted to a vote of stockholders.
There is no cumulative voting for election of directors. Accordingly, the
holders of a majority of the shares voted can elect all of the nominees for
director. Subject to the preferences of any series of preferred stock that may
at times be outstanding, if any, holders of outstanding shares of common stock
are entitled to receive dividends when, as, and if declared by our Board of
Directors out of funds legally available for dividends and, if we liquidate,
dissolve or wind up, are entitled to share ratably in all assets remaining
after payment of liabilities and payment of accrued dividends and liquidation
preferences on the preferred stock, if any. Holders of common stock have no
preemptive rights and have no rights to convert their common stock into any
other securities. All shares of common stock outstanding upon completion of
this offering are validly authorized and issued, fully paid and nonassessable.
Preferred Stock
We are authorized to issue up to 1,000,000 shares of preferred stock, par
value $1.00 per share, none of which will be outstanding upon completion of
this offering. The preferred stock may be issued in one or more series, the
terms of which may be determined at the time of issuance by our board of
directors, without further action by our stockholders, and may include voting
rights, including the right to vote as a series on particular matters,
preferences as to dividends and liquidation, conversion rights, redemption
rights and sinking fund provisions. The issuance of any preferred stock could
adversely affect the rights of the holders of common stock and, therefore,
reduce the value of the common stock. The ability of our board of directors to
issue preferred stock could discourage, delay or prevent a takeover.
Indemnification of Directors and Executive Officers and Limitation on Liability
Our Restated Certificate of Incorporation includes provisions that eliminate
the personal liability of our directors and officers for monetary damages
resulting from breaches of their fiduciary duty (except for liability for
breaches of the duty of loyalty, acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, violations under
Section 174 of the DGCL or for any transaction from which the director derived
an improper personal benefit). We believe that these provisions are necessary
to attract and retain qualified persons as directors and officers.
Section 145 of the DGCL permits a corporation to indemnify certain of its
officers, directors, employees and agents. Our Restated Certificate of
Incorporation provides that we will indemnify, to the fullest extent permitted
under law, each of our directors and officers with respect to all liability and
loss suffered and expenses incurred by such person in any action, suit or
proceeding in which such person was or is made or threatened to be made a party
or is otherwise involved by reason of the fact that such person is or was one
of our directors or officers. We are also obligated to pay the expenses of the
directors and officers incurred in defending such proceedings, subject to
reimbursement if it is subsequently determined that such person is not entitled
to indemnification.
We intend to obtain a policy of insurance under which our directors and
officers will be insured, subject to the limits of the policy, against certain
losses arising from claims made against such directors and officers by reason
of any acts or omissions covered under such policy in their respective
capacities as directors or officers,
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including liabilities under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to our directors,
officers and controlling persons pursuant to the foregoing provisions, or
otherwise, we have been advised that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
Delaware Anti-Takeover Law
We are subject to Section 203 of the DGCL ("Section 203"), which, subject to
certain exceptions and limitations, prohibits a Delaware corporation from
engaging in any "business combination" with any "interested stockholder" for a
period of three years following the date that such stockholder became an
interested stockholder, unless:
(i) prior to such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (for the purposes of determining the
number of shares outstanding under the DGCL, those shares owned (x) by
persons who are directors and also officers and (y) by employee stock
plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer are excluded from the
calculation); or
(iii) on or subsequent to such date, the business combination is approved
by the board of directors and authorized at an annual or special meeting
of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder.
For purposes of Section 203, a "business combination" includes:
(i) any merger or consolidation involving the corporation and the
interested stockholder;
(ii) any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
(iii) subject to certain exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
(iv) any transaction involving the corporation which has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder;
or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by
or through the corporation.
For purposes of Section 203, an interested stockholder is defined as any entity
or person beneficially owning 15% or more of the outstanding voting stock of
the corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Selected Certificate and Bylaw Provisions
Our Restated Certificate of Incorporation provides that our board of
directors will be divided into 3 classes, with staggered 3-year terms. As a
result, only one class of directors will be elected at each annual meeting of
stockholders, with the other classes continuing for the remainder of their
respective terms.
Our Restated Certificate of Incorporation also provides that directors may
be removed from office only for cause and only by the affirmative vote of the
holders of at least a majority of our total outstanding voting stock. Vacancies
on our board of directors, including those resulting from an increase in the
number of directors, may be filled only by the remaining directors, not by
stockholders.
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Any action required or permitted to be taken by our stockholders may be
effected only at an annual or special meeting of stockholders and will not be
permitted to be taken by written consent in lieu of a meeting. Our Restated
Certificate of Incorporation and Bylaws also provide that special meetings of
stockholders may be called by the chairman of the board or the president and
shall be called by any such officer at the written request of a majority of our
board of directors. Stockholders will not be permitted to call a special
meeting or to require that the board of directors call a special meeting of
stockholders. Our Restated Certificate of Incorporation provides that our
Bylaws may only be amended by the affirmative vote of the holders of at least a
majority of our outstanding voting stock or by a vote of a majority of the
members of the board of directors in office.
Our Bylaws contain an advance notice procedure for nominations, other than
by or at the direction of the board of directors, of candidates for election as
directors, as well as for other stockholder proposals to be considered at
annual meetings of stockholders. In general, notice of intent to nominate a
director or raise business at such meeting must be received by us not less than
60 nor more than 90 days prior to the scheduled annual meeting and must contain
certain specified information concerning the person to be nominated or the
matter to be brought before the meeting.
The preceding provisions could have the effect of discouraging, delaying or
making more difficult certain attempts to acquire us or to remove incumbent
directors even if a majority of our stockholders believe the attempt to be in
their or our best interests.
Options and Other Awards
No options are currently outstanding. Effective upon the closing of this
offering, 33,334 shares of restricted stock (assuming an initial public
offering price of $6.00 per share) and options to purchase a total of 650,000
shares of common stock (assuming an initial public offering price of $6.00 per
share) will be granted or issued under the 1999 Omnibus Stock Incentive Plan.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Once this offering is complete, we will have a total of 7,500,000 shares of
common stock outstanding, assuming no exercise of the underwriters'
overallotment option and no exercise of the outstanding options or warrants to
purchase shares of common stock, and excluding the 33,334 shares (assuming an
initial public offering price of $6.00 per share) of restricted stock to be
issued to our 2 non-employee directors upon completion of this offering. Of
these shares of common stock, the 2,500,000 shares from the offering will be
freely tradable without restriction or further registration under the
Securities Act, except that any shares held by an "affiliate," as that term is
defined in Rule 144 of the Act, may generally be sold only in compliance with
the limitations of Rule 144 described below.
The 5,000,000 shares of common stock held by Mr. Strauss, our President and
Chief Executive Officer, and any shares that he may purchase in this offering
are "restricted securities" as defined in Rule 144 of the Securities Act.
Restricted securities may be sold in the public market only if they are
registered or if they qualify for an exemption from registration under the
Securities Act. Subject to the lockup agreement described below, all shares of
common stock held by Mr. Strauss will be available for sale in the public
market 90 days after the date of this prospectus. Under Rule 144, in any 3-
month period beginning 90 days after the date of this prospectus, Mr. Strauss
may sell a number of shares of common stock not to exceed the greater of:
. 1% of the then outstanding shares of common stock (75,000 shares
immediately after the offering); or
. the average weekly trading volume in the common stock during the 4
calendar weeks before the person files notice of the Rule 144 sale,
subject to various restrictions.
Lock-Up Agreements
We and Mr. Strauss, our President, Chief Executive Officer and sole existing
stockholder, have agreed not to offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of
directly or indirectly, any shares of our common stock, or any securities
convertible into or exercisable or exchangeable for any of our common stock or
any right to acquire our common stock, for a period of 180 days from the
effective date of this prospectus in our case, and for a period of 540 days
from the effective date in Mr. Strauss' case. Our employees, officers and
directors who will receive shares of our common stock or options to purchase
shares of our common stock have agreed to similar lock-up provisions for a
period of 180 days from the effective date of this prospectus. Friedman,
Billings, Ramsey & Co., Inc. at any time and without notice, may release all or
any portion of common stock subject to the foregoing lock-up agreements.
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UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
between us and Friedman, Billings, Ramsey & Co., Inc. and Advest, Inc. as
representatives of the several underwriters, we have agreed to sell to each of
the underwriters named below, and each of the underwriters has severally agreed
to purchase, the number of shares of common stock set forth opposite their
names below.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc............................
Advest, Inc......................................................
---------
Total.......................................................... 2,500,000
=========
</TABLE>
Under the terms and conditions of the underwriting agreement, the
underwriters are committed to purchase all the common stock offered by this
prospectus if any is purchased. We have agreed to indemnify the underwriters
against certain civil liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of such
liabilities.
The underwriters initially propose to offer the common stock directly to the
public at the public offering price set forth on the cover page of this
prospectus, and to certain dealers at such offering price less a concession not
to exceed $ per share. The underwriters may allow, and such dealers may
reallow, a concession not to exceed $ per share to certain other dealers.
After the common stock is released for sale to the public, the underwriters may
change the offering price and other selling terms.
At our request, the underwriters have reserved (i) up to 89,606 shares of
common stock (assuming an initial public offering price of $6.00 per share) for
sale to Michael Strauss, our President and Chief Executive Officer, at the
public offering price, net of any underwriting discounts or commissions and
(ii) up to 75,000 shares of common stock for sale to our directors, officers,
employees and associates and their friends and family members at the public
offering price. The number of shares available for sale to the general public
will be reduced to the extent such persons purchase such reserved shares. Any
reserved shares not so purchased will be offered by the underwriters to the
general public at the public offering price on the same basis as the other
shares offered hereby.
We have granted the underwriters an option exercisable during the 30-day
period after the date of this prospectus to purchase, at the initial offering
price less underwriting discounts and commissions, up to an additional 375,000
shares of common stock for the sole purpose of covering over-allotments, if
any. To the extent that the underwriters exercise the option, each underwriter
will be committed, subject to certain conditions, to purchase that number of
additional shares of common stock that is proportionate to such underwriter's
initial commitment.
As described in the underwriting agreement, we have agreed to reimburse the
underwriters for certain accountable out-of-pocket expenses up to $425,000. The
following table summarizes the compensation and estimated expenses we will pay:
<TABLE>
<CAPTION>
Total
------------------------
Without Over- With Over-
Per Share Allotment Allotment
--------- ------------- ----------
<S> <C> <C> <C>
Underwriting discounts and
commissions.........................
Expenses.............................
</TABLE>
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may over-allot this offering
creating a syndicate short position. In addition, the underwriters may bid for
and purchase common stock in the
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open market to cover syndicate short positions or to stabilize the price of the
common stock. Finally, the underwriting syndicate may reclaim selling
concessions from syndicate members if the syndicate repurchases previously
distributed common stock in syndicate covering transactions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain
the market price of the common stock above independent market levels. The
underwriters are not required to engage in these activities and may end any of
these activities at any time.
The underwriters have informed us that they do not intend to confirm sales
of the common stock offered by this prospectus to any accounts over which they
exercise discretionary authority.
We, our employees, officers and directors who will receive shares of our
common stock or options to purchase shares of our common stock and Mr. Strauss,
our President, Chief Executive Officer and sole existing stockholder, have
agreed not to offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, or otherwise transfer or dispose of
directly or indirectly, any shares of our common stock, or any securities
convertible into or exercisable or exchangeable for any of our common stock or
any right to acquire our common stock, for a period of 180 days from the
effective date of this prospectus in our case and in the case of our employees,
officers and directors, and for a period of 540 days from the effective date in
Mr. Strauss' case. Friedman, Billings, Ramsey & Co., Inc. at any time and
without notice, may release all or any portion of common stock subject to the
foregoing lock-up agreements.
We have agreed to sell to Friedman, Billings, Ramsey & Co., Inc. or its
designees, for nominal consideration, warrants to purchase an aggregate of
250,000 shares of our common stock (the FBR Warrants). The shares of common
stock subject to the FBR Warrants will be in all respects identical to the
shares of common stock offered to the public by this prospectus. The FBR
Warrants will be exercisable for a period of 4 years, which period commences
one year after the closing date of this offering, at a per share exercise price
equal to 130% of the initial public offering price. Neither the FBR Warrants
nor the underlying shares of common stock may be transferred, sold, assigned or
hypothecated for a period of one year from the closing of the offering, except
to officers or partners of Friedman, Billings, Ramsey & Co., Inc. and members
of the selling group and/or their officers or partners. We are also registering
in this offering the shares of common stock issuable upon exercise of the FBR
Warrants. We have granted the holders of the FBR Warrants (or the underlying
shares of common stock) one demand registration right that may be exercised no
later than 5 years from the effective date of the offering and piggyback
registration rights that may be exercised no later than 7 years from the
effective date of the offering. The FBR Warrants will contain anti-dilution
provisions providing for appropriate adjustment of the exercise price and
number of shares of common stock that may be purchased upon the occurrence of
certain events. The FBR Warrants may be exercised by paying the exercise price
in cash, through the surrender of shares of common stock, through a reduction
in the number of shares covered by such Warrants, or by using a combination of
these methods. The holders of the FBR Warrants will have no voting, dividend or
other rights as stockholders with respect to shares of common stock underlying
the FBR Warrants until the FBR Warrants have been exercised.
We have agreed that, for a period of at least two years from the date of
this prospectus, Friedman, Billings, Ramsey & Co., Inc. will have the right to
require us to use our best efforts to elect a mutually acceptable designee to
our board of directors for at least such 2-year period.
There is no established trading market for the shares. The offering price
for the shares will be determined by negotiation between us and the
representatives. The principal factors we will consider in determining the
public offering price include:
. prevailing market and general economic conditions;
. the market capitalizations, trading histories and stages of development
of other traded companies that we and the representatives believe to be
comparable to us;
. our results of operations in recent periods;
66
<PAGE>
. our current financial position;
. estimates of our business potential;
. an assessment of our management;
. the present state of our development; and
. the availability for sale in the market of a significant number of
shares of common stock.
We cannot assure you that an active trading market will develop for the
common stock or that the common stock will trade in the market subsequent to
the offering at or above the initial public offering price.
We have applied to list the shares of common stock on The Nasdaq National
Market under the symbol "AHMH".
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered hereby
will be passed on for us by Cadwalader, Wickersham & Taft. Certain legal
matters will be passed on for the underwriters by Gibson, Dunn & Crutcher LLP.
EXPERTS
The consolidated financial statements as of December 31, 1997 and 1998 and
June 30, 1999 and for each of the 3 years in the period ended December 31, 1998
and for the six months ended June 30, 1999 included in this prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and have been so included in reliance on the report of
such firm given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act relating to the shares of our
common stock being offered by this prospectus. This prospectus does not contain
all of the information set forth in the registration statement and the
exhibits. For further information about us and the common stock offered, see
the registration statement and the exhibits thereto. Statements contained in
this prospectus regarding the contents of any contract or any other document to
which reference is made are not necessarily complete, and, in each instance
where a copy of a contract or other document has been filed as an exhibit to
the registration statement, reference is made to the copy so filed, each of
those statements being qualified in all respects by that reference.
A copy of the registration statement and the exhibits may be inspected
without charge at the Commission's offices at Judiciary Plaza, 450 Fifth
Street, Washington, D.C. 20549, and copies of all or any part of the
registration statement may be obtained from the Public Reference Room of the
Commission, Washington, D.C. 20549 upon the payment of the fees prescribed by
the Commission. The public may obtain information on the operation of the
Public Reference Room by calling the Commission at 1-800-SEC-0330. The
Commission maintains a Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934, as amended, and
we will file periodic reports, proxy statements and other information with the
Commission. We intend to furnish our stockholders with annual reports
containing audited financial statements and with quarterly reports for the
first three quarters of each year containing unaudited interim financial
information.
67
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and June
30, 1999............................................................... F-3
Consolidated Statements of Income for the years ended December 31, 1996,
1997 and 1998 and the six months ended June 30, 1998 (unaudited) and
1999................................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1997 and 1998 and the six months ended June 30,
1999................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998 and the six months ended June 30, 1998 (unaudited)
and 1999............................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
American Home Mortgage Holdings, Inc.
We have audited the accompanying consolidated balance sheets of American
Home Mortgage Holdings, Inc. and its subsidiary (the "Company") as of December
31, 1997 and 1998 and June 30, 1999 and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998 and the six months ended June 30,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of American Home Mortgage
Holdings, Inc. and its subsidiary at December 31, 1997 and 1998 and June 30,
1999 and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 and the six months ended June
30, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
August 18, 1999
(September 29, 1999 as to Notes 1, 8 and 16)
F-2
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
June 30,
June 30, 1999
1997 1998 1999 Proforma
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents...... $ 2,057,619 $ 2,891,513 $ 2,093,431 $ 7,570,159
Mortgage loans held for sale,
net........................... 24,675,753 34,666,863 42,056,131 42,056,131
Mortgage loans held for
investment, net............... 78,817 88,900 169,348 169,348
Accounts receivable............ 982,863 2,892,807 4,145,672 4,145,672
Mortgage servicing rights,
net........................... 26,306 39,887 37,887 37,887
Real estate owned.............. 186,000 -- -- --
Premises and equipment, net.... 690,236 1,575,154 2,099,249 2,099,249
Prepaid expenses and security
deposits...................... 216,424 236,810 318,332 318,332
----------- ----------- ----------- -----------
Total assets............... $28,914,018 $42,391,934 $50,920,050 $56,396,778
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
LIABILITIES:
Warehouse lines of credit.... $24,453,671 $34,069,526 $25,312,700 $25,312,700
Drafts payable............... -- -- 15,502,122 15,502,122
Accrued expenses and other... 1,886,801 2,297,542 2,463,105 2,463,105
Deferred income tax
liability................... -- -- -- 375,000
----------- ----------- ----------- -----------
Total liabilities.......... 26,340,472 36,367,068 43,277,927 43,652,927
----------- ----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
(Note 7)
MINORITY INTEREST.............. -- 100,760 70,251 70,251
STOCKHOLDERS' EQUITY:
Preferred Stock $1.00 per
share, 1,000,000 shares
authorized, none issued and
outstanding................. -- -- -- --
Common stock, $.01 per share
par value, 19,000,000 shares
authorized, 5,000,000 issued
and outstanding, 7,500,000
issued and outstanding
proforma.................... 50,000 50,000 50,000 75,000
Additional paid-in capital... 267,600 267,600 268,600 12,598,600
Retained earnings............ 2,255,946 5,606,506 7,253,272 --
----------- ----------- ----------- -----------
Total stockholders'
equity.................... 2,573,546 5,924,106 7,571,872 12,673,600
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY.......... $28,914,018 $42,391,934 $50,920,050 $56,396,778
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended June
Year Ended December 31, 30,
---------------------------------- ------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(unaudited)
REVENUES:
<CAPTION>
Gain on sale of mortgage
loans.................... $6,360,692 $10,596,604 $18,980,534 $ 7,689,722 $10,822,214
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income, net...... 203,736 368,808 734,179 448,282 708,368
Other..................... 21,053 356,018 502,223 269,302 636,715
---------- ----------- ----------- ----------- -----------
Total revenues.......... 6,585,481 11,321,430 20,216,936 8,407,306 12,167,297
---------- ----------- ----------- ----------- -----------
EXPENSES:
Salaries, commissions and
benefits, net............ 2,700,541 5,186,373 9,301,023 3,571,108 5,758,515
Officer's salary.......... 757,925 129,359 129,359 65,000 65,000
Marketing and promotion... 814,180 962,475 1,236,461 598,127 868,948
Occupancy and equipment... 501,168 909,216 1,653,709 648,196 1,023,058
Data processing and
communications........... 336,813 611,699 951,508 423,478 616,662
Provision for loss........ -- 116,837 152,955 33,422 27,967
Other..................... 830,484 946,270 1,542,997 714,419 1,102,801
---------- ----------- ----------- ----------- -----------
Total expenses.......... 5,941,111 8,862,229 14,968,012 6,053,750 9,462,951
---------- ----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST...... 644,370 2,459,201 5,248,924 2,353,556 2,704,346
STATE INCOME TAXES.......... 38,334 139,887 328,209 118,242 131,266
---------- ----------- ----------- ----------- -----------
INCOME BEFORE MINORITY
INTEREST................... 606,036 2,319,314 4,920,715 2,235,314 2,573,080
MINORITY INTEREST IN INCOME
(LOSS) OF CONSOLIDATED
JOINT VENTURE.............. -- -- 50,760 (5,645) 44,491
---------- ----------- ----------- ----------- -----------
NET INCOME.................. $ 606,036 $ 2,319,314 $ 4,869,955 $ 2,240,959 $ 2,528,589
========== =========== =========== =========== ===========
Unaudited pro forma
information:
Provision for pro forma
income taxes............. 245,000 942,000 1,982,000 917,000 1,058,000
---------- ----------- ----------- ----------- -----------
Pro forma earnings........ $ 361,036 $ 1,377,314 $ 2,887,955 $ 1,323,959 $ 1,470,589
========== =========== =========== =========== ===========
Pro forma earnings per
share of common stock.... $ 0.39 $ 0.20
=========== ===========
Pro forma weighted average
number of shares
outstanding.............. 7,500,000 7,500,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained Total
Stock Capital Earnings Equity
------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996............. $50,000 $267,600 $ 402,814 $ 720,414
Net income......................... -- -- 606,036 606,036
------- -------- ---------- ----------
BALANCE, DECEMBER 31, 1996........... 50,000 267,600 1,008,850 1,326,450
Net income......................... -- -- 2,319,314 2,319,314
Distributions...................... -- -- (1,072,218) (1,072,218)
------- -------- ---------- ----------
BALANCE, DECEMBER 31, 1997........... 50,000 267,600 2,255,946 2,573,546
Net income......................... -- -- 4,869,955 4,869,955
Distributions...................... -- -- (1,519,395) (1,519,395)
------- -------- ---------- ----------
BALANCE, DECEMBER 31, 1998........... 50,000 267,600 5,606,506 5,924,106
Net income......................... -- -- 2,528,589 2,528,589
Distributions...................... -- -- (881,823) (881,823)
------- -------- ---------- ----------
BALANCE, JUNE 30, 1999............... $50,000 $267,600 $7,253,272 $7,570,872
======= ======== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
--------------------------------------------- -------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............ $ 606,036 $ 2,319,314 $ 4,869,955 $ 2,240,959 $ 2,528,589
Adjustments to
reconcile net income
to net cash (used in)
provided by operating
activities:
Gain on equity
securities......... -- -- (76,088) (76,088) --
Depreciation and
amortization....... 61,732 126,965 284,304 118,947 170,185
Provision for loss.. -- 116,837 152,955 33,422 27,967
Origination of
mortgage loans..... (490,822,316) (714,612,136) (1,141,240,923) (511,572,907) (600,376,762)
Proceeds on sale of
mortgage loans..... 490,713,588 698,872,291 1,131,144,305 496,825,681 592,959,527
Proceeds on sale of
equity securities,
trading............ -- -- 176,088 176,088 --
Purchases of equity
securities,
trading............ -- -- (100,000) (100,000) --
(Increase) decrease
in:
Accounts
receivable........ (424,226) (393,329) (1,909,944) (871,295) (1,252,865)
Mortgage servicing
rights............ 23,119 (16,970) (13,581) (12,332) (1,000)
Prepaid expenses
and security
deposits.......... (41,484) (117,451) (20,385) (33,930) (81,522)
Increase in accrued
expenses and other
liabilities........ 361,928 1,016,562 413,293 651,332 165,563
------------- ------------- --------------- -------------- -------------
Net cash provided
by (used in)
operating
activities....... 478,377 (12,687,917) (6,320,021) (12,620,123) (5,860,318)
------------- ------------- --------------- -------------- -------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Sale/(purchase) of
real estate owned,
net................. -- (186,000) 186,000 186,000 --
Net sale/(purchases)
of loans held for
investment.......... -- (78,817) (10,083) 16,041 (80,448)
Investment in joint
venture............. -- -- (50,000) -- --
Net purchases of
premises and
equipment........... (285,200) (520,829) (1,169,222) (812,896) (691,280)
Increase/(decrease)
in minority
interest............ -- -- 100,760 44,355 (30,509)
------------- ------------- --------------- -------------- -------------
Net cash provided
by (used in)
investing
activities....... (285,200) (785,646) (942,545) 566,500 (802,237)
------------- ------------- --------------- -------------- -------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Increase/(decrease)
in warehouse lines
of credit........... 49,537 15,377,843 9,615,855 14,163,818 (8,756,826)
Increase in drafts
payable............. -- -- -- -- 15,502,122
Capital
distribution........ -- (1,072,218) (1,519,395) (1,286,073) (881,823)
Proceeds from
issuance of capital
stock............... -- -- -- -- 1,000
------------- ------------- --------------- -------------- -------------
Net cash provided
by financing
activities....... 49,537 14,305,625 8,096,460 12,877,745 5,864,473
------------- ------------- --------------- -------------- -------------
NET INCREASE/(DECREASE)
IN CASH............... 242,714 832,062 833,894 (308,878) (798,082)
------------- ------------- --------------- -------------- -------------
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. 982,843 1,225,557 2,057,619 2,057,619 2,891,513
------------- ------------- --------------- -------------- -------------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 1,225,557 $ 2,057,619 $ 2,891,513 $ 1,748,741 $ 2,093,431
============= ============= =============== ============== =============
SUPPLEMENTAL
DISCLOSURE--CASH PAID
FOR:
Interest............. $ 422,732 $ 905,333 $ 1,674,266 $ 614,177 $ 1,065,132
Taxes................ 10,504 66,556 180,299 127,822 374,933
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ownership
American Home Mortgage Holdings, Inc. is a holding company whose principal
asset is its investment in its wholly-owned subsidiary, American Home Mortgage
Corp. (American Home Mortgage) (collectively referred to herein as the
Company). On June 15, 1999, American Home Mortgage Holdings, Inc. was formed.
On September 29, 1999, Michael Strauss exchanged his shares of American Home
Mortgage Corp. for 4,999,900 shares of American Home Mortgage Holdings, Inc.
common stock. American Home Mortgage is a residential mortgage lender
headquartered in New York City with offices in New York, Connecticut, New
Jersey, Florida, Pennsylvania and Maryland. The Company is 100% owned by its
President, Michael Strauss. On April 23, 1998, the Company entered into a joint
venture with a realtor in which the Company and the realtor each own a 50%
interest. The Company entered into a second joint venture on March 31, 1999
with a realtor in which the Company and the realtor each own a 50% interest.
The Company entered into a third joint venture on May 14, 1999 with a home
builder/developer in which the Company and home builder/developer each own a
50% interest. The latest joint venture had no activity as of the period ended
June 30, 1999. The Company purchases many of the loans originated by the joint
ventures.
Consolidation
Because the Company exercises significant influence on the operations of the
joint ventures, their balances and operations have been fully consolidated in
the accompanying consolidated financial statements and all material
intercompany accounts and transactions have been eliminated.
Basis of Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
The Company's estimates and assumptions primarily arise from risks and
uncertainties associated with interest rate volatility, credit exposure and
regulatory changes. Although management is not currently aware of any factors
that would significantly change its estimates and assumptions in the near term,
future changes in market trends and conditions may occur which could cause
actual results to differ materially.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, restricted cash, amounts due
from banks, and overnight deposits.
Mortgage Loans Held for Sale
Mortgage loans held for sale represent mortgage loans originated and held
pending sale to interim and permanent investors. The mortgages are carried at
the lower of cost or market as determined by outstanding commitments from
investors or current investor yield requirements calculated on the aggregate
loan basis. The Company separately evaluates for impairment the estimated fair
value of its commitments to lend. If impairment exists, the Company records a
charge to earnings in the current period. The Company generally sells whole
loans without servicing retained. Gains or losses on such sales are generally
recognized at the time
F-7
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
the title transfers to the investor based upon the difference between the sales
proceeds from the final investor and the basis of the loan sold, adjusted for
net deferred loan fees and certain direct costs, selling costs and any other
adjustments. The Company defers net loan origination costs as a component of
the loan balance on the balance sheet. Such costs are not amortized and are
recognized into income as a component of the gain or loss upon sale.
Mortgage Loans Held for Investment
Periodically, the Company originates or repurchases loans which are unable
to be sold through normal investor channels. These loans are classified as held
for investment and carried at amortized cost, which represents the lower of
cost or market value at the time the loans are transferred or repurchased. The
Company has the intent and ability to hold these loans for the foreseeable
future. The Company defers net loan origination costs as a component of the
loan balance and amortizes the deferred costs into interest income over the
life of the loan using the effective interest method.
Provision for Foreclosure and Loan Losses
A provision for loss is provided based on management's periodic evaluation
of its loss exposures for loans held for sale and the applicable loan sale
agreements. The provision for loans held for sale is based on certain default
and foreclosure provisions in the applicable loan sale agreements. Management
reviews such loan sale agreement exposure on an aggregate basis to evaluate the
adequacy of the related allowance for loss. Due to the relatively small number
of loans held for investment, analysis is performed on a specific loan basis.
The pertinent factors in determining the exposures include the underlying
quality of the loans, actual loss experience, current economic conditions,
detailed analysis of individual loans for which full collectibility may not be
assured, and determination of the existence and realizable value of the
collateral and any guarantees securing such loans.
Mortgage Servicing Rights
The Company generally sells whole loans without servicing retained. Mortgage
servicing rights represent servicing retained on loans sold to one of the
Company's permanent investors who requires the Company to continue to service
the loans as a condition of sale. The Company does not have in-house servicing
capability and has a sub-servicing contract with a third party. The Company
capitalizes the cost of these mortgage servicing rights by allocating the
original cost basis in the loans based upon the relative fair value of the
underlying mortgage loans and mortgage servicing rights at the time the
servicing rights are contractually separated from the underlying loans. The
Company records amortization expense over the period of the projected net
servicing income. Impairment is recorded as a direct reduction of the asset
balance and a charge to amortization expense in the period it is determined.
Derivative Financial Instruments
The Company obtains and holds derivative financial instruments to manage
price and interest rate risk related to its mortgage loans held for sale and
commitments to fund mortgages. No derivatives are held for trading purposes.
Fair value amounts were determined based upon available market information.
Realized and unrealized gains and losses associated with these instruments are
included in the Company's lower of cost or market evaluation and the
determination of gain or loss on sale of mortgage loans. The Company is not
required to satisfy margin or collateral requirements for any of these
financial instruments.
F-8
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation is provided in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives using the straight-line method. Leasehold improvements
are amortized over the lesser of the life of the lease or service lives of the
improvements using the straight-line method. Depreciation and amortization are
recorded within occupancy and equipment expense within the financial
statements.
Drafts Payable
Beginning in June 1999, the Company implemented a new cash management system
enabling it to draw funds against its warehouse facility upon the presentment
of borrowers' loan disbursement checks to the Company's warehouse lender. This
system enables the Company to minimize its interest expense by not having to
increase the outstanding warehouse balance until the loan funding check is
presented to the Company's warehouse lender.
Income Taxes
Through September 28, 1999, American Home Mortgage elected for both federal
and state income tax purposes to be treated as an S corporation (effective
April 1, 1988). As an S corporation, the net
earnings of American Home Mortgage were generally taxed directly to the
stockholder rather than American Home Mortgage.
On September 29, 1999, the Company became a C corporation. All income earned
from that date is subject to corporate tax at statutory rates for both federal
and state income tax purposes. The Company accounts for income taxes from that
date in conformity with SFAS No. 109, "Accounting for Income Taxes', which
requires an asset and liability approach for accounting and reporting of income
taxes.
Loan Origination Fees
Loan fees, discount points and certain direct origination costs are recorded
as an adjustment of the cost of the loan and are included in gain on sales of
loans when the loan is sold. Accordingly, salaries, compensation
and benefits have been reduced by approximately $2,636,000, $4,242,000 and
$6,788,000 in direct loan origination costs including commission costs incurred
for the years ended December 31, 1996, 1997 and 1998, respectively. Salaries,
compensation and benefits have been reduced by approximately $3,306,000 and
$4,261,000 for the six month periods ended June 30, 1998 and 1999.
Interest Recognition
Interest income is accrued as earned. Loans are placed on a non-accrual
status when any portion of the principal or interest is ninety days past due or
earlier when concern exists as to the ultimate collectibility of principal or
interest. Loans return to accrual status when principal and interest become
current and are anticipated to be fully collectible. Interest expense is
recorded on outstanding lines of credit at a rate based on a spread to the Fed
Funds rate. Interest expense has been netted with interest income within the
consolidated statements of income in the amounts of $430,966, $905,333,
$1,910,289, $980,615 and $962,254 for the years ended December 31, 1996, 1997
and 1998, and for the six month periods ended June 30, 1998 and 1999,
respectively.
F-9
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Marketing and Promotion
The Company charges the costs of marketing and promotion to expense in the
period incurred.
Net Worth Requirements
American Home Mortgage is required to maintain certain specified levels of
minimum net worth in order to maintain its approved seller/servicer status for
Fannie Mae and HUD. At December 31, 1997 and 1998 and June 30, 1999 American
Home Mortgage was in compliance with its minimum net worth requirements.
At December 31, 1998 and June 30, 1999, the highest minimum net worth
requirement applicable to the Company was $1,000,000 and the Company's net
worth was $5,924,106 and $7,570,872, respectively. The minimum net worth
requirement is based on a percentage of originated loans with a minimum and
maximum requirement of $250,000 and $1,000,000, respectively.
2. MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------ June 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Mortgage loans held for sale....... $24,684,913 $34,307,323 $41,280,445
Deferred origination costs (fees),
net............................... (9,160) 359,540 775,686
----------- ----------- -----------
Mortgage loans held for sale, net.. $24,675,753 $34,666,863 $42,056,131
=========== =========== ===========
</TABLE>
3. MORTGAGE LOANS HELD FOR INVESTMENT, net
Mortgage loans held for investment consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------- June 30,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Mortgage loans held for investment............ $117,884 $210,811 $291,259
Less: Allowance for loss...................... 39,067 121,911 121,911
-------- -------- --------
Mortgage loans held for investment, net....... $ 78,817 $ 88,900 $169,348
======== ======== ========
</TABLE>
The activity in the allowance for loss was as follows:
<TABLE>
<S> <C>
Balance at January 1, 1997...................................... $ --
Provision..................................................... 116,837
Chargeoffs.................................................... (77,770)
--------
Balance at December 31, 1997.................................... 39,067
Provision..................................................... 152,955
Chargeoffs.................................................... (70,111)
--------
Balance at December 31, 1998.................................... 121,911
Provision..................................................... 27,967
Chargeoffs.................................................... (27,967)
--------
Balance at June 30, 1999........................................ $121,911
========
</TABLE>
F-10
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------- June 30,
1997 1998 1999
-------- ---------- ----------
<S> <C> <C> <C>
Investor receivables...................... $821,514 $1,977,950 $3,068,892
Due from settlement agent................. -- 750,000 516,177
Mortgage payments receivable.............. 150,291 83,338 127,329
Due from related party.................... -- 52,429 75,090
Accrued interest receivable............... -- 26,588 26,147
Other..................................... 11,058 2,502 332,037
-------- ---------- ----------
Accounts receivable....................... $982,863 $2,892,807 $4,145,672
======== ========== ==========
</TABLE>
5. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1997 1998 1999
--------- ---------- ----------
<S> <C> <C> <C>
Furniture and fixtures............... $ 285,939 $ 659,612 $ 760,168
Office equipment..................... 692,247 1,420,390 2,000,377
Leasehold improvements............... 57,165 122,241 132,976
--------- ---------- ----------
Subtotal........................... 1,035,351 2,202,243 2,893,521
Less: Accumulated depreciation and
amortization........................ (345,115) (627,089) (794,272)
--------- ---------- ----------
Property, equipment and leasehold
improvements, net................... $ 690,236 $1,575,154 $2,099,249
========= ========== ==========
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1996,
1997 and 1998 was $60,248, $124,865, and $281,974, respectively, and $117,549
and $167,185 for the six months ended June 30, 1998 and 1999.
6. WAREHOUSE FACILITIES
Warehouse lines of credit consist of the following:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998 June 30, 1999
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Outstanding Average Outstanding Average Outstanding Average
Balance Rate Balance Rate Balance Rate
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
First Union............. $ -- $26,380,841 7.03% $24,544,246 7.52%
PNC..................... 24,453,671 7.55% 7,688,685 6.18% 768,454 8.80%
----------- ----------- -----------
Warehouse facilities.... $24,453,671 7.55% $34,069,526 6.84% $25,312,700 7.55%
=========== =========== ===========
Drafts payable.......... $15,502,122
===========
</TABLE>
F-11
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999
6. WAREHOUSE FACILITIES (continued)
First Union extended a $50,000,000 line of credit to American Home Mortgage
on June 23, 1999. Under this line of credit arrangement, the Company issues
loan disbursement checks in the form of drafts payable which are applied to the
warehouse facility upon their presentment for payment by First Union. The
interest rate on outstanding balances fluctuates daily based on a spread to the
Fed Funds rate and is paid monthly. This line continues until terminated or
modified by either party.
Upon extension of the line of credit by First Union, the PNC line of credit
was terminated and borrowings outstanding will be repaid upon sale of loans to
investors. Specific loans held for sale are collateral to this line of credit.
The interest rate on outstanding balances fluctuates daily based on a spread to
the Fed Funds rate and is paid monthly. This line terminates upon repayment of
the remaining outstanding borrowings.
The lines of credit are secured by mortgage loans and all other assets of
American Home Mortgage, and are guaranteed by the stockholder. The lines
contain various covenants pertaining to maintenance of net worth and working
capital. At December 31, 1997 and 1998, and June 30, 1999, American Home
Mortgage was in compliance with its loan covenants.
7. OTHER INCOME AND EXPENSE
The significant components of other income and expense are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
---------------------------- ----------------------
1996 1997 1998 1998 1999
-------- -------- ---------- ----------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Other income:
Volume incentives..... $ -- $284,807 $ 422,760 $186,305 $ 599,017
Other................. 21,053 71,211 79,463 82,997 37,698
-------- -------- ---------- -------- ----------
Other income.......... $ 21,053 $356,018 $ 502,223 $269,302 $ 636,715
======== ======== ========== ======== ==========
Other expense
Office supplies....... $191,497 $218,031 $ 375,718 $176,497 $ 278,467
Travel................ 22,220 111,037 162,973 77,594 117,416
Legal and accounting.. 162,221 224,424 142,200 90,042 113,917
Other................. 454,546 392,778 862,106 370,286 593,001
-------- -------- ---------- -------- ----------
Other expenses........ $830,484 $946,270 $1,542,997 $714,419 $1,102,801
======== ======== ========== ======== ==========
</TABLE>
8. INCOME TAXES
As discussed in Note 1, American Home Mortgage was an S corporation pursuant
to the Internal Revenue Code of 1986, as amended, New York State law and
certain other states' laws, and as such did not incur any federal or New York
State income tax expense. American Home Mortgage was liable for New York City
income tax and other states minimum taxes. This provision is included in the
consolidated statement of income under current state and local provision.
On September 29, 1999 the Company converted its tax status to a C
corporation. The Company recorded a one-time, non-cash reduction to earnings in
the amount of $625,000 as of September 28, 1999 for the deferred income tax
expense.
Assuming the Company had converted to a C corporation on July 1, 1999, the
Company would have incurred a deferred income tax expense of $375,000 as of
June 30, 1999.
F-12
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999
8. INCOME TAXES (continued)
The proforma provision for income taxes, including the state income tax
provision of $131,266, is as follows:
<TABLE>
<S> <C>
Current........................................................ $1,009,336
Deferred....................................................... 179,930
----------
Total provision................................................ $1,189,266
==========
</TABLE>
A reconciliation of the statutory income tax provision to the effective
income tax provision, as applied to income for the six months ended June 30,
1999, is as follows:
<TABLE>
<S> <C>
Tax at statutory rate.......................................... $ 919,478
State and local taxes.......................................... 260,435
Other.......................................................... 9,353
----------
Total provision.............................................. $1,189,266
==========
</TABLE>
The liability for income taxes at June 30, 1999 reflected on the proforma
consolidated balance sheet includes a deferred tax liability of $375,000. This
represents the tax effect of temporary differences and differences between the
tax basis and financial statement carrying amounts of assets and liabilities.
The major sources of temporary differences and their deferred tax effect at
June 30, 1999 are as follows:
Deferred tax liabilities:
<TABLE>
<S> <C>
Capitalized cost of mortgage servicing rights................... $ 16,670
Capitalized loan origination expenses........................... 341,302
Other........................................................... 17,028
--------
Total deferred tax liabilities................................ $375,000
========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
Loans Sold to Investors
Generally, the Company is not exposed to significant credit risk on its
loans sold to investors. In the normal course of business the Company is
obligated to repurchase loans which are subsequently unable to be sold through
normal investor channels. Management believes this is a rare occurrence and
that the Company can usually sell the loans directly to a permanent investor.
Loan Funding Commitments
At December 31, 1997 and 1998, the Company had commitments to fund loans
approximating $163 million and $333 million, respectively. At December 31, 1997
and 1998, the Company had commitments to fund loans with agreed upon rates
approximating $54 million and $122 million, respectively. The Company hedges
the interest rate risk of such commitments primarily with mandatory delivery
commitments, which totaled $80 million at December 31, 1998. The remaining
commitments to fund loans with agreed-upon rates are anticipated to be sold
through "best-efforts" and investor programs. The Company does not anticipate
any material losses from such sales.
F-13
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999
9. COMMITMENTS AND CONTINGENCIES (continued)
At June 30, 1999, the Company had commitments to fund loans approximating
$308 million, commitments to fund loans with agreed upon rates approximating
$152 million and mandatory delivery commitments, as described above,
approximating $100 million.
Outstanding Litigation
The Company is involved in litigation arising in the normal course of
business. Although the amount of any ultimate liability arising from these
matters cannot presently be determined, the Company does not anticipate that
any such liability will have a material effect on the Company's consolidated
financial position or results of operations.
10. OPERATING LEASES
Certain facilities and equipment are leased under short-term lease
agreements expiring at various dates through December 31, 2007. All such leases
are accounted for as operating leases. Total rental expense for premises and
equipment, which is included in occupancy and equipment expense within the
financial statements amounted to $426,537, $728,645 and $1,253,362 for the
years ended December 31, 1996, 1997 and 1998, respectively. Total rental
expense for premises and equipment amounted to $488,411 and $790,592 for the
six months ended June 30, 1998 and 1999.
Obligations under non-cancelable operating leases which have an initial term
of more than a year are as follows:
<TABLE>
<CAPTION>
As of As of
December 31, June 30,
1998 1999
------------ ----------
<S> <C> <C>
1999.................................................... $1,159,441 $ 705,356
2000.................................................... 772,221 1,084,620
2001.................................................... 456,174 700,805
2002.................................................... 361,686 637,473
2003.................................................... 194,020 476,066
Thereafter.............................................. 752,680 942,469
---------- ----------
$3,696,222 $4,546,789
========== ==========
</TABLE>
11. OTHER RELATED PARTY TRANSACTIONS
The majority stockholder of the Company is a minority stockholder in another
company that provides credit reports in the normal course of business. Payments
to this company for the years ended December 31, 1996, 1997 and 1998 amounted
to approximately $130,000, $280,000 and $504,000, respectively. Additionally,
total amounts due to this related party as of December 31, 1997 and 1998 were
$10,400 and $25,379, respectively. Payments approximating $89,000 and $226,000
for the six months ended June 30, 1998 and 1999 were made to this related
company. Amounts outstanding to this party as of June 30, 1999 was $6,000.
The majority stockholder of the Company is a majority stockholder in another
company that provides title services in the normal course of business. It is
the borrower's option to use this company for title services. The total amount
due from this related party was $0, $52,429 and $15,000 as of December 31, 1997
and 1998 and June 30, 1999, respectively. The amounts due to the Company
represent expenses paid on behalf of the title company. Payments from this
company amounted to approximately $52,000 for the six months ended June 30,
1999. No amounts were received prior to the period ended June 30, 1999.
F-14
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999
11. OTHER RELATED PARTY TRANSACTIONS (continued)
The activity in the Minority interest accounts is as follows:
<TABLE>
<S> <C>
Capital contribution............................................... $ 50,000
Minority interest in income........................................ 50,760
--------
Balance at December 31, 1998....................................... 100,760
Distribution....................................................... (75,000)
Minority interest in income........................................ 44,491
--------
Balance at June 30, 1999........................................... $ 70,251
========
</TABLE>
12. CONCENTRATIONS OF CREDIT RISK
The Company originates loans predominately in northeastern states. Loan
concentrations are considered to exist when there are amounts loaned to a
multiple number of borrowers with similar characteristics, which would cause
their ability to meet contractual obligations to be similarly impacted by
economic or other conditions. In management's opinion at June 30, 1999 and
December 31, 1998 there were no significant concentrations of credit risk
within loans held for sale.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made as of a specific point in time based on
estimates using present value or other valuation techniques. These techniques
involve uncertainties and are significantly affected by the assumptions used
and the judgments made regarding risk characteristics of various financial
instruments, discount rates, estimates of future cash flows, future expected
loss experience, and other factors.
Changes in assumptions could significantly affect these estimates and the
resulting fair values. Derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
an immediate sale of the instrument. Also, because of differences in
methodologies and assumptions used to estimate fair values, the Company's fair
values should not be compared to those of other companies. All forward delivery
commitments and option contracts to buy securities are to be contractually
settled within six months of the balance sheet date.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value
of assets and liabilities that are not considered financial instruments.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
Certain assets and liabilities, as a matter of accounting policy, are
reflected in the accompanying consolidated financial statements at fair value
due to their short-term nature, terms of repayment or interest rate associated
with the asset or liability. Such assets or liabilities include cash, accounts
receivable, loans held for investment, accrued expenses and other liabilities,
and warehouse lines of credit.
The following describes the methods and assumptions used by the Company in
estimating fair values of other financial instruments:
Mortgage Loans Held for Sale--Fair value is estimated using the quoted
market prices for securities backed by similar types of loans and current
investor or dealer commitments to purchase loans.
Mortgage Servicing Rights--Fair value is estimated by discounting the
anticipated net future cash flows associated with servicing the underlying
loans using discount rates that approximate market rates, expected
subservicing costs and externally published prepayment rates.
F-15
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Commitments to Fund with Agreed Upon Rates--The fair value of
commitments to fund with agreed upon rates are estimated using the fees and
rates currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan commitments,
fair value also considers the difference between current levels of interest
rates and the committed rates. These commitment obligations are considered
in conjunction with the Company's lower of cost or market valuation of its
mortgage loans held for sale.
Commitments to Deliver Mortgages and Option Contracts to Buy
Securities--The fair value of these instruments are estimated using current
market prices for dealer or investor commitments relative to the Company's
existing positions. These instruments contain an element of risk in the
event that the counterparties may be unable to meet the terms of such
agreements. In the event a counterparty to a delivery commitment was unable
to fulfill its obligation, the Company would not incur any material loss by
replacing the position at market rates in effect at June 30, 1999 and
December 31, 1998. The Company minimizes its risk exposure by limiting the
counterparties to those major banks, investment bankers and private
investors who meet established credit and capital guidelines. Management
does not expect any counterparty to default on their obligations and,
therefore, does not expect to incur any loss due to counterparty default.
These commitments and option contracts are considered in conjunction with
the Company's lower of cost or market valuation of its mortgage loans held
for sale.
No amounts were outstanding for loans held for sale related positions as
of December 31, 1997. Management believes that the fair value amounts for
loans held for sale and mortgage servicing rights approximated the carrying
amounts as of December 31, 1997.
F-16
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The following tables set forth information about financial instruments and
other selected assets, except for those noted above for which the carrying
value approximates fair value.
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------
Estimated
Notional Carrying Fair
Amount Amount Value
------------ ----------- -----------
<S> <C> <C> <C>
Assets:
Mortgage loans held for sale............. $ -- $34,666,863 $35,557,116
Mortgage servicing rights................ -- 39,887 39,887
Commitments and Contingencies:
Mortgage loans held for sale related
positions:
Commitments to fund mortgages at
agreed-upon rates..................... 122,430,687 -- 2,075,471
Forward delivery commitments........... 79,841,139 -- (215,571)
Option contracts to buy securities..... 4,000,000 -- --
<CAPTION>
June 30, 1999
------------------------------------
Estimated
Notional Carrying Fair
Amount Amount Value
------------ ----------- -----------
<S> <C> <C> <C>
Assets:
Mortgage loans held for sale............. $ -- $42,056,131 $42,292,675
Mortgage servicing rights................ -- 37,887 37,887
Commitments and Contingencies:
Mortgage loans held for sale related
positions:
Commitments to fund mortgages at
agreed-upon rates..................... 151,910,361 -- 1,908,706
Forward delivery commitments........... 99,730,000 -- (555,781)
Option contracts to buy securities..... 18,000,000 -- --
</TABLE>
14. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133").
SFAS 133 requires that all derivative instruments be recognized as either
assets or liabilities at fair value. If certain conditions are met, a
derivative may be specifically designated as a hedge of fair value of a
recognized asset, liability or firm commitment, a hedge of cash flows of a
forecasted transaction or a hedge of foreign currency exposure. The statement's
implementation has been delayed to be effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company will adopt this
statement effective January 1, 2001. The Company has not yet determined the
impact SFAS No. 133 will have on its financial position or results of
operations when such statement is adopted.
In October 1998, the Financial Accounting Standards Board issued SFAS No.
134, Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise, an amendment to FASB SFAS No. 65, Accounting for Certain Mortgage
Banking Activities. SFAS No. 134 is effective for the first fiscal quarter
beginning after December 15, 1998. Management believes that the adoption of
SFAS No. 134 will not have a material impact on the Company or its results of
operations.
F-17
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999
14. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS (continued)
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed for Internal Use" ("SOP 98-1"), which will become effective for
financial statements for calendar year 1999, with early adoption encouraged.
SOP 98-1 requires the capitalization of eligible costs of specified activities
related to computer software developed or obtained for internal use. We do not
believe that the adoption of this statement will have a material impact on our
financial condition or results of operations.
15. CONDENSED FINANCIAL INFORMATION OF AMERICAN HOME MORTGAGE HOLDINGS, INC.
The following provides condensed financial information for the financial
position, results of operations and cash flows of American Home Mortgage
Holdings, Inc. (parent company only):
Condensed Balance Sheet
<TABLE>
<CAPTION>
June
30, 1999
June 30, 1999 Proforma
------------- -----------
(unaudited)
<S> <C> <C>
ASSETS:
Cash................................................. $1,000 $ 5,476,728
Equity in American Home Mortgage Corp. .............. -- 7,196,872
Other................................................ -- --
------ -----------
Total Assets..................................... $1,000 $12,673,600
====== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES.......................................... $ -- $ --
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value, 1,000,000 shares
authorized, no shares issued and outstanding...... -- --
Common stock, $0.01 par value, 19,000,000 shares
authorized, 100 shares issued and outstanding,
7,500,000 shares issued and outstanding
pro forma......................................... 1 75,000
Additional paid-in-capital......................... 999 12,598,600
Retained earnings.................................. -- --
------ -----------
Total stockholders' equity....................... 1,000 12,673,600
------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $1,000 $12,673,600
====== ===========
Condensed Statement of Cash Flows
For the period June 15, 1999 (date of inception) to June 30, 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ --
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in earnings of American Home Mortgage
Corp. .......................................... --
Cash provided by operating activities.............. --
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of capital stock............ 1,000
------
Cash provided by financing activities.............. 1,000
------
NET INCREASE IN CASH................................. 1,000
CASH, BEGINNING OF PERIOD............................ --
------
CASH, END OF PERIOD.................................. $1,000
======
</TABLE>
F-18
<PAGE>
AMERICAN HOME MORTGAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND 1999
16. PENDING PUBLIC OFFERING OF COMMON STOCK
The Company has filed a registration statement with the Securities and
Exchange Commission for an underwritten initial public offering of 2,500,000
shares of common stock (the Offering). On September 29, 1999, Michael Strauss
contributed his sole ownership interest in American Home Mortgage Corp. for
4,999,900 shares of $.01 par value Common Stock of the Company in which:
. American Home Mortgage Holdings, Inc. is the holding company
. American Home Mortgage Corp. is a wholly-owned subsidiary of the holding
company
. Michael Strauss received 4,999,900 shares of $.01 par value Common Stock
of American Home Mortgage Holdings, Inc.
. 2,500,000 shares of $.01 par value Common Stock will be sold in the
Offering.
All shares and per share information included in the accompanying
consolidated financial statements have been adjusted to give retroactive effect
to the change in the number of shares outstanding as a result of these
transactions.
17. UNAUDITED PRO FORMA INFORMATION
The pro forma financial information has been presented to show what the
significant effects on the historical results of operations might have been had
the exchange of shares described in Note 16 and the termination of the
Company's S corporation status occurred as of the beginning of the earliest
period presented.
Pro forma net income represents the results of operations adjusted to
reflect the Company's income tax status for an S corporation to a C
corporation, using a pro forma income tax rate of 44%.
Pro forma net income per share has been computed by dividing pro forma net
income by the shares received in exchange for the Company's shares. The pro
forma financial information, as of June 30, 1999, reflects the sale of shares
in the initial public offering and an assumed S corporation distribution of
$7,153,000 as of June 30, 1999 (which amount increased to $7,806,000 at the
actual date of distribution). The price per share was assumed at $6 with net
proceeds from the public offering of approximately $12,630,000.
F-19
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,500,000 Shares
[LOGO]
American Home Mortgage Holdings, Inc.
Common Stock
----------------
PROSPECTUS
----------------
Friedman Billings Ramsey Advest, Inc.
, 1999
You should rely on the information contained in this prospectus. We have not
authorized anyone to provide you with information different from that which is
set forth in this prospectus. We are offering to sell shares of common stock
and seeking offers to buy shares of common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus
is accurate only as of the date of this prospectus, regardless of the time of
delivery of the prospectus or of any sale of common stock.
Until , 1999 (25 days after the date of this prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts, other than SEC, NASD and
Nasdaq fees, are estimates.
<TABLE>
<S> <C>
SEC Registration fee.......................................... $ 10,508
NASD Filing fee............................................... 4,280
Nasdaq National Market listing fee............................ 69,375
Printing and engraving expenses............................... 150,000
Legal fees and expenses....................................... 275,000
Accounting fees and expenses.................................. 350,000
Underwriters' reimbursable expenses........................... 425,000
Blue sky fees and expenses.................................... 5,000
Transfer agent and registrar fees and expenses................ 5,000
Miscellaneous fees and expenses............................... 25,837
----------
Total....................................................... $1,320,000
==========
</TABLE>
American Home Mortgage will bear all of the expenses shown above.
ITEM 14. Indemnification of Directors and Officers.
Subsection (a) of Section 145 of the General Corporation Law of Delaware
(the "DGCL") empowers a corporation to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
complete action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and, with respect to any criminal action
or proceeding, had no cause to believe his conduct was unlawful.
Subsection (b) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of
the corporation to procure a judgment in its favor by reason of the fact that
such person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and except that no indemnification may be
made in respect to any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall determine that despite the adjudication of liability such person
is fairly and reasonably entitled to indemnity for such expenses which the
court shall deem proper.
Section 145 of the DGCL further provides that to the extent a director,
officer, employee or agent of a corporation has been successful in the defense
of any action, suit or proceeding referred to in subsections (a) and (b) or in
the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection therewith; that indemnification or advancement of expenses
provided for by Section 145 shall not be deemed exclusive of any other rights
to which the indemnified party may be entitled; and empowers the corporation to
purchase and
II-1
<PAGE>
maintain insurance on behalf of a director, officer, employee or agent of the
corporation against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities
under Section 145.
Our Restated Certificate of Incorporation provides that no director, or
person serving on a committee of the board of directors, shall be personally
liable to American Home Mortgage Holdings, Inc. or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability:
. for any breach of that director's duty of loyalty to American Home
Mortgage Holdings, Inc. or its stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the DGCL; or
. for any transaction from which the director derived an improper personal
benefit.
Our Bylaws provide that we must indemnify our directors or officers against
any liability incurred in connection with any proceeding in which they may be
involved as a party or otherwise, by reason of the fact that he or she is or
was a director or officer of American Home Mortgage Holdings, Inc., or is or
was serving at the request of American Home Mortgage Holdings, Inc. as a
director, officer, employee, agent, fiduciary or trustee of another
corporation, partnership, joint venture, trust, employee benefit plan, or
other entity or enterprise, except:
. to the extent that such indemnification against a particular liability
is expressly prohibited by applicable law;
. for a breach of such person's duty of loyalty to American Home Mortgage
Holdings, Inc. or its stockholders;
. for acts or omission not in good faith;
. for intentional misconduct or a knowing violation of law; or
. for any transaction resulting in receipt by such person of an improper
personal benefit.
Such indemnification may include advances of expenses prior to the final
disposition of such proceeding.
ITEM 15. Recent Sales of Unregistered Securities.
The following is a list of securities sold by us over the last 3 years that
were not registered under the Securities Act:
In June 1999, we sold 100 shares of our common stock to Michael Strauss,
the president, chief executive officer and sole existing stockholder of
American Home Mortgage Corp., for an aggregate consideration of $1,000. On
September 29, 1999 in connection with this offering, he exchanged his shares
in American Home Mortgage Corp. for an aggregate of 4,999,900 shares of our
common stock.
ITEM 16. Exhibits and Financial Statement Schedules.
(A) EXHIBITS:
The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Registrant.
3.2 Amended and Restated Bylaws of the Registrant.
4.1 Reference is hereby made to Exhibits 3.1 and 3.2.
4.2+ Specimen Certificate for the Registrant's Common Stock.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
5.1+ Opinion of Cadwalader, Wickersham & Taft, special counsel to the
Registrant.
10.1+ Employment Agreement, dated as of August 26, 1999, between American
Home Mortgage Corp. and Michael Strauss.
10.2+ Employment Agreement, dated as of January 6, 1989, between American
Home Mortgage Corp. and Leonard Schoen, Jr., as amended on August 26,
1999.
10.3 Employment Agreement, dated as of April 14, 1999, between American Home
Mortgage Corp. and Nicholas P. Rizzetta, as amended on August 26, 1999.
10.4+ Employment Agreement, dated as of April 3, 1997, between American Home
Mortgage Corp. and Robert Burke, as amended on August 26, 1999.
10.5+ Employment Agreement, dated as of March 9, 1998, between American Home
Mortgage Corp. and James P. O'Reilly.
10.6 Employment Agreement, dated as of July 14, 1999, between American Home
Mortgage Holdings, Inc. and Ronald D. Taylor.
10.7+ 1999 Omnibus Stock Incentive Plan
10.8+ Sublease, dated as of February 1996, between Credit Suisse First Boston
Corporation and Michael Strauss, Inc., d/b/a American Home Mortgage.
10.9+ Sublease, dated as of December 17, 1997, between Suntory International
Corp. and Michael Strauss, Inc., d/b/a American Home Mortgage.
10.10+ Mortgage Warehousing Loan and Security Agreement, dated as of December
8, 1998, between First Union National Bank and Michael Strauss, Inc.,
d/b/a American Home Mortgage.
10.11+ Software Licensing Agreement, dated as of July 7, 1999, between
American Home Mortgage Corp. and James P. O'Reilly.
10.12 Form of Warrant Agreement, between American Home Mortgage Holdings,
Inc., and Friedman, Billings, Ramsey & Co., Inc.
10.13 Form of Lock-up Agreement, between and Michael Strauss and Friedman,
Billings, Ramsey & Co., Inc. (included in Exhibit 1.1)
10.14 Form of Lock-up Agreement, between each of American Home Mortgage
Holdings, Inc. and its Employees, Directors and Officers and Friedman,
Billings, Ramsey & Co., Inc. (included in Exhibit 1.1)
10.15+ Loan Purchase Agreement, dated as of July 8, 1996, between Michael
Strauss, Inc., d/b/a American Home Mortgage, and Norwest Funding, Inc.
10.16+ Origination and Sales Agreement, dated as of July 8, 1994, between
American Home Mortgage Corp. and Chase Manhattan Mortgage Corporation.
10.17+ Loan Sales Agreement, dated as of March 31, 1995, between American Home
Mortgage Corp. and Columbia Federal Savings Bank.
10.18+ Master Agreement for the Sale and Purchase of Mortgages, dated as of
April 19, 1994, between Astoria Federal Savings and Loan Association
and Michael Strauss, Inc., d/b/a American Home Mortgage.
10.19+ Mortgage Loan Purchase and Sale Operating Agreement, dated as of
February 1996, between Independence Savings Bank and American Home
Mortgage, Inc.
10.20+ Correspondent Origination and Sales Agreement, dated as of April 25,
1997, between Dime Mortgage Inc., and Michael Strauss, Inc. d/b/a
American Home Mortgage.
10.21+ Employment Agreement, dated as of January 18, 1996, between American
Home Mortgage Corp. and Leslie E. Tao, as amended on August 26, 1999.
10.22 Tax Indemnification Agreement, by and among American Home Mortgage
Holdings, Inc., American Home Mortgage Corp. and Michael Strauss.
21.1+ Subsidiaries of American Home Mortgage Holdings, Inc.
23.1 Consent of Deloitte & Touche LLP.
23.2+ Consent of Cadwalader, Wickersham & Taft (included in Exhibit 5.1).
24.1+ Power of Attorney (included on signature page).
27.1+ Financial Data Schedule.
</TABLE>
- --------
+ Previously filed
II-3
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES:
All schedules have been omitted because the information required to be set
forth in those schedules is not applicable or is shown in the combined
financial statements or notes thereto.
ITEM 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on September 29, 1999.
American Home Mortgage Holdings,
Inc.
By: /s/ Michael Strauss
-----------------------------------
Name: Michael Strauss
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated below on September 29, 1999:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Michael Strauss
/s/ Chairman of the Board,
______________________________________ President and Chief Executive Officer
Michael Strauss
/s/ Nicholas P. Rizzetta Chief Financial Officer
______________________________________
</TABLE> Nicholas P. Rizzetta
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Registrant.
3.2 Amended and Restated Bylaws of the Registrant.
4.1 Reference is hereby made to Exhibits 3.1 and 3.2.
4.2+ Specimen Certificate for the Registrant's Common Stock.
5.1+ Opinion of Cadwalader, Wickersham & Taft, special counsel to the
Registrant.
10.1+ Employment Agreement, dated as of August 26, 1999, between American
Home Mortgage Corp. and Michael Strauss.
10.2+ Employment Agreement, dated as of January 6, 1989, between American
Home Mortgage Corp. and Leonard Schoen, Jr., as amended on August 26,
1999.
10.3 Employment Agreement, dated as of April 14, 1999, between American
Home Mortgage Corp. and Nicholas P. Rizzetta, as amended on August 26,
1999.
10.4+ Employment Agreement, dated as of April 3, 1997, between American Home
Mortgage Corp. and Robert Burke, as amended on August 26, 1999.
10.5+ Employment Agreement, dated as of March 9, 1998, between American Home
Mortgage Corp. and James P. O'Reilly.
10.6 Employment Agreement, dated as of July 14, 1999, between American Home
Mortgage Holdings, Inc. and Ronald D. Taylor.
10.7+ 1999 Omnibus Stock Incentive Plan
10.8+ Sublease, dated as of February 1996, between Credit Suisse First
Boston Corporation and Michael Strauss, Inc., d/b/a American Home
Mortgage.
10.9+ Sublease, dated as of December 17, 1997, between Suntory International
Corp. and Michael Strauss, Inc., d/b/a American Home Mortgage.
10.10+ Mortgage Warehousing Loan and Security Agreement, dated as of December
8, 1998, between First Union National Bank and Michael Strauss, Inc.,
d/b/a American Home Mortgage.
10.11+ Software Licensing Agreement, dated as of July 7, 1999, between
American Home Mortgage Corp. and James P. O'Reilly.
10.12 Form of Warrant Agreement, between American Home Mortgage Holdings,
Inc., and Friedman, Billings, Ramsey & Co., Inc.
10.13 Form of Lock-up Agreement, between and Michael Strauss and Friedman,
Billings, Ramsey & Co., Inc. (included in Exhibit 1.1)
10.14 Form of Lock-up Agreement, between each of American Home Mortgage
Holdings, Inc. and its Employees, Directors and Officers and Friedman,
Billings, Ramsey & Co., Inc. (included in Exhibit 1.1)
10.15+ Loan Purchase Agreement, dated as of July 8, 1996, between Michael
Strauss, Inc., d/b/a American Home Mortgage, and Norwest Funding, Inc.
10.16+ Origination and Sales Agreement, dated as of July 8, 1994, between
American Home Mortgage Corp. and Chase Manhattan Mortgage Corporation.
10.17+ Loan Sales Agreement, dated as of March 31, 1995, between American
Home Mortgage Corp. and Columbia Federal Savings Bank.
10.18+ Master Agreement for the Sale and Purchase of Mortgages, dated as of
April 19, 1994, between Astoria Federal Savings and Loan Association
and Michael Strauss, Inc., d/b/a American Home Mortgage.
10.19+ Mortgage Loan Purchase and Sale Operating Agreement, dated as of
February 1996, between Independence Savings Bank and American Home
Mortgage, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.20+ Correspondent Origination and Sales Agreement, dated as of April 25,
1997, between Dime Mortgage Inc., and Michael Strauss, Inc. d/b/a
American Home Mortgage.
10.21+ Employment Agreement, dated as of January 18, 1996, between America
Home Mortgage Corp. and Leslie E. Tao, as amended on August 26, 1999.
10.22 Tax Indemnification Agreement, by and among American Home Mortgage
Holdings, Inc., American Home Mortgage Corp. and Michael Strauss.
21.1+ Subsidiaries of American Home Mortgage Holdings, Inc.
23.1 Consent of Deloitte & Touche LLP.
23.2+ Consent of Cadwalader, Wickersham & Taft (included in Exhibit 5.1).
24.1+ Power of Attorney (included on signature page).
27.1+ Financial Data Schedule.
</TABLE>
- --------
+ Previously filed
<PAGE>
EXHIBIT 1.1
American Home Mortgage Holdings, Inc.
2,500,000 Shares of Common Stock
FORM OF UNDERWRITING AGREEMENT
September __, 1999
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
ADVEST, INC.
c/o FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
as Representatives of the several Underwriters
1001 19th Street North
Arlington, Virginia 22209
Dear Sirs:
American Home Mortgage Holdings, Inc., a Delaware corporation (the
"Company"), confirms its agreement with each of the Underwriters listed on
Schedule I hereto (collectively, the "Underwriters"), for whom Friedman,
Billings, Ramsey & Co., Inc. and Advest, Inc. are acting as representatives (in
such capacity, the "Representatives"), with respect to (i) the sale by the
Company of 2,500,000 shares (the "Initial Shares") of Common Stock, par value
$0.01 per share, of the Company ("Common Stock"), and the purchase by the
Underwriters, acting severally and not jointly, of the respective number of
shares of Common Stock set forth opposite the names of the Underwriters in
Schedule I hereto, and (ii) the grant of the option described in Section 1(b)
hereof to purchase all or any part of 375,000 additional shares of Common Stock
to cover overallotments (the "Option Shares"), if any, from the Company to the
Underwriters. The Initial Shares and the Option Shares are hereinafter called,
collectively, the "Shares".
As part of the offering contemplated by this Agreement, Friedman, Billings,
Ramsey & Co., Inc. ("FBR") has agreed to reserve out of the Initial Shares set
forth opposite its name on Schedule I to this Agreement, (i) up to 59,737 shares
(assuming an initial public offering price of $9.00 per share), for offer and
sale to Michael Strauss, the Company's President and Chief Executive Officer, at
the public offering price net of any underwriting discounts and commissions and
(ii) up to 75,000 shares, for sale to the Company's employees, officers,
directors and associates (the "Participants"), at the public offering price,
each as set forth in the Prospectus under the heading "Underwriting"
(collectively, the "Directed Share Program"). The Shares to be sold by FBR
pursuant to the Directed Share Program are hereinafter called the "Directed
Shares." Any Directed Shares not orally confirmed for purchase by Mr. Strauss
or any Participants, as the case may be, by the end of the first business day
after the date on which this Agreement is executed will be offered to the public
by FBR as set forth in the Prospectus.
<PAGE>
The Company also proposes to issue to FBR, in its individual capacity, the
warrants referred to in Section 1(c) to purchase up to an aggregate of 250,000
shares of Common Stock.
The Company understands that the Underwriters propose to make a public
offering of the Shares as soon as the Underwriters deem advisable after this
Agreement has been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-82409) and a related
preliminary prospectus for the registration of the Shares under the Securities
Act of 1933, as amended (the "Securities Act"), and the rules and regulations
thereunder (the "Securities Act Regulations"). The Company has prepared and
filed such amendments thereto, if any, and such amended preliminary
prospectuses, if any, as may have been required to the date hereof, and will
file such additional amendments thereto and such amended prospectuses as may
hereafter be required. The registration statement has been declared effective
under the Securities Act by the Commission. The registration statement as
amended at the time it became effective (including all information deemed
(whether by incorporation by reference or otherwise) to be a part of the
registration statement at the time it became effective pursuant to Rule 430A(b)
of the Securities Act Regulations) is hereinafter called the "Registration
Statement," except that, if the Company files a post-effective amendment to such
registration statement which becomes effective prior to the Closing Time (as
defined below), "Registration Statement" shall refer to such registration
statement as so amended. Any registration statement filed pursuant to Rule
462(b) of the Securities Act Regulations is hereinafter called the "Rule 462(b)
Registration Statement," and after such filing the term "Registration Statement"
shall include the 462(b) Registration Statement. Each prospectus included in
the registration statement, or amendments thereof or supplements thereto, before
it became effective under the Securities Act and any prospectus filed with the
Commission by the Company with the consent of the Underwriters pursuant to Rule
424(a) of the Securities Act Regulations is hereinafter called the "Preliminary
Prospectus." The term "'Prospectus" means the final prospectus, as first filed
with the Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the
Securities Act Regulations, and any amendments thereof or supplements thereto.
The Commission has not issued any order preventing or suspending the use of any
Preliminary Prospectus.
The Company and the Underwriters agree as follows:
1. Sale and Purchase:
-----------------
(a) Initial Shares. Upon the basis of the warranties and representations
and other terms and conditions herein set forth, at the purchase price per share
of $________ the Company agrees to sell to the Underwriters the Initial Shares,
and each Underwriter agrees, severally and not jointly, to purchase from the
Company the number of Initial Shares set forth in Schedule I opposite such
Underwriter's name, plus any additional
-2-
<PAGE>
number of Initial Shares which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 8 hereof, subject in each case, to such
adjustments among the Underwriters as the Representatives in their sole
discretion shall make to eliminate any sales or purchases of fractional shares.
(b) Option Shares. In addition, upon the basis of the warranties and
representations and other terms and conditions herein set forth, at the purchase
price per share set forth in paragraph (a), the Company hereby grants an option
to purchase the Option Shares to the Underwriters, acting severally and not
jointly, in the respective numbers of shares of Common Stock set forth opposite
the names of the Underwriters in Schedule I hereto, plus any additional number
of Option Shares which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 8 hereof. The option hereby granted will
expire 30 days after the date hereof and may be exercised in whole or in part
from time to time only for the purpose of covering over-allotments which may be
made in connection with the offering and distribution of the Initial Shares upon
written notice by the Representatives to the Company setting forth the number of
Option Shares as to which the several Underwriters are then exercising the
option and the time and date of payment and delivery for such Option Shares.
Any such time and date of delivery (a "Date of Delivery") shall be determined by
the Representatives, but shall not be later than three full business days (or
earlier, without the consent of the Company, than two full business days) after
the exercise of said option, nor in any event prior to the Closing Time, as
hereinafter defined. If the option is exercised as to all or any portion of the
Option Shares, the Company will sell that number of Option Shares then being
purchased, and each of the Underwriters, acting severally and not jointly, will
purchase that proportion of the total number of Option Shares then being
purchased which the number of Initial Shares set forth in Schedule I opposite
the name of such Underwriter bears to the total number of Initial Shares,
subject in each case to such adjustments among the Underwriters as the
Representatives in their sole discretion shall make to eliminate any sales or
purchases of fractional shares.
(c) Warrants. At the Closing Time, the Company agrees to issue to FBR (for
its own account and not as a Representative of the several Underwriters),
warrants (the "Warrants") to purchase an aggregate of 250,000 shares of Common
Stock (the "Warrant Shares") at a price per Warrant Share equal to 130% of the
purchase price per share set forth in paragraph (a) above. The Warrants will be
issued pursuant to an agreement (the "Warrant Agreement") between the Company
and FBR and will be exercisable at any time and from time to time on or after
the first anniversary of the date of this Agreement up to the fifth anniversary
thereof. The Warrants will be restricted from sale, transfer, assignment or
hypothecation for a period of one year from the date of this Agreement except to
officers or partners of FBR and members of the selling group and/or their
officers or partners. Each Warrant shall be substantially identical to the form
of Warrant filed as an exhibit to the Registration Statement.
-3-
<PAGE>
2. Payment and Delivery:
--------------------
(a) Initial Shares. Payment of the purchase price for the Initial Shares
shall be made to the Company by wire transfer of immediately available funds or
certified or official bank check payable in federal (same-day) funds at the
offices of Gibson, Dunn & Crutcher LLP located at 1050 Connecticut Avenue, N.W.,
Washington, D.C. 20036 (unless another place shall be agreed upon by the
Representatives and the Company) against delivery of the certificates for the
Initial Shares to the Representatives for the respective accounts of the
Underwriters. Such payment and delivery shall be made at 9:30 a.m., New York
City time, on the third (fourth, if pricing occurs after 4:30 p.m., New York
City time) business day after the date hereof (unless another time, not later
than ten business days after such date, shall be agreed to by the
Representatives and the Company). The time at which such payment and delivery
are actually made is hereinafter sometimes called the "Closing Time."
Certificates for the Initial Shares shall be delivered to the Representatives in
definitive form registered in such names and in such denominations as the
Representatives shall have specified in writing no later than two business days
prior to the Closing Time. For the purpose of expediting the checking of the
certificates for the Initial Shares by the Representatives, the Company agrees
to make such certificates available to the Representatives for such purpose at
least one full business day preceding the Closing Time.
(b) Option Shares. In addition, payment of the purchase price for the
Option Shares shall be made to the Company by wire transfer of immediately
available funds or certified or official bank check payable in federal (same-
day) funds at the offices of Gibson, Dunn & Crutcher LLP located at 1050
Connecticut Avenue, N.W., Washington, D.C. 20036 (unless another place shall be
agreed upon by the Representatives and the Company), against delivery of the
certificates for the Option Shares to the Representatives for the respective
accounts of the Underwriters. Such payment and delivery shall be made at 9:30
a.m., New York City time, on each Date of Delivery determined pursuant to
Section 1(b) above. Certificates for the Option Shares shall be delivered to
the Representatives in definitive form registered in such names and in such
denominations as the Representatives shall have specified in writing no later
than two business days prior to the Date of Delivery. For the purpose of
expediting the checking of the certificates for the Option Shares by the
Representatives, the Company agrees to make such certificates available to the
Representatives for such purpose at least one full business day preceding the
relevant Date of Delivery.
3. Representations and Warranties of the Company: The Company represents
---------------------------------------------
and warrants to the Underwriters that:
(a) the Company has an authorized capitalization as set forth in the
Prospectus under the caption "Capitalization;" the outstanding shares of capital
stock of the Company and its Subsidiaries (as defined below) have been duly and
validly authorized and issued and are fully paid and non-assessable, and all of
the outstanding shares of capital stock of the Subsidiaries are directly or
indirectly owned of record and
-4-
<PAGE>
beneficially by the Company; except as disclosed in the Prospectus, there are no
outstanding (i) securities or obligations of the Company or any of its
Subsidiaries convertible into or exchangeable for any capital stock of the
Company or any such Subsidiary, (ii) warrants, rights or options to subscribe
for or purchase from the Company or any such Subsidiary any such capital stock
or any such convertible or exchangeable securities or obligations, or (iii)
obligations of the Company or any such Subsidiary to issue any shares of capital
stock, any such convertible or exchangeable securities or obligations, or any
such warrants, rights or options; the Company has reserved and kept available
for issuance upon exercise of the Warrants, such number of authorized but
unissued shares of Common Stock as are sufficient to permit the exercise in full
of the Warrants; each entity controlled, directly or indirectly, by the Company,
is set forth on Schedule II hereto (collectively, the "Subsidiaries");
(b) the Company and the Subsidiaries each has been duly incorporated and
is validly existing as a corporation in good standing under the laws of its
respective jurisdiction of incorporation with full corporate power and authority
to own its respective properties and to conduct its respective business as
described in the Registration Statement and Prospectus and, in the case of the
Company, to execute and deliver this Agreement, the Warrant Agreement and the
Warrants and to consummate the transactions contemplated hereby and thereby
(including the issuance and sale of the Shares, the Warrants and the Warrant
Shares);
(c) the Company and all of its Subsidiaries are duly qualified or licensed
by, and are in good standing in, each jurisdiction in which they conduct their
respective businesses or in which they own or lease real property or maintain an
office and in which such qualification or licensing is necessary, and in which
the failure, individually or in the aggregate, to be so qualified or licensed
could have a material adverse effect on the assets, business, results of
operations or financial condition of the Company and its Subsidiaries taken as a
whole (a "Material Adverse Effect"); except as disclosed in the Prospectus or
otherwise restricted by law of the Company's state of incorporation, no
Subsidiary is prohibited or restricted, directly or indirectly, from paying
dividends to the Company, or from making any other distribution with respect to
such Subsidiary's capital stock or from repaying to the Company or any other
Subsidiary any amounts which may from time to time become due under any loans or
advances to such Subsidiary from the Company or such other Subsidiary, or from
transferring any such Subsidiary's property or assets to the Company or to any
other Subsidiary; other than as disclosed in the Prospectus, the Company does
not own, directly or indirectly, any capital stock or other equity securities of
any other corporation or any ownership interest in any partnership, joint
venture or other association;
(d) the Company and its Subsidiaries are in compliance in all material
respects with all material applicable laws, rules, regulations, orders, decrees
and judgments, including those relating to transactions with affiliates;
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<PAGE>
(e) neither the Company nor any of its Subsidiaries is in breach of or in
default under (nor has any event occurred which with notice, lapse of time, or
both would constitute a breach of, or default under), its respective articles of
incorporation or charter or by-laws, or in the performance or observance of any
obligation, agreement, covenant or condition contained in any license,
indenture, mortgage, deed of trust, loan or credit agreement or other agreement
or instrument to which the Company or any of its Subsidiaries is a party or by
which any of them or their respective properties is bound, except for such
breaches or defaults which would not have a Material Adverse Effect, and the
execution, delivery and performance of this Agreement, the Warrant Agreement and
the Warrants, and consummation of the transactions contemplated hereby and
thereby (including the issuance and sale by the Company of the Shares, the
Warrants and the Warrant Shares) will not conflict with, or result in any breach
of, or constitute a default under (nor constitute any event which with notice,
lapse of time, or both would constitute a breach of, or default under), (i) any
provision of the articles of incorporation or charter or bylaws of the Company
or any of its Subsidiaries, or (ii) any provision of any license, indenture,
mortgage, deed of trust, loan or credit agreement or other agreement or
instrument to which the Company or any of its Subsidiaries is a party or by
which any of them or their respective properties may be bound or affected, or
under any federal, state, local or foreign law, regulation or rule or any
decree, judgment or order applicable to the Company or any of its Subsidiaries;
or result in the creation or imposition of any lien, charge, claim or
encumbrance upon any property or asset of the Company or its Subsidiaries;
(f) this Agreement and the Warrant Agreement have been, and the Warrants
at the Closing Time will be, duly authorized, executed and delivered by the
Company and are or will be legal, valid and binding agreements of the Company
enforceable in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally, and by general
principles of equity, and except to the extent that the indemnification and
contribution provisions of Section 9 hereof may be limited by federal or state
securities laws and public policy considerations in respect thereof;
(g) no approval, authorization, consent or order of or filing with any
federal, state or local governmental or regulatory commission, board, body,
authority or agency is required in connection with the Company's execution,
delivery and performance of this Agreement, the Warrant Agreement and the
Warrants, its consummation of the transaction contemplated hereby and thereby,
and its sale and delivery of the Shares, the Warrants and the Warrant Shares,
other than (A) such as have been obtained, or will have been obtained at the
Closing Time or the relevant Date of Delivery, as the case may be, under the
Securities Act, (B) such approvals as have been obtained in connection with the
approval of the quotation of the Company's shares of Common Stock on The Nasdaq
National Market ("Nasdaq") of The Nasdaq Stock Market, Inc. and (C) any
necessary qualification under the securities or blue sky laws of the various
jurisdictions in which the Shares are being offered by the Underwriters;
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<PAGE>
(h) each of the Company and its Subsidiaries has all necessary licenses,
authorizations, consents and approvals and has made all necessary filings
required under any federal, state or local law, regulation or rule, and has
obtained all necessary authorizations, consents and approvals from other
persons, required in order to conduct their respective businesses as described
in the Prospectus, except to the extent that any failure to have any such
licenses, authorizations, consents or approvals, to make any such filings or to
obtain any such authorizations, consents or approvals would not, individually or
in the aggregate, have a Material Adverse Effect; neither the Company nor any of
its Subsidiaries is required by any applicable law to obtain accreditation or
certification from any governmental agency or authority in order to provide the
products and services which it currently provides as set forth in the Prospectus
which it has not obtained; neither the Company nor any of its Subsidiaries is in
violation of, in default under, or has received any notice regarding a possible
violation, default or revocation of any such license, authorization, consent or
approval or any federal, state, local or foreign law, regulation or rule or any
decree, order or judgment applicable to the Company or any of its Subsidiaries
the effect of which could reasonably be expected to result in a Material Adverse
Effect ; and no such license, authorization, consent or approval contains a
materially burdensome restriction that is not adequately disclosed in the
Registration Statement and the Prospectus;
(i) each of the Registration Statement and any Rule 462(b) Registration
Statement has become effective under the Securities Act and no stop order
suspending the effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the Securities Act and no
proceedings for that purpose have been instituted or are pending or, to the
knowledge of the Company, are threatened by the Commission, and any request on
the part of the Commission for additional information has been complied with;
(j) the Preliminary Prospectus and the Registration Statement comply and
the Prospectus and any further amendments or supplements thereto will, when they
have become effective or are filed with the Commission, as the case may be,
comply in all material respects with the requirements of the Securities Act and
the Securities Act Regulations; the Registration Statement did not, and any
amendment thereto will not, in each case as of the applicable effective date,
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading; and
the Preliminary Prospectus does not, and the Prospectus or any amendment or
supplement thereto will not, as of the applicable filing date and at the Closing
Time and on each Date of Delivery (if any), contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the Company
makes no warranty or representation with respect to any statement contained in
the Registration Statement or the Prospectus in reliance upon and in conformity
with the information concerning the
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<PAGE>
Underwriters and furnished in writing by or on behalf of the Underwriters
through the Representatives to the Company expressly for use in the Registration
Statement or the Prospectus (that information being limited to that described in
the last sentence of the first paragraph of Section 9(c) hereof);
(k) the Preliminary Prospectus was and the Prospectus delivered to the
Underwriters for use in connection with this offering will be identical to the
versions of the Preliminary Prospectus and Prospectus created to be transmitted
to the Commission for filing via the Electronic Data Gathering Analysis and
Retrieval System ("EDGAR"), except to the extent permitted by Regulation S-T;
(l) all legal or governmental proceedings, contracts, leases or documents
of a character required by the Securities Act and the Securities Act Regulations
to be filed as exhibits to the Registration Statement or to be summarized or
described in the Prospectus have been so filed, summarized or described as
required;
(m) there are no actions, suits, proceedings, inquiries or investigations
pending or, to the knowledge of the Company, threatened against the Company or
any of its Subsidiaries or any of their respective officers and directors or to
which the properties, assets or rights of any such entity are subject, at law or
in equity, before or by any federal, state, local or foreign governmental or
regulatory commission, board, body, authority, arbitral panel or agency which
could result in a judgment, decree, award or order having a Material Adverse
Effect;
(n) the financial statements, including the notes thereto, included in the
Registration Statement and the Prospectus present fairly the consolidated
financial position of the entities to which such financial statements relate
(the "Covered Entities") as of the dates indicated and the consolidated results
of operations and changes in financial position and cash flows of the Covered
Entities for the periods specified; such financial statements have been prepared
in conformity with generally accepted accounting principles applied on a
consistent basis during the periods involved and in accordance with Regulation
S-X promulgated by the Commission; the amounts in the Prospectus under the
captions "Prospectus Summary - Summary Financial Information" and "Selected
Financial Information" fairly present the information shown therein and have
been compiled on a basis consistent with the financial statements included in
the Registration Statement and the Prospectus; the unaudited pro forma financial
information (including the related notes) included in the Prospectus or any
Preliminary Prospectus complies as to form in all material respects to the
applicable accounting requirements of the Securities Act and the Securities Act
Regulations, and management of the Company believes that the assumptions
underlying the pro forma adjustments are reasonable; such pro forma adjustments
have been properly applied to the historical amounts in the compilation of the
information and such information fairly presents with respect to the Company and
the Subsidiaries, the financial position, results of operations and other
information purported to be shown therein at the respective dates and for the
respective periods specified;
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<PAGE>
(o) Deloitte & Touche LLP, whose reports on the consolidated financial
statements of the Company and its Subsidiaries are filed with the Commission as
part of the Registration Statement and Prospectus, are and were during the
periods covered by their reports independent public accountants as required by
the Securities Act and the Securities Act Regulations;
(p) subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus, and except as may be otherwise
stated in the Registration Statement or Prospectus, there has not been (A) any
material adverse change in the assets, business, results of operations or
financial condition of the Company and its Subsidiaries taken as a whole,
whether or not arising in the ordinary course of business, (B) any transaction,
which is material to the Company and its Subsidiaries taken as a whole,
contemplated or entered into by the Company or any of its Subsidiaries, (C) any
obligation, contingent or otherwise, directly or indirectly incurred by the
Company or any of its Subsidiaries, which is material to the Company and its
Subsidiaries taken as a whole or (D) any dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock;
(q) the Common Stock, the Shares and the Warrants conform in all material
respects to the description thereof contained in the Registration Statement and
the Prospectus;
(r) there are no persons with registration or other similar rights to have
any equity securities, including securities which are convertible into or
exchangeable for equity securities, registered pursuant to the Registration
Statement or otherwise registered by the Company under the Securities Act;
(s) the Shares and the Warrant Shares have been duly authorized and, when
issued and duly delivered against payment therefor by the Underwriters as
contemplated by this Agreement and the Warrant Agreement, respectively, will be
validly issued, fully paid and nonassessable, free and clear of any pledge,
lien, encumbrance, security interest or other claim, and the issuance and sale
of the Shares and the Warrant Shares by the Company is not subject to preemptive
or other similar rights arising by operation of law, under the certificate of
incorporation or by-laws of the Company, under any agreement to which the
Company or any of its Subsidiaries is a party or otherwise;
(t) the Company has not taken, and will not take, directly or indirectly,
any action which is designed to or which has constituted or which might
reasonably be expected to cause or result in stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of the
Shares;
(u) neither the Company nor any of its affiliates (i) is required to
register as a "broker" or "dealer" in accordance with the provisions of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the rules
and regulations thereunder, or (ii) directly, or indirectly through one or more
intermediaries, controls or has any other
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<PAGE>
association with (within the meaning of Article I of the By-laws of the National
Association of Securities Dealers, Inc. (the "NASD")) any member firm of the
NASD;
(v) the Company has not relied upon the Representatives or legal counsel
for the Representatives for any legal, tax or accounting advice in connection
with the offering and sale of the Shares or the Warrant Shares;
(w) any certificate signed by any officer of the Company or any Subsidiary
delivered to the Representatives or to counsel for the Underwriters pursuant to
or in connection with this Agreement shall be deemed a representation and
warranty by the Company to each Underwriter as to the matters covered thereby;
(x) the form of certificate used to evidence the Common Stock complies in
all material respects with all applicable statutory requirements, with any
applicable requirements of the certificate of incorporation and by-laws of the
Company and the requirements of Nasdaq;
(y) the Company and the Subsidiaries have good and marketable title in fee
simple to all real property, if any, and good title to all personal property
owned by them, in each case free and clear of all liens, security interests,
pledges, charges, encumbrances, mortgages and defects, except such as are
disclosed in the Prospectus or such as do not materially and adversely affect
the value of such property and do not interfere with the use made or proposed to
be made of such property by the Company and the Subsidiaries; and any real
property and buildings held under lease by the Company or any Subsidiary are
held under valid, existing and enforceable leases, with such exceptions as are
disclosed in the Prospectus or are not, individually or in the aggregate,
material to the Company and its Subsidiaries taken as a whole and do not
interfere with the use made or proposed to be made of such property and
buildings by the Company or such Subsidiary;
(z) the Company and each Subsidiary owns or possesses such licenses or
other rights to use all patents, trademarks, service marks, trade names,
copyrights, software and design licenses, trade secrets, manufacturing
processes, other intangible property rights and know-how (collectively
"Intangibles") as are necessary to entitle the Company and each Subsidiary to
conduct its business as described in the Prospectus, and neither the Company,
nor any Subsidiary, has received written notice of any infringement of or
conflict with (and the Company knows of no such infringement of or conflict
with) asserted rights of others with respect to any Intangibles which could have
a Material Adverse Effect;
(aa) the Company and each of its Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's
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<PAGE>
general or specific authorization; and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences;
(bb) each of the Company and the Subsidiaries has filed on a timely basis
all necessary federal, state, local and foreign income and franchise tax returns
required to be filed through the date hereof and has paid all taxes shown as due
thereon (except where the failure so to file or pay, individually or in the
aggregate, would not have a Material Adverse Effect); and no tax deficiency has
been asserted against any such entity, nor does any such entity know of any
basis for the assertion of any tax deficiency which if determined adversely to
any such entity, could have a Material Adverse Effect; all tax liabilities are
adequately provided for on the respective books of such entities; American
Home Mortgage Corp., a wholly-owned subsidiary of the Company had duly and
properly filed an election to be taxed as an S corporation for federal and state
income tax purposes (each an "S Election"), and each such S Election has been
and was in full force and effect since its date of election (each an "S Election
Date") without interruption through September __, 1999; during such period there
was no termination of any such S Election, including any inadvertent termination
which was reinstated under Section 1362 of the Internal Revenue Code of
1986, as amended, and the rules and regulations promulgated thereunder and the
corresponding provisions of state income tax laws;
(cc) each of the Company and its Subsidiaries maintain insurance (issued by
insurers of recognized financial responsibility) of the types and in the amounts
generally deemed adequate for their respective businesses, including, but not
limited to, insurance covering real and personal property owned or leased by the
Company and its Subsidiaries against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect;
(dd) neither the Company nor any of its Subsidiaries has violated, or
received notice of any violation with respect to, any applicable environmental,
safety or similar law applicable to the business of the Company or any of its
Subsidiaries, nor any federal or state law relating to discrimination in the
hiring, promotion or pay of employees, nor any applicable federal or state wages
and hours law, nor any provisions of the Employee Retirement Income Security Act
or the rules and regulations promulgated thereunder, nor any federal or state
law precluding the denial of credit due to the neighborhood in which a property
is situated, the violation of any of which could have a Material Adverse Effect;
(ee) neither the Company nor any of its Subsidiaries nor any officer or
director purporting to act on behalf of the Company or any of its Subsidiaries
has at any time (i) made any contributions to any candidate for political
office, or failed to disclose fully any such contributions, in violation of law,
(ii) made any payment to any state, federal or foreign governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments required or allowed by applicable law, (iii) made any
payment outside the ordinary course of business to any investment officer or
loan broker or person charged with similar duties of any entity to which the
Company or any
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<PAGE>
of its Subsidiaries sells or from which the Company or any of its Subsidiaries
buys loans or servicing arrangements for the purpose of influencing such agent,
officer, broker or person to buy loans or servicing arrangements from or sell
loans to the Company or any of its Subsidiaries, or (iv) engaged in any
transactions, maintained any bank account or used any corporate funds except for
transactions, bank accounts and funds which have been and are reflected in the
normally maintained books and records of the Company and its Subsidiaries;
(ff) except as otherwise disclosed in the Prospectus, there are no
outstanding loans or advances or guarantees of indebtedness by the Company or
any of its Subsidiaries to or for the benefit of any of the officers or
directors of the Company or any of its Subsidiaries or any of the members of the
families of any of them;
(gg) neither the Company nor any of its Subsidiaries nor, to the knowledge
of the Company, any employee or agent of the Company or any of its Subsidiaries,
has made any payment of funds of the Company or of any Subsidiary or received or
retained any funds in violation of any law, rule or regulation or of a character
required to be disclosed in the Prospectus;
(hh) all securities issued by the Company, any of its Subsidiaries or any
trusts established by the Company or any Subsidiary, have been issued and sold
in compliance with (i) all applicable federal and state securities laws, (ii)
the laws of the applicable jurisdiction of incorporation of the issuing entity,
and (iii) to the extent applicable to the issuing entity, the requirements of
Nasdaq;
(ii) the Company has not distributed and will not distribute any Prospectus
or other offering material in connection with the offer and sale of the Shares;
(jj) the Company has not incurred any liability for any finder's fees or
similar payments in connection with the transactions herein contemplated;
(kk) no relationship, direct or indirect, exists or has existed between or
among the Company or any of its Subsidiaries on the one hand, and the directors,
officers, stockholders, customers or suppliers of the Company or any of its
Subsidiaries on the other hand, which is required by the Securities Act and the
Securities Act Regulations to be described in the Registration Statement and the
Prospectus and which is not so described;
(ll) there are no existing or, to the knowledge of the Company, threatened
labor disputes with the employees of the Company or any of its Subsidiaries
which are reasonably anticipated to have individually or in the aggregate a
Material Adverse Effect;
(mm) all computer software (including, without limitation software which
forms a part of any hardware) owned or used by the Company or any Subsidiary, or
licensed by the Company or any Subsidiary, as licensor or as licensee, other
than any shrinkwrap
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software available generally to retail customers, is "Year 2000 Compliant" (as
hereinafter defined). For purposes of this Agreement, "Year 2000 Compliant"
shall mean: (i) all such software shall operate in 4-digit year format and, in
all material respects, without errors in the recognition, calculation and
processing of date data relating to century recognition, leap years, single and
multi-century formulae, date values and interfaces of date-related
functionalities; (ii) all date processing shall be conducted in a four-digit
year format and all date sorting that includes a "year field" or "year category"
shall be based upon a four-digit year format; and (iii) any date arithmetic
programs or calculators in the software shall operate in all material respects
in accordance with the related user documentation in the Year 2000, and the
years following, without degrading functionality or performance; and
(nn) the Company has not offered, or caused the Underwriters to offer,
Shares to any person pursuant to the Directed Share Program with the specific
intent to unlawfully influence (i) a customer or supplier of the Company to
alter the customer's or supplier's level or type of business with the Company or
(ii) a trade journalist or publication to write or publish favorable information
about the Company or its business.
4. Certain Covenants: The Company hereby covenants and agrees with each
-----------------
Underwriter:
(a) to furnish such information as may be required and otherwise to
cooperate in qualifying the Shares for offering and sale under the securities or
blue sky laws of such states as the Representatives may designate and to
maintain such qualifications in effect as long as required for the distribution
of the Shares, provided that the Company shall not be required to qualify as a
foreign corporation or to consent to the service of process under the laws of
any such state (except service of process with respect to the offering and sale
of the Shares);
(b) to prepare the Prospectus in a form approved by the Underwriters and
timely file such Prospectus with the Commission pursuant to Rule 424(b) and to
furnish promptly to the Underwriters as many copies of the Prospectus (or of the
Prospectus as amended or supplemented if the Company shall have made any
amendments or supplements thereto after the effective date of the Registration
Statement) as the Underwriters may reasonably request for the purposes
contemplated by the Securities Act Regulations, which Prospectus and any
amendments or supplements thereto furnished to the Underwriters will be
identical to the version created to be transmitted to the Commission for filing
via EDGAR, except to the extent permitted by Regulation S-T;
(c) to advise the Representatives promptly and (if requested by the
Representatives) to confirm such advice in writing, when the Registration
Statement has become effective and when any post-effective amendment thereto
becomes effective under the Securities Act Regulations;
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<PAGE>
(d) to advise the Representatives immediately, confirming such advice in
writing, of (i) the receipt of any comments from, or any request by, the
Commission for amendments or supplements to the Registration Statement or
Prospectus or for additional information with respect thereto, or (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus, or of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceedings for any of such purposes and, if
the Commission or any other government agency or authority should issue any such
order, to make every reasonable effort to obtain the lifting or removal of such
order as soon as possible; to advise the Representatives promptly of any
proposal to amend or supplement the Registration Statement or Prospectus and to
file no such amendment or supplement to which the Representatives shall
reasonably object in writing;
(e) to furnish to the Representatives and to each Underwriter who may so
request in writing for a period of five years from the date of this Agreement
(i) concurrently with their dissemination to the holders of its Common Stock,
copies of all annual, quarterly and current reports or other communications
supplied to such holders, (ii) as soon as practicable after the filing thereof,
copies of all reports filed by the Company with the Commission, the NASD or any
securities exchange and (iii) such other information as the Underwriters may
reasonably request regarding the Company and its Subsidiaries;
(f) to advise the Underwriters promptly of the happening of any event
known to the Company within the time during which a Prospectus relating to the
Shares is required to be delivered under the Securities Act Regulations which,
in the judgment of the Company, would require the making of any change in the
Prospectus then being used so that the Prospectus would not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and, during such time,
to prepare and furnish, at the Company's expense, to the Underwriters promptly
such amendments or supplements to such Prospectus as may be necessary to reflect
any such change and to furnish to the Underwriters for their information a copy
of such proposed amendment or supplement before filing any such amendment or
supplement with the Commission;
(g) to furnish promptly to the Representatives a signed copy of the
Registration Statement, as initially filed with the Commission, and of all
amendments or supplements thereto (including all exhibits filed therewith or
incorporated by reference therein to the extent not previously furnished to the
Representatives) and such number of conformed copies of the foregoing as the
Representatives may reasonably request;
(h) to apply the net proceeds of the sale of the Shares in accordance with
its statements under the caption "Use of Proceeds" in the Prospectus;
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<PAGE>
(i) to make generally available to its security holders as soon as
practicable, but in any event not later than the end of the fiscal quarter first
occurring after the first anniversary of the effective date of the Registration
Statement an earnings statement complying with the provisions of Section 11(a)
of the Securities Act (in form, at the option of the Company, complying with the
provisions of Rule 158 of the Securities Act Regulations,) covering a period of
12 months beginning after the effective date of the Registration Statement;
(j) to use its best efforts to effect and maintain the quotation of the
Shares on Nasdaq and to file with Nasdaq all documents and notices required by
Nasdaq of companies that have securities that are traded in the over-the-counter
market and quotations for which are reported by Nasdaq;
(k) to engage and maintain, at its expense, a registrar and transfer agent
for the Shares;
(l) to refrain during a period of 180 days from the date of the
Prospectus, without the prior written consent of FBR, from (i) offering,
pledging, selling, contracting to sell, selling any option or contract to
purchase, purchasing any option or contract to sell, granting any option for the
sale of, or otherwise disposing of or transferring, directly or indirectly, any
share of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or filing any registration statement under the
Securities Act with respect to any of the foregoing, or (ii) entering into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
the Shares to be sold hereunder, the Warrants and the Warrant Shares to be
issued upon exercise of the Warrants, (B) any shares of Common Stock issued by
the Company upon the exercise of an option outstanding on the date hereof and
referred to in the Prospectus, or (C) such issuances of options or grants of
restricted stock under the Company's 1999 Omnibus Stock Incentive Plan as are
described in the Prospectus;
(m) to not itself, and to use its best efforts to cause its officers,
directors and affiliates not to, take, directly or indirectly prior to
termination of the underwriting syndicate contemplated by this Agreement, any
action designed to stabilize or manipulate the price of any security of the
Company, or which may cause or result in, or which might in the future
reasonably be expected to cause or result in, the stabilization or manipulation
of the price of any security of the Company, to facilitate the sale or resale of
any of the Shares;
(n) to pay, or reimburse if paid by the Underwriters, all stamp duties,
similar taxes or duties or other taxes, if any, incurred by the Underwriters in
connection with the Directed Share Program.
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5. Payment of Expenses:
-------------------
(a) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, whether or not the
transactions contemplated hereunder are consummated or this Agreement is
terminated, including expenses, fees and taxes in connection with (i) the
preparation and filing of the Registration Statement, each Preliminary
Prospectus, the Prospectus, and any amendments or supplements thereto, and the
printing and furnishing of copies of each thereof to the Underwriters and to
dealers (including costs of mailing and shipment), (ii) the preparation,
issuance and delivery of the certificates for the Shares to the Underwriters and
the Warrants, and when issued, the Warrant Shares, to FBR, including any stock
or other transfer taxes or duties payable upon the sale of the Shares to the
Underwriters or the issuance of the Warrant Shares to FBR, (iii) the printing of
this Agreement and any dealer agreements and furnishing of copies of each to the
Underwriters and to dealers (including costs of mailing and shipment), (iv) the
qualification of the Shares for offering and sale under state laws that the
Company and the Representatives have mutually agreed are appropriate and the
determination of their eligibility for investment under state law as aforesaid
(including the legal fees and filing fees and other disbursements of counsel for
the Underwriters and the printing and furnishing of copies of any blue sky
surveys or legal investment surveys to the Underwriters and to dealers), (v)
filing for review of the public offering of the Shares by the NASD (including
the legal fees and filing fees and other disbursements of counsel for the
Underwriters relating thereto), (vi) the fees and expenses of any transfer agent
or registrar for the Shares and miscellaneous expenses referred to in the
Registration Statement, (vii) the fees and expenses incurred in connection with
the inclusion of the Shares on Nasdaq, (viii) expenses of the Company in making
road show presentations with respect to the offering of the Shares, (ix)
preparing and distributing bound volumes of transaction documents for the
Representatives and its legal counsel and (x) the performance of the Company's
other obligations hereunder. Upon the request of the Representatives, the
Company will provide funds in advance for filing fees.
(b) The Company agrees to reimburse FBR for its reasonable out-of-pocket
expenses actually incurred up to $125,000 in connection with the performance of
its activities under this Agreement, including, but not limited to, costs such
as printing, facsimile, courier service, direct computer expenses,
accommodations, travel and road show expenses of the Underwriters. The Company
further agrees to reimburse FBR, up to $300,000 for the fees and expenses of the
Underwriters' outside legal counsel and any other advisors, accountants,
appraisers, etc. (in addition to the fees and expenses of counsel with respect
to state securities or blue sky laws and obtaining the filing for review of the
public offering of the Shares by the NASD, all of which shall be reimbursed by
the Company pursuant to the provisions of subsection (a) above).
6. Conditions of the Underwriters' Obligations: The obligations of the
-------------------------------------------
Underwriters hereunder to purchase Shares at the Closing Time or on the Date of
Delivery, as applicable, are subject to the accuracy of the representations and
warranties
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on the part of the Company on the date hereof and at the Closing Time and on
each Date of Delivery, as applicable, the performance by the Company of its
obligations hereunder and the satisfaction of the following further conditions
at the Closing Time or on the Date of Delivery, as applicable:
(a) The Company shall furnish to the Underwriters at the Closing Time and
on each Date of Delivery an opinion of Cadwalader, Wickersham & Taft, counsel
for the Company and its Subsidiaries, addressed to the Underwriters and dated
the Closing Time and each Date of Delivery and in form and substance reasonably
satisfactory to Gibson, Dunn & Crutcher LLP, counsel for the Underwriters,
substantially to the effect that:
(i) the Company has an authorized capitalization as set forth in the
Prospectus under the caption "Capitalization"; the outstanding shares of
capital stock of the Company and its Subsidiaries have been duly and validly
authorized and issued and are fully paid and non-assessable, and all of the
outstanding shares of capital stock of the Subsidiaries are directly or
indirectly owned of record and beneficially by the Company; except as disclosed
in the Prospectus, there are no outstanding (i) securities or obligations of the
Company or any of its Subsidiaries convertible into or exchangeable for any
capital stock of the Company or any such Subsidiary, (ii) warrants, rights or
options to subscribe for or purchase from the Company or any such Subsidiary any
such capital stock or any such convertible or exchangeable securities or
obligations, or (iii) obligations of the Company or any such Subsidiary to issue
any shares of capital stock, any such convertible or exchangeable securities or
obligation, or any such warrants, rights or options;
(ii) the Company and its Subsidiaries each has been duly incorporated
and is validly existing as a corporation in good standing under the laws of its
respective jurisdiction of incorporation with full corporate power and authority
to own its respective properties and to conduct its respective business as
described in the Registration Statement and Prospectus and, in the case of the
Company, to execute and deliver this Agreement and the Warrant Agreement and to
consummate the transactions described in this Agreement and in the Warrant
Agreement, including to issue and sell the Shares and the Warrant Shares;
(iii) the Company and its Subsidiaries are duly qualified or licensed
by, and are in good standing in, each jurisdiction in which they conduct their
respective businesses or in which they own or lease real property or maintain an
office and in which such qualification or licensing is necessary and in which
the failure, individually or in the aggregate, to be so qualified or licensed
could have a Material Adverse Effect; except as disclosed in the Prospectus, no
Subsidiary is prohibited or restricted, directly or indirectly, from paying
dividends to the Company, or from making any other distribution with respect to
such Subsidiary's capital stock or from repaying to the Company or any other
Subsidiary, any amounts which may from time to time become due under any loans
or advances to such Subsidiary from the Company or such other Subsidiary, or
from transferring any such Subsidiary's property or assets to the Company or to
any other
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<PAGE>
Subsidiary; other than as disclosed in the Prospectus, the Company does not own,
directly or indirectly, any capital stock or other equity securities of any
other corporation or any ownership interest in any partnership, joint venture or
other association;
(iv) to such counsel's knowledge, the Company and its Subsidiaries
are in compliance in all material respects with all material applicable laws,
orders, rules, regulations and orders, including those relating to transactions
with affiliates;
(v) to such counsel's knowledge, neither the Company nor any of its
Subsidiaries is in breach of, or in default under (nor has any event occurred
which with notice, lapse of time, or both would constitute a breach of, or
default under), any license, indenture, mortgage, deed of trust, loan or credit
agreement or any other agreement or instrument to which the Company or any of
its Subsidiaries is a party or by which any of them or their respective
properties may be bound or affected or under any law, regulation or rule or any
decree, judgment or order applicable to the Company or any of its Subsidiaries,
except such breaches or defaults which would not have a Material Adverse Effect;
(vi) the execution, delivery and performance of this Agreement, the
Warrant Agreement and the Warrants by the Company and the consummation by the
Company of the transactions contemplated by this Agreement, the Warrant
Agreement and the Warrants do not and will not (A) conflict with, or result in
any breach of, or constitute a default under (nor constitute any event which
with notice, lapse of time, or both would constitute a breach of or default
under), (i) any provisions of the certificate of incorporation, charter or by-
laws of the Company or any Subsidiary, (ii) any provision of any material
license, indenture, mortgage, deed of trust, loan, credit or other agreement or
instrument known by such counsel and to which the Company or any Subsidiary is a
party or by which any of them or their respective properties or assets may be
bound or affected, (iii) any federal or New York State law or regulation binding
upon or applicable to the Company or any Subsidiary or any of their respective
properties or assets, or (iv) any decree, judgment or order known to such
counsel to be applicable to the Company or any Subsidiary; or (B) result in the
creation or imposition of any lien, charge, claim or encumbrance upon any
property or assets of the Company or its Subsidiaries;
(vii) this Agreement, the Warrant Agreement and the Warrants have
been duly authorized, executed and delivered by the Company and are legal, valid
and binding agreements of the Company enforceable in accordance with their
respective terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally, and by general principles of equity, and except to the extent
that the indemnification and contribution provisions set forth in Section 9 of
this Agreement may be limited by federal or state securities laws and public
policy considerations in respect thereof;
(viii) no approval, authorization, consent or order of or filing with
any federal or state governmental or regulatory commission, board, body,
authority or agency
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<PAGE>
is required in connection with the execution, delivery and performance of this
Agreement, the Warrant Agreement or the Warrants by the Company, the
consummation of the transactions contemplated hereby and thereby, and the sale
and delivery of the Shares and the Warrant Shares by the Company as contemplated
hereby and thereby, other than such as have been obtained or made under the
Securities Act and the Securities Act Regulations, and except that such counsel
need express no opinion as to any necessary qualification under the state
securities or blue sky laws of the various jurisdictions in which the Shares are
being offered by the Underwriters or any approval of the underwriting terms and
arrangements by the National Association of Securities Dealers, Inc.;
(ix) to such counsel's knowledge, each of the Company and its
Subsidiaries has all necessary material licenses, authorizations, consents and
approvals and has made all necessary material filings required under any federal
or New York State law, regulation or rule, and has obtained all necessary
material authorizations, consents and approvals from other persons, required to
conduct their respective businesses, as described in the Prospectus; to such
counsel's knowledge neither the Company nor any of its Subsidiaries is in
violation of, in default under, or has received any notice regarding a possible
violation, default or revocation of any such material license, authorization,
consent or approval or any federal or New York State law or regulation or any
decree, order or judgment applicable to the Company or any of its Subsidiaries;
(x) all necessary corporate action has been duly and validly taken
by the Company to authorize the execution, delivery and performance of this
Agreement, the Warrant Agreement and the Warrants, and the issuance and sale of
the Shares, the Warrants and the Warrant Shares; the Shares and the Warrant
Shares have been duly authorized and when the Shares and the Warrant Shares have
been issued and duly delivered against payment therefor by the Underwriters as
contemplated by this Agreement and the Warrant Agreement, respectively, the
Shares and the Warrant Shares will be validly issued, fully paid and
nonassessable, free and clear of any pledge, lien, encumbrance, security
interest, or other claim;
(xi) the issuance and sale of the Shares and the Warrant Shares by
the Company is not subject to preemptive or other similar rights arising by
operation of law, under the certificate of incorporation, charter or by-laws of
the Company, or under any agreement known to such counsel to which the Company
or any of its Subsidiaries is a party;
(xii) to such counsel's knowledge, there are no persons with
registration or other similar rights to have any equity securities, including
securities which are convertible into or exchangeable for equity securities,
registered pursuant to the Registration Statement or otherwise registered by the
Company under the Securities Act;
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<PAGE>
(xiii) the Common Stock, the Shares and the Warrants conform in all
material respects to the descriptions thereof contained in the Registration
Statement and Prospectus;
(xiv) the form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory requirements,
with any applicable requirements of the certificate of incorporation and by-laws
of the Company and the requirements of Nasdaq;
(xv) the Registration Statement has become effective under the
Securities Act and no stop order suspending the effectiveness of the
Registration Statement has been issued and, to such counsel's knowledge, no
proceedings with respect thereto have been commenced or threatened;
(xvi) as of the effective date of the Registration Statement, the
Registration Statement and the Prospectus (except as to the financial statements
and other financial and statistical data contained therein, as to which such
counsel need express no opinion) complied as to form in all material respects
with the requirements of the Securities Act and the Securities Act Regulations;
(xvii) the statements under the captions "Transactions Related to the
Offering," "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources," "Business - Loan
Funding and Borrowing Arrangements," "Business - Government Regulation,"
"Capitalization," "Management - Stock Incentive Plan," "Management - Employment
Agreements," "Certain Transactions," "Description of Capital Stock," and "Shares
Eligible for Future Sale," in the Registration Statement and the Prospectus,
insofar as such statements constitute a summary of the legal matters referred to
therein, constitute accurate summaries thereof in all material respects;
(xviii) there are no actions, suits or proceedings, inquiries, or
investigations pending or, to such counsel's knowledge, threatened against the
Company or any of its Subsidiaries or any of their respective officers and
directors or to which the properties, assets or rights of any such entity are
subject, at law or in equity, before or by any federal, state, local or foreign
governmental or regulatory commission, board, body, authority, arbitral panel or
agency which are required to be described in the Prospectus but are not so
described;
(xix) there are no contracts or documents of a character which are
required to be filed as exhibits to the Registration Statement or required to be
described or summarized in the Prospectus which have not been so filed,
summarized or described, and all such summaries and descriptions, in all
material respects, fairly and accurately set forth the material provisions of
such contracts and documents;
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<PAGE>
(xx) the Company and each Subsidiary owns or possesses such licenses
or other rights to use all patents, trademarks, service marks, trade names,
copyrights, software and design licenses, trade secrets, manufacturing
processes, other intangible property rights and know-how (collectively
"Intangibles") as are necessary to entitle the Company and each Subsidiary to
conduct its business as currently conducted as described in the Prospectus, and
neither the Company, nor any Subsidiary, has received written notice of
infringement of or conflict with asserted rights of others with respect to any
Intangibles which could have a Material Adverse Effect; and
(xxi) neither the Company nor any of the Subsidiaries is or, after
giving effect to the offering and sale of the Shares, will be an "investment
company" or an entity "controlled" by an "investment company", as such terms are
defined in the Investment Company Act of 1940, as amended.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company, independent
public accountants of the Company, representatives of the Representatives, at
which the contents of the Registration Statement and Prospectus were discussed
and, although such counsel is not passing upon and does not assume
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or Prospectus (except as and to the
extent stated in subparagraphs (xiii), (xvii), and (xix) above), they have no
reason to believe that the Registration Statement, the Preliminary Prospectus or
the Prospectus, as of their respective effective or issue dates and as of the
date of such counsel's opinion, contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading (it being understood
that, in each case, such counsel need express no view with respect to the
financial statements and other financial and statistical data included in the
Registration Statement, Preliminary Prospectus or Prospectus).
In rendering its opinion, Cadwalader, Wickersham & Taft is authorized to
rely upon the opinion of Weiner, Brodsky, Sidman & Kider, P.C. with respect to
the opinions regarding licensing of the Subsidiaries called for by Section
6(a)(iii) and 6(a)(ix) and the opinion regarding statements under the caption
"Business - Government Regulation" called for by Section 6(a)(xvii).
(b) The Representatives shall have received from Deloitte & Touche LLP,
letters dated, respectively, as of the date of this Agreement, the Closing Time
and each Date of Delivery, as the case may be, addressed to the Representatives,
in form and substance reasonably satisfactory to the Representatives, relating
to the financial statements, including any pro forma financial statements, of
the Company and its Subsidiaries, and such other matters customarily covered by
comfort letters issued in connection with registered public offerings.
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<PAGE>
(c) The Representatives shall have received at the Closing Time and on
each Date of Delivery the favorable opinion of Gibson, Dunn & Crutcher LLP,
dated the Closing Time or such Date of Delivery, addressed to the
Representatives and in form and substance reasonably satisfactory to the
Representatives.
(d) No amendment or supplement to the Registration Statement or Prospectus
shall have been filed to which the Underwriters shall have objected in writing.
(e) Prior to the Closing Time and each Date of Delivery (i) no stop order
suspending the effectiveness of the Registration Statement or any order
preventing or suspending the use of any Preliminary Prospectus or Prospectus has
been issued, and no proceedings for such purpose shall have been initiated or
threatened, by the Commission, and no suspension of the qualification of the
Shares for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes, has occurred; and (ii)
the Registration Statement and the Prospectus shall not contain an untrue
statement of material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(f) Between the time of execution of this Agreement and the Closing Time
or the relevant Date of Delivery (i) no material and unfavorable change in the
assets, business, results of operations or condition (financial or otherwise) of
the Company and its Subsidiaries taken as a whole shall occur or become known
(whether or not arising in the ordinary course of business), and (ii) no
transaction which is material and unfavorable to the Company shall have been
entered into by the Company or any of its Subsidiaries.
(g) The Shares shall have been approved for inclusion in Nasdaq.
(h) The NASD shall not have raised any objection with respect to the
fairness and reasonableness of the underwriting terms and arrangements.
(i) The Representatives shall have received lock-up agreements from each
officer, director and stockholder of the Company, in the form of Exhibit A
attached hereto, and such letter agreements shall be in full force and effect.
(j) The Company will, at the Closing Time and on each Date of Delivery,
deliver to the Underwriters a certificate of its Chairman of the Board, Chief
Executive Officer and President and its Vice President and Chief Financial
Officer, to the effect that, to each of such officer's knowledge, the
representations and warranties of the Company set forth in this Agreement are
true and correct on and as of such date with the same effect as if made on such
date, and the Company has performed all covenants and agreements and satisfied
all conditions contained in this Agreement required to be performed or satisfied
by it at or prior to such date.
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<PAGE>
(k) The Company shall have furnished to the Underwriters such other
documents and certificates as to the accuracy and completeness of any statement
in the Registration Statement and the Prospectus, the representations,
warranties and statements of the Company contained herein, and the performance
by the Company of its covenants contained herein, and the fulfillment of any
conditions contained herein, as of the Closing Time or any Date of Delivery as
the Underwriters may reasonably request.
(l) The Company shall have performed such of its obligations under this
Agreement as are to be performed by the terms hereof at or before the Closing
Time or the relevant Date of Delivery.
7. Termination: The obligations of the several Underwriters hereunder
-----------
shall be subject to termination in the absolute discretion of the
Representatives, at any time prior to the Closing Time or any Date of Delivery,
(i) if any of the conditions specified in Section 6 shall not have been
fulfilled when and as required by this Agreement to be fulfilled, or (ii) if
there has been since the respective dates as of which information is given in
the Registration Statement, any material adverse change in or affecting the
assets, business, operations, financial condition of the Company or any
Subsidiary, whether or not arising in the ordinary course of business, or (iii)
if there has occurred any outbreak or escalation of hostilities or other
national or international calamity or crisis or change in economic, political or
other conditions the effect of which on the financial markets of the United
States is such as to make it, in the sole judgment of the Representatives,
impracticable to market the Shares or enforce contracts for the sale of the
Shares, or (iv) if trading in any securities of the Company has been suspended
by the Commission or by Nasdaq, or if trading generally on the New York Stock
Exchange or in the Nasdaq over-the-counter market has been suspended (including
any automatic halt in trading pursuant to market-decline triggers other than
those in which solely program trading is temporarily halted), or limitations on
prices for trading (other than limitations on hours or numbers of days of
trading) have been fixed, or maximum ranges for prices for securities have been
required, by such exchange or the NASD or Nasdaq or by order of the Commission
or any other governmental authority, or (v) any federal or state statute,
regulation, rule or order of any court or other governmental authority has been
enacted, published, decreed or otherwise promulgated which in the reasonable
opinion of the Representatives materially adversely affects or will materially
adversely affect the business or operations of the Company, or (vi) any action
has been taken by any federal, state or local government or agency in respect of
its monetary or fiscal affairs which in the reasonable opinion of the
Representatives has a material adverse effect on the securities markets in the
United States.
(a) If the Representatives elect to terminate this Agreement as provided in
this Section 7, the Company and the Underwriters shall be notified promptly by
telephone, promptly confirmed by facsimile.
(b) If the sale to the Underwriters of the Shares, as contemplated by this
Agreement, is not carried out by the Underwriters for any reason permitted under
this
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<PAGE>
Agreement or if such sale is not carried out because the Company shall be unable
to comply in all material respects with any of the terms of this Agreement, the
Company shall not be under any obligation or liability under this Agreement
(except to the extent provided in Sections 5 and 9 hereof) and the Underwriters
shall be under no obligation or liability to the Company under this Agreement
(except to the extent provided in Section 9 hereof) or to one another hereunder.
8. Increase in Underwriters' Commitments: If any Underwriter shall
-------------------------------------
default at the Closing Time or on a Date of Delivery in its obligation to take
up and pay for the Shares to be purchased by it under this Agreement on such
date the Representatives shall have the right, within 36 hours after such
default, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Shares which such defaulting Underwriter shall have agreed but failed to
take up and pay for (the "Defaulted Shares"). Absent the completion of such
arrangements within such 36 hour period, (i) if the total number of Defaulted
Shares does not exceed 10% of the total number of Shares to be purchased on such
date, each non-defaulting Underwriter shall take up and pay for (in addition to
the number of Shares which it is otherwise obligated to purchase on such date
pursuant to this Agreement) the portion of the total number of Shares agreed to
be purchased by the defaulting Underwriter on such date in the proportion that
its underwriting obligations hereunder bears to the underwriting obligations of
all non-defaulting Underwriters; and (ii) if the total number of Defaulted
Shares exceeds 10% of such total, the Representatives may terminate this
Agreement by notice to the Company, without liability to any non-defaulting
Underwriter.
Without relieving any defaulting Underwriter from its obligations
hereunder, the Company agrees with the non-defaulting Underwriters that it will
not sell any Shares hereunder on such date unless all of the Shares to be
purchased on such date are purchased on such date by the Underwriters (or by
substituted Underwriters selected by the Representatives with the approval of
the Company or selected by the Company with the approval of the
Representatives).
If a new Underwriter or Underwriters are substituted for a defaulting
Underwriter in accordance with the foregoing provision, the Company or the non-
defaulting Underwriters shall have the right to postpone the Closing Time or the
relevant Date of Delivery for a period not exceeding five business days in order
that any necessary changes in the Registration Statement and Prospectus and
other documents may be effected.
The term Underwriter as used in this Agreement shall refer to and include
any Underwriter substituted under this Section 8 with the like effect as, if
such substituted Underwriter had originally been named in this Agreement.
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<PAGE>
9. Indemnity and Contribution by the Company and the Underwriters:
--------------------------------------------------------------
(a) (i) The Company agrees to indemnify, defend and hold harmless each
Underwriter and any person who controls any Underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, from and
against any loss, expense, liability, damage or claim (including the reasonable
cost of investigation) which, jointly or severally, any such Underwriter or
controlling person may incur under the Securities Act, the Exchange Act or
otherwise, insofar as such loss, expense, liability, damage or claim arises out
of or is based upon (A) any breach of any representation, warranty or covenant
of the Company contained herein, (B) any failure on the part of the Company to
comply with any applicable law, rule or regulation relating to the offering of
securities being made pursuant to the Prospectus, or (C) any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or in the Registration Statement as amended by any post-effective
amendment thereof by the Company) or in a Prospectus (the term Prospectus for
the purpose of this Section 9 being deemed to include any Preliminary
Prospectus, the Prospectus and the Prospectus as amended or supplemented by the
Company), or arises out of or is based upon any omission or alleged omission to
state a material fact required to be stated in either such Registration
Statement or Prospectus or necessary to make the statements made therein, in the
light of the circumstances under which they were made, not misleading, except
insofar as any such loss, expense, liability, damage or claim arises out of or
is based upon any untrue statement or alleged untrue statement or omission or
alleged omission of a material fact contained in and in conformity with
information furnished in writing by the Underwriters through the Representatives
to the Company expressly for use in such Registration Statement (or in the
Registration Statement as amended by any post-effective amendment thereof by the
Company) or such Prospectus.
(b) If any action is brought against an Underwriter or controlling person
in respect of which indemnity may be sought against the Company pursuant to
subsection (a) above, such Underwriter shall promptly notify the Company in
writing of the institution of such action, and the Company shall assume the
defense of such action, including the employment of counsel and payment of
expenses, provided, however, that any failure or delay to so notify the Company
will not relieve the Company of any obligation hereunder, except to the extent
that its ability to defend is actually impaired by such failure or delay. Such
Underwriter or controlling person shall have the right to employ its or their
own counsel in any such case, but the fees and expenses of such counsel shall be
at the expense of such Underwriter or such controlling person unless the
employment of such counsel shall have been authorized in writing by the Company
in connection with the defense of such action, or the Company shall not have
employed counsel to have charge of the defense of such action within a
reasonable time or such indemnified party or parties shall have reasonably
concluded (based on the advice of counsel) that there may be defenses available
to it or them which are different from or additional to those available to the
Company (in which case the Company shall not have the right to direct the
defense of such action on behalf of the indemnified party or
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<PAGE>
parties), in any of which events such fees and expenses shall be borne by the
Company and paid as incurred (it being understood, however, that the Company
shall not be liable for the expenses of more than one separate firm of attorneys
for the Underwriters or controlling persons in any one action or series of
related actions in the same jurisdiction (other than local counsel in any such
jurisdiction) representing the indemnified parties who are parties to such
action). Anything in this paragraph to the contrary notwithstanding, the Company
shall not be liable for any settlement of any such claim or action effected
without its written consent.
(c) Each Underwriter agrees, severally and not jointly, to indemnify,
defend and hold harmless the Company, the Company's directors, the Company's
officers that signed the Registration Statement, and any person who controls the
Company within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act, from and against any loss, expense, liability, damage or claim
(including the reasonable cost of investigation) which, jointly or severally,
the Company, or any such person may incur under the Securities Act, the Exchange
Act or otherwise, but only insofar as such loss, expense, liability, damage or
claim arises out of or is based upon any untrue statement or alleged untrue
statement of a material fact (or omission or alleged omission necessary to make
such statements, in the light of the circumstances under which they were made,
not misleading) contained in and in conformity with information furnished in
writing by such Underwriter through the Representatives to the Company expressly
for use in the Registration Statement (or in the Registration Statement as
amended by any post-effective amendment thereof by the Company) or in a
Prospectus, or arises out of or is based upon any omission or alleged omission
to state a material fact in connection with such information required to be
stated either in such Registration Statement or Prospectus or necessary to make
such information, in the light of the circumstances under which made, not
misleading. The statements set forth in the [third, sixth, seventh and twelfth]
paragraphs under the caption "Underwriting" in the Preliminary Prospectus and
the Prospectus (to the extent such statements relate to the Underwriters)
constitute the only information furnished by or on behalf of any Underwriter
through the Representatives to the Company for purposes of Section 3(j) and this
Section 9.
If any action is brought against the Company or any such person in
respect of which indemnity may be sought against any Underwriter pursuant to the
foregoing paragraph, the Company or such person shall promptly notify the
Representatives in writing of the institution of such action and the
Representatives, on behalf of the Underwriters, shall assume the defense of such
action, including the employment of counsel and payment of expenses. The Company
or such person shall have the right to employ its own counsel in any such case,
but the fees and expenses of such counsel shall be at the expense of the Company
or such person unless the employment of such counsel shall have been authorized
in writing by the Representatives in connection with the defense of such action
or the Representatives shall not have employed counsel to have charge of the
defense of such action within a reasonable time or such indemnified party or
parties shall have reasonably concluded (based on the advice of counsel) that
there may
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<PAGE>
be defenses available to it or them which are different from or additional to
those available to the Underwriters (in which case the Representatives shall not
have the right to direct the defense of such action on behalf of the indemnified
party or parties), in any of which events such fees and expenses shall be borne
by such Underwriter and paid as incurred (it being understood, however, that the
Underwriters shall not be liable for the expenses of more than one separate firm
of attorneys in any one action or series of related actions in the same
jurisdiction (other than local counsel in any such jurisdiction) representing
the indemnified parties who are parties to such action). Anything in this
paragraph to the contrary notwithstanding, no Underwriter shall be liable for
any settlement of any such claim or action effected without the written consent
of the Representatives.
(d) If the indemnification provided for in this Section 9 is unavailable to
an indemnified party under subsections (a), (b) and (c) of this Section 9 in
respect of any losses, expenses, liabilities, damages or claims referred to
therein, then each applicable indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, expenses, liabilities, damages or
claims (i) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Underwriters from the offering of the Shares or
(ii) if (but only if) the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company and of the Underwriters in connection with the statements
or omissions which resulted in such losses, expenses, liabilities, damages or
claims, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Underwriters shall be deemed to be in
the same proportion as, the total proceeds from the offering (net of
underwriting discounts and commissions but before deducting expenses) received
by the Company bear to the underwriting discounts and commissions received by
the Underwriters. The relative fault of the Company and of the Underwriters
shall be determined by reference to, among other things, whether the untrue
statement or alleged untrue statement of a material fact or omission or alleged
omission relates to information supplied by the Company or by the Underwriters
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The amount paid or
payable by a party as a result of the losses, claims, damages and liabilities
referred to above shall be deemed to include any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or defending
any claim or action.
(e) The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in subsection (d)(i) and, if applicable
(ii), above. Notwithstanding the provisions of this Section 9, no Underwriter
shall be required to contribute any amount in excess of the
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<PAGE>
underwriting discounts and commissions applicable to the Shares purchased by
such Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 9 are several in proportion to their respective underwriting commitments
and not joint.
10. Survival: The indemnity and contribution agreements contained in
--------
Section 9 and the covenants, warranties and representations of the Company
contained in Sections 3 and 4 of this Agreement shall remain in full force and
effect regardless of any investigation made by or on behalf of any Underwriter,
or any person who controls any Underwriter within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act, or by or on behalf of the
Company, its directors and officers, or any person who controls the Company
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, and shall survive any termination of this Agreement or the sale
and delivery of the Shares. The Company and each Underwriter agree promptly to
notify the others of the commencement of any litigation or proceeding against it
and, in the case of the Company, against any of the Company's officers and
directors, in connection with the sale and delivery of the Shares, or in
connection with the Registration Statement or Prospectus.
11. Notices: Except as otherwise herein provided, all statements,
-------
requests, notices and agreements shall be in writing or by telegram and, if to
the Underwriters, shall be sufficient in all respects if delivered to Friedman,
Billings, Ramsey & Co., Inc., 1001 19th Street North, Arlington, Virginia 22209,
Attention: Syndicate Department; or if to the Company, shall be sufficient in
all respects if delivered to the Company at the offices of the Company at 12
East 49th Street, New York, New York 10017 Attention: Michael Strauss.
12. Governing Law; Headings: THIS AGREEMENT SHALL BE GOVERNED BY, AND
-----------------------
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO CONFLICTS OF LAWS PRINCIPLES. The section headings in this Agreement have
been inserted as a matter of convenience of reference and are not a part of this
Agreement.
13. Parties at Interest: The Agreement herein set forth has been and is
-------------------
made solely for the benefit of the Underwriters, the Company and the controlling
persons, directors and officers referred to in Sections 9 and 10 hereof, and
their respective successors, assigns, executors and administrators. No other
person, partnership, association or corporation (including a purchaser, as such
purchaser, from any of the Underwriters) shall acquire or have any right under
or by virtue of this Agreement.
14. Counterparts and Facsimile Signatures: This Agreement may be signed
-------------------------------------
by the parties in counterparts which together shall constitute one and the same
agreement among the parties. A facsimile signature shall constitute an original
signature for all purposes.
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<PAGE>
If the foregoing correctly sets forth the understanding among the
Company and the Underwriters, please so indicate in the space provided below for
the purpose, whereupon this Agreement shall constitute a binding agreement among
the Company and the Underwriters.
Very truly yours,
AMERICAN HOME MORTGAGE HOLDINGS, INC.
By: _____________________________
Name:
Title:
Accepted and agreed to as
of the date first above written:
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
ADVEST, INC.
By: FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By: _______________________________
Name:
Title:
For themselves and as Representatives of the other
Underwriters named on Schedule I hereto.
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<PAGE>
Schedule I
Number of Initial
Underwriter Shares to be Purchased
- --------------------------------------
Friedman, Billings, Ramsey & Co., Inc.
Advest, Inc.
[INSERT NAMES OF OTHER UNDERWRITERS]
Total................................... 2,500,000
=========
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<PAGE>
Schedule II
Subsidiaries of the Company
American Home Mortgage Corp.
-31-
<PAGE>
EXHIBIT A
[FORM OF LOCK-UP AGREEMENT FOR OFFICERS, DIRECTORS, STOCKHOLDERS,
EMPLOYEES AND AMERICAN HOME MORTGAGE HOLDINGS, INC.]
September __, 1999
Friedman, Billings, Ramsey & Co., Inc.
Advest, Inc.
c/o Friedman, Billings, Ramsey & Co., Inc.
as Representatives of the several Underwriters
1001 19th Street North
Arlington, Virginia 22209
Ladies and Gentlemen:
The undersigned understands and agrees as follows:
1. Friedman, Billings, Ramsey & Co., Inc. ("FBR") and Advest, Inc.
propose to enter into an Underwriting Agreement (the "Underwriting
Agreement") with American Home Mortgage Holdings, Inc., a Delaware
corporation (the "Company"), providing for the public offering (the "Public
Offering") by the several Underwriters, including FBR and Advest, Inc. (the
"Underwriters"), of 2,500,000 shares (the "Shares") of the Common Stock,
$0.01 par value, of the Company (the "Common Stock"), and in connection
therewith, the Company has filed a registration statement, File No. 333-
82409 (the "Registration Statement") with the Securities and Exchange
Commission.
2. After consultation, the Company, FBR and Advest, Inc., acting as
representatives of the Underwriters for the Public Offering, have agreed
that sales by the sole stockholder and certain officers, directors and
affiliates of the Company within the [540 in the case of Michael
Strauss/180 in the case of all others]-day period after the date of
effectiveness of the Registration Statement could have an adverse effect on
the market price for the Common Stock and that the public to whom the
Common Stock is being offered should be protected for a reasonable time
from the impact of such sales.
-32-
<PAGE>
3. It is in the best interest of the Company and its officers,
directors and stockholders to have a successful public offering and stable
and orderly public market thereafter.
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned
hereby agrees that, without the prior written consent of FBR on behalf of the
Underwriters, it will not, during the period commencing on the effective date of
the Registration Statement and ending [540/180] days after the date of the final
prospectus relating to the Public Offering, (1) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, lend, or otherwise
transfer or dispose of, directly or indirectly, any equity securities of the
Company or any securities convertible into or exercisable or exchangeable for
equity securities of the Company or (2) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of equity securities of the Company, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of Common
Stock or other securities, in cash or otherwise.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York without regard to principles of conflict of laws.
Whether or not the Public Offering actually occurs depends on a number of
factors, including market conditions. Any Public Offering will only be made
pursuant to the Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
_________________________
Name:
Address:
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<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
AMERICAN HOME MORTGAGE HOLDINGS, INC.
-----------------------------------------------
Pursuant to Sections 242 and 245 of the General
Corporation Law of the State of Delaware
-----------------------------------------------
American Home Mortgage Holdings, Inc., a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), hereby
certifies as follows:
1. The name of the Corporation is American Home Mortgage Holdings,
Inc. The name under which the Corporation was originally incorporated was
American Home Mortgage Holdings, Inc. and the date of filing of the Certificate
of Incorporation of the Corporation with the Secretary of State of the State of
Delaware was June 15, 1999.
2. This Restated Certificate of Incorporation was duly adopted by the
Board of Directors of the Corporation (the "Board") and by the sole stockholder
of the Corporation, all in accordance with the provisions of Sections 242 and
245 of the General Corporation Law of the State of Delaware (the `DGCL").
3. This Restated Certificate of Incorporation restates and
integrates, and further amends the Certificate of Incorporation of the
Corporation.
4. The Certificate of Incorporation of the Corporation is hereby
amended and restated to read in its entirety as follows:
FIRST: The name of the corporation is American Home Mortgage Holdings,
Inc. (the "Corporation").
SECOND: the registered office of the corporation in the state of
Delaware is 1209 Orange Street, Wilmington, county of New Castle, Delaware. The
name of its registered agent at that address is the Corporation Trust Company.
THIRD: the purpose of the corporation is to engage in any lawful act
or activity, without limitation, for which a corporation may be organized under
the dgcl.
FOURTH: the total number of all classes of stock which the corporation
is authorized to issue is twenty million (20,000,000) shares, consisting of
nineteen million (19,000,000) shares of common stock, each having a par value of
$0.01 (the "common stock"), and one million (1,000,000) shares of preferred
stock, each having a par value of $1.00 (the "preferred stock"). the
designations, preferences, powers, and relative, participating, optional
<PAGE>
or other special rights, and the qualifications, limitations and restrictions
thereof shall be as set forth below in article FIFTH and article SIXTH.
FIFTH:
Section 1. Except as expressly provided otherwise in this Restated
Certificate of Incorporation or as required by law, all shares of Common Stock
shall be identical and shall entitle the holders thereof to the same rights and
privileges.
Section 2. Subject to any preferential or other rights of the holders
of shares of Preferred Stock at any time outstanding, the Board may cause
dividends to be declared and paid on outstanding shares of Common Stock out of
funds legally available for the payment of dividends. When, as and if such
dividends are declared by the Board, whether payable in cash, stock or property
of the Corporation, the holders of outstanding shares of Common Stock shall be
entitled to share equally therein, in accordance with the number of shares of
Common Stock held by each such holder.
Section 3. Upon any voluntary or involuntary liquidation, dissolution
or winding-up of the affairs of the Corporation, after payment to all creditors
of the Corporation of the full amounts to which they shall be entitled and
subject to any preferential or other rights of the holders of shares of
Preferred Stock at any time outstanding, the holders of all classes of
outstanding shares of Common Stock shall be entitled to share ratably, in
accordance with the number of shares of Common Shares held by each such holder,
in all remaining assets of the Corporation available for distribution among the
stockholders of the Corporation, whether such assets are capital, surplus or
earnings. For the purposes of this Section 3, neither the consolidation or
merger of the Corporation with or into any other corporation or corporations,
nor the sale, lease, exchange or transfer by the Corporation of all or any part
of its assets, nor the reduction of the capital stock of the Corporation, shall
be deemed to be a voluntary or involuntary liquidation, dissolution, or winding-
up of the Corporation.
Section 4. Except as otherwise provided in this Restated Certificate
of Incorporation or as required by law, and subject to any voting rights
provided to the holders of shares of Preferred Stock at any time outstanding,
the holders of any outstanding shares of Common Stock shall vote together as a
single class on all matters with respect to which stockholders are entitled to
vote under applicable law, this Restated Certificate of Incorporation or the
Bylaws of the Corporation, or upon which a vote of stockholders is otherwise
duly called for by the Corporation. At each annual or special meeting of
stockholders, each holder of record of shares of Common Stock on the relevant
record date shall be entitled to cast one vote in person or by proxy for each
share of the Common Stock standing in such holder's name on the stock transfer
records of the Corporation. The holders of shares of Common Stock shall not
have cumulative voting rights.
Section 5. No holder of shares of Common Stock shall be entitled to
preemptive or subscription rights.
-2-
<PAGE>
SIXTH:
Section 1. The Preferred Stock may be issued from time to time in one
or more series of any number of shares, provided that the aggregate number of
shares issued and not cancelled of any and all such series shall not exceed the
total number of shares of Preferred Stock hereinabove authorized. Each series
of Preferred Stock shall be distinctively designated by letter or descriptive
words. All series of Preferred Stock shall rank equally and be identical in all
respects except as permitted by, or as established pursuant to, the provisions
of this Article SIXTH or as required by law.
Section 2. Authority is hereby expressly vested in the Board from
time to time to issue the Preferred Stock as Preferred Stock of any series and
in connection with the creation of each such series to fix by the resolution or
resolutions providing for the issue of shares thereof the designations,
preferences, powers and relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions thereof, to the full
extent now or hereafter permitted by this Restated Certificate of Incorporation
and the laws of the State of Delaware, including, without limitation:
(a) the distinctive designation of such series and the number of shares
which shall constitute such series, which number may be increased (but not
above the total number of authorized shares of the series) or decreased
(but not below the number of shares thereof then outstanding) from time to
time by a resolution or resolutions of the Board;
(b) the dividend rate payable on shares of such series, the conditions
and dates upon which such dividends shall be payable, the preferences or
relation which such dividend shall bear to the dividends payable on any
other class or classes or any other series of capital stock (except as
otherwise expressly provided in this Restated Certificate of
Incorporation), and whether such dividends shall be cumulative or non-
cumulative and, if cumulative, the date or dates from which dividends shall
accumulate;
(c) whether the shares of such series shall be subject to redemption by
the Corporation and, if made subject to redemption, the price or prices at
which, and the terms and conditions on which, the shares of such series may
be redeemed by the Corporation;
(d) the amount or amounts payable upon the shares of such series in the
event of any voluntary or involuntary liquidation, dissolution or winding
up of the Corporation and the preferences or relation which such payments
shall bear to payments to be made on any other class or classes or any
other series of capital stock (except as otherwise expressly provided in
this Restated Certificate of Incorporation);
(e) whether or not the shares of such series shall be made convertible
into, or exchangeable for, shares of any other class or classes of capital
stock of the Corporation, or any series thereof, or for any other series of
the same class of capital stock of the Corporation or for debt of the
Corporation evidenced by an instrument of indebtedness, and, if so
convertible or exchangeable, the conversion price or prices, or
-3-
<PAGE>
the rate or rates of exchange, and the adjustments thereof, if any, at
which such conversion or exchange may be made at any time or from time to
time, and any other terms and conditions of such conversion or exchange;
(f) whether the holders of shares of such series shall have any right or
power to vote or to receive notice of any meeting of stockholders, either
generally or as a condition to specified corporate action; and
(g) any other preferences and relative, participating, optional or other
special rights and qualifications, limitations or restrictions thereof as
may be permitted by the laws of the State of Delaware and as shall not be
inconsistent with this Restated Certificate of Incorporation.
Section 3. Shares of Preferred Stock which have been issued and
reacquired in any manner by the Corporation (excluding, until the Corporation
elects to retire them, shares which are held as treasury shares, but including
shares redeemed, shares purchased and retired and shares which have been
converted into shares of Common Stock) shall have the status of authorized but
unissued shares of Preferred Stock and may be reissued as a part of the series
of which they were originally a part or may be reissued as part of another
series of Preferred Stock, all subject to the conditions or restrictions on
issuance set forth in the resolution or resolutions adopted by the Board
providing for the issuance of any series of Preferred Stock.
Section 4. Except as otherwise provided by the resolution or
resolutions adopted by the Board providing for the issuance of any series of
Preferred Stock, after payment shall have been made to the holders of Preferred
Stock of the full amount of dividends to which they shall be entitled pursuant
to the resolution or resolutions providing for the issuance of any such series
of Preferred Stock, the holders of Common Stock shall be entitled, to the
exclusion of the holders of Preferred Stock of any and all series, to receive
such dividends as from time to time may be declared by the Board.
Section 5. Except as otherwise provided by the resolution or
resolutions adopted by the Board providing for the issuance of any series of
Preferred Stock, in the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, after payment shall have been
made to the holders of Preferred Stock of the full amounts to which they shall
be entitled pursuant to the resolution or resolutions providing for the issuance
of any such series of Preferred Stock, the holders of Common Stock shall be
entitled, to the exclusion of the holders of Preferred Stock of any and all
series, to share, ratably according to the number of shares of Common Stock held
by them, in all remaining assets of the Corporation available for distribution
to its stockholders.
Section 6. Except to the extent such rights shall be specifically
provided for in the resolution or resolutions adopted by the Board providing for
the issuance thereof, no holder of shares of Preferred Stock shall be entitled
to preemptive or subscription rights.
-4-
<PAGE>
SEVENTH:
Section 1. The number of directors of the Corporation that shall
constitute the whole Board shall be not less than three nor more than twelve,
with the number of directors constituting the whole Board to be fixed
exclusively by a resolution passed by a majority of the whole Board.
Section 2. The directors of the Corporation shall be divided into
three classes: Class I, Class II and Class III, each of which shall be, as
nearly as possible, of equal size. No class shall include less than one nor
more than three directors. Each director shall serve for a term ending on the
date of the third Annual Meeting of Stockholders following the Annual Meeting of
Stockholders at which such director was elected; provided, however, that each
-------- -------
initial director in Class I shall serve for a term ending on the date of the
Annual Meeting of Stockholders held in 2000, each initial director in Class II
shall serve for a term ending on the date of the Annual Meeting of Stockholders
held in 2001, and each initial director in Class III shall serve for a term
ending on the date of the Annual Meeting of Stockholders held in 2002.
Section 3. The presence of a majority of the total number of
directors shall constitute a quorum for the transaction of business and, except
as otherwise provided herein, the vote of a majority of such quorum as shall be
required in order for the Board to act.
Section 4. In the event of any increase or decrease in the authorized
number of directors:
(a) each continuing director then serving shall continue as a director
of the class of which he or she is a member until the expiration of his or
her term or his or her prior death, retirement, resignation or removal; and
(b) the newly created or eliminated directorships resulting from any
increase or decrease shall be apportioned by the Board among the three
classes so as to keep the number of directors in each class as nearly equal
as possible, provided, however, that in no event shall a decrease in the
number of directors shorten the term of any incumbent director.
Notwithstanding the provisions of Section 4 of this Article SEVENTH, each
director shall serve until his or her successor is elected and qualified or
until his or her earlier death, retirement, resignation or removal.
Section 5. Except as may otherwise be provided for or fixed pursuant
to the provisions of Article SIXTH with respect to the rights of holders of
shares of Preferred Stock to elect directors, a vacancy on the Board which
occurs or is created (whether arising through death, retirement, resignation or
removal or through an increase in the number of authorized directors), may be
filled by the affirmative vote of a majority of the remaining directors, even
though less than a quorum of the Board, or by its sole director. A director so
elected to fill a vacancy, other than a vacancy arising through an increase in
-5-
<PAGE>
the number of authorized directors, shall serve for the remainder of the term of
the class of directors in which the vacancy occurred and until such director's
successor shall have been duly elected and qualified (so long as such director
remains qualified). A director so elected to fill a vacancy arising through an
increase in the number of authorized directors shall serve for the remainder of
the term of the class of directors into which such director has been placed by
the Board pursuant to Section 4(b) of this Article SEVENTH (so long as such
director remains qualified). When a vacancy is created as a result of the
resignation of a director from the Board, which resignation is not effective
until a future date, such director shall not have the power to vote to fill such
vacancy.
Section 6. Subject to the rights, if any, of the holders of shares of
Preferred Stock then outstanding, any or all of the directors of the Corporation
may be removed from office at any time, but only for cause and only by the
affirmative vote of the holders of at least a majority of the voting power of
the Corporation's then outstanding capital stock entitled to vote generally in
the election of directors. The foregoing notwithstanding, whenever the holders
of any one or more classes or series of Preferred Stock issued by the
Corporation shall have the right, voting separately by class or series, to elect
directors at an annual or special meeting of stockholders, the election, term of
office, filling of vacancies and other features of such directorships shall be
governed by the terms of this Restated Certificate of Incorporation applicable
thereto, and such directors so elected shall not be divided into classes
pursuant to this Article SEVENTH unless expressly provided by such terms.
Section 7. The election of directors need not be by written ballot
unless the Bylaws so provide.
EIGHTH: The Board, by the affirmative vote of at least a majority of
the entire Board is authorized and empowered from time to time, in its
discretion, to adopt, alter, amend or repeal the Bylaws of the Corporation,
except as such power may be restricted or limited by the DGCL. Stockholders may
not adopt, alter, amend or repeal the Bylaws except upon the affirmative vote of
not less than fifty percent (50%) of the outstanding stock of the Corporation
entitled to vote thereon; provided, however, that no Bylaws hereafter adopted by
the stockholders shall invalidate any prior act of the directors which would
have been valid if such Bylaws had not been adopted.
NINTH: Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of Section 279 of Title 8 of the Delaware Code,
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
the Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders of the Corporation, as the case may be, and also on the
Corporation.
-6-
<PAGE>
TENTH: Unless otherwise required by law, special meetings of
stockholders, for any purpose or purposes, may be called by either the Chairman
of the Board, if there be one, or the President and shall be called by any such
officer at the written request of a majority of the whole Board. The ability of
the stockholders to call a special meeting of stockholders is hereby
specifically denied. Any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation, and the ability of the
stockholders to consent in writing to the taking of any action is hereby
specifically denied.
ELEVENTH: The personal liability of the directors and officers of the
Corporation is hereby eliminated to the fullest extent permitted by paragraph
(7) of subsection (b) of Section 102 of the DGCL, as the same may be amended and
supplemented. Any repeal or modification of this Article ELEVENTH shall not
increase the personal liability of any director of the Corporation for any act
or occurrence taking place prior to such repeal or modification, or otherwise
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
TWELFTH: The Corporation shall indemnify, to the fullest extent
permitted by Section 145 of the DGCL, as the same may be amended and
supplemented, any and all persons whom it shall have power to indemnify under
said section from and against any and all of the expenses, liabilities or other
matters referred to in or covered by said section and shall advance expenses
incurred by any and all of such persons in relation to any threatened, pending
or completed action, suit, or proceeding, whether civil, criminal,
administrative or investigative. The indemnification provided for herein shall
not be deemed exclusive of any other rights to which those indemnified may be
entitled under any Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his or her official capacity and as
to action in any other capacity while holding such office, and shall continue as
to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and administrators of such a
person. Any repeal or modification of this paragraph by the stockholders of the
Corporation shall be prospective only, and shall not adversely affect the right
to indemnification or advancement of expenses hereunder existing at the time of
such repeal or modification.
The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the DGCL.
THIRTEENTH: If any provision in this Restated Certificate of
Incorporation is determined to be invalid, void, illegal or unenforceable, the
remaining provisions of this Restated Certificate of Incorporation shall
continue to be valid and enforceable and shall in no way be affected, impaired
or invalidated.
-7-
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Restated
Certificate of Incorporation to be signed by its President and Chief Executive
Officer of the Corporation this 23rd day of September, 1999.
/s/ Michael Strauss
------------------------------------------
Michael Strauss
President and Chief Executive Officer
-8-
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
BY-LAWS
of
AMERICAN HOME MORTGAGE HOLDINGS, INC.
Effective as of September 23, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
OFFICES
Section 1. Registered Office................................. 1
Section 2. Other Offices..................................... 1
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings................................. 1
Section 2. Annual Meetings................................... 1
Section 3. Special Meetings.................................. 2
Section 4. Quorum............................................ 2
Section 5. Proxies........................................... 3
Section 6. Voting............................................ 4
Section 7. Nature of Business at Meetings of Stockholders.... 4
Section 8. List of Stockholders Entitled to Vote............. 7
Section 9. Stock Ledger...................................... 7
Section 10. Record Date....................................... 7
Section 11. Inspectors of Election............................ 8
Section 12. Conduct of Meetings............................... 9
ARTICLE III
DIRECTORS
Section 1. Number and Election of Directors.................. 9
Section 2. Nomination of Directors........................... 10
Section 3. Vacancies......................................... 12
Section 4. Duties and Powers................................. 12
Section 5. Organization...................................... 13
Section 6. Resignations and Removals of Directors............ 13
Section 7. Meetings.......................................... 13
Section 8. Quorum............................................ 14
Section 9. Actions of Board.................................. 14
Section 10. Meetings by Means of Conference Telephone......... 14
Section 11. Committees........................................ 15
Section 12. Compensation...................................... 15
-i-
<PAGE>
Section 13. Interested Directors.............................. 15
ARTICLE IV
OFFICERS
Section 1. General.............................................16
Section 2. Election and Removal................................17
Section 3. Compensation........................................17
Section 4. Voting Securities Owned by the Corporation..........18
Section 5. Chairman of the Board of Directors..................18
Section 6. President...........................................19
Section 7. Executive Vice Presidents, Senior Vice Presidents
Vice Presidents and Other Officers............... 19
Section 8. Secretary...........................................19
Section 9. Treasurer...........................................20
Section 10. Assistant Secretaries...............................21
Section 11. Assistant Treasurers................................21
ARTICLE V
STOCK
Section 1. Form of Certificates.............................. 22
Section 2. Signatures........................................ 22
Section 3. Lost Certificates................................. 22
Section 4. Transfers......................................... 23
Section 5. Transfer and Registry Agents...................... 23
Section 6. Beneficial Owners................................. 23
ARTICLE VI
NOTICES
Section 1. Notices........................................... 24
Section 2. Waivers of Notice................................. 24
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends......................................... 25
Section 2. Disbursements..................................... 25
Section 3. Fiscal Year....................................... 25
Section 4. Corporate Seal.................................... 25
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ARTICLE VIII
INDEMNIFICATION
Section 1. Power to Indemnify in Actions, Suits or Proceedings other Than
Those by or in the Right of the Corporation................. 26
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or in
the Right of the Corporation................................ 26
Section 3. Authorization of Indemnification............................. 27
Section 4. Good Faith Defined........................................... 28
Section 5. Indemnification by a Court................................... 28
Section 6. Expenses Payable in Advance.................................. 29
Section 7. Nonexclusivity of Indemnification and Advancement
of Expenses................................................. 29
Section 8. Insurance.................................................... 30
Section 9. Certain Definitions.......................................... 30
Section 10. Survival of Indemnification and Advancement of Expenses...... 31
Section 11. Limitation on Indemnification................................ 31
Section 12. Indemnification of Employees and Agents...................... 32
ARTICLE IX
AMENDMENTS
Section 1. Amendments................................................... 32
Section 2. Entire Board of Directors.................................... 32
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<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
AMERICAN HOME MORTGAGE HOLDINGS, INC.
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
-------
Section 1. Registered Office. The registered office of the
-----------------
Corporation shall be in the City of Wilmington, County of New Castle, State of
Delaware.
Section 2. Other Offices. The Corporation may also have offices at
-------------
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
Section 1. Place of Meetings. Meetings of the stockholders for the
-----------------
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware, as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meetings. The Annual Meetings of Stockholders
---------------
shall be held on such date and at such time as shall be designated from time to
time by the Board of Directors and stated in the notice of the meeting, at which
meetings the stockholders shall elect by a plurality vote a Board of Directors,
and transact such other business as may properly be brought before the meeting.
Written notice of the Annual Meeting stating the place, date and
<PAGE>
hour of the meeting shall be given to each stockholder entitled to vote at such
meeting not less than ten nor more than sixty days before the date of the
meeting.
Section 3. Special Meetings. Unless otherwise prescribed by law or by the
----------------
certificate of incorporation, as amended and restated from time to time (the
"Certificate of Incorporation"), Special Meetings of Stockholders, for any
purpose or purposes, may be called by either the Chairman of the Board or the
President, and shall be called by any such officer at the written request of a
majority of the whole Board of Directors. Such request shall state the purpose
or purposes of the proposed meeting. Written notice of a Special Meeting stating
the place, date and hour of the meeting and the purpose or purposes for which
the meeting is called shall be given not less than ten nor more than sixty days
before the date of the meeting to each stockholder entitled to vote at such
meeting. At a Special Meeting of Stockholders only such business shall be
conducted as shall be specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors. The ability of
the Corporation's stockholders to call a Special Meeting is hereby specifically
denied.
Section 4. Quorum. Except as otherwise required by law or by the
------
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. A quorum, once established, shall
not be broken by the withdrawal of enough votes to leave less than a quorum. If,
however, such quorum shall not be present or represented at any meeting of the
stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
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present or represented, any business may be transacted which might have been
transacted at the meeting as originally noticed. If the adjournment is for more
than thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder entitled to vote at the meeting not less than ten nor more than
sixty days before the date of the meeting.
Section 5. Proxies. Any stockholder entitled to vote may do so in person
-------
or by his or her proxy appointed by an instrument in writing subscribed by such
stockholder or by his or her attorney thereunto authorized, delivered to the
Secretary of the meeting; provided, however, that no proxy shall be voted or
acted upon after three years from its date, unless said proxy provides for a
longer period. Without limiting the manner in which a stockholder may authorize
another person or persons to act for him or her as proxy, either of the
following shall constitute a valid means by which a stockholder may grant such
authority:
(i) A stockholder may execute a writing authorizing another
person or persons to act for him or her as proxy. Execution may be
accomplished by the stockholder or his or her authorized officer,
director, employee or agent signing such writing or causing his or her
signature to be affixed to such writing by any reasonable means,
including, but not limited to, by facsimile signature; or
(ii) A stockholder may authorize another person or persons to act
for him or her as proxy by transmitting or authorizing the
transmission of a telegram or other means of electronic transmission
to the person who will be the holder of the proxy or to a proxy
solicitation firm, proxy support service organization or like agent
duly authorized by the person who will be the holder of the proxy to
receive such transmission, provided that any such telegram or other
means of electronic
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<PAGE>
transmission must either set forth or be submitted with information
from which it can be determined that the telegram or other electronic
transmission was authorized by the stockholder. Any copy, facsimile
telecommunication or other reliable reproduction of the writing or
transmission authorizing another person or persons to act as proxy for
a stockholder may be substituted or used in lieu of the original
writing or transmission for any and all purposes for which the
original writing or transmission could be used; PROVIDED that such
copy, facsimile telecommunication or other reproduction shall be a
complete reproduction of the entire original writing or transmission.
Section 6. Voting. At all meetings of stockholders at which a quorum is
------
present, unless otherwise required by law, the Certificate of Incorporation or
these By-Laws, any question brought before any meeting of stockholders shall be
decided by the affirmative vote of the holders of a majority of the total number
of votes of the capital stock present in person or represented by proxy and
entitled to vote thereon, voting as a single class. Each stockholder represented
at a meeting of stockholders shall be entitled to cast one vote for each share
of the capital stock entitled to vote thereat held by such stockholder. Such
votes may be cast in person or by proxy but no proxy shall be voted on or after
three years from its date, unless such proxy provides for a longer period. The
Board of Directors, in its discretion, or the officer of the Corporation
presiding at a meeting of stockholders, in his or her discretion, may require
that any votes cast at such meeting shall be cast by written ballot.
Section 7. Nature of Business at Meetings of Stockholders. No business
----------------------------------------------
may be transacted at an Annual Meeting of Stockholders, other than business that
is either (a) specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the
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<PAGE>
Board of Directors (or any duly authorized committee thereof), (b) otherwise
properly brought before the Annual Meeting by or at the direction of the Board
of Directors (or any duly authorized committee thereof) or (c) otherwise
properly brought before the Annual Meeting by any stockholder of the Corporation
(i) who is a stockholder of record on the date of the giving of the notice
provided for in this Section 7 and on the record date for the determination of
stockholders entitled to vote at such Annual Meeting and (ii) who complies with
the notice procedures set forth in this Section 7.
In addition to any other applicable requirements, for business to be
properly brought before an Annual Meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the Secretary of
the Corporation.
To be timely, a stockholder's notice to the Secretary must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than sixty (60) days nor more than ninety (90) days prior
to the anniversary date of the immediately preceding Annual Meeting of
Stockholders; provided, however, that in the event that the Annual Meeting is
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder, in order to be timely, must be so
received not later than the close of business on the tenth (10th) day following
the day on which such notice of the date of the Annual Meeting was mailed or
such public disclosure of the date of the annual meeting was made, whichever
first occurs. In no event shall the public announcement of an adjournment of an
Annual Meeting commence a new time period for the giving of a stockholder's
notice as described above.
To be in proper written form, a stockholder's notice to the Secretary
must set forth as to each matter such stockholder proposes to bring before the
Annual Meeting (i) a brief description of the business desired to be brought
before the Annual Meeting and the reasons for
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<PAGE>
conducting such business at the annual meeting, (ii) the name and record address
of such stockholder, (iii) the class or series and number of shares of capital
stock of the Corporation which are owned beneficially or of record by such
stockholder, (iv) a description of all arrangements or understandings between
such stockholder and any other person or persons (including their names) in
connection with the proposal of such business by such stockholder and any
material interest of such stockholder in such business and (v) a representation
that such stockholder intends to appear in person or by proxy at the annual
meeting to bring such business before the meeting.
No business shall be conducted at the Annual Meeting of Stockholders
except business brought before the Annual Meeting in accordance with the
procedures set forth in this Section 7, provided, however, that, once business
has been properly brought before the Annual Meeting in accordance with such
procedures, nothing in this Section 7 shall be deemed to preclude discussion by
any stockholder of any such business. If the Chairman of an Annual Meeting
determines that business was not properly brought before the Annual Meeting in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the business was not properly brought before the meeting and such
business shall not be transacted thereat.
For purposes of this Section 7, the term "public announcement" shall
mean an announcement in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
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<PAGE>
Section 8. List of Stockholders Entitled to Vote. The officer of the
-------------------------------------
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
Section 9. Stock Ledger. The stock ledger of the Corporation shall be the
------------
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 8 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
Section 10. Record Date. In order that the Corporation may determine the
-----------
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix a record date, which
record date shall not precede the date on which the resolution fixing the record
date is adopted by the Board of Directors and which record date: (1) in the case
of determination of stockholders entitled to vote at any meeting of stockholders
or adjournment thereof, shall not be
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<PAGE>
less than ten nor more than sixty days before the date of such meeting; and (2)
in the case of any other action, shall not be more than sixty days prior to such
other action. If no record date is fixed: (1) the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; and (2) the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 11. Inspectors of Election. In advance of any meeting of
----------------------
stockholders, the Board of Directors by resolution or the Chairman of the
meeting shall appoint one or more inspectors of election to act at the meeting
and make a written report thereof. One or more other persons may be designated
as alternate inspectors to replace any inspector who fails to act. If no
inspector or alternate is present, ready and willing to act at a meeting of
stockholders, the Chairman of the meeting shall appoint one or more inspectors
to act at the meeting. Unless otherwise required by law, inspectors may be
officers, employees or agents of the Corporation. Each inspector, before
entering upon the discharge of his or her duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his or her ability. The inspector shall have the duties
prescribed by law and shall take charge of the polls and, when the vote is
completed, shall make a certificate of the result of the vote taken and of such
other facts as may be required by law.
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<PAGE>
Section 12. Conduct of Meetings. The Board of Directors may adopt by
-------------------
resolution such rules and regulations for the conduct of the meeting of
stockholders as it shall deem appropriate. Except to the extent inconsistent
with such rules and regulations as adopted by the Board of Directors, the
Chairman of any meeting of the stockholders shall have the right and authority
to prescribe such rules, regulations and procedures and to do all such acts as,
in the judgment of such Chairman, are appropriate for the proper conduct of the
meeting. Such rules, regulations or procedures, whether adopted by the Board of
Directors or prescribed by the Chairman of the meeting, may include, without
limitation, the following: (1) the establishment of an agenda or order of
business for the meeting; (2) the determination of when the polls shall open and
close for any given matter to be voted on at the meeting; (3) rules and
procedures for maintaining order at the meeting and the safety of those present;
(4) limitations on attendance at or participation in the meeting to stockholders
of record of the Corporation, their duly authorized and constituted proxies or
such other persons as the Chairman of the meeting shall determine; (5)
restrictions on entry to the meeting after the time fixed for the commencement
thereof; and (6) limitations on the time allotted to questions or comments by
participants.
ARTICLE III
DIRECTORS
---------
Section 1. Number and Election of Directors. The Board of Directors shall
--------------------------------
consist of not less than three nor more than twelve members, the exact number of
which shall be fixed time to time by resolution adopted by the Board of
Directors. Except as provided in Section 3 of this Article, directors shall be
elected by a plurality of the votes cast at the Annual Meetings of Stockholders,
and each director so elected shall hold office until the next Annual Meeting and
until his successor is duly elected and qualified, or until his earlier
resignation or
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<PAGE>
removal. Any director may resign at any time upon notice to the Corporation.
Directors need not be stockholders.
Section 2. Nomination of Directors. Only persons who are nominated in
-----------------------
accordance with the following procedures shall be eligible for election as
directors of the Corporation, except as may be otherwise provided in the
Certificate of Incorporation with respect to the right of holders of preferred
stock of the Corporation to nominate and elect a specified number of directors
in certain circumstances. Nominations of persons for election to the Board of
Directors may be made at any Annual Meeting of Stockholders, or at any Special
Meeting of Stockholders called for the purpose of electing directors, (a) by or
at the direction of the Board of Directors (or any duly authorized committee
thereof) or (b) by any stockholder of the Corporation (i) who is a stockholder
of record on the date of the giving of the notice provided for in this Section 2
and on the record date for the determination of stockholders entitled to vote at
such meeting and (ii) who complies with the notice procedures set forth in this
Section 2.
In addition to any other applicable requirements, for a nomination to be
made by a stockholder, such stockholder must have given timely notice thereof in
proper written form to the Secretary of the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered to
or mailed and received at the principal executive offices of the Corporation (a)
in the case of an Annual Meeting, not less than sixty days nor more than ninety
days prior to the anniversary date of the immediately preceding Annual Meeting
of Stockholders; provided, however, that in the event that the Annual Meeting is
called for a date that is not within thirty days before or after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth day following the day
on which such notice of the
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<PAGE>
date of the Annual Meeting was mailed or such public disclosure of the date of
the Annual Meeting was made, whichever first occurs; and (b) in the case of a
Special Meeting of Stockholders called for the purpose of electing directors,
not later than the close of business on the tenth following the day on which
notice of the date of the Special Meeting was mailed or public disclosure of the
date of the special meeting was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the Secretary
must set forth (a) as to each person whom the stockholder proposes to nominate
for election as a director (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class or series and number of shares of capital stock of the
Corporation which are owned beneficially or of record by the person, and (iv)
any other information relating to the person that would be required to be
disclosed in a proxy statement or other filings required to be made in
connection with solicitations of proxies for election of directors pursuant to
Section 14 of the Exchange Act and the rules and regulations promulgated
thereunder; and (b) as to the stockholder giving the notice (i) the name and
record address of such stockholder, (ii) the class or series and number of
shares of capital stock of the Corporation which are owned beneficially or of
record by such stockholder, (iii) a description of all arrangements or
understandings between such stockholder and each proposed nominee and any other
person or persons (including their names) pursuant to which the nomination(s)
are to be made by such stockholder, (iv) a representation that such stockholder
intends to appear in person or by proxy at the meeting to nominate the persons
named in its notice, and (v) any other information relating to such stockholder
that would be required to be disclosed in a proxy statement or other filings
required to be made in connection with solicitations of proxies for election of
directors pursuant to Section 14 of the Exchange Act and the rules and
regulations
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<PAGE>
promulgated thereunder. Such notice must be accompanied by a written consent of
each proposed nominee to being named as a nominee and to serve as a director if
elected.
No person shall be eligible for election as a director of the Corporation
unless nominated in accordance with the procedures set forth in this Section 2.
If the Chairman of the meeting determines that a nomination was not made in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the nomination was defective and such defective nomination shall be
disregarded.
Section 3. Vacancies. Subject to the terms of any one or more classes or
---------
series of preferred stock outstanding at any time, any vacancy on the Board of
Directors which occurs or is created (whether arising through death, retirement,
resignation or removal or through an increase in the number of authorized
directors) may be filled by the affirmative vote of a majority of the remaining
directors, provided that a quorum is present, and any other vacancy occurring on
the Board of Directors may be filled by a majority of the Board of Directors
then in office, even if less than a quorum, or by a sole remaining director.
Notwithstanding the foregoing, whenever the holders of any one or more class or
classes or series of preferred stock of the Corporation outstanding at any time
shall have the right, voting separately as a class, to elect directors at an
annual or special meeting of stockholders, the election, term of office, filling
of vacancies and other features of such directorships shall be governed by the
Certificate of Incorporation.
Section 4. Duties and Powers. The business of the Corporation shall be
-----------------
managed by or under the direction of the Board of Directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by statute or by the Certificate of Incorporation or by these By-Laws
directed or required to be exercised or done by the stockholders.
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Section 5. Organization. At each meeting of the Board of Directors, the
------------
Chairman of the Board, or, in his or her absence, a director chosen by a
majority of the directors present, shall act as Chairman. The Secretary of the
Corporation shall act as Secretary at each meeting of the Board of Directors. In
case the Secretary shall be absent from any meeting of the Board of Directors,
an Assistant Secretary shall perform the duties of Secretary at such meeting;
and in the absence from any such meeting of the Secretary and all the Assistant
Secretaries, the Chairman of the meeting may appoint any person to act as
Secretary of the meeting.
Section 6. Resignations and Removals of Directors. Any director of the
--------------------------------------
Corporation may resign at any time, by giving written notice to the Chairman of
the Board of Directors, the President or the Secretary of the Corporation. Such
resignation shall take effect at the time therein specified or, if no time is
specified, immediately; and, unless otherwise specified in such notice, the
acceptance of such resignation shall not be necessary to make it effective. Any
director or the entire Board of Directors may be removed only in accordance with
the provisions of the Certificate of Incorporation.
Section 7. Meetings. The Board of Directors of the Corporation may hold
--------
meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held at such time
and at such place as may from time to time be determined by the Board of
Directors and, unless required by resolution of the Board of Directors, without
notice. Special meetings of the Board of Directors may be called by the Chairman
of the Board, the President, or a majority of the directors then in office.
Notice thereof stating the place, date and hour of the meeting shall be given to
each director either by mail not less than forty-eight (48) hours before the
date of the meeting, by telephone or telegram on
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twenty-four (24) hours' notice, or on such shorter notice as the person or
persons calling such meeting may deem necessary or appropriate in the
circumstances.
Section 8. Quorum. Except as may be otherwise required by law, the
------
Certificate of Incorporation or these By-Laws, at all meetings of the Board of
Directors, a majority of the entire Board of Directors shall constitute a quorum
for the transaction of business and the act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the Board
of Directors. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
Section 9. Actions of Board. Unless otherwise provided by the Certificate
----------------
of Incorporation or these By-Laws, any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee thereof may be
taken without a meeting, if all the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 10. Meetings by Means of Conference Telephone. Unless otherwise
-----------------------------------------
provided by the Certificate of Incorporation or these By-Laws, members of the
Board of Directors of the Corporation, or any committee thereof, may participate
in a meeting of the Board of Directors or such committee by means of a
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting pursuant to this Section 10 shall constitute presence in person at such
meeting.
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<PAGE>
Section 11. Committees. The Board of Directors may, by resolution passed
----------
by a majority of the entire Board of Directors, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of any such committee. In the absence or disqualification
of a member of a committee, and in the absence of a designation by the Board of
Directors of an alternate member to replace the absent or disqualified member,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or she or they constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in the
place of any absent or disqualified member. Any committee, to the extent allowed
by law and provided in the resolution establishing such committee, shall have
and may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation. Each committee shall
keep regular minutes and report to the Board of Directors when required.
Section 12. Compensation. The directors may be paid their expenses, if
------------
any, of attendance at each meeting of the Board of Directors and may be paid
such remuneration as the Board of Directors may determine from time to time. No
such payment shall preclude any director from serving the Corporation in any
other capacity and receiving compensation therefor. Members of special or
standing committees may be allowed like compensation for attending committee
meetings.
Section 13. Interested Directors. No contract or transaction between the
--------------------
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association or other
organization in which one or more of its
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directors or officers are directors or officers, or have a financial interest,
shall be void or voidable solely for this reason, or solely because the director
or officer is present at or participates in the meeting of the Board of
Directors or committee thereof which authorizes the contract or transaction, or
solely because such person's vote or their votes are counted for such purpose if
(i) the material facts as to such person's or their relationship or interest and
as to the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board of Directors or committee in good
faith authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested directors
be less than a quorum; or (ii) the material facts as to such person's or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the stockholders;
or (iii) the contract or transaction is fair as to the Corporation as of the
time it is authorized, approved or ratified, by the Board of Directors, a
committee thereof or the stockholders. Common or interested directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or of a committee which authorizes the contract or transaction.
ARTICLE IV
OFFICERS
--------
Section 1. General. The officers of the Corporation shall be chosen by
-------
the Board of Directors and shall be a Chairman of the Board (who must be a
director), a President, a Secretary and a Treasurer, each of whom shall be
appointed by the Board of Directors and shall hold office for such term and
shall exercise such powers and perform such duties as set forth in these By-Laws
and as shall be determined from time to time by the Board of Directors. The
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Board of Directors and the Chairman of the Board may also choose and appoint one
or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and other
officers, each of whom shall hold office for such term and shall exercise such
powers and perform such duties as set forth in these By-Laws and as shall be
determined from time to time by the Board of Directors if such officer was
appointed by the Board of Directors or by the Chairman of the Board if such
officer was appointed by the Chairman of the Board. Any number of offices may be
held by the same person, unless otherwise prohibited by law, the Certificate of
Incorporation or these By-Laws. The officers of the Corporation need not be
stockholders of the Corporation nor, except in the case of the Chairman of the
Board of Directors, need such officers be directors of the Corporation.
Section 2. Election and Removal. All officers of the Corporation shall
--------------------
hold office until their successors are appointed and qualified, or until their
earlier resignation or removal. Any officer may be removed at any time by the
affirmative vote of a majority of the entire Board of Directors or by the
Chairman of the Board, if such officer was appointed by the Chairman of the
Board. Anything herein to the contrary notwithstanding, any vacancy occurring in
the offices of Chairman of the Board and Chief Executive Officer, President,
Secretary or Treasurer shall be filled by the Board of Directors. Any vacancy
occurring in any other office of the Corporation shall be filled by the Board of
Directors or the Chairman of the Board. The salaries of all officers of the
Corporation shall be fixed by the Board of Directors.
Section 3. Compensation. The Board of Directors from time to time shall
------------
fix the compensation of the officers of the Corporation. The compensation of
other agents and employees of the Corporation may be fixed by the Board of
Directors, or by any committee
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<PAGE>
designated by the board or by an officer to whom that function has been
delegated by the Board of Directors.
Section 4. Voting Securities Owned by the Corporation. Powers of attorney,
------------------------------------------
proxies, waivers of notice of meeting, consents and other instruments relating
to securities owned by the Corporation may be executed in the name and on behalf
of the Corporation by the Chairman of the Board, the Chief Executive Officer,
the President or any Vice President, and any such officer may, in the name and
on behalf of the Corporation, take all such action as any such officer may deem
advisable to vote in person or by proxy at any meeting of security holders of
any corporation in which the Corporation may own securities and at any such
meeting shall possess and may exercise any and all rights and power incident to
the ownership of such securities and which, as the owner thereof, the
Corporation might have exercised and possessed if present. The Board of
Directors may, by resolution, from time to time confer like powers upon any
other person or persons.
Section 5. Chairman of the Board of Directors. The Chairman of the Board
----------------------------------
of Directors shall preside at all meetings of the stockholders and of the Board
of Directors. He shall be the Chief Executive Officer of the Corporation and
shall in general supervise and control all of the business and affairs of the
Corporation. The Chairman of the Board shall possess the power to execute all
deeds, mortgages, bonds, contracts, certificates and other instruments of the
Corporation requiring a seal, under the seal of the Corporation, except in cases
where the execution thereof shall be expressly delegated by the Board of
Directors or by these By-laws to some other officer or agent of the Corporation
or shall be required by law to be otherwise executed or signed. The Chairman of
the Board shall make reports to the Board of Directors and the stockholders, and
shall see that all orders and resolutions of the Board of Directors and of any
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<PAGE>
committee thereof are carried into effect. The Chairman of the Board shall also
perform such other duties and may exercise such other powers as from time to
time may be assigned to him or her by these By-laws or by the Board of
Directors.
Section 6. President. The President shall be the second most senior
---------
executive of the Corporation and, subject to the direction and control of the
Chairman of the Board, shall assist the Chairman of the Board in the
administration and operation of the Corporation's business and general
supervision of its policies and affairs. In the absence of the Chairman of the
Board, the President shall preside at all meetings of the stockholders of the
Corporation. The President shall possess the power to execute all deeds,
mortgages, bonds, contracts, certificates and other instruments of the
Corporation requiring a seal, under the seal of the Corporation, except in cases
where the execution thereof shall be expressly delegated by the Board of
Directors or by these By-Laws to some other officer or agent of the Corporation
or shall be required by law to be otherwise executed or signed. The President
shall also perform such other duties and may exercise such other powers as from
time to time may be assigned to him or her by these By-Laws, the Chairman of the
Board or by the Board of Directors.
Section 7. Executive Vice Presidents, Senior Vice Presidents Vice
------------------------------------------------------
Presidents and Other Officers. Each Executive Vice President, Senior Vice
- -----------------------------
President, other Vice President or other officer of the Corporation shall
perform such duties and have such powers as from time to time may be assigned to
him or her by the Board of Directors or the Chairman of the Board as provided in
Section 1 of this Article.
Section 8. Secretary. The Secretary shall attend all meetings of the
---------
Board of Directors and all meetings of stockholders and record all the
proceedings thereat in a book or books to be kept for that purpose; the
Secretary shall also perform like duties for the standing
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<PAGE>
committees when required. The Secretary shall give, or cause to be given, notice
of all meetings of the stockholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or the Chairman of the Board, under whose supervision he shall be.
If the Secretary shall be unable or shall refuse to cause to be given notice of
all meetings of the stockholders and special meetings of the Board of Directors,
and if there be no Assistant Secretary, then either the Board of Directors or
the Chairman of the Board may choose another officer to cause such notice to be
given. The Secretary shall have custody of the seal of the Corporation and the
Secretary or any Assistant Secretary, if there be one, shall have authority to
affix the same to any instrument requiring it and when so affixed, it may be
attested by the signature of the Secretary or by the signature of any such
Assistant Secretary. The Board of Directors may give general authority to any
other officer to affix the seal of the Corporation and to attest the affixing by
his signature. The Secretary shall see that all books, reports, statements,
certificates and other documents and records required by law to be kept or filed
are properly kept or filed, as the case may be.
Section 9. Treasurer. The Treasurer shall have the custody of the
---------
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the Chairman of the Board and the Board of
Directors, at its regular meetings, or when the Board of Directors so requires,
an account of all his transactions as Treasurer and of the financial condition
of the Corporation. If required by the Board of Directors, the Treasurer shall
give the
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<PAGE>
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
Section 10. Assistant Secretaries. Except as may be otherwise provided in
---------------------
these By-Laws, Assistant Secretaries, if there be any, shall perform such duties
and have such powers as from time to time may be assigned to them by the Board
of Directors, the Chairman of the Board, the President, any Vice President, if
there be one, or the Secretary, and in the absence of the Secretary or in the
event of his disability or refusal to act, shall perform the duties of the
Secretary, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the Secretary.
Section 11. Assistant Treasurers. Assistant Treasurers, if there be any,
--------------------
shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the Chairman of the Board, the
President, any Vice President, if there be one, or the Treasurer, and in the
absence of the Treasurer or in the event of his disability or refusal to act,
shall perform the duties of the Treasurer, and when so acting, shall have all
the powers of and be subject to all the restrictions upon the Treasurer. If
required by the Board of Directors, an Assistant Treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
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<PAGE>
ARTICLE V
STOCK
-----
Section 1. Form of Certificates. Every holder of stock in the Corporation
--------------------
shall be entitled to have a certificate signed, in the name of the Corporation
(i) by the Chairman of the Board, the President or a Vice President and (ii) by
the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant
Secretary of the Corporation, certifying the number of shares owned by such
holder in the Corporation.
Section 2. Signatures. Any or all of the signatures on a certificate may
----------
be a facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the Corporation with the same effect as if he
were such officer, transfer agent or registrar at the date of issue.
Section 3. Lost Certificates. The Board of Directors may direct a new
-----------------
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate, the
Board of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or such owner's legal representative, to advertise the same in such
manner as the Board of Directors shall require and/or to give the Corporation a
bond in such sum as it may direct as indemnity against any claim that may be
made against the Corporation with respect to the certificate alleged to have
been lost, stolen or destroyed.
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<PAGE>
Section 4. Transfers. Stock of the Corporation shall be transferable in
---------
the manner prescribed by law and in these By-Laws. Transfers of stock shall be
made on the books of the Corporation only by the person named in the certificate
or by such person's attorney lawfully constituted in writing and upon the
surrender of the certificate therefor, properly endorsed for transfer and
payment of all necessary transfer taxes; provided, however, that such surrender
and endorsement or payment of taxes shall not be required in any case in which
the officers of the Corporation shall determine to waive such requirement. Every
certificate exchanged, returned or surrendered to the Corporation shall be
marked "Cancelled," with the date of cancellation, by the Secretary or Assistant
Secretary of the Corporation or the transfer agent thereof. No transfer of stock
shall be valid as against the Corporation for any purpose until it shall have
been entered in the stock records of the Corporation by an entry showing from
and to whom transferred.
Section 5. Transfer and Registry Agents. The Corporation may from time to
----------------------------
time maintain one or more transfer offices or agencies and registry offices or
agencies at such place or places as may be determined from time to time by the
Board of Directors.
Section 6. Beneficial Owners. The Corporation shall be entitled to
-----------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
law.
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<PAGE>
ARTICLE VI
NOTICES
-------
Section 1. Notices. Whenever written notice is required by law, the
-------
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at such
person's address as it appears on the records of the Corporation, with postage
thereon prepaid, and such notice shall be deemed to be given at the time when
the same shall be deposited in the United States mail. Written notice may also
be given personally or by facsimile, telegram, telex or cable.
Section 2. Waivers of Notice.
-----------------
(a) Whenever any notice is required by law, the Certificate of
Incorporation or these By-Laws, to be given to any director, member of a
committee or stockholder, a waiver thereof in writing, signed, by the person or
persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto. Attendance of a person at a
meeting, present by person or represented by proxy, shall constitute a waiver of
notice of such meeting, except where the person attends the meeting for the
express purpose of objecting at the beginning of the meeting to the transaction
of any business because the meeting is not lawfully called or convened.
(b) Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders, directors or members of a
committee of directors need be specified in any written waiver of notice unless
so required by law, the Certificate of Incorporation or these By-Laws.
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<PAGE>
ARTICLE VII
GENERAL PROVISIONS
------------------
Section 1. Dividends. Subject to the requirements of the General
---------
Corporation Law of the State of Delaware and any provisions of the Certificate
of Incorporation, dividends upon the capital stock of the Corporation may be
declared by the Board of Directors at any regular or special meeting, and may be
paid in cash, in property, or in shares of the Corporation's capital stock.
Before payment of any dividend, there may be set aside out of any funds of the
Corporation available for dividends such sum or sums as the Board of Directors
from time to time, in its absolute discretion, deems proper as a reserve or
reserves to meet contingencies, or for purchasing any of the shares of capital
stock, warrants, rights, options, bonds, debentures, notes, scrip or other
securities or evidences of indebtedness of the Corporation, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for any proper purpose, and the Board of Directors may modify or abolish any
such reserve.
Section 2. Disbursements. All checks or demands for money and notes of
-------------
the Corporation shall be signed by such officer or officers or such other person
or persons as the Board of Directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the Corporation shall be fixed
-----------
by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have inscribed
--------------
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
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<PAGE>
ARTICLE VIII
INDEMNIFICATION
---------------
Section 1. Power to Indemnify in Actions, Suits or Proceedings other Than
--------------------------------------------------------------
Those by or in the Right of the Corporation. Subject to Section 3 of this
- -------------------------------------------
Article VIII, the Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that such person is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director or officer, employee, agent,
fiduciary or trustee of another corporation, partnership, joint venture, trust,
employee benefit plan or other entity or enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, such person
had no reasonable cause to believe his or her conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he or she reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his or her conduct was
unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or in
------------------------------------------------------------
the Right of the Corporation. Subject to Section 3 of this Article VIII, the
- ----------------------------
Corporation shall
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<PAGE>
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director or officer of the Corporation, or is or was a
director or officer of the Corporation serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner such person reasonably believed to be in, or
not opposed to, the best interests of the Corporation; except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless, and then only to the extent that, the Court of Chancery or the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 3. Authorization of Indemnification. Any indemnification under
--------------------------------
this Article VIII (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper in the circumstances
because such person has met the applicable standard of conduct set forth in
Section 1 or Section 2 of this Article VIII, as the case may be. Such
determination shall be made (i) by a majority vote of the directors who are not
parties to such action, suit or proceeding, even though less than a quorum, or
(ii) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or (iii) by the stockholders. To
the extent,
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<PAGE>
however, that a director or officer of the Corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding described
above, or in defense of any claim, issue or matter therein, such person shall be
indemnified against expenses (including attorney's fees) actually and reasonably
incurred by such person in connection therewith, without the necessity of
authorization in the specific case.
Section 4. Good Faith Defined. For purposes of any determination under
------------------
Section 3 of this Article VIII, a person shall be deemed to have acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the Corporation, or, with respect to any criminal action
or proceeding, to have had no reasonable cause to believe his or her conduct was
unlawful, if his or her action is based on the records or books of account of
the Corporation or another enterprise, or on information supplied to such person
by the officers of the Corporation or another enterprise in the course of their
duties, or on the advice of legal counsel for the Corporation or another
enterprise or on information or records given or reports made to the Corporation
or another enterprise by an independent certified public accountant or by an
appraiser or other expert selected with reasonable care by the Corporation or
another enterprise. The term "another enterprise" as used in this Section 4
shall mean any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise of which such person is or was serving
at the request of the Corporation as a director, officer, employee or agent. The
provisions of this Section 4 shall not be deemed to be exclusive or to limit in
any way the circumstances in which a person may be deemed to have met the
applicable standard of conduct set forth in Sections 1 or 2 of this Article
VIII, as the case may be.
Section 5. Indemnification by a Court. Notwithstanding any contrary
--------------------------
determination in the specific case under Section 3 of this Article VIII, and
notwithstanding the
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<PAGE>
absence of any determination thereunder, any director or officer may apply to
any court of competent jurisdiction in the State of Delaware for indemnification
to the extent otherwise permissible under Sections 1 and 2 of this Article VIII.
The basis of such indemnification by a court shall be a determination by such
court that indemnification of the director or officer is proper in the
circumstances because such person has met the applicable standards of conduct
set forth in Sections 1 or 2 of this Article VIII, as the case may be. Neither a
contrary determination in the specific case under Section 3 of this Article VIII
nor the absence of any determination thereunder shall be a defense to such
application or create a presumption that the director or officer seeking
indemnification has not met any applicable standard of conduct. Notice of any
application for indemnification pursuant to this Section 5 shall be given to the
Corporation promptly upon the filing of such application. If successful, in
whole or in part, the director or officer seeking indemnification shall also be
entitled to be paid the expense of prosecuting such application.
Section 6. Expenses Payable in Advance. Expenses incurred by a director
---------------------------
or officer in defending or investigating a threatened or pending action, suit or
proceeding shall be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that he or she is not entitled to be indemnified by the
Corporation as authorized in this Article VIII.
Section 7. Nonexclusivity of Indemnification and Advancement of Expenses.
-------------------------------------------------------------
The indemnification and advancement of expenses provided by or granted pursuant
to this Article VIII shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
the Certificate of
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<PAGE>
Incorporation or any By-Law, agreement, contract, vote of stockholders or
disinterested directors or pursuant to the direction (howsoever embodied) of any
court of competent jurisdiction or otherwise, both as to action in his or her
official capacity and as to action in another capacity while holding such
office, it being the policy of the Corporation that indemnification of the
persons specified in Sections 1 and 2 of this Article VIII shall be made to the
fullest extent permitted by law. The provisions of this Article VIII shall not
be deemed to preclude the indemnification of any person who is not specified in
Sections 1 or 2 of this Article VIII but whom the Corporation has the power or
obligation to indemnify under the provisions of the General Corporation Law of
the State of Delaware, or otherwise.
Section 8. Insurance. The Corporation may purchase and maintain insurance
---------
on behalf of any person who is or was a director or officer of the Corporation,
or is or was a director or officer of the Corporation serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against any liability asserted against such person and incurred by
such person in any such capacity, or arising out of such person's status as
such, whether or not the Corporation would have the power or the obligation to
indemnify such person against such liability under the provisions of this
Article VIII.
Section 9. Certain Definitions. For purposes of this Article VIII,
-------------------
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors or officers, so that any person who is or was a director or officer of
such constituent corporation, or is or was a director or officer of such
constituent corporation serving at the
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<PAGE>
request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, shall stand in the same position under the
provisions of this Article VIII with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued. For purposes of this Article VIII, references
to "fines" shall include any excise taxes assessed on a person with respect to
an employee benefit plan; and references to "serving at the request of the
Corporation" shall include any service as a director, officer, employee or agent
of the Corporation which imposes duties on, or involves services by, such
director or officer with respect to an employee benefit plan, its participants
or beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this Article
VIII.
Section 10. Survival of Indemnification and Advancement of Expenses. The
-------------------------------------------------------
indemnification and advancement of expenses provided by, or granted pursuant to,
this Article VIII shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
Section 11. Limitation on Indemnification. Notwithstanding anything
-----------------------------
contained in this Article VIII to the contrary, except for proceedings to
enforce rights to indemnification (which shall be governed by Section 5 hereof),
the Corporation shall not be obligated to indemnify any director or officer in
connection with a proceeding (or part thereof) initiated by such person unless
such proceeding (or part thereof) was authorized or consented to by the Board of
Directors of the Corporation.
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<PAGE>
Section 12. Indemnification of Employees and Agents. The Corporation may,
---------------------------------------
to the extent authorized from time to time by the Board of Directors, provide
rights to indemnification and to the advancement of expenses to employees and
agents of the Corporation similar to those conferred in this Article VIII to
directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
----------
Section 1. Amendments. These By-Laws may be altered, amended or repealed,
-----------
in whole or in part, or new By-Laws may be adopted by the Board of Directors or
the stockholders as provided in the Certificate of Incorporation.
Section 2. Entire Board of Directors. As used in this Article IX and in
-------------------------
these By-Laws generally, the term "entire Board of Directors" means the total
number of directors which the Corporation would have if there were no vacancies.
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<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
Made on the 14th day of April, 1999 by and between American Home Mortgage
Corp., 12 E. 49th Street, New York, NY, 10017 (the "Employer") and Nicholas P.
Rizzetta, 2 Beverly Place, Larchmont, NY 10538 (the "Employee").
WHEREAS, the Employer is engaged in business as a mortgage banker; and
WHEREAS, the Employee seeks employment with the Employer as a Chief
Financial Officer, Treasury;
Now, therefore, in consideration of the mutual promises set forth herein,
IT IS AGREED, by and between the Employer and the Employee as follows:
1. Employment. The Employer hereby employs the Employee, and the Employee
----------
hereby accepts employment upon the terms and conditions of this Agreement.
2. Duties. The Employee shall perform services for the Employer as a
------
Chief Financial Officer, Treasury, and shall have such duties as are customary
for a Chief Financial Officer, Treasury in the mortgage banking business,
through the precise manner in which those duties are to be performed and their
extent and the precise title of the Employee will rest within the sole
discretion of the Employer. The Employee shall devote his entire time, attention
and energy in furtherance of the business of the Employer, and shall not engage
in any other business activity during the term of this Agreement.
3. Term. The term of this Agreement shall commence on May 1, 1999 and
----
shall continue until terminated by either party upon three weeks written notice
to the other party. Notwithstanding the above, this Agreement shall terminate
immediately if the Employee commits an illegal or unethical act.
4. Compensation
------------
A. Annual Salary
-------------
The Employer shall pay the Employee for all services rendered a salary of
$140,000 per year. The Employer will provide the Employee medical benefits.
----------------
The medical benefits will be the Employer's standard company benefits as may be
-------------------------
amended from time to time.
[EMPLOYER INITIALS APPEAR HERE] [EMPLOYEE INITIALS APPEAR HERE]
<PAGE>
B. Discretionary Bonus
-------------------
The Employer will pay the Employee an annual Discretionary Bonus of up to
$30,000. The actual amount of this bonus will be at the discreation of the
President of American Home Mortgage. For the calendar year 1999, the amount of
this bonus will be 75% of what it otherwise would have been to account for the
fact that the Employee will only work approximately 1/4 of a year at the
Employer.
C. Financial Performance Bonus
---------------------------
The Employer will pay the Employee a bonus based upon the financial performance
of American Home Mortgage. The Performance Bonus for the year 1999 will be based
upon the financial performance in the 2nd, 3rd, and 4th quarter of 1999. The
Performance Bonus for the in all future years will be based upon the financial
performance in the 1st, 2nd, 3rd, and 4th quarter of that year. The level of
financial performance and corresponding bonus are as follows:
If American Home Mortgage
Annual pretax income is Then the bonus paid to
at least: the Employee will be:
------------------------- -------------------------
90% of Plan $7,500
100% of Plan $15,000
110% of Plan $22,500
120% of Plan $30,000
5. Expenses The employer will pay the reasonable expenses of the
--------
Employee in accordance with its policy for acceptable expenses which may be
amended from time to time. The Employee will submit a report of expenses
incurred on a monthly basis. The Employer will pay the Employee a monthly car
allowance of $450.00.
6. Waiver No waiver by the Employer of a breach of any provision of this
------
Agreement by the Employee shall operate or be construed as a waiver of any
subsequent breach by the Employee. No waiver shall be valid unless it is in
writing signed by the Employer.
7. Assignment The Employee acknowledges that his services are unique and
----------
personal, and that he may not assign his rights or delegate his duties
hereunder. This Agreement shall inure to the benefit of any successor or assign
of the Employer.
8. Applicable Law. This Agreement shall be construed in accordance with
--------------
the laws of the State of New York for agreements entered into and to be wholly
preformed therein.
Employer Initials [INITIALS APPEAR HERE]
----------------------
Employee Initials [INITIALS APPEAR HERE] Page 2 of 3
----------------------
<PAGE>
9. Entire Agreement. This Agreement supercedes all prior agreements,
----------------
and contains the entire understanding of the parties hereto. It may only be
modified in writing signed by the Employer.
American Home Mortgage Corp.
dba American Brokers Conduit
By: /s/ Michael Strauss
---------------------------------------------
Michael Strauss, President
/s/ Nicholas P. Rizzetta 4/14/99
---------------------------------------------
Nicholas P. Rizzetta
Page 3 of 3
<PAGE>
LETTER AGREEMENT
AMENDING EMPLOYMENT AGREEMENT
August 26, 1999
Dear Mr. Rizzetta:
Reference is hereby made to your employment agreement, dated April 14, 1999 (the
"Employment Agreement"), with American Home Mortgage Corp. (the "Company"). This
letter agreement amends certain provisions of your Employment Agreement as
follows:
Your title shall be Chief Financial Officer
Your 1999 base salary shall be $140,000.00
Your bonus for 1999 shall be $150,000.00
Your bonus for 2000 shall be $150,000.00
In addition, upon completion of the initial public offering of American Home
Mortgage Holdings, Inc. ("AHM"), you shall receive options to purchase such
number of shares of AHM Common Stock as is determined by dividing $150,000.00 by
the initial public offering price per share of AHM Common Stock. Your options
will be subject to the terms and conditions of the 1999 Omnibus Stock Incentive
Plan of AHM and will vest on the closing of the second anniversary of AHM's
initial public offering.
Other than the amendments expressly set forth herein, the terms of your
Employment Agreement shall remain in full force and effect.
Kindly acknowledge your acceptance of the terms of this letter agreement by
signing below and returning the signed original to the Company. Please keep a
copy of this letter agreement for your files.
Sincerely yours,
/s/ Michael Strauss
- -----------------------------
Michael Strauss
President and CEO
Acknowledged and Accepted:
/s/ Nicholas P. Rizzetta
----------------------------
Nicholas P. Rizzetta
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
This Employment Agreement, dated as of July 14, 1999 (this
"Agreement"), is by and between American Home Mortgage Holdings, Inc., a
Delaware corporation having its principal executive offices at 12 East 49th
Street, New York, New York 10017 (the "Company"), and Ron Taylor (the
"Executive").
Whereas, the Company wishes to assure itself of the continued services
of the Executive, and the Executive is willing to continue in the employ of the
Company, upon the terms and conditions hereinafter set forth.
Now, Therefore, the Company and the Executive hereby agree as follows:
1. Definitions. Unless defined elsewhere in this Agreement, capitalized terms
- -- -----------
contained herein shall have the meanings set forth or incorporated by reference
in Section 18.
2. Employment. The Company agrees to continue to employ the Executive, and the
- -- ----------
Executive agrees to continue to be employed by the Company and/or any subsidiary
of the Company, during the term set forth in Section 3 and on the other terms
and conditions of this Agreement.
3. Term.
- -- ----
(a) The term of this Agreement shall commence as of the date hereof, and,
subject to Section 3(b), shall terminate at the close of business on the
third anniversary of that date.
(b) The term of this Agreement set forth in Section 3(a) shall be extended or
further extended, as the case may be, without any action by the Company or
the Executive, on the third anniversary of the date hereof and on each
subsequent anniversary of the date hereof, for an additional period of one
year, until either party gives written notice to the other party not less
than 60 days prior to the then current termination date in the manner set
forth in Section 14, that the term in effect when such notice is given is
not to be extended or further extended, as the case may be, beyond the then
current termination date. If the Executive shall continue in the full-time
employment of the Company after the term of this Agreement, such continued
employment shall be at will, and otherwise subject to the terms and
conditions of this Agreement.
4. Position, Duties and Responsibilities, Rights.
- -- ---------------------------------------------
(a) During the term of this Agreement, the Executive shall serve as, and be
elected to and hold the office and title Senior Vice President, Electronic
Commerce of the Company. As such, the Executive shall have all of the
powers and duties usually incident to the office of Senior Vice President,
Electronic Commerce, of a mortgage banking business and shall
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have such other duties and powers to perform such other additional duties
as may from time to time be lawfully assigned to the Executive by the
Company.
(b) During the term of this Agreement, the Executive agrees to devote
substantially all the Executive's time, efforts and skills to the affairs
of the Company during the Company's normal business hours, except for
vacations, illness and incapacity, but nothing in this Agreement shall
preclude the Executive from devoting reasonable periods to (i) manage the
Executive's personal investments, (ii) participate in professional,
educational, public interest, charitable, civic or community activities,
including activities sponsored by trade organizations, and (iii) serve as a
director or member of an advisory committee of any corporation not in
competition with the Company or any of its subsidiaries, or as an officer,
trustee or director of any charitable, educational, philanthropic, civic,
social or industry organizations, or as a speaker or arbitrator, provided
that the performance of the Executive's duties or responsibilities in any
of such capacities does not materially interfere with the regular
performance of the Executive's duties and responsibilities hereunder.
5. Compensation.
- -- ------------
(a) During the term of this Agreement, the Company shall pay the Executive, and
the Executive agrees to accept a base salary at the rate of not less than
$180,000 per year, with increases in such rate in accordance with the
Company's regular administrative practices of salary increases applicable
to senior officers from time to time during the term of this Agreement (the
annual base salary as increased from time to time during the term of this
Agreement being hereinafter referred to as the "Base Salary"). The Base
Salary shall be paid in installments no less frequently than monthly. Any
increase in Base Salary or other compensation shall not limit or reduce any
other obligation of the Company hereunder, and once established at an
increased specified rate, the Executive's Base Salary hereunder shall not
thereafter be reduced.
(b) During the term of this Agreement, the Executive shall be paid a bonus if
the performance standards set forth below are met as follows:
(i) 8% of base salary if the Company's internet originations and profitability
are 90% to 100% of Plan (as defined below);
(ii) 15% of base salary if the Company's internet originations and profitability
are 100% to 120% of Plan; or
(iii) 25% of base salary if the Company's internet originations and
profitability are 120% or more of Plan.
For purposes of this Section 5(b), Plan shall be the internet
origination plan developed and agreed to by Executives and the Company, a copy
of which is attached hereto as Exhibit A, which Plan shall be amended from time
to time for any extensions to the term of this Agreement.
(c) During the term of this Agreement, the Company will pay the Executive a
bonus of 10% to 25% or more of the base salary based on overall performance
and success in
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achieving the general responsibilities set forth herein. The percentage
hereunder will be determined at the sole discretion of the Company.
(d) During the term of this Agreement, the Executive shall be a full
participant in any and all of the Company's short and long-term incentive
plans and equity compensation plans in which senior officers of the Company
participate that are in effect on the date hereof or that may hereafter be
adopted, including, without limitation, the Company's 1999 Omnibus Stock
Incentive Plan (the "Stock Incentive Plan").
(e) During the term of this Agreement, the Executive shall be entitled to (i) a
grant of stock options following the completion of the Company's Initial
Public Offering ("IPO"), with respect to such number of shares as is valued
at $150,000, which may be exercised two years from the date of grant at the
IPO price (the "Initial Grant"), (ii) a grant of stock options, one year
from the date of the Initial Grant, with respect to such number of shares
as is valued at $150,000, exercisable two years from the date of grant at
the current market price on the date of grant, (iii) perquisites,
including, without limitation, an office and secretarial and clerical
staff, and (iv) fringe benefits, including, without limitation, health
insurance, pension benefits and other benefits consistent with the
Company's general policies, in each case, as well as to reimbursement, upon
proper accounting, of all reasonable expenses and disbursements incurred by
the Executive in the course of the Executive's duties.
(f) The Executive, the Executive's dependents and beneficiaries shall be
entitled to all benefits and service credit for benefits during the term of
this Agreement to which senior officers of the Company and their dependents
and beneficiaries are entitled as the result of the employment of such
officers during the term of this Agreement under the terms of employee
plans and practices of the Company and its subsidiaries, including, without
limitation, any pension plans, profit sharing plans, any non-qualified
deferred compensation plans and related "rabbi" trusts, the Company's life
insurance plans, its disability benefit plans, its vacation and holiday pay
plans, its medical, dental and welfare plans, and other present or
successor plans and practices of the Company and its subsidiaries for
which senior officers, their dependents and beneficiaries are eligible, and
to all payments and other benefits under any such plan or practice
subsequent to the term of this Agreement as a result of participation in
such plan or practice during the term of this Agreement.
(g) The Company shall pay the relocation costs of the Executive's spouse to
Florida, including the costs associated with the sale of the Executive's
existing home in New York (including realtor fees and attorney fees of up
to $800). The Company shall provide the Executive a loan at cost to be
used by the Executive to finance the reasonable purchase of a home in
Florida. In addition, the Company will pay for the cost of the actual
physical move of the Executive's spouse to Florida.
(h) The Company shall pay the costs of the Executive's relocation to Long
Island, including the costs associated with the Executive's actual physical
move to Long Island and the Executive's reasonable temporary housing costs
for 90 days while searching for a permanent home on Long Island.
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(i) The Company shall pay the Executive an advance of $28,000 of the bonuses
set forth in Section 5(b) herein, which shall be in the form of a no-
interest loan against that advance should the Executive fail to earn his
bonus according to the terms set forth in Section 5(b).
6. Termination of Employment.
- -- -------------------------
(a) The term of this Agreement shall terminate upon the death of the Executive.
(b) The Company may terminate the Executive's employment during the term of
this Agreement for Cause as provided in Section 7(b)(i) or in the event of
Disability as provided in Section 7(b)(ii).
(i) This Agreement shall be considered terminated for "Cause' only:
(A) if the Executive fails to substantially perform the Executive's duties
hereunder, other than by reason of a Disability;
(B) if the Executive is grossly negligent or engages in gross misconduct in the
performance of the Executive's duties hereunder; and
(C) if the Executive knowingly engages in an act of dishonesty, an act of fraud
or embezzlement, or any felonious conduct.
(ii) The term "Disability" as used in this Agreement means an accident or
physical or mental illness which prevents the Executive from substantially
performing the Executive's duties hereunder for three consecutive months.
The term of this Agreement shall end as of the close of business on the
last day of such three month period but without prejudice to any payments
due to the Executive in respect of disability under this Agreement or any
plan or practice of the Company. The amount of any payments payable under
Section 6(b) during such six month period shall be reduced by any payments
to which the Executive may be entitled for the same period because of
disability under any disability or pension plan or arrangement of the
Company or any subsidiary or affiliate thereof.
(c) The Executive may terminate the Executive's employment during the term of
this Agreement for Good Reason. For purposes of this Agreement, "Good
Reason" shall mean (i) a reduction of the Executive's rate of compensation
or any other failure by the Company to comply with Section 6, (ii) failure
by the Company to obtain the assumption of, and the agreement to perform,
this Agreement by any successor as contemplated in Section 9(a), or (iii)
the Company's failure to comply in any material respect to its other
obligations under the Agreement which it fails to correct within 30 days of
Notice by Executive.
(d) Any termination by the Company pursuant to Section 6(b) or by the Executive
pursuant to Section 6(c) shall be communicated by a written Notice of
Termination to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a notice which indicates the specific
termination provision in this Agreement relied upon and sets
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<PAGE>
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provisions so
indicated.
(e) "Date of Termination" shall mean (i) if the Executive's employment is
terminated by the Executive's death, the date of the Executive's death,
(ii) if the Executive's employment is terminated pursuant to Section
6(b)(ii), 10 days after Notice of Termination is given (provided that the
Executive shall not have returned to the performance of the Executive's
duties on a full-time basis during such 10 day period), and (iii) if the
Executive's employment is terminated for any other reason, the date on
which a Notice of Termination is given.
7. Indemnification. The Company shall indemnify the Executive to the fullest
- -- ---------------
extent permitted by the General Corporation Law of the State of Delaware, as
amended from time to time.
8. Non-competition; Non-solicitation.
- -- ---------------------------------
(a) In consideration of this Agreement, the Executive agrees that, for the
period ending one year after the termination of the Executive's employment
with the Company by the Company for Cause or by the Executive without Good
Reason (the "Non-Competition Period"), the Executive will not, directly or
indirectly (whether as a sole proprietor, partner or venturer, stockholder,
director, officer, employee, consultant or in any other capacity as
principal or agent or through any Person, subsidiary or employee acting as
nominee or agent):
(i) conduct or engage in or be interested in or associated with any Person
which conducts or engages in the Business within the United States;
(ii) take any action, directly or indirectly, to finance, guarantee or provide
any other material assistance to any Person engaged in the Business;
(iii) solicit, contact or accept business of any client or counterparty whom
the Company served or conducted business with or whose name became known to the
Executive as a potential client or counterparty while in the employ of the
Company or during the Non-Competition Period; or
(iv) influence or attempt to influence any Person that is a contracting party
with the Company at any time during the Non-Competition Period to terminate
any written or oral agreement with the Company.
(b) The Executive shall neither, either on the Executive's own account or in
conjunction with or on behalf of any other Person, solicit or entice away
from the Company any officer, employee or customer of the Company during
the term hereof or the Non-Competition Period nor engage, hire, employ, or
induce the employment of any such Person whether or not such officer,
employee or customer would commit a breach of contract by reason of leaving
service or transferring business.
(c) The restrictive provisions hereof shall not prohibit the Executive from (i)
having an equity interest in the securities of any entity engaged in the
Business or any business with respect to which the Executive obtained
confidential or proprietary data or
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information, which entity's securities are listed on a nationally-
recognized securities exchange or quotation system or traded in the over-
the-counter market, to the extent that such interest does not exceed 5% of
the outstanding equity interests of such entity, (ii) investing as a
passive investor in an entity engaging in the Business that is not so
listed or traded, so long as such interest does not exceed 5% of the
outstanding equity interests of such entity or (iii) with the prior written
consent of the Company, serving as a director or other advisor to any other
Person.
(d) The Executive agrees that the covenants contained in this Section 8 are
reasonable covenants under the circumstances, and further agrees that if in
the opinion of a court of competent jurisdiction, such restraint is not
reasonable in any respect, such court shall have the right, power and
authority to excise or modify such provision or provisions of these
covenants which as to such court shall appear not reasonable and to enforce
the remainder thereof as so amended.
9. Successors; Binding Agreement.
- -- -----------------------------
(a) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all
of the business and/or assets of the Company to expressly assume and agree
to perform this Agreement in the same manner and to the extent that the
Company would be required to perform it if no such succession had taken
place; provided that no such agreement with a successor shall release the
Company without the Executive's express written consent. Failure of the
Company to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Company in the same amount and on the
same terms as the Executive would be entitled to hereunder if the
Executive's employment were terminated by the Company other than pursuant
to Section 6(b), except that for purposes of implementing the foregoing,
the date on which any such succession becomes effective shall be deemed the
Date of Termination.
(b) If the Executive should die while any amounts are due and payable to the
Executive hereunder, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of the Agreement to the
Executive's devisees, legatee, or other designee or, if there be no such
designee, to the Executive's estate.
(c) Except as to withholding of any tax under the laws of the United States or
any state or locality, neither this Agreement nor any right or interest
hereunder nor any amount payable at any time hereunder shall be subject in
any manner to alienation, sale, transfer, assignment, pledge, attachment,
or other legal process, or encumbrance of any kind by the Executive or the
beneficiaries of the Executive or by legal representatives without the
Company's prior written consent. Nothing in this Section 9 shall preclude
the Executive from designating a beneficiary to receive any benefit payable
on the Executive's death, or the legal representatives of the Executive
from assigning any rights hereunder to the Person or Persons entitled
thereto under the Executive's will or, in case of intestacy, to the Person
or Persons entitled thereto under the laws of intestacy applicable to the
Executive's estate.
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10. Parties. This Agreement shall be binding upon and shall inure to the
- --- -------
benefit of the Company and the Executive, the Executive's heirs, beneficiaries
and legal representatives.
11. Entire Agreement; Amendment.
- --- ---------------------------
(a) This Agreement contains the entire understanding of the parties with
respect to the subject matter hereof and supersedes any and all other
agreements between the parties with respect to the subject matter hereof.
(b) Any amendment of this Agreement shall not be binding unless in writing and
signed by both (i) an officer or director of the Company duly authorized to
do so and (ii) the Executive.
12. Enforceability. In the event that any provision of this Agreement is
- --- --------------
determined to be invalid or unenforceable, the remaining terms and conditions of
this Agreement shall be unaffected and shall remain in full force and effect,
and any such determination of invalidity or enforceability shall not affect the
validity or enforceability of any other provision of this Agreement.
13. Notices. All notices which may be necessary or proper for either the
- --- -------
Company or the Executive to give to the other shall be in writing and shall be
sent by hand delivery, registered or certified mail, return receipt requested,
overnight courier or facsimile, if to the Executive, at offices at 12 East 49th
Street, New York, NY 10017,or, if to the Company, at its principal executive
offices at 12 East 49th Street, New York, NY 10017, and shall be deemed given
when sent, provided that any Notice of Termination or other notice given
pursuant to Section 7 shall be deemed given only when received. Either party may
by like notice to the other party change the address at which the Executive or
it is to receive notices hereunder.
14. Governing Law. THIS AGREEMENT IS EXECUTED IN THE STATE OF NEW YORK AND
- --- -------------
SHALL BE GOVERNED BY, AND BE ENFORCEABLE IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS
THEREOF.
15. Definitions. The following terms, when capitalized in this Agreement,
- --- -----------
shall have the meanings set forth or incorporated by reference in this Section
15.
(a) "Base Salary" shall have the meaning set forth in Section 6(a).
(b) "Board of Directors" means the Board of Directors of the Company, as
constituted from time to time.
(c) "Business" means a business involving the supplying of home mortgages or
equity loans over or through the internet.
(d) "Cause" shall have the meaning set forth in Section 7(b)(i).
(e) "Code" means the Internal Revenue Code of 1986, as amended.
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(f) "Company" means American Home Mortgage Holdings, Inc., a Delaware
corporation, and any successors to its business and/or assets, which
executes and delivers an agreement provided for in Section 9(a) or which
otherwise becomes bound by all the terms and conditions of this Agreement
by operation of law.
(g) "Date of Termination" shall have the meaning set forth in Section 6(e).
(h) "Disability" shall have the meaning set forth in Section 6(b)(ii).
(i) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(j) "Good Reason" shall have the meaning set forth in Section 6(c).
(k) "Non-Competition Period" shall have the meaning set forth in Section 8(a).
(l) "Notice of Termination" shall have the meaning set forth in section 7(f).
(m) "Person" means any individual, corporation, partnership, limited liability
company, limited duration company, trust or other entity of any nature
whatsoever.
(Remainder of This Page Intentionally Left Blank)
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first written above.
American Home Mortgage Holdings, Inc.
By: /s/ Michael Strauss
--------------------------
Name: Michael Strauss
Title: President and Chief Executive Officer
/s/ Ron Taylor
----------------------------
Ron Taylor
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EXHIBIT 10.12
================================================================================
AMERICAN HOME MORTGAGE HOLDINGS, INC.
and
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
as Representative of the holders
_____________
FORM OF WARRANT AGREEMENT
Dated as of September __, 1999
_____________
================================================================================
<PAGE>
WARRANT AGREEMENT
This Agreement is made as of September __, 1999 between American Home
Mortgage Holdings, Inc., a Delaware corporation (the "Company"), and Friedman,
Billings, Ramsey & Co., Inc., (the "Representative").
RECITALS
A. The Company proposes to sell, pursuant to an Underwriting Agreement
dated September __, 1999 between the Company and Friedman, Billings, Ramsey &
Co., Inc. and Advest, Inc. (the "Underwriting Agreement"), 2,500,000 shares (the
"Initial Shares") of Common Stock, par value $.01 per share, of the Company (the
"Common Stock"), to certain underwriters, for which Friedman, Billings, Ramsey &
Co., Inc. is acting as lead representative (the "Underwriters") and up to
375,000 shares (the "Option Shares") of Common Stock, to cover over-allotments,
if any.
B. The Company deems it advisable, in consideration for the services
rendered to the Company by Friedman, Billings, Ramsey & Co., Inc. as lead
underwriter in connection with the offering of the Common Stock, to issue to
Friedman, Billings, Ramsey & Co., Inc. warrants (the "Warrants") entitling the
holders thereof to purchase an aggregate of 250,000 shares of Common Stock. The
shares of Common Stock issued upon exercise of the Warrants are referred to as
the "Warrant Shares".
C. The Company desires to enter into this Agreement to set forth the terms
and conditions of the Warrants and the rights of the holders thereof.
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
herein contained, the parties hereto agree as follows:
ARTICLE I
ISSUANCE, EXECUTION, EXPIRATION AND TRANSFER OF WARRANT
CERTIFICATES
SECTION 1.01. Form of Warrant Certificates. The Warrants shall be
----------------------------
evidenced by certificates in temporary or definitive fully registered form (the
"Warrant Certificates") substantially in the form of Exhibit A and may have such
letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with any law or with
any rule or regulation made pursuant thereto or with any rule or regulation of
any securities exchange, or to conform to usage, or as consistently herewith may
be determined by the officers executing such Warrant Certificates as evidenced
by their execution of the Warrant Certificates. Each Warrant Certificate shall
evidence the right, subject to the provisions of this Agreement and of the
Warrant Certificate, to purchase the
<PAGE>
number of shares of Common Stock stated therein, adjusted as provided for in
Article III hereof, upon payment of the Exercise Price (as defined in Section
2.01).
SECTION 1.02. Execution of Warrant Certificates. Each Warrant
---------------------------------
Certificate, whenever issued, shall be dated as of the date of signature thereof
by the Company either upon initial issuance or upon exchange, substitution or
transfer, shall be signed manually by, or bear the facsimile signature of, the
Chairman of the Board or the President or a Treasurer or a Vice President of the
Company, shall have the Company's seal or a facsimile thereof affixed or
imprinted thereon and shall be attested by the manual or facsimile signature of
the Secretary or an Assistant Secretary of the Company. In case any officer of
the Company whose manual or facsimile signature has been placed upon any Warrant
Certificate shall have ceased to be such before such Warrant Certificate is
issued, it may be issued with the same effect as if such officer had not ceased
to be such at the date of issuance. Any Warrant Certificate may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Warrant Certificate, shall be a proper officer of the Company to sign such
Warrant Certificate, although at the date of the execution of this Agreement any
such person was not such an officer.
SECTION 1.03. Issuance, Delivery and Registration of Warrant Certificates.
-----------------------------------------------------------
The Company shall issue and deliver, at the closing of the sale of the Initial
Shares to the Underwriters as provided in the Underwriting Agreement, to the
Representative or its designees, a Warrant Certificate representing the
Warrants, in substantially the form of Exhibit A. Additionally, the Company
shall sign and deliver Warrant Certificates upon exchange, transfer or
substitution for one or more previously signed Warrant Certificates as
hereinafter provided. The Company shall maintain books for the registration of
transfer and registration of Warrant Certificates (the "Warrant Register").
SECTION 1.04. Transfer and Exchange of Warrant Certificates. The Company,
---------------------------------------------
from time to time, shall register the transfer of any outstanding Warrant
Certificates in the Warrant Register upon surrender at the principal office of
the Company of Warrant Certificates accompanied by a written instrument or
instruments of transfer, in form satisfactory to the Company, duly executed by
the Warrantholder or the Warrantholder's attorney duly authorized in writing,
and evidence, satisfactory to the Company, of compliance with the provisions of
Section 6.04. Upon any such registration of transfer, a new Warrant Certificate
shall be signed by the Company and issued to the transferee and the surrendered
Warrant Certificate shall be canceled by the Company. Warrant Certificates may
be exchanged at the option of the holder thereof, upon surrender, properly
endorsed, at the principal office of the Company, with written instructions, for
other Warrant Certificates signed by the Company entitling the registered holder
thereof, subject to the provisions thereof and of this Agreement, to purchase in
the aggregate a like number of shares of Common Stock as the Warrant Certificate
so surrendered. The Company may require the payment of a sum sufficient to cover
any tax or governmental charge that may be imposed in connection with any such
exchange or transfer.
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ARTICLE II
SHARES OF COMMON STOCK ISSUABLE, EXERCISE PRICE, EXPIRATION
DATE AND EXERCISE OF WARRANTS
SECTION 2.01. Warrant Shares Issuable; Exercise Price; Expiration Date.
--------------------------------------------------------
Each Warrant Certificate shall entitle the registered holder thereof, subject to
the provisions thereof and of this Agreement, to purchase from the Company at
any time from the first anniversary of the effective date (the "Effective Date")
of the registration statement (No. 333-82409) filed by the Company on Form S-1
under the Securities Act of 1933, as amended (the "Securities Act") to the close
of business on the fifth anniversary of such date (or, if such date is not a
Business Day (as defined below), the first following Business Day) the number of
shares of Common Stock stated therein, adjusted as provided in Article III, upon
payment of $_____ per share (which price is equal to 130% of the initial public
offering price), adjusted as provided in Article III. Such price, as in effect
from time to time as provided in Article III, is referred to as the "Exercise
Price". Each share of Common Stock issuable upon exercise of a Warrant is
referred to as a "Warrant Share". Each Warrant not exercised during the period
set forth above shall become void, and all rights thereunder and all rights in
respect thereof under this Agreement shall cease, at the end of such period. For
purposes of this Agreement, the term "Business Day" means any day of the week
other than a Saturday, Sunday or a day which in The City of New York or in the
city in which the principal office of the Company is located shall be a legal
holiday or a day on which banking institutions are authorized or required by law
to close.
SECTION 2.02. Exercise of Warrants. (a) Warrants may be exercised by
--------------------
surrendering the Warrant Certificate evidencing such Warrants at the principal
office of the Company, with the Election to Exercise form set forth on the
reverse of the Warrant Certificate duly completed and signed, and by paying in
full to the Company (i) in cash, or (ii) by certified or official bank check, or
(iii) by any combination of the foregoing, the Exercise Price for each Warrant
Share as to which Warrants are then being exercised and any applicable taxes,
other than taxes that the Company is required to pay hereunder. A Warrantholder
may exercise such holder's Warrant for the full number of Warrant Shares
issuable upon exercise thereof or any lesser number of whole Warrant Shares.
(b) As soon as practicable after the exercise of any Warrants and payment
by the Warrantholder of the full Exercise Price for the Warrant Shares as to
which such Warrants are then being exercised, the Company shall requisition from
the transfer agent of the shares of Common Stock and deliver to or upon the
order of such Warrantholder a certificate or certificates for the number of full
Warrant Shares to which such Warrantholder is entitled, registered in the name
of such Warrantholder or as such Warrantholder shall direct. Fractional Warrant
Shares that otherwise would be issuable in respect of such exercise shall be
paid in cash as provided in Section 2.03, and the number of Warrant Shares
issuable to such Warrantholder shall be rounded down to the next nearest whole
number. If such Warrant Certificate shall not have been exercised in full, the
Company will issue to such
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Warrantholder a new Warrant Certificate exercisable for the number of shares of
Common Stock as to which such Warrant shall not have been exercised. The Company
will cancel all Warrants so surrendered.
(c) Each person in whose name any such certificate for Warrant Shares is
issued shall for all purposes be deemed to have become the holder of record of
such Warrant Shares on the date on which the Warrant Certificate was surrendered
to the Company and payment of the Exercise Price and any applicable taxes was
made to the Company, irrespective of the date of delivery of such certificate
for Warrant Shares.
(d) All Warrant Shares will be duly authorized, validly issued, fully paid
and nonassessable. The Company will pay all documentary stamp taxes attributable
to the initial issuance of Warrant Shares. The Company will not be required,
however, to pay any tax imposed in connection with any transfer involved in the
issue of the Warrant Shares in a name other than that of the Warrantholder. In
such case, the Company will not be required to issue any certificate for Warrant
Shares until the person or persons requesting the same shall have paid to the
Company the amount of any such tax or shall have established to the Company's
satisfaction that the tax has been paid or that no tax is due.
SECTION 2.03. No Fractional Shares to Be Issued. If more than one Warrant
---------------------------------
Certificate shall be surrendered for exercise at one time by the same holder,
the number of full Warrant Shares which shall be issuable upon exercise thereof
shall be computed on the basis of the aggregate number of Warrants so
surrendered. The Warrantholders, by their acceptance of the Warrant
Certificates, expressly waive their right to receive any fraction of a Warrant
Share or a share certificate representing a fraction of a Warrant Share. In lieu
thereof, the Company will purchase such fractional interest for an amount in
cash equal to the current market value of such fractional interest, as
reasonably determined by the Board of Directors of the Company.
SECTION 2.04. Cancellation of Warrants. The Company shall cancel any
------------------------
Warrant Certificate delivered to it for exercise, in whole or in part, or
delivered to it for transfer, exchange or substitution, and no Warrant
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall destroy canceled
Warrant Certificates. If the Company shall acquire any of the Warrants, such
acquisition shall not operate as a redemption or termination of the right
represented by such Warrants unless and until the Warrant Certificates
evidencing such Warrants are surrendered to the Company for cancellation.
4
<PAGE>
ARTICLE III
ADJUSTMENT OF EXERCISE PRICE; MERGER, ACQUISITION, ETC.;
RESERVATION OF SHARES OF COMMON STOCK; PAYMENT OF TAXES
SECTION 3.01. Adjustment of Exercise Price and Number of Warrant Shares.
---------------------------------------------------------
The Exercise Price shall be subject to adjustment from time to time as provided
in this Article III. After each adjustment of the Exercise Price, each
Warrantholder shall at any time thereafter be entitled to purchase, at the
Exercise Price resulting from such adjustment, the number of Warrant Shares
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Shares purchasable pursuant to the
provisions of such Warrant immediately prior to such adjustment and dividing the
product thereof by the Exercise Price resulting from such adjustment.
SECTION 3.02. Stock Dividends. If the Company shall declare a dividend or
---------------
any other distribution upon any capital stock which is payable in shares of
Common Stock or securities convertible into shares of Common Stock, the Exercise
Price shall be reduced to the quotient obtained by dividing (i) the number of
shares of Common Stock outstanding immediately prior to such declaration
multiplied by the then effective Exercise Price by (ii) the total number of
shares of Common Stock outstanding immediately after such declaration. All
shares of Common Stock and all convertible securities issuable in payment of any
dividend or other distribution upon the capital stock of the Company shall be
deemed to have been issued or sold without consideration.
SECTION 3.03. Stock Splits and Reverse Stock Splits. If the Company shall
-------------------------------------
subdivide its outstanding shares of Common Stock into a greater number of
shares, the Exercise Price shall be proportionately reduced and the number of
Warrant Shares issuable upon exercise of each Warrant shall be proportionately
increased. If the Company shall combine the outstanding shares of Common Stock
into a smaller number of shares, the Exercise Price shall be proportionately
increased and the number of Warrant Shares issuable upon exercise of each
Warrant shall be proportionately decreased.
SECTION 3.04. Reorganizations and Asset Sales. If any capital
-------------------------------
reorganization or reclassification of the Company, or any consolidation or
merger of the Company with another corporation, or the sale of all or
substantially all of the assets of the Company shall be effected in such a way
that the holders of the shares of Common Stock shall be entitled to receive
securities or assets with respect to or in exchange for shares of Common Stock,
adequate provision shall be made, prior to and as a condition of such
reorganization, reclassification, consolidation, merger or sale, whereby each
Warrantholder shall have the right to receive, upon the terms and conditions
specified herein and in lieu of the Warrant Shares otherwise receivable upon the
exercise of such Warrants, such securities or assets as may be issued or payable
with respect to or in exchange for the number of outstanding shares of Common
Stock equal to the number of Warrant Shares otherwise receivable had such
reorganization, reclassification, consolidation, merger or sale not taken place.
In any such
5
<PAGE>
case appropriate provision shall be made with respect to the rights and
interests of such Warrantholder so that the provisions of this Agreement shall
be applicable with respect to any securities or assets thereafter deliverable
upon exercise of the Warrants. The Company shall not effect any such
consolidation, merger or sale unless prior to or simultaneously with the
consummation thereof the survivor or successor corporation resulting from such
consolidation or merger or the purchaser of such assets shall assume by written
instrument delivered to each holder of Warrants the obligation to deliver to
such holder such securities or assets as such holder may be entitled to receive,
subject to payment of the Exercise Price. Notwithstanding any other provision
contained herein, the Company may, upon notice and subject to the provisions of
Section 4.03 hereof, terminate the Warrants in the event of a consolidation or
merger described in this Section 3.04.
SECTION 3.05. Covenant to Reserve Shares for Issuance on Exercise. (a)
---------------------------------------------------
The Company will cause an appropriate number of shares of Common Stock to be
duly and validly authorized and reserved and will keep available out of its
authorized shares of Common Stock, solely for the purpose of issue upon exercise
of Warrants as herein provided, the full number of shares of Common Stock, if
any, then issuable if all outstanding Warrants then exercisable were to be
exercised. The Company covenants that all shares of Common Stock that shall be
so issuable shall be duly and validly issued and, upon payment of the Exercise
Price, fully paid and non-assessable. If at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient for such purpose,
the Company will take such action as, in the opinion of its counsel, may be
necessary to increase its authorized but unissued Common Stock to such number of
shares as shall be sufficient for such purpose. Prior to the issuance of any
Warrant Shares, the Company shall secure the listing of such Warrant Shares upon
any securities exchange upon which shares of Common Stock are then listed, if
any.
(b) The Company hereby authorizes and directs its current and future
transfer agents for the shares of Common Stock at all times to reserve such
number of authorized shares as shall be requisite for such purpose. The Company
will supply such transfer agents with duly executed stock certificates for such
purposes. Promptly after the date of expiration of the Warrants, no shares shall
be reserved in respect of such Warrants.
SECTION 3.06. Statements on Warrants. The form of Warrant Certificate
----------------------
need not be changed because of any adjustment made pursuant to this Article III,
and Warrant Certificates issued after such adjustment may state the same
Exercise Price and the same number of shares of Common Stock as are stated in
the Warrant Certificates initially issued pursuant to this Agreement. The
Company, however, may at any time in its sole discretion (which shall be
conclusive) make any change in the form of Warrant Certificate that it may deem
appropriate and that does not affect the substance thereof; and any Warrant
Certificates thereafter issued or countersigned, whether in exchange or
substitution for an outstanding Warrant Certificate or otherwise, may be in the
form as so changed.
6
<PAGE>
SECTION 3.07. Notice of Change in Securities Issuable, etc. Whenever the
---------------------------------------------
securities issuable or deliverable in exchange for Warrants are changed pursuant
to this Article III, the Company promptly shall mail to each Warrantholder a
notice, executed by its chief financial officer, setting forth in reasonable
detail the facts requiring the change and specifying the effective date of such
change and the number or amount of, and describing the shares or other
securities issuable or deliverable in exchange for, each Warrant as so changed.
Failure to publish such notice, or any defect in such notice, shall not affect
the legality or validity of any such change.
SECTION 3.09. References to Common Stock. Unless the context otherwise
--------------------------
indicates, all references to Common Stock in this Agreement and in the Warrant
Certificates, in the event of a change under this Article III, shall be deemed
to refer also to any other securities issuable or deliverable in exchange for
Warrants pursuant to such change.
ARTICLE IV
OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANTS
SECTION 4.01. No Rights as Shareholders. Nothing contained in this
-------------------------
Agreement or in any Warrant Certificate shall be construed as conferring on any
Warrantholder any rights whatsoever as a shareholder of the Company, including
the right to vote at, or to receive notice of, any meeting of shareholders of
the Company; nor shall the consent of any such holder be required with respect
to any action or proceeding of the Company; nor shall any such holder, by reason
of the ownership or possession of a Warrant or the Warrant Certificate
representing the same, either at, before or after exercising such Warrant, have
any right to receive any cash dividends, stock dividends, allotments or rights,
or other distributions (except as specifically provided herein), paid, allotted
or distributed or distributable to the shareholders of the Company prior to the
date of the exercise of such Warrant, nor shall such holder have any right not
expressly conferred by such holder's Warrant or Warrant Certificate.
SECTION 4.02. Mutilated or Missing Warrant Certificates. If any Warrant
-----------------------------------------
Certificate is lost, stolen, mutilated or destroyed, the Company in its
discretion may issue, in exchange and substitution for and upon cancellation of
the mutilated Warrant Certificate, or in lieu of and substitution for the
Warrant Certificate lost, stolen or destroyed, upon receipt of a proper
affidavit or other evidence satisfactory to the Company (and surrender of any
mutilated Warrant Certificate) and bond of indemnity in form and amount and with
corporate surety satisfactory to the Company in each instance protecting the
Company, a new Warrant Certificate of like tenor and exercisable for an
equivalent number of shares of Common Stock as the Warrant Certificate so lost,
stolen, mutilated or destroyed. Any such new Warrant Certificate shall
constitute an original contractual obligation of the Company, whether or not the
allegedly lost, stolen, mutilated or destroyed Warrant Certificate at any time
shall be enforceable by anyone. An applicant for such a substitute Warrant
Certificate
7
<PAGE>
also shall comply with such other reasonable regulations and pay such other
reasonable charges as the Company may prescribe. All Warrant Certificates shall
be held and owned upon the express condition that the foregoing provisions are
exclusive with respect to the replacement of lost, stolen, mutilated or
destroyed Warrant Certificates, and shall preclude any and all other rights or
remedies notwithstanding any law or statute existing or hereafter enacted to the
contrary with respect to the replacement of negotiable instruments or other
securities without their surrender.
SECTION 4.03. Liquidation, Merger, etc.; Notice to Warrantholders. If:
---------------------------------------------------
(a) the Company shall authorize the issuance to all holders of Common
Stock of rights or warrants to subscribe for or purchase capital stock of the
Company or of any other subscription rights or warrants; or
(b) the Company shall authorize the distribution to all holders of Common
Stock of evidences of its indebtedness or assets (other than cash dividends or
cash distributions payable out of current earnings, retained earnings or earned
surplus or dividends payable in Common Stock); or
(c) there shall be proposed any consolidation or merger to which the
Company is to be a party and for which approval of the holders of Common Stock
is required, or the conveyance or transfer of the properties and assets of the
Company substantially as an entirety, or such other merger or transaction
described in Section 3.04 hereof; or
(d) there shall be proposed the voluntary or involuntary dissolution,
liquidation or winding up of the Company;
the Company shall cause to be given to each Warrantholder, by first-class mail,
postage prepaid, a written notice stating (i) the date as of which the holders
of record of shares of Common Stock to be entitled to receive any such rights,
warrants or distribution are to be determined or (ii) the date on which any
consolidation, merger, conveyance, transfer, reorganization, reclassification,
dissolution, liquidation or winding up is expected to become effective, and the
date as of which it is expected that holders of record of shares of Common Stock
shall be entitled to exchange the shares for securities or other property, if
any, deliverable upon the consolidation, merger, conveyance, transfer,
reorganization, reclassification, dissolution, liquidation or winding up. Such
notice shall be filed and mailed in the case of a notice pursuant to (i) above
at least ten calendar days before the record date specified and in the case of a
notice pursuant to clause (ii) above at least 20 calendar days before the
earlier of the dates specified. From the time notice is required to be given
pursuant to this Section 4.03, the holders of Warrants shall be entitled to
exercise such Warrants regardless of the provisions of Section 2.01. Unless
assumed by the survivor or successor corporation resulting from any transaction
described in Section 4.03(c) hereof, the Warrants shall expire and be of no
further force or effect upon consummation of such transaction.
8
<PAGE>
ARTICLE V
MISCELLANEOUS
SECTION 5.01. Registration of Warrant Shares.
------------------------------
(a) If, at any time prior to the close of business on the fifth
anniversary of the Effective Date, there is no registration statement in effect
for the Warrant Shares, the Company, upon the written request of holders of
Warrants and of Warrant Shares representing an aggregate of 50% or more of the
Warrant Shares, will file with the Securities and Exchange Commission under the
Securities Act, such registration statements and amendments thereto and such
other filings as may be required to permit the public offering and sale of such
Warrant Shares in compliance with the Securities Act. The Company shall be
required to register Warrant Shares no more than once pursuant to this Section
5.01(a).
(b) The Company will permit, subject to the last sentence of this Section
5.01(b), any Warrant Shares to be included, at the request of the holders of
such Warrant Shares, in any registration of securities of the Company (other
than shares of Common Stock for an employees' option or stock purchase plan or
shares registered on Form S-4 in connection with an arms-length merger
transaction) under a registration statement filed by the Company under the
Securities Act at any time prior to the close of business on the seventh
anniversary of the Effective Date. The Company shall provide written notice to
the record holders of all Warrants and Warrant Shares at least 30 days prior to
the filing of any such registration statement sent by registered mail to the
address of record of each such holder. If the offering pursuant to any
registration statement described in this Section 5.01(b) is made through
underwriters and the managing underwriter of such offering shall advise the
Company in writing that, in its opinion, the distribution of the number of
Warrant Shares requested to be included in the registration concurrently with
the securities being registered by the Company would materially and adversely
affect the distribution of such securities by the Company, then all selling
security holders (but not the Company) shall reduce the amount of securities
each intended to distribute through such offering on a pro rata basis.
(c) Each such holder shall pay the underwriting discount attributable to
such holder's Warrant Shares, any transfer tax payable with respect thereto and
the fees and expenses of such holder's counsel. All other expenses of
registration under Section 5.01(a), or Section 5.01(b) shall be borne by the
Company.
(d) The Company will agree to indemnify the holders of Warrant Shares that
are included in a registration statement or amendments to existing registration
statements pursuant to this Section 5.01 substantially to the same extent as the
Company has agreed to indemnify the Underwriters in the Underwriting Agreement
and such holders will agree to indemnify the Company and any underwriter with
respect to information furnished by them in writing to the Company for inclusion
therein substantially to the same extent as the Underwriters have indemnified
the Company in the Underwriting Agreement.
9
<PAGE>
(e) If the offering pursuant to any registration statement provided for
herein is made through underwriters, the Company will enter into an underwriting
agreement in customary form and indemnify, in customary form, such underwriters
and each person who controls any such underwriter within the meaning of the
Securities Act. Such underwriting agreement shall contain provisions for the
indemnification of the Company in customary form, provided that the aggregate
amount that may be recovered from any such underwriter pursuant to such
provisions shall be limited to the total price at which the Warrant Shares
purchased by any such underwriter under such underwriting agreement were offered
to the public.
SECTION 5.02. Enforcement of Warrant Rights. All rights of action are
-----------------------------
vested in the respective Warrantholders. Any holder of any Warrant, in his own
behalf and for his own benefit, may enforce, and may institute and maintain any
suit, action or proceeding against the Company suitable to enforce, or otherwise
in respect of, his right to exercise his Warrant for the purchase of the number
of Warrant Shares issuable or deliverable in exchange therefor, in the manner
provided in the Warrant and in this Agreement.
SECTION 5.03. Negotiability and Ownership. The Warrants issued hereunder
---------------------------
shall not, for a period of one year following the Effective Date, be sold,
transferred, assigned or hypothecated by the holders thereof except (a) to
persons who are officers or partners of Friedman, Billings, Ramsey & Co., Inc.
and members of the selling group and/or their officers and partners or (b) in
the case of an individual, pursuant to such individual's last will and testament
or the laws of descent and distribution and, in any case, only in compliance
with the Securities Act. For the period commencing one year after the Effective
Date until the expiration of the Warrants, the Warrants issued hereunder shall
not be sold, transferred, assigned or hypothecated by the holders thereof except
(a) to Friedman, Billings, Ramsey & Co., Inc., and any of its affiliates, or any
officers, directors, employees or representatives of the foregoing or (b) in the
case of an individual, pursuant to such individual's last will and testament or
the laws of descent and distribution and, in any case, only in compliance with
the Securities Act. For the purposes of this Section 5.03, the terms "officers,"
"directors," "employees" and "representatives" shall refer to those persons who
are officers, directors, employees or representatives, as the case may be, of
Friedman, Billings, Ramsey & Co., Inc. or any of its affiliates, as the case
maybe, or who become officers, directors or employees of Friedman, Billings,
Ramsey & Co., Inc. or any of its affiliates at any time before the expiration of
the Warrants regardless of whether such persons are officers, directors,
employees or representatives of Friedman, Billings, Ramsey & Co., Inc. or any of
its affiliates at the time they sell, transfer, assign or hypothecate a Warrant.
Any attempt to sell, transfer, assign or hypothecate in contravention of this
Section shall be null and void.
SECTION 5.04. Warrant Legend. (a) Each Warrant shall contain a legend in
--------------
substantially the following form:
10
<PAGE>
"THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS
WARRANT ARE SUBJECT TO THE CONDITIONS SPECIFIED IN THE AGREEMENT, DATED
SEPTEMBER ___, 1999, BETWEEN AMERICAN HOME MORTGAGE HOLDINGS, INC. AND FRIEDMAN,
BILLINGS, RAMSEY & CO., INC. ANY ATTEMPT TO TRANSFER THIS WARRANT OR ANY SHARE
OF COMMON STOCK ISSUED UPON EXERCISE OF THIS WARRANT TO ANY UNAUTHORIZED
TRANSFEREE, SHALL BE NULL AND VOID. NO TRANSFER IN VIOLATION OF SAID AGREEMENT
SHALL BE EFFECTIVE. THIS WARRANT MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT
TO AN EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR POSTEFFECTIVE AMENDMENT
THERETO FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER THAT
REGISTRATION IS NOT REQUIRED UNDER THE ACT. THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD OR TRANSFERRED WITHOUT AN
EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR POSTEFFECTIVE AMENDMENT THERETO
FOR SUCH SHARES UNDER THE ACT OR AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER THIS ACT."
(b) Each certificate representing Warrant Shares, unless registered
pursuant to Section 5.01, shall contain a legend substantially in the following
form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD OR TRANSFERRED
WITHOUT AN EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR POSTEFFECTIVE
AMENDMENT THERETO FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933 OR AN OPINION
OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER THAT REGISTRATION IS
NOT REQUIRED UNDER THAT ACT. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO THE CONDITIONS SPECIFIED IN THE AGREEMENT, DATED SEPTEMBER __, 1999,
BETWEEN AMERICAN HOME MORTGAGE HOLDINGS, INC. AND FRIEDMAN, BILLINGS, RAMSEY &
CO., INC. ANY ATTEMPT TO TRANSFER THE SHARES REPRESENTED BY THIS CERTIFICATE TO
ANY UNAUTHORIZED TRANSFEREE, SHALL BE NULL AND VOID. NO TRANSFER IN VIOLATION OF
SAID AGREEMENT SHALL BE EFFECTIVE."
SECTION 5.05. Supplements and Amendments. (a) Notwithstanding the
--------------------------
provisions of Section 5.05(b). the Representative, without the consent or
concurrence of the registered holders of the Warrants, may enter into one or
more supplemental agreements or amendments with the Company for the purpose of
evidencing the rights of Warrantholders upon consolidation, merger, sale,
transfer or reclassification pursuant to Section 3.04, making any changes or
corrections in this Agreement that are required to cure any ambiguity, to
correct or supplement any provision contained herein that may be defective or
inconsistent
11
<PAGE>
with any other provision herein or any clerical omission or mistake or manifest
error herein contained, or making such other provisions in regard to matters or
questions arising under this Agreement as shall not adversely affect the
interests of the holders of the Warrants or be inconsistent with this Agreement
or any supplemental agreement or amendment.
(b) With the consent of the registered holders of at least a majority in
number of the Warrants at the time outstanding, the Company and the
Representative at any time and from time to time by supplemental agreement or
amendment may add any provisions to or change in any manner or eliminate any of
the provisions of this Agreement or of any supplemental agreement or modify in
any manner the rights and obligations of the Warrantholders and of the Company;
provided, however, that no such supplemental agreement or amendment, without the
consent of the registered holder of each outstanding Warrant affected thereby,
shall:
(1) alter the provisions of this Agreement so as to affect adversely the
terms upon which the Warrants are exercisable or may be redeemed; or
(2) reduce the number of Warrants outstanding the consent of whose holders
is required for any such supplemental agreement or amendment.
SECTION 5.06. Covenant as to No Investment Company Status. The Company
-------------------------------------------
shall use its best efforts, until the fifth anniversary of the Effective Date,
to maintain its status that it is not an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940.
SECTION 5.07. Successors and Assigns. All the covenants and provisions of
----------------------
this Agreement by or for the benefit of the Company or the Representative shall
bind and inure to the benefit of their respective successors and assigns
hereunder.
SECTION 5.08. Notices. Any notice or demand authorized by this Agreement
-------
to be given or made by the holder of any Warrant to or on the Company shall be
sufficiently given or made if sent by mail first-class, postage prepaid,
addressed (until another address is filed in writing by the Company with the
Representative), as follows:
American Home Mortgage Holdings, Inc.
12 East 49th Street
New York, New York 10017
Attention: Michael Strauss, President
Any notice or demand authorized by this Agreement to be given or made by
the holder of any Warrant or by the Company to or on the Representative shall be
sufficiently given or made if sent by mail first-class, postage prepaid,
addressed (until another address is filed in writing by the Representative with
the Company), as follows:
12
<PAGE>
Friedman, Billings, Ramsey & Co., Inc.
1001 Nineteenth Street North
Arlington, Virginia 22209
Attention: Kurt Harrington
Any notice or demand authorized by this Agreement to be given or made to
the holder of any Warrants shall be sufficiently given or made if sent by first-
class mail, postage prepaid to the last address of such holder as it shall
appear on the Warrant Register.
SECTION 5.09. Applicable Law. The validity, interpretation and
--------------
performance of this Agreement and of the Warrant Certificate shall be governed
by the law of the State of New York without giving effect to the principles of
conflicts of laws thereof.
SECTION 5.10. Benefits of this Agreement. Nothing in this Agreement
--------------------------
expressed and nothing that may be implied from any of the provisions hereof is
intended, or shall be construed, to confer upon, or give to, any person or
corporation other than the parties hereto and the holders of the Warrants any
right, remedy or claim under or by reason of this Agreement or of any covenant,
condition, stipulation, promise or agreement hereof, and all covenants,
conditions, stipulations, promises and agreements in this Agreement contained
shall be for the sole and exclusive benefit of the parties hereto and their
successors and of the holders of the Warrants.
SECTION 5.11. Registered Warrantholders. Prior to due presentment for
-------------------------
registration of transfer, the Company may deem and treat the person in whose
name any Warrants are registered in the Warrant Register as the absolute owner
thereof for all purposes whatever (notwithstanding any notation of ownership or
other writing thereon made by anyone other than the Company) and the Company
shall not be affected by any notice to the contrary or be bound to recognize any
equitable or other claim to or interest in any Warrants on the part of any other
person and shall not be liable for any registration of transfer of Warrants that
are registered or to be registered in the name of a fiduciary or the nominee of
a fiduciary unless made with actual knowledge that a fiduciary or nominee is
committing a breach of trust in requesting such registration of transfer or with
such knowledge of such facts that its participation therein amounts to bad
faith. The terms "Warrantholder" and "holder of any "Warrants" and all other
similar terms used herein shall mean such person in whose name Warrants are
registered in the Warrant Register.
SECTION 5.12. Inspection of Agreement. A copy of this Agreement shall be
-----------------------
available at all reasonable times for inspection by any Warrantholder at the
principal office of the Company. The Company may require any such Warrantholder
to submit his Warrant Certificate for inspection by it before allowing such
Warrantholder to inspect a copy of this Agreement.
13
<PAGE>
SECTION 5.13. Headings. The Article and Section headings herein are for
--------
convenience only and are not a part of this Agreement and shall not affect the
interpretation thereof.
SECTION 5.14. Counterparts. The Agreement may be executed in any number
------------
of counterparts, each of which so executed shall be deemed to be an original.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto under their respective seals as of the day and year first above written.
AMERICAN HOME MORTGAGE
HOLDINGS, INC.
[CORPORATE SEAL]
By: ___________________
Name:
Title:
Attest:
Name:
Title:
FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.,
as Representative of the holders
[CORPORATE SEAL]
By: ___________________
Name:
Title:
Attest:
Name:
Title:
14
<PAGE>
EXHIBIT A
Exhibit A
[FORM OF WARRANT CERTIFICATE]
No. __________ _______ Warrants
WARRANTS
TO PURCHASE SHARES OF COMMON STOCK OF
AMERICAN HOME MORTGAGE HOLDINGS, INC.
American Home Mortgage Holdings, Inc., a Delaware corporation (the
"Company"), for value received, hereby certifies that
_____________________________________
or registered assigns, is the owner of the number of Warrants, set forth
above, each of which represents the right, subject to the terms and conditions
hereof and of the Warrant Agreement hereafter referred to (the "Warrant
Agreement"), to purchase from the Company at any time, or from time to time,
from the first anniversary of the date of original issuance of the Warrants to
the close of business on the fifth anniversary of such date (or, if such date is
not a Business Day (as defined below), the first following Business Day) (the
"Exercise Period"), the number of shares of Common Stock, par value $.01 per
share, of the Company (the "Common Stock") described in the Warrant Agreement
(each share of Common Stock issuable upon exercise of a Warrant is referred to
as a "Warrant Share"). Subject to the terms and conditions of the Warrant
Agreement, the exercise price per Warrant represented by this Warrant
Certificate shall be $____ per share, adjusted as provided in Article III of the
Warrant Agreement, payable in full as to each Warrant exercised at the time of
purchase. The term "Underwriting Agreement" as used herein refers to the
Underwriting Agreement dated September __, 1999 between the Company and
Friedman, Billings, Ramsey & Co., Inc. and Advest, Inc. The term "Exercise
Price" as used herein refers to the foregoing price per share in effect at any
time.
This Warrant may be exercised in whole or in part at any time or from time
to time during the Exercise Period. The portion of any Warrant not exercised
during the Exercise Period shall become void, and all rights hereunder and all
rights in respect hereof and under the Warrant Agreement shall cease at the end
of the Exercise Period.
Each such purchase of Warrant Shares shall be made, and shall be deemed
effective for the purpose of determining the date of exercise, only upon
surrender hereof to the Company at the principal office of the Company, with the
form of Election to Exercise on the reverse hereof duly filled in and signed,
and upon payment in full to the Company of the Exercise Price (i) in cash or
(ii) by certified or official bank check or (iii) by any combination
A-1
<PAGE>
of the foregoing, all as provided in the Warrant Agreement and upon compliance
with and subject to the conditions set forth herein and in the Warrant
Agreement.
This Warrant Certificate is issued under and in accordance with the Warrant
Agreement dated as of September __, 1999 (the "Warrant Agreement"), between the
Company and Friedman, Billings, Ramsey & Co., Inc., as representative for the
holders, and is subject to the terms and provisions of the Warrant Agreement,
which terms and provisions are hereby incorporated by reference herein and made
a part hereof. Copies of the Warrant Agreement and of the Underwriting Agreement
are available for inspection by the registered holder at the principal office of
the Company.
The Company shall not be required upon the exercise of the Warrants
represented hereby to issue fractions of Warrant Shares or to distribute share
certificates that evidence fractional Warrant Shares. Every holder of this
Warrant Certificate expressly waives its right to receive any fraction of a
Warrant Share or a share certificate representing a fraction of a Warrant Share.
Fractional Warrant Shares that otherwise would be issuable in respect of such
exercise shall be paid in cash as provided in the Warrant Agreement, and the
number of Warrant Shares issuable to such Warrantholder shall be rounded down to
the next nearest whole number. If such Warrant Certificate shall not have been
exercised in full, the Company will issue to such Warrantholder a new Warrant
Certificate exercisable for the number of shares of Common Stock as to which
such Warrant shall not have been exercised.
This Warrant Certificate may be exchanged either separately or in
combination with other Warrant Certificates at the principal office of the
Company for new Warrant Certificates representing the same aggregate number of
Warrants as were evidenced by the Warrant Certificate or Warrant Certificates
exchanged, upon surrender of this Warrant Certificate and upon compliance with
and subject to the conditions set forth herein and in the Warrant Agreement.
This Warrant Certificate is transferable (subject to restrictions set forth
in the Warrant Agreement) at the principal office of the Company by the
registered holder hereof in person or by his attorney duly authorized in
writing, upon (i) surrender of this Warrant Certificate and (ii) upon compliance
with and subject to the conditions set forth herein and in the Warrant
Agreement. Upon any such transfer, a new Warrant Certificate or new Warrant
Certificates of different denominations, representing in the aggregate a like
number of Warrants, will be issued to the transferee. Every holder of Warrants,
by accepting this Warrant Certificate, consents and agrees with the Company and
with every subsequent holder of this Warrant Certificate that until due
presentation for the registration of transfer of this Warrant Certificate on the
Warrant Register maintained by the Company, the Company may deem and treat the
person in whose name this Warrant Certificate is registered as the absolute and
lawful owner for all purposes whatsoever and the Company shall not be affected
by any notice to the contrary.
A-2
<PAGE>
Nothing contained in the Warrant Agreement or in this Warrant Certificate
shall be construed as conferring on the holder of any Warrants or his transferee
any rights whatsoever as a shareholder of the Company.
The Warrant Agreement and each Warrant Certificate, including this Warrant
Certificate, shall be deemed a contract made under the laws of the State of New
York and for all purposes shall be construed in accordance with the laws of the
State of New York without giving effect to the principles of conflicts of law
thereof.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
Dated:
AMERICAN HOME MORTGAGE
HOLDINGS, INC.
(CORPORATE SEAL) By: ___________________
ATTEST:
________________________________
A-3
<PAGE>
ELECTION TO EXERCISE
(To be executed upon exercise of Warrant)
TO AMERICAN HOME MORTGAGE HOLDINGS, INC.:
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant Certificate for, and to purchase thereunder,
___________ shares of Common Stock, as provided for therein, and tenders
herewith payment of the purchase price in full in the form of cash or a
certified or official bank check (or combination thereof) in the amount of
$__________________.
Please issue a certificate or certificates for such shares of Common Stock
in the name of:
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE: Name ______________________________
_____________________________ Address ___________________________
Signature _________________________
___________________________________
Note: The above signature should
correspond exactly with the name on
the face of this Warrant
Certificate or with the name of
assignee appearing in the
assignment form below.
Dated: ____________________, _______
<PAGE>
ASSIGNMENT
(To be executed only upon assignment of Warrant Certificate)
For value received, __________________________ hereby sells, assigns and
transfer unto ___________________________ the within Warrant Certificate,
together with all right, title and interest therein, and does hereby irrevocably
constitute and appoint _______________________ attorney, to transfer said
Warrant Certificate on the books of the within-named Company, with full power of
substitution in the premises.
Dated: ____________, _______
________________________________________
NOTE: The above signature should correspond
exactly with the name on the face of this
Warrant Certificate
<PAGE>
EXHIBIT 10.22
TAX INDEMNIFICATION
AGREEMENT
AGREEMENT, dated as of August 26, 1999, by and among American
Home Mortgage Holdings, Inc., a Delaware corporation (the "Company"), American
-------
Home Mortgage Corp., a New York corporation ("S Sub"), and Michael Strauss, the
-----
sole shareholder of each of the Company and S Sub (the "Shareholder").
-----------
Preliminary Statement
Shareholder owns 100 shares of Common Stock, par value $0.01 per share
(the "Company Common Stock"), of the Company and 200 shares of Common Stock,
--------------------
without par value (the "S Sub Common Stock"), of S Sub. The S Sub has
------------------
distributed to Shareholder, in the form of a promissory note, substantially all
previously earned and undistributed taxable S corporation earnings through the
date before the date of the Transfer and the closing of the initial public
offering (the "IPO") the Company intends to make of its Company Common Stock.
Immediately prior to the closing of the IPO, Shareholder will exchange his
shares of S Sub Common Stock for an aggregate of 4,999,900 shares of Company
Common Stock (the "Exchange"). As a result of the Exchange, S Sub will no
--------
longer be treated as an S corporation under the Internal Revenue Code of 1986,
as amended. The parties hereby desire to set forth their respective rights and
obligations following the IPO and hereby agree as follows.
1. Definitions.
-----------
"Affiliate" shall mean, with respect to another entity, an entity that
---------
directly or indirectly controls or is controlled by, or is under the direct or
indirect control of the same person as, such other entity.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
----
"Company" shall mean American Home Mortgage Holdings, Inc.
-------
"Company Common Stock" shall have the meaning ascribed to such term in
--------------------
the Preliminary Statement.
"S Sub" shall mean American Home Mortgage Corp.
-----
"S Sub Common Stock" shall have the meaning ascribed to such term in
------------------
the Preliminary Statement.
"Shareholder" shall mean Michael Strauss.
-----------
"Shares" shall mean the shares of Company Common Stock owned by
------
Shareholder.
<PAGE>
"Straddle Period" shall mean any and all taxable periods which
---------------
includes, but does not end, on the day before the Transfer Date.
"Tax" shall mean all federal, state, county, local, municipal, foreign
---
and other taxes, assessments, duties or similar charges of any kind whatsoever,
including all corporate franchise, income, sales, use, ad valorem, receipts,
value added, profits, license, withholding, payroll, employment, excise,
premium, property, customs, net worth, capital gains, transfer, stamp,
documentary, social security, environmental, alternative minimum, occupation,
recapture, and other taxes, and including all interest, penalties and additions
imposed with respect to such amounts, and all amounts payable pursuant to any
agreement or arrangement with respect to Taxes.
"Taxing Authorities" shall mean all federal, state, county, local,
------------------
municipal, foreign or other governmental agency or organization.
"Tax Returns" shall mean all reports, estimates, information
-----------
statements and returns relating to, or required to be filed in connection with,
any Taxes pursuant to the statutes, rules and regulations of any federal state,
local or foreign government taxing authority.
"Transfer" shall mean the transfer of the shares of American Home
--------
Mortgage Corp. to American Home Mortgage Holdings, Inc. on the Transfer Date.
"Transfer Date" shall mean the date on which the shares of American
-------------
Home Mortgage Corp. are transferred to American Home Mortgage Holdings, Inc. by
Michael Strauss.
2. Obligations After The Transfer Of The Shares.
--------------------------------------------
2.1 Closing of Tax Year. The Shareholder, the S Sub. and the Company hereby
-------------------
acknowledge that, effective as of the passing of title to the Shares on the
Transfer Date and the IPO, the S Sub will cease to be an S corporation under the
Code and the taxation statutes of all states in which an "S" election is in
effect. As a result, the S corporation taxable year of the S Sub will
terminate as of the day before the transfer of the Shares and the S Sub will be
required to file Tax Returns for the period beginning on the first day of its
then current fiscal year and ending on the day before the transfer of the Shares
(the "Final S Tax Period"). The Shareholder, the S Sub and the Company hereby
------------------
agree that the S Sub shall be treated as an S corporation for federal income Tax
purposes, and by all states in which an "S" election is in effect, for the Final
S Tax Period of the S Sub.
2.2 Tax Return Filings. The Company shall, or shall cause the S Sub to, timely
------------------
prepare and file with the relevant Taxing Authorities all Tax Returns of the S
Sub, whether the due date for filing of which, determined taking into account
Tax extensions, is before or after the transfer of the Shares, including the Tax
Returns for the Final S Tax Period of the S Sub, and including Tax Returns for
the Straddle Period; provided that the Company or the S Sub shall furnish the
-------- ----
Shareholder with a copy of such Tax Returns that the Company or the S Sub is
preparing and filing (or causing to be prepared and filed) at least fifteen (15)
days before such Tax Returns are due, and no such Tax Returns shall be filed
without the prior written consent of the Shareholder, which consent shall not be
unreasonably withheld. Any Tax Returns
-2-
<PAGE>
that the Company or the S Sub is preparing and filing (or causing to be prepared
and filed) shall be prepared on a basis consistent with the past practices. All
Tax Returns for a taxable period including the Straddle Period shall be filed on
the basis that the relevant taxable period ended as of the close of business on
the day before the Transfer Date, unless the relevant Taxing Authority will not
accept such a Tax Return or otherwise required by law. Whenever it is necessary
to determine the liability for Taxes attributable to tax periods prior to the
Transfer Date (such periods, "Pre-Transfer Tax Periods"), on the one hand, and
tax periods following the transfer of the Shares to the Company (such periods,
"Post-Transfer Tax Periods"), on the other hand, such determination shall be
made on a "closing of the books basis" by assuming that the relevant books were
closed at 11:59 p.m. on the day prior to the Transfer Date. Exemptions,
allowances or deductions that are calculated on an annual basis, if any, shall
be apportioned between Pre-Transfer Tax Periods and Post-Transfer Tax Periods on
a daily basis, and Taxes that are computed on a periodic basis, such as property
taxes, shall also be so apportioned on a daily basis.
2.3 Tax Liability and Indemnification
---------------------------------
a) From and after the Transfer, the Company and the S Sub shall be
liable for, and shall indemnify the Shareholder against and hold the
Shareholder harmless on an after-Tax basis from (i) all liability for
Taxes of the S Sub and the Company with respect to any Post-Transfer Tax
Period, (ii) all liability for Taxes arising (directly or indirectly) as
a result of the Transfer, (iii) the imposition of any additional income
Tax on the Shareholder, as a result of a net positive adjustment to the
taxable income of the S Sub with respect to any Pre-Transfer Tax Period,
and (iv) all loss, liability, damages, reasonable costs and expenses,
including reasonable legal fees, costs and expenses incurred in
investigating, preparing, defending against or prosecuting any
litigation, claim, proceeding, or demand attributable to any item in the
foregoing clauses.
b) Any indemnity payment to be made under this Section 2.3, shall
be paid within 10 days after the Shareholder makes written demand upon
the S Sub or the Company, but in no case later than five business days
prior to the date on which the relevant Taxes are required to be paid to
the relevant Taxing Authority (including as estimated Tax payments). The
payments to be made pursuant this Section 2.3 shall be appropriately
adjusted to reflect any final determination (which shall include the
execution of Form 870AD or successor or similar form in effect in any
taxing jurisdiction) with respect to any Taxes.
c) For purposes of any indemnification payment under this Section
2.3, with respect to income taxes imposed on ordinary income taxable to
the Shareholder, the Shareholder shall be assumed to pay income taxes at
a combined U.S. federal, state, local and foreign income tax rate equal
to the highest marginal federal tax rate applicable to individuals
(currently 39.6%), plus 10%. In the case of any indemnification payment
pursuant to this Section 2.3 for income taxes imposed on long-term
capital gain taxable to the Shareholder, the Shareholder shall be
assumed to pay income taxes at a combined U.S. federal, state, local and
-3-
<PAGE>
foreign income tax rate equal to the federal tax rate applicable to
long-term capital gains of individuals (currently 20%), plus 10%.
d) The parties shall treat any payment made pursuant to this
Section 2.3, as having been made as a distribution of the accumulated
adjustment account of the S Sub pursuant to Section 1368(c)(1), or, if
such treatment is not appropriate, as having been made in connection
with the contribution of the Shares to the Company, as described in
Section 351(b) of the Internal Revenue Code.
2.4 Cooperation. The Shareholder, the Company and the S Sub shall reasonably
-----------
cooperate, and shall cause their respective affiliates, officers, employees,
agents, auditors and representatives reasonably to cooperate, in preparing and
filing all Tax Returns, including maintaining and making available to each other
all records necessary in connection with Taxes, and in resolving all disputes
and audits with respect to all taxable periods relating to Taxes, including all
claims made by a Taxing Authority relating to any Tax. The Company and the S
Sub shall retain all books and records needed to determine Taxes for the periods
of the statute of limitations relating to any Tax and shall provide the
Shareholder the opportunity to obtain such books and records thereafter if the
Company or the S Sub determines to dispose of such books and records.
2.5 Refunds and Credits. Any refund or credit of Taxes of either the Company
-------------------
or the S Sub for any Pre-Transfer Tax Period shall be for the account of the
Shareholder. Notwithstanding the foregoing, however, any such refund or credit
shall be for the account of the Company to the extent that such refunds or
credits are attributable (determined on a marginal basis) to the carryback from
a Post-Transfer Tax Period (or the portion of a Straddle Period that begins on
the Transfer Date) of items of loss, deductions or other Tax items of either the
Company or the S Sub (or any of its respective affiliates). Any refund or
credit of Taxes of either the Company or the S Sub for any Post-Transfer Tax
Period shall be for the account of the Company. Any refund or credit of Taxes
of either the Company or the S Sub for any Straddle Period shall be equitably
apportioned between the Shareholder and the Company and the S Sub. Each party
shall, or shall cause its affiliates to, forward to any other party entitled
under this Section 2.5 to any refund or credit of Taxes any such refund within
10 days after the credit is allowed or applied against any other Tax liability
of such party. The parties shall treat any payments under this Section 2.5 as
having been made as a distribution of the accumulated adjustment account of the
S Sub pursuant to Section 1368(c)(1) of the Code, or, if such treatment is not
appropriate, as having been made in connection with the contribution of the
Shares to the Company, as described in Section 351(b) of the Code.
Notwithstanding the foregoing, the control of the prosecution of a claim for
refund of Taxes paid pursuant to a deficiency assessed subsequent to the
Transfer Date of the Shares as a result of an audit shall be governed by the
provisions of Section 2.6.
2.6 Procedures Relating to Indemnification of Tax Claims.
----------------------------------------------------
a) Notice. If a claim shall be made by any Taxing Authority
------
against the Shareholder, which, if successful, might result in an
indemnity payment to the Shareholder pursuant to Section 2.3, the
Shareholder shall promptly notify the
-4-
<PAGE>
Company in writing of such claim (a "Tax Claim"). Failure to give notice of a
---------
Tax Claim to the Company shall not affect the liability of the Company and the S
Sub to indemnify the Shareholder. If a claim shall be made by a Taxing
Authority to the Company or the S Sub, which, if successful, might result in an
indemnity payment to the Shareholder pursuant to Section 2.3, the Company or the
S Sub shall promptly notify the Shareholder in writing of the Tax Claim.
Failure of the Company or the S Sub to notify the Shareholder shall not affect
the Shareholder's rights hereunder.
b) Control of Proceedings. The Shareholder may, upon providing
written notice to the Company, elect to control all proceedings taken in
connection with any Tax Claim relating to Taxes of the S Sub for a Pre-Transfer
Tax Period, and may make all decisions in connection with such Tax Claim,
provided, however, that (A) the Company, the S Sub and counsel of their own
- -------- -------
choosing at the Company's own cost shall, unless the Shareholder has elected to
control a proceeding taken in connection with any such Tax Claim, prosecute and
defend against such Tax Claim and take all appropriate actions to minimize the
tax liabilities of the Shareholder, the S Sub and the Company, and (B) the
Company and the S Sub shall not settle any such Tax Claim without prior written
consent of the Shareholder, which consent shall not be unreasonably withheld.
The Shareholder and the Company shall jointly control all proceedings taken in
connection with any Tax Claim relating to Taxes of either the Company or the S
Sub for a Straddle Period and neither party shall settle any such Tax Claim
without the written consent of the other party. The Company shall control all
proceedings with respect to all other Tax Claims, provided, however, that the
-------- -------
Company shall not settle any such Tax Claims in any manner which could result in
income being recognized in a Tax year or portion thereof ending before the
transfer of the Shares or an increase in the liability of the Shareholder for
Taxes, without prior written consent of the Shareholder, which consent shall not
be unreasonably withheld.
2.7 Tax Sharing Agreements. The Shareholder shall cause any and all Tax
----------------------
sharing agreements, other than as set forth herein, between the Shareholder and
the S Sub, or any of its affiliates, to be terminated on or before the transfer
of the Shares.
2.8 Calculation of Losses. The amount of any indemnity payment under
---------------------
this Agreement shall be (i) increased to take account of any net Tax cost to the
indemnified party arising from the receipt of indemnity payments hereunder
(grossed up for such increase) and (ii) reduced to take account of any net Tax
benefit realized by the indemnified party arising from the incurrence of any
such indemnified cost or loss, or payment of any such indemnity payment. In
computing the amount of any such Tax cost or Tax benefit, the indemnified party
shall be deemed to recognize all other items of income, gain, loss, deduction or
credit before recognizing any item arising from the receipt of any indemnity
payment hereunder or the incurrence of any indemnified cost or loss or payment
of any indemnity payment. Any indemnity payment under this Agreement shall be
treated as having been made as a distribution of the accumulated adjustment
account of the S Sub pursuant to Section 1368(c)(1) of the Code, or, if such
treatment
-5-
<PAGE>
is not appropriate, as having been made in connection with the contribution of
the Shares to the Company, as described in Section 351(b) of the Code.
3. Miscellaneous.
-------------
3.1 Binding Effect. This Agreement shall be binding upon and shall
--------------
inure to the benefit of the Company and S Sub and Shareholder, Shareholder's
heirs, beneficiaries and legal representatives and their respective successors
and assigns.
3.2 Entire Agreement. This Agreement contains the entire
----------------
understanding of the parties with respect to the subject matter hereof and
supersedes any and all other agreements between the parties with respect to the
subject matter hereof. Any amendment of this Agreement shall not be binding
unless in writing and signed by all parties hereto.
3.3 Enforceability. In the event that any provision of this
--------------
Agreement is determined to be invalid or unenforceable, the remaining terms and
conditions of this Agreement shall be unaffected and shall remain in full force
and effect, and any such determination of invalidity or enforceability shall not
affect the validity or enforceability of any other provision of this Agreement.
3.4 Notices. All notices which may be necessary or proper for either
-------
the Company, S Sub or Shareholder to give to the other parties hereto shall be
in writing and shall be sent by hand delivery, registered or certified mail,
return receipt requested, overnight courier or facsimile, if to Shareholder, to
him at c/o American Home Mortgage Holdings, Inc., 12 East 49th Street, New York,
New York 10017 and, if to the Company and S Sub, to them at 12 East 49th Street,
New York, New York 10017, Attention: Chief Financial Officer, facsimile:
212 546-6834, with a copy to Cadwalader, Wickersham & Taft, 100 Maiden Lane, New
York, New York 10038, Attention Louis Bevilacqua, Esq., Facsimile 212-504-6666
and shall be deemed given when sent. Any party may by like notice to the other
parties change the address at which he or it is to receive notices hereunder.
3.5 Governing Law. THIS AGREEMENT IS EXECUTED IN THE STATE OF NEW
-------------
YORK AND SHALL BE GOVERNED BY, AND BE ENFORCEABLE IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF
LAWS THEREOF.
-6-
<PAGE>
2. In witness whereof the parties hereto have executed this Agreement as
of the date and year first written above.
AMERICAN HOME MORTGAGE HOLDINGS, INC.
By: /s/ Michael Strauss
---------------------------------
Name: Michael Strauss
Title: President and Chief Executive Officer
AMERICAN HOME MORTGAGE CORP.
By: /s/ Michael Strauss
---------------------------------
Name: Michael Strauss
Title: President and Chief Executive Officer
/s/ Michael Strauss
-------------------------------------
Michael Strauss
-7-
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of American Home
Mortgage Holdings, Inc. on Form S-1 of our report dated August 18, 1999
(September 29, 1999 as to Notes 1, 8 and 16), appearing in the Prospectus,
which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
September 29, 1999
