<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-6031
PROSPECTUS SUPPLEMENT
dated July 16, 1996
to Prospectus dated July 1, 1996
$57,500,000
[AMRESCO LOGO]
SENIOR NOTES, SERIES 1996-A DUE 1999
The Senior Notes, Series 1996-A due 1999 (the "Notes") being offered hereby (the
"Offering") are unsecured senior obligations of AMRESCO, INC. (the "Company").
Interest on the Notes is payable on the 15th day of each month or, if any such
day is not a business day, the next succeeding business day (each, an "Interest
Payment Date"), at the rate of 8.75% per annum beginning September 15, 1996. The
Notes mature on July 1, 1999 and are not redeemable prior to maturity. The Notes
will rank pari passu in right of payment with all existing and future
unsubordinated indebtedness of the Company, but will be effectively subordinated
to the rights of holders of secured unsubordinated indebtedness of the Company
to the extent of the value of the collateral securing such indebtedness. The
Notes will rank senior to all unsecured subordinated indebtedness of the
Company. At March 31, 1996, there was outstanding approximately $350.7 million
of unsubordinated indebtedness for money borrowed of the Company and its
subsidiaries (including $251.7 million of which indebtedness was nonrecourse to
the Company and its subsidiaries), all of which was secured indebtedness, and
$24.7 million of general unsecured trade indebtedness and other liabilities of
the Company and its subsidiaries. Under the most restrictive leverage covenant
applicable to the Company from previously contracted indebtedness, at March 31,
1996 the Company could have incurred up to approximately $79.5 million of
additional Senior Recourse Debt, which may be secured. There is no limit on the
amount of trade indebtedness the Company may incur. The Company is principally a
holding company whose primary assets consist of shares of common stock issued to
the Company by its subsidiaries. The Notes will not be guaranteed by the
Company's subsidiaries. Accordingly, any right of the Company to receive assets
of its subsidiaries upon their liquidation or reorganization (and the consequent
right of the holders of the Notes to participate in those assets) will be
effectively subordinated to the claims of creditors of such subsidiaries as
proceeds from any such liquidation or reorganization will first be applied to
satisfy obligations of such subsidiaries owing to creditors of such subsidiaries
before such proceeds may be available for distribution to the Company. The Notes
have been approved for listing on the New York Stock Exchange. See "Description
of the Notes."
This Prospectus Supplement is qualified in its entirety by reference to the more
detailed information and the consolidated financial statements of the Company,
including the notes thereto, appearing or incorporated by reference herein or in
the accompanying Prospectus and to the Senior Notes Indenture dated as of July
1, 1996, between the Company and Comerica Bank, as trustee (the "Trustee"), with
respect to the Senior Debt Securities, including the Officers' Certificate and
Company Order to be dated as of July 19, 1996, establishing the terms of the
Notes (collectively, the "Note Indenture"). All capitalized terms used in this
Prospectus Supplement are defined as set forth elsewhere herein, in the
accompanying Prospectus or in the Note Indenture. All references in this
Prospectus Supplement to the "Prospectus" are to the Company's Prospectus dated
July 1, 1996, accompanying this Prospectus Supplement.
SEE "RISK FACTORS" BEGINNING ON PAGE S-10 OF THIS PROSPECTUS SUPPLEMENT AND ON
PAGE 5 OF THE PROSPECTUS FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE NOTES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
======================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Per Note................................... 100.0% 3.0% 97.0%
- ------------------------------------------------------------------------------------------------------
Total...................................... $57,500,000 $1,725,000 $55,775,000
======================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting offering expenses payable by the Company estimated at
$130,000.
The Notes are offered by the several Underwriters subject to prior sale when, as
and if delivered to and accepted by the Underwriters and subject to their right
to reject orders in whole or in part. It is expected that delivery of the Notes
will be made at the offices of Piper Jaffray Inc. in Minneapolis, Minnesota on
or about July 19, 1996. The Notes will be issued initially as book-entry notes
in the form of one fully registered global security deposited with or on behalf
of The Depository Trust Company or its nominees ("DTC"). The Notes will not
generally be issuable in definitive certificated form to any person other than
DTC.
PIPER JAFFRAY INC.
J.C. BRADFORD & CO.
MORGAN KEEGAN & COMPANY, INC.
<PAGE> 2
[AMRESCO LOGO]
[AMRESCO MAP]
The Company intends to furnish holders of the Notes with (i) annual reports
containing audited financial statements and (ii) quarterly reports for each of
the first three quarters of each fiscal year, which will contain unaudited
summary financial information.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WITH A VIEW TO STABILIZING OR MAINTAINING THE MARKET PRICE OF THE
NOTES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL ON THE NEW YORK STOCK
EXCHANGE. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
S-2
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information appearing elsewhere or
incorporated by reference in this Prospectus Supplement and in the accompanying
Prospectus dated July 1, 1996 (the "Prospectus"). Certain terms used in this
Prospectus Supplement are defined in the "Glossary" included in the Prospectus.
Certain terms used in connection with the Notes are defined herein under
"Description of the Notes -- Certain Definitions" and in the Prospectus under
"Description of Securities -- Debt Securities -- Certain Definitions."
THE COMPANY
General. The Company is a leading specialty financial services company
engaged in Asset Portfolio acquisition and resolution, commercial mortgage
banking, residential mortgage securitization and institutional investment
advisory services. The Asset Portfolio acquisition and resolution business
involves acquiring at a substantial discount to Face Value and managing and
resolving Asset Portfolios to maximize cash recoveries. The Company manages and
resolves Asset Portfolios acquired by the Company alone, acquired by the Company
with co-investors and owned by third parties. The commercial mortgage banking
business involves the origination, underwriting, placement, sale and servicing
of commercial real estate mortgages. The residential capital markets business
purchases, warehouses and securitizes portfolios of residential mortgages of
borrowers who do not qualify for conventional loans. The Company's institutional
investment advisory subsidiary provides real estate investment advice to various
institutional investors (primarily pension funds).
History. The Company is the product of the December 1993 merger of two
Asset Portfolio management and resolution service companies: BEI and Holdings.
Holdings was the former Asset Portfolio management and resolution unit of
NationsBank of Texas, which was created in 1988 in connection with the
acquisition by NationsBank Corporation from the FDIC of certain assets and
liabilities of the failed First RepublicBank bank group. BEI, a publicly-held
company that was in the real estate and asset management services businesses,
began providing asset management and resolution services to the RTC in 1990. The
BEI Merger created one of the largest Asset Portfolio management and resolution
service companies in the United States. Since 1987, the Company and its
predecessors have managed over $30.0 billion (Face Value) of Asset Portfolios.
Business Strategy. The Company's original business of managing and
resolving Asset Portfolios for third parties developed as a result of the
takeover of failed thrifts and banks by the federal government's deposit
insurance agencies in the late 1980s. Due to the substantial volume of
under-performing and non-performing loans and foreclosed assets (much of it
commercial real estate loans and properties) and a lack of sufficient internal
staffing, the RTC and FDIC turned to private contractors such as the Company to
assist in the management and resolution of Asset Portfolios. Although the need
of government agencies for Asset Portfolio management and resolution services
has declined substantially in recent years, the Company believes that a
permanent market for Asset Portfolio acquisition, management and resolution
services has developed within the private sector.
In early 1994, the Company made the strategic decision to diversify its
business lines and to reduce its dependence on asset management and resolution
contracts with governmental agencies and certain other entities. As a result,
the Company has shifted its strategic focus in order to take advantage of
business opportunities in those specialty finance markets that capitalize on the
Company's competitive strengths and reputation. The key elements of this
strategy include:
- increasing the amount that the Company invests for its own account in
Asset Portfolios;
- continuing to provide high quality management and resolution services to
co-investors and other third-party owners of Asset Portfolios;
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S-3
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- expanding its presence in the mortgage banking market through greater
market penetration and by increasing its participation in the market for
securitization of commercial and residential real estate mortgages; and
- developing its institutional real estate investment advisory business to
complement the Company's existing business lines.
ASSET ACQUISITION AND RESOLUTION
General. The Company manages and resolves Asset Portfolios acquired at a
substantial discount to Face Value by the Company alone and by the Company with
co-investors. The Company also manages and resolves Asset Portfolios owned by
third parties. Asset Portfolios generally include secured loans of varying
qualities and collateral types. The majority of the loans in the Asset
Portfolios in which the Company invests are in payment default at the time of
acquisition. Although some Asset Portfolios include foreclosed real estate and
other collateral, the Company generally seeks Asset Portfolios that do not
include such assets. The Company's policy is to not refinance or renew purchased
loans. Some Asset Portfolio loans are loans for which resolution is tied
primarily to the real estate securing the loan. Other loans, however, are
collateralized business loans, the resolution of which may be based either on
cash flow of a business or on real estate and other collateral securing the
loan. Collateralized business loans acquired by the Company generally have
smaller Face Values and often are more quickly resolved than more traditional
real estate loans. The Company intends to increase its investment in
collateralized business loans.
Asset Portfolio Investment. The Company invests in Asset Portfolios by
purchasing them alone or with co-investors. The Face Values of Asset Portfolios
acquired solely by the Company have ranged between approximately $0.5 million
and approximately $96.8 million, whereas Asset Portfolios owned by it with co-
investors have ranged up to approximately $426.8 million. The Company generally
funds its share of any investment with a combination of borrowings under its
existing credit lines and internal cash flow. Future Asset Portfolio purchases
will depend on the availability of Asset Portfolios offered for sale, the
availability of capital and the Company's ability to submit successful offers to
purchase Asset Portfolios. As a result, Asset Portfolio purchases may vary
significantly from quarter to quarter. At March 31, 1996, the Face Value of the
Company's total investment in wholly-owned Asset Portfolios aggregated
approximately $385.0 million, which was composed of approximately $298.9 million
(77.6%) of collateralized business loans, approximately $17.0 million (4.4%) of
real estate loans, approximately $66.8 million (17.4%) of asset-backed
securities and approximately $2.3 million (0.6%) of real estate.
Asset Management and Resolution Services. The Company provides asset
management and resolution services to third parties pursuant to contracts with
owners of Asset Portfolios (including partnerships, joint ventures and other
groups in which the Company is a co-investor). Management of Asset Portfolios
includes loan resolution and providing routine accounting services, monitoring
collections of interest and principal (if any), confirming (or advancing)
insurance premium and tax payments due on collateral and generally overseeing
and managing, if necessary, collateral condition and performance.
COMMERCIAL MORTGAGE BANKING
General. The Company performs a wide range of commercial mortgage banking
services, including originating, underwriting, placing, selling and servicing
commercial real estate loans through its Holliday Fenoglio and ACC mortgage
banking units.
Commercial Mortgage Banking Business. Holliday Fenoglio primarily serves
commercial real estate developers and owners by originating commercial real
estate loans through its own commission-based mortgage bankers in its offices
located in Atlanta, Boca Raton, Buffalo, Dallas, Houston, New York City and
Orlando. The loans originated by Holliday Fenoglio generally are funded by
institutional lenders, principally insurance companies, and by Conduit
Purchasers, with Holliday Fenoglio retaining the Primary Servicer rights
- --------------------------------------------------------------------------------
S-4
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on more than a quarter of such loans. The Company believes that Holliday
Fenoglio's relationship and credibility with its institutional lender network
provide the Company with a competitive advantage in the commercial mortgage
banking industry.
ACC, which originated and underwrote approximately $447.1 million of
commercial real estate mortgages during 1995, and $64.2 million during the first
quarter of 1996, is a mortgage banker that originates and underwrites commercial
real estate loans that are funded primarily by Conduit Purchasers. ACC,
therefore, makes certain representations and warranties concerning the loans it
originates. These representations cover title to the property, lien priority,
environmental reviews and certain other matters. ACC targets mortgage loans for
commercial real estate properties suitable for sale to Conduit Purchasers
accumulating loans for securitization programs. ACC serves its market directly
through ACC's offices located in Dallas, Miami, Washington, D.C. and
Winston-Salem, as well as through a network of approximately 42 independent
mortgage brokers located throughout the United States. ACC is an approved Fannie
Mae DUS lender, which ACC believes makes it a more competitive loan originator
and underwriter of multi-family mortgages. ACC is also an approved lender in the
Freddie Mac multi-family sales/servicer program in the states of Florida, North
Carolina and South Carolina. Through March 31, 1996, approximately 28.0% of the
loans underwritten by ACC were originated by Holliday Fenoglio, with Holliday
Fenoglio and ACC each receiving fees for their respective services.
Commercial Loan Servicing Business. The Company serves as a Primary
Servicer for whole loans and as a Master/Full Servicer for securitized pools of
commercial mortgages through its AMRESCO Services unit. At March 31, 1996, the
Company acted as servicer with respect to approximately $10.4 billion of loans.
The dominant users of loan servicers are mortgage-backed bond trusts and similar
securitized asset-backed loan portfolios made up of numerous passive investors.
The revenue stream from servicing contracts on commercial mortgages is
relatively predictable as prepayment penalties in commercial mortgages
discourage early loan payoffs, a risk that is more significant to servicers of
residential mortgage portfolios.
RESIDENTIAL CAPITAL MARKETS
The Company purchases (in bulk from independent originators), warehouses
and securitizes portfolios of residential mortgages of borrowers who do not
qualify for conventional loans or whose borrowing needs are not met by
traditional residential mortgage lenders. Such borrowers may not satisfy the
more rigid underwriting standards of the traditional residential mortgage
lending market for a number of reasons, such as blemished credit histories (from
past loan delinquencies or bankruptcy), inability to provide income verification
data or lack of established credit history. The Company believes that this
market is underserved by traditional lenders. Therefore, there is less
competition in this market and interest rates are higher than on mortgage loans
for more credit-worthy borrowers. The Company believes that the higher interest
rates offered by this market are attractive even after discounting for the
greater credit risk associated with such borrowers. During 1996 through the date
of this Prospectus Supplement, the Company has securitized approximately $800.0
million in residential mortgages.
INSTITUTIONAL INVESTMENT ADVISORY
The Company provides real estate investment advice to various institutional
investors (primarily pension funds) seeking to invest a portion of their funds
in real estate. Although the Company is paid acquisition and disposition fees by
some of its clients, its principal form of revenue from this activity is asset
management fees, which are based on the cash flow of the investments under
management or are negotiated at the time of the client's investment in a
property.
The Company is a Delaware corporation. The Company's principal executive
offices are located at 1845 Woodall Rodgers Freeway, Suite 1700, Dallas, Texas
75201 and its telephone number at that address is (214) 953-7700.
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S-5
<PAGE> 6
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THE OFFERING
Issuer........................... AMRESCO, INC.
Securities offered............... $57,500,000 aggregate principal amount of
Senior Notes, Series 1996-A due 1999.
Denomination..................... $1,000 and any integral multiple thereof.
Registration..................... The Notes will be issued in registered
book-entry form. The Notes will not
generally be issuable in definitive
certificated form to any person other than
DTC.
Maturity......................... July 1, 1999.
Sinking fund..................... None.
Interest rate.................... Interest will accrue at the rate of 8.75%
per annum commencing on the date of
original issuance.
Interest payment dates........... Interest is payable monthly on the 15th day
of each month or, if such day is not a
business day, the next succeeding business
day beginning September 15, 1996. The first
interest payment will represent interest
from the date of issuance of the Notes
through September 14, 1996.
Redemption....................... The Notes are not redeemable prior to
maturity.
Structural subordination......... The Notes are unsecured senior obligations
of the Company. The Notes rank pari passu
in right of payment with all unsubordinated
indebtedness of the Company, but will be
effectively subordinated to the rights of
holders of secured unsubordinated
indebtedness of the Company to the extent
of the value of the collateral securing
such indebtedness. At March 31, 1996, there
was outstanding approximately $350.7
million of unsubordinated indebtedness for
money borrowed of the Company and its
subsidiaries (including $251.7 million of
which was nonrecourse to the Company and
its subsidiaries), all of which was secured
indebtedness, and $24.7 million of general
unsecured trade indebtedness and other
liabilities of the Company and its
subsidiaries. The Notes rank senior to all
unsecured subordinated indebtedness of the
Company. The Company is principally a
holding company whose primary assets
consist of shares of common stock issued to
the Company by its subsidiaries. Any right
of the Company to receive assets of its
subsidiaries upon their liquidation or
reorganization (and the consequent right of
the holders of the Notes to participate in
those assets) will be effectively
subordinated to the claims of creditors of
such subsidiaries as proceeds from any such
liquidation or reorganization will first be
applied to satisfy obligations of such
subsidiaries owing to creditors of such
subsidiaries before such proceeds may be
available for distribution to the Company.
See "Risk Factors -- Structural
Subordination of Notes."
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S-6
<PAGE> 7
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Limited rights of acceleration
or repurchase.................. Payment of principal on the Notes may be
accelerated upon the occurrence of Events
of Default (as defined) only upon the
action of the Trustee or the holders of at
least 25% in aggregate principal amount of
outstanding Notes, and such acceleration
may be rescinded by the holders of a
majority of the aggregate principal amount
of the outstanding Notes if all Events of
Default are remedied and all payments due
are made before a judgment or decree for
payment of money due is obtained. See
"Description of Debt Securities -- Events
of Default" in the Prospectus.
Limited covenants................ The Notes do not have the benefit of
extensive financial covenants. The Note
Indenture imposes certain limited
restrictions on the ability of the Company
to, among other things, create or incur
Senior Debt or pay dividends or make
certain other restricted payments. See
"Risk Factors -- Limited Covenants; Absence
of Sinking Fund" and "Description of the
Notes -- Covenants" in this Prospectus
Supplement and "Description of
Securities -- Debt Securities -- Covenants"
in the Prospectus.
Absence of security.............. The Notes are unsecured obligations of the
Company, without collateral security of any
kind.
Listing.......................... The Notes have been approved for listing on
the New York Stock Exchange under the
symbol "AMMB 99," subject to notice of
issuance.
Trustee.......................... Comerica Bank.
Use of proceeds.................. The net proceeds from the sale of the Notes
offered hereby will be used to reduce the
Company's outstanding borrowings under the
Revolving Loan Agreement. After application
of the net proceeds, approximately $80.5
million would have been available as of
June 28, 1996 for borrowing under the
Revolving Loan Agreement for general
corporate purposes, which may include
funding investments in Asset Portfolios,
funding the capital requirements of the
Company's commercial mortgage banking and
residential mortgage securitization
business lines, acquiring new businesses or
making strategic investments in companies
that complement the Company's business
lines and strategies. See "Use of
Proceeds."
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S-7
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SUMMARY FINANCIAL AND OTHER DATA
The summary data presented below under the captions "Summary Income
Statement" and "Summary Balance Sheet Data" for and as of the end of each of the
fiscal years in the three-year period ended December 31, 1995 are derived from
the consolidated financial statements of the Company audited by Deloitte &
Touche LLP, which are included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 (the "1995 Form 10-K") and incorporated by
reference in the Prospectus. In the opinion of management of the Company, the
data presented for the three months ended March 31, 1996 and 1995, which are
derived from the Company's unaudited consolidated financial statements, reflect
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the financial position and results of operations for such
periods. Results for the three months ended March 31, 1996 are not necessarily
indicative of results for the entire fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- ------------------------------------
1996 1995 1995(1) 1994(1) 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT:
Revenues:
Asset management and resolution
fees............................ $ 9,223 $ 10,170 $ 41,295 $ 93,764 $ 118,552
Interest and other investment
income.......................... 18,172 6,181 40,105 14,215 3,440
Mortgage banking fees.............. 6,605 2,775 24,382 6,176 --
Gain on sale of loans and
investments, net................ 2,008 23 1,382 839 --
Other revenues..................... 888 1,028 3,322 14,797 409
---------- ---------- ---------- ---------- ----------
Total revenues............. 36,896 20,177 110,486 129,791 122,401
Operating expenses................... 23,634 14,426 73,307 92,337 77,970
---------- ---------- ---------- ---------- ----------
Operating income..................... 13,262 5,751 37,179 37,454 44,431
Interest expense..................... 5,167 415 6,921 1,768 754
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before taxes....................... 8,095 5,336 30,258 35,686 43,677
Income tax expense................... 3,300 2,181 11,593 14,753 17,371
---------- ---------- ---------- ---------- ----------
Income from continuing operations.... 4,795 3,155 18,665 20,933 26,306
Gain (loss) from discontinued
operations......................... -- -- 2,425 (2,185) (2,088)
---------- ---------- ---------- ---------- ----------
Net income........................... $ 4,795 $ 3,155 $ 21,090 $ 18,748 $ 24,218
========== ========== ========== ========== ==========
Primary earnings per share from
continuing operations.............. $ 0.18 $ 0.13 $ 0.76 $ 0.88 $ 2.33
Fully diluted earnings per share from
continuing operations.............. 0.17 0.13 0.75 0.88 2.33
Primary earnings per share........... 0.18 0.13 0.86 0.79 2.15
Fully-diluted earnings per share..... 0.17 0.13 0.85 0.79 2.15
Weighted average number of common
shares outstanding and common share
equivalents........................ 27,369,411 24,182,827 24,654,321 23,679,239 11,288,688
</TABLE>
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<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
------------------------- ---------------------------------------
1996 1995 1995 1994 1993
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
SUMMARY BALANCE SHEET DATA:
Cash and cash equivalents...... $ 18,338 $ 16,119 $ 16,139 $ 20,446 $ 43,442
Investments:
Loans........................ 149,603 38,708 138,180 32,631 33,795
Partnerships and joint
ventures.................. 33,698 25,379 34,694 22,491 2,503
Asset-backed securities and
other securities.......... 65,946 3,481 46,187 3,481 --
Real estate.................. 5,884 11,233 5,686 14,054 2,504
Total assets................... 644,061 167,745 521,713 172,340 163,653
Notes payable.................. 99,046 10,000 89,442 15,500 22,113
Warehouse loan payable......... 221,489 -- 153,158 -- --
Nonrecourse debt............... 30,189 14,375 38,354 959 6,000
Senior subordinated debt....... 57,500 -- -- -- --
Convertible subordinated
debt......................... 45,000 -- 45,000 -- --
Total indebtedness............. 453,224 24,375 325,954 16,459 28,113
Shareholders' equity........... 166,190 116,332 160,794 113,586 91,699
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------- ---------------------------------------
1996 1995 1995(1) 1994(1) 1993
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
OTHER DATA:
Ratio of earnings to fixed
charges(2)................... 2.5x 13.9x 5.4x 21.2x 58.9x
EBITDA(3)...................... $ 15,259 $ 6,593 $ 41,513 $ 43,177 $ 45,668
Interest coverage ratio(4)..... 3.0x 15.9x 6.0x 24.4x 60.6x
Face Value of assets under
management (at period end)... $ 3,575,700 $2,826,800 $3,693,900 $3,031,800 $5,754,400
Commercial mortgage loans
originated:
Face Value................... $ 518,300 $ 226,550 $2,573,400 $ 610,000 --
Number of loans.............. 76 38 444 106 --
Commercial mortgage loans
serviced (at period end):
Face Value................... $10,418,986 $2,728,118 $9,919,596 $2,555,000 --
Number of loans.............. 6,999 770 7,226 592 --
</TABLE>
- ---------------
(1) Summary Income Statement and Other Data for the fiscal years ended December
31, 1995 and 1994 reflect data for Holliday Fenoglio beginning August 1,
1994 and EQS effective October 27, 1995, the effective dates of the
acquisitions by the Company.
(2) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of operating income before income taxes and fixed charges. Fixed
charges consist of interest expense.
(3) EBITDA is calculated as operating income (excluding gain (loss) from
discontinued operations) before interest, income taxes, depreciation and
amortization. The Company has included information concerning EBITDA because
EBITDA is one measure of an issuer's historical ability to service its
indebtedness. EBITDA should not be considered as an alternative to, or more
meaningful than, net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity.
(4) Interest coverage ratio means the ratio of EBITDA to cash interest expense.
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RISK FACTORS
Investors should carefully consider the following matters and the matters
set forth under "Risk Factors" in the Prospectus in connection with an
investment in the Notes in addition to the other information contained or
incorporated by reference in this Prospectus Supplement or in the accompanying
Prospectus. Information contained or incorporated by reference in this
Prospectus Supplement or in the accompanying Prospectus may contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology. The following matters and certain other factors noted
throughout this Prospectus Supplement and the Prospectus, and any exhibits and
attachments to this Prospectus Supplement and the Prospectus, constitute
cautionary statements identifying important factors with respect to any such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to differ materially from those in such
forward-looking statements.
STRUCTURAL SUBORDINATION OF NOTES
The Notes are unsecured senior general obligations of the Company. Payment
of the principal of and interest on the Notes will rank pari passu in right of
payment with all existing and future unsubordinated indebtedness of the Company,
but will be effectively subordinated to the rights of holders of secured
unsubordinated indebtedness of the Company to the extent of the value of the
collateral securing such indebtedness. At March 31, 1996, there was outstanding
approximately $350.7 million of unsubordinated indebtedness for money borrowed
of the Company and its subsidiaries (including $251.7 million of which
indebtedness was nonrecourse to the Company and its subsidiaries), all of which
was secured, and $24.7 million of general unsecured trade indebtedness and other
liabilities of the Company and its subsidiaries. The Company may incur
additional Senior Debt, which may be secured. Under the most restrictive
leverage covenant applicable to the Company from previously contracted
indebtedness, at March 31, 1996 the Company could have incurred up to
approximately $79.5 of additional Senior Recourse Debt. The Company intends to
incur additional indebtedness in the future as it executes its business
strategy.
The Company's operations are conducted principally through its wholly-owned
subsidiaries. Since the Company is a holding company, its primary assets consist
of shares of common stock issued to the Company by its subsidiaries.
Accordingly, the Company will be dependent upon the cash flow of, and receipt of
dividends or advances from, its subsidiaries in order to meet its debt
obligations, including the Company's obligations under the Notes. Inasmuch as
the Notes are obligations of the parent company only, the Company's subsidiaries
are not obligated or required to pay any amounts pursuant to the Notes or to
make funds available therefor in the form of dividends or advances to the
Company. None of the Company's subsidiaries will guarantee the payment of the
Notes. Accordingly, the claims of holders of the Notes will be effectively
subordinated to the prior claims of holders of preferred stock, if any, and
creditors, including trade creditors, of the Company's subsidiaries.
FINANCIAL LEVERAGE
Following the Offering, the Company and its subsidiaries will have
substantial indebtedness and, as a result, significant debt service obligations.
As of March 31, 1996, the Company and its subsidiaries had outstanding
approximately $453.2 million aggregate amount of indebtedness for money
borrowed, representing approximately 73.2% of their total consolidated
capitalization. See "Use of Proceeds" and "Capitalization."
Increasing the degree to which the Company is leveraged as a result of the
sale of the Notes and any future incurrences of indebtedness by the Company
could have important consequences to purchasers of the Notes, including: (i)
limiting the Company's ability to obtain necessary additional financing to fund
future working capital requirements, Asset Portfolio investments, capital
expenditures, acquisitions or other general corporate requirements; (ii)
requiring a significant portion of the Company's cash flow from operations to be
dedicated to debt service requirements, thereby reducing the funds available for
operations and future business opportunities; (iii) requiring all of the
indebtedness incurred under the Revolving Loan Agreement to be repaid prior to
the time any principal payments are required on the Notes, thereby potentially
impairing the
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<PAGE> 11
Company's ability to make payments on the Notes and (iv) increasing the
Company's vulnerability to adverse economic and industry conditions. The Company
may incur additional indebtedness in the future, although its ability to do so
will be restricted by the Note Indenture and the Credit Agreements. The ability
of the Company to make scheduled payments under its present and future
indebtedness, or to refinance such indebtedness, will depend on, among other
things, the future operating performance of the Company, changes in interest
rates, general economic conditions and the perception in the capital markets of
the Company's business, results of operations, leverage, financial condition and
business prospects. Each of these factors is to a large extent subject to
economic, financial, competitive and other factors beyond the Company's control.
The Credit Agreements contain numerous financial and operating covenants
that limit the discretion of the Company's management with respect to certain
business matters. These covenants place significant restrictions on, among other
things, the ability of the Company to make certain payments and investments and
to sell or otherwise dispose of assets and merge or consolidate with other
entities. The Credit Agreements also require the Company to meet certain
financial ratios and tests. A failure to comply with the obligations contained
in the Credit Agreements could result in an event of default under any of the
Credit Agreements, the Senior Subordinated Notes Indenture, the Convertible
Subordinated Debenture Indenture or the Notes Indenture, which could permit
acceleration of the related indebtedness and acceleration of indebtedness under
other instruments that may contain cross-acceleration or cross-default
provisions. See "Description of Other Indebtedness."
The Company anticipates that it will be necessary to refinance all or a
portion of the principal amount of the Notes at maturity. However, there can be
no assurance that the Company will be able to refinance the Notes at that time.
LACK OF SECURITY FOR THE NOTES
The Notes will not be secured by any of the Company's assets. The Revolving
Loan Agreement is secured by substantially all of the assets of the Company not
pledged under other credit facilities, including stock of a majority of the
Company's subsidiaries. If the Company becomes insolvent or is liquidated, or if
payment under the Revolving Loan Agreement is accelerated, the lenders under the
Revolving Loan Agreement would be entitled to exercise the remedies available to
a secured lender under applicable law and pursuant to the Revolving Loan
Agreement. Accordingly, such lenders will have a prior claim with respect to
such assets and subsidiary capital stock.
LIMITED COVENANTS; ABSENCE OF SINKING FUND
The holders of the Notes do not have the benefit of extensive covenants.
The covenants in the Note Indenture are not designed to protect holders of the
Notes in the event of a material adverse change in the Company's financial
condition or results of operations. These covenants impose only limited
restrictions on the ability of the Company to, among other things, create or
incur Senior Debt, pay dividends or make certain other restricted payments. The
Note Indenture does not contain covenants specifically designed to protect
holders of the Notes in the event of a highly leveraged transaction involving
the Company. In addition, the Notes will not have the benefit of sinking fund
payments by the Company. See "Description of the Notes -- Covenants" in this
Prospectus Supplement and "Description of Securities -- Debt
Securities -- Covenants" in the Prospectus.
LIMITED MARKET FOR THE NOTES
The Notes have been approved for listing on the New York Stock Exchange,
subject to notice of issuance. However, no assurance can be given that an active
trading market for the Notes will develop. If a trading market for the Notes
does develop, the Notes may trade at a discount from their initial offering
price, depending on prevailing interest rates, the Company's operating results,
the market for similar securities and other factors.
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<PAGE> 12
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered hereby
(after deducting underwriting discounts and estimated expenses of the Offering)
will be approximately $55.7 million.
The Company intends to use the net proceeds to reduce the Company's
outstanding borrowings under the Revolving Loan Agreement (which had an
outstanding balance of approximately $63.2 million as of June 28, 1996). For the
year ended December 31, 1995, the weighted average interest rate on indebtedness
incurred under the Company's bank credit agreements in place during 1995 was
8.30% per annum. At May 31, 1996, the weighted average interest rate on
indebtedness incurred under the Revolving Loan Agreement was 7.11%. The
indebtedness under the predecessor credit agreements and the Revolving Loan
Agreement was incurred primarily in connection with investments in Asset
Portfolios, certain corporate acquisitions and other general corporate purposes.
After application of the net proceeds to the Company of the Offering, $80.5
million would have been available as of June 28, 1996 for reborrowing under the
Revolving Loan Agreement to be used for general corporate purposes, which may
include funding investments in Asset Portfolios, funding the capital
requirements of the Company's commercial mortgage banking and residential
mortgage securitization business lines, acquiring new businesses or making
strategic investments in entities that complement the Company's business lines
and strategies. The Company has no understandings or agreements in respect of
any material acquisition. See "Description of Other Indebtedness -- Revolving
Loan Agreement."
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<PAGE> 13
CAPITALIZATION
The following table presents the capitalization of the Company at March 31,
1996, and as adjusted to reflect the application of the estimated net proceeds
from the sale of the Notes offered hereby as described under "Use of Proceeds."
This table should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto included in the Company's 1995 Form
10-K and the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996 (the "March 31, 1996 Form 10-Q"), both of which are incorporated by
reference in the Prospectus, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" included elsewhere in this Prospectus Supplement.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt(1):
Notes payable....................................................... $ 99,046 $ 43,401
Warehouse loans payable............................................. 221,489 221,489
Nonrecourse debt.................................................... 30,189 30,189
Notes............................................................... -- 57,500
Senior Subordinated Notes........................................... 57,500 57,500
Convertible Subordinated Debentures................................. 45,000 45,000
-------- --------
Total debt.................................................. 453,224 455,079
Shareholders' equity:
Common Stock, par value $0.05 per share; 50,000,000 authorized
shares and 26,805,235 issued shares(2)........................... 1,340 1,340
Capital in excess of par............................................ 106,667 106,667
Reductions for employee stock....................................... (1,760) (1,760)
Treasury stock, 24,339 shares....................................... (160) (160)
Net unrealized gains (losses)....................................... (382) (382)
Retained earnings................................................... 60,485 60,485
-------- --------
Total shareholders' equity.................................. 166,190 166,190
-------- --------
Total capitalization........................................ $619,414 $621,269
======== ========
</TABLE>
- ---------------
(1) See "Description of Other Indebtedness" and Note 5 of Notes to Consolidated
Financial Statements included in the 1995 Form 10-K.
(2) Does not include an aggregate of 2,114,440 shares of Common Stock reserved
for issuance upon the exercise of outstanding stock options, 3,600,000
shares reserved for issuance upon conversion of the Convertible
Subordinated Debentures and 1,684,378 shares available for future grants of
options and shares of restricted stock under the Company's Stock Option and
Award Plan. Since March 31, 1996 through June 28, 1996, options for an
aggregate of 39,200 shares have been exercised and no shares of restricted
stock have been issued under the Company's Stock Option and Award Plan. See
Note 11 of Notes to Consolidated Financial Statements included in the 1995
Form 10-K.
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<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is engaged primarily in the business of Asset Portfolio
acquisition and resolution, commercial mortgage banking, residential mortgage
securitization and institutional investment advisory services. The Company's
business may be affected by many factors, including real estate and other asset
values, the availability and price of Asset Portfolios and commercial and
residential mortgages to be purchased, the level of and fluctuations in interest
rates, changes in the securitization market and competition. In addition, the
Company's operations require continued access to short and long term sources of
financing.
On December 31, 1993, AMRESCO, INC., formerly BEI, merged with Holdings.
The merger was accounted for as a "reverse acquisition" whereby Holdings was
deemed to have acquired BEI for financial reporting purposes. However, BEI,
renamed AMRESCO, INC., remains the continuing legal entity and registrant for
Commission filing purposes. Consistent with the reverse acquisition accounting
treatment, the historical financial statements of AMRESCO, INC. presented for
the year ended December 31, 1993 are the consolidated financial statements of
Holdings and differ from the consolidated financial statements of BEI as
previously reported. The results of operations of BEI have been included in the
Company's financial statements from the date of acquisition.
In 1994, the Company concluded all of its significant asset management
relationships with government agencies and financial institutions and began to
shift its focus toward investment activities and the development of new lines of
financial service businesses. Since the BEI Merger, the Company has extended its
business lines to offer a full range of mortgage banking services, including the
development of capital markets activities, increased substantially the amount it
invests in Asset Portfolios, developed its institutional investment advisory
business and disposed of certain non-core business lines. These significant
changes in the composition of the Company's business are reflected in the
Company's results of operations and may limit the comparability of the Company's
results from period to period.
The following discussion and analysis presents the significant changes in
financial condition and results of continuing operations of the Company by
primary business lines for the three months ended March 31, 1996 and 1995 and
for the years ended December 31, 1995, 1994 and 1993. The results of operations
of acquired businesses are included in the Consolidated Financial Statements
from the date of acquisition. This discussion should be read in conjunction with
the Consolidated Financial Statements and notes thereto included in the March
31, 1996 Form 10-Q and 1995 Form 10-K, both of which are incorporated by
reference in the Prospectus.
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<PAGE> 15
The following is a summary of the Company's results of operations for the
three months ended March 31, 1996 and 1995 and for the years ended December 31,
1995, 1994 and 1993.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- ------------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues:
Asset acquisition and resolution... $ 20,954 $ 17,230 $ 81,144 $ 110,637 $ 122,944
Commercial mortgage banking........ 9,375 2,930 26,573 6,460 --
Residential capital markets........ 5,776 -- 2,307 -- --
Institutional investment
advisory........................ 967 -- 452 -- --
Corporate and other................ (176) 17 10 12,694 (543)
---------- ---------- ---------- ---------- ----------
Total revenues............. 36,896 20,177 110,486 129,791 122,401
---------- ---------- ---------- ---------- ----------
Operating expenses:
Asset acquisition and resolution... 11,155 8,098 37,691 52,741 51,678
Commercial mortgage banking........ 8,134 3,075 20,550 6,237 --
Residential capital markets........ 2,300 -- 1,694 -- --
Institutional investment
advisory........................ 816 -- 444 -- --
Corporate and other................ 6,396 3,668 19,849 35,127 27,046
---------- ---------- ---------- ---------- ----------
Total operating expenses... 28,801 14,841 80,228 94,105 78,724
---------- ---------- ---------- ---------- ----------
Operating profit:
Asset acquisition and resolution... 9,799 9,132 43,453 57,896 71,266
Commercial mortgage banking........ 1,241 (145) 6,023 223 --
Residential capital markets........ 3,476 -- 613 -- --
Institutional investment
advisory........................ 151 -- 8 -- --
Corporate and other................ (6,572) (3,651) (19,839) (22,433) (27,589)
---------- ---------- ---------- ---------- ----------
Total operating profit..... 8,095 5,336 30,258 35,686 43,677
---------- ---------- ---------- ---------- ----------
Income tax expense................... 3,300 2,181 11,593 14,753 17,371
---------- ---------- ---------- ---------- ----------
Income from continuing operations.... 4,795 3,155 18,665 20,933 26,306
Gain (Loss) from discontinued
operations......................... -- -- 2,425 (2,185) (2,088)
---------- ---------- ---------- ---------- ----------
Net income........................... $ 4,795 $ 3,155 $ 21,090 $ 18,748 $ 24,218
========== ========== ========== ========== ==========
Weighted average common shares
outstanding and common share
equivalents........................ 27,369,411 24,182,827 24,654,321 23,679,239 11,288,688
Primary earnings per share from
continuing operations.............. $ 0.18 $ 0.13 $ 0.76 $ 0.88 $ 2.33
Fully-diluted earnings per share from
continuing operations.............. 0.17 0.13 0.75 0.88 2.33
Primary earnings per share........... 0.18 0.13 0.86 0.79 2.15
Fully-diluted earnings per share..... 0.17 0.13 0.85 0.79 2.15
</TABLE>
RESULTS OF OPERATIONS
Revenues from the Company's asset management and resolution activities
primarily consist of fees charged for the management of Asset Portfolios
comprised of performing, non-performing or underperforming commercial,
industrial, agricultural and real estate loans and for the successful resolution
of the assets within such Asset Portfolios. The asset base of each Asset
Portfolio declines over the life of the Asset Portfolio, thus reducing asset
management fees as assets within the Asset Portfolio are resolved. These fees
are subject to fluctuation based on the consideration received, timing of the
sale or collection of the managed assets and the attainment of specified
earnings levels on behalf of investors or investment partners. Certain direct
costs
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<PAGE> 16
incurred, primarily through 1994, in the management of assets for the FDIC were
paid by the Company and billed to the FDIC.
The original cost of an investment in Asset Portfolios is allocated to
individual assets within that Asset Portfolio based on their relative fair value
to the total purchase price. The difference between gross estimated cash flows
from loans and asset-backed and other securities and its present value is
accrued using the level yield method. The Company accounts for its investments
in partnerships and joint ventures using the equity method which generally
results in the pass-through of its pro rata share of earnings as if it had a
direct investment in the underlying loans. Loans, partnerships and joint
ventures, and real estate are carried at the lower of cost or estimated fair
value. The Company's investments in asset-backed and other securities are
classified as available for sale and are carried at estimated fair value
determined by discounting estimated cash flows at current market rates. Any
unrealized gains (losses) on asset-backed and other securities are excluded from
earnings and reported as a separate component of shareholders' equity, net of
tax effects.
Revenues from the Company's commercial mortgage banking activities are
earned from the origination and underwriting of commercial real estate mortgage
loans, the placement of such loans with permanent investors and the servicing of
loans. Loan placement and servicing fees, commitment fees and real estate
brokerage commissions are recognized as earned. Placement and servicing expenses
are charged to expense as incurred.
Revenues from the Company's residential capital markets activities consist
of interest earned on residential mortgage loans purchased, gains on the
securitization and sale of such loans, accrued earnings on certificates
purchased or retained from securitization trusts and gains on sales, if any, of
such retained certificates. The gains on securitization and sale of mortgage
loans represent the amount by which the proceeds received (including the
estimated value of any certificates retained) exceed the basis of the loans sold
and the cost of securitization. When loans are securitized and sold, the
certificates retained are valued at the discounted present value of the cash
flow expected to be realized over the anticipated average life of the loans sold
less future estimated credit losses and normal servicing and other fees relating
to the loans sold. The discounted present value of such certificates is computed
using management's assumptions of market discount rates (currently approximately
20%), prepayment rates, default rates and other costs.
Revenues from the Company's institutional investment advisory business are
earned from providing real estate investment advisory services, including
acquisition, portfolio/asset management and disposition services, to
institutional and corporate investors.
Other revenues consist of consulting revenues earned on due diligence,
gains on sales of other assets and other miscellaneous income. Additionally,
1994 included a $10.0 million conclusion fee on a management contract with a
financial institution.
In December 1994, the Company elected to dispose of the operations of its
data processing and home banking subsidiary. The loss from such discontinued
operations totaled approximately $2.2 million and $2.1 million for the years
ended December 31, 1994 and 1993, respectively. The subsidiary was sold on June
16, 1995 for a net gain of $2.4 million, or $0.10 per share.
QUARTER ENDED MARCH 31, 1996 COMPARED TO QUARTER ENDED MARCH 31, 1995
The Company reported 1996 first quarter revenues of $36.9 million, an 83%
increase from the same period in 1995. Operating profit also increased 52% over
the same period in 1995 primarily due to the inclusion of residential capital
markets operations initiated in September 1995. Commercial mortgage banking
posted an increase in operating profit, and asset acquisition and resolution
operating profit rose 7%. Weighted average shares outstanding and equivalents at
March 31, 1996 increased 13% over March 31, 1995, primarily due to the issuance
of 2,300,000 shares of common stock in late 1995. Fully-diluted earnings per
share from continuing operations for the first quarter of 1996 was $0.17,
compared to $0.13 for the first quarter of 1995, a 31% increase.
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<PAGE> 17
Asset Acquisition and Resolution. Revenues for the first quarter of 1996
were comprised of $8.3 million in asset management and resolution fees, $12.2
million in interest and other investment income and $0.5 million in other
revenues, primarily consulting revenues. The $3.7 million, or 22%, increase in
revenues from the same period of 1995 was comprised of a $6.0 million increase
in interest and other investment income due to an increase in aggregate
investments of $137.3 million from March 31, 1995, which increase was offset in
part by a $1.9 million decrease in asset management and resolution fees due to
the conclusion of significant government contracts during early 1995 and a shift
from primarily managing and investing in partnerships and joint ventures to
investing in wholly-owned Asset Portfolios.
Expenses for the quarter ended March 31, 1996 were comprised of $5.4
million in personnel costs, $2.0 million in other general and administrative
expenses and $3.8 million in interest expense. The $3.1 million, or 38%,
increase in expenses over the same period in 1995 was primarily due to a $2.6
million increase in interest expense and a $0.8 million increase in other
general and administrative expenses, which increases were partially offset by a
$0.3 million decrease in profit participation expenses. The increase in interest
expense was due to the financing incurred for a $137.3 million increase in
aggregate investments at March 31, 1996 as compared to March 31, 1995.
Commercial Mortgage Banking. Revenues for the quarter ended March 31, 1996
consisted of $2.9 million in interest and other investment income and $6.5
million in origination, underwriting and servicing revenues. Interest and other
investment income increased $2.7 million and origination, underwriting and
servicing fees increased $3.7 million primarily due to the inclusion of the
operations of the commercial loan servicing business acquired in September 1995
and increases in the loan originations and servicing volumes of the Company's
previously existing commercial mortgage banking operations.
Expenses for the quarter ended March 31, 1996 were comprised of $5.8
million in personnel expense, $1.9 million in other general and administrative
expense and $0.4 million in interest expense. The $5.1 million increase in
expenses is primarily due to a $3.5 million increase in personnel expenses, a
$1.2 million increase in other general and administrative expense and a $0.4
million increase in interest expense. Expenses increased primarily due to the
inclusion of operations of the commercial loan servicing business acquired
during October 1995.
Residential Capital Markets. The Company initiated the operation of the
residential capital markets business in September 1995. Revenues for the quarter
ended March 31, 1996 consisted of $3.7 million in interest and other investment
income and $2.1 million gain on securitization and sale of residential mortgage
loans. Interest and other investment income primarily consists of interest
earned on mortgage loans held for sale which totaled $235.6 million at March 31,
1996, compared to no such loans held at March 31, 1995. The $2.1 million gain
was realized on the securitization and sale of $275.0 million in residential
mortgage loans during the first quarter of 1996.
Expenses for the quarter ended March 31, 1996 were comprised of $1.6
million in interest expense, $0.4 million in other general and administrative
expense and $0.3 million in personnel expense. The $1.6 million interest expense
relates to borrowings under warehouse loans payable which funded the acquisition
of the mortgage loans held for sale.
Institutional Investment Advisory. The Company acquired substantially all
of the assets of Acacia in November 1995. First quarter 1996 revenues of $1.0
million were earned in conjunction with providing real estate investment
advisory services to institutional and corporate investors, including
acquisition, portfolio/asset management and disposition services. Expenses of
$0.8 million were incurred, including $0.5 million in personnel expense and $0.3
million in other general and administrative expenses.
Corporate and Other. Net revenues in this category for the quarters ended
March 31, 1996 and 1995 were nominal. Expenses for the quarter ended March 31,
1996 were $6.4 million, compared to $3.7 million during the same period in 1995,
a 74% increase. The $2.7 million increase was primarily due to $0.9 million of
intangible amortization related to businesses acquired late in 1995 as well as a
$1.6 million increase in personnel costs and other overhead related to expanded
operations since the first quarter of 1995.
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<PAGE> 18
Income Taxes. The Company must have future taxable income to realize
recorded deferred tax assets, including net operating loss carryforward tax
benefits obtained in the BEI Merger. Certain of these benefits expire beginning
in 1998 and are subject to annual utilization limitations. Management believes
that recorded deferred tax assets will be realized in the normal course of
business.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company reported 1995 revenues of $110.5 million, a 15% decrease from
1994. Operating profit also decreased 15% over the same period. Revenues and
operating profit in 1994 included $10.0 million and $6.0 million, respectively,
related to the conclusion of an asset management contract. After adjustment for
this one-time conclusion fee, 1995 revenues decreased 8% while operating profits
increased 2%. Commercial mortgage banking posted a significant increase in
operating profit, while asset acquisition and resolution operating profit fell
25%. Fully-diluted earnings per share from continuing operations for 1995 was
$0.75 compared to $0.73 for 1994 after elimination of the one-time contract
conclusion fee in 1994, a 3% increase.
Asset Acquisition and Resolution. Revenues for 1995 were comprised of $20.6
million in asset management fees, $19.5 million in resolution fees, $36.9
million in interest and other investment income and $4.1 million in other
revenues, primarily consulting revenues and gains on sales of investments. The
$29.5 million, or 27%, decrease in revenues from 1994 was comprised of a $21.2
million decrease in management fees and a $32.4 million decrease in resolution
fees due to the conclusion of significant institutional and government contracts
during 1994 and early 1995. These declines were partially offset by a $23.0
million increase in interest and other investment income due to an increase in
aggregate investments of $138.6 million from December 31, 1994 and a $1.1
million increase in other revenues.
Expenses for the year ended December 31, 1995 were comprised of $21.1
million in personnel costs, $5.0 million in other general and administrative
expenses, $9.5 million in interest and $2.1 million in profit participation
expenses. The $15.1 million, or 29%, decrease in expenses was primarily due to
an $18.5 million decrease in personnel expenses and a $5.8 million decrease in
other general and administrative expenses, which decreases were partially offset
by a $7.2 million increase in interest expense and a $2.0 million increase in
profit participation expenses. Personnel and other general and administrative
expenses decreased as significant institutional and government contracts
concluded during 1994, including a related $3.7 million reduction in estimate of
accounts receivable bad debt reserve and other accrued expenses related to
certain concluding asset management contracts. The increase in interest expense
was due to the financing incurred for a $138.6 million increase in aggregate
investments at December 31, 1995 compared to December 31, 1994. The increase in
profit participation expense is primarily due to the $4.0 million received
related to certain expired RTC contracts, approximately 40% of which is due to a
joint venture partner.
Commercial Mortgage Banking. Revenues for the year ended December 31, 1995
consisted of $24.4 million in origination, underwriting and servicing revenues,
$2.1 million in interest and other investment income and $0.1 million in other
income. Interest and other investment income increased $1.9 million and mortgage
banking revenues increased $18.2 million primarily due to the inclusion for an
entire year of the operations of Holliday Fenoglio, which was purchased in
August 1994, commencement of ACC's underwriting activities in the fourth quarter
of 1994 and the inclusion of securitized commercial loan servicing contracts
acquired from EQS in the fourth quarter of 1995.
Expenses for the year ended December 31, 1995 were comprised of $16.1
million in personnel expense, $4.1 million in other general and administrative
expense, and $0.3 million in interest expense. The $14.3 million increase is
primarily due to a $11.2 million increase in personnel expenses, a $2.8 million
increase in other general and administrative expense and a $0.3 million increase
in interest expense. Expenses increased due to the inclusion of operations of
Holliday Fenoglio, ACC and the contracts acquired from EQS.
Residential Capital Markets. The Company initiated the operations of the
residential capital markets business in September 1995. Revenues for the year
ended December 31, 1995 consisted of $2.3 million in interest and other
investment income. Interest and other investment income primarily consists of
interest earned on mortgage loans held for sale which totaled $142.7 million at
December 31, 1995.
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<PAGE> 19
Expenses for the year ended December 31, 1995 were comprised of $1.1
million in interest expense, $0.4 million in personnel expense and $0.2 million
in other general and administrative expenses. The $1.1 million interest expense
relates to borrowings under warehouse loans payable which funded the acquisition
of mortgage loans held for sale.
Institutional Investment Advisory. After the Acacia Acquisition in November
1995, revenues of $0.5 million were earned as the result of providing real
estate investment advisory services to institutional and corporate investors,
including acquisition, portfolio/asset management and disposition services.
Expenses of $0.4 million were incurred, including $0.2 million in personnel
expense and $0.2 million in other general and administrative expenses.
Corporate and Other. Revenues for the year ended December 31, 1995 were
nominal, compared to $12.7 million in 1994. The $12.7 million decrease in
revenues was primarily due to the $10.0 million conclusion fee on a significant
institutional asset management contract terminated in 1994 and $3.8 million
relating to the inclusion in 1994 of operations and sale of a subsidiary
acquired with BEI for the period prior to its sale in the first quarter of 1994.
Expenses for the year ended December 31, 1995 were $19.8 million, compared
to $35.1 million during 1994, a 44% decrease. The $15.3 million decrease was
primarily due to the inclusion of $6.0 million of expenses in 1994 related to
the conclusion of a significant institutional asset management contract as well
as reduced incentive compensation and severance costs.
Income Taxes. The Company must have future taxable income to realize
recorded deferred tax assets, including net operating loss carryforward tax
benefits obtained in the BEI Merger. Certain of these benefits expire beginning
in 1998 and are subject to annual utilization limitations. Management believes
that recorded deferred tax assets will be realized in the normal course of
business. The decrease in the effective income tax rate for the year ended
December 31, 1995 was primarily due to permanent tax differences related to
mortgages sold by a partnership in which the Company owns an interest for which
the acquired tax basis exceeded the book basis.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
The Company reported 1994 revenues of $129.8 million, a 6% increase from
1993, while operating profit decreased 18% over the same period. Revenues and
operating profit in 1994 included $10.0 million and $6.0 million, respectively,
related to the early conclusion of an asset management contract. The operations
of BEI are included from the date of acquisition, December 31, 1993. The
Company's commercial mortgage banking operations were initiated during 1994 with
the acquisition of Holliday Fenoglio in August 1994 and the commencement of
business by ACC during the fourth quarter of 1994. Additionally, during 1994,
the focus of the asset acquisition and resolution business began changing from
managing assets for institutional and governmental entities to the direct
ownership of Asset Portfolios acquired from non-governmental sellers and the
management of Asset Portfolios for private third parties.
Asset Acquisition and Resolution. Revenues for the year ended December 31,
1994 included $41.8 million in management fees, $52.0 million in resolution
fees, $13.9 million in interest and other investment income and $2.9 million in
other revenues. Management fees decreased $8.9 million and resolution fees
declined $15.9 million during 1994 principally due to only eight months of
operations under a significant institutional asset management contract, as well
as reduced revenues from the government sector contracts as the contracts
continued to conclude. These declines were offset by a $9.7 million increase in
interest and investment income and gains on sales of assets and other revenues
of $2.8 million.
Expenses of $52.7 million for the year ended December 31, 1994 included
$39.6 million in personnel expenses, $10.7 million in other general and
administrative expenses, $2.3 million in interest expense and $0.1 million in
profit participations. The $1.1 million increase over the same period of 1993
was primarily due to a $6.6 million increase in other general and administrative
expenses and a $1.2 million increase in interest expense, which increases were
partially offset by a $3.8 million decline in personnel expenses and a $2.9
million decrease in profit participations. The increase in other general and
administrative expenses was
S-19
<PAGE> 20
primarily due to the inclusion of BEI operations in 1994. The increase in
interest expense was due to the incurrence of debt to facilitate increased
investments. The decrease in personnel expense was primarily related to a
reduction in the number of personnel due to the conclusion of
personnel-intensive institutional and government asset management contracts. The
decrease in profit participations of $3.0 million was primarily due to the
modification of an asset management contract effective April 1 1993 that
effected an exchange of profit participation in the Company's income before
taxes for a rebate of fees.
Commercial Mortgage Banking. Revenues of $6.4 million and expenses of $6.2
million were due to the acquisition of Holliday Fenoglio and the commencement of
business by ACC during 1994. Revenues in 1994 consisted of $0.2 million in
interest income and $6.2 million in commercial mortgage banking revenues,
primarily origination, underwriting and servicing revenues. Expenses in 1994
consisted of $4.9 million in personnel expenses and $1.3 million in other
general and administrative expenses.
Corporate and Other. Other revenues for the year ended December 31, 1994
were $12.7 million, compared to a loss of $0.5 million in 1993. The $13.2
million increase in revenues was primarily due to the $10.0 million conclusion
fee on an institutional asset management contract and the $3.8 million in
revenue relating to the inclusion in 1994 of operations and sale of a subsidiary
acquired with BEI for the period prior to its sale in the first quarter of 1994.
Expenses for the year ended December 31, 1994 increased $8.1 million over 1993
to $35.1 million primarily due to the inclusion of $6.0 million of expenses
related to the conclusion of an institutional asset management contract in 1994.
Pro Forma Income Summary. Pro forma combined revenues for 1994 totaled
$139.3 million compared to $168.4 million for 1993, assuming the BEI Merger and
the Holliday Fenoglio acquisition had been consummated as of January 1, 1993.
The $29.1 million, or 17%, decrease was primarily due to a decrease in BEI
revenues of $15.3 million and a decrease in Holdings revenues of $13.8 million.
The decline in revenues was primarily related to the conclusion of certain asset
management contracts during 1994 and the sale of certain Company subsidiaries in
the first quarter of 1994. Pro forma income from continuing operations for 1994
totaled $21.8 million compared to $28.0 million for 1993, after removing the
impact of merger expenses, net gain on sales of subsidiaries and discontinued
operations, for a decrease of $6.2 million, or 22%. Earnings per share from
continuing operations were $0.91 for 1994, compared to $1.23 for the previous
year, a decrease of $0.32, or 26%.
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<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $18.3 million and $16.1 million at March
31, 1996 and December 31, 1995, respectively. Cash flows from operating
activities plus principal cash collections on investments totaled $7.0 million
for the three months ended March 31, 1996 and $77.9 million for 1995. The
increase in cash flows from these activities resulted primarily from increased
investments. Cash for investing, originating and underwriting loans, acquiring
loans for securitization, general operating expenses and business acquisitions
is primarily obtained through cash flow and borrowings under credit facilities,
including advances on the corporate and portfolio credit lines, mortgage
warehouse lines, nonrecourse debt, subordinated indebtedness, retained earnings
and cash flow from owned investments. Cash may also be generated by the
Company's sale of certain excess interest receivable certificates retained in
the securitization and sale of residential mortgage loans.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
---------------- -----------------
1996 1995 1995 1994
------ ------ ------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Cash provided by operations and collections on
investments............................................. $ 7.0 $ 10.6 $ 77.9 $ 69.8
Net cash provided by (used for) new capital and
borrowings,............................................. 56.2 7.9 334.6 (11.7)
Cash used for purchase of investments..................... (49.4) (21.8) (221.8) (62.6)
Net cash used for mortgage loans held for sale............ (74.9) -- (160.8) --
Cash used for purchase of subsidiaries.................... -- -- (22.3) (17.8)
Interest coverage ratio(1)................................ 3.0x 15.9x 6.0x 24.4x
</TABLE>
- ---------------
(1) Interest coverage ratio means the ratio of earnings before interest, income
taxes, depreciation and amortization to cash interest expense.
During 1995, the Company replaced its $75.0 million revolving loan
agreement with a $150.0 million revolving loan agreement, entered into a $27.5
million nonrecourse debt agreement, issued $45.0 million of Convertible
Subordinated Debentures with net proceeds of approximately $43.0 million, issued
2,300,000 shares of its common stock with net proceeds of approximately $25.1
million and obtained several mortgage warehouse lines of credit to facilitate
the origination, underwriting, funding and purchase of mortgage loans.
Additionally, in February 1996, the Company issued $57.5 million of Senior
Subordinated Notes with net proceeds of approximately $54.9 million. In April
1996, the Company amended and restated its revolving credit facility with
NationsBank of Texas, as more fully described below. The net proceeds from these
debt and stock offerings were used to purchase investments and mortgage loans
held for sale, and to temporarily reduce borrowings under the Revolving Loan
Agreement.
The following table shows the components of the Company's capital structure
as of March 31, 1996 and as of December 31, 1995:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 % OF TOTAL 1995 % OF TOTAL
--------- ---------- ------------ ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Shareholders' equity............................. $ 166.2 28.3% $160.8 34.6%
Mortgage warehouse loans......................... 221.5 37.8 153.2 33.0
Notes payable (excluding investment line(1))..... 96.2 16.4 105.9 22.8
Senior Subordinated Notes........................ 57.5 9.8 -- --
Subordinated Convertible Debentures.............. 45.0 7.7 45.0 9.6
</TABLE>
- ---------------
(1) The investment line under which $33.0 million and $21.9 million was
outstanding as of March 31, 1996 and December 31, 1995, respectively, is
used solely to acquire short term investments of high grade government
securities that secure the loan.
S-21
<PAGE> 22
Total assets increased $349.4 million during 1995 primarily due to an
increase in investments of $152.1 million and an increase in mortgage loans,
primarily residential mortgages, held for sale of $160.8 million. These
increases were financed by increased borrowings of $309.5 million and a $47.2
million increase in shareholders' equity. Also, during 1995, the Company made
acquisitions to develop its new commercial loan servicing business and its
institutional investment advisory business. These acquisitions resulted in a
$21.2 million increase in intangible assets.
Total assets increased $122.3 million during the first quarter of 1996
primarily due to a $74.8 million increase in residential mortgage loans held for
sale, a $30.4 million increase in investments and an $11.1 million increase in
temporary investments. These increases were financed by increased borrowings of
$127.3 million, including the February 1996 issuance of $57.5 million of Senior
Subordinated Notes.
At June 28, 1996, the lenders' commitment under the $200.0 million
Revolving Loan Agreement was limited to a total of $185.0 million, with a
maximum borrowing base availability of $88.1 million. The additional $15.0
million would become available to the Company upon the participation by
additional financial institutions and upon an increase in the Company's
borrowing base under this facility. The interest rate may be selected by the
Company and tied to either the NationsBank of Texas' variable rate (8.25% at
March 31, 1996) or, for advances on a term basis up to approximately 180 days, a
rate equal to an adjusted LIBOR rate (6.87% at March 31, 1996 for a term of 30
days), or, on borrowings funded in foreign currency, an adjusted currency rate
(7.33% at June 28, 1996). At March 31, 1996, there was a balance of $13.0
million at 8.25% and $53.0 million at 6.87% for a total of $66.0 million
outstanding. The total balance outstanding at June 28, 1996 was $63.2 million.
The Revolving Loan Agreement is secured by substantially all of the assets of
the Company not pledged under other credit facilities, including stock of a
majority of the Company's subsidiaries. The Revolving Loan Agreement requires
the Company to meet certain financial tests, including minimum consolidated
tangible net worth, maximum consolidated funded debt to consolidated
capitalization ratio, minimum fixed charge coverage ratio, minimum interest
coverage ratio, maximum consolidated funded debt to consolidated earnings before
interest, income taxes, depreciation and amortization ("EBITDA") ratio and
maximum corporate facility outstanding to consolidated EBITDA ratio. The
Revolving Loan Agreement contains covenants that, among other things, will limit
the incurrence of additional indebtedness, investments, asset sales, loans to
stockholders, dividends, transactions with affiliates, acquisitions, mergers and
consolidations, liens and encumbrances and other matters customarily restricted
in such agreements. The Revolving Loan Agreement matures on May 31, 1998.
On June 28, 1996, the Company received approximately $40.0 million of
proceeds from the sale of certain excess interest-only certificates retained by
the Company in connection with the securitization and sale of residential
mortgage loans. The proceeds from this sale were used to reduce outstanding
borrowings under the Revolving Loan Agreement. Although the Company intends,
from time to time, to continue to pursue opportunities to sell other such
retained certificates to generate additional borrowing capacity under its
Revolving Loan Agreement and reduce the Company's capital exposure with respect
to such retained certificates, no assurance can be given that such opportunities
will be available in the future.
During July 1995, two wholly-owned subsidiaries of the Company jointly
entered into a nonrecourse loan agreement for $27.5 million to support
wholly-owned Asset Portfolio purchases. This nonrecourse facility is secured by
all wholly-owned Asset Portfolios purchased with borrowings under this debt and
bears interest at the financing company's reference rate plus 1.5% or LIBOR plus
3%. There was a balance outstanding at March 31, 1996, of $13.3 million under
this nonrecourse loan agreement, bearing interest at 8.35% per annum. This
facility matures on July 31, 1998.
On April 28, 1995, ACC entered into a $25.0 million warehouse line of
credit agreement with NationsBank of Texas (the "NationsBank Warehouse
Facility") to support its commercial mortgage origination and underwriting
activities. This facility has since been amended twice effective September 30,
1995 and April 29, 1996, respectively. This facility is secured by loans
originated through borrowings under this facility and bears interest at either
the prime rate announced from time to time by NationsBank of Texas or an
Adjusted LIBOR Rate (as defined in the facility) plus 1.65% or 2.0% based upon
certain enumerated factors. The Company is a guarantor of certain of ACC's
obligations under this facility. A total of $2.8 million
S-22
<PAGE> 23
bearing interest at 7.31% per annum was outstanding at March 31, 1996. The
NationsBank Warehouse Facility matures on January 25, 1997.
On August 15, 1995, ACC entered into a warehouse line of credit agreement
with Residential Funding Corporation (the "RFC Warehouse Facility") to
facilitate multi-family mortgage loan underwriting and origination. This
facility was amended on May 1, 1996 and was supplemented by letter dated May 2,
1996. This facility is secured by the loans originated through borrowings under
this facility and the stated interest rate for this line is an adjusted 30-day
LIBOR rate plus 3.0% or less as determined solely by the lender (7.37% at March
31, 1996). At March 31, 1996, an advance of $3.5 million was outstanding. Each
borrowing under the RFC Warehouse Facility is generally due 60 to 80 days after
funding.
On September 7, 1995, the Company entered into an interest rate swap
agreement to hedge a portion of its 30-day LIBOR floating rate debt. The swap
agreement has a notional amount of $25.0 million and requires payment of
interest by the Company at a fixed rate of 5.8% and receipt of interest by the
Company at a floating rate equal to 30-day LIBOR.
Effective November 1, 1995, ARMC entered into a $100.0 million warehouse
line of credit (the "Prudential Warehouse Facility"), increased to $150.0
million on November 30, 1995, with Prudential Securities Realty Funding
Corporation to finance the acquisition and warehousing of residential mortgage
loans. This facility was secured by the loans purchased through borrowings under
this facility and held for sale. The stated interest rate for this line was
LIBOR (as defined in the facility) plus 0.88% (which can be adjusted
retroactively under certain circumstances to LIBOR plus 2.4%). At December 31,
1995, $135.6 million was outstanding under this facility. On January 26, 1996,
the mortgages purchased with borrowings under this facility were securitized,
such borrowings were repaid in their entirety and the facility was terminated.
On February 23, 1996, ARMC and Prudential Securities Realty Funding Corporation
entered into a $220.0 million warehouse line of credit (which was amended on
March 22, 1996) to finance the continued acquisition and warehousing of
residential mortgage loans on substantially similar terms as the prior facility.
On June 20, 1996, the mortgages purchased with borrowings under this facility
were securitized, such borrowings were repaid in their entirety and the facility
was terminated.
On November 27, 1995, the Company completed the sale of $45.0 million
principal amount of Convertible Subordinated Debentures bearing interest at 8.0%
per annum and maturing on December 15, 2005. The net proceeds (approximately
$43.0 million) were used to repay indebtedness under the predecessor to the
Revolving Loan Agreement.
On December 13, 1995, the Company completed a public offering of 2,000,000
shares of its common stock. An additional 300,000 shares of common stock were
sold on December 19, 1995, upon exercise of the underwriters' overallotment
option. The aggregate net proceeds to the Company (approximately $25.1 million)
were used to repay indebtedness under the predecessor to the Revolving Loan
Agreement.
On December 19, 1995, a wholly-owned subsidiary of the Company entered into
a Global Master Repurchase Agreement to support the purchase of certain
commercial mortgage pass-through certificates. A total of $16.9 million was
outstanding under this facility at March 31, 1996. This facility bears interest
at a rate of 30 day LIBOR plus 1.4% (6.78% at March 31, 1996). This facility is
secured by the Company's investments in certain asset-backed securities. This
facility matures on December 18, 1996.
On February 2, 1996, the Company completed the sale of $57.5 million
principal amount of Senior Subordinated Notes bearing interest at 10.0% per
annum and maturing on January 15, 2003. The net proceeds (approximately $54.9
million) were used to repay indebtedness under the predecessor to the Revolving
Loan Agreement.
Effective February 26, 1996, ARMC entered into another warehouse facility
with Prudential (the "1996 Prudential Warehouse Facility"). The 1996 Prudential
Warehouse Facility is currently a $400.0 million credit facility used to finance
the acquisition and warehousing of certain residential mortgage loans. At June
28, 1996, a total of $43.6 million was outstanding under the 1996 Prudential
Warehouse Facility bearing interest at 6.35% per annum. The 1996 Prudential
Warehouse Facility is secured by all residential mortgage loans acquired using
funds obtained under this facility.
S-23
<PAGE> 24
Pursuant to a Commitment Letter dated May 29, 1996, CS First Boston
Mortgage Capital Corp. agreed to provide ARMC with a repurchase facility in an
amount not to exceed $500.0 million (the "Repurchase Facility"), which
supplements, forms a part of and is subject to a Global Master Repurchase
Agreement dated May 28, 1996, to finance the acquisition and warehousing of
certain residential mortgage loans. As of June 28, 1996, $133.5 million was
outstanding under the Repurchase Facility.
In 1996, the Company intends to pursue (i) additional investment
opportunities by acquiring Asset Portfolios, both for its own account and as an
investor with various capital partners who acquire such investments, (ii)
acquisitions of new businesses and (iii) expansion of current businesses. The
funds for such acquisitions and investments are anticipated to be provided in
1996 by cash flows and borrowings under the Company's Revolving Loan Agreement
and the proceeds of this Offering. As a result, interest expense in 1996 is
expected to be higher than interest expense in 1995.
The Company believes its funds on hand of $18.3 million at March 31, 1996,
cash flow from operations, its unused borrowing capacity under its credit lines
($64.4 million at March 31, 1996, excluding availability under
lender-discretionary mortgage warehouse lines), the net proceeds of this
Offering and its continuing ability to obtain financing should be sufficient to
meet its anticipated operating needs and capital expenditures, as well as
planned new acquisitions and investments, for at least the next twelve months.
The magnitude of the Company's acquisition and investment program will be
governed by the availability of capital.
IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," issued by the Financial Accounting Standards
Board, which is effective for fiscal years beginning after December 15, 1995,
requires that an employer's financial statements include certain disclosures
about stock-based employee compensation arrangements regardless of the method
used to account for them. The Company continues to measure compensation costs
using APB Opinion No. 25, "Accounting for Stock Issued to Employees," and will
therefore include pro forma disclosures in the notes to the financial statements
for all awards granted after December 31, 1994. The Company will disclose the
pro forma net income and pro forma earnings per share as if the fair value based
accounting methods in SFAS No. 123 had been used to account for stock-based
compensation cost in future financial statement presentations.
INFLATION
The Company has generally been able to offset cost increases with increases
in revenues. Accordingly, management does not believe that inflation has had a
material effect on its results of operations to date. However, there can be no
assurance that the Company's business will not be adversely affected by
inflation in the future.
S-24
<PAGE> 25
BUSINESS
GENERAL
The Company is a leading specialty financial services company engaged in
Asset Portfolio acquisition and resolution, commercial mortgage banking,
residential mortgage securitization and institutional investment advisory
services. The Asset Portfolio acquisition and resolution business involves
acquiring at a substantial discount to Face Value and managing and resolving
Asset Portfolios to maximize cash recoveries. The Company manages and resolves
Asset Portfolios acquired by the Company alone, acquired by the Company with
co-investors and owned by third parties. The commercial mortgage banking
business involves the origination, underwriting, placement, sale and servicing
of commercial real estate mortgages. The residential capital markets business
purchases, warehouses and securitizes portfolios of residential mortgages of
borrowers who do not qualify for conventional loans. The Company's institutional
investment advisory subsidiary provides real estate investment advice to various
institutional investors (primarily pension funds).
BACKGROUND
History. The Company is the product of the December 1993 merger of two
Asset Portfolio management and resolution service companies: BEI and Holdings.
Holdings was the former Asset Portfolio management and resolution unit of
NationsBank of Texas, which was created in 1988 in connection with the
acquisition by NationsBank Corporation from the FDIC of certain assets and
liabilities of the failed First RepublicBank bank group. BEI, a publicly-held
company that was in the real estate and asset management services businesses,
began providing asset management and resolution services to the RTC in 1990. The
BEI Merger created one of the largest Asset Portfolio management and resolution
service companies in the United States. Since 1987, the Company and its
predecessors have managed over $30.0 billion (Face Value) of Asset Portfolios.
Business Strategy. The Company's original business of managing and
resolving Asset Portfolios for third parties developed as a result of the
takeover of failed thrifts and banks by the federal government's deposit
insurance agencies in the late 1980s. Due to the substantial volume of
under-performing and non-performing loans and foreclosed assets (much of it
commercial real estate loans and properties) and a lack of sufficient internal
staffing, the RTC and FDIC turned to private contractors such as the Company to
assist in the management and resolution of Asset Portfolios. Although the need
of government agencies for Asset Portfolio management and resolution services
has declined substantially in recent years, the Company believes that a
permanent market for Asset Portfolio acquisition, management and resolution
services has developed within the private sector.
In early 1994, the Company made the strategic decision to diversify its
business lines and to reduce the Company's dependence on asset management and
resolution contracts with governmental agencies and certain other entities. As a
result, the Company has shifted its strategic focus in order to take advantage
of business opportunities in the specialty finance markets that capitalize on
the Company's competitive strengths and reputation. The key elements of this
strategy include:
- increasing the amount that the Company invests for its own account in
Asset Portfolios;
- continuing to provide high quality management and resolution services to
co-investors and other third-party owners of Asset Portfolios;
- expanding its presence in the mortgage banking market through greater
market penetration and by increasing its participation in the market for
securitization of commercial and residential real estate mortgages; and
- developing its real estate pension advisory business to complement the
Company's existing business lines.
S-25
<PAGE> 26
ASSET ACQUISITION AND RESOLUTION BUSINESS
General. The Company manages and resolves Asset Portfolios acquired at a
substantial discount to Face Value by the Company alone and by the Company with
co-investors. The Company also manages and resolves Asset Portfolios owned by
third parties. Management of Asset Portfolios includes resolving loans and
providing routine accounting services, monitoring collections of interest and
principal (if any), confirming (or advancing) insurance premiums and tax
payments due on collateral and generally overseeing and managing, if necessary,
collateral condition and performance. Asset Portfolios generally include secured
loans of varying qualities and collateral types. The Company estimates that
typically approximately 85% of the loans in the Asset Portfolios in which the
Company invests are in payment default at the time of acquisition. Although some
Asset Portfolios include foreclosed real estate and other collateral, the
Company generally seeks Asset Portfolios that do not include such assets. The
Company's policy is to not refinance or renew purchased loans. Some Asset
Portfolio loans are loans for which resolution is tied primarily to the real
estate securing the loan. Other loans, however, are collateralized business
loans, the resolution of which may be based either on cash flow of a business or
on real estate and other collateral securing the loan. Collateralized business
loans generally have smaller Face Values and often are more quickly resolved
than more traditional real estate loans. The Company intends to increase its
investment in collateralized business loans.
The Company obtains information on available Asset Portfolios from many
sources. Repeat business and referrals from Asset Portfolio sellers with whom
the Company previously has transacted business are an important and frequent
source of Asset Portfolios. The Company has developed relationships in which it
is a preferred Asset Portfolio purchaser from certain sellers. The Company
believes that it receives many Asset Portfolio solicitations that result
primarily from the Company's reputation as an active portfolio purchaser. Other
important sources of business include referrals from co-investors who seek the
Company's participation in Asset Portfolio purchases, focused contacts initiated
by senior management, public advertising of Asset Portfolios for sale and the
Company's nationwide presence.
Although the need for asset management and resolution services by
governmental agencies has substantially declined in recent years, the Company
believes that a permanent market for Asset Portfolio acquisition, management and
resolution services has emerged within the private sector. The Company believes
that many financial institutions now recognize that it is advantageous to use
outside contractors to manage and resolve Asset Portfolios for a variety of
reasons, including a desire to reduce overhead costs, inadequate staffing to
handle large volumes of Asset Portfolios or a need to avoid management and
personnel distractions with the intensive and time-consuming job of resolving
Asset Portfolios. These financial institutions include multi-national, money
center, super-regional and regional banking institutions in the United States,
Canada and Europe, as well as insurance companies in the United States.
Moreover, financial institutions have embraced the concept of packaging and
selling Asset Portfolios to investors as a means of disposing of non-performing
and under-performing loans and improving the financial institution's balance
sheet. Consolidations within the banking industry have reinforced this trend.
Insurance companies, which historically have avoided outsourcing Asset Portfolio
management or selling Asset Portfolios, also are emerging as sellers of Asset
Portfolios due in part to the implementation of risk-based capital rules for
insurance companies. Additionally, there is a market for management and
resolution services for delinquent or non-performing loans within performing
securitized loan pools. The Company believes that the significant volume of
annual performing loan securitizations makes this an attractive market in which
to participate.
The Company believes that opportunities for the acquisition, management and
resolution of Asset Portfolios are becoming increasingly evident in certain
international markets and that lenders in these markets are adopting many of the
Asset Portfolio management and resolution outsourcing techniques currently
utilized in the United States. Accordingly, the Company has opened offices in
Toronto (August 1994) and London (October 1995) in order to take advantage of
opportunities in Canada, the United Kingdom and certain other Western European
nations. The Company had $292.2 million (US$ Face Value) in Canadian Asset
Portfolios and $35.3 million (US$ Face Value) in United Kingdom Asset Portfolios
under management as of March 31, 1996.
S-26
<PAGE> 27
Because of the significant decline in Asset Portfolio management and
resolution services required by governmental agencies and the trend toward
outright sales of Asset Portfolios, the Company shifted its strategic focus to
becoming an active Asset Portfolio investor for its own account and a
co-investor with other Asset Portfolio buyers. The Company believes that as a
direct investor in Asset Portfolios it has a significant competitive advantage
relative to the Company's competitors in the management and resolution business.
Moreover, the Company believes that direct investment permits the Company to
take advantage of the profit opportunities of Asset Portfolio investing. The
Company believes that it can gain market share in the Asset Portfolio
acquisition, management and resolution business due to its financial strength,
experience in managing and resolving Asset Portfolios, national reputation and
strategic relationships with sellers and purchasers of Asset Portfolios,
including financial institutions, large corporate buyers, investment banking
firms and sophisticated private investors.
For the three months ended March 31, 1996 and the year ended December 31,
1995, $21.0 million (56.8%) and $81.1 million (73.4%), respectively, of the
Company's gross revenues were attributable to its Asset Portfolio acquisition
and resolution business. The following table reflects the ownership composition
of the Asset Portfolios (based on their Face Value) under management by the
Company as of the dates indicated and further reflects the decline in the
management of Asset Portfolios for governmental agencies and the increase in the
Company's investment in Asset Portfolios since December 31, 1993. Certain
reclassifications of prior period amounts have been conformed to the current
year presentation.
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF
MARCH 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993
--------------------- --------------------- --------------------- ---------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wholly-owned by the Company(1).... $ 385.0 10.8% $ 354.3 9.6% $ 140.4 4.6% $ 90.4 1.6%
Owned by the Company with
co-investors(2)................. 1,427.3 39.9 1,558.1 42.2 1,675.9 55.3 392.4 6.8
Owned by third parties:
Special Servicing............... 772.6 21.6 738.3 20.0 315.0 10.4 268.8 4.7
Government and other owners..... 990.8 27.7 1,043.2 28.2 900.5 29.7 5,002.8 86.9
-------- ----- -------- ----- -------- ----- -------- -----
Total under management.... $3,575.7 100.0% $3,693.9 100.0% $3,031.8 100.0% $5,754.4 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
- ---------------
(1) Includes $66.8 million, $66.8 million, $13.9 million and $0.0, respectively,
of asset-backed securities, and $2.3 million, $1.7 million, $0.6 million and
$0.0 million of real estate, respectively, as of March 31, 1996 and as of
December 31, 1995, 1994 and 1993.
(2) Includes the securitized Asset Portfolios managed by the Company in which
the Company has invested, which aggregated $713.3 million, $775.3 million,
$973.8 million and $354.3 million, respectively, as of March 31, 1996 and as
of December 31, 1995, 1994 and 1993.
The following table reflects, by ownership category, the number of Asset
Portfolios managed by the Company as of March 31, 1996 and the number of assets
included in such portfolios:
<TABLE>
<CAPTION>
NUMBER OF ASSET NUMBER OF
PORTFOLIOS ASSETS
--------------- ---------
<S> <C> <C>
Wholly-owned by the Company................................ 38 1,122
Owned by the Company with co-investors..................... 29 1,361
Owned by third parties:
Special Servicing........................................ 14 943
Government and other owners.............................. 11 1,949
--
-----
Total under management........................... 92 5,375
== =====
</TABLE>
S-27
<PAGE> 28
The following table reflects the Company's investment (at carrying value)
in Asset Portfolios as of the dates indicated below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
AS OF MARCH 31, --------------------------
1996 1995 1994 1993
--------------- ------ ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Wholly-owned by the Company(1).............. $ 183.6 $173.2 $34.4 $33.8
Owned by the Company with co-investors(2)... 33.3 34.3 33.7 2.5
------- ------ ----- -----
Total............................. $ 216.9 $207.5 $68.1 $36.3
======== ====== ===== =====
</TABLE>
- ---------------
(1) Includes $32.6 million, $33.9 million, $3.5 million and $0.0 million,
respectively, of asset-backed securities, and $2.4 million, $0.5 million,
$0.0 million and $0.0 million of real estate, respectively, as of March 31,
1996 and as of December 31, 1995, 1994 and 1993.
(2) Includes the securitized Asset Portfolios managed by the Company in which
the Company has invested, which aggregated $8.4 million, $8.9 million, $7.9
million and $1.7 million, respectively, as of March 31, 1996 and as of
December 31, 1995, 1994 and 1993.
Asset Portfolio Investment. The Company invests in Asset Portfolios by
purchasing them alone or with co-investors. As of March 31, 1996, the Company's
weighted average investment in all Asset Portfolios in which it was a
co-investor was 6.0% of the aggregate purchase price of such Asset Portfolios.
The Company generally funds its share of any investment with a combination of
borrowings under its existing credit lines and internal cash flow. Future Asset
Portfolio purchases will depend on the availability of Asset Portfolios offered
for sale, the availability of capital and the Company's ability to submit
successful offers to purchase Asset Portfolios. As a result, Asset Portfolio
purchases may vary significantly from quarter to quarter. The following table
reflects the Company's total purchases (at cost) of Asset Portfolios by fiscal
quarter over the past nine quarters:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-------------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1996 1995 1995 1995 1995 1994 1994 1994 1994
--------- ------------ ------------- -------- --------- ------------ ------------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Wholly-owned by the
Company(1)....... $24,548 $ 76,749 $45,987 $ 62,499 $15,539 $ 21,014 $ -- $ 6,941 $ 6,761
Owned by the
Company with
co-investors(2)... 581 5,452 325 8,480 6,294 7,900 11,306 8,948 5,125
------- ------- ------- ------- ------- ------- ------- ------- -------
Total...... $25,129 $ 82,201 $46,312 $ 70,979 $21,833 $ 28,914 $11,306 $ 15,889 $11,886
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes $27,520, $13,248, $2,875 and $3,497 in the quarters ended December
31, 1995, September 30, 1995, June 30, 1995 and June 30, 1994,
respectively, for purchases of asset-backed securities, but does not
include any real estate assets.
(2) Includes $4,000, $1,601 and $2,000 of investments in securitized mortgage
pools purchased in the quarters ended December 31, 1994, June 30, 1994 and
March 31, 1994, respectively.
Prior to making an offer to purchase an Asset Portfolio, the Company
conducts an extensive investigation and evaluation of the individual loans
generally comprising 100% of the aggregate Face Value of all the loans therein,
except in rare instances where an unusually large number of assets are being
purchased. This examination typically consists of analyzing the information made
available by the Asset Portfolio seller (generally, the respective credit and
collateral files for the loans), reviewing other relevant material that may be
available (including tax and judgment records), and analyzing the underlying
collateral (including conducting site inspections, obtaining value opinions from
third parties and consulting with any of the Company's asset managers who have
experience with the local market for such assets). The Company also reviews
information on the local economy and real estate markets in the area in which
the loan collateral is located. Because of its broad, nationwide experience in
managing assets, the Company often is able to draw on
S-28
<PAGE> 29
its asset management experience in the specific market in which an asset is
located. Unlike the original lender, the Company values Asset Portfolio loans
based on the present value of estimated total cash flow from resolution, with
the expectation that the loans will be resolved prior to scheduled maturity. The
Company's policy is to not refinance or renew purchased loans or grant new
credit.
Asset Portfolio evaluations are conducted almost exclusively by the
Company's employees who specialize in analysis of non-performing and
under-performing loans, often with further specialization based on geographic or
collateral-specific factors. Most of these employees have previously served the
Company (and some continue to serve) as asset managers with responsibility for
resolving such loans. Their asset management experience aids these individuals,
working together in teams, in making informed judgments about the status of each
loan and the underlying collateral, the probable cash flows from the loan, the
likely resolution of the loan and the time and expense required for such
resolution. The Company's personnel document these evaluations in standardized
Company formats.
Upon completion of evaluation forms, the Company compiles a database of
information about the loans in the Asset Portfolio. The primary focus of the
database is the anticipated recovery amount, timing and cost of the resolution
of the Asset Portfolio. Using its proprietary modeling system and loan
information database, the Company then determines the amount it will offer. The
offer is structured to achieve certain minimum rates of return. As of March 31,
1996, the Company had paid an average purchase price of 54% of the aggregate
Face Value on all of its Asset Portfolios.
When an Asset Portfolio is acquired (whether for the Company's own account
or with co-investors), the Company assumes the management of the loans therein.
Management includes responsibility both for servicing and for resolving such
loans. The Company's asset managers are given the supporting due diligence
information and projections relating to each newly-acquired loan for which the
manager assumes management responsibility. Because asset managers are actively
involved in the Asset Portfolio evaluation process, it is not unusual for an
asset manager to be given management responsibility for the specific loans that
the asset manager assisted in evaluating in the due diligence or pricing
processes. The Company believes that by combining the resolution and evaluation
activities it achieves efficiency in loan resolution and accuracy in loan
evaluations.
Asset resolutions are typically accomplished through (i) negotiating with
debtors a discounted payoff, which may be accomplished through a refinancing by
the obligor with a lender other than the Company, or (ii) foreclosure and sale
of the collateral. The Company generally seeks consensual resolution of each
loan, having found that a negotiated resolution usually maximizes the Company's
or investor's rate of return. Historically, the Company has resolved the
majority of the assets within an Asset Portfolio within 18 months of
acquisition. The goal of the Company's asset resolution process is to maximize
in a timely manner the cash recovery on each loan in an Asset Portfolio.
In evaluating Asset Portfolios, the Company takes into account
concentrations of collateral located in specific regions of the United States,
Canada and the United Kingdom. As of March 31, 1996, the geographic dispersion
of each primary asset securing the loans in the Asset Portfolios in which the
Company had invested (whether for its own account or with co-investors) was as
follows:
<TABLE>
<CAPTION>
FACE VALUE % OF TOTAL NUMBER OF ASSETS % OF TOTAL
---------- ---------- ---------------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Northeast................................ $ 483.2 26.7% 1,147 46.2%
West..................................... 709.3 39.1 520 20.9
Southwest................................ 188.9 10.4 291 11.7
Midwest.................................. 79.7 4.4 92 3.7
Southeast................................ 292.0 16.1 304 12.3
-------- ----- ----- -----
United States subtotal................. 1,753.1 96.7 2,354 94.8
Canada................................... 23.9 1.3 82 3.3
United Kingdom........................... 35.3 2.0 47 1.9
-------- ----- ----- -----
Total.......................... $1,812.3 100.0% 2,483 100.0%
======== ===== ===== =====
</TABLE>
S-29
<PAGE> 30
The Company invests in both Asset Portfolios composed of collateralized
business loans and in Asset Portfolios composed of real estate collateralized
loans. Asset Portfolios purchased by the Company alone have tended to be
primarily composed of collateralized business loans, because many such Asset
Portfolios are within the size range generally sought by the Company. Asset
Portfolios composed primarily of real estate loans typically are larger and the
Company's investments in such portfolios usually are made with co-investors. At
March 31, 1996, the Face Value of the Company's total investment in wholly-owned
Asset Portfolios aggregated approximately $385.0 million, which was composed of
approximately $298.9 million (77.6%) of collateralized business loans,
approximately $17.0 million (4.4%) of real estate loans, approximately $66.8
million (17.4%) of asset-backed securities and approximately $2.3 million (0.6%)
of real estate.
In addition, as of March 31, 1996, the Asset Portfolios in which the
Company had invested (whether for its own account or with co-investors) included
approximately 2,500 individual assets. The Company has found that the market for
smaller portfolios is less competitive, because larger Asset Portfolio buyers
often elect not to consider these portfolios. In a recent industry trend, some
Asset Portfolio sellers are soliciting bids on portfolios consisting of small
groups of loans.
The Company also purchases unrated portions of collateralized commercial
mortgage bonds (typically comprised of problem loans to which the Company can
apply its resolution expertise). The Company believes that acceptance of this
risk is similar to its Asset Portfolio acquisition business, and that the risk
is acceptable because the Company has significant expertise in understanding
loan valuations and will manage the loan resolutions.
Asset Management and Resolution Services. The Company provides asset
management and resolution services to third parties pursuant to contracts with
owners of Asset Portfolios (including partnerships, joint ventures and other
groups in which the Company is a co-investor). Management of Asset Portfolios
includes loan resolution and providing routine accounting services, monitoring
collections of interest and principal (if any), confirming (or advancing)
insurance premium and tax payments due on collateral, and generally overseeing
and managing, if necessary, collateral condition and performance.
Asset management and resolution contracts relating to Asset Portfolios
managed by the Company for third parties have a finite duration, typically three
to five years, and, at March 31, 1996, covered Asset Portfolios with an
aggregate Face Value of approximately $1.8 billion. These contracts generally
provide for the payment of (i) a fixed annual management fee (generally between
50 and 75 basis points based on the Face Value or original purchase price of the
loans) with revenues declining as assets under management decrease, (ii) a
resolution fee (generally between 50 and 150 basis points based on the net cash
collections on loans and assets) and (iii) a negotiated incentive fee for the
successful resolution of loans or assets which is earned after a predetermined
rate of return for the portfolio owner or co-investor is achieved.
As part of its third-party asset management and resolution business, the
Company aggressively pursues contracts to serve as the designated Special
Servicer for pools of securitized commercial mortgages. After a loan within a
securitized pool of performing loans becomes delinquent or non-performing, the
Master Servicer or Primary Servicer of the pool will contractually transfer
responsibility for resolution of that loan to the pool's designated Special
Servicer. Special Servicers earn an annual fee (typically approximately 50 basis
points of the Face Value of the delinquent or non-performing loans subject to
Special Servicing), plus a 75 to 100 basis points resolution fee based on the
total cash flow from resolution of each such loan as it is received. As of March
31, 1996, the Company was the designated Special Servicer for securitized pools
holding over $5.9 billion (Face Value) of loans, $772.6 million (Face Value) of
which had been assigned to the Company for resolution in its capacity as Special
Servicer. The Company believes that its willingness to purchase participating
interests in the delinquent or non-performing portion of a securitized portfolio
provides the Company a significant competitive advantage in pursuing Master/Full
and Special Servicer contracts.
COMMERCIAL MORTGAGE BANKING BUSINESS
General. The Company performs a wide range of commercial mortgage banking
services, including originating, underwriting, placement, selling and servicing
commercial real estate loans through its Holliday
S-30
<PAGE> 31
Fenoglio, ACC and AMRESCO Services commercial mortgage banking units. For the
year ended December 31, 1995 and the three month period ended March 31, 1996,
$26.6 million (24.1%) and $9.4 million (25.4%), respectively, of the Company's
gross revenues were attributable to the Company's commercial mortgage banking
business.
The Company believes that the commercial real estate mortgage banking
business offers significant growth opportunities. There are an estimated $1.0
trillion of commercial real estate mortgages outstanding within the United
States and the Company estimates that $125.0 billion to $150.0 billion in
commercial real estate mortgages are refinanced each year in addition to
mortgage financing of new construction. Originations of loans for new
construction projects are cyclical and are influenced by various factors
including interest rates, general economic conditions and demand patterns in
individual real estate markets. The commercial mortgage banking industry is
fragmented, composed primarily of small local or regional firms. The Company
anticipates that expensive technological demands, increasingly standardized
underwriting requirements, more demanding borrowers and lenders and the
emergence of a market for securitized commercial real estate mortgage pools will
likely push the commercial mortgage banking industry toward greater
consolidation. The Company believes that well-capitalized, full service,
nationwide mortgage banking firms offering a variety of mortgage banking and
loan management services will emerge from this consolidation. The Company's
objective is to improve its position as a major nationwide full service mortgage
banker to the commercial real estate industry. The Company intends to achieve
this goal through the internal development of its commercial mortgage banking
group and through strategic acquisitions of commercial mortgage bankers which
either serve key real estate markets in the United States or provide niche or
specialized services that enhance the Company's product line.
Commercial Mortgage Banking Business. As a leading full service commercial
mortgage broker and banker with offices in key markets throughout the United
States, the Company provides a wide range of real estate capital markets
services to owners and developers of the full range of commercial real estate
properties. The typical consumers of commercial real estate mortgage banking
services are both real estate developers and owners (as borrowers) and
investor/lenders (as funding sources). Due to the more specialized nature of
commercial mortgage lending and the smaller universe of lenders serving this
market (in each case relative to the residential mortgage market), borrowers
rely on commercial mortgage brokers and bankers to find competitive lenders, and
these lenders (particularly insurance companies and pension plans, which do not
generally have origination staffs located in multiple branches) rely on mortgage
brokers and bankers to source potential borrowers. Lenders generally include
banks, pension funds and insurance companies. In originating loans, Holliday
Fenoglio and ACC each work closely with both the borrower and potential lenders
from the time a loan prospect is first contacted, through the application and
proposal process and throughout the documentation of the loan to final funding.
Holliday Fenoglio and ACC each typically perform extensive due diligence and
market analysis for the lenders in this process.
Holliday Fenoglio was one of the largest commercial mortgage bankers in the
United States in 1995 (based on origination volume) and primarily serves
commercial real estate developers and owners by originating commercial real
estate loans. Holliday Fenoglio principally targets developers and owners of
higher-quality commercial and multi-family real estate properties. Holliday
Fenoglio services prospective borrowers through its own commission-based
mortgage bankers in its offices located in Atlanta, Boca Raton, Buffalo, Dallas,
Houston, New York City and Orlando. The loans originated by Holliday Fenoglio
generally are funded by institutional lenders, primarily insurance companies,
and by Conduit Purchasers, with Holliday Fenoglio retaining the Primary Servicer
rights on approximately 28% of such loans. The Company believes that Holliday
Fenoglio's relationship and credibility with its institutional lender network
provide the Company a competitive advantage in the commercial mortgage banking
industry.
ACC, which originated approximately $447.1 million of mortgages during
1995, and $64.2 million of mortgages during the three months ended March 31,
1996, is a mortgage banker that originates and underwrites commercial real
estate loans that are funded primarily by Conduit Purchasers. ACC, therefore,
makes certain representations and warranties concerning the loans it originates.
These representations cover title to the property, lien priority, environmental
reviews and certain other matters. ACC targets mortgage loans for commercial
real estate properties that are suitable for sale to Conduit Purchasers
accumulating loans
S-31
<PAGE> 32
for securitization programs. ACC serves its market directly through ACC's
offices located in Dallas, Miami, Washington, D.C. and Winston-Salem as well as
through a network of approximately 42 independent mortgage brokers located
throughout the United States. Through March 31, 1996, approximately 28.0% of the
loans underwritten by ACC were originated by Holliday Fenoglio, with Holliday
Fenoglio and ACC each receiving fees for their respective services.
The Company believes that it has certain additional significant advantages
in the commercial mortgage banking marketplace. First, through its relationships
with certain institutional investors, the Company is able to underwrite and sell
commercial mortgage loans, particularly in instances where the borrower needs
relatively quick access to funding for a particular project. Through a warehouse
credit facility arranged in early 1995, the Company is able to underwrite and
fund a loan and hold that loan for resale to a buyer. Second, because of the
Company's extensive experience in real estate markets, the Company believes it
can carefully evaluate the risks of such underwriting transactions in order to
minimize financial exposure to the Company in underwriting and/or warehousing a
loan.
In July 1995, ACC acquired CKSRS, whose primary business is the
origination, sale to Freddie Mac and servicing of multi-family apartment
mortgages in the state of Florida. Through CKSRS, the Company became a member of
the Freddie Mac multi-family seller/servicer program in Florida. Through this
acquisition, the Company will obtain access to a significant source of funding
for multi-family mortgages. The Company has expanded its Freddie Mac
authorization to operate in the states of North Carolina and South Carolina and
intends to expand into other states.
In January 1996, ACC was approved by Fannie Mae to participate in its
Delegated Underwriting and Servicing ("DUS") program. An approved DUS lender is
delegated the authority to approve, commit and close loans for multi-family
mortgages on a national basis with the assurance that Fannie Mae will purchase
the loans. In contrast to a "prior approval" lender, DUS lenders do not need to
obtain the approval of Fannie Mae prior to making the loan. In return for the
delegated authority to make loans and the subsequent purchase of such loans by
Fannie Mae, DUS lenders must maintain a significant capital base, and retain a
certain level of credit risk on the loans they make. The DUS lender takes first
loss risk up to 5% of the loan amount, and above 5% Fannie Mae and the DUS
lender share the loss, with the DUS lender's maximum loss capped at 20% of the
loan amount.
ACC is one of only 27 currently approved DUS lenders. While all DUS lenders
operate on a national basis, the Company believes that ten such lenders account
for the majority of DUS volume. The Company believes that ACC, as one of the few
DUS lenders, has certain competitive advantages in the multi-family mortgage
origination business. These advantages include the competitive pricing afforded
by Fannie Mae's position as the largest purchaser of housing related mortgages
in the nation and the ability to commit and close mortgages without the delay
and the accompanying market risks of such delay for an approval process by the
mortgage purchaser. For these reasons, the Company expects Freddie Mac and
Fannie Mae loan originations to become a significant part of its commercial
mortgage banking activities. Holliday Fenoglio is expected to be a significant
source of such loan originations.
The Company generally earns a fee of between 50 and 100 basis points of the
loan amount for originated or underwritten loans, plus certain additional
processing fees. From time to time, the Company also originates non-traditional
financing involving hybrid forms of debt, equity participations and other
creative financing structures. Fees for equity or joint venture structures are
typically higher.
S-32
<PAGE> 33
The table that follows reflects the loan origination activity and loan
origination and underwriting fee revenue for three months ended March 31, 1996
and the year ended December 31, 1995, respectively:
<TABLE>
<CAPTION>
FOR THE YEAR
FOR THE QUARTER ENDED ENDED
MARCH 31, 1996 DECEMBER 31, 1995
--------------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Originations:
Dollar volume..................................... $ 518.3 $ 2,573.4
Number of loans................................... 76 444
Origination and underwriting fees earned............ $ 4.1 $ 20.6
Number of offices................................... 11 11
</TABLE>
After the evaluation of a loan prospect and the project financing needs,
and depending upon the type of property involved and its location, the Company
approaches institutional lenders that the Company believes would be interested
in funding the loan. The Company has established relationships with over 200
institutional lenders that include insurance companies, pension plans and
Conduit Purchasers. In 1995, the Company placed 444 loans with over 79 different
lenders. Forty-three institutional lenders have retained the Company as their
respective exclusive or semi-exclusive loan originator in selected cities and
regions.
Commercial Loan Servicing Business. The Company serves as a Primary
Servicer for whole loans and as a Master/Full Servicer for securitized pools of
commercial mortgages through its AMRESCO Services unit. At March 31, 1996, the
Company acted as servicer with respect to approximately $10.4 billion of loans.
See "-- Asset Acquisition and Resolution Business -- Asset Management and
Resolution Services." The dominant users of commercial loan servicers are
mortgage-backed bond trusts and similar securitized asset-backed loan portfolios
made up of numerous passive investors. Other lenders often contract with the
originating mortgage banker or other third-party servicer to manage collection,
accounting and other activities with respect to the loan. The revenue stream
from servicing contracts on commercial mortgages is relatively predictable as
prepayment penalties in commercial mortgages discourage early loan payoffs, a
risk that is more significant to servicers of residential mortgage portfolios.
Primary Servicing involves collecting monthly mortgage payments,
maintaining escrow accounts for the payment of ad valorem taxes and insurance
premiums on behalf of borrowers, remitting payments of principal and interest
promptly to investors in the underlying mortgages, reporting to those investors
on financial transactions related to such mortgages and generally administering
the loans. The Primary Servicer also must cause properties to be inspected
periodically, determine the adequacy of insurance coverage on each property,
monitor delinquent accounts for payment and, in cases of extreme delinquency,
institute and complete either appropriate forbearance arrangements or
foreclosure proceedings on behalf of investors. Primary Servicer rates are
determined by a bidding and negotiating process. At March 31, 1996, the Face
Value of the Company's Primary Servicing portfolio totaled approximately $3.1
billion.
Master Servicing involves providing administrative and reporting services
to securitized pools of mortgage-backed securities. Typically, mortgages
underlying mortgage-backed securities are serviced by a number of Primary
Servicers. Under most master servicing arrangements, the Primary Servicers
retain principal responsibility for administering the mortgage loans and the
Master Servicer acts as an intermediary in overseeing the work of the Primary
Servicers, monitoring their compliance with the issuer's standards and
consolidating their respective periodic accounting reports for transmission to
the issuer of the related securities. The Company occasionally is designated as
the Full Servicer for a pool of mortgages, in which case the Company acts as
Master, Primary and Special Servicer for the pool. Master/Full Servicers are
typically paid fees based on the Face Value of loans under management, and the
compensation is determined by a bidding and negotiating process. At March 31,
1996, the Face Value of the Company's Master/Full Servicing portfolio totaled
approximately $7.3 billion. The average life of these securitized pools is
expected to be approximately eight years.
The market for servicing performing loan pools constitutes a much larger
potential market than the market for servicing non-performing and
under-performing assets. The Company believes that by gaining access to these
pools in a servicer capacity, opportunities exist for the Company to originate
loan refinancings
S-33
<PAGE> 34
as outstanding loans mature. In addition, the Company's ability to also act as
Special Servicer is a competitive advantage. The Company, therefore, has
targeted the market for performing loan management services as a growth area for
the Company. The Company has previously participated in this market as a Primary
Servicer of commercial real estate loans for loans originated by the Company's
mortgage banking unit and for loans owned by investor clients.
Special Situation Lending. The Company has teamed with a major Wall Street
investment bank to provide bridge financing to commercial real estate and
business borrowers for short-term financing or in situations where conventional
financing is unavailable. The Company will consider financing for asset
acquisitions and special use projects, "bridge" financing, bankruptcy and
post-bankruptcy financing, financings to accommodate discounted payoffs, debt
restructurings and "turnaround" situations, acquisitions of Asset Portfolios and
the acquisition of creditor positions in litigation or bankruptcy cases. These
loans are generally collateral-based, including commercial real estate,
machinery and equipment. Typically these loans have a term of six to 36 months
and provide higher interest rate opportunities than conventional loans. Through
March 31, 1996, the Company had arranged $45.7 million of such loans with the
Company funding $5.7 million of such loans and the investment bank funding the
balance.
RESIDENTIAL CAPITAL MARKETS
Through AMRESCO Residential, the Company purchases (in bulk from
independent originators), warehouses and securitizes or resells portfolios of
residential mortgages of borrowers who do not qualify for conventional loans or
whose borrowing needs are not met by traditional residential mortgage lenders.
The Company does not originate or service the loans contained in these
portfolios. Such borrowers may not satisfy the more rigid underwriting standards
of the traditional residential mortgage lending market for a number of reasons,
such as blemished credit histories (from past loan delinquencies or bankruptcy),
inability to provide income verification data or lack of established credit
history. The Company believes that this market is underserved by traditional
lenders. Therefore, there is less competition in this market and interest rates
are higher than on mortgage loans for more credit-worthy borrowers. The Company
believes that the higher interest rates offered by this market are attractive
even after discounting for the greater credit risk associated with such
borrowers. During 1996 through the date of this Supplemental Prospectus, AMRESCO
Residential has securitized approximately $800.0 million of mortgage portfolios.
To lead the Company's entry into this market, the Company hired an
experienced team of individuals from a major national consumer finance company.
This group managed their former employer's residential mortgage securitization
business. This group has estimated that between 1991 and 1995, it managed the
acquisition of over $2.0 billion of mortgage assets.
The Company pools the loans it purchases to create asset-backed securities
which it sells on a quarterly or more frequent basis, depending on the
availability of loans, profitability and other relevant factors. Securitization
is used by companies as a cost-competitive source of capital compared to
traditional corporate debt financing alternatives. The Company seeks to utilize
securitization structures that minimize the Company's capital requirements,
while still providing income to the Company. For example, the Company may sell
certificates for senior interests in a securitization, but retain subordinated
or interest-only certificates, some of which it may later elect to sell. The
Company then would have limited capital at risk, but would retain a portion of
the cash flow from the securitization. The Company also may seek to place
bundled residential mortgages through private securitization transactions such
as joint ventures with insurance companies and pension funds. The Company
utilizes the net proceeds from securitizations to purchase additional
residential mortgages and to pay down outstanding warehouse facilities. The
Company, through AMRESCO Residential, uses warehouse facilities with financial
institutions to finance its purchase of loans on a short-term basis pending
securitization. At June 28, 1996, the Company had an aggregate borrowing
capacity of $900.0 million under two primary warehouse facilities of which
$722.9 million was available. See "Description of Other Indebtedness."
In its securitizations, the Company transfers residential mortgages to
newly-formed securitization trusts, which issue one or more classes of
asset-backed securities. The asset-backed securities are simultaneously sold to
investors (except for certain subordinated classes of securities which may be
retained by the Company and which are included in "Asset Backed and Other
Securities" in the Company's Consolidated Financial
S-34
<PAGE> 35
Statements included in the Company's 1995 Form 10-K and incorporated by
reference in the Prospectus). Each month, collections of principal and interest
on the residential mortgages are used by the trustee to pay the holders of the
related asset-backed securities, to build overcollateralization by using excess
interest to pay down principal on the securities and to pay expenses, with any
remaining cash flows paid to the Company.
The Company arranges for credit enhancement to achieve a desired credit
rating on the asset-backed securities issued. The credit enhancement generally
involves four primary components: (i) a financial guaranty insurance policy;
(ii) servicer advances of scheduled interest and principal on delinquent loans;
(iii) overcollateralization of the securities and (iv) use of excess interest
spread to absorb losses.
The financial guarantee insurance policies used to date have been issued by
Financial Security Assurance, Inc. ("FSA") and MBIA Insurance Corporation
("MBIA"), which insure payments of principal and interest due on rated
asset-backed securities. Both FSA and MBIA and their respective subsidiaries
principally insure publicly and privately offered, asset-backed, collateralized
and municipal securities. The Company typically retains the unrated, uninsured
asset-backed securities, but has and may in the future elect to sell a portion
of such certificates to generate additional borrowing capacity under the
Revolving Loan Agreement and reduce the Company's capital exposure with respect
to such retained certificates.
The Company uses third party servicers in its securitizations that are
required to advance to the securitization trust each month scheduled principal
and interest due on delinquent loans. The Company limits it servicer selection
to those companies sufficiently capitalized to meet these advance obligations.
The advancement of scheduled principal and interest contributes to the timely
payment of principal and interest on the securities.
A significant portion of the credit enhancement for the securities results
from the use of interest collected on the loans that exceeds the sum of the
interest payable to the holders of the asset-backed securities, the monthly
servicing fees and other amounts (in total, the excess spread) to pay down the
principal on the asset-backed securities. Use of the excess spread in this
manner causes the security principal balance to decline more quickly than the
principal balance of the underlying collateral, thus causing
overcollateralization. This overcollateralization provides not only additional
principal protection to the bondholders, but also a higher level of assets
earning interest relative to the level of senior securities on which interest
must be paid. Initial and ongoing target levels of overcollateralization must be
achieved and maintained on each securitization.
Once target levels of overcollateralization are achieved, the excess spread
is used on a monthly basis to absorb any losses and maintain ongoing target
overcollateralization levels. If the excess spread is insufficient to absorb
losses in a given period, a draw is required under the financial guarantee
insurance policy. Excess spread in future periods must be used to repay any such
draws. Excess spread after these obligations are met are passed through the
securitization trust to the Company.
Each insured securitization trust has certain portfolio performance tests
relating to levels of delinquency, defaults and net losses on the loans in such
trust. If any of these levels are exceeded, the amount required to be used for
additional overcollateralization and not passed through to the Company may be
increased.
INSTITUTIONAL INVESTMENT ADVISORY SERVICES
The Company believes that a market exists for quality real estate advisory
services to pension plans and other institutional investors in commercial real
estate. The Company believes that through the targeted hiring of high quality
personnel with proven track records and the purchase of advisory contracts from
other advisors, the Company can become a major provider of real estate advisory
services to institutional real estate investors, such as pension plans. The
Company's acquisition of substantially all of the advisory contracts and the
hiring of pension advisory personnel of Acacia was the first step in the
implementation of this strategy. The Company principally provides investment
advice to various institutional investors (primarily pension funds) seeking to
invest a portion of their funds in real estate. The investors establish certain
investment parameters with the Company (e.g., amount of funds available for
investment, type of property, geographic mix, form of investment (loan,
partnership, direct ownership), target rate of return and investment term). The
Company then seeks investment opportunities it believes meet the investors'
parameters. The investors exercise varying degrees of control over the Company's
investment decisions. Depending on the amount of discretion granted
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by the client, the Company also will make a recommendation, or the final
decision, concerning whether to sell a particular property and will direct the
work necessary to complete the sale. Although the Company is paid acquisition
and disposition fees by some of its clients, its principal source of revenue is
asset management fees, which are based on the cash flow of the investments under
management or are negotiated at the time of the client's investment in a
property.
COMPETITION
The Company's competition varies by business line and geographic market.
Generally, competition within each of the business lines within which the
Company competes is fragmented, with national, local and regional competitors,
none of which dominates a particular business line. Certain of the Company's
competitors within each of its business lines are larger and have greater
financial resources than the Company.
The Company believes that its ability to acquire Asset Portfolios for its
own account will be important to its future growth. Recently, the Company has
been encountering increasing competition in the market for Asset Portfolios
which could cause the Company to experience decreasing profit margins in this
business line in order to remain a competitive bidder for Asset Portfolios.
Asset Portfolio acquisitions also require significant capital. Certain of the
Company's larger, national competitors have access to greater financial
resources and lower costs of capital.
The Company also encounters significant competition in its other business
lines. The commercial mortgage banking business is highly fragmented with
certain large national competitors and significant localized competition. In
addition, within the commercial loan origination and residential mortgage
securitization business access to, and the cost of, capital are critical to the
Company's ability to compete. The Company must compete with numerous
competitors, many of which have superior access to capital sources and can
arrange or obtain lower cost capital for customers.
LEGAL PROCEEDINGS
The Company is involved from time to time in various legal proceedings
arising in the ordinary course of business. In connection with the Company's
loan servicing, asset management and resolution activities, the Company is
indemnified to varying degrees by the party on whose behalf the Company is
acting. The Company also maintains insurance that management believes is
adequate for the Company's operations. None of the legal proceedings in which
the Company is currently involved, either individually or in the aggregate (and
after consideration of available indemnities and insurance), is expected to have
a material adverse effect on the Company's business or financial condition.
EMPLOYEES
At March 31, 1996, the Company and its subsidiaries employed 812 persons.
338 persons were employed in the Company's asset management and resolution
group, 311 in the Company's commercial real estate mortgage banking and services
group, 11 in its residential capital markets, 23 in its pension advisory
services business and 129 in general administration. The Company believes that
its employee relations are generally good.
PROPERTIES
The Company leases approximately 65,000 square feet in the Woodall Rodgers
Tower in Dallas, Texas for its centralized corporate functions including
executive, business development and marketing, accounting, legal, human
resources and support. The lease provides for annual rent of $693,000. The
Company has exercised its right to terminate this lease in August 1996. The
Company also leases approximately 197,000 square feet of space for an operations
office and branch offices pursuant to leases with varying terms.
The Company has entered into a lease covering approximately 125,000 square
feet in the North Tower of the Plaza of the Americas, Dallas, Texas. This lease
has an initial termination date of October 31, 2006 and has an initial annual
base rent of approximately $1.5 million. The Company plans to consolidate
substantially all of its Dallas, Texas operations in such space commencing in
August 1996.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and a brief account of the business
experience of each person who is a director or executive officer of the Company.
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY AND PRINCIPAL
NAME (AGE) OCCUPATION DURING THE PAST FIVE YEARS
- ------------------------- ------------------------------------------------------------------
<S> <C>
Robert L. Adair III Mr. Adair serves as director, President and Chief Operating
(52) Officer of the Company (since December 1993). Mr. Adair previously
served as Executive Vice President and director of BEI (1989 to
December 1993). His term as a director expires in 1997.
L. Keith Blackwell Mr. Blackwell serves as Vice President (since February 1996),
(55) General Counsel and Secretary (since January 1994) of the Company
and previously served as General Counsel and Secretary of Holdings
(December 1993). Mr. Blackwell previously was an investor and
consultant (May 1992 to December 1993) and served as Executive
Vice President, General Counsel and Secretary of First Gibraltar
Bank, FSB, a Federal savings bank (December 1988 to May 1992).
James P. Cotton, Jr. Mr. Cotton serves as a director of the Company (since December
(57) 1993). His term expires in 1998. Mr. Cotton previously served as
Chairman of the Board of BEI (1986 to December 1993). Mr. Cotton
also serves as Chairman of the Board and Chairman of the Executive
Committee of USBA Holdings, Ltd., a provider of products and
services to financial institutions (since 1990).
Richard L. Cravey Mr. Cravey serves as a director of the Company. His term expires
(51) in 1999. Mr. Cravey previously served in the following positions:
Chairman of the Board and Chief Executive Officer of the Company
(December 1993 to May 1994) and Chairman of the Board of Holdings
(1992 to December 1993). Mr. Cravey also holds the following
positions: Founder and Managing Director of Cravey, Green & Wahlen
Incorporated, a private risk capital investment firm (since 1985),
its investment management affiliate, CGW Southeast Management
Company (since 1991) and its affiliates, CGW Southeast I, Inc.
(the general partner of CGW Southeast Partners I, L.P.) and CGW
Southeast II, Inc. (the general partner of CGW Southeast Partners
II, L.P.) (since 1991); Director of Commercial Bancorp of Georgia
(since 1988); and Director of Cameron Ashley Inc., a national
distributor of home building products (since 1994).
Barry L. Edwards Mr. Edwards serves as Executive Vice President and Chief Financial
(49) Officer of the Company (since November 1994). Mr. Edwards
previously served as Vice President and Treasurer of Liberty
Corporation, an insurance holding company (1979 to November 1994).
Gerald E. Eickhoff Mr. Eickhoff serves as a director of the Company. His term expires
(49) in 1999. Mr. Eickhoff also is a private investor (since December
1993). He previously served as President, Chief Executive Officer
and director of BEI (1986 to December 1993).
Harold E. Holliday, Jr. Mr. Holliday serves as President -- Commercial Mortgage Banking of
(48) the Company (since February 1996). He previously served as
Chairman of the Board and Chief Executive Officer of Holliday
Fenoglio (August 1994 to February 1996). Mr. Holliday previously
served as President of Holliday, Fenoglio, Dockerty & Gibson,
Inc., a mortgage banking company (for more than five years prior
to August 1994).
Amy J. Jorgensen Ms. Jorgensen serves as a director of the Company. Her term
(43) expires in 1998. Ms. Jorgensen also serves as Managing Director of
Greenbriar Associates LLC, which provides advice and executes
transactions relating to real estate assets and companies (since
1995). Ms. Jorgensen previously served as President of The
Jorgensen Company, a consultant for real estate strategy and
finance (April 1992 to September 1995) and as Managing Director in
the Real Estate Department of Morgan Stanley & Co. Incorporated
(1986 to February 1992).
</TABLE>
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<PAGE> 38
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY AND PRINCIPAL
NAME (AGE) OCCUPATION DURING THE PAST FIVE YEARS
- ------------------------- ------------------------------------------------------------------
<S> <C>
Robert H. Lutz, Jr. Mr. Lutz serves as Chairman of the Board and Chief Executive
(46) Officer of the Company (since May 1994). Mr. Lutz previously
served as President of Allegiance Realty, a real estate management
company (November 1991 to May 1994); Executive Vice President of
Cousins Properties (February 1990 to October 1991) and Director of
Bristol Hotel Company (since 1995). His term as a director expires
in 1999.
Michael N. Maberry Mr. Maberry serves as President of ACC (since April 1994). Mr.
(53) Maberry previously was a Shareholder of the law firm of Winstead,
Sechrest & Minick P.C. (April 1989 to April 1994).
John J. McDonough Mr. McDonough serves as a director of the Company. His term
(60) expires in 1997. Mr. McDonough also serves or has served in the
following positions: President and Chief Executive Officer of
McDonough Capital Company LLC, a company through which Mr.
McDonough conducts personal and family investments (since February
1995); Chairman of the Board of SoftNet Systems, Inc., a company
that develops, markets, installs and services information and
document management systems (since June 1995); Vice Chairman and
Chief Executive Officer (1993 to February 1995) of DENTSPLY
International, Inc., a manufacturer of dental supplies, dental
equipment and medical x-ray products; Chairman of the Board (1992
to 1993), Director (1983 to 1992), Chief Executive Officer (1983
to 1993) and President (1983 to 1991) of GENDEX Corporation, a
manufacturer of dental equipment and medical x-ray products, which
merged with DENTSPLY in June 1993; Director (since 1992) of Newell
Co., a New York Stock Exchange-listed manufacturer of products for
the do-it-yourself hardware and housewares market; and Director of
AmNet Systems, Inc., a company that develops, markets and installs
electronic information and document management for the health care
industry (since 1995).
Scott J. Reading Mr. Reading serves as President of AMRESCO Residential (since
(52) August 1995). Mr. Reading previously served as Managing Director
of Household Financial Services, Inc., a division of Household
International, Inc., a diversified financial services company
(June 1991 to August 1995).
Bruce W. Schnitzer Mr. Schnitzer serves as a director of the Company. His term
(52) expires in 1997. Mr. Schnitzer previously served as Vice Chairman
of the Board of BEI (1986 to December 1993). Mr. Schnitzer also
serves as Chairman of Wand Partners Inc., a private investment
firm (since 1987); Director of Life Partners Group, Inc., a life
insurance holding company (since 1990); Director of Penncorp
Financial Group, Inc. (since 1990); Director of Chartwell Re
Corporation (since 1992); Director of Nestor, Inc. (since 1994)
and Director of New London Capital PLC (since 1993).
Edwin A. Wahlen, Jr. Mr. Wahlen serves as a director of the Company (since May 1996).
(48) His term as director expires in 1998. Mr. Wahlen also holds the
following positions: Founder and Managing Director of Cravey,
Green & Wahlen Incorporated, a private risk capital investment
firm (since 1985), its investment management affiliate, CGW
Southeast Management Company (since 1991) and its affiliates, CGW
Southeast I, Inc. (the general partner of CGW Southeast Partners
I, L.P.) and CGW Southeast II, Inc. (the general partner of CGW
Southeast Partners II, L.P.) (since 1991).
</TABLE>
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<PAGE> 39
DESCRIPTION OF THE NOTES
The Notes are to be issued under an Indenture (the "Senior Indenture"),
dated as of July 1, 1996 between the Company and Comerica Bank, as trustee (the
"Trustee"), and pursuant to an Officers' Certificate and Company Order to be
dated as of July 19, 1996, establishing the terms of the Notes (the "Company
Order") (the Senior Indenture, as supplemented by the Company Order, is
sometimes referred to herein as the "Note Indenture"), the form of which Senior
Indenture is filed as an exhibit to the Registration Statement of which this
Prospectus Supplement and the Prospectus are a part. The following description
of the particular terms of the Notes offered hereby supplements, and to the
extent inconsistent therewith or contradictory thereto, modifies the description
of the general terms and provisions of the Senior Debt Securities set forth in
the accompanying Prospectus under the caption "Description of Securities -- Debt
Securities," to which description reference is hereby made.
GENERAL
The Notes offered by this Prospectus Supplement will be limited to $57.5
million aggregate principal amount. The Notes will be issued in fully registered
form only, without coupons, in denominations of $1,000 and any integral multiple
thereof. Interest on the Notes will accrue from the date of original issuance
and will be payable on the 15th day of each month, or if any such day is not a
business day, on the next succeeding business day (each an "Interest Payment
Date"), beginning on the Interest Payment Date specified on the cover page of
this Prospectus Supplement. The Notes will bear interest at the rate set forth
on the cover page of this Prospectus Supplement and will be payable to the
person in whose name the Note is registered at close of business on the 10th day
of the month (whether or not a business day) in which such payment is to be
made. The Notes will mature on July 1, 1999, and may not be redeemed at the
option of the Company prior to that time. Except as set forth below under
"-- Conditional Repayment Option," the Company is not required to make mandatory
redemption or sinking fund payments with respect to the Notes. See
"-- Conditional Repayment Option."
Principal and interest will be payable at an office or agency to be
maintained by the Company in New York, New York (through DTC) and Detroit,
Michigan in same day funds except that, at the option of the Company, interest
may be paid by check mailed to the person entitled thereto. So long as The
Depository Trust Company ("DTC") or its nominee is the sole registered owner and
the sole holder of the Notes, such payments will be made by the Trustee directly
to DTC or its nominee. The Notes may be presented for registration of transfer
or exchange at an office or agency to be maintained by the Company in New York,
New York (through DTC) and Detroit, Michigan. The Notes will not be secured by
the assets of the Company or any of its subsidiaries or Affiliates or otherwise.
In addition, the rights of the Company to participate in any distribution of
assets of any subsidiary, including Holliday Fenoglio, ACC, AMRESCO Advisors,
Inc. and AMRESCO Residential, upon its liquidation or reorganization or
otherwise (and thus the ability of the holders of the Notes to benefit
indirectly from such distribution) are subject to the prior claims of creditors
of the subsidiary.
So long as the Company is a reporting company under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), the Company will furnish to
holders of the Notes annual reports of the Company containing audited
consolidated financial statements and interim reports with unaudited
consolidated summary financial data on a quarterly basis. If the Company ceases
to be a reporting company under the Exchange Act, the Company will furnish to
holders of the Notes annual audited consolidated financial statements and
quarterly unaudited consolidated summary financial statements.
CONDITIONAL REPAYMENT OPTION
The Note Indenture provides that each holder shall have the right to
require the Company to repurchase the Notes at a purchase price equal to 100% of
the principal amount, plus accrued and unpaid interest, upon the occurrence of
any event requiring that the Company repurchase, or make an offer to repurchase,
any Subordinated Debt or Senior Debt other than the Notes. In the event such a
requirement is effected with respect to Subordinated Debt, the holders of the
Notes requiring the Company to repurchase Notes must be
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<PAGE> 40
paid in full prior to any payment to the holders of Subordinated Debt. In the
event such a requirement is effected with respect to Senior Debt, the holders of
the Notes requiring the Company to repurchase Notes must be paid concurrently
with the holders of the pari passu Senior Debt. The Convertible Subordinated
Debenture Indenture contains such a repurchase requirement (i) in the event of
any Fundamental Change (as defined in the Convertible Subordinated Debenture
Indenture) or (ii) if the Company's Net Worth (as defined in the Convertible
Subordinated Debenture Indenture) at the end of each of any two consecutive
fiscal quarters is less than the Minimum Net Worth (defined in the Convertible
Subordinated Debenture Indenture as approximately $141.0 million plus the net
proceeds to the Company from any offering of Common Stock by the Company
subsequent to the date thereof). See "Description of Other
Indebtedness -- Convertible Subordinated Debentures."
COVENANTS
The following covenants will be applicable to the Notes, but are not
applicable to other series of Senior Debt Securities or Subordinated Debt
Securities unless specifically made applicable thereto. Except as set forth
under "-- Conditional Repayment Option," the Note Indenture does not contain
provisions that permit the holders of the Notes to require that the Company
repurchase or redeem such securities in the event of a takeover,
recapitalization or similar restructuring, nor does the Note Indenture contain
covenants specifically designed to protect holders of the Notes in the event of
a highly-leveraged transaction involving the Company.
Restrictions on Additional Senior Recourse Debt. The Note Indenture limits
the amount of Senior Recourse Debt of the Company on a consolidated basis. The
Company may not create, incur, assume, guarantee or otherwise be liable for any
Senior Recourse Debt if, immediately after giving effect thereto, the aggregate
amount of Senior Recourse Debt outstanding would exceed 450% of the Company's
Consolidated Net Worth. See "-- Certain Definitions Applicable to the Notes." As
of March 31, 1996, the Company's Consolidated Net Worth was approximately $166.2
million. As of March 31, 1996, and after giving effect to the sale of $57.5
million principal amount of the Notes offered hereby, the Company could have
incurred approximately $647.0 million of additional Senior Recourse Debt under
this covenant.
Restrictions on Dividends, Redemptions and Other Payments. The Note
Indenture provides that the Company cannot (i) declare or pay any dividend,
either in cash or property, on any shares of its capital stock (except dividends
or other distributions payable solely in shares of capital stock of the
Company), (ii) purchase, redeem or retire any shares of its capital stock or any
warrants, rights or options to purchase or acquire any shares of its capital
stock or (iii) make any other payment or distribution, either directly or
indirectly through any subsidiary, in respect of its capital stock (such
dividends, purchases, redemptions, retirements, payments and distributions being
herein collectively called "Restricted Payments") if, after giving effect
thereto,
(1) an Event of Default (as defined in the Note Indenture) would have
occurred; or
(2) (A) the sum of (i) such Restricted Payments plus (ii) the
aggregate amount of all Restricted Payments made during the period after
December 31, 1995 would exceed (B) the sum of (i) $10 million plus (ii) 50%
of the Company's Consolidated Net Income for each fiscal year commencing
subsequent to December 31, 1995 (with 100% reduction for a loss in any
fiscal year), plus (iii) the cumulative net proceeds received by the
Company from the issuance or sale after December 31, 1995 of capital stock
of the Company (including in such proceeds, the face amount of
indebtedness, including the Convertible Subordinated Debentures, that has
been converted to Common Stock after December 31, 1995).
Notwithstanding the foregoing, the Company may make a previously-declared
Restricted Payment if the declaration of such Restricted Payment was permitted
when made. The amount of any Restricted Payment payable in property shall be
deemed to be the fair market value of such property as determined by the Board
of Directors of the Company.
Limitations on Restricting Subsidiary Dividends. The Note Indenture
provides that neither the Company nor its subsidiaries may create or otherwise
cause to become effective any consensual encumbrance or restriction of any kind
on the ability of any subsidiary of the Company to (i) pay dividends or make any
other
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<PAGE> 41
distribution on its capital stock, (ii) pay any debt owed to the Company or any
other subsidiary of the Company or (iii) make loans, advances or capital
contributions to the Company or any other subsidiary of the Company except in
certain specified circumstances.
Limitation on Transactions With Affiliates. Neither the Company nor any of
its Material Subsidiaries may enter into any transactions with any Affiliate on
terms and conditions less favorable to the Company or such Material Subsidiary,
as the case may be, than would be available at such time in a comparable
transaction in arm's length dealings with an unrelated person as determined by
the Company's Board of Directors. These provisions do not apply to Restricted
Payments otherwise permitted under the Note Indenture, fees and compensation
paid to, and indemnity provided on behalf of, officers, directors, employees or
consultants of the Company or any subsidiary, as determined by the Company's
Board of Directors or its senior management in the exercise of their reasonable
business judgment or payments for goods and services purchased in the ordinary
course of business on an arm's length basis.
CERTAIN DEFINITIONS
In addition to those terms already defined in the Senior Indenture, the
following additional terms shall have the meanings given below when used in
connection with the Notes.
"Consolidated Net Worth" is defined as the excess, as determined in
accordance with generally accepted accounting principles, after appropriate
deduction for minority interests in the net worth of consolidated subsidiaries,
of the Company's assets over its liabilities.
"Funded Debt" is defined as any of the following obligations of the Company
or any subsidiary which by its terms matures at or is extendable or renewable at
the sole option of the obligor without requiring the consent of the obligee to a
date more than 360 days after the date of the creation or incurrence of such
obligation: (i) any obligations, contingent or otherwise, for borrowed money or
for the deferred purchase price of property, assets, securities or services
(including, without limitation, any interest accruing subsequent to an event of
default); (ii) all obligations (including the Notes) evidenced by bonds, notes,
debentures or similar instruments; (iii) all indebtedness created or arising
under any conditional sale or other title retention agreement with respect to
property acquired (even though the rights and remedies of the seller or lender
under such agreement in the event of default are limited to repossession or sale
of such property), except any such obligation that constitutes a trade payable
and an accrued liability arising in the ordinary course of business, if and to
the extent any of the foregoing indebtedness would appear as a liability upon a
balance sheet prepared in accordance with generally accepted accounting
principles; (iv) all Capital Lease Obligations; (v) liabilities of the Company
actually due and payable under banker's acceptances or letters of credit; (vi)
all indebtedness of the type referred to in clause (i), (ii), (iii), (iv) or (v)
above secured by (or for which the holder of such indebtedness has an existing
right, contingent or otherwise, to be secured by) any lien upon or security
interest in property of the Company or any subsidiary (including, without
limitation, accounts and contract rights), even though the Company or any
Subsidiary has not assumed or become liable for the payment of such
indebtedness; and (vii) any guarantee or endorsement (other than for collection
or deposit in the ordinary course of business) or discount with recourse of, or
other agreement, contingent or otherwise, to purchase, repurchase or otherwise
acquire, to supply or advance funds or become liable with respect to, any
indebtedness or any obligation of the type referred to in any of the foregoing
clauses (i) through (vi), regardless of whether such obligation would appear on
a balance sheet.
"Material Subsidiaries" is defined to include Holliday Fenoglio, AMRESCO
Management, Inc., AMRESCO Residential, AMRESCO Advisors, Inc., ACC, AMRESCO New
England, Inc., Oak Cliff Financial, Inc. and any other subsidiary of the Company
whose assets or revenues comprise at least five percent of the assets or
revenues of the Company and its subsidiaries on a consolidated basis as of the
end of, or for the, Company's most recently completed fiscal quarter, as
determined from time to time.
"Senior Debt" is defined as any Funded Debt, whether outstanding on the
date of execution of the Note Indenture or thereafter created or incurred,
unless it is provided in the appropriate instrument that such Funded Debt is
subordinated to any other Funded Debt (including the Notes).
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<PAGE> 42
"Senior Recourse Debt" is defined as Senior Debt minus any Funded Debt of
the Company or any of its subsidiaries that is (A)(i) specifically advanced to
finance the acquisition of assets classified on the Company's balance sheet as
"assets held for sale" and (ii) either (a) secured only by the assets to which
such indebtedness relates without recourse to the Company or any of its
subsidiaries or (b) issued under a loan agreement that requires each advance to
be repaid upon sale of the assets to which such advance relates within no more
than one year from the date of such advance or (B) advanced to a subsidiary or
group of subsidiaries formed for the sole purpose of acquiring or holding a
portfolio of assets (i) against which a loan is obtained that is made without
recourse to, and with no cross-collateralization against the assets of, the
Company or any other subsidiary of the Company and (ii) upon complete or partial
liquidation of which the loan must be correspondingly completely or partially
repaid, as the case may be.
"Subordinated Debt" is defined as all Funded Debt except Senior Debt.
BOOK-ENTRY
The Notes will be issued initially as book-entry notes in the form of one
fully registered global security which will be deposited with, or on behalf of,
DTC, and registered in the name of DTC's nominee. Beneficial interests in the
Notes will be shown on, and transfers thereof will be effected only through,
records maintained by DTC and its participants. Except as described in the
accompanying Prospectus, Notes in definitive certificated form will not be
issued.
CONCERNING THE TRUSTEE
Comerica Bank is Trustee under the Note Indenture and is also the Note
Registrar. Comerica Bank-Texas, an affiliate of Comerica Bank, is a lender under
the Revolving Loan Agreement.
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<PAGE> 43
DESCRIPTION OF OTHER INDEBTEDNESS
The following summaries of the principal terms of certain credit
facilities, the Senior Subordinated Note Indenture and the Convertible
Subordinated Debenture Indenture do not purport to be complete and are subject
to the detailed provisions of, and qualified in their entirety by reference to,
such agreements. The Company will provide without charge to each person to whom
a copy of this Prospectus Supplement is delivered, upon the written or oral
request of such person, a copy of any agreement described in this section. See
"Incorporation of Certain Documents by Reference" in the accompanying
Prospectus.
REVOLVING LOAN AGREEMENT
General. Effective April 25, 1996, the Company and certain of its
subsidiaries entered into the First Amended and Restated Revolving Loan
Agreement with NationsBank of Texas, as agent (the "Agent"), and NationsBank of
Texas and other lending institutions party thereto, as lenders (collectively,
the "Banks"), which replaced the Company's previous revolving line of credit
with NationsBank of Texas as agent bank. A total of $63.2 million was
outstanding under this facility at June 28, 1996. At June 28, 1996, the Company
had outstanding $1.2 million in face amount of letters of credit pursuant to
such facility.
The Revolving Loan Agreement has a maximum borrowing base of $200.0
million. At June 28, 1996, the Banks' maximum commitment under the Revolving
Loan Agreement was limited to an aggregate of $185.0 million, subject to
borrowing base limitations. The additional $15.0 million would become available
to the Company upon the participation by additional financial institutions in
the syndicate for the loan and upon an increase in the Company's borrowing base
under this agreement. There can be no assurance that such events will occur. The
borrowing base is determined from time to time based upon a formula applied to
performing loans, non-performing loans and other investments and assets of the
Company. The borrowing base for June 1996 was set at $88.1 million. Advances
under the Revolving Loan Agreement may be used for (i) general working capital
purposes, (ii) acquisitions of equity interests in other persons, (iii) certain
permitted investments, (iv) other business needs approved by the Banks, (v)
acquisitions of Asset Portfolios, (vi) acquisitions of entities for the purpose
of resolving Asset Portfolios owned by such entities, and (vii) other lending
activities conducted by the Company. There are also sublimits of $10.0 million
for letters of credit and $50.0 million for a commercial paper program. The
facility permits the Company to make draws denominated in foreign currencies to
facilitate the Company's foreign Asset Portfolio management and investment
activities.
Ranking. Indebtedness under the Revolving Loan Agreement constitutes Senior
Debt.
Security. Indebtedness under the Revolving Loan Agreement is secured by
substantially all the assets of the Company not pledged under other facilities,
including stock of a majority of the Company's subsidiaries.
Interest. Indebtedness under the Revolving Loan Agreement generally bears
interest at a rate based (at the Company's option) upon the lesser of (i) the
Variable Rate (defined as the greater of the Agent's prime rate, as announced
from time to time, and the Federal Funds Rate (as defined in the Revolving Loan
Agreement) plus .50%) or (ii) the Adjusted LIBOR Rate (as defined in the
Revolving Loan Agreement). All advances funded in foreign currencies bear
interest at the Alternate Currency Rate (as defined in the Revolving Loan
Agreement).
Maturity. The Revolving Loan Agreement will mature on May 31, 1998.
Fees. The Company paid to the Banks, upon execution and delivery of the
Revolving Loan Agreement, an aggregate participation fee equal to $177,500. The
Company also will be required to pay to the Banks a commitment fee of 25 basis
points per annum, payable in arrears on a quarterly basis, on the committed
undrawn amount of the Revolving Loan Agreement. In addition, the Company will be
required to pay to the Agent (for the account of each Bank) certain fees in
respect of letters of credit issued under the Revolving Loan Agreement. The
Company also will pay to the Agent, or an affiliate thereof, certain other fees
for the Agent's role in structuring and administering the Revolving Loan
Agreement.
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Conditions to Funding Extensions of Credit. The obligation of the Banks to
make loans or extend letters of credit will be subject to the satisfaction of
certain customary conditions, including, without limitation, the absence of any
default under the Revolving Loan Agreement and all representations and
warranties under the Revolving Loan Agreement being true and correct in all
material respects.
Covenants. The Revolving Loan Agreement requires the Company to meet
certain financial tests, including minimum consolidated tangible net worth,
maximum consolidated funded debt to consolidated capitalization ratio, minimum
fixed charge coverage ratio, minimum interest coverage ratio and maximum senior
consolidated funded debt to consolidated EBITDA ratio. The Revolving Loan
Agreement contains covenants that, among other things, will limit the incurrence
of additional indebtedness, investments, asset sales, loans to stockholders,
dividends, transactions with affiliates, acquisitions, mergers and
consolidations, liens and encumbrances and other matters customarily restricted
in such agreements. The Revolving Loan Agreement also contains additional
covenants that require the Company to maintain its properties and those of its
subsidiaries (including corporate franchises), together with insurance thereon,
to provide certain information to the Agent, including financial statements,
notices and reports, to permit inspections of the books and records of the
Company and its subsidiaries by the Agent, to comply with applicable laws,
including environmental laws and ERISA and to pay taxes.
Events of Default. The Revolving Loan Agreement contains customary events
of default, including payment defaults, covenant defaults (subject to certain
cure periods), breaches of representations and warranties, cross-defaults to
certain other indebtedness, certain events of bankruptcy and insolvency,
judgment defaults in excess of $500,000, failure of any guaranty or security
agreement supporting the Revolving Loan Agreement to be in full force and effect
and change of control of the Company.
Indemnification. Under the Revolving Loan Agreement, the Company has agreed
to indemnify the Agent and the Banks from and against any and all liabilities,
losses, damages, costs and expenses of any kind (including, without limitation,
reasonable fees and disbursements of counsel for Agent and the Banks) that may
be incurred by Agent or any Bank relating to or arising out of the Revolving
Loan Agreement, provided that the Company is not liable for any such
liabilities, losses, damages, costs or expenses resulting from such indemnified
party's own gross negligence or willful misconduct. In addition, the Company has
agreed to indemnify the Agent and the Banks against any and all present and
future claims related to tax payments (excluding income taxes of the Agent and
any Bank) in connection with the loans made under the Revolving Loan Agreement.
ACC WAREHOUSE FACILITIES
NATIONSBANK
General. On April 28, 1995, ACC entered into the $25.0 million NationsBank
Warehouse Facility, which ACC uses to finance the origination and warehousing of
certain mortgage loans. See "Business -- Commercial Mortgage Banking Business."
The NationsBank Warehouse Facility has been amended twice, effective September
30, 1995 and April 29, 1996, respectively. The Company has guaranteed certain of
ACC's obligations under the NationsBank Warehouse Facility. A total of $9.0
million and $2.8 million was outstanding under the NationsBank Warehouse
Facility at December 31, 1995 and March 31, 1996, respectively.
Ranking. Indebtedness under the NationsBank Warehouse Facility constitutes
Senior Debt.
Security. ACC's indebtedness under the NationsBank Warehouse Facility is
secured by all mortgage loans originated by ACC using funds obtained under the
NationsBank Warehouse Facility and related collection accounts.
Interest. Indebtedness under the NationsBank Warehouse Facility generally
bears interest at a rate based (at ACC's option) upon either (i) the prime rate
established by NationsBank of Texas, as announced from time to time or (ii) the
Adjusted LIBOR Rate (as defined in the NationsBank Warehouse Facility) plus
1.65% or 2% based upon certain enumerated factors.
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Maturity. The original maturity date of the NationsBank Warehouse Facility
is January 25, 1997, subject to certain limitations and short extensions. Under
certain circumstances, ACC may extend the maturity date to January 25, 1998.
Conditions to Extensions of Credit. The obligation of NationsBank of Texas
to make loans to ACC under the NationsBank Warehouse Facility is subject to
certain customary conditions including, without limitation, the delivery of
certain documents, instruments and applications by ACC, approval by NationsBank
of Texas of the mortgage loan to be originated by ACC, the absence of any
default under the NationsBank Warehouse Facility and all representations and
warranties under the NationsBank Warehouse Facility being true and correct.
Covenants. The NationsBank Warehouse Facility requires ACC to meet certain
financial tests, including minimum liquidity and minimum tangible net worth. The
NationsBank Warehouse Facility also contains covenants that, among other things,
limit the incurrence of additional indebtedness, investments, asset sales,
distributions, transactions with affiliates, mergers and consolidations, liens
and encumbrances and other matters customarily restricted in such agreements.
The NationsBank Warehouse Facility also contains additional covenants that
require ACC to provide certain information to NationsBank of Texas, including
financial statements, notices and reports, to permit inspections of the books
and records of the Company and its subsidiaries by NationsBank of Texas and to
comply with applicable laws and to pay taxes.
Events of Default. The NationsBank Warehouse Facility contains customary
events of default, including payment defaults, covenant defaults, breaches of
representations and warranties, cross-defaults to certain other indebtedness,
certain events of bankruptcy and insolvency, judgment defaults in excess of
certain amounts, failure of any guarantee or security agreement supporting the
NationsBank Warehouse Facility to be in full force and effect, a change in
control of ACC, changes in the basic business of ACC and changes in the
individuals holding certain offices with ACC.
Indemnification. Under the NationsBank Warehouse Facility, ACC has agreed
to indemnify NationsBank of Texas and certain related parties from and against
any and all losses, liabilities, claims, damages, deficiencies, interest,
judgments, costs and expenses (including, without limitation, reasonable fees
and disbursements of counsel for NationsBank of Texas) that arise out of certain
matters described in the NationsBank Warehouse Facility, provided that ACC is
not liable for such matters resulting from the gross negligence or willful
misconduct of an indemnitee thereunder.
RESIDENTIAL FUNDING CORPORATION
General. On August 15, 1995, ACC entered into the RFC Warehouse Facility,
which ACC uses to facilitate the underwriting and origination of multi-family
mortgage loans to be purchased by Freddie Mac. The RFC Warehouse Facility was
amended on May 1, 1996 and was supplemented by letter dated May 2, 1996. A total
of $8.6 million and $3.5 million was outstanding under the RFC Warehouse
Facility at December 31, 1995 and March 31, 1996, respectively. The RFC
Warehouse Facility is non-recourse to the Company.
Ranking. Indebtedness under the RFC Warehouse Facility constitutes Senior
Debt.
Security. ACC's indebtedness under the RFC Warehouse Facility is secured by
all mortgage loans originated by ACC using funds obtained under the RFC
Warehouse Facility.
Interest. Indebtedness under the RFC Warehouse Facility generally bears
interest at a rate based upon LIBOR (as defined in the RFC Warehouse Facility)
plus 3.0%. However, pursuant to the supplemental letter, the Lender in its sole
discretion may lower the per annum rate of interest. The RFC Warehouse Facility
currently bears interest at a rate of LIBOR plus 1.25%.
Maturity. The stated maturity date will be provided in a note related to
each borrowing under the RFC Warehouse Facility and is expected to be
approximately 60 to 80 days from the date of each such borrowing.
Conditions to Extensions of Credit. The obligation of Residential Funding
Corporation to make loans to ACC under the RFC Warehouse Facility is subject to
certain customary conditions including, without
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limitation, the delivery of certain documents, instruments and applications by
ACC, approval by Residential Funding Corporation of the mortgage loans to be
originated by ACC, the absence of any default under the RFC Warehouse Facility,
and all representations and warranties under the RFC Warehouse Facility being
true and correct.
Covenants. The RFC Warehouse Facility requires ACC to meet certain
financial tests, including a maximum ratio of debt to tangible net worth,
minimum tangible net worth and minimum Servicing Portfolio (as defined in the
RFC Warehouse Facility). The RFC Warehouse Facility also contains covenants
that, among other things, limit ACC's ability to liquidate, dissolve,
consolidate or merge or sell any substantial part of its assets, or acquire any
substantial part of the assets of another business. The RFC Warehouse Facility
also contains additional covenants that require ACC to provide certain
information to Residential Funding Corporation, including financial statements,
notices and reports, permit inspections of the books and records of ACC by
Residential Funding Corporation and to comply with applicable laws and to pay
taxes.
Events of Default. The RFC Warehouse Facility contains customary events of
default, including payment defaults (subject to certain cure periods), breaches
of covenants or representations and warranties, cross-defaults to certain other
indebtedness, certain events of bankruptcy and insolvency (including of the
Company) and judgment defaults in excess of certain amounts.
Indemnification. Under the RFC Warehouse Facility, ACC has agreed to
indemnify Residential Funding Corporation and certain related parties from and
against any and all losses, liabilities, claims, damages, deficiencies,
interest, judgments, costs and expenses (including, without limitation,
reasonable fees and disbursements of counsel for Residential Funding
Corporation) that arise out of certain matters described in the RFC Warehouse
Facility, provided that ACC is not liable for such matters resulting from the
gross negligence or willful misconduct of an indemnitee thereunder.
ARMC WAREHOUSE FACILITY
General. Effective February 26, 1996, ARMC entered into the Prudential
Warehouse Facility. The Prudential Warehouse Facility is currently a $400.0
million credit facility that ARMC uses to finance the acquisition and
warehousing of certain residential mortgage loans. See "Business -- Residential
Mortgage Securitization." A total of $43.6 million was outstanding under the
Prudential Warehouse Facility at June 28, 1996. The Prudential Warehouse
Facility is non-recourse to the Company and its subsidiaries.
Ranking. Indebtedness under the ARMC Warehouse Facility constitutes Senior
Debt.
Security. ARMC's indebtedness under the Prudential Warehouse Facility is
secured by all residential mortgage loans acquired by ARMC using funds obtained
under the Prudential Warehouse Facility.
Interest. Indebtedness under the Prudential Warehouse Facility generally
bears interest at a rate based upon LIBOR (as defined in the Prudential
Warehouse Facility) plus 0.85%; if Prudential Securities, Inc. is not the
underwriter on the eventual securitization of the mortgage loans securing this
warehouse facility, the interest rate may be increased to LIBOR plus 2.4%
applicable retroactively.
Maturity. The stated maturity date for the Prudential Warehouse Facility is
the earlier of (i) October 31, 1996 or (ii) the date on which the loans
collateralizing the Prudential Warehouse Facility are securitized; provided that
if the securitization includes a pre-funding account, a portion of the
Prudential Warehouse Facility equal to the pre-funding account balance shall
remain outstanding during the related funding period.
Conditions to Extensions of Credit. The obligation of Prudential Securities
Realty Funding Corporation to make loans to ARMC under the Prudential Warehouse
Facility is subject to certain customary conditions, including, without
limitation, the delivery of certain documents, instruments and applications by
ARMC, approval by Prudential Securities Realty Funding Corporation of the
mortgage loan pool to be acquired by ARMC, the absence of any default under the
Prudential Warehouse Facility, and all representations and warranties under the
Prudential Warehouse Facility being true and correct.
Covenants. The Prudential Warehouse Facility requires ARMC to meet certain
financial tests, including minimum tangible equity capital and a maximum
leverage ratio. The Prudential Warehouse Facility also
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contains covenants that, among other things, require ARMC to provide certain
information to Prudential Securities Realty Funding Corporation, including
financial statements and other reports regarding the mortgage loans, to maintain
adequate insurance, and to comply with the applicable laws.
Events of Default. The Prudential Warehouse Facility contains customary
events of default, including payment default, breaches of covenants or
representations and warranties, certain events of bankruptcy and insolvency
(including of the Company) and material adverse changes in the financial
condition of ARMC or the Company.
Indemnification. Under the Prudential Warehouse Facility, ARMC has agreed
to indemnify Prudential Securities Realty Funding Corporation against all
liabilities, losses, damages, judgments, costs and expenses of any kind which
relate to or arise out of the Prudential Warehouse Facility, provided that ARMC
is not liable for such matters resulting from the negligence or willful
misconduct of Prudential.
ARMC REPURCHASE FACILITY
General. Pursuant to a Commitment Letter dated May 29, 1996, CS First
Boston Mortgage Capital Corp. ("CSFB") agreed to provide ARMC with a repurchase
facility in an amount not to exceed $500 million (the "Repurchase Facility"),
which supplements, forms a part of and is subject to a Global Master Repurchase
Agreement dated May 28, 1996 (the "Global Agreement"), to finance the
acquisition and warehousing of residential mortgage loans. As of June 28, 1996,
$133.5 million was outstanding under the Repurchase Facility.
Ranking. Indebtedness under the ARMC Repurchase Facility constitutes Senior
Debt.
Security. Indebtedness under the Repurchase Facility is secured by a first
priority security interest in the mortgage loans acquired with funds advanced
under the Repurchase Facility.
Interest. Indebtedness under the Repurchase Facility bears interest at a
rate of LIBOR plus 0.85% to 2.1% based upon the purchase price, market value and
unpaid principal amount of the mortgage loans related to each repurchase
transaction.
Repurchase Date. The repurchase date is determined by each repurchase
transaction.
Covenants. The Repurchase Facility requires ARMC to meet certain financial
tests, including minimum tangible net worth. The Repurchase Facility also
contains covenants that, among other things, limit ARMC's ability to create or
suffer to exist new debt and to liquidate, dissolve, consolidate or merge or
sell any substantial part of its assets, or acquire any substantial part of the
assets of another business. The Repurchase Facility also contains additional
covenants that require ARMC to provide certain information to CSFB, including
financial statements, notices and reports.
Events of Default. The Global Agreement contains certain events of default,
including, among others, the failure to transfer Purchased Securities upon the
applicable Repurchase Date, payment defaults, failure to maintain a minimum
margin on the value of the underlying loans, insolvency and breaches of
representations and warranties.
AMBS REPURCHASE TRANSACTION
General. On December 19, 1995, AMRESCO MBS I, INC., a wholly-owned
subsidiary of the Company ("AMBS"), entered into a Repurchase Transaction (the
"AMBS Repurchase Transaction") which supplements, forms part of and is subject
to a Global Master Repurchase Agreement (the "AMBS Repurchase Agreement") with
Nomura Grand Cayman, Ltd. ("Nomura") to support the purchase on margin of
certain commercial mortgage pass-through certificates (the "AMBS Purchased
Securities"). As of December 31, 1995 and March 31, 1996, $20.6 million and
$16.9 million was outstanding, respectively, under the AMBS Repurchase
Transaction.
Ranking. Indebtedness under the AMBS Repurchase Transaction constitutes
Senior Debt.
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Security. Indebtedness under the AMBS Repurchase Transaction is secured by
a first priority security interest in the AMBS Purchased Securities.
Interest. Indebtedness under the AMBS Repurchase Transaction bears interest
at a rate of 30 day LIBOR plus 1.40%.
Repurchase Date. The repurchase date for the AMBS Repurchase Transaction is
December 18, 1996, with a six month extension at the option of Nomura.
Events of Acceleration. Upon the occurrence of (i) a material adverse
impact on (A) the creditworthiness of AMBS, (B) the ability of AMBS to perform
its obligations under the AMBS Repurchase Agreement, (C) the marketability or
value of the AMBS Purchased Securities or (D) the economic, political or
financial stability of the issuing or domicile country or (ii) governmental
changes in taxation or exchange controls which affect the AMBS Purchased
Securities or relevant financial markets, Nomura may immediately accelerate the
repurchase date.
Events of Default. The AMBS Repurchase Transaction contains certain events
of default, including, among others, payment defaults, failure to maintain a
minimum margin, insolvency, breaches of representations and warranties,
suspension from a securities exchange or association, failure to maintain a
first priority security interest in the AMBS Purchased Securities, judgment
defaults in excess of $1.0 million and cross-defaults in excess of certain
amounts.
SENIOR SUBORDINATED NOTES
General. On February 2, 1996, the Company entered into the Senior
Subordinated Note Indenture with BankOne, Columbus, N.A., as trustee. Pursuant
to the terms of the Senior Subordinated Note Indenture, an aggregate of $57.5
million of Senior Subordinated Notes were issued. All of the net proceeds from
the sale of the Senior Subordinated Notes were applied to pay down indebtedness
under the Company's Revolving Loan Agreement.
Ranking. Indebtedness under the Senior Subordinated Note Indenture does not
constitute Senior Debt and will be subordinated to the Notes.
Security. Indebtedness under the Senior Subordinated Note Indenture is
unsecured.
Interest. The Senior Subordinated Notes bear interest at a rate of 10% per
annum.
Maturity. The Senior Subordinated Notes will mature on January 15, 2003.
Certain Rights to Require Repurchase of Senior Subordinated Notes. The
Senior Subordinated Note Indenture provides that each holder shall have the
right to require the Company to repurchase the Senior Subordinated Notes at a
purchase price equal to 100% of the principal amount plus accrued and unpaid
interest, upon the occurrence of any event requiring the Company to repurchase,
or make an offer to repurchase, any Subordinated Debt other than the Senior
Subordinated Notes, including (i) in the event of any Fundamental Change (as
defined in the Convertible Subordinated Debenture Indenture), or (ii) if the
Company fails to maintain a certain minimum net worth. In addition, upon the
death of any holder of Notes, the Company will redeem, at par plus accrued
interest, such holder's Notes upon request up to $30,000 in principal amount per
holder per year subject to an aggregate limit for all holders of $300,000 in
principal amount in any twelve month period.
Optional Redemption. The Senior Subordinated Notes are not redeemable prior
to January 15, 2001. Thereafter, the Senior Subordinated Notes will be
redeemable, at the Company's option, in whole or in part, at 100% of the
principal amount thereof plus accrued interest.
Covenants. The Senior Subordinated Note Indenture contains covenants
limiting the incurrence of indebtedness, limiting dividends and redemptions,
limiting restrictions on subsidiary dividends and requiring that certain
conditions be met prior to any consolidation, merger or sale of the assets of
the Company.
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Events of Default. The Senior Subordinated Note Indenture contains certain
customary events of default, including payment defaults, covenant defaults
(subject to certain cure periods), defaults of certain other indebtedness,
certain events of bankruptcy and insolvency and judgment defaults in excess of
$1.0 million.
CONVERTIBLE SUBORDINATED DEBENTURES
General. On November 27, 1995, the Company entered into the Convertible
Subordinated Debenture Indenture with Wells Fargo Bank (Texas) National
Association (formerly First Interstate Bank of Texas, National Association), as
trustee. Pursuant to the terms of the Convertible Subordinated Debenture
Indenture, an aggregate of $45.0 million of Convertible Subordinated Debentures
were issued. All of the net proceeds from the sale of the Convertible
Subordinated Debentures were applied to pay down indebtedness under the
Company's Revolving Loan Agreement.
Ranking. Indebtedness under the Convertible Subordinated Debenture
Indenture does not constitute Senior Debt and will be subordinated to the Notes.
Security. Indebtedness under the Convertible Subordinated Debenture
Indenture is unsecured.
Interest. The Convertible Subordinated Debentures bear interest at the rate
of 8% per annum.
Maturity. The Convertible Subordinated Debentures will mature on December
15, 2005.
Conversion Rights. The Convertible Subordinated Debentures are convertible
into Common Stock at the option of holders thereof at any time and from time to
time prior to and including maturity. The initial conversion price is $12.50 per
share, subject to adjustment in certain events.
Certain Rights to Require Repurchase of Convertible Subordinated
Debentures. In the event of any Fundamental Change (as described below)
affecting the Company which constitutes a Repurchase Event (as described below)
occurring after the date of issuance of the Convertible Subordinated Debentures
and on or prior to maturity, each holder of Convertible Subordinated Debentures
will have the right, at the holder's option, to require the Company to
repurchase all or any part of the holder's Convertible Subordinated Debentures
at a price (the "Repurchase Price") equal to 101% of the principal amount
thereof, together with accrued and unpaid interest to the repurchase date.
The term "Fundamental Change" means the occurrence of any transaction or
event in connection with which all or substantially all of the Common Stock
shall be exchanged for, converted into, acquired for or constitute the right to
receive consideration (whether by means of an exchange offer, liquidation,
tender offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise) which is not all or substantially all common
stock which is (or, upon consummation of or immediately following such
transaction or event, will be) listed on a national securities exchange or
approved for quotation on the Nasdaq Stock Market or any similar system of
automated dissemination of quotations of securities prices. For purposes of the
definition of a "Fundamental Change," (i) "substantially all of the Common
Stock" shall mean at least 85% of the Common Stock outstanding immediately prior
to the transaction or event giving rise to a Fundamental Change and (ii)
consideration shall be "substantially all common stock" if at least 80% of the
fair value (as determined in good faith by the Board of Directors) of the total
consideration is attributable to common stock. A Fundamental Change would not
include an acquisition of Common Stock by any person or group so long as it does
not result in termination of such listing or approval for quotation.
A "Repurchase Event" shall have occurred if a Fundamental Change shall have
occurred unless (i) the current market price of the Common Stock is at least
equal to the conversion price of the Convertible Subordinated Debentures in
effect immediately preceding the time of such Fundamental Change or (ii) the
consideration in the transaction or event giving rise to such Fundamental Change
to the holders of Common Stock consists of cash, securities that are, or
immediately upon issuance will be, listed on a national securities exchange or
quoted on the Nasdaq National Market (or any similar system of automated
dissemination of quotations of securities prices), or a combination of cash and
such securities, and the aggregate fair market value of such consideration
(which, in the case of such securities, shall be equal to the average of the
daily closing prices of such securities during the 10 consecutive trading days
commencing with the sixth trading day
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following consummation of such transaction or event) is at least 105% of the
conversion price of the Convertible Subordinated Debentures in effect on the
date immediately preceding the closing date of such transaction or event.
Optional Redemption. The Convertible Subordinated Debentures are not
redeemable prior to December 15, 1996. Thereafter the Convertible Subordinated
Debentures will be redeemable, at the Company's option, in whole and not in
part, at various redemption prices (expressed as a percentage of principal
amount). The Convertible Subordinated Debentures may not be redeemed, however,
after December 15, 1996, and prior to December 15, 1998, unless, for twenty
consecutive trading days ending on the day immediately preceding the fifth day
prior to notice of redemption, the Closing Price (as defined) equals or exceeds
145% of the conversion price.
Covenants. The Convertible Subordinated Debenture Indenture contains
covenants limiting dividends and redemptions, limiting restrictions on
subsidiary dividends and requiring that certain conditions be met prior to any
consolidation, merger or sale of assets of the Company.
In addition, the Convertible Subordinated Debenture Indenture provides that
if the Company's Net Worth (as defined below) at the end of each of any two
consecutive fiscal quarters (the last day of such second fiscal quarter being
referred to as the "Acceleration Date"), respectively, is less than the Minimum
Net Worth (as defined below), then the Company shall make an irrevocable,
unconditional offer to all holders (an "Offer") to acquire, on a pro rata basis,
on or before the last day of the next following fiscal quarter or, if the
Acceleration Date is the last day of the Company's fiscal year, the 45th day
after the last day of the next following fiscal quarter (the "Accelerated
Payment Date"), $20.0 million aggregate principal amount of Convertible
Subordinated Debentures (or if less than such amount of Convertible Subordinated
Debentures are then outstanding, all of the Convertible Subordinated Debentures
outstanding at the time) at a purchase price equal to 100% of the principal
amount, plus accrued and unpaid interest, if any, to and including such
Accelerated Payment Date, which amounts or portion thereof upon acceptance of
such Offer by tender shall thereupon become due and payable.
"Minimum Net Worth" means approximately $141.0 million plus the net
proceeds to the Company from any other offering of Common Stock by the Company
subsequent to the date of this Prospectus Supplement. "Net Worth" of the Company
as of any date means the amount of equity of the holders of capital stock of the
Company which would appear on the balance sheet of the Company as of such date,
determined in accordance with generally accepted accounting principles.
Events of Defaults. The Convertible Subordinated Debenture Indenture
contains certain customary events of default, including payment defaults,
covenant defaults (subject to certain cure periods), defaults of certain other
indebtedness, certain events of bankruptcy and insolvency and judgment defaults
in excess of $1.0 million.
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UNDERWRITING
Subject to the terms and conditions of the Purchase Agreement (the
"Purchase Agreement") among the Company and Piper Jaffray Inc., J.C. Bradford &
Co. and Morgan Keegan & Company, Inc. (collectively, the "Underwriters") and to
the receipt of certain legal opinions and other closing conditions contemplated
thereby, the Underwriters have severally agreed to purchase from the Company the
respective principal amount of the Notes set forth opposite their names below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
------------------------------------------------------------- ----------------
<S> <C>
Piper Jaffray Inc............................................ $ 28,750,000
J.C. Bradford & Co........................................... 14,375,000
Morgan Keegan & Company, Inc................................. 14,375,000
------------
Total.............................................. $ 57,500,000
============
</TABLE>
The nature of the obligations of the Underwriters is such that if any of
the Notes are purchased, all of them must be purchased.
The Underwriters have advised the Company that they propose to offer the
Notes to the public at the Price to Public and to selected dealers at such price
less a concession of not more than 1.5% of the principal amount of the Notes.
The Underwriters may allow, and such dealers may re-allow, concessions not in
excess of 0.5% of the principal amount of the Notes to certain other brokers and
dealers. After the initial public offering of the Notes, the Price to Public and
other selling terms may be changed by the Underwriters.
The Purchase Agreement provides that the obligations of the Underwriters to
purchase the Notes are subject to certain conditions precedent. The Purchase
Agreement also provides that the Company will indemnify the Underwriters and
their controlling persons against certain liabilities and expenses, including
liabilities under the Securities Act, or contribute to payments the Underwriters
may be required to make in respect thereof.
The Notes have been approved for listing on the New York Stock Exchange,
subject to notice of issuance, under the symbol "AMMB 99." However, there can be
no assurance that an active trading market in the Notes will develop or that the
Notes will not trade at a discount to their principal amount.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by L. Keith Blackwell, General Counsel of the Company. Certain other
legal matters will be passed upon for the Company by Haynes and Boone, LLP,
Dallas, Texas. Certain legal matters relating to the Notes offered hereby will
be passed upon for the Underwriters by Lindquist & Vennum P.L.L.P., Minneapolis,
Minnesota. Lindquist & Vennum P.L.L.P. has represented the Company in certain
litigation matters.
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$250,000,000
[AMRESCO LOGO]
COMMON STOCK, PREFERRED STOCK, DEBT SECURITIES,
SECURITIES WARRANTS AND UNITS
---------------------
AMRESCO, INC. (the "Company") may offer from time to time, together or
separately, (i) shares of its common stock, par value $0.05 per share (the
"Common Stock"), (ii) shares of its preferred stock, par value $1.00 per share
(the "Preferred Stock"), (iii) its unsecured debt securities, which may be
either senior (the "Senior Debt Securities") or subordinated (the "Subordinated
Debt Securities" and, together with the Senior Debt Securities, the "Debt
Securities") and (iv) warrants (collectively, the "Securities Warrants") to
purchase Debt Securities (the "Debt Securities Warrants"), Preferred Stock (the
"Preferred Stock Warrants") or Common Stock (the "Common Stock Warrants"), in
amounts, at prices and on terms to be determined at the time of the offering
thereof. The Common Stock, Preferred Stock, Debt Securities and Securities
Warrants (collectively, the "Securities") may be offered independently or
together in any combination ("Units") for sale directly to purchasers or through
dealers, underwriters or agents to be designated. The Subordinated Debt
Securities and Preferred Stock may be convertible or exchangeable into other
series of Debt Securities, Preferred Stock or Common Stock. The Securities
offered pursuant to this Prospectus may be issued in one or more series or
issuances the aggregate offering price of which will not exceed $250.0 million
(or the equivalent thereof if the Debt Securities are denominated in one or more
foreign currencies of foreign currency units).
The specific terms of the Securities in respect of which this Prospectus is
being delivered (the "Offered Securities") will be set forth in an accompanying
supplement to this Prospectus (each, a "Prospectus Supplement"), including,
where applicable, (i) in the case of Common Stock, the aggregate number of
shares offered and by whom offered, (ii) in the case of the Preferred Stock, the
specific designation, the aggregate number of shares offered, the dividend rate
(or method of calculation thereof), the dividend period and dividend payment
dates, whether such dividends will be cumulative or noncumulative, the
liquidation preference, voting rights, if any, any terms for optional or
mandatory redemption, any terms for conversion or exchange into other series of
Debt Securities or Common Stock and any other special terms, (iii) in the case
of Debt Securities, the specific designation, aggregate principal amount,
ranking as Senior Debt Securities or Subordinated Debt Securities, authorized
denominations, maturity, any premium, rate or method of calculation of interest,
if any, and dates for payment thereof, any terms for optional or mandatory
redemption, any sinking fund provisions, any terms for conversion or exchange
into other series of Debt Securities, Preferred Stock or Common Stock and any
other special terms, (iv) the terms of any Securities Warrants offered,
including where applicable, the exercise price, detachability, duration and
other specific terms not described in this Prospectus and (v) the initial public
offering price and the net proceeds to the Company from and other specific terms
relating to the Offered Securities.
The Senior Debt Securities will rank pari passu in right of payment with all
unsubordinated indebtedness of the Company, but, except to the extent such
Senior Debt Securities are secured by collateral, will be effectively
subordinated to the rights of holders of secured unsubordinated indebtedness of
the Company to the extent of the value of the collateral securing such
indebtedness. The Senior Debt Securities will rank senior to all unsecured
subordinated indebtedness of the Company. The Subordinated Debt Securities will
be subordinate in right of payment to all existing and future Senior Debt (as
defined herein) of the Company, including any Senior Debt Securities.
This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement.
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SECURITIES OFFERED HEREBY, SEE "RISK FACTORS" BEGINNING ON
PAGE 5 HEREIN AND "RISK FACTORS" IN THE PROSPECTUS SUPPLEMENT ACCOMPANYING THIS
PROSPECTUS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The Company may sell the Securities (i) through underwriting syndicates
represented by managing underwriters or by underwriters without a syndicate,
with such underwriters to be designated at the time of sale, (ii) through agents
designated from time to time or (iii) directly. The names of any underwriters or
agents of the Company involved in the sale of the Securities, the public
offering price or purchase price thereof, any applicable commissions or
discounts, any other terms of the offering of such Securities and the net
proceeds to the Company from such sale will be set forth in the applicable
Prospectus Supplement. See "Plan of Distribution" for possible indemnification
arrangements for agents, dealers and underwriters.
---------------------
The date of this Prospectus is July 1, 1996
<PAGE> 53
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In accordance with the
Exchange Act, the Company files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). The reports,
proxy statements and other information can be inspected and copied at the public
reference facilities that the Commission maintains at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at 7 World Trade Center, 13th Floor, New York, New York 10048, and Suite
1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of these
materials can be obtained at prescribed rates from the Public Reference Section
of the Commission at the principal offices of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. The Company's Common Stock is quoted on the Nasdaq
National Market and such reports, proxy statements and other information may be
inspected at the National Association of Securities Dealers, Inc., 1735 K.
Street N.W., Washington, D.C. 20006. The Company's 10% Senior Subordinated Notes
due 2003 are listed for trading on the New York Stock Exchange. Reports and
other information concerning the Company can be inspected at the offices of such
Exchange, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Securities. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement, certain items of which are
contained in schedules and exhibits to the Registration Statement as permitted
by the rules and regulations of the Commission. Statements made in the
Prospectus concerning the contents of any documents referred to herein are not
necessarily complete. With respect to each such document filed with the
Commission as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description, and each such statement shall be deemed
qualified in its entirety by such reference.
Unless otherwise indicated, currency amounts in this Prospectus and any
Prospectus Supplement are stated in United States dollars ("$," "dollars," "U.S.
dollars," or "U.S.$").
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act, are hereby incorporated by reference in
this Prospectus: (i) Annual Report on Form 10-K for the year ended December 31,
1995, (ii) Current Report on Form 8-K dated February 2, 1996 and (iii) Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus shall be
deemed to be incorporated by reference herein. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed superseded or modified for purposes of this Prospectus to the extent that
a statement contained herein (or in any other subsequently filed document which
also is incorporated by reference herein) modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, on the written or oral
request of any such person, a copy of any or all of the documents incorporated
by reference (other than exhibits to such documents which are not specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to the Company, 1845 Woodall Rodgers Freeway, Suite 1700,
Dallas, Texas 75201, Attention: L. Keith Blackwell, Vice President, General
Counsel and Secretary. Telephone requests may be directed to L. Keith Blackwell,
Vice President, General Counsel and Secretary of the Company, at (214) 953-7700.
2
<PAGE> 54
THE COMPANY
Certain terms used in this Prospectus are defined in the "Glossary"
included herein. Certain terms used in connection with the Debt Securities are
defined under the caption "Description of Securities -- Debt
Securities -- Certain Definitions."
The Company is a leading specialty financial services company engaged in
Asset Portfolio acquisition and resolution, commercial mortgage banking,
residential mortgage securitization and institutional investment advisory
services. The Asset Portfolio acquisition and resolution business involves
acquiring at a substantial discount to Face Value and managing and resolving
Asset Portfolios to maximize cash recoveries. The Company manages and resolves
Asset Portfolios acquired by the Company alone, acquired by the Company with
co-investors and owned by third parties. The commercial mortgage banking
business involves the origination, underwriting, placement, sale and servicing
of commercial real estate mortgages. The residential capital markets business
purchases, warehouses and securitizes portfolios of residential mortgages of
borrowers who do not qualify for conventional loans. The Company's institutional
investment advisory subsidiary provides real estate investment advice to various
institutional investors (primarily pension funds).
HISTORY
The Company is the product of the December 1993 merger of two Asset
Portfolio management and resolution service companies: BEI and Holdings.
Holdings was the former Asset Portfolio management and resolution unit of
NationsBank of Texas, which unit was created in 1988 in connection with the
acquisition by NationsBank Corporation from the FDIC of certain assets and
liabilities of the failed First RepublicBank. BEI, a publicly-held company that
was in the real estate and asset management services businesses, began providing
asset management and resolution services to the RTC in 1990. The BEI Merger
created one of the largest Asset Portfolio management and resolution service
companies in the United States. Since 1987, the Company and its predecessors
have managed over $30.0 billion (Face Value) of Asset Portfolios.
ASSET ACQUISITION AND RESOLUTION
The Company manages and resolves Asset Portfolios acquired at a substantial
discount to Face Value by the Company alone and by the Company with
co-investors. The Company also manages and resolves Asset Portfolios owned by
third parties. Management of Asset Portfolios includes resolving loans and
providing routine accounting services, monitoring collections of interest and
principal (if any), confirming (or advancing) insurance premium and tax payments
due on collateral and generally overseeing and managing, if necessary,
collateral condition and performance. Asset Portfolios generally include secured
loans of varying qualities and collateral types. The majority of the loans in
the Asset Portfolios in which the Company invests are in payment default at the
time of acquisition. Although some Asset Portfolios include foreclosed real
estate and other collateral, the Company generally seeks Asset Portfolios that
do not include such assets. The Company's policy is to not refinance or renew
purchased loans.
COMMERCIAL MORTGAGE BANKING
The Company performs a wide range of commercial mortgage banking services,
including originating, underwriting, placing, selling and servicing commercial
real estate loans through its Holliday Fenoglio and ACC mortgage banking units.
The Company also engages in the commercial loan servicing business, serving as a
Primary Servicer for whole loans and as a Master/Full Servicer for securitized
pools of commercial mortgages through its AMRESCO Services unit.
Holliday Fenoglio primarily serves commercial real estate developers and
owners by originating commercial real estate loans through its own
commission-based mortgage bankers. The loans originated by Holliday Fenoglio
generally are funded by institutional lenders, principally insurance companies,
and by Conduit Purchasers, with Holliday Fenoglio retaining the Primary Servicer
rights on more than a quarter of such loans.
3
<PAGE> 55
ACC is a mortgage banker that originates and underwrites commercial real
estate loans that are funded primarily by Conduit Purchasers. ACC targets
mortgage loans for commercial real estate properties suitable for sale to
Conduit Purchasers accumulating loans for securitization programs. ACC serves
its market directly through branch offices, as well as through a network of
independent mortgage brokers. ACC is an approved Fannie Mae DUS lender, which
ACC believes makes it a more competitive loan originator and underwriter of
multi-family mortgages. ACC is also an approved lender in the Freddie Mac
multi-family sales/servicer program in the states of Florida, North Carolina and
South Carolina.
RESIDENTIAL CAPITAL MARKETS
The Company purchases (in bulk from independent originators), warehouses
and securitizes portfolios of residential mortgages of borrowers who do not
qualify for conventional loans and whose borrowing needs are not met by
traditional residential mortgage lenders. Such borrowers may not satisfy the
more rigid underwriting standards of the traditional residential mortgage
lending market for a number of reasons, such as blemished credit histories (from
past loan delinquencies or bankruptcy), inability to provide income verification
data or lack of established credit history. The Company believes that this
market is underserved by traditional lenders. Therefore, there is less
competition in this market and interest rates are higher than on mortgage loans
for more credit-worthy borrowers.
INSTITUTIONAL INVESTMENT ADVISORY
The Company provides real estate investment advice to various institutional
investors (primarily pension funds). Although the Company is paid acquisition
and disposition fees by some of its clients, its principal form of revenue from
this activity is asset management fees, which are based on the cash flow of the
investments under management or are negotiated at the time of the client's
investment in a property.
The Company is a Delaware corporation. The Company's principal executive
offices are located at 1845 Woodall Rodgers Freeway, Suite 1700, Dallas, Texas
75201 and its telephone number at that address is (214) 953-7700.
4
<PAGE> 56
RISK FACTORS
Investors should carefully consider the following matters and the matters
set forth under "Risk Factors" in the Prospectus Supplement accompanying this
Prospectus in connection with an investment in the Securities, in addition to
the other information contained or incorporated by reference in this Prospectus
or in the accompanying Prospectus Supplement. Information contained or
incorporated by reference in this Prospectus or in the accompanying Prospectus
Supplement may contain "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, which can be identified by the
use of forward-looking terminology such as "may," "will," "expect,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. The following matters and certain
other factors noted throughout this Prospectus and any Prospectus Supplement
accompanying this Prospectus, as well as any exhibits and attachments to this
Prospectus and such Prospectus Supplement, constitute cautionary statements
identifying important factors with respect to any such forward-looking
statements, including certain risks and uncertainties that could cause actual
results to differ materially from those reflected in such forward-looking
statements.
UNCERTAIN NATURE OF THE ASSET ACQUISITION AND RESOLUTION BUSINESS
The outsourcing of the management and resolution of Asset Portfolios has
grown rapidly since the late 1980s; accordingly, the Asset Portfolio acquisition
and resolution business is relatively young and still evolving. This business is
affected by long-term cycles in the general economy. In addition, the volume of
domestic Asset Portfolios available for purchase by investors or management by
third party servicers such as the Company has generally declined since 1993. The
Company cannot predict what will be a normal annual volume of Asset Portfolios
to be sold or outsourced for management and resolution. Moreover, there cannot
be any assurance that Asset Portfolio purchasers/owners for whom the Company
provides Asset Portfolio management services will not build their own management
and resolution staffs and reduce or eliminate their outsourcing of these
services. In addition, increased competition for Asset Portfolios will continue
to impact the Company's ability to invest in Asset Portfolios and to obtain
management and resolution contracts from third party buyers. As a result of
these factors, it is difficult to predict the long-term future of this business.
See "-- Competition."
DIVERSIFICATION IN BUSINESS LINES AND MANAGEMENT OF GROWTH
In early 1994, the Company made the strategic decision to diversify its
business lines and to reduce the Company's dependence on asset management and
resolution contracts with governmental agencies and certain other entities. The
Company has substantially increased its investments in Asset Portfolios. The
Company also pursues private sector Asset Portfolio management contracts,
generally through co-investing in Asset Portfolios. Since 1993, the Company has
also entered the commercial mortgage banking, residential capital markets and
institutional investment advisory businesses through a combination of
acquisitions and the internal start-up of new business lines.
As a result, the Company must simultaneously manage (i) a significant
change in its customer mix, (ii) the investment of the Company's own capital in
Asset Portfolios and its commercial mortgage banking and residential capital
markets business lines and (iii) the development of other new business lines in
which the Company has not previously participated. All of these activities will
require the investment of additional capital and the significant involvement of
senior management to achieve a successful outcome. There is no assurance that
the Company will successfully execute this strategic transition.
The rapid entry of the Company into new business lines has resulted in
increased demands on the Company's personnel and systems. The Company must
successfully continue its assimilation of multiple acquired businesses with
differing cultures, systems and managements. The Company's ability to support,
manage and control continued growth is dependent upon, among other things, its
ability to hire, train, supervise and manage its workforce and to continue to
develop the skills necessary for the Company to compete successfully in its new
business lines. There can be no assurance that the Company will successfully
meet all of these challenges.
5
<PAGE> 57
GENERAL ECONOMIC CONDITIONS
Periods of economic slowdown or recession, rising interest rates or
declining demand for real estate may adversely affect certain segments of the
Company's business. Although such economic conditions may increase the number of
non-performing loans available for sale to or for management by the Company,
such conditions could adversely affect the resolution of Asset Portfolios held
by the Company for its own account or managed for others, lead to a decline in
prices or demand for collateral underlying Asset Portfolios or, in the case of
Asset Portfolios held for the Company's own account, increase the cost of
capital invested by the Company and the length of time that capital is invested
in a particular Asset Portfolio, thereby negatively impacting the rate of return
realized from such Asset Portfolio. Economic downturns and rising interest rates
also may reduce the number of loan originations by the Company's commercial
mortgage banking business and negatively impact its commercial and residential
mortgage securitization activity.
NEED FOR ADDITIONAL FINANCING
The Company's ability to execute its business strategy depends to a
significant degree on its ability to obtain additional indebtedness and equity
capital. Other than as described in this Prospectus or any accompanying
Prospectus Supplement, the Company has no commitments for additional borrowings
or sales of equity capital and there can be no assurance that the Company will
be successful in consummating any such future financing transactions on terms
satisfactory to the Company, if at all. Factors which could affect the Company's
access to the capital markets, or the costs of such capital, include changes in
interest rates, general economic conditions and the perception in the capital
markets of the Company's business, results of operations, leverage, financial
condition and business prospects. Each of these factors is to a large extent
subject to economic, financial, competitive and other factors beyond the
Company's control. In addition, covenants under the Company's current and future
debt securities and credit facilities may significantly restrict the Company's
ability to incur additional indebtedness and to issue Preferred Stock. The
Company's ability to repay its outstanding indebtedness, including the Debt
Securities, at maturity may depend on its ability to refinance such
indebtedness, which could be adversely affected if the Company does not have
access to the capital markets for the sale of additional debt or equity
securities through public offerings or private placements on terms reasonably
satisfactory to the Company.
The Company's commercial and residential mortgage securitization businesses
depend upon warehouse facilities with financial institutions or institutional
lenders to finance the Company's purchase of loans on a short-term basis pending
sale or securitization. Implementation of the Company's growth strategy requires
continued availability of warehouse facilities and may require increases in the
capacity of warehouse facilities. There can be no assurance that such financing
will be available on terms reasonably satisfactory to the Company. The inability
of the Company to arrange additional warehouse facilities or to extend or
replace existing facilities when they expire would have a material adverse
effect on the Company's business, financial condition and results of operations
and on the Company's outstanding securities.
SIGNIFICANCE OF SECURITIZATION
The Company currently believes that it will become increasingly dependent
upon its ability to securitize mortgage loans by pooling and subsequently
selling them in the secondary market in order to generate revenues, earnings and
cash flows. Accordingly, adverse changes in the secondary mortgage market could
impair the Company's ability to originate, purchase and sell mortgage loans on a
favorable or timely basis. Any such impairment could have a material adverse
effect upon the Company's business and results of operations. The Company
endeavors to effect public securitizations of its loans on at least a quarterly
basis. However, market and other considerations, including the conformity of
loans to insurance company and rating agency requirements, could affect the
timing of such transactions. Any delay in the sale of loans beyond a quarter end
would delay any expected gain on sale beyond the given quarter and adversely
affect the Company's reported earnings for such quarter.
6
<PAGE> 58
IMPORTANCE OF CREDIT ENHANCEMENT
In order to gain access to the secondary market for residential
mortgage-backed securities, the Company may rely on monoline insurance companies
to provide, in exchange for premiums, a guarantee on outstanding senior
interests in the related securitization trusts to enable it to obtain a
"AAA/Aaa" rating for such interests. Any unwillingness of monoline insurance
companies to guarantee the senior interests in the Company's loan pools could
have a material adverse effect on the Company's financial position and results
of operations.
ASSET PERFORMANCE ASSUMPTIONS
The Company's business, financial condition, results of operations and
liquidity depend, to a material extent, on the performance of loans owned
directly or backing securities purchased and sold by the Company. The carrying
value of the Company's principal assets has been determined in part using
estimates of future cash flows based on assumptions concerning future default
and prepayment rates that are consistent with the Company's historical
experience and market conditions and present value discount rates that the
Company believes would be requested by an unrelated purchaser of an identical
stream of estimated cash flows. Management believes that the Company's estimates
of cash flows are reasonable at the time such estimates are made. However, the
actual rates of default and/or prepayment on such assets may exceed those
estimated and consequently may adversely affect anticipated future cash flows
and results of operations. The Company periodically reviews its prepayment and
loss assumptions in relation to current performance of the loans and market
conditions and, if necessary, provides for the impairment of the respective
asset. The Company's business, financial condition and results of operations
could be materially adversely affected by such adjustments in the future. No
assurance can be given that loan losses and prepayments will not exceed the
Company's estimates or that such assets could be sold at their stated value on
the balance sheet, if at all.
RETAINED RISKS OF LOANS SOLD OR SECURITIZED
In connection with the Company's sale of certain loans or securities, the
Company retains certain risks of loss associated with unrated or higher default
risk loans or assets. In addition, the Company must also make certain
representations and warranties concerning loans originated by the Company and
sold to Conduit Purchasers or Fannie Mae. These representations cover such
matters as title to the property, lien priority, environmental reviews and
certain other matters. In connection with its residential capital markets
business, the Company also makes various representations with respect to the
loans that it pools and securitizes. The Company's representations rely in part
on similar representations made by the originators of such loans to the Company.
The Company would have a claim against the originator in the event of a breach
of any of these representations made by the originators, however, the Company's
ability to recover on any such claim is dependent on the financial condition of
the originator. There can be no assurance that the Company will not experience a
material loss in respect of any of these contingencies.
RESIDENTIAL MORTGAGE MARKET CONDITIONS
Periods of economic slowdown or recession, whether general, regional or
industry-related, may increase the risk of default on residential mortgage loans
and may have an adverse effect on the Company's business, financial condition
and results of operations. Such periods also may be accompanied by decreased
consumer demand for residential mortgages, resulting in declining values of
homes securing outstanding loans, thereby weakening collateral coverage and
increasing the possibility of losses in the event of default. Significant
increases in homes for sale during recessionary economic periods may depress the
prices at which foreclosed homes may be sold or delay the timing of such sales.
There can be no assurance that the housing markets will be adequate for the sale
of foreclosed homes and any material deterioration of such markets could reduce
recoveries from the sale of repossession inventory.
7
<PAGE> 59
INTEREST RATES
Since certain of the Company's borrowings, including borrowings under the
Revolving Loan Agreement, are at variable rates of interest, the Company may be
impacted by increases in interest rates. In addition, the value of its
interest-earning assets and liabilities may be directly affected by the level of
and fluctuations in interest rates. The Company monitors the interest rate
environment and employs prefunding or other hedging strategies designed to
mitigate the impact of changes in interest rates. However, there can be no
assurance that the profitability of the Company would not be adversely affected
during any period of changes in interest rates. A significant decline in
interest rates could result in increased prepayment of outstanding loans.
FOREIGN OPERATIONS
The Company's asset management and resolution business has entered into,
and intends to continue to enter into, contracts to purchase and to manage and
resolve Asset Portfolios located in Canada and Western Europe and may in the
future expand into other foreign countries. Foreign operations are subject to
various special risks, including currency exchange rate fluctuations (which the
Company intends to mitigate with currency hedging arrangements as available and
economical) and exchange controls. Changes in foreign exchange rates may have an
adverse effect on the Company's financial condition and results of operations.
In addition, earnings of foreign operations are subject to foreign income taxes
that reduce cash flow available to meet debt service requirements and other
obligations of the Company, which may be payable even if the Company has no
earnings on a consolidated basis.
RISKS OF HEDGING TRANSACTIONS
The Company has in the past and may in the future enter into interest rate
or foreign currency financial instruments used for hedging purposes. While
intended to reduce the effects of volatility in interest rate or foreign
currency price movements, such transactions could cause the Company to recognize
losses depending on the terms of the instrument and the interest rate or foreign
currency price movement. See Note 14 of Notes to Consolidated Financial
Statements included in Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 and incorporated by reference herein.
COMPETITION
The Asset Portfolio management and resolution and other financial services
industries in which the Company operates are highly competitive. Some of the
Company's principal competitors in certain business lines are substantially
larger and better capitalized than the Company. Because of these resources,
these companies may be better able than the Company to obtain new customers, to
acquire Asset Portfolios, to pursue new business opportunities or to survive
periods of industry consolidation.
The Company believes that its ability to acquire Asset Portfolios for its
own account will be important to its future growth. Acquisitions of Asset
Portfolios are often based on competitive bidding, where there are dangers of
bidding too low (which generates no business), as well as of bidding too high
(which could win the Asset Portfolio at an economically unattractive price). In
addition, the increasing competition in this business line could cause the
Company to experience decreasing profit margins in its Asset Portfolio business
in order to remain a competitive bidder for Asset Portfolios.
The Company also encounters significant competition in its other business
lines. The commercial mortgage banking business is highly fragmented with
certain large national competitors and significant localized competition. In
addition, within the commercial loan origination and residential mortgage
securitization business, access to and the cost of capital are critical to the
Company's ability to compete. The Company must compete with numerous
competitors, many of whom have superior access to capital sources and can
arrange or obtain lower cost capital for customers.
8
<PAGE> 60
USE OF PROCEEDS
The net proceeds from the sale of the Offered Securities, together with
internally generated funds, will be used (i) to repay, redeem or repurchase
outstanding indebtedness of the Company, (ii) for general operations of the
Company, including acquisitions, investments, capital expenditures and working
capital requirements and (iii) for such other purposes as may be specified in
the related Prospectus Supplement.
RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following table sets forth the Company's and its predecessors'
consolidated ratios of earnings to fixed charges and earnings to combined fixed
charges and Preferred Stock dividends for each of the three months ended March
31, 1996 and 1995 and the years ended December 31, 1995, 1994, 1993, 1992 and
1991 on an historical basis.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
31, YEAR ENDED DECEMBER 31,
------------- ------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges(1)....... 2.5 x 13.9x 5.4 x 21.2x 58.9x (2) (2)
Ratio of earnings to combined fixed charges
and Preferred Stock dividends(3).......... 2.5 x 13.9x 5.4 x 21.2x 58.9x (2) (2)
</TABLE>
- ---------------
(1) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of operating income before income taxes and fixed charges. Fixed
charges consist of interest expense and amortization of debt issuance costs.
(2) The Company or its predecessors had no or nominal interest expense in 1991
and 1992 and it was not meaningful, therefore, to calculate these ratios for
the years ended December 31, 1992 and 1991.
(3) The Company did not have any Preferred Stock outstanding during any of these
periods.
9
<PAGE> 61
DESCRIPTION OF SECURITIES
The following description of the terms of the Securities sets forth certain
general terms and provisions of the Securities to which any Prospectus
Supplement may relate. The particular terms of the Securities offered by any
Prospectus Supplement and the extent, if any, to which such general provisions
may apply to the Securities so offered will be described in the Prospectus
Supplement relating to such Securities.
The Company is authorized to issue 50,000,000 shares of Common Stock, par
value $0.05 per share, and 5,000,000 shares of Preferred Stock, par value $1.00
per share. As of June 1, 1996, the Company had issued and outstanding 26,847,282
shares of Common Stock and no shares of Preferred Stock. As of such date, there
were approximately 3,000 holders of record of the outstanding shares of Common
Stock.
The following summary of the Company's Common Stock and Preferred Stock is
qualified in its entirety by reference to the Company's Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation"), its Amended
and Restated Bylaws (the "Bylaws"), and the Delaware General Corporation Law, as
amended (the "DGCL").
COMMON STOCK
General. Subject to such preferential rights as may be granted by the Board
of Directors in connection with any issuances of Preferred Stock, holders of
shares of Common Stock are entitled to receive such dividends as may be declared
by the Board of Directors in its discretion from funds legally available
therefor. From October 1993 through October 1995, the Company paid a quarterly
dividend of $0.05 per share on shares of Common Stock. In October 1995, the
Company announced that it would discontinue its policy of paying cash dividends.
The Board of Directors determined to retain all earnings to support anticipated
growth in the current operations of the Company and to finance future expansion.
The Company's Revolving Loan Agreement, the Senior Subordinated Notes Indenture
and the Convertible Subordinated Debenture Indenture restrict the payment of
cash dividends unless certain earnings tests are satisfied. Additional
restrictions on the payment of cash dividends may be imposed in connection with
future issuances of Preferred Stock and indebtedness by the Company, including
issuances of Debt Securities and Preferred Stock contemplated by this
Prospectus. Further declarations and payments of cash dividends, if any, will
also be determined in light of then-current conditions, including the Company's
earnings, operations, capital requirements, liquidity, financial condition,
restrictions in financing agreements and other factors deemed relevant by the
Board of Directors. Upon the liquidation, dissolution or winding up of the
Company, after payment of creditors, the remaining net assets of the Company
will be distributed pro rata to the holders of Common Stock, subject to any
liquidation preference of the holders of Preferred Stock. There are no
preemptive rights, conversion rights, or redemption or sinking fund provisions
with respect to the shares of Common Stock. All of the outstanding shares of
Common Stock are duly and validly authorized and issued, fully paid and
non-assessable.
Voting Rights. Holders of Common Stock are entitled to one vote per share
of Common Stock held of record on all such matters submitted to a vote of the
stockholders. Holders of the shares of Common Stock do not have cumulative
voting rights. As a result, the holders of a majority of the outstanding shares
of Common Stock voting for the election of directors can elect all the
directors, and, in such event, the holders of the remaining shares of Common
Stock will not be able to elect any persons to the Board of Directors.
Delaware Law and Certain Corporate Provisions. The Company is subject to
the provisions of Section 203 of the DGCL. In general, this statute prohibits a
publicly-held Delaware corporation from engaging, under certain circumstances,
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person becomes an
interested stockholder, unless either (i) prior to the date at which the
stockholder became an interested stockholder the Board of Directors approved
either the business combination or the transaction in which the person becomes
an interested stockholder, (ii) the stockholder acquires more than 85% of the
outstanding voting stock of the corporation (excluding shares held by directors
who are officers or held in certain employee stock plans) upon consummation of
the transaction in which the stockholder becomes an interested stockholder or
(iii) the business combination is approved by the Board of Directors and by
two-thirds of the outstanding voting stock of the corporation (excluding shares
held by the interested stockholder) at a meeting of the stockholders (and
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not by written consent) held on or subsequent to the date on which the person
became an "interested stockholder" of the business combination. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
is an affiliate or associate of the corporation and, together with affiliates
and associates, at any time within the prior three years did own) 15% or more of
the corporation's voting stock. Section 203 defines a "business combination" to
include, without limitation, mergers, consolidations, stock sales and asset
based transactions and other transactions resulting in a financial benefit to
the interested stockholder.
The Company's Certificate of Incorporation and Bylaws contain a number of
provisions relating to corporate governance and to the rights of stockholders.
Certain of these provisions may be deemed to have a potential "anti-takeover"
effect in that such provisions may delay, defer or prevent a change of control
of the Company. These provisions include (i) the classification of the Board of
Directors into three classes, each class serving for staggered three-year terms;
(ii) the authority of the Board of Directors to determine the size of the Board
of Directors, subject to certain minimums and maximums; (iii) the authority of
certain members of the Board of Directors to fill vacancies on the Board of
Directors; (iv) a requirement that special meetings of stockholders may be
called only by the Board of Directors, the Chairman of the Board or holders of
at least one-tenth of all the shares entitled to vote at the meeting; (v) the
elimination of stockholder action by written consent; (vi) the authority of the
Board of Directors to issue series of Preferred Stock with such voting rights
and other powers as the Board of Directors may determine; (vii) the requirement
that the Article in the Certificate of Incorporation creating the staggered
board may only be amended by the vote of at least 66 2/3% of the voting
securities of the Company; (viii) the prohibition on amending or rescinding,
before December 31, 1996, the Article in the Certificate of Incorporation
related to the filling of vacancies on the Board of Directors; and (ix) a
requirement that any business combination between the Company and a beneficial
owner of more than five percent of any class of an equity security of the
Company must be approved by the holders of a majority of the Company's
securities, excluding those securities held by such beneficial owner, voted at a
meeting called for the purpose of approving such business combination.
Indemnification and Limited Liability. The Company's Certificate of
Incorporation and Bylaws require the Company to indemnify the directors and
officers of the Company to the fullest extent permitted by law. In addition, as
permitted by the DGCL, the Company's Certificate of Incorporation and Bylaws
provide that no director of the Company will be personally liable to the Company
or its stockholders for monetary damages for such director's breach of duty as a
director. This limitation of liability does not relieve directors from liability
for (i) any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) any liability under
Section 174 of the DGCL for unlawful distributions or (iv) any transaction from
which the director derived an improper personal benefit. This provision of the
Certificate of Incorporation will limit the remedies available to a stockholder
who is dissatisfied with a decision of the Board of Directors protected by this
provision, and such stockholder's only remedy in that circumstance may be to
bring a suit to prevent the action of the Board of Directors. In many
situations, this remedy may not be effective, including instances when
stockholders are not aware of a transaction or an event prior to action of the
Board of Directors in respect of such transaction or event.
Subject to certain limitations, the Company's officers and directors are
insured against losses arising from claims made against them for wrongful acts
which they may become obligated to pay or for which the Company may be required
to indemnify them.
Registration Rights. The Company has entered into an agreement granting
registration rights (the "Registration Rights Agreement") with certain holders
of Common Stock. Pursuant to the Registration Rights Agreement, these holders
may exercise demand or "piggyback" registration rights with respect to shares of
Common Stock held by them. The Company is obligated to register stock on only
two occasions pursuant to the demand registration rights. The Registration
Rights Agreement has a term of three years (ending on December 31, 1996) for
demand registration rights and five years (ending on December 31, 1998) for
"piggyback" registration rights. These registration rights are subject to
certain conditions and limitations, including the right of underwriters to
restrict the number of shares offered in a registration.
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Other Matters. The Common Stock is listed on Nasdaq National Market under
the symbol "AMMB." Sun Trust Bank, Atlanta, Georgia, is the transfer agent and
registrar for the Common Stock.
PREFERRED STOCK
The description of certain provisions of the Preferred Stock set forth
below and in any Prospectus Supplement does not purport to be complete and is
subject to and qualified in its entirety by reference to the Company's
Certificate of Incorporation, and the Certificate of Designation relating to
each series of Preferred Stock, which will be filed with the Secretary of State
of Delaware and the Commission in connection with the offering of such series of
Preferred Stock.
General. The Board of Directors may, without approval of the Company's
stockholders, establish series of Preferred Stock having such voting powers, and
such designations, preferences and relative, participating, optional and other
special rights, and qualifications, limitations or restrictions thereof, as the
Board of Directors may determine.
The Preferred Stock will have the dividend, liquidation and voting rights
set forth below unless otherwise provided in the Prospectus Supplement relating
to a particular series of Preferred Stock. Reference is made to the Prospectus
Supplement relating to the particular series of Preferred Stock offered thereby
for specific terms, including: (i) the designation and stated value per share of
such Preferred Stock and the number of shares offered; (ii) the amount of
liquidation preference per share; (iii) the price at which such Preferred Stock
will be issued; (iv) the dividend rate (or method of calculation), the dates on
which dividends will be payable, whether such dividends will be cumulative or
noncumulative and, if cumulative, the dates from which dividends will accrue;
(v) any redemption or sinking fund provisions; (vi) any terms by which such
series of Preferred Stock may be convertible into or exchanged for Common Stock
or Debt Securities; and (vii) any additional or other rights, preferences,
privileges, limitations and restrictions relating to such series of Preferred
Stock.
The Preferred Stock will be issued in one or more series. The holders of
Preferred Stock will have no preemptive rights. Preferred Stock will be fully
paid and nonassessable upon issuance against full payment of the purchase price
therefor. Unless otherwise specified in the Prospectus Supplement relating to a
particular series of Preferred Stock, each series of Preferred Stock will, with
respect to dividend rights and rights on liquidation, dissolution and winding up
of the Company, rank prior to the Common Stock (the "Junior Stock") and on a
parity with each other series of Preferred Stock (the "Parity Stock").
Dividend Rights. Holders of the Preferred Stock of each series will be
entitled to receive when, as and if declared by the Board of Directors of the
Company, out of funds legally available therefor, cash dividends at such rates
and on such dates as are set forth in the Prospectus Supplement relating to such
series of Preferred Stock. Such rate may be fixed or variable or both. Each such
dividend will be payable to the holders of record as they appear on the stock
books of the Company on such record dates as will be fixed by the Board of
Directors of the Company. Dividends on any series of the Preferred Stock may be
cumulative or noncumulative, as provided in the Prospectus Supplement relating
thereto. If the Board of Directors of the Company fails to declare a dividend
payable on a dividend payment date on any series of Preferred Stock for which
dividends are noncumulative, then the right to receive a dividend in respect of
the dividend period ending on such dividend payment date will be lost, and the
Company will have no obligation to pay the dividend accrued for that period,
whether or not dividends are declared for any future period. Dividends on shares
of each series of Preferred Stock for which dividends are cumulative will accrue
from the date set forth in the applicable Prospectus Supplement.
The Preferred Stock of each series will include customary provisions (i)
restricting the payment of dividends or the making of other distributions on, or
the redemption, purchase or other acquisition of, Junior Stock unless full
dividends, including in the case of cumulative Preferred Stock, accruals, if
any, in respect of prior dividend periods, on the shares of such series of
Preferred Stock have been paid and (ii) providing for the pro rata payment of
dividends on such series and other Parity Stock when dividends have not been
paid in full upon such series and other Parity Stock.
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Rights Upon Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of each
series of Preferred Stock will be entitled to receive out of assets of the
Company available for distribution to stockholders, before any distribution of
assets is made to holders of Junior Stock, liquidating distributions in the
amount set forth in the Prospectus Supplement relating to such series of
Preferred Stock plus an amount equal to accrued and unpaid dividends. If, upon
any voluntary or involuntary liquidation, dissolution or winding up of the
Company, the amounts payable with respect to the Preferred Stock of any series
and any Parity Stock are not paid in full, the holders of the Preferred Stock of
such series and of such Parity Stock will share ratably in any such distribution
of assets of the Company in proration to the full respective preferential
amounts (which may include accumulated dividends) to which they are entitled.
After payment of the full amount of the liquidating distribution to which they
are entitled, the holders of such series of Preferred Stock will have no right
or claim to any of the remaining assets of the Company. Neither the sale of all
or a portion of the Company's assets nor the merger or consolidation of the
Company into or with any other corporation shall be deemed to be a dissolution,
liquidation or winding up, voluntarily or involuntarily, of the Company.
Voting Rights. Except as indicated below or in the Prospectus Supplement
relating to a particular series of the Preferred Stock, or except as expressly
required by the DGCL, the holders of the Preferred Stock will not be entitled to
vote. In the event the Company issues shares of a series of the Preferred Stock,
unless otherwise indicated in the Prospectus Supplement relating to such series,
each share will be entitled to one vote on matters on which holders of such
series are entitled to vote. In the case of any series of Preferred Stock having
one vote per share on matters on which holders of such series are entitled to
vote, the voting power of such series, on matters on which holders of such
series and holders of any other series of Preferred Stock are entitled to vote
as a single class, will depend on the number of shares in such series, not the
aggregate stated value, liquidation preference or initial offering price of the
shares of such series of the Preferred Stock.
DEBT SECURITIES
The following description of the terms of the Debt Securities sets forth
certain general terms and provisions of the Debt Securities to which any
Prospectus Supplement may relate. Particular terms of the Debt Securities
offered by any Prospectus Supplement and the extent, if any, to which such
general and specific provisions may apply to the Debt Securities so offered will
be described in the Prospectus Supplement relating to such Debt Securities. The
Debt Securities may be issued either separately, or together with, or upon
conversion of or in exchange for, other Securities.
The Senior Debt Securities and the Subordinated Debt Securities will be
issued under the indentures (the "Senior Indenture" and the "Subordinated
Indenture," respectively) between the Company and the Trustee named in the
applicable Prospectus Supplement. The forms of Senior Indenture and Subordinated
Indenture (collectively, the "Indentures") have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. The following brief
summary of certain provisions of the Indentures does not purport to be complete
and is subject to, and is qualified in its entirety by reference to all of the
provisions of, the Indentures, and is further qualified by any description
contained in the applicable Prospectus Supplement or Prospectus Supplements.
Certain terms capitalized and not otherwise defined herein are defined in the
Indentures. Wherever particular sections or defined terms of the Indentures are
referred to, such sections or defined terms are incorporated herein by
reference.
General. The Debt Securities may be issued from time to time in one or more
series. The terms of each series of Debt Securities, including without
limitation any restrictive covenants with respect thereto, will be established
by or pursuant to a resolution of the Board of Directors of the Company and set
forth or determined in the manner provided in an Officers' Certificate or by a
supplemental indenture. The particular terms of the Debt Securities offered
pursuant to any Prospectus Supplement or Prospectus Supplements will be
described in such Prospectus Supplement or Prospectus Supplements.
The amount of Debt Securities offered by this Prospectus will be limited to
the amount of Securities set forth on the cover of this Prospectus that have not
been otherwise issued or reserved for issuance. The Indentures will not limit
the aggregate principal amount of Debt Securities that may be issued thereunder.
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The Senior Debt Securities will rank pari passu in right of payment with
all unsubordinated indebtedness of the Company, but, except to the extent such
Senior Debt Securities are secured by collateral, will be effectively
subordinated to the rights of holders of secured unsubordinated indebtedness of
the Company to the extent of the value of the collateral securing such
indebtedness. The Senior Debt Securities will rank senior to all unsecured
subordinated indebtedness of the Company. The Subordinated Debt Securities will
be unsecured and will be subordinated in right of payment to all existing and
future Senior Debt of the Company, including the Senior Debt Securities, as
described under "Subordination of Subordinated Debt Securities."
The applicable Prospectus Supplement will indicate the form, registered or
bearer, and denominations in which Debt Securities of any series may be issued.
Debt Securities may be issuable in the form of one or more Global Securities, as
described below under "Global Securities." The Debt Securities (other than those
issued in the form of a Global Security) are exchangeable or transferable
without charge therefor, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith
and require the holders to furnish appropriate endorsements and transfer
documents. (Indenture Section 305)
Debt Securities may be issued as original issue discount securities to be
sold at a substantial discount below their principal amount. Special federal
income tax and other considerations applicable thereto and special federal tax
and other considerations applicable to any Debt Securities which are denominated
in a currency other than U.S. dollars will be described in the Prospectus
Supplement or Prospectus Supplements relating thereto.
Principal of and any premium and interest on the Debt Securities will be
payable, and the transfer of the Debt Securities will be registrable at the
office or agency maintained for such purpose. Interest on any Debt Security that
is payable will be paid to the Person in whose name that Debt Security is
registered in the Security Register. In addition, payment of interest may be
made at the option of the Company by check mailed to the address of the Person
entitled thereto as it appears on the Security Register or by wire transfer to
an account maintained by the Person entitled to such interest. (Indenture
Sections 301 and 307)
The applicable Prospectus Supplement or Prospectus Supplements will
describe the terms of the Debt Securities offered thereby, including the
following: (i) the title of the offered Debt Securities and whether the offered
Debt Securities are Senior Debt Securities or Subordinated Debt Securities; (ii)
any limit on the aggregate principal amount of the offered Debt Securities;
(iii) the Person to whom any interest on the offered Debt Securities will be
payable, if other than the Person in whose name they are registered on the
regular record date for such interest; (iv) the date or dates, or the method by
which such date or dates are determined or extended, on which the principal or
installments of principal and premium, if any, of the offered Debt Securities is
or are payable; (v) the rate or rates (which may be fixed or variable) at which
the offered Debt Securities will bear interest, if any, or the method by which
such rate or rates shall be determined, the date from which any such interest
will accrue, the dates on which such interest on the offered Debt Securities
will be payable and the regular record dates therefor, the circumstances, if
any, in which the Company may defer interest payments and the basis for
calculating interest if other than a 360-day year of twelve 30-day months; (vi)
the place or places where the principal of and premium, if any, and interest on
the offered Debt Securities will be payable and the offered Debt Securities may
be surrendered for registration of transfer or exchange if other than those
provided for in the Senior Indenture or the Subordinated Indenture; (vii) if
applicable, the period or periods within which, the price or prices at which and
the terms and conditions upon which the offered Debt Securities may be redeemed,
in whole or in part, at the option of the Company; (viii) the obligation, if
any, of the Company to redeem or purchase Debt Securities of the series pursuant
to any sinking fund or analogous provisions or at the option of a holder thereof
and the period or periods within which, the price or prices at which and the
terms and conditions upon which Debt Securities of the series shall be redeemed
or purchased in whole or in part pursuant to such obligation; (ix) whether the
Debt Securities of the series will be convertible into shares of Common Stock
and/or exchangeable for other securities, and if so, the terms and conditions
upon which such Debt Securities will be so convertible or exchangeable and any
deletions from or modifications or additions to the applicable Indenture to
permit or to facilitate the issuance of such convertible or exchangeable Debt
Securities or the administration thereof; (x) the identity of each Security
Registrar and Paying Agent if other than or in addition to the Trustee; (xi) if
the amount of principal
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of or any premium or interest on the offered Debt Securities may be determined
by reference to an index or pursuant to a formula, the manner in which such
amounts shall be determined; (xii) the applicability of, and any addition to or
change in the covenants and definitions set forth in the applicable Indenture;
(xiii) the denominations in which any offered Debt Securities will be issuable,
if other than denominations of $1,000 or any amount in excess thereof which is
an integral multiple of $1,000; (xiv) if other than U.S. dollars the currency or
currencies for the payment of principal of and any premium and interest on the
offered Debt Securities and the manner of determining the U.S. dollar equivalent
of the principal amount thereof for purposes of the definition of "outstanding"
and, if the principal of or any premium or interest on the offered Debt
Securities is to be payable, at the election of the Company or the holder
thereof, in one or more currencies other than that or those in which the offered
Debt Securities are stated to be payable, the currency, currencies or currency
units in which payment of the principal of and any premium and interest on such
offered Debt Securities of such series as to which such election is made shall
be payable, and the periods within which and the terms and conditions upon which
such election is to be made; (xv) any other event or events of default
applicable with respect to the offered Debt Securities in addition to or in lieu
of those described below under "Events of Default" and any change in the right
of the Trustee or the holders to declare the principal of or any premium or
interest on the offered Debt Securities due and payable; (xvi) if less than the
principal amount thereof, the portion of the principal payable upon acceleration
of such Debt Securities following an Event of Default; (xvii) whether such Debt
Securities are to be issued in whole or in part in the form of one or more
Global Securities and, if so, the identity of the depositary for such Global
Security or Securities, and any circumstances under which any such Global
Security may be exchanged for Debt Securities registered in the name of, and any
transfer of such Global Security may be registered to, a Person other than such
depositary or its nominee, if other than those described in the applicable
Indenture (see "Global Securities"); (xviii) if applicable, that the offered
Debt Securities, in whole or in any specified part, are not defeasible; and
(xix) any other terms of the offered Debt Securities not inconsistent with the
provisions of the applicable Indenture. (Indenture Section 301)
If the purchase price of any Debt Securities is payable in a currency other
than U.S. dollars or if principal of or premium, if any, or interest, if any, on
any of the Debt Securities is payable in any currency other than U.S. dollars,
the specific terms and other information with respect to such Debt Securities
and such foreign currency, including any material foreign currency risks, will
be specified in the Prospectus Supplement or Prospectus Supplements relating
thereto.
Under the Indentures, the terms of the Debt Securities of any series may
differ, and the Company, without the consent of the holders of the Debt
Securities of any series, may reopen a previous series of Debt Securities and
issue additional Debt Securities of such series or establish additional terms of
such series.
Redemption. Except as set forth in the Prospectus Supplement with respect
to any offered Debt Securities or series thereof, the Company is not required to
make mandatory redemption or sinking fund payments with respect to the Debt
Securities. The Prospectus Supplement relating to any offered Debt Securities or
series thereof will specify the provisions, if any, regarding sinking fund
provisions related to such Debt Securities or series thereof. The Indentures
provide that the Company may deliver outstanding Debt Securities of like tenor
of a series (other than any previously called for redemption) and may apply as a
credit Debt Securities of like tenor of a series which have been redeemed either
at the election of the Company pursuant to the terms of such Debt Securities or
through the application of permitted optional sinking fund payments pursuant to
the terms of such Debt Securities, in each case in satisfaction of all or any
part of any sinking fund payment with respect to the Debt Securities of like
tenor of such series required to be made pursuant to the terms of such
Securities as provided for by the terms of such series. (Indenture Sections 1202
and 1203)
The Indentures provide that, if less than all of the Debt Securities of any
series are to be redeemed at any time, selection of Debt Securities for
redemption will be made by the Trustee by such method as the Trustee shall deem
fair and appropriate, and portions of the Debt Securities selected for
redemption shall be in amounts equal to the minimum authorized denomination for
Debt Securities of like tenor of that series or any integral multiple thereof of
principal amount of Debt Securities of such series of a denomination larger than
the minimum authorized denomination for Debt Securities of that series. Notices
of redemption shall be
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mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each Holder of Debt Securities to be redeemed at its
registered address. If any Debt Security is to be redeemed in part only, the
notice of redemption that relates to such Debt Security shall state the portion
of the principal amount thereof to be redeemed. A new Debt Security in principal
amount equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original Debt Security. On and after the
redemption date, interest ceases to accrue on Debt Securities or portions of
them called for redemption. (Indenture Sections 1103, 1104, 1106 and 1107)
Repurchase at the Option of Holders. Except as set forth in the Prospectus
Supplement with respect to any offered Debt Securities or any series thereof,
the Indentures do not contain provisions that permit the Holders of the Debt
Securities to require that the Company repurchase or redeem the Debt Securities
in the event of a sale of assets or a takeover, recapitalization or similar
restructuring, nor does the Indenture contain covenants specifically designed to
protect holders in the event of a highly leveraged transaction involving the
Company.
Covenants. The Indentures contain certain covenants relating to the Company
and its operations, including covenants requiring the Company to (i) punctually
pay interest and principal of Debt Securities, (ii) maintain of an office or
agency in each place of payment in respect of the Debt Securities, (iii) hold in
trust money for payment of interest or principal on Debt Securities, (iv)
preserve the corporate existence, rights and franchises of the Company and its
Material Subsidiaries (as defined in the Indentures), (v) generally maintain its
properties and trademarks and to comply with applicable statutes, laws,
ordinances and regulations, (vi) maintain adequate insurance, (vii) timely pay
or discharge material tax obligations and claims for labor, material and
supplies, which, if unpaid, might become a lien upon the property of the Company
or any Subsidiary, (viii) keep proper books of record and account and (ix)
provide to the Trustee quarterly statements of compliance with the Indentures
and notice of any event which after notice or lapse of time or both would become
an Event of Default or the occurrence of any Repurchase Event. Certain of these
covenants are subject to various exceptions and qualifications as set forth in
the Indentures.
Certain additional covenants in respect of the Company may be set forth in
the Prospectus Supplement accompanying this Prospectus.
Consolidation, Merger or Transfer. The Indentures provide that the Company
may not consolidate with, merge with, or transfer all or substantially all of
its assets to another entity where the Company is not the surviving corporation
unless (i) such other entity assumes the Company's obligations under the
applicable Indenture and (ii), after giving effect thereto, no event shall have
occurred and be continuing which, after notice or lapse of time, would become an
Event of Default. (Indenture Section 801)
Events of Default. The Indentures provide that each of the following
constitutes an Event of Default with respect to the Debt Securities of any
series issued pursuant to the Indentures: (i) failure to pay the principal on
the Debt Securities of that series when due; (ii) failure for 30 consecutive
days (for Debt Securities that pay interest less frequently than monthly) or 10
consecutive days (for Debt Securities that pay interest monthly) to pay when due
any interest on the Debt Securities of that series; (iii) failure to deposit any
sinking fund payment, when and as due, in respect of the Debt Securities of that
series; (iv) failure to perform, or a breach of, any covenant or warranty set
forth in the Indenture for 30 consecutive days after receipt of written notice
from the Trustee or Holders of at least 25% in principal amount of the
outstanding Debt Securities specifying the default and requiring the Company to
remedy such default; (v) an event of default as defined in any indenture or
instrument under which the Company or any Material Subsidiary shall have
Outstanding at least $1.0 million aggregate principal amount of indebtedness
shall have happened and resulted in acceleration of such indebtedness and such
default shall not have been cured or waived and such acceleration shall not have
been rescinded or annulled for a period of 30 consecutive days, (vi) certain
events of insolvency, receivership or reorganization of the Company or any
Material Subsidiary and (vii) entry of a final judgment, decree or order against
the Company or any Material Subsidiary for the payment of money in excess of
$5.0 million and such judgment, decree or order continues unsatisfied for 30
consecutive days without a stay of execution. (Indenture Section 501)
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If any Event of Default occurs and is continuing with respect to any series
of Debt Securities, the Trustee or the Holders of at least 25% in aggregate
principal amount of the then outstanding Debt Securities of such series may
declare the unpaid principal amount (or, if any of the Debt Securities of that
series are Original Issue Discount Debt Securities, such lesser portion of the
principal amount of such Debt Securities as may be specified in the terms
thereof), premium, if any, and any accrued and unpaid interest on all the Debt
Securities of such series to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company or any Material Subsidiary
of the Company, all principal, premium, if any and interest on outstanding Debt
Securities will become due and payable without further action or notice. Holders
of the Debt Securities may not enforce the respective Indentures or the Debt
Securities except as provided in the Indentures. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Debt
Securities of any series may direct the Trustee in its exercise of any trust or
power with respect to such series of Debt Securities. The Trustee may withhold
from Holders of the Debt Securities of any series notice of any continuing
Default or Event of Default (except a Default or Event of Default in payment on
any Debt Security of any series or in the payment of any sinking fund
installment with respect to such series) if it in good faith determines that
withholding notice is in their interest. (Indenture Sections 502, 507, 512 and
602)
The Holders of a majority in aggregate principal amount of the Debt
Securities of any series then outstanding by notice to the Trustee may on behalf
of the Holders of all of the Debt Securities of such series waive any existing
Default or Event of Default with respect to such series of Debt Securities and
its consequences under the applicable Indenture except a continuing Default or
Event of Default with respect to such series in the payment of interest on, or
the principal of, or premium, if any, on the Debt Securities of such series.
(Indenture Section 513)
The Holders of a majority in principal amount of the outstanding Debt
Securities of any series will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. (Indenture Section 512) The Indentures
provide that in case an Event of Default shall occur and be continuing, the
Trustee will be required, in the exercise of its power, to use the degree of
care of a prudent person in the conduct of such person's own affairs. Subject to
such provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture unless the Trustee receives reasonable
security or indemnity against any loss, liability or expense. (Indenture
Sections 601 and 603)
The Company is required to deliver to the Trustee quarterly a statement
regarding compliance with the Indentures, and the Company is required upon
becoming aware of any Default or Event of Default with respect to a series of
Debt Securities due to any event of default under any other indenture or
instrument to deliver to the Trustee a statement specifying such Default or
Event of Default and what action the Company is taking or proposes to take with
respect thereto. (Indenture Section 703)
Defeasance Provisions. The Company will be discharged from any and all
obligations in respect of the Debt Securities of any series (except for certain
obligations to register the transfer or exchange of Debt Securities, to replace
destroyed, stolen, lost or mutilated Debt Securities, to maintain paying
agencies and to hold moneys for payment in trust) on the 91st day after the date
of deposit with the Trustee, in trust, of money, U.S. Government Obligations
which through the payment of interest and principal thereof in accordance with
their terms will provide money, or a combination thereof, in an amount
sufficient to pay any installment of principal of (and premium, if any) and
interest on and any mandatory sinking fund payments in respect of the Debt
Securities of such series on the dates on which such payments are due and
payable in accordance with the terms of the applicable Indenture and such Debt
Securities. Any such discharge is also subject to certain other conditions,
including the limitation that such discharge may only occur if there has been a
change in applicable federal law, or the Company has delivered to the Trustee an
Opinion of Counsel to the effect that such a discharge will not cause the
holders of such series of Debt Securities to recognize income, gain or loss for
federal income tax purposes and that such holders will be subject to federal
income tax on the same amount and in the same manner and at the same times as
would have been the case had such deposit, defeasance and discharge not
occurred, and that such discharge will not cause any outstanding Debt Securities
then listed on any securities exchange to be de-listed as a result thereof.
(Indenture Section 403)
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The Company may omit to comply with certain restrictive covenants with
respect to the Debt Securities of any series. If the Company elects not to
comply with any term, provision or condition in any such covenant, the Company
must deposit with the Trustee money, U.S. Government Obligations which through
the payment of interest and principal thereof in accordance with their terms
will provide money, or a combination thereof, in an amount sufficient to pay any
installment of principal of (and premium, if any) and interest on and any
mandatory sinking fund payments in respect of the Debt Securities of such series
on the dates on which such payments are due and payable in accordance with the
terms of the applicable Indenture and such Debt Securities. Any such covenant
defeasance is also subject to certain other conditions, including the delivery
to the Trustee of an opinion of counsel to the effect that the deposit and
related covenant defeasance will not cause the holders of the Debt Securities to
recognize income, gain or loss for federal income tax purposes and that such
holders will be subject to federal income tax on the same amount and in the same
manner and at the same times as would have been the case had such deposit and
defeasance not occurred. (Indenture Section 1009)
In the event the Company omits compliance with certain covenants of the
Indenture and the Debt Securities issued pursuant thereto are declared due and
payable because of the occurrence of any event of default, although the amount
of money and U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Debt Securities at the time of their stated
maturity, it may not be sufficient to pay amounts due on the Debt Securities at
the time of the acceleration resulting from such event of default. In such
event, the Company shall remain liable for all such payments.
Subordination of Subordinated Debt Securities. The Subordinated Debt
Securities will be subordinate and subject in right of payment, to the extent
and in the manner set forth in the Subordinated Indenture, to the prior payment
in full of all Senior Debt. Upon any distribution to creditors in a liquidation,
dissolution, winding up, reorganization, assignment for the benefit of
creditors, marshaling of assets and liabilities or any bankruptcy, insolvency or
similar proceeding involving the Company, the holders of Senior Debt will be
entitled to receive payment in full in cash of all Obligations (as defined in
the Subordinated Indenture) due on or to become due on or in respect of all
Senior Debt, before the holders of Subordinated Debt Securities are entitled to
receive any payment or distribution of any kind, whether in cash, property or
securities, by set off or otherwise on account of the principal of (and premium,
if any) or interest on the Subordinated Debt Securities or on account of any
purchase, redemption or other acquisition of Subordinated Debt Securities by the
Company, any Subsidiary of the Company, the Trustee or any Paying Agent or on
account of any other obligation of the Company in respect of any Subordinated
Debt Securities (excluding (i) shares of stock or securities of the Company or
another corporation provided for by a plan of reorganization or readjustment
that are subordinated in right of payment to all then outstanding Senior Debt to
substantially the same extent as, or to a greater extent than, the Subordinated
Debt Securities are so subordinated and (ii) payments of assets from any
defeasance trust which have been on deposit for 90 consecutive days without the
occurrence of blockage of payment on any such series of Subordinated Debt
Securities as described below) ("Securities Payments"). Until the Senior Debt is
paid in full, any Securities Payment to which the holders of Subordinated Debt
Securities or the Trustee for their benefit would be entitled, will be paid or
delivered by the Company or any receiver, trustee in bankruptcy, liquidating
trustee, agent or other person making such payment or distribution, directly to
the holders of Senior Debt or their representative or representatives or the
trustee or trustees under any indenture pursuant to which any instruments
evidencing, any Senior Debt may have been issued. (Subordinated Indenture
Sections 1301 and 1302)
The Subordinated Indenture contains certain standstill provisions, which
provide that no payments of principal of, or interest on, the Subordinated Debt
Securities may be made and no Subordinated Debt Securities may be accelerated if
at the time thereof the Trustee has received a written notice (a "Default
Notice") from the holder or holders of not less than 51% in principal amount of
the outstanding Senior Debt or any agent therefor (a "Senior Agent") specifying
that an event of default (a "Senior Event of Default") under any Senior Debt has
occurred. Such standstill will remain in effect until the first to occur of the
following: (i) the Senior Event of Default is cured, (ii) the Senior Event of
Default is waived by the holders of such Senior Debt or the Senior Agent or
(iii) the expiration of 180 days after the date the Default Notice is
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received by the Trustee if the maturity of such Senior Debt has not been
accelerated at such time. Any such standstill will not prevent the occurrence of
an "Event of Default" under the Subordinated Indenture.
In the event that the Trustee receives any Securities Payment prohibited by
the subordination provisions of the Subordinated Indenture, such payment will be
held by the Trustee in trust for the benefit of, and will immediately be paid
over upon written request to, the holders of Senior Debt or their representative
or representatives, or the trustee or trustees under any applicable indenture
for application to the payment of Senior Debt. (Subordinated Indenture Section
1304) Such subordination will not prevent the occurrence of any event of default
in respect of the Subordinated Debt Securities.
By reason of such subordination, in the event of the insolvency of the
Company, holders of Senior Debt may receive more, ratably, and holders of the
Subordinated Debt Securities having a claim pursuant to such securities may
receive less, ratably, than the other creditors of the Company. There may also
be interruption of scheduled interest and principal payments resulting from
events of default on Senior Debt.
Modification and Waiver. Modifications and amendments of the respective
Indentures may be made by the Company and the Trustee with the consent of the
holders of not less than a majority in aggregate principal amount of the
outstanding Debt Securities of all series affected by such modification or
amendment (voting as one class); provided, however, that no such modification or
amendment may, without the consent of the holder of each outstanding Debt
Security affected thereby, (i) change the stated maturity of the principal of,
or any installment of principal of or interest on, any Debt Security, reduce the
principal amount of, or premium or interest on, any Debt Security, reduce the
amount of principal of an Original Issue Discount Debt Security due and payable
upon acceleration of the maturity thereof, change the place of payment where or
coin or currency in which the principal of, or any premium or interest on, any
Debt Security is payable, or impair the right to institute suit for the
enforcement of any payment on or after the stated maturity of any Debt Security,
(ii) reduce the percentage in principal amount of outstanding Debt Securities of
any series, the consent of the holders of which is required for modification or
amendment of the Senior Indenture or for waiver of compliance with certain
provisions of the Senior Indenture or for waiver of certain defaults or (iii)
modify any of the various sections relating to above-described provisions.
(Indenture Section 902)
The holders of not less than a majority in aggregate principal amount of
the outstanding Debt Securities of each series may, on behalf of the holders of
all Debt Securities of that series, waive, insofar as that series is concerned,
compliance by the Company with certain restrictive provisions of the Indenture.
(Indenture Section 1011) The holders of not less than a majority in aggregate
principal amount of the Outstanding Debt Securities of each series may, on
behalf of the holders of all Debt Securities of that series, waive any past
default under the Indenture with respect to Debt Securities of that series,
except a default (i) in the payment of principal of, or any premium or interest
on, any Debt Security of such series when due (other than amounts due and
payable solely upon acceleration), or (ii) in respect of a covenant or provision
of the Indenture which cannot be modified or amended without the consent of the
holder of each outstanding Debt Security of such series affected. (Indenture
Section 513) The definition of "Senior Debt" in the Subordinated Indenture may
not be amended or modified in a manner adverse to the holders of then
outstanding Senior Debt without the consent of the holders of all Senior Debt
affected thereby. (Subordinated Indenture Section 908)
The Indentures provide that, in determining whether the holders of the
requisite principal amount of the outstanding Debt Securities have given any
request, demand, authorization, direction, notice, consent or waiver thereunder
or whether a quorum is present at a meeting of holders of Debt Securities, (i)
the principal amount of an Original Issue Discount Debt Security that will be
deemed to be outstanding will be the amount of the principal thereof that would
be due and payable as of the date of such determination upon acceleration of the
maturity thereof to such date and (ii) the principal amount of a Debt Security
denominated in a foreign currency or currency unit that will be deemed to be
outstanding will be the United States dollar equivalent, determined as of the
date of original issuance of such Debt Security, of the principal amount of such
Debt Security (or, in the case of an Original Issue Discount Debt Security, the
United States dollar equivalent, determined as of the date of original issuance
of such Debt Security, of the amount determined as provided in (i) above).
(Indenture Section 101)
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Global Securities. The following description will apply to any series of
Debt Securities issued, in whole or in part, in the form of a Global Security or
Global Securities deposited with, or on behalf of, The Depository Trust Company
("DTC") (each such Debt Security represented by a Global Security, being herein
referred to as a "Book-Entry Security").
Upon initial issuance, all Book-Entry Securities of the same series and
bearing interest, if any, at the same rate or pursuant to the same formula and
having the same date of issuance, redemption provisions, if any, repayment
provisions, if any, stated maturity and other terms will be represented by a
single Global Security. Each Global Security representing Book-Entry Securities
will be deposited with, or on behalf of, DTC and will be registered in the name
of DTC or a nominee of DTC. Unless otherwise specified in the applicable
Prospectus Supplement, all Book-Entry Securities will be denominated in U.S.
dollars.
Upon the issuance of a Global Security, DTC will credit accounts held with
it with the respective principal or face amounts of the Book-Entry Securities
represented by such Global Security. The accounts to be credited shall be
designated initially by the Agent through which the Debt Security was sold or,
to the extent that such Debt Securities are offered and sold directly, by the
Company. Ownership of beneficial interests in a Global Security will be limited
to institutions that have accounts with DTC ("participants") and to persons that
may hold interests through such participants. Ownership of beneficial interests
by participants in a Global Security will be shown on, and the transfer of that
ownership interest will be effected only through, records maintained by DTC for
such Global Security. Ownership of beneficial interests in such Global Security
by persons that hold through participants will be shown on, and the transfer of
that ownership interest within such participant will be effected only through,
records maintained by such participant.
Payment of principal of, premium, if any, and interest, if any, on
Book-Entry Securities represented by any such Global Security will be made to
DTC or its nominee, as the case may be, as the sole registered holder of the
Book-Entry Securities represented thereby for all purposes under the Indentures.
None of the Company, the Trustee, the Paying Agent or any agent of the Company
or the Trustee will have a responsibility or liability for any aspect of DTC's
records relating to or payments made on account of beneficial ownership
interests in a Global Security representing any Book-Entry Securities or any
other aspect of the relationship between DTC and its participants or the
relationship between such participants and the owners of beneficial interests in
a Global Security owning through such participants or for maintaining,
supervising or reviewing any of DTC's records relating to such beneficial
ownership interests.
The Company has been advised by DTC that upon receipt of any payment of
principal of, premium, if any, or interest, if any, on any such Global Security,
DTC will immediately credit, on its book-entry registration and transfer system,
the accounts of participants with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Security
as shown on the records of DTC. Payments by participants to owners of beneficial
interests in a Global Security held through such participants will be governed
by standing instructions and customary practices, as is now the case with
securities held by such participants for customer accounts registered in "street
name," and will be the sole responsibility of such participants.
No Global Security may be transferred except as a whole by a nominee of DTC
to DTC or to another nominee of DTC, or by DTC or any such nominee to a
successor of DTC or a nominee of such successor.
A Global Security representing Book-Entry Securities is exchangeable for
certificated Debt Securities of the same series and bearing interest, if any, at
the same rate or pursuant to the same formula, having the same date of issuance,
redemption provisions, if any, repayment provisions, if any, stated maturity and
other terms and of differing authorized denominations aggregating a like amount,
if any, if (i) DTC notifies the Company that it is unwilling or unable to
continue as depositary for such Global Security or if at any time DTC ceases to
be a clearing agent registered under the Exchange Act, (ii) the Company, in its
sole discretion, determines that such Global Security shall be exchangeable for
certificated Debt Securities or (iii) there shall have occurred and be
continuing an Event of Default with respect to the Book-Entry Securities. Such
certificated Debt Securities shall be registered in the names of the owners of
the beneficial interests in such Global Security as provided by DTC's relevant
participants (as identified by DTC).
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Owners of beneficial interests in a Global Security will not be considered
the registered holders thereof for any purpose under the applicable Indenture
and no Global Security representing Book-Entry Securities shall be exchangeable
or transferrable. Accordingly, each person owning a beneficial interest in such
a Global Security must rely on the procedures of DTC and, if such person is not
a participant, on the procedures of the participant through which such person
owns its interest, to exercise any rights of a registered holder under the
applicable Indenture. The laws of some jurisdictions require that certain
purchasers of securities take physical delivery of such securities in
certificated form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Security.
DTC, as the registered holder of each Global Security, may appoint agents
and otherwise authorize participants to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action which a
registered holder is entitled to give or take under the applicable Indenture.
The Company understands that under existing industry practices, in the event
that the Company requests any action of registered holders or that an owner of a
beneficial interest in such a Global Security desires to give or take any action
which a registered holder is entitled to give or take under such Indenture. DTC
would authorize the participants holding the relevant beneficial interests to
give or take such action, and such participants would authorize beneficial
owners owning through such participants to give or take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code and a "clearing agency" registered under the Exchange
Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers, banks (which may include the Trustee), trust companies, clearing
corporations, and certain other organizations some of whom (and/or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly.
Certain Definitions. Set forth below are certain defined terms used in the
Indentures. Reference is made to the Indentures for a full disclosure of all
such terms, as well as any other capitalized terms used herein for which no
definition is provided. (Indenture Section 101)
"Funded Debt" means any of the following obligations of the Company or any
Subsidiary which by its terms matures at or is extendable or renewable at the
sole option of the obligor without requiring the consent of the obligee to a
date more than 360 days after the date of the creation or incurrence of such
obligation: (i) any obligations, contingent or otherwise, for borrowed money or
for the deferred purchase price of property, assets, securities or services
(including, without limitation, any interest accruing subsequent to an event of
default), (ii) all obligations (including the Debt Securities) evidenced by
bonds, notes, debentures or other similar instruments, (iii) all indebtedness
created or arising under any conditional sale or other title retention agreement
with respect to property acquired (even though the rights and remedies of the
seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), except any such obligation that
constitutes a trade payable and an accrued liability arising in the ordinary
course of business, if and to the extent any of the foregoing indebtedness would
appear as a liability upon a balance sheet prepared in accordance with generally
accepted accounting principles, (iv) all Capital Lease Obligations, (v)
liabilities of the Company actually due and payable under banker's acceptances
or letters of credit, (vi) all indebtedness of the type referred to in clause
(i), (ii), (iii), (iv) or (v) above secured by (or for which the holder of such
indebtedness has an existing right, content or otherwise, to be secured by) any
lien upon or security interest in property of the Company or any Subsidiary
(including, without limitation, accounts and contract rights), even though the
Company or any Subsidiary has not assumed or become liable for the payment of
such indebtedness and (vii) any guarantee or endorsement (other than for
collection or deposit in the ordinary course of business) or discount with
recourse of, or other agreement, contingent or otherwise, to purchase,
repurchase, or otherwise acquire, to supply, or advance funds or become liable
with
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respect to, any indebtedness or any obligation of the type referred to in any of
the foregoing clauses (i) through (vi), regardless of whether such obligation
would appear on a balance sheet.
"Junior Indebtedness" means all Funded Debt except Senior Debt.
"Material Subsidiary" means Holliday Fenoglio, Inc., AMRESCO Management,
Inc., AMRESCO Residential Mortgage Corporation, AMRESCO Advisors, Inc., AMRESCO
Residential Credit Corporation, AMRESCO Capital Corporation, AMRESCO New
England, Inc., Oak Cliff Financial, Inc. and any other Subsidiary whose assets
or revenues comprise at least five percent (5%) of the assets or revenues of the
Company and the Subsidiaries on a consolidated basis as of the end of, or for
the, Company's most recently completed fiscal quarter, as determined from time
to time.
"Original Issue Discount Security" means any Debt Security which provides
for an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration of the maturity thereof pursuant to the terms of
the applicable Indenture.
"Senior Debt" means any Funded Debt whether outstanding on the date of
execution of the Indenture or thereafter created or incurred, unless it is
provided in the appropriate instrument that such Funded Debt is subordinated to
any other Funded Debt.
"Subsidiary," means, with respect to any Person, (i) any Corporation of
which at the time of determination more than 50% of the shares of Voting Stock
is at the time owned or controlled, directly or indirectly, by such Person or
one or more of the other Subsidiaries of that Person (or a combination thereof)
and (ii) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or (b) the only
general partners of which are such Person or one or more Subsidiaries of such
Person (or any combination thereof).
"U.S. Government Obligations" means direct obligations of the United States
of America, or any Person controlled or supervised by and acting as an agency or
instrumentality of such government, in each case where the payment or payments
thereunder are unconditionally guaranteed as a full faith and credit obligation
by such government and which are not callable or redeemable at the option of the
issuer or issuers thereof, and shall also include a depository receipt issued by
a bank or trust company as custodian with respect to any such U.S. Government
Obligation or a specific payment of interest on or principal of or other amount
with respect to any such U.S. Government Obligation held by such custodian for
the account of the holder of a depository receipt, provided that (except as
required by law) such custodian is not authorized to make any deduction from the
amount payable to the holder of such depository receipt from any amount received
by the custodian in respect of the U.S. Government Obligation or the specific
payment of interest on or principal of or other amount with respect to the U.S.
Government Obligation evidenced by such depository receipt.
SECURITIES WARRANTS
The Company may issue Securities Warrants for the purchase of Debt
Securities, Preferred Stock or Common Stock. Securities Warrants may be issued
independently or together with other Securities offered by any Prospectus
Supplement and may be attached to or separate from such other Securities. Each
series of Securities Warrants will be issued under a separate warrant agreement
(a "Securities Warrant Agreement") to be entered into between the Company and a
bank or trust company as Securities Warrant Agent, all as set forth in the
Prospectus Supplement relating to the particular issue of offered Securities
Warrants. The Securities Warrant Agent will act solely as an agent of the
Company in connection with the Securities Warrant Certificates and will not
assume any obligation or relationship of agency or trust for or with any holders
of Securities Warrant Certificates or beneficial owners of Securities Warrants.
Copies of the forms of Securities Warrant Agreements, including the forms of
Securities Warrant Certificates representing the Securities Warrants, will be
filed or incorporated by reference as exhibits to the Registration Statement to
which this Prospectus pertains. The following summaries of certain provisions of
the forms of Securities Warrant Agreements and Securities Warrant Certificates
do not purport to be complete and are subject to and are qualified in their
entirety by reference to all the provisions of the Securities Warrant Agreements
and the Securities Warrant Certificates.
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General. If Securities Warrants are offered, the applicable Prospectus
Supplement will describe the terms of such Securities Warrants, including, in
the case of Securities Warrants for the purchase of Debt Securities, the
following where applicable: (i) the offering price; (ii) the currencies in which
such Securities Warrants are being offered; (iii) the designation, aggregate
principal amount, currencies, denominations and terms of the series of Debt
Securities purchasable upon exercise of such Securities Warrants: (iv) the
designation and terms of any series of Securities with which such Securities
Warrants are being offered and the number of such Securities Warrants being
offered with each such Security; (v) the date on and after which such Securities
Warrants and the related series of Securities will be transferable separately;
(vi) the principal amount of the series of Debt Securities purchasable upon
exercise of each such Securities Warrant and the price at which and currencies
in which such principal amount of Debt Securities of such series may be
purchased upon such exercise; (vii) the date on which the right to exercise such
Securities Warrants shall commence and the date (the "Expiration Date") on which
such right shall expire; (viii) whether the Securities Warrants will be issued
in registered or bearer form; (ix) a discussion of any material United States
federal income tax consequences; and (x) any other terms of such Securities
Warrants.
In the case of Securities Warrants for the purchase of Preferred Stock or
Common Stock. the applicable Prospectus Supplement will describe the terms of
such Securities Warrants, including the following where applicable: (i) the
offering price; (ii) the aggregate number of shares purchasable upon exercise of
such Securities Warrants and, in the case of Securities Warrants for Preferred
Stock, the designation, aggregate number and terms of the series of Preferred
Stock purchasable upon exercise of such Securities Warrants; (iii) the
designation and terms of the series of Securities with which such Securities
Warrants are being offered and the number of such Securities Warrants being
offered with each such Security; (iv) the date on and after which such
Securities Warrants and the related series of Securities will be transferable
separately; (v) the shares of Preferred Stock or Common Stock purchasable upon
exercise of each such Securities Warrant and the price at which such shares of
Preferred Stock or Common Stock may be purchased upon each exercise; (vi) the
date on which the right to exercise such Securities Warrants shall commence and
the expiration date thereof; (vii) a discussion of any material United States
federal income tax consequences; and (viii) any other terms of such Securities
Warrants. Securities Warrants for the purchase of Preferred Stock or Common
Stock will be offered and exercisable for U.S. dollars only and will be in
registered form only.
Securities Warrant Certificates may be exchanged for new Securities Warrant
Certificates of different denominations, may (if in registered form) be
presented for registration of transfer and may be exercised at the corporate
trust office of the Securities Warrant Agent or any other office indicated in
the applicable Prospectus Supplement. Prior to the exercise of any Securities
Warrant to purchase Debt Securities, holders of such Securities Warrants will
not have any of the rights of holders of the Debt Securities purchasable upon
such exercise, including the right to receive payments of principal of, premium,
if any, or interest, if any, on the Debt Securities purchasable upon such
exercise or to enforce covenants in the applicable Indenture. Prior to the
exercise of any Securities Warrants to purchase Preferred Stock or Common Stock,
holders of such Securities Warrants will not have any rights of holders of the
Preferred Stock or Common Stock purchasable upon such exercise, including the
right to receive payment of dividends, if any, on the Preferred Stock or Common
Stock purchasable upon such exercise or to exercise any applicable right to
vote.
Exercise of Securities Warrants. Each Securities Warrant will entitle the
holder thereof to purchase such principal amount of Debt Securities or shares of
Preferred Stock or Common Stock, as the case may be, at such exercise price as
shall in each case be set forth in, or calculable from, the Prospectus
Supplement relating to the offered Securities Warrants. After the close of
business on the Expiration Date (or such later date to which such Expiration
Date may be extended by the Company), unexercised Securities Warrants will
become void.
Securities Warrants may be exercised by delivering to the Securities
Warrant Agent payment as provided in the applicable Prospectus Supplement of the
amount required to purchase the Debt Securities, Preferred Stock or Common
Stock, as the case may be, purchasable upon such exercise together with certain
information set forth on the reverse side of the Securities Warrant Certificate.
Securities Warrants will be deemed to have been exercised upon receipt of
payment of the exercise price, subject to the receipt of the Securities Warrant
Certificate evidencing such Securities Warrants. Upon receipt of such payment
and the
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Securities Warrant Certificate properly completed and duly executed at the
corporate trust office of the Securities Warrant Agent or any other office
indicated in the applicable Prospectus Supplement, the Company will, as soon as
practicable, issue and deliver the Debt Securities, Preferred Stock or Common
Stock, as the case may be, purchasable upon exercise. If fewer than all of the
Securities Warrants represented by such Securities Warrant Certificate are
exercised. a new Securities Warrant Certificate will be issued for the remaining
amount of Securities Warrants.
Amendments and Supplements to Securities Warrant Agreement. The Securities
Warrant Agreements may be amended or supplemented without the consent of the
holders of the Securities Warrants issued thereunder to effect changes that are
not inconsistent with the provisions of the Securities Warrants and that do not
adversely affect the interests of the holders of the Securities Warrants.
Common Stock Warrant Adjustments. The exercise price of, and the number of
shares of Common Stock covered by, a Common Stock Warrant are subject to
adjustment in certain events, including (i) the issuance of capital stock as a
dividend or distribution on the Common Stock; (ii) subdivisions and combinations
of the Common Stock; (iii) the issuance to all holders of Common Stock of
certain rights or warrants entitling them to subscribe for or purchase Common
Stock within 45 days after the date fixed for the determination of the
stockholders entitled to receive such rights or warrants, at less than the
current market price (as defined in the Warrant Agreement for such series of
Common Stock Warrants) and (iv) the distribution to all holders of Common Stock
of evidences of indebtedness or assets of the Company (excluding certain cash
dividends and distributions described below) or rights or warrants (excluding
those referred to above). In the event that the Company shall distribute any
rights or warrants to acquire capital stock pursuant to clause (iv) above (the
"Capital Stock Rights") pursuant to which separate certificates representing
such Capital Stock Rights will be distributed subsequent to the initial
distribution of such Capital Stock Rights (whether or not such distribution
shall have occurred prior to the date of the issuance of a series of Common
Stock Warrants), such subsequent distribution shall be deemed to be the
distribution of such Capital Stock Rights; provided that the Company may, in
lieu of making any adjustment in the exercise price of and the number of shares
of Common Stock covered by a Common Stock Warrant upon a distribution of
separate certificates representing such Capital Stock Rights. make proper
provision so that each holder of such a Common Stock Warrant who exercises such
Common Stock Warrant (or any portion thereof) (a) before the record date for
such distribution of separate certificates shall be entitled to receive upon
such exercise shares of Common Stock issued with Capital Stock Rights and (b)
after such record date and prior to the expiration, redemption or termination of
such Capital Stock Rights shall be entitled to receive upon such exercise, in
addition to the shares of Common Stock issuable upon such exercise, the same
number of such Capital Stock Rights as would a holder of the number of shares of
Common Stock that such Common Stock Warrant so exercised would have entitled the
holder thereof to acquire in accordance with the terms and provisions applicable
to the Capital Stock Rights if such Common Stock Warrant was exercised
immediately prior to the record date for such distribution. Common Stock owned
by or held for the account of the Company or any majority owned Subsidiary shall
not be deemed outstanding for the purpose of any adjustment.
No adjustment in the exercise price of and the number of shares of Common
Stock covered by a Common Stock Warrant will be made for regular quarterly or
other periodic or recurring cash dividends or distributions or for cash
dividends or distributions to the extent paid from retained earnings. No
adjustment will be required unless such adjustment would require a change of at
least 1% in the exercise price then in effect; provided that any such adjustment
not so made will be carried forward and taken into account in any subsequent
adjustment; and provided further that any such adjustment not so made shall be
made no later than three years after the occurrence of the event requiring such
adjustment to be made or carried forward. Except as stated above, the exercise
price of and the number of shares of Common Stock covered by a Common Stock
Warrant will not be adjusted for the issuance of Common Stock or any securities
convertible into or exchangeable for Common Stock, or securities carrying the
right to purchase any of the foregoing.
In the case of (i) a reclassification of or change to the Common Stock,
other than changes in par value, (ii) a consolidation or merger involving the
Company, other than where the Company is the continuing corporation and
reclassification or change, as described in (i) above, is involved or (iii) a
sale or conveyance to another corporation of the property and assets of the
Company as an entirety or substantially as an entirety,
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<PAGE> 76
the holders of the Common Stock Warrants then outstanding will be entitled
thereafter to convert such Common Stock Warrants into the kind and amount of
shares of stock and other securities or property which they would have received
upon such reclassification, change, consolidation, merger, sale or conveyance
had such Common Stock Warrants been exercised immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance.
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<PAGE> 77
PLAN OF DISTRIBUTION
The Company may offer and sell the Offered Securities in one or more of the
following ways: (i) through underwriters or dealers, (ii) through agents or
(iii) directly to one or more purchasers. The Prospectus Supplement with respect
to a particular offering of a series of Offered Securities will set forth the
terms of the offering of such Offered Securities, including the name or names of
any underwriters or agents with whom the Company has entered into arrangements
with respect to the sale of such Offered Securities, the public offering or
purchase price of such Offered Securities and the proceeds to the Company from
such sales and any underwriting discounts, agency fees or commissions and other
items constituting underwriters' compensation, the initial public offering
price, any discounts or concessions to be allowed or re-allowed or paid to
dealers and any securities exchange, if any, on which such Offered Securities
may be listed. Dealer trading may take place in certain of the Offered
Securities, including Offered Securities not listed on any securities exchange.
If underwriters are involved in the offer and sale of Offered Securities,
the Offered Securities will be acquired by the underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. The Offered Securities may be
offered to the public either through underwriting syndicates represented by
managing underwriters, or by underwriters without a syndicate, all of which
underwriters in either case will be designated in the applicable Prospectus
Supplement. Unless otherwise set forth in the applicable Prospectus Supplement,
under the terms of the underwriting agreement, the obligations of the
underwriters to purchase Offered Securities will be subject to certain
conditions precedent and the underwriters will be obligated to purchase all of
the Offered Securities if any are purchased. Any initial public offering price
and any discounts or concessions or re-allowed or paid to dealers may be changed
from time to time.
Offered Securities may be offered and sold directly by the Company or
through agents designated by the Company from time to time. Any agent involved
in the offer or sale of the Offered Securities with respect to which this
Prospectus is delivered will be named in, and any commissions payable by the
Company to such agent will be set forth in or calculable from, the applicable
Prospectus Supplement. Unless otherwise indicated in the Prospectus Supplement,
any such agent will be acting on a best efforts basis for the period of its
appointment.
If so indicated in the applicable Prospectus Supplement, the Company may
authorize underwriters, dealers or agents to solicit offers by certain
institutions to purchase the Offered Securities from the Company at the public
offering price set forth in such Prospectus Supplement pursuant to delayed
delivery contracts ("Delayed Delivery Contracts") providing for payment and
delivery on the date or dates stated in the Prospectus Supplement. Each Delayed
Delivery Contract will be for an amount of the Offered Securities not less than
and, unless the Company otherwise agrees, the aggregate amount of the Offered
Securities sold pursuant to Delayed Delivery Contracts shall be not more than
the respective minimum and maximum amounts stated in the Prospectus Supplement.
Institutions with which Delayed Delivery Contracts, when authorized, may be made
include commercial and savings banks, insurance companies, pension funds,
investment companies and educational and charitable institutions, but shall in
all cases be subject to the approval of the Company in its sole discretion. The
obligations of the purchaser under any Delayed Delivery Contract to pay for and
take delivery of the Offered Securities will not be subject to any conditions
except that (i) the purchase of the Offered Securities by such institution shall
not at the time of delivery be prohibited under the laws of the jurisdiction to
which such institution is subject and (ii) any related sale of the Offered
Securities to underwriters shall have occurred. A commission set forth in the
Prospectus Supplement will be paid to underwriters soliciting purchases of the
Offered Securities pursuant to Delayed Delivery Contracts accepted by the
Company. The underwriters will not have any responsibility in respect of the
validity or performance of Delayed Delivery Contracts.
The Debt Securities, the Preferred Stock and the Securities Warrants will
be new issues of securities with no established trading market. Any underwriters
to whom Offered Securities are sold by the Company for public offering and sale
may make a market in such Offered Securities, but such underwriters will not be
26
<PAGE> 78
obligated to do so and may discontinue any market making at any time without
notice. No assurance can be given as to the liquidity of the trading market for
any Offered Securities.
Any underwriter, dealer or agent participating in the distribution of the
Offered Securities may be deemed to be an underwriter, as that term is defined
in the Securities Act, of the Offered Securities so offered and sold and any
discounts or commissions received by it from the Company and any profit realized
by it on the sale or resale of the Offered Securities may be deemed to be
underwriting discounts and commissions under the Securities Act.
Under agreements entered into with the Company, underwriters, dealers and
agents may be entitled to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments which the underwriters or agents may be required to
make in respect thereof.
Underwriters, dealers and agents also may be customers of, engage in
transactions with, or perform other services for the Company in the ordinary
course of business.
LEGAL MATTERS
The validity of the shares of Common Stock, the Preferred Stock, the Debt
Securities and Securities Warrants offered hereby will be passed upon for the
Company by L. Keith Blackwell, General Counsel of the Company. Certain legal
matters will be passed upon for the Company by Haynes and Boone, LLP, Dallas,
Texas.
EXPERTS
The consolidated financial statements incorporated in this prospectus by
reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report which is incorporated herein by reference
and has been so incorporated in reliance upon their authority as experts in
accounting and auditing.
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GLOSSARY
The following are certain defined terms which may be used in this
Prospectus and any accompanying Prospectus Supplement:
"ACACIA" means Acacia Realty Advisors, Inc.
"ACACIA ACQUISITION" means the acquisition by the Company of the assets
comprising the real estate pension advisory business of Acacia Realty Advisors,
Inc.
"ACC" means AMRESCO Capital Corporation, a subsidiary of the Company.
"AMRESCO RESIDENTIAL" means, collectively, ARMC and AMRESCO Residential
Credit Corporation, subsidiaries of the Company.
"ARMC" means AMRESCO Residential Mortgage Corporation, a subsidiary of the
Company.
"ASSET PORTFOLIO" means a pool or portfolio of performing, non-performing
or underperforming commercial, industrial, agricultural and/or real estate
loans.
"BEI" means BEI Holdings, Ltd.
"BEI MERGER" means the merger of Holdings with and into a subsidiary of BEI
on December 31, 1993.
"CKSRS" means CKSRS Housing Group, Ltd., a Florida limited partnership.
"COMPANY" means, unless otherwise stated in this Prospectus or unless the
context otherwise requires, the Company and each of its subsidiaries.
"CONDUIT PURCHASERS" means investment bankers and other financial
intermediaries who purchase or otherwise accumulate pools or portfolios of loans
having common features (e.g., real estate mortgages, etc.), with the intent of
securitizing such loan assets and selling them to a trust that obtains its funds
by selling ownership interests in the trust to public or private investors.
"CONVERTIBLE SUBORDINATED DEBENTURES" means the Company's 8% Convertible
Subordinated Debentures due 2005.
"CONVERTIBLE SUBORDINATED DEBENTURE INDENTURE" means that certain Indenture
dated November 27, 1995, as amended, governing the Convertible Subordinated
Debentures.
"CREDIT AGREEMENTS" means the Revolving Loan Agreement and the Warehouse
Agreements.
"CREDIT ENHANCEMENT" means the method by which a seller of asset-backed
securities achieves a higher credit rating with respect to such securities than
the credit rating of the assets collateralizing such securities. Credit
enhancement is often achieved through the use of financial guaranty insurance
policies.
"DTC" means The Depository Trust Company or its nominees.
"DUS" means the Delegated Underwriting and Servicing program established by
Fannie Mae that permits a DUS approved lender to commit and close loans for
multi-family mortgages for resale to Fannie Mae without Fannie Mae's prior
approval of such loans.
"EQS" means, collectively, EQ Services, Inc. and Equitable Real Estate
Investment Management, Inc.
"EQS ACQUISITION" means the acquisition by the Company of the third-party
securitized, commercial mortgage loan Master Servicer and Special Servicer
business of EQS.
"FACE VALUE" means, with respect to any loan or Asset Portfolio, the
aggregate unpaid principal balance of a loan or loans.
"FANNIE MAE" means the Federal National Mortgage Association.
"FDIC" means the Federal Deposit Insurance Corporation.
"FREDDIE MAC" means the Federal Home Loan Mortgage Corporation.
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<PAGE> 80
"FULL SERVICER" means an entity which serves as Primary Servicer, Master
Servicer and Special Servicer on an Asset Portfolio.
"HOLDINGS" means AMRESCO Holdings, Inc.
"HOLLIDAY FENOGLIO" means Holliday Fenoglio, Inc., a subsidiary of the
Company.
"MASTER SERVICER" means an entity which provides administrative services
with respect to securitized pools of mortgage-backed securities.
"NATIONSBANK CONTRACT" means the asset management contract, as amended,
originally dated July 1, 1992, among the Company, NationsBank Corporation and
certain of its bank subsidiaries.
"NATIONSBANK OF TEXAS" means NationsBank of Texas, N.A.
"PRIMARY SERVICER" means an entity which provides various administrative
services with respect to loans such as collecting monthly mortgage payments,
maintaining escrow accounts for the payment of ad valorem taxes and insurance
premiums on behalf of borrowers, remitting payments of principal and interest
promptly to investors in mortgages or the Master Servicer of a pool and
reporting to those investors or the Master Servicer on financial transactions
related to such mortgages.
"REVOLVING LOAN AGREEMENT" means the First Amended and Restated Revolving
Loan Agreement dated as of April 25, 1996 and as subsequently amended, among the
Company, NationsBank of Texas, as Agent, and the Banks which are parties thereto
from time to time.
"RTC" means the Resolution Trust Corporation.
"SECURITIZATION" and "SECURITIZED" mean a transaction in which loans
originated or purchased by an entity are sold to special purpose entities
organized for the purpose of issuing asset-backed securities.
"SENIOR SUBORDINATED NOTES" means the Company's 10% Senior Subordinated
Notes due 2003.
"SENIOR SUBORDINATED NOTES INDENTURE" means the Indenture dated February 2,
1996, governing the Senior Subordinated Notes.
"SPECIAL SERVICER" means an entity which provides asset management and
resolution services with respect to non-performing or under-performing loans
within a pool of performing loans and/or mortgages.
"WAREHOUSE" means a type of lending arrangement whereby loans funded or
purchased and held for sale are financed by financial institutions or
institutional lenders on a short-term basis and secured by the underlying loans.
"WAREHOUSE AGREEMENTS" mean all warehouse loan facilities entered into by
the Company from time to time.
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No dealer, salesperson or other person has been authorized by the Company to
give any information or to make any representations other than those contained
or incorporated by reference in this Prospectus Supplement or the Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company or the Underwriters. Neither this
Prospectus Supplement nor the Prospectus constitutes an offer to sell or a
solicitation of an offer to buy any securities other than the securities
described in this Prospectus Supplement or an offer to sell or the solicitation
of an offer to buy the securities described in this Prospectus Supplement in any
circumstances in which such offer or solicitation is unlawful. Neither the
delivery of this Prospectus Supplement or the Prospectus nor any sale made
hereunder or thereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the date
hereof or thereof or that the information contained herein or therein is correct
as of any time subsequent to the date of such information.
---------------------
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................... S-3
Risk Factors.......................... S-10
Use of Proceeds....................... S-12
Capitalization........................ S-13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... S-14
Business.............................. S-25
Management............................ S-37
Description of the Notes.............. S-39
Description of Other Indebtedness..... S-43
Underwriting.......................... S-51
Legal Matters......................... S-51
Prospectus
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
The Company........................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 9
Ratios of Earnings to Fixed Charges
and Earnings to Combined Fixed
Charges and Preferred Stock
Dividends........................... 9
Description of Securities............. 10
Plan of Distribution.................. 26
Legal Matters......................... 27
Experts............................... 27
Glossary.............................. 28
</TABLE>
$57,500,000
[AMRESCO LOGO]
Senior Notes,
Series 1996-A due 1999
--------------------------------------------
PROSPECTUS SUPPLEMENT
to Prospectus dated July 1, 1996
--------------------------------------------
PIPER JAFFRAY INC.
J.C. BRADFORD & CO.
MORGAN KEEGAN & COMPANY, INC.
JULY 16, 1996
