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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995.
OR
/ / FOR THE TRANSITION PERIOD FROM to .
Commission File No. 0-8630
AMRESCO, INC.
(Exact name of registrant as specified in its charter)
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<CAPTION>
DELAWARE 59-1781257
<S> <C>
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1845 WOODALL RODGERS FWY, DALLAS, TEXAS 75201
(Address of principal executive offices) (zip code)
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Registrant's telephone number, including area code: (214) 953-7700
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Securities registered pursuant to Section 12(g) of the Act:
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<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Shares of Common Stock, par value $0.05 per share Nasdaq National Market
10% Senior Subordinated Notes due 2003 New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the closing price of such stock as of March
22, 1996, was approximately $236,900,000.00.
The number of shares outstanding of each of the registrant's classes of
common stock, as of March 22, 1996, the latest practical date, was 26,780,896
shares of Common Stock, par value $0.05 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed for the Annual
Meeting of Shareholders to be held on May 29, 1996, are incorporated by
reference in Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
The Company is a leading specialty financial services company engaged in
Asset Portfolio (see "Certain Definitions" for a listing of the defined terms
used herein) acquisition and resolution, mortgage banking and institutional real
estate 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
mortgage banking business involves the origination, placement and servicing of
commercial real estate mortgages and the purchase and securitization of
portfolios of residential mortgages of borrowers who do not qualify for
conventional loans. The institutional real estate investment advisory business
involves the provision of real estate investment advice to various institutional
investors (primarily pension funds) seeking to invest a portion of their funds
in real estate.
DEVELOPMENT OF BUSINESS STRATEGY
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 shifted its strategic focus in order to take advantage of business
opportunities in the specialty finance markets that capitalize on its
competitive strengths and reputation within its core business. 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 traditional mortgage banking market through
greater market penetration and by participating in the expanding 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. 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 focus to a greater extent on
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 for certain sellers. The Company
believes that it receives many Asset Portfolio solicitations that result
primarily from its reputation as an active portfolio purchaser. Other important
sources of business include referrals from co-investors
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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 international 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. Whether because a
financial institution desires to reduce overhead costs, is not staffed to handle
large volumes of Asset Portfolios or simply does not want to distract management
and personnel with the intensive and time-consuming job of resolving Asset
Portfolios, many financial institutions now recognize that outside contractors
often are better staffed to manage and resolve Asset Portfolios. These financial
institutions include multi-national, money center, super-regional and regional
banking institutions nationwide, in Canada and Western European nations, as well
as insurance companies. 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. 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 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 $302.0 million (US$Face Value) in Canadian Asset
Portfolios under management on December 31, 1995. In January 1996, the Company
acquired $44.3 (US$Face Value) in United Kingdom Asset Portfolios.
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 its competitors in the asset management and resolution business.
Moreover, the Company believes that direct investment permits it 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; international reputation; and strategic
relationships with sellers and purchasers of Asset Portfolios, including
financial institutions, large corporate buyers, investment banking firms and
sophisticated private investors.
ASSET PORTFOLIO INVESTMENT. The Company's business of investing in Asset
Portfolios is conducted either through it owning the Asset Portfolio alone or
with co-investors. Asset Portfolios acquired solely by the Company have ranged
between approximately $.5 million (Face Value) and approximately $96.8 million
(Face Value), whereas Asset Portfolios owned by it with co-investors have ranged
up to approximately $679.0 million (Face Value). 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 can vary
significantly from quarter to quarter.
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Prior to making an offer to purchase an Asset Portfolio, the Company
conducts an extensive investigation and evaluation of the individual loans
comprising 95% to 100% of the aggregate Face Value of all the loans in the Asset
Portfolio. 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 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 December
31, 1995, the Company had paid an average purchase price of 53.0% 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 in the
Asset Portfolio. 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, the Company achieves efficiency in loan resolution and
accuracy in loan evaluations.
Resolutions typically are 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 overall
recovery. The Company resolves most assets within an Asset Portfolio within 18
months. The goal of the Company's asset resolution process is to maximize in a
timely manner cash recovery on each loan in an Asset Portfolio.
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In evaluating Asset Portfolios, the Company takes into account
concentrations of collateral located in specific regions. At December 31, 1995,
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:
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NUMBER OF
FACE VALUE % OF TOTAL ASSETS % OF TOTAL
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(DOLLARS IN MILLIONS)
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Northeast............................................... $ 492.4 25.2% 1,255 44.2%
West.................................................... 807.5 41.4 673 23.7
Southwest............................................... 217.8 11.2 352 12.4
Midwest................................................. 72.5 3.7 104 3.7
Southeast............................................... 335.5 17.2 333 11.8
Canada.................................................. 26.1 1.3 120 4.2
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Total................................................. $ 1,951.8 100.0% 2,837 100.0%
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The Company invests in both collateralized business loans and real estate
collateralized loans. Asset Portfolios purchased by the Company alone have
tended to be primarily composed of collateralized business loans, because many
of 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 December 31, 1995, the Company's total investment in
wholly-owned Asset Portfolios aggregated $361.5 million (Face Value), which was
composed of $272.4 million (Face Value) (75.4%) of collateralized business
loans, $17.1 million (Face Value) (4.7%) of real estate loans, $66.8 million
(Face Value) (18.5%) of asset-backed securities and $5.2 million (Face Value)
(1.4%) of real estate.
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.
ASSET MANAGEMENT AND RESOLUTION SERVICES. The Company provides asset
management and resolution services to third parties pursuant to contracts with
the owner of an Asset Portfolio or a purchaser (including a partnership, joint
venture or other group in which the Company is a co-investor) of an Asset
Portfolio. Management of Asset Portfolios includes both 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 December 31, 1995, covered Asset Portfolios that ranged
up to $274.6 million (Face Value). 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), (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 is aggressively pursuing contracts to serve as the designated Special
Servicer for pools of securitized 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 (approximately 50 basis points of
the Face Amount 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. At December 31, 1995,
the Company was the designated
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Special Servicer for securitized pools holding over $5.9 billion (Face Value) of
loans, $738.3 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 interests in the
subordinated or unrated tranches from commercial real estate mortgage
securitizations provides the Company a significant competitive advantage in
pursuing Special Servicer contracts. 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 understands the loan valuations and will
manage the loan resolutions. In addition, the Company performs due diligence
reviews of the loans in such securitizations as it does in the acquisitions of
Asset Portfolios.
MORTGAGE BANKING
GENERAL. The Company performs a wide range of commercial mortgage banking
services, including originating, underwriting, placing, selling and servicing of
commercial real estate loans through its Holliday Fenoglio and ACC mortgage
banking units. Through AMRESCO Residential, a residential mortgage banking
business, the Company purchases and securitizes portfolios composed of
residential mortgages of borrowers who do not qualify for conventional loans.
For 1995, $28.9 million (26.1%) of the Company's gross revenues were
attributable to the Company's mortgage banking business.
The Company believes that the real estate mortgage banking business offers
significant growth opportunities. Industry wide, there are an estimated $1.0
trillion principal amount of commercial real estate mortgages outstanding and
the Company estimates that $125.0 billion to $150.0 billion principal amount of
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 mortgage
banking firms offering a variety of mortgage banking and loan management
services nationwide 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 mortgage banking group and through
strategic acquisitions of 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.
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Holliday Fenoglio primarily serves commercial real estate developers and
owners by originating commercial real estate loans. Holliday Fenoglio originates
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, with Holliday Fenoglio
retaining the Primary Servicer rights on more than a quarter of such loans. The
Company believes that Holliday Fenoglio's relationship and credibility with the
institutional lender network provide the Company a competitive advantage in the
commercial mortgage banking industry.
ACC, which originated approximately $447.1 million of commercial real estate
mortgages during 1995, is a mortgage banker that originates and underwrites
commercial real estate loans that are funded primarily by Conduit Purchasers
rather than by institutional lenders. ACC, therefore, makes certain
representations and warranties concerning the loans it originates. These
representations cover such matters as title to the property, lien priority,
environmental reviews and certain other matters. ACC primarily targets
originators of commercial mortgage loans for commercial real estate properties
that are suitable for sale to Conduit Purchasers accumulating loans for
securitization programs directly through ACC's offices located in Dallas, Miami,
Raleigh and Washington, DC, as well as through a network of approximately 42
independent mortgage brokers located throughout the United States. ACC also has
a relationship with the 18-office commercial real estate finance unit of a major
insurance company whereby the insurance company has agreed to refer prospective
borrowers to the Company in instances where the prospective loan does not meet
the insurer's requirements (typically borrowers for medium-quality commercial
properties). Since ACC commenced underwriting activities and through December
31, 1995, Holliday Fenoglio originated approximately 29% of the loans
underwritten by ACC, with Holliday Fenoglio and ACC each receiving fees for
their respective services.
The Company believes that through ACC, the Company has certain additional
significant advantages in the 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 its 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 it in underwriting and/or warehousing a loan.
In July 1995, the Company, through ACC, acquired for approximately $1.3
million CKSRS, whose primary business is the origination, sale to Freddie Mac
and servicing of multi-family apartment mortgages. Through CKSRS, the Company
has become a Freddie Mac Program Plus-Registered Trademark- Seller/Servicer in
Florida, North Carolina and South Carolina. Through this acquisition, the
Company has obtained access to a significant source of funding for multi-family
mortgages. The Company intends to expand its Freddie Mac authorization to
operate in other states. The Company has become an approved Fannie Mae DUS
multi-family lender. The Company expects Freddie Mac and Fannie Mae loan
originations to become an important part of its 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. In addition, the Company acts as a real estate
broker, generally selling investment-quality properties to institutional
investors. Fees for equity or joint venture structures are typically higher.
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
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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 442 loans with over 80 different lenders. Over 30 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 Servicer for securitized pools of
commercial mortgages. For 1995, $4.7 million (4.3%) of the Company's gross
revenues were generated by its commercial loan servicing business. The dominant
users of 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 Servicers are typically paid an
annual fee ranging between 4 and 25 basis points of Face Value of the loans
under management. At December 31, 1995, the Company's Primary Servicing
portfolio totaled approximately $3.3 billion (Face Value).
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 Servicers are typically paid an annual fee ranging
between 4 and 12 basis points of Face Value of the loans under management. The
average life of these securitized pools is expected to be approximately eight
years. At December 31, 1995, the Company's Master Servicing portfolio totaled
approximately $6.7 billion (Face Value).
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 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. The Company has previously participated in this market as a Primary
Servicer of commercial real estate loans for loans originated by its mortgage
banking unit and for loans owned by investor clients.
On October 27, 1995, the Company acquired for approximately $16.9 million a
substantial portion of the assets of EQS, consisting primarily of EQS'
third-party loan pool servicing contracts. At December 31, 1995, the Company was
Master Servicer on approximately $6.6 billion (Face Value) in loans under the
servicing contracts purchased in the EQS Acquisition.
RESIDENTIAL MORTGAGE SECURITIZATION. Through AMRESCO Residential, the
Company purchases (in bulk from independent originators), warehouses and
securitizes portfolios of residential mortgages
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of borrowers who do not qualify for conventional loans and whose borrowing needs
are not met by traditional financial institutions. 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. Because this
market is underserved by traditional lenders, credit is less available, there is
less competition and interest rates are higher than for higher credit quality
mortgage borrowers. The Company believes that the higher risk-adjusted profit
opportunities offered by this market are attractive. At December 31, 1995,
AMRESCO Residential held mortgage portfolios aggregating approximately $142.7
million, which (together with mortgages purchased after December 31, 1995) were
securitized and sold on January 26, 1996, with the Company retaining certain
interest only certificates.
The Company intends to securitize loans through the sale of residential
mortgage-backed securities in the public and private capital markets. The
Company will seek to utilize securitization structures that minimize its 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 and/or interest-only certificates. 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 non-securitization transactions such as joint ventures with
insurance companies and pension funds.
INSTITUTIONAL INVESTMENT ADVISORY
Effective November 20, 1995, the Company acquired for approximately $4.2
million substantially all of the institutional real estate investment advisory
contracts and certain other assets of Acacia. Through these contracts, the
Company now provides real estate 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 (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 these investment decisions. Depending on the amount of discretion
granted 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 very few national competitors, none of which
dominate a particular business line, and many local and regional competitors.
Certain of its competitors within each of its business lines are larger and have
greater financial resources than the Company.
EMPLOYEES
At December 31, 1995, the Company and its subsidiaries employed
approximately 810 employees. Approximately 355 persons are employed in its asset
management and resolution group, 300 in its real estate mortgage banking and
services group, 10 in its residential mortgage group, 20 in its institutional
investment advisory services business and 125 in general corporate
administration. The Company believes that its employee relations are generally
good.
CERTAIN DEFINITIONS
The following are certain defined terms used herein:
"ACACIA" means Acacia Realty Advisors, Inc.
8
<PAGE>
"ACACIA ACQUISITION" means the acquisition by the Company of the
institutional real estate investment 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
and real estate and other collateral acquired through foreclosure or settlement.
"BEI" means BEI Holdings, Ltd.
"BEI MERGER" means the merger of Holdings with and into a subsidiary of BEI
on December 31, 1993.
"CGW" means, collectively, CGW Southwest Partners I, L.P. and CGW Southeast
Partners II, L.P.
"CKSRS" means CKSRS Housing Group, Ltd., a Florida limited partnership.
"COMPANY" means, unless otherwise stated herein 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 secures its funds
by selling ownership interests in the trust to public or private investors.
"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.
"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 to
securitized pools of mortgage-backed securities.
"PRIMARY SERVICER" means an entity which provides various administrative
services for 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.
"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.
9
<PAGE>
"SPECIAL SERVICER" means an entity which provides asset management and
resolution services for non-performing or under-performing loans within a pool
of performing loans and/or mortgages.
ITEM 2. 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.
On February 9, 1996, the Company 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 $1,500,000. The Company proposes to
consolidate substantially all of its Dallas, Texas operations in such space
commencing in August 1996.
ITEM 3. 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
generally is indemnified 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 matters 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fiscal quarter ended December 31, 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Common Stock Market Prices and Dividends included in the Company's Annual
Shareholders Report for the year ended December 31, 1995 are incorporated herein
by reference.
10
<PAGE>
ITEM 6. AMRESCO, INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA
AMRESCO, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
PREDECESSOR
AMRESCO, INC. (1) BUSINESSES (2)
------------------------------------------------------- --------------------------
TWO MONTHS TEN MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, DECEMBER 31,
1995 1994 1993 1992 1992 1991
------------ ------------ ------------ ------------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Operating Results:
Revenues (5)...................... $ 110,486 $ 129,791 $ 122,401 $ 22,809 $ 87,538 $ 48,141
Income from continuing
operations....................... 18,665 20,933 26,306 3,883 (2) (2)
Net income........................ 21,090 18,748 24,218 3,735 23,307 16,037
Primary earnings per share for
income from continuing
operations....................... 0.76 0.88 2.33 0.34 (3) (3)
Primary earnings per share........ 0.86 0.79 2.15 0.33 (3) (3)
Fully-diluted earnings per share
for income from continuing
operations....................... 0.75 0.88 2.33 0.34 (3) (3)
Fully-diluted earnings per
share............................ 0.85 0.79 2.15 0.33 (3) (3)
Dividends per share (4)........... 0.15 0.20 0.35 (3) (3)
Balance Sheet Data:
Total assets...................... 521,713 172,340 163,653 44,238 59,049 59,883
Total liabilities................. 360,919 58,754 71,954 25,503 46,501 28,948
Equity............................ 160,794 113,586 91,699 18,735 12,548 30,935
</TABLE>
- ------------------------
(1) Effective December 31, 1993, AMRESCO, INC., formerly BEI, merged with
Holdings. See discussion of this reverse acquisition in Item 7.
(2) The information for predecessor businesses represents the combined financial
and operating information for the businesses acquired effective October 31,
1992. Predecessor financial statements have not been restated for the effect
of discontinued operations.
(3) Per share data for predecessor businesses are not presented as such data are
not comparable, due to changes in ownership and capital structure of
Holdings as a result of its acquisition by CGW.
(4) In 1993 dividends of $0.35 were paid by Holdings to its shareholders prior
to the merger with BEI.
(5) Certain reclassifications of prior year amounts have been made to conform to
the current year presentation. In particular, reimbursable expenses,
previously shown as assistance revenue and reimbursable costs, are now shown
net for all periods presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
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 Securities
and Exchange 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.
11
<PAGE>
In 1994, the Company concluded all of its significant asset management
relationships with government agencies and financial institutions and also 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 portfolios, developed its institutional real estate
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 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
(dollars in thousands, except per share data).
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Asset acquisition and resolution................................... $ 81,144 $ 110,637 $ 122,944
Mortgage banking................................................... 28,880 6,460
Institutional investment advisory.................................. 452
Corporate and other................................................ 10 12,694 (543)
------------- ------------- -------------
Total revenues................................................... 110,486 129,791 122,401
------------- ------------- -------------
Operating expenses:
Asset acquisition and resolution................................... 37,691 52,741 51,678
Mortgage banking................................................... 22,244 6,237
Institutional investment advisory.................................. 444
Corporate and other................................................ 19,849 35,127 27,046
------------- ------------- -------------
Total operating expenses......................................... 80,228 94,105 78,724
------------- ------------- -------------
Operating profit:
Asset acquisition and resolution................................... 43,453 57,896 71,266
Mortgage banking................................................... 6,636 223
Institutional investment advisory.................................. 8
Corporate and other................................................ (19,839) (22,433) (27,589)
------------- ------------- -------------
Total operating profit........................................... 30,258 35,686 43,677
------------- ------------- -------------
Income tax expense................................................... 11,593 14,753 17,371
------------- ------------- -------------
Income from continuing operations.................................... 18,665 20,933 26,306
Gain(Loss) from discontinued operations.............................. 2,425 (2,185) (2,088)
------------- ------------- -------------
Net income........................................................... $ 21,090 $ 18,748 $ 24,218
------------- ------------- -------------
------------- ------------- -------------
Weighted average shares outstanding and equivalents.................. 24,654,321 23,679,239 11,288,688
Primary earnings per share from continuing operations................ $ 0.76 $ 0.88 $ 2.33
Fully-diluted earnings per share from continuing operations.......... $ 0.75 $ 0.88 $ 2.33
Primary earnings per share........................................... $ 0.86 $ 0.79 $ 2.15
Fully-diluted earnings per share..................................... $ 0.85 $ 0.79 $ 2.15
</TABLE>
RESULTS OF OPERATIONS
Revenues from the Company's asset management and resolution activities
include fees charged for the management of portfolios of performing,
non-performing or underperforming commercial, industrial, agricultural and real
estate loans and for the successful resolution of the assets within such
12
<PAGE>
portfolios. The asset base of each portfolio declines over the life of the
portfolio, thus reducing asset management fees as assets within the portfolio
are resolved. These fees, therefore, 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 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 loan and real estate portfolios is
allocated to individual assets within that 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. Revenues from the Company's residential capital markets activities
consist of interest earned on residential mortgage loans purchased and accrued
earnings on securities purchased. 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 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.
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. 1994 revenues
and operating profit 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%. 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
13
<PAGE>
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 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. 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.
MORTGAGE BANKING -- Revenues for the year ended December 31, 1995 consisted
of $24.4 million in origination, underwriting and servicing revenues, $4.4
million in interest and other investment income, and $.1 million in other
income. Interest and other investment income increased $4.2 million primarily
because of interest earned on mortgage loans held for sale, which increased
$160.8 million late in 1995. 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, ACC's underwriting activities
commencing in the fourth quarter of 1994, and the 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 $16.5
million in personnel expense, $4.3 million in other general and administrative
expense, and $1.4 million in interest expense. The $16.0 million increase is
primarily due to the $11.6 million increase in personnel expenses, the $3.0
million increase in other general and administrative expense, and the $1.4
million increase in interest expense. Expenses increased due to the inclusion of
operations of Holliday Fenoglio, ACC and the contracts acquired from EQS.
INSTITUTIONAL INVESTMENT ADVISORY -- After the Acacia Acquisition in
November 1995, revenues of $.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 $.4 million were incurred, including $.2 million in
personnel expense and $.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 and the $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 costs 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
14
<PAGE>
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. 1994 revenues
and operating profit 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
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 assets and
the management of private third party contracts.
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 $.1 million in
profit participations. The $1.1 million increase over the same period of 1993 is
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 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 contracts. The
decrease in profit participations of $3.0 million is 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.
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. 1994 revenues consisted of $.2 million in interest
income and $6.2 million in mortgage banking revenues, primarily origination,
underwriting and servicing revenues. 1994 expenses 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 $.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 a $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 and
Holliday Fenoglio acquisitions had been consummated as of January 1, 1993. The
$29.1 million, or 17%, decrease was primarily due to a
15
<PAGE>
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 was $0.91 for 1994, compared
to $1.23 for the previous year, a decrease of $0.32, or 26%.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $16.1 million at December 31, 1995,
compared to $20.4 million at December 31, 1994. Cash flows from operating
activities plus principal cash collections on investments totaled $77.9 million
for 1995, compared to $69.8 for 1994. 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 credit facilities, including advances on the corporate and portfolio
credit lines, mortgage warehouse lines, nonrecourse debt, subordinated debt,
retained earnings and cash flow from owned investments.
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Cash provided by operations and collections on investments......................... $ 77.9 $ 69.8
Cash provided by (used for) new capital and borrowings, net........................ 334.6 (11.7)
Cash used for purchase of investments.............................................. (221.8) (62.6)
Cash used for purchase of mortgage loans, net...................................... (160.8)
Cash used for purchase of subsidiaries............................................. (22.3) (17.8)
Ratio of total debt to capital (excluding investment line)......................... 1.9:1 0.1:1
Ratio of total debt to capital (excluding warehouse debt and investment line)...... 0.9:1 0.1:1
Interest coverage ratio *.......................................................... 6.0x 24.4x
</TABLE>
- ------------------------
* Interest coverage ratio means the ratio of earnings before interest, 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 8% convertible subordinated
debt with net proceeds of $43.0 million, issued 2,300,000 shares of common stock
with net proceeds of $25.1 million and obtained several mortgage warehouse lines
of credit to facilitate the origination, underwriting and purchase of mortgage
loans. Additionally, in February 1996, the Company issued $57.5 million in 10%
senior subordinated debt with net proceeds of $54.9 million. 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 line.
The following table shows the components of the Company's capital structure
at December 31, 1995 (dollars in millions):
<TABLE>
<CAPTION>
1995 BALANCE % OF TOTAL
------------- ---------------
<S> <C> <C>
Shareholders' equity.......................................................... $ 160.8 35%
Convertible debentures........................................................ 45.0 9%
Mortgage warehouse loans...................................................... 153.2 33%
Notes payable (excluding investment line)..................................... 105.9 23%
</TABLE>
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 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'
16
<PAGE>
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, primarily contract rights.
At December 31, 1995, the lenders' commitment under the $150.0 million
revolving loan agreement was limited to a total of $105.0 million with $35.0
million available under a corporate facility and $70.0 million available under a
portfolio facility. The additional $45.0 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 agreement. At December 31,
1995, the balance outstanding under the corporate facility was $6.5 million and
the balance outstanding under the portfolio facility was $61.0 million. The
available borrowing capacity under this facility at December 31, 1995, was $37.3
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, 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
shareholders, dividends, transactions with affiliates, acquisitions, mergers and
consolidations, liens and encumbrances and other matters customarily restricted
in such agreements.
Effective November 1, 1995, ARMC entered into a $100.0 million warehouse
line of credit, increased to $150.0 million on November 30, 1995, to finance the
acquisition and warehousing of residential mortgage loans. 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 and
sold and such borrowings were repaid in their entirety and the facility was
terminated. On February 23, 1996, and as amended March 22, 1996, ARMC entered
into a $220.0 million warehouse line of credit to finance the acquisition and
warehousing of residential mortgage loans.
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.
In 1996, the Company intends to pursue (i) additional investment
opportunities by acquiring assets 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 10%
senior subordinated notes sold in February 1996. 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 $16.1 million at December 31,
1995, cash flow from operations, its unused borrowing capacity under its credit
lines ($59.1 million at December 31, 1995, excluding availability under a
mortgage warehouse line which has no stated limit), the net proceeds from the
February 1996 10% senior subordinated debt issuance, 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 to some extent by the availability of
capital.
17
<PAGE>
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.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on Page F-1 of this Annual
Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information contained in item 4. "Changes in Registrant's Certifying
Accountant" of the Company's Current Report on Form 8-K dated March 15, 1994, is
incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is set forth under the caption
"Management" in the Company's definitive Proxy Statement (the "Proxy
Statement"), which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A under the Securities Exchange Act of 1934 and is
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the caption
"Executive Compensation" in the Proxy Statement, which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement, which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A under the Securities Exchange Act of 1934 and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth under the caption
"Certain Relationships and Related Transactions" in the Proxy Statement, which
will be filed with the Securities and Exchange Commission pursuant to Regulation
14A under the Securities Exchange Act of 1934 and is incorporated herein by
reference.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
CONSOLIDATED FINANCIAL STATEMENTS
See Index to Consolidated Financial Statements on page F-1 of this Annual
Report on Form 10-K.
FINANCIAL STATEMENT SCHEDULES
See Index to Consolidated Financial Statements on Page F-1 of this Annual
Report on Form 10-K.
LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- -------------------------------------------------------------------------------------------------
<C> <S>
2.(a) Agreement for Purchase and Sale of Assets, dated as of July 28, 1994, among Holliday Fenoglio
Dockerty & Gibson, Inc., Holliday Fenoglio Dockerty & Gibson of Dallas, Inc., Holliday Fenoglio &
Monte, Inc. and 3003, Inc. and Holliday Acquisition Corp., filed as Exhibit 2.1 to Registrant's
Current Report on Form 8-K dated August 15, 1994, which exhibit is incorporated herein by
reference.
3.(a) Restated Certificate of Incorporation, filed as Exhibit 3(i) to the Registrant's Form 10-Q for
the quarter ended September 30, 1995, which exhibit is incorporated herein by reference.
(b) Amended and Restated Bylaws as of May 23, 1994, filed as Exhibit 3(f) to the Registrant's Form
10-K for the fiscal year ended December 31, 1994, which exhibit is incorporated herein by
reference.
4. See Exhibits 3(a) and (b).
9. Voting Agreement, dated December 29, 1993, by and among Registrant, Gerald E. Eickhoff, James P.
Cotton, Jr., CGW Southeast Partners I, L.P. and CGW Southeast Partners II, L.P., filed as Exhibit
9 to the Registrant's Form 10-K for the fiscal year ended December 31, 1994, which exhibit is
incorporated herein by reference.
10.(a) Employment Agreement of James P. Cotton, Jr. filed as Exhibit 10(a) to the Registration Statement
filed by the Registrant on Form S-4 under the Securities Act of 1933 (File No. 33-4696), which
exhibit is incorporated herein by reference, as amended by Amendment dated January 15, 1992,
filed as Exhibit 10(a) to the Registrant's Form 10-K for the year ended October 31, 1991, which
exhibits are incorporated herein by reference, and Termination of Employment Agreement, dated as
of June 25, 1993, by and between the Registrant and James P. Cotton, Jr., filed as exhibit 10(a)
to the Registrant's Form 10-Q for the quarter ended June 30, 1993, which exhibits are
incorporated herein by reference.(A)
(b) Amendment and Restatement of Employment Agreement, dated as of May 28, 1993, by and between the
Registrant and Gerald E. Eickhoff, filed as Exhibit 10(b) to the June 30, 1993 10-Q, which is
incorporated herein by reference.(A)
(c) Consulting Agreement, dated as of January 3, 1994, between the Registrant and Gerald E. Eickhoff
filed as Exhibit 10(c) to the Registrant's Annual Report on Form 10-K for the year ended December
31, 1993, which exhibit is incorporated herein by reference.(A)
(d) Form of Indemnification Agreement together with a list of all officers and directors who have
signed such agreement, filed as Exhibit 10(g) to the Registrant's Annual Report on Form 10-K for
the year ended October 31, 1987, which exhibit is incorporated herein by reference.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- -------------------------------------------------------------------------------------------------
<C> <S>
(e) Form of Indemnification Agreements, dated as of August 24, 1993, together with a list of all
officers and directors who have signed such agreement, filed as Exhibit 10(g) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 31, 1993, which exhibit is
incorporated herein by reference.
(f) Fifth Amended and Restated Incentive Stock Option Plan dated as of November 20, 1990, filed as
Exhibit 10(h) to the Registrant's Annual Report on Form 10-K for the year ended December 31,
1991, which exhibit is incorporated herein by references.(A)
(g) Fourth Amended and Restated Stock Option Plan dated as of November 20, 1991, filed as Exhibit
10(i) to the Registrants Annual Report on Form 10-K for the year ended December 31, 1991, which
exhibit is incorporated herein by reference.(A)
(h) Stock Option Agreement, dated as of April 17, 1990, between the Registrant and Bruce W.
Schnitzer, and Termination of Warrant between Mr. Schnitzer and the Registrant, filed as Exhibit
10(s) to the Registrant's Annual Report on Form 10-K for the year ended October 31, 1990, which
exhibit is incorporated herein by reference.(A)
(i) Promissory Note dated October 31, 1990 issued by James P. Cotton, Jr. to the Registrant, filed as
Exhibit 10(s) to the Registrant's Annual Report on Form 10-K for the year ended October 31, 1990,
which exhibit is incorporated herein by reference.
(j) Promissory Note dated October 31, 1990 issued by Gerald E. Eickhoff to the Registrant, filed as
Exhibit 10(w) to the Registrant's Annual Report Form 10-K for the year ended October 31, 1990,
which exhibit is incorporated herein by reference.
(k) Stock Purchase Agreement effective as of August 1, 1987 by and among the Registrant, Joe Foster
Company, Joe Foster Management, Inc., JFK Asset Managers, Inc., Joseph H. Foster, Jr. and Eugene
K. Sanger, Jr., as amended by Amendatory Agreement entered into effective as of August 1, 1989,
filed as Exhibit 10(y) to the Registrant's Annual Report on Form 10-K for the fiscal year ended
October 31, 1990 and related Closing Agreement by and between the Registrant, Joe Foster Company,
BEI Asset Managers, Inc., BEI Management, Inc., Joseph H. Foster, Jr., Eugene K. Sanger, Jr.,
Lawrence W. Nixon, Douglas R. Urquhart, Robert L. Adair III and Joseph E. Jernigan, dated
September 10, 1991, filed as Exhibit 10(v) to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1991, which exhibits are incorporated herein by reference.(A)
(l) Employment Agreement of Robert L. Adair III, dated as of November 16, 1993, filed as Exhibit
10(aa) to the Registration Statement of Registrant on Form S-4 under the Securities Act of 1993
(File No. 33-72732), which exhibit is by this reference incorporated herein.(A)
(m) Registrant's 1993 Key Individual Stock Option Plan filed as Exhibit 10(z) to the Registration
Statement of Registrant on Form S-4 under the Securities Act of 1993 (File No. 33-72732), which
exhibit is incorporated herein by reference.(A)
(n) Loan Agreement, dated August 13, 1993, between NationsBank of Texas, N.A., and AMRESCO New
Hampshire, Inc. filed as Exhibit 10(z) to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993, which exhibit is incorporated herein by reference.
(o) Indemnification Agreement, dated March 30, 1993, between AMRESCO Holdings, Inc. and Richard L.
Cravey, filed as Exhibit 10(ab) to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993, which exhibit is incorporated herein by reference.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- -------------------------------------------------------------------------------------------------
<C> <S>
(p) Indemnification Agreement, dated March 30, 1993, between AMRESCO Holdings, and William S. Green,
filed as Exhibit 10(ac) to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993, which exhibit is incorporated herein by reference.
(q) Amended and Restated Agreement for Consulting Services, dated December 29, 1993, between AMRESCO
Holdings, Inc. and CGW Southeast Partners I, L.P., filed as Exhibit 10(ae) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993, which exhibit is incorporated
herein by reference.
(r) Amended and Restated Agreement for Consulting Services, dated December 29, 1993, between AMRESCO
Holdings, Inc. and CGW Southeast Partners II, L.P., filed as Exhibit 10(af) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993, which exhibit is incorporated
herein by reference.
(s) The Registrant's Retirement Savings and Profit Sharing Plan and Trust filed as Exhibit 10(ag) to
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, which exhibit
is incorporated herein by reference.(A)
(t) The Registrant's Retention Bonus Plan, as amended, filed as Exhibit 10(ah) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993 and as Exhibit 10(y) to the
Registration Statement of the Registrant on Form S-4 under the Securities Act of 1993 (File No.
33-72321), which exhibits are incorporated herein by reference.(A)
(u) The Registrant's Severance Pay Plan filed as Exhibit 10(ai) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993, which exhibit is incorporated herein by
reference.(A)
(v) The Registrant's Thrift Restoration Plan filed as Exhibit 10(ak) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993, which exhibit is incorporated herein by
reference.(A)
(w) Second Amended, Restated and Substitute Promissory Note and Share Pledge Agreement between
AMRESCO Holdings, Inc. and Kenneth M. Abrams filed as Exhibit 10(an) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993, which exhibit is incorporated herein by
reference.(A)
(x) Registrant's 1995 Stock Option and Award Plan, filed as Exhibit 10(x) to the Registrant's Form
10-K for the fiscal year ended December 31, 1994, which exhibit is incorporated herein by
reference.
(y) Employment Agreement, dated as of May 31, 1994, between Registrant and Robert H. Lutz, Jr., filed
as Exhibit 10(y) to the Registrant's Form 10-K for the fiscal year ended December 31, 1994, which
exhibit is incorporated herein by reference.
(z) Registration Rights Agreement, dated December 30, 1993, among Registrant, AMRESCO Holdings, Inc.,
James P. Cotton, Jr., Gerald E. Eickhoff, O. Darwin Smith, Calvin C. Hunkele, William G. Kelley,
Kenneth M. Abrams, John L. Hatfield, James D. Philips, I.D. Flores, CGW Southeast Partners I,
L.P. and CGW Southeast Partners II, L.P., filed as Exhibit 10(z) to the Registrant's Form 10-K
for the fiscal year ended December 31, 1994, which exhibit is incorporated herein by reference.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- -------------------------------------------------------------------------------------------------
<C> <S>
(aa) Office Lease between AMRESCO Holdings, Inc. and Mutual Benefit Life Insurance Company in
Rehabilitation, dated July 16, 1992, filed as Exhibit 10(aa) to the Registrant's Form 10-K for
the fiscal year ended December 31, 1994, which exhibit is incorporated herein by reference.
(ab) First Amendment to Office Lease between AMRESCO Holdings, Inc. and Mutual Benefit Life Insurance
Company in Rehabilitation, dated May 15, 1993.
(ac) Second Amendment to Office Lease between AMRESCO, INC. and MBL Life Insurance Corporation, dated
July 1, 1994, filed as Exhibit 10(ac) to the Registrant's Form 10-K for the fiscal year ended
December 31, 1994, which exhibit is incorporated herein by reference.
(ad) Revolving Credit Loan Agreement dated November 2, 1994, between AMRESCO, INC. and NationsBank of
Texas, N.A. filed as Exhibit 10(ad) to the Registrant's Form 10-K for the fiscal year ended
December 31, 1994, which exhibit is incorporated herein by reference.
(ae) Warehousing Credit and Security Agreement, dated as of August 15, 1995, between AMRESCO Capital
Corporation and Residential Funding Corporation, filed as Exhibit 10(a) to the Registrant's Form
10-Q/A No. 1 dated October 25, 1995 for the quarter ended September 30, 1995, which exhibit is
incorporated herein by reference.
(af) Revolving Loan Agreement, dated as of September 29, 1995, among the Registrant, certain
subsidiaries of the Registrant, NationsBank of Texas, N.A. as Agent and the Banks named therein,
filed as Exhibit 10(b) to the Registrant's Form 10-Q/A No. 1 dated October 25, 1995 for the
quarter ended September 30, 1995, which exhibit is incorporated herein by reference.
(ag) First Amendment to Credit Agreement, dated as of November 21, 1995, among the Registrant and
NationsBank of Texas, N.A., as agent, and the Banks named therein, and consented to by certain of
the Registrant's subsidiaries, field as Exhibit 4.2 to the Registrant's Registration Statement on
Form S-3 (No. 33-65329), which exhibit is incorporated herein by reference.
(ah) Indenture, dated as of November 27, 1995, between the Registrant and First Interstate Bank of
Texas, National Association in respect of the Registrant's 8% Convertible Subordinated Debentures
due 2005, filed as Exhibit 4.5 to the Registrant's Registration Statement on Form S-3 (No.
33-63683), which exhibit is incorporated herein by reference.
(ai) Registration Rights Agreement, dated as of November 27, 1995, by and among the Company and the
Agents named therein on behalf of the purchasers of the Company's 8% Convertible Subordinated
Debentures Due 2005, filed as Exhibit 4.7 to the Registrant's Registration Statement on Form S-3
(No. 33-00157), which exhibit is incorporated herein by reference.
(aj) Underwriting Agreement, dated December 7, 1995, among the Registrant, the Selling Shareholders
named therein, and The Robinson-Humphry Company, Inc. and Piper Jaffray Inc., as representatives
of the underwriters listed in Schedule I thereto, filed as Exhibit 1.1 to the Registrant's Form
8-K dated December 13, 1995, which exhibit is incorporated herein by reference.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- -------------------------------------------------------------------------------------------------
<C> <S>
(ak) Purchase Agreement, dated January 29, 1996, between the Registrant and Piper Jaffray Inc., as
representative of the underwriters listed in Schedule I thereto, filed as Exhibit 1.1 to the
Registrant's Form 8-K dated February 2, 1996, which exhibit is incorporated herein by reference.
(al) Indenture, dated as of January 15, 1996, between the Registrant and Bank One, Columbus, N.A., as
trustee, filed as Exhibit 4.1 to the Registrant's Form 8-K dated February 2, 1996, which exhibit
is incorporated herein by reference.
(am) Second Amendment to Agreement for Purchase and Sale of Assets, dated November 21, 1995, by and
among the Registrant, Holliday Fenoglio, Inc. and certain sellers and shareholders named
therein.*
(an) Amendment to Stock Option Agreement, dated as of April 1, 1995, between the Registrant and Bruce
W. Schnitzer.*(A)
(ao) Lease Agreement, dated as of February 9, 1996, between K-P Plaza Limited Partnership and the
Registrant.*
(ap) Interim Warehouse and Security Agreement, dated as of February 23, 1996, among Prudential
Securities Realty Funding Corporation and AMRESCO Residential Mortgage Corporation.*
11. Statement re: Computation of Per Share Earnings.*
13. Preliminary proof of the 1994 Annual Report to Shareholders which contains the manually executed
report of independent auditors covering the financial statements in such Annual Report that are
incorporated into this Form 10-K by reference. With the exception of information expressly
incorporated herein by direct reference thereto, the Annual Report is not deemed to be filed as
part of this Annual Report on Form 10-K.
16. Letter from Ernst & Young with respect to change in certifying accountants, filed as Exhibit 16
to Amendment No. 1 to the Registrant's Current Report on Form 8-K dated March 15, 1994, which
exhibit is incorporated herein by reference.
21. Subsidiaries of the Registrant.*
23. Consent of Independent Auditors.*
24. Power of Attorney of the Directors and certain officers of the Registrant.*
27. Financial Data Schedule.*
</TABLE>
- ------------------------
* Filed herewith.
(A) Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of this Report.
REPORTS ON FORM 8-K
During the fiscal quarter ended December 31, 1995, the Company filed two
Current Reports on Form 8-K, each of which reported information under Item 5
(Other Information). The Form 8-K's were dated as of November 21, 1995 and as of
December 13, 1995, respectively.
23
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Consolidated Balance Sheets, December 31, 1995 and 1994.................................................... F-2
Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993..................... F-3
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1995, 1994 and 1993....... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993................. F-5
Notes to Consolidated Financial Statements................................................................. F-6
Independent Auditors' Report............................................................................... F-24
</TABLE>
F-1
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Cash and cash equivalents............................................................... $ 16,139 $ 20,446
Temporary investments (Note 7).......................................................... 21,942
Accounts receivable, net of reserves of $1,737 and $4,929, respectively................. 20,158 20,682
Mortgage loans held for sale (Notes 4 and 7)............................................ 160,843
Investments (Note 7):
Loans (Note 4)........................................................................ 138,180 32,631
Partnerships and joint ventures....................................................... 34,694 22,491
Asset-backed and other securities (Note 5)............................................ 46,187 3,481
Real estate........................................................................... 5,686 14,054
Deferred income taxes (Note 8).......................................................... 12,184 17,207
Premises and equipment, net of accumulated depreciation of $2,335 and $1,082,
respectively........................................................................... 5,904 4,301
Intangible assets, net of accumulated amortization of $4,136 and $1,226, respectively
(Note 2)............................................................................... 51,878 30,668
Other assets (Note 6)................................................................... 7,918 6,379
----------- -----------
TOTAL ASSETS............................................................................ $ 521,713 $ 172,340
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable...................................................................... $ 14,124 $ 12,045
Accrued employee compensation and benefits (Note 12).................................. 10,487 18,460
Notes payable (Note 7)................................................................ 127,796 16,459
Warehouse loan payable (Note 7)....................................................... 153,158
Convertible debt (Note 7)............................................................. 45,000
Income taxes payable (Note 8)......................................................... 2,897 1,219
Net liabilities of discontinued operations (Note 10).................................. 954
Other liabilities (Note 9)............................................................ 7,457 9,617
----------- -----------
TOTAL LIABILITIES................................................................... 360,919 58,754
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY (Note 11):
Preferred stock, $1.00 par value, authorized 5,000,000 shares; none outstanding
Common stock, $0.05 par value, authorized 50,000,000 shares; 26,689,331 and 23,592,647
issued in 1995 and 1994, respectively................................................ 1,334 1,180
Capital in excess of par.............................................................. 106,054 74,691
Reductions for employee stock......................................................... (2,238) (429)
Treasury stock, $0.05 par value, 24,339 shares in 1995................................ (160)
Unrealized gains (losses) (Note 5).................................................... 114 (62)
Retained earnings..................................................................... 55,690 38,206
----------- -----------
TOTAL SHAREHOLDERS' EQUITY.......................................................... 160,794 113,586
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................................. $ 521,713 $ 172,340
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Asset management and resolution fees (Note 3)...................... $ 41,295 $ 93,764 $ 118,552
Interest and other investment income............................... 40,105 14,215 3,440
Mortgage banking fees.............................................. 24,382 6,176
Other revenues (Note 3)............................................ 4,704 15,636 409
------------- ------------- -------------
Total revenues................................................... 110,486 129,791 122,401
------------- ------------- -------------
EXPENSES:
Personnel (Note 12)................................................ 52,852 68,143 63,618
Occupancy.......................................................... 2,646 2,814 1,448
Equipment.......................................................... 2,294 1,973 845
Professional fees.................................................. 3,190 2,922 1,916
General and administrative......................................... 10,251 16,410 7,106
Interest (Note 7).................................................. 6,921 1,768 754
Profit participations.............................................. 2,074 75 3,037
------------- ------------- -------------
Total expenses................................................... 80,228 94,105 78,724
------------- ------------- -------------
Income from continuing operations before income taxes................ 30,258 35,686 43,677
Income tax expense (Note 8).......................................... 11,593 14,753 17,371
------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS.................................... 18,665 20,933 26,306
Gain (loss) from discontinued operations, net of income taxes (Note
10)................................................................. 2,425 (2,185) (2,088)
------------- ------------- -------------
NET INCOME........................................................... $ 21,090 $ 18,748 $ 24,218
------------- ------------- -------------
------------- ------------- -------------
Primary earnings per share for income from continuing operations..... $ 0.76 $ 0.88 $ 2.33
Primary earnings per share........................................... $ 0.86 $ 0.79 $ 2.15
Weighted average number of common shares outstanding and common share
equivalents......................................................... 24,654,321 23,679,239 11,288,688
Fully-diluted earnings per share for income from continuing
operations.......................................................... $ 0.75 $ 0.88 $ 2.33
Fully-diluted earnings per share..................................... $ 0.85 $ 0.79 $ 2.15
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK,
$0.05 PAR VALUE REDUCTIONS
CONVERTIBLE COMMON ----------------------- CAPITAL IN FOR
PREFERRED STOCK, NO NUMBER OF EXCESS OF EMPLOYEE TREASURY
STOCK PAR SHARES AMOUNT PAR STOCK STOCK
----------- ----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1993.................. $ 12,696 $ 3,090 $ $ $ (786) $
Cancellation of stock and notes
receivable (Note 11)............ (179) 179
Employee stock compensation (Note
11)............................. 1,188
Dividends paid ($.35 per
share)..........................
Conversion of convertible
preferred stock (Note 2)........ (12,696) 12,696
Conversion of common stock (Note
2).............................. (16,795) 11,120,530 556 16,239
Issuance of common stock for
acquisition (Note 2)............ 11,189,287 560 50,873
Net income.......................
----------- ----------- ---------- ----------- ----------- ----------- -----------
DECEMBER 31, 1993................ 22,309,817 1,116 67,112 (607)
----------- ----------- ---------- ----------- ----------- ----------- -----------
Exercise of stock options (Note
11)............................. 711,590 35 1,560
Issuance of common stock for
acquisition (Note 2)............ 571,240 29 4,291
Tax benefits from employee stock
compensation.................... 1,728
Repayments of notes receivable
for officer's shares (Note
11)............................. 178
Dividends paid ($.20 per
share)..........................
Foreign currency translation
adjustments.....................
Net income.......................
----------- ----------- ---------- ----------- ----------- ----------- -----------
DECEMBER 31, 1994................ 23,592,647 1,180 74,691 (429)
----------- ----------- ---------- ----------- ----------- ----------- -----------
Common stock offering (Note 11).. 2,300,000 115 24,995
Exercise of stock options (Note
11)............................. 434,480 22 1,234
Issuance of common stock for
earnout (Note 2)................ 112,002 5 772
Issuance of common stock for
unearned stock compensation
(Note 11)....................... 250,202 12 2,385 (2,397)
Amortization of unearned stock
compensation (Note 11).......... 279
Tax benefits from employee stock
compensation.................... 1,977
Repayment of notes receivable for
officers' shares (Note 11)...... 220
Settlement of notes receivable
for officers' shares with common
stock (14,339 shares)........... 89 (89)
Acquisition of treasury stock
(10,000 shares)................. (71)
Dividends paid ($0.15 per
share)..........................
Foreign currency translation
adjustments.....................
Unrealized gain on investments
available for sale, net (Note
5)..............................
Net income.......................
----------- ----------- ---------- ----------- ----------- ----------- -----------
DECEMBER 31, 1995................ $ $ 26,689,331 $ 1,334 $ 106,054 $ (2,238) $ (160)
----------- ----------- ---------- ----------- ----------- ----------- -----------
----------- ----------- ---------- ----------- ----------- ----------- -----------
<CAPTION>
NET
UNREALIZED TOTAL
GAINS RETAINED SHAREHOLDERS'
(LOSSES) EARNINGS EQUITY
------------- ----------- -------------
<S> <C> <C> <C>
JANUARY 1, 1993.................. $ $ 3,735 $ 18,735
Cancellation of stock and notes
receivable (Note 11)............
Employee stock compensation (Note
11)............................. 1,188
Dividends paid ($.35 per
share).......................... (3,875) (3,875)
Conversion of convertible
preferred stock (Note 2)........
Conversion of common stock (Note
2)..............................
Issuance of common stock for
acquisition (Note 2)............ 51,433
Net income....................... 24,218 24,218
----- ----------- -------------
DECEMBER 31, 1993................ 24,078 91,699
----- ----------- -------------
Exercise of stock options (Note
11)............................. 1,595
Issuance of common stock for
acquisition (Note 2)............ 4,320
Tax benefits from employee stock
compensation.................... 1,728
Repayments of notes receivable
for officer's shares (Note
11)............................. 178
Dividends paid ($.20 per
share).......................... (4,620) (4,620)
Foreign currency translation
adjustments..................... (62) (62)
Net income....................... 18,748 18,748
----- ----------- -------------
DECEMBER 31, 1994................ (62) 38,206 113,586
----- ----------- -------------
Common stock offering (Note 11).. 25,110
Exercise of stock options (Note
11)............................. 1,256
Issuance of common stock for
earnout (Note 2)................ 777
Issuance of common stock for
unearned stock compensation
(Note 11).......................
Amortization of unearned stock
compensation (Note 11).......... 279
Tax benefits from employee stock
compensation.................... 1,977
Repayment of notes receivable for
officers' shares (Note 11)...... 220
Settlement of notes receivable
for officers' shares with common
stock (14,339 shares)...........
Acquisition of treasury stock
(10,000 shares)................. (71)
Dividends paid ($0.15 per
share).......................... (3,606) (3,606)
Foreign currency translation
adjustments..................... 111 111
Unrealized gain on investments
available for sale, net (Note
5).............................. 65 65
Net income....................... 21,090 21,090
----- ----------- -------------
DECEMBER 31, 1995................ $ 114 $ 55,690 $ 160,794
----- ----------- -------------
----- ----------- -------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income..................................................................... $ 21,090 $ 18,748 $ 24,218
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.............................................. 4,334 3,028 2,955
Provision for loss (gain on sale) of discontinued operation................ (2,425) 1,645
Write-off of intangible related to contract conclusion..................... 2,827
Deferred tax provision (benefit)........................................... 5,023 966 (1,650)
Loss from disposition of property and equipment............................ 67 198
Employee stock compensation................................................ 279 1,188
Increase (decrease) in cash for changes in (exclusive of assets and
liabilities acquired in business combinations):
Accounts receivable...................................................... 4,757 17,855 3,287
Purchase of mortgage loans held for sale, net............................ (160,843)
Proceeds from mortgage warehouse debt,net................................ 153,158
Other assets............................................................. (3,990) 1,908 (3,848)
Accounts payable......................................................... (2,272) (4,768) (4,924)
Income taxes payable..................................................... 61 678 (2,699)
Other liabilities........................................................ (11,577) (4,137) 17,391
--------- --------- ---------
Net cash provided by operating activities.............................. 7,662 38,948 35,918
--------- --------- ---------
INVESTING ACTIVITIES:
Purchase of temporary investments, net....................................... (21,942)
Purchase of investments...................................................... (166,180) (59,099) (36,894)
Collections on investments................................................... 57,208 30,815 3,099
Purchase of investments available for sale................................... (55,665) (3,481)
Collections on investments available for sale................................ 13,067
Cash used for purchase of subsidiaries....................................... (22,323) (17,830)
Proceeds from sales of subsidiaries.......................................... 6,250 1,385
Cash and cash equivalents acquired through BEI merger........................ 18,521
Purchase of premises and equipment........................................... (2,384) (2,141) (852)
--------- --------- ---------
Net cash used in investing activities.................................. (191,969) (50,351) (16,126)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from notes payable and other debt................................... 565,311 19,894 42,426
Repayment of notes payable and other debt.................................... (408,974) (31,547) (19,129)
Payment of dividends......................................................... (4,785) (3,441) (3,875)
Proceeds from common stock offering.......................................... 25,110
Stock options exercised...................................................... 1,256 1,595
Tax benefit of employee stock compensation................................... 1,977 1,728
Tax effect of unrealized gains and losses.................................... (44)
Acquisition of treasury stock................................................ (71)
Repayment of notes receivable for officers' shares........................... 220 178
--------- --------- ---------
Net cash provided by (used in) financing activities.................... 180,000 (11,593) 19,422
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........................... (4,307) (22,996) 39,214
Cash and cash equivalents, beginning of period................................. 20,446 43,442 4,228
--------- --------- ---------
Cash and cash equivalents, end of period....................................... $ 16,139 $ 20,446 $ 43,442
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES:
Interest paid................................................................ $ 5,494 $ 1,533 $ 678
Income taxes paid............................................................ 4,813 8,507 23,460
Conversion of convertible preferred stock to common stock.................... 12,696
Common stock issued for purchase of mortgage banking subsidiary and related
earnout..................................................................... 777 4,320
Accrued earnout payment for purchase of mortgage banking subsidiary.......... 3,883 3,883
Common stock issued for unearned stock compensation.......................... 2,397
Notes receivable received in connection with sales of subsidiaries........... 818
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- On December 31, 1993, AMRESCO, INC., formerly BEI
Holdings, Ltd. (BEI), merged with AMRESCO Holdings, Inc. (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. on May 23, 1994, remains the continuing legal entity and registrant for
Securities and Exchange 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 operations of BEI have
been included in the financial statements from the date of acquisition. AMRESCO,
INC. (the "Company") is engaged primarily in the business of investment
acquisition, asset management and resolution, loan origination/underwriting,
residential mortgage loan purchasing and securitization, commercial loan
servicing and institutional real estate investment advising. The Company's
business may be affected by many factors, including real estate and other asset
values, 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.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include
the accounts of the Company, its subsidiaries and its controlled joint ventures.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE AND EXPENSE RECOGNITION -- Asset management and resolution fees from
management contracts are based on the amount of assets under management and the
net proceeds from the resolution of such assets, respectively, and are
recognized as earned. Expenses incurred in managing and administering the assets
subject to management contracts are charged to expense as incurred. Loan
placement fees, commitment fees, loan servicing 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 institutional
investment advisor business are earned from providing real estate investment
advisory services to institutional and corporate investors, including
acquisition, portfolio/ asset management and disposition services.
CASH EQUIVALENTS -- Cash equivalents include all highly liquid investments
with a maturity of three months or less when purchased.
TEMPORARY INVESTMENTS -- Temporary investments consist of short-term
investments such as Treasury bills, federal agency securities and commercial
paper with a maturity of three months or less. The Company has the intent and
ability to hold these investments to maturity and are carried at amortized cost.
Because of the short maturities, cost estimates fair value. All temporary
investments are pledged as collateral under the investment loan agreement. See
Note 7.
RECEIVABLES -- Receivables are recognized as earned according to the
respective management contracts. Included in accounts receivable are other
amounts due as reimbursement for certain expenses incurred, or for funds
advanced on behalf of customers. The Company's exposure to credit loss in the
event that payment is not received for revenue recognized equals the balance of
accounts receivable in the balance sheet.
MORTGAGE LOANS HELD FOR SALE -- Mortgage loans held for sale are carried at
the lower of cost or market. Market is determined on an individual loan basis
based upon the estimated fair value of similar loans for the month of expected
delivery.
Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting for
Mortgage Servicing Rights" (an amendment of SFAS No. 65), which is effective for
the fiscal year 1996, requires mortgage banking enterprises to recognize as
separate assets rights to service mortgage loans for
F-6
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
others, whether such rights are originated by the Company's own mortgage banking
activities or purchased from others. The Company adopted SFAS No. 122 effective
January 1, 1996, and the impact of such adoption will be insignificant to its
financial condition and results of operations.
INVESTMENTS -- The Company classifies its investments as: loans,
partnerships and joint ventures, asset-backed and other securities, and real
estate. The original cost of an investment portfolio is allocated to individual
assets within that 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 cost 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
the Company's pro rata share of earnings as if the Company 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
or losses on asset-backed and other securities are excluded from earnings and
reported as a separate component of shareholders' equity, net of tax effects.
Any permanent impairment in the value of a security will be included in
earnings.
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended
by SFAS No. 118 requires creditors to evaluate the collectibility of both
contractual interest and principal of loans when assessing the need for a loss
accrual. Impairment is measured based on the present value of the expected
future cash flows discounted at the loan's effective interest rate, or the fair
value of the collateral, less estimated selling costs, if the loan is collateral
dependent and foreclosure is probable. As of January 1, 1995, the Company
adopted the provisions of SFAS No. 114 and SFAS No. 118. Because substantially
all of the Company's loans at January 1, 1995, had been purchased at a
substantial discount, the adoption had an insignificant impact on the Company's
financial condition and results of operations.
PREMISES AND EQUIPMENT -- Premises and equipment, primarily furniture and
fixtures, are stated at cost less accumulated depreciation. The related assets
are depreciated using the straight-line method over their estimated service
lives, which range from three to twenty years. Improvements to leased property
are amortized over the life of the lease or the life of the improvement,
whichever is shorter.
INTANGIBLE ASSETS -- Intangible assets represent the excess of purchase
price over the fair market value of net assets acquired in connection with the
purchases described in Note 2, as well as capitalized debt issuance costs. These
intangible assets, principally goodwill, servicing rights and contracts
acquired, are amortized using the straight-line method over periods ranging from
one to fifteen years. The Company periodically assesses the recoverability of
intangible assets and estimates the remaining useful life by reviewing projected
results of acquired operations, servicing rights and contracts.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", which is effective for fiscal years
beginning after December 15, 1995, requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. SFAS No. 121 also requires
that long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell. The
Company adopted SFAS No. 121 effective January 1, 1996, and the impact of such
adoption will be insignificant to its financial condition and results of
operations.
F-7
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES -- Deferred income taxes are recorded for temporary differences
between the bases of assets and liabilities as recognized by tax laws and their
carrying value as reported in the financial statements.
EARNINGS PER SHARE -- Earnings per share is computed by dividing net income
by the weighted average number of common shares and common share equivalents
outstanding. The weighted average number of shares outstanding for the year
ended December 31, 1993, is based on the number of BEI shares of common stock
and equivalents exchanged for Holdings shares (see Note 2) and assumes the
retroactive conversion of the preferred stock.
SFAS No. 123, "Accounting for Stock-Based Compensation", 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.
Management expects to continue 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
method in SFAS No. 123 had been used to account for stock-based compensation
cost in future financial statement presentations.
FOREIGN OPERATIONS -- Assets and liabilities of the foreign subsidiaries are
translated into United States dollars at the prevailing exchange rate on the
balance sheet date. Revenue and expense accounts for these subsidiaries are
translated using the weighted average exchange rate during the period. These
translation methods give rise to cumulative foreign currency translation
adjustments which are reported as a component of equity.
DERIVATIVE FINANCIAL INSTRUMENTS -- Derivative financial instruments are
utilized by the Company to reduce interest rate and foreign exchange risks. The
Company has established a control environment which includes policies and
procedures for risk assessment and the approval, reporting and monitoring of
derivative financial instruments activities. The Company does not hold or issue
derivative financial instruments for speculative or trading purposes. Income and
expense from derivative financial instruments are recorded in the same category
as that arising from the related asset or liability being hedged. Gains and
losses resulting from effective hedges of existing assets, liabilities or firm
commitments are deferred and recognized when the offsetting gains and losses are
recognized on the related hedged items.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principals requires management to make
estimates and assumptions that affect reporting amounts of certain assets,
liabilities, revenues and expenses as of and for the years ended December 31,
1995, 1994 and 1993. Actual results may differ from such estimates.
RECLASSIFICATIONS -- Certain reclassifications of prior year amounts have
been made to conform to the current year presentation. In particular,
reimbursable expenses, previously shown as assistance revenue and reimbursable
costs, are now shown net for the years ended December 31, 1995, 1994 and 1993.
2. ACQUISITIONS
On October 27, 1995, the Company, through its wholly-owned subsidiary
AMRESCO Management, Inc., completed the acquisition of the third-party
securitized, commercial mortgage loan Master Servicer and Special Servicer
businesses of EQ Services, Inc. and Equitable Real Estate Investment Management,
Inc. (collectively "EQS") for $16,864,000. Effective November 20, 1995, the
Company,
F-8
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
through its wholly-owned subsidiary AMRESCO Advisors, Inc., completed the
purchase of substantially all of the pension fund advisory contracts and certain
other assets of Acacia Realty Advisors, Inc. ("Acacia") for $4,180,000. AMRESCO
Advisors, Inc. provides real estate investment advisory services to pension and
other institutional investors in respect of investments in office, industrial
and distressed real estate properties. AMRESCO Advisors, Inc. is a registered
investment advisor with the Securities and Exchange Commission under the
Investment Advisors Act of 1940. The purchases were allocated as follows (in
thousands):
<TABLE>
<CAPTION>
AMRESCO AMRESCO
MANAGEMENT, ADVISORS,
INC. INC.
------------ -----------
<S> <C> <C>
Servicing contracts and other intangibles.................................... $ 14,500 $ 4,300
Accounts receivable.......................................................... 1,832
Equipment, furniture and fixtures............................................ 500 200
Other assets................................................................. 32 30
Accrued other liabilities.................................................... (350)
------------ -----------
Net assets acquired........................................................ $ 16,864 $ 4,180
------------ -----------
------------ -----------
</TABLE>
The allocations of the purchase price are based on the best available
information and are subject to adjustment.
Effective June 30, 1995, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of CKSRS Housing Group, Ltd., ("CKSRS") a Miami,
Florida-based commercial mortgage banking company specializing in the
origination, sale and servicing of multifamily mortgages in Florida for
$1,278,000.
Effective August 1, 1994, the Company acquired substantially all of the
assets of Holliday Fenoglio Dockerty & Gibson, Inc. and certain of its
affiliates ("Holliday Fenoglio"), which are originators and servicers of
commercial mortgages, for a maximum of approximately $33,000,000, based upon an
initial payment of $17,280,000 in cash and $4,320,000 in stock, and three
additional annual earnout payments if targeted earnings are met or exceeded in
1994, 1995 and 1996. For each of the periods ended December 31, 1995 and 1994,
$3,883,000 was accrued for the respective year's earnout payment. The
transaction has been accounted for as an asset purchase. The purchase price,
determined based on the cash paid, the fair market value of the Company stock
issued and direct acquisition costs, was allocated to the Holliday Fenoglio
assets acquired based on the fair market value at the date of acquisition. The
Holliday Fenoglio assets purchased, including acquisition costs, as of August 1,
1994, were as follows (in thousands):
<TABLE>
<S> <C>
Premises and equipment.................................................... $ 1,015
Loan servicing rights..................................................... 2,200
Goodwill and non-compete agreement........................................ 18,907
Other assets.............................................................. 78
---------
Net assets acquired..................................................... $ 22,200
---------
---------
</TABLE>
On December 31, 1993, BEI merged with Holdings. The merger was accomplished
first by converting each outstanding share of Holdings' convertible preferred
stock into 4.91 shares of Holdings common stock. Each share of Holdings' common
stock was then exchanged for 10.03 shares of BEI common stock for a total of
11,120,530 shares, resulting in Holdings becoming a subsidiary of
F-9
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
BEI. During 1994, the Company sold to outside parties substantially all of the
assets of its EnterChange subsidiaries, acquired December 31, 1993 with the
acquisition of BEI, for approximately $1,500,000 in cash and $818,000 in
promissory notes.
The following pro forma consolidated results of operations for the twelve
months ended December 31, 1994 and 1993 are presented as if the acquisitions of
Holliday Fenoglio and BEI occurred at the beginning of the period presented (in
thousands, except per share data):
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Revenues...................................................................... $ 139,275 $ 168,367
Income from continuing operations............................................. 21,846 28,001
Earnings per share from continuing operations................................. 0.91 1.23
</TABLE>
The pro forma effect of the acquisitions of EQS, Acacia and CKSRS in 1995
would have an insignificant impact on the consolidated results of operations of
the Company for the years ended December 31, 1995, 1994 and 1993.
3. ASSET MANAGEMENT CONTRACTS
The Company provides asset management and resolution services for private
investors, financial institutions, and government agencies. Generally, the
contracts provide for the payment of a fixed management fee which is reduced
proportionately as managed assets decrease, a resolution fee using specified
percentage rates based on net cash collections and an incentive fee for
resolution of certain assets. Asset management and resolution contracts are of a
finite duration, typically 3-5 years. Unless new assets are added to these
contracts during their terms, the amount of total assets under management
decreases over the terms of these contracts.
On August 31, 1994, the Company and NationsBank Corporation concluded their
asset management contract ("NationsBank Contract"). The NationsBank Contract had
an original term expiring in June 1997 and, as provided, the Company received an
early conclusion fee of $10,000,000 which is included in 1994 other revenues.
One-time expenses related to the NationsBank Contract conclusion included
incentive compensation of $1,200,000 and $2,800,000 for related intangible
write-offs. A significant management contract with the FDIC expired on January
31, 1995. During 1994 all the existing asset management contracts with the RTC
expired, and in December, 1995, the Company received a $4,000,000 final
settlement from the RTC for certain contracts.
4. INVESTMENT IN LOANS
Ninety-seven percent of the Company's loans held for investment are loans
purchased at substantial discounts from the principal amount, with the remaining
three percent comprised of other high-yield loans and other notes receivable. At
December 31, 1995 the Company had mortgage loans held for securitization with a
book value of $142,749,000 included in mortgage loans held for sale. These loans
are carried at cost, which does not exceed market. These loans were securitized
and sold for a gain in January, 1996. All of the Company's loans are collateral
under the Company's notes payable and other debt.
F-10
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ASSET-BACKED AND OTHER SECURITIES
Securities available for sale, carried at estimated fair value, at December
31, 1995 and 1994, are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
1995:
Asset-backed securities............................... $ 33,930 $ 325 ($ 217) $ 34,038
Interest-only securities.............................. 12,149 12,149
----------- ----- ----------- ---------
Total............................................... $ 46,079 $ 325 ($ 217) $ 46,187
----------- ----- ----------- ---------
----------- ----- ----------- ---------
1994:
Asset-backed securities............................... $ 3,481 $ 3,481
----------- ----- ----------- ---------
----------- ----- ----------- ---------
</TABLE>
Maturities of asset-backed securities are not presented because the loans
underlying such securities are subject to prepayment. All of the Company's
asset-backed and other securities are collateral under the Company's notes
payable and other debt.
Proceeds from the sales of an available for sale investment security during
1995 were $13,760,000, with a gross realized gain of $428,000.
6. OTHER ASSETS
The following table summarizes the components of other assets at December
31, 1995 and 1994, (in thousands):
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Deferred compensation agreements with former officers.............................. $ 1,848 $ 1,629
Prepaid expenses................................................................... 1,605 412
Notes receivable................................................................... 525 525
Income taxes receivable............................................................ 1,135
Other.............................................................................. 3,940 2,678
--------- ---------
Total other assets............................................................... $ 7,918 $ 6,379
--------- ---------
--------- ---------
</TABLE>
Deferred compensation agreements include notes from two former officers of
BEI, who are currently directors, which were executed prior to its acquisition
by the Company. The amounts due represent the present value of non-interest
bearing notes due in 2006 and 2007 for advances for premiums on split-dollar
life insurance policies owned by the two directors. Cash surrender values of
approximately $1,738,000 and $850,000 at December 31, 1995 and 1994,
respectively, collateralize these notes, and the Company is a beneficiary under
the life insurance policies to the extent of total premiums advanced. Included
in other liabilities at December 31, 1995 and 1994 is $1,191,000 and $1,331,000,
respectively, representing the present value of the Company's obligation to make
future premium payments on such life insurance policies. Notes receivable are
unsecured notes from these former officers due in 1996 and bearing interest at
8.5%.
F-11
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE AND OTHER DEBT
Notes payable and other debt at December 31, 1995 and 1994, consist of the
following (in thousands):
<TABLE>
<CAPTION>
1995 1994
----------- ---------
<S> <C> <C>
NOTES PAYABLE:
$150,000,000 revolving credit line agreement with a syndicate of lenders for:
Advances on 30 day terms at 7.6224% to 7.75%............................... $ 61,000
Advances at a prime rate of 8.5%........................................... 6,500
$75,000,000 revolving credit line agreement with NationsBank of Texas, N.A.
(the "Bank") for:
Advance on a 182 day term at a 8.375%...................................... $ 8,000
Advance at a prime rate of 8.5%............................................ 7,500
$35,000,000 revolving investment loan agreement with the Bank................ 21,942
Nonrecourse debt payable to two financial services companies................. 38,354 959
----------- ---------
Total notes payable...................................................... $ 127,796 $ 16,459
----------- ---------
----------- ---------
</TABLE>
On September 29, 1995, the Company entered into a $150,000,000 revolving
loan agreement with a syndicate of lenders, led by the Bank which matures on
September 29, 1997. By its terms, the revolving loan agreement has two primary
components, $50,000,000 available under a corporate facility and $100,000,000
available under a portfolio facility. The syndicate's current commitment under
the revolving loan agreement is limited to a total of $105,000,000; $35,000,000
under the corporate facility and $70,000,000 under the portfolio facility. The
additional amounts under the revolving loan agreement 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 terms, including interest, may be selected by the Company and tied to
either the Bank's variable rate (8.50% at December 31, 1995) or, for advances on
a term basis up to approximately 180 days, a rate equal to an adjusted LIBOR
rate (5.53% at December 31, 1995). Interest is payable quarterly and at the end
of each advance period. 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 held by the Company.
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, 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 shareholders, dividends, transactions with affiliates,
acquisitions, mergers and consolidations, liens and encumbrances and other
matters customarily restricted in such agreements. The Company has outstanding
letters of credit totaling $239,000 at December 31, 1995, which reduce the
available revolving line. The available borrowing capacity under this facility
at December 31, 1995, was $37,300,000.
Prior to entering into the revolving loan agreement described above,
Holdings maintained a $75,000,000 line of credit with the Bank which bore
interest at their prime rate. This line of credit was terminated with the
$150,000,000 revolving credit agreement. Prior to entering into the $75,000,000
F-12
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE AND OTHER DEBT (CONTINUED)
revolving credit agreement , Holdings maintained a $35,000,000 line of credit
with the Bank which bore interest at their prime rate plus 0.5%. This line of
credit was terminated with the $75,000,000 revolving credit agreement.
On January 20, 1995, the Company entered into a $35,000,000 revolving
investment loan agreement with the Bank. Proceeds of the loan are used to
acquire short-term investments which secure the loan. Interest is computed based
on market rates adjusted for the Company's credited funds at the Bank.
On July 27, 1995, two wholly-owned subsidiaries of the Company jointly
entered into a $27,500,000 nonrecourse term loan agreement with a financial
services company to finance investments in portfolios. The loan, with an
outstanding balance of $17,760,000 at December 31, 1995, is collateralized by a
security interest in the investments in asset portfolios of the subsidiaries
with a net book value at December 31, 1995, of $35,527,000. The stated interest
rate for this debt is the financial company's floating prime rate plus 1.5% (10%
at December 31, 1995); however, the borrowing entities may elect to have up to
three traunches of debt bear interest at adjusted LIBOR rate plus 3% (8.53% at
December 31, 1995 for a term of 180 days), with the term of each traunche to be
up to 180 days. Interest is payable monthly. Principal payments are due monthly
and are equal to 90% of the net portfolio cash flow for the preceding month.
Additional principal reductions may be required on a quarterly basis to meet
minimum principal payment requirements. The loan is nonrecourse to the Company
and matures on July 31, 1998. As part of the agreement, the borrowing entities
and the Company are subject to both positive and negative covenants.
On December 19, 1995, a wholly-owned subsidiary of the Company entered into
a $20,593,000 Global Master Repurchase Agreement with a financial services
company to support the purchase of certain commercial mortgage pass-through
certificates. The agreement bears interest at a rate based on 30 day LIBOR plus
1.4% (7.12% at December 31, 1995) payable monthly. This facility is secured by
the commercial mortgage pass-through certificates and repayment of principal is
based on cash flow from such securities. At December 31, 1995, the balance
outstanding under this facility was $20,593,000, secured by assets with a book
value of $27,520,000.
<TABLE>
<CAPTION>
1995
-----------
<S> <C>
MORTGAGE WAREHOUSE DEBT (IN THOUSANDS):
$25,000,000 mortgage warehouse debt at 7.75%............................................. $ 8,987
Mortgage warehouse debt payable to two financial services companies:
Advances on 60 day terms at 7.37% to 7.65%............................................. 144,171
-----------
Total mortgage warehouse debt........................................................ $ 153,158
-----------
-----------
</TABLE>
On April 28, 1995, a wholly-owned subsidiary of the Company entered into a
$25,000,000 revolving credit loan agreement with the Bank to facilitate mortgage
loan underwriting and origination. The stated interest rate for this line is the
Bank's floating prime rate (8.5% at December 31, 1995); however, the Company may
elect to have up to three traunches of debt bear interest at adjusted 30-day
LIBOR rate plus 2% (7.72% at December 31, 1995 for a term of 30 days), and
interest is payable monthly. Principal payments on the note are due monthly, and
are equal to the aggregate amount of all principal payments received by the
borrowing entity with respect to mortgage loan underwriting and origination. The
loan is collateralized by the mortgage loans and the borrowing entity/servicers
collection accounts. At December 31, 1995, the balance outstanding under this
facility was $8,987,000, secured by assets totaling $9,474,000. The available
borrowing capacity under this facility at December 31, 1995, was $16,013,000.
F-13
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE AND OTHER DEBT (CONTINUED)
On August 15, 1995, a wholly-owned subsidiary of the Company entered into a
mortgage warehouse agreement with a funding corporation to facilitate
multi-family mortgage loan underwriting and origination. The stated interest
rate for this line is an adjusted 30-day LIBOR rate plus 3% (8.72% at December
31, 1995), and interest and principal are payable upon the receipt of the
proceeds of the sale or other disposition of related mortgage loans. The loan is
secured by the mortgage loans originated by the Company and held for sale under
the facility. The Company is a guarantor on this facility. At December 31, 1995,
the balance outstanding under this facility was $8,570,000, secured by assets
totaling $8,620,000.
Effective November 1, 1995, a wholly-owned subsidiary of the Company entered
into a $100,000,000 warehouse line of credit, increased to $150,000,000 on
November 30, 1995, with Prudential Securities Realty Funding Corporation
("Prudential") to finance the acquisition 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 plus 0.875% (which can be adjusted retroactively under certain
circumstances to LIBOR plus 2.4%). At December 31, 1995, the balance outstanding
under this facility was $135,601,000, secured by assets totaling $142,749,000.
On January 26, 1996, the mortgages purchased with borrowings under this facility
were securitized and sold and such borrowings were repaid in their entirety and
the facility was terminated. The Company anticipates that it will incur
additional borrowings under similar facilities in connection with loans
purchased for securitization in the future (see Note 15).
<TABLE>
<CAPTION>
1995
---------
<S> <C>
OTHER DEBT (IN THOUSANDS):
Convertible Subordinated Debt at 8%, due December 15, 2005................................... $ 45,000
---------
---------
</TABLE>
On November 27, 1995, the Company completed an offering conducted in Europe
of $45,000,000 aggregate principal amount of Convertible Subordinated
Debentures. The net proceeds (aggregating approximately $43,000,000) from such
offering were used to repay borrowings under the revolving credit line. The
Convertible Subordinated Debentures bear interest at 8% per annum and will
mature on December 15, 2005. There is no sinking fund or amortization of
principal prior to maturity. The capitalized debt offering costs are included in
intangibles and amortized over ten years. The Convertible Subordinated
Debentures are not redeemable prior to December 15, 1996. The Convertible
Subordinated Debentures are convertible at the option of the holders into shares
of Common Stock at a conversion price of $12.50 per share (equivalent to a
conversion rate of 80 shares of Common Stock per $1,000 principal amount of
Convertible Subordinated Debentures), subject to adjustment in certain events.
The Convertible Subordinated Debentures are unsecured obligations of the Company
and subordinated to all existing and future Senior Indebtedness (as defined in
the Convertible Subordinated Debenture Indenture) of the Company. The
Convertible Subordinated Debentures contain certain rights of the holder to
require the repurchase of the Convertible Subordinated Debentures (i) upon a
Fundamental Change (as defined in the Convertible Subordinated Debenture
Indenture) and (ii) if the Company is not able to maintain a Net Worth (as
defined in the Convertible Subordinated Debenture Indenture) of approximately
$141.0 million plus the net proceeds to the Company from any offering of common
stock by the Company subsequent to December 31, 1995. There are certain other
covenants restricting dividends on and redemptions of capital stock.
A subsidiary of the Company had a nonrecourse subordinated note payable to a
financial services company collateralized by a second security interest in the
investment in asset portfolio which was fully repaid at January 31, 1995. The
note required basic interest at the 90 day LIBOR plus 4.5% (11% at December 31,
1994) payable monthly. Principal payments were due monthly, equal to 10% of the
net portfolio cash flow with the remaining outstanding balance due December 30,
1996. The note was
F-14
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE AND OTHER DEBT (CONTINUED)
nonrecourse to the borrowing entity and the Company. After repayment of the
outstanding principal and basic interest, contingent interest to provide the
lender a 15% compounded rate was due from any available net portfolio cash flow.
Additionally, after the above payments were made, and the subsidiary had
recovered $6,337,000 (representing its equity in the asset portfolio at December
31, 1993, the date of the loan, and capitalized costs), the lender became
entitled to receive 6% of the net portfolio cash flow. During 1995, the Company
paid $222,000 to the lender for its 6% share of net portfolio cash flow.
On January 30, 1996, the Company completed an offering of $57,500,000
aggregate principal amount of Senior Subordinated Notes. The net proceeds
(aggregating approximately $54,900,000) from such offering were used to repay
borrowings under the revolving credit line. The Senior Subordinated Notes bear
interest at 10% per annum and will mature on January 15, 2003. There is no
sinking fund or amortization of principal prior to maturity. The capitalized
debt offering costs are included in intangibles and amortized over seven years.
The Senior Subordinated Notes are not redeemable prior to January 15, 2001. The
Senior Subordinated Notes are unsecured general obligations of the Company and
subordinated to all existing and future Senior Indebtedness (as defined in
Senior Subordinated Notes Indenture) of the Company. There are certain covenants
restricting dividends on and redemptions of capital stock.
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 $25,000,000 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.
Substantially all of the assets of the Company, including stock of a
majority of the Company's subsidiaries, are pledged to secure notes payable and
other debt.
Aggregate amounts of notes payable and other debt that mature during the
next five years are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1996 1997 1998 1999 2000 THEREAFTER
----------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Notes payable and other debt.......... $ 239,136 $ 15,487 $ 17,761 $ -- $ -- $ 53,570
</TABLE>
8. INCOME TAXES
Income tax expense (benefit) consists of the following for the years ended
December 31, 1995, 1994 and 1993, (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal............................................................ $ 6,040 $ 9,665 $ 14,533
State.............................................................. 2,147 2,609 3,096
--------- --------- ---------
Total current tax expense........................................ 8,187 12,274 17,629
Deferred tax expense (benefit)....................................... 5,023 966 (1,650)
--------- --------- ---------
Total income tax expense......................................... $ 13,210 $ 13,240 $ 15,979
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-15
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
A reconciliation of income taxes on reported pretax income at statutory
rates to actual income tax expense for the years ended December 31, 1995 and
1994, is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------------------- ---------------------- ----------------------
DOLLARS RATE DOLLARS RATE DOLLARS RATE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory rates............ $ 12,005 35% $ 11,196 35% $ 14,069 35%
State income taxes, net of Federal tax
benefit................................. 1,205 4% 1,606 5% 1,910 5%
Other.................................... 438 1%
--------- --------- ---------
Total income tax expense............... $ 13,210 39% $ 13,240 41% $ 15,979 40%
--------- --------- ---------
--------- --------- ---------
Income tax expense attributable to
continuing operations................... $ 11,593 $ 14,753 $ 17,371
Income tax expense (benefit) attributable
to discontinued operations.............. 1,617 (1,513) (1,392)
--------- --------- ---------
Total income tax expense............... $ 13,210 $ 13,240 $ 15,979
--------- --------- ---------
--------- --------- ---------
</TABLE>
The net deferred tax assets at December 31, 1995 and 1994, consist of the
tax effects of temporary differences related to the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Allowance for uncollectible accounts receivable.................................. $ 594 $ 1,386
Equipment, furniture and fixtures................................................ 235
Intangible assets................................................................ 1,759 2,691
Investment in subsidiaries....................................................... 477 930
Accrued employee compensation.................................................... 2,085 3,261
Net operating loss carryforwards................................................. 5,334 6,775
AMT credit carryforwards......................................................... 602 602
Other............................................................................ 2,008 2,002
--------- ---------
Deferred tax asset before valuation allowance.................................. 12,859 17,882
Valuation allowance.............................................................. (675) (675)
--------- ---------
Net deferred tax asset......................................................... $ 12,184 $ 17,207
--------- ---------
--------- ---------
</TABLE>
As a result of the acquisition of BEI, the Company has available for its use
BEI's net operating loss carryforwards existing at the acquisition date. The
Company is limited to utilizing approximately $4,246,000 of such losses
annually. The following are the expiration dates and the approximate net
operating loss carry forwards at December 31, 1995, (in thousands):
<TABLE>
<CAPTION>
EXPIRATION DATE AMOUNT
- ------------------------------------------------------------------------- ---------
<S> <C>
1998..................................................................... $ 2,448
1999..................................................................... 1,333
2001..................................................................... 3,516
2002..................................................................... 2,071
2003..................................................................... 1,459
2006..................................................................... 372
2007..................................................................... 2,867
---------
$ 14,066
---------
---------
</TABLE>
F-16
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Realization of deferred tax assets is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. Although
realization is not assured, management believes it is more likely than not, that
all of the deferred tax asset, net of applicable valuation allowance, will be
realized. The amount of the deferred tax asset considered realizable could be
reduced or increased if estimates of future taxable income during the
carryforward period are reduced or increased.
9. OTHER LIABILITIES
The following table summarizes the components of other liabilities at
December 31, 1995 and 1994, (in thousands):
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Accrued interest................................................................... $ 1,752 $ 325
Deferred compensation obligations (Note 6)......................................... 1,191 1,331
Dividends payable.................................................................. 1,179
Payable to partners................................................................ 2,349 3,907
Other.............................................................................. 2,165 2,875
--------- ---------
Total other liabilities.......................................................... $ 7,457 $ 9,617
--------- ---------
--------- ---------
</TABLE>
On October 25, 1995, the Company announced the discontinuation of its policy
of paying cash dividends. The Board of Directors has determined the Company
should retain all earnings to support current operations and finance future
expansions.
Payable to partners represents amounts owed to Esther Ritz Corporation
("Ritz") and other partners for their shares of the undistributed earnings of
various joint ventures and partnerships. The consolidated balance sheets at
December 31, 1995 and 1994, include the accounts of BEI-Ritz Joint Venture #1
and BEI-Ritz Joint Venture #2 (the "Joint Ventures") of which the Company owns a
controlling interest. The Joint Ventures were formed in 1991 between BEI and
Ritz to participate in the bidding for contracts for the management and
disposition of assets owned by the RTC. The Joint Ventures make distributions to
the Company and to Ritz as cash is collected on the RTC contracts. The related
contracts concluded during 1994 and a final settlement with the RTC was reached
in December 1995.
10. DISCONTINUED OPERATION
The Company adopted a plan on December 1, 1994, to discontinue its data
processing operations for the banking and asset management industry and to sell
substantially all of the assets of the related subsidiary by June 30, 1995. The
net liabilities of the subsidiary at December 31, 1994, were as follows (in
thousands):
<TABLE>
<S> <C>
Accounts receivable........................................................ $ 666
Premises and equipment and other assets.................................... 341
Liabilities................................................................ (718)
Reserve for losses on discontinued operations.............................. (1,243)
---------
Net liabilities of discontinued subsidiary............................... $ (954)
---------
---------
</TABLE>
Gross revenues applicable to the discontinued operations were $4,542,000 and
$5,500,000 for the eleven months ended November 30, 1994, and the year ended
December 31, 1993, respectively. The loss from discontinued operations for the
eleven months ended November 30, 1994 and the year ended December 31, 1993, was
$1,287,000 and $2,088,000, respectively, net of $891,000 and $1,392,000 income
tax benefit, respectively. The loss from the discontinued operations for the
period December 1,
F-17
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. DISCONTINUED OPERATION (CONTINUED)
1994, to December 31, 1994, was $95,000, net of $63,000 income tax benefit. The
loss on the disposal of discontinued operations for the year ended December 31,
1994, was $898,000, net of income tax benefit of $622,000.
On June 16, 1995, the Company sold substantially all of the assets of its
data processing operations for the banking and asset management industry for
$6,250,000 in cash with a gain of $2,425,000, or $0.10 per share, net of certain
transaction costs and a $1,617,000 provision for income taxes. The book values
of the net assets sold in the transaction were as follows (in thousands):
<TABLE>
<S> <C>
Cash........................................................................ $ 283
Accounts receivable......................................................... 293
Premises and equipment...................................................... 302
Other assets................................................................ 65
Liabilities................................................................. (199)
---------
Net assets of discontinued subsidiary..................................... $ 744
---------
---------
</TABLE>
11. COMMON STOCK
The Company has a stock option and award plan for the benefit of key
individuals, including its directors, officers and key employees. In connection
with the merger of BEI and Holdings (see Note 2), certain granted options became
fully vested. The plan is administered by a committee of the Board of Directors.
The plan was adjusted to reflect the conversion of each share of Holdings common
stock into 10.03 shares of the Company's stock for the year ended December 31,
1993. Stock option activity under the plan for the years ended December 31,
1995, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE PER
SHARES SHARE
----------- ---------------------
<S> <C> <C>
Options outstanding at January 1, 1993............................. 411,230 $0.60
Granted.......................................................... 431,290 $3.50
Canceled......................................................... (70,210) $0.60
Acquired company options outstanding............................. 1,321,790 $2.25 to $4.50
-----------
Options outstanding at December 31, 1993........................... 2,094,100 $0.60 to $4.50
Granted.......................................................... 500,000 $7.00 to $8.94
Exercised........................................................ (711,590) $0.60 to $3.50
Forfeited........................................................ (10,060) $3.50
-----------
Options outstanding at December 31, 1994........................... 1,872,450 $0.60 to $4.50
Granted.......................................................... 872,160 $6.88 to $11.38
Exercised........................................................ (434,480) $0.60 to $6.88
Forfeited........................................................ (8,337) $2.75 to $3.75
-----------
Options outstanding at December 31, 1995........................... 2,301,793 $0.60 to $11.38
-----------
-----------
Options exercisable at December 31, 1995........................... 1,382,691 $0.60 to $11.38
-----------
-----------
Options available for grant at December 31, 1995................... 1,766,833
-----------
-----------
</TABLE>
At December 31, 1995, the Company has reserved a total of 4,068,626 shares
of common stock for exercise of stock options.
A stock subscription agreement and related shareholders' agreement (the
"Shareholder Agreements") were entered into by the Company with various officers
and other parties (the "Subscribers") on December 9, 1992. The purchase price
was based on $.60 per share (after effect of the conversion
F-18
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMON STOCK (CONTINUED)
into Company stock). Certain executive officers purchased common stock with cash
and promissory notes. The notes accrue interest at 6% per annum and are due and
payable in December 2002 or within one year of termination of employment. The
shares are subject to certain restrictions and repurchase rights pursuant to the
Shareholder Agreements. In the event of termination of employment prior to
December 2002, the Company could cancel unvested shares by canceling related
indebtedness based on the original issue price. Originally, 50% of the notes
were vested based upon performance and the remainder were time notes. As a
result of the merger with BEI, the performance notes were converted into time
notes. The conversion of the notes resulted in additional compensation expense
recorded during 1993 of $1,188,000. In addition, the shares are now fully
vested. The notes are secured by the stock acquired and are nonrecourse to the
Subscribers. The notes are classified as a reduction of shareholders' equity for
financial reporting purposes. At December 31, 1995 and 1994, reductions for
employee stock included notes receivable for officers' shares of $120,000 and
$429,000, respectively. During 1995, $309,000 in officers' notes receivable were
collected, including $220,000 in cash and $89,000 in common stock. During 1994,
a $178,000 note receivable was repaid. During 1993, $179,000 in notes receivable
for officers' shares and the related common stock were canceled.
During 1995, the Company issued 250,202 shares of restricted common stock at
prices ranging from $6.88 per share to $11.38 per share under the Company's
stock option and award plan. During 1995, $279,000 in unearned stock
compensation was amortized as compensation expense. At December 31, 1995,
reductions for employee stock included unearned stock compensation of
$2,118,000. Also, during 1995 the Company initiated an employee stock purchase
plan under which employees of the Company, through payroll deductions, can
purchase common stock of the Company for 85% of the then-current market price.
On December 13, 1995, the Company completed a registered public offering of
2,000,000 shares of Common Stock. Subsequent thereto, the Company sold an
additional 300,000 shares of Common Stock upon exercise of the Underwriters'
over-allotment option. The net proceeds from such offering aggregating
approximately $25,110,000 were used to repay borrowings under the revolving
credit line. The price to the public was $11.75 per share and the price to the
Company was $11.10 per share (after an underwriting discount of $0.65 per
share). In addition to the offering of shares of Common Stock by the Company,
two institutional shareholders sold an aggregate of 2,300,000 shares of Common
Stock (including 300,000 shares sold pursuant to the exercise of the
underwriters' over-allotment option). The Company did not receive any proceeds
from the sale of these shares. Assuming issuance of 2,300,000 shares of common
stock at the beginning of each of the periods January 1, 1995 and 1994 and
application of related net proceeds to the repayment of borrowings bearing an
average interest cost of 8.1%, pro forma per share amounts of income from
continuing operations and net income would be $0.74 and $0.83, respectively, for
the year ended December 31, 1995, and $0.85 and $0.77, respectively for the year
ended December 31, 1994.
12. EMPLOYEE COMPENSATION AND BENEFITS
Accrued employee compensation and benefits at December 31, 1995 and 1994,
include amounts for incentive compensation, severance and benefits. Certain
employees are eligible to receive a bonus from a pool computed on 15% to 25% of
pretax income over predetermined minimum earning levels. In addition, certain
employees are covered by severance plans in the event their employment is
terminated due to reductions in the workforce. The Company accrues for such
costs over the service period. At December 31, 1995 and 1994, a total of
$1,423,000 and $5,144,000, respectively, was accrued for costs incurred or
expected to be incurred under the severance plans of continuing operations.
The AMRESCO Retirement Savings and Profit Sharing Plan (the "Plan")
qualifies under Section 401(k) of the Internal Revenue Code and incorporates
both a savings component and a profit
F-19
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE COMPENSATION AND BENEFITS (CONTINUED)
sharing component for eligible employees. As determined each year by the Board
of Directors, the Company may match the employee contribution up to 6% of their
base pay based on the Company's performance. For 1995, the matching contribution
was set at $.50 for each $1.00 contributed by the employees. In addition to the
matching savings contribution, the Company provides an annual contribution to
the profit sharing retirement component of the Plan on behalf of all eligible
employees. This portion of the Plan has been amended to assure that the Company
is not required to make an employer profit sharing contribution to the Plan.
However, it is anticipated that some level of profit sharing contribution will
continue in future periods. For the years ended December 31, 1995, 1994 and
1993, the Company made profit sharing contributions of $1,218,000 and $1,312,000
and $1,700,000, respectively. Allocation of the Company's contribution will be
based on a percentage of an employee's weighted total pay. Weighted total pay
places a stronger emphasis on the age of the employee and provides an
increasingly larger profit sharing contribution as an employee nears retirement.
13. COMMITMENTS AND CONTINGENCIES
The Company is committed to pay additional consideration to former owners of
an acquired subsidiary based on financial performance during 1995 and 1996. See
Note 2.
The Company has entered into non-cancelable operating leases covering office
facilities which expire at various dates through 2006. Certain of the lease
agreements provide for minimum annual rentals with provisions to increase the
rents to cover increases in real estate taxes and other expenses of the lessor.
The Company also has leases on equipment, some of which are non-cancelable,
which expire on various dates through 1999. The total rent expense for the years
ended December 31, 1995, 1994 and 1993, was approximately $3,655,000,
$4,386,000, and $3,116,000, respectively. The future minimum annual rental
commitments under non-cancelable agreements having a remaining term in excess of
one year at December 31, 1995 are as follows (in thousands):
<TABLE>
<S> <C>
Year Ended December 31,
1996..................................................... $ 3,249
1997..................................................... 3,592
1998..................................................... 3,178
1999..................................................... 2,540
2000..................................................... 1,789
Thereafter............................................... 9,981
</TABLE>
The Company is a defendant in various legal actions. In the opinion of
management, such actions will not materially affect the financial position,
results of operations or cash flows of the Company.
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to hedge against changes in interest rates.
These financial instruments include commitments to sell certain mortgage loans
and interest rate swap agreements. These instruments involve, to varying
degrees, elements of interest rate risk in excess of the amount recognized in
the consolidated statements of financial condition. The Company controls the
risk of its hedging agreements, interest rate swap agreements and forward
contracts through approvals, limits and monitoring procedures.
14. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company may reduce its exposure to fluctuations in interest rates by
creating offsetting positions through the use of derivative financial
instruments, particularly forward contracts and interest rate swaps. The Company
currently does not use derivative financial instruments for trading or
speculative purposes, nor is the Company party to highly-leveraged derivatives.
The notional
F-20
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
amount of interest rate swaps is the underlying principal amount used in
determining the interest payments exchanged over the life of the swap. The
notional amounts are not a measure of the Company's exposure through its use of
derivatives.
The Company had two forward contracts at December 31, 1995, to sell a total
of $70,000,000 7.5% residential mortgage loans at contracted forward prices.
Both of the Company's forward contracts are hedges against interest rate
exposures and a change in a forward contract's value would be offset with an
equivalent but opposite change in the hedged residential mortgage loans. These
contracts matured on January 16, 1996.
Interest rate swap agreements are used to reduce interest rate risks and
costs inherent in the Company's outstanding debt. The Company enters into these
agreements to change the fixed/variable interest rate mix of the debt portfolio
to reduce the Company's aggregate risk to movements in interest rates.
Accordingly, the Company enters into agreements to effectively convert
variable-rate debt to fixed-rate debt to reduce the Company's risk of incurring
higher interest costs due to rising interest rates. During 1995, the Company
entered into a $25,000,000 interest rate swap agreement thereby allowing the
Company to establish fixed interest rates on a portion of its outstanding debt.
During 1995, there were no deferred gains or losses related to the swap
agreement. This swap agreement matures September 7, 1997. See Note 7.
The Company continually monitors the market risk of its forward and interest
rate swap contracts. The Company uses commercial rating agencies to evaluate the
credit quality of the counterparties, all of whom are major international
financial institutions. The Company does not anticipate a loss resulting from
any credit risk of these institutions.
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirement of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents................................... $ 16,139 $ 16,139 $ 20,446 $ 20,446
Temporary investments....................................... 21,942 21,942
Accounts receivable......................................... 20,158 20,158 20,682 20,682
Mortgage loans held for sale................................ 160,843 161,841
Investments:
Loans..................................................... 138,180 147,000 32,631 38,000
Partnerships and joint ventures........................... 34,694 38,000 22,491 25,200
Asset-backed securities................................... 46,187 46,187 3,481 3,500
Liabilities:
Accounts payable............................................ 14,124 14,124 12,045 12,045
Notes payable and other debt................................ 325,954 326,354 16,459 16,459
Off-Balance Sheet:
Interest rate swap.......................................... (251)
Forward contracts........................................... (998)
Letters of credit ($239 and $833, respectively)............. -- --
</TABLE>
F-21
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
The fair values of investments, notes payable and other debt are estimated
based on present values of estimated cash flows using current entry-value
interest rates applicable to each category of such financial instruments.
Mortgage loans held for sale are valued at their contracted sales prices. The
carrying amount of cash and cash equivalents, temporary investments, accounts
receivable, net of reserves, and accounts payable approximates fair value. The
Company has reviewed its exposure on standby letters of credit and has
determined that the fair value of such exposure is not material. The fair values
of the interest rate swap and forward contracts are estimated using market
quotes. The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1995 and 1994. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since the date presented,
and therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
15. SUBSEQUENT EVENTS (UNAUDITED)
Effective February 23, 1996, and as amended on March 22, 1996, a
wholly-owned subsidiary of the Company entered into a $220,000,000 warehouse
line of credit with Prudential to finance the acquisition and warehousing of
residential mortgage loans. This facility is secured by the loans purchased
through borrowings under this facility and held for sale. The stated interest
rate for this line is LIBOR plus 0.85%. This facility matures on April 30, 1996.
Effective February 26, 1996, a wholly-owned subsidiary of the Company entered
into a $40,000,000 warehouse line of credit with Prudential to finance the
acquisition and warehousing of residential mortgage loans. This facility is
secured by the loans purchased through borrowings under this facility and held
for sale. The stated interest rate for this line is LIBOR plus 0.85%. This
facility matures on July 31, 1996. The combined amounts outstanding under
mortgage warehouse lines of credit with Prudential cannot exceed $220,000,000 at
any time.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations,
revised to reflect discontinued operations, for the years ended December 31,
1995 and 1994 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues from continuing operations...................... $ 20,177 $ 23,482 $ 25,416 $ 41,411
Income from continuing operations before income taxes.... 5,336 6,205 8,430 10,287
Income from continuing operations........................ 3,155 4,079 5,196 6,235
Gain from sale of discontinued operations................ 2,425
Net income............................................... 3,155 6,504 5,196 6,235
Primary earnings per share from continuing operations.... 0.13 0.17 0.21 0.25
Primary earnings per share from net income............... 0.13 0.27 0.21 0.25
Fully-diluted earnings per share from continuing
operations.............................................. 0.13 0.17 0.21 0.24
Fully-diluted earnings per share from net income......... 0.13 0.27 0.21 0.24
</TABLE>
A nonrecurring gain on the sale of a discontinued operation was recorded
during the second quarter of 1995. Included in revenues for the fourth quarter
of 1995 are $4,000,000 related to an expired RTC contract.
F-22
<PAGE>
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues from continuing operations...................... $ 34,140 $ 33,899 $ 39,783 $ 21,969
Income from continuing operations before income taxes.... 9,244 9,307 14,979 2,156
Income from continuing operations........................ 5,358 5,425 8,873 1,277
Loss from discontinued operations........................ (422) (316) (238) (1,209)
Net income............................................... 4,936 5,109 8,635 68
Primary earnings per share from continuing operations.... 0.23 0.23 0.37 0.05
Primary earnings per share from net income............... 0.21 0.22 0.36 0.00
Fully-diluted earnings per share from continuing
operations.............................................. 0.23 0.23 0.37 0.05
Fully-diluted earnings per share from net income......... 0.21 0.22 0.36 0.00
</TABLE>
Nonrecurring revenues of $10,000,000 related to the conclusion of the
NationsBank Contract was recorded during the third quarter of 1994. Nonrecurring
accruals for the loss on discontinued operations were made during the fourth
quarter of 1994.
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of AMRESCO, INC.:
We have audited the accompanying consolidated balance sheets of AMRESCO,
INC. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, shareholders' equity and cash flows for the
years ended December 31, 1995, 1994 and 1993. These financial statements are the
responsibility of AMRESCO, INC.'s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of AMRESCO, INC. and subsidiaries
as of December 31, 1995 and 1994, and the results of their operations and their
cash flows for the years ended December 31, 1995, 1994 and 1993, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 6, 1996
F-24
<PAGE>
EXHIBIT 10(am)
SECOND AMENDMENT TO AGREEMENT FOR
PURCHASE AND SALE OF ASSETS
THIS SECOND AMENDMENT is made and entered into this 21st day of
November, 1995 by and among AMRESCO, INC., a Delaware corporation
("AMRESCO"), HOLLIDAY FENOGLIO, INC., a Delaware Corporation (formerly known
as Holliday Acquisition Corp.) that is a wholly owned subsidiary of AMRESCO
("Purchaser"), HFDG, INC., a Texas corporation, HFDGD, INC., a Texas
corporation and HFMNY, INC., a New York corporation, and 3003, INC., a Texas
corporation (collectively the "Sellers"), and Harold E. Holliday, Jr., John
T. Fenoglio, Robert J. Dockerty, Mark D. Gibson, Daniel F. Monte and Joe B.
Thornton, Jr. (collectively the "Shareholders").
W I T N E S S E T H
WHEREAS, AMRESCO, AMRESCO HOLDINGS, INC., Purchaser, Sellers and
Shareholders entered into that certain Agreement for Purchase and Sale of
Assets, dated July 28, 1994 (and as amended August 15, 1994), (the "Purchase
Agreement"); and
WHEREAS, the parties wish to amend the Purchase Agreement as set forth
herein;
WHEREAS, AMRESCO Holdings, Inc. was merged into AMRESCO and therefore is
no longer a necessary signatory party to an amendment to the Purchase
Agreement;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and agreements herein contained, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
1. Paragraph 3.10(b) is deleted in its entirety upon the effective
date of this Second Amendment. The Registration Rights Agreement, attached
as Exhibit "B" to the Purchase Agreement and described in Paragraph 3.10(b)
of the Purchase Agreement is null and void as of the effective date of the
Second Amendment.
2. Paragraph 4 from the Registration Rights Agreement originally
attached as Exhibit B to the Purchase Agreement, shall now be included as a
new Paragraph 3.10(b) and shall read as follows:
"(b) REPORTS UNDER THE EXCHANGE ACT. With a view to making
available to the holders of Registrable Securities (as defined below)
the benefits of Rule 144 promulgated under the Securities Act of 1933,
as amended (or any similar successor statute), and the rules and
regulations thereunder ("Securities Act") and any other rule or
regulation of the Securities and Exchange Commission or any other
Federal agency at the time administering the Securities Act
("Commission") that may at any time permit a holder of Registrable
Securities to sell securities of AMRESCO to the public without
registration, AMRESCO agrees to:
(i) File with the Commission in a timely manner all
reports and other documents required of AMRESCO under the
-1-
<PAGE>
Securities Act and the Securities and Exchange Act of 1934, as amended
(or any similar successor statute) and the rules and regulations
thereunder ("Exchange Act"); and
(ii) Furnish to any holder of Registrable Securities,
forthwith upon request (A) a written statement by AMRESCO that it has
complied with its reporting requirements in order that Rule 144 is
available for any holder of Registrable Securities, (B) a copy of the
most recent annual or quarterly report of AMRESCO and such other reports
or documents so filed with the Commission by AMRESCO, and (C) such other
information as may be reasonably requested in availing any such holder
of any rule or regulation of the Commission which permits the selling of
any such securities without registration.
(iii) Registrable Securities means the 571,240 shares of
Common Stock issued to Shareholders as of the Closing Date, the
112,002 shares of Common Stock issued to Shareholders for the 1994 earn
out and such additional shares of Common Stock as may be issued to
Shareholders in the future pursuant to the terms of this Agreement. For
purposes of this Agreement, an otherwise Registrable Security shall
cease to be a Registrable Security when (A) a registration statement
with respect to the sale of such security shall have become effective
under the Securities Act and such security shall have been disposed of
in accordance with such registration statement, (B) such security has
been publicly sold or distributed to any person pursuant to Rule 144 (or
any successor provision) under the Securities Act, (C) such security
shall have ceased to be outstanding, or (D) such security has been sold,
distributed or transferred pursuant to an exemption from the
registration requirements of the Securities Act to any Person who is not
a permitted assignee of the rights hereunder.
3. Paragraph 11.1 is amended to shorten the time period of the
Survival Period for certain representations, warranties and indemnitees
in the Purchase Agreement and shall now read as follows:
11.1 SURVIVAL. The representations, warranties, covenants,
agreements contained in Sections 4 and 5 of this Agreement and
indemnifications of the parties contained in this Agreement or in any
writing delivered pursuant to the provisions of this Agreement shall
survive any investigation heretofore or hereafter made by Purchaser or
AMRESCO, Seller or Shareholders and the consummation of the transactions
contemplated herein and shall continue in full force and effect for the
period (the "Survival Period") beginning on the Closing Date and
continuing until December 31, 1995; PROVIDED, HOWEVER, that the Survival
Period shall be extended until the third anniversary of the Closing Date
for all other covenants and agreements contained in this Agreement or in
ANY writing delivered pursuant to the provisions of this Agreement; and
PROVIDED,
-2-
<PAGE>
FURTHER, that the Survival Period shall not apply to the
representations, warranties, covenants, agreements and indemnifications
set forth in Sections 4.20, 4.24 and 14.12 which shall survive without
temporal limitations.
This Second Amendment is deemed to amend the Purchase Agreement,
effective the 21st day of November, 1995, and as so amended, the Purchase
Agreement is ratified and acknowledged by the parties to remain in full force
and effect.
PURCHASER:
HOLLIDAY FENOGLIO, INC., formerly
known as Holliday Acquisition
Corp., a Delaware corporation
By: /s/ BARRY L. EDWARDS
-----------------------------------
Name: Barry L. Edwards
---------------------------------
Title: Executive Vice President
--------------------------------
ATTEST:
L. KEITH BLACKWELL
- -----------------------------------
Secretary
PARENT:
AMRESCO, INC., a Delaware corporation
By: /s/ ROBERT H. LUTZ, JR.
-----------------------------------
Name: Robert H. Lutz, Jr.
---------------------------------
Title: Chief Executive Officer
--------------------------------
ATTEST:
L. KEITH BLACKWELL
- -----------------------------------
Secretary
-3-
<PAGE>
SELLERS:
HFDG,INC.
By: /s/ JOHN T. FENOGLIO
-----------------------------------
Name: John T. Fenoglio
---------------------------------
Title: Chief Executive Officer
--------------------------------
ATTEST:
/s/ HAROLD E. HOLLIDAY, JR.
- -----------------------------------
Harold E. Holliday, Jr. Secretary
HFDGD, INC.
By: /s/ MARK D. GIBSON
-----------------------------------
Name: Mark D. Gibson
Title: President
ATTEST:
/s/ JOHN T. FENOGLIO
- -----------------------------------
John T. Fenoglio, Secretary
HFMNY, INC.
By: /s/ DANIEL F. MONTE
-----------------------------------
Name: Daniel F. Monte
Title: President
ATTEST:
/s/ LAURA MONTE
- -----------------------------------
Laura Monte, Secretary
3003, INC.
By: /s/ HAROLD E. HOLLIDAY, JR.
-----------------------------------
Name: Harold E. Holliday, Jr.
Title: President
ATTEST:
/s/ JOHN T. FENOGLIO
- -----------------------------------
John T. Fenoglio, Secretary
-4-
<PAGE>
SHAREHOLDERS:
/s/ HAROLD E. HOLLIDAY, JR.
--------------------------------------
HAROLD E. HOLLIDAY, JR.
/s/ JOHN T. FENOGLIO
--------------------------------------
JOHN T. FENOGLIO
/s/ ROBERT J. DOCKERTY
--------------------------------------
ROBERT J. DOCKERTY
/s/ MARK D. GIBSON
--------------------------------------
MARK D. GIBSON
/s/ DANIEL F. MONTE
--------------------------------------
DANIEL F. MONTE
/s/ JOE B. THORNTON, JR.
--------------------------------------
JOE B. THORNTON, JR.
-5-
<PAGE>
EXHIBIT 10(an)
AMENDED STOCK OPTION AGREEMENT
THIS AMENDED STOCK OPTION AGREEMENT (the "Amendment") is made and
entered into as of April 11, 1995 (the "Effective Date"), by and between
AMRESCO, INC., a Delaware corporation, formerly known as BEI Holdings, Ltd.,
(the "Company") and Bruce W. Schnitzer, an individual resident of the State
of New York ("Optionee").
WHEREAS, effective April 17, 1990, the Company and Optionee entered into
that certain Stock Option Agreement (the "Agreement") whereby the Company
granted Optionee the option and right to purchase certain common stock of the
Company k(the "Option") subject to the terms and conditions set forth therein.
WHEREAS, the Company continues to recognize the meritorious service and
tangible contributions of Optionee to the Company. As a result of such
service and contribution, the Company desires, on the terms and conditions
set forth in the Agreement and herein, to extend the term of the Option for a
period of five (5) years.
NOW, THEREFORE, in consideration of the mutual premises, renewal of the
covenants and agreements set forth in the Agreement, and other good and
valuable consideration, the adequacy and sufficiency which are hereby
acknowledged, the parties agree as follows:
Article I Section 1.3 of the Agreement shall be deleted and replaced in
its entirety with the following:
"1.3 TERM OF OPTION: TERMINATION. The Option and this Agreement, except
the provisions of Section 7.7 shall terminate and lapse at 12:00 midnight,
Atlanta, Georgia time, on April 16, 2000 (the "Termination Time") and
neither shall be of any further force or effect thereafter."
Except for the modifications expressly stated herein, the terms,
covenants, provisions and conditions of the Agreement are not modified or
amended by this Amendment and remain in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed
by its duly authorized officer and Optionee has executed this Amendment all
as of the day and year first above written.
AMRESCO, INC.
By: /s/ Robert H. Lutz, Jr.
-------------------------------
Robert H. Lutz., Jr
Chairman of the Board
and Chief Executive Officer
/s/ Bruce W. Schnitzer
--------------------------------
BRUCE W. SCHNITZER
<PAGE>
EXHIBIT 99
PLAZA OF THE AMERICAS BASIC OFFICE LEASE INFORMATION
Lease Date: February 9, 1996
Tenant: AMRESCO, INC.
a Delaware corporation
Tenant's Address: 700 North Pearl Street
Suite 2500
Dallas, Texas 75201
Tenant's Contact: Derek Nash
Telephone: 214/953-7772
Landlord: K-P PLAZA LIMITED PARTNERSHIP
Landlord's Address: 700 N. Pearl Street
Suite 300, LB #370
Dallas, Texas 75201
Landlord's Contact: Donald G. Smith
Telephone: 214/720-8001
Development: The land and the improvements owned by
Landlord and including Landlord's
interest in the Common Elements and
Limited Common Elements described in the
Declaration of Covenants, Conditions and
Restrictions for Plaza of the Americas, a
Condominium Regime, recorded in Volume
88045, Page 3748 et seq., Condominium
Records, Dallas County, Texas located
within the Blocks 257 and 258 (the
"Land") in the City of Dallas, Dallas
County, Texas. The Development, together
with other land and improvements, is
commonly known as, and may be hereinafter
referred to as, the "Plaza of the
Americas."
Premises: The entire 17th, 22nd, 23rd, 24th and
25th floors and part of the 16th floor of
the North Tower, consisting of
approximately 125,279 rentable square
feet, as shown on the floor plans
attached to the Lease as EXHIBIT A,
(i) together with (1) any additional
space Tenant may lease, from time to
time, in the Building pursuant hereto and
(2) all rights of ways or use,
servitudes, licenses, easements,
tenements, herediments, and all fixtures,
equipments, improvements, installations,
and appurtenances that at any time during
the term of this Lease are attached to or
used in connection with the space leased
by Tenant, but excluding any personal
property of Tenant or trade fixtures of
Tenant, and (ii) less any space Tenant
may delete from the Premises pursuant to
and in accordance with this Lease.
(i)
<PAGE>
Building or Buildings: The office building located in the
Development at 700 N. Pearl, Dallas,
Texas (the "North Tower"), which building
together with the office building located
in the Development at 600 N. Pearl,
Dallas, Texas (the "South Tower"), may be
hereinafter referred to collectively as
either the "Building" or the "Buildings."
Term: One hundred and twenty (120) months,
scheduled to commence on November 1, 1996
(the "Commencement Date") and to expire
on October 31, 2006 (the "Expiration Date"),
subject, however to the terms and provisions
of the Lease, including without limitation
Section 3 and Exhibits "I", "O" and "S"
attached.
Basic Rental: See Exhibit "E" attached.
Rent: Basic Rental and all other sums that
Tenant may owe to Landlord under the
Lease.
Security Deposit: $250,558.00.
Prepaid Rent: $125,279.00 to be applied to the Basic
Rental for November 1996.
Permitted Use: General office use and uses incidental
thereto.
Expense Stop: 1996 Basic Cost per rentable square foot.
Operating expenses for the base year and
subsequent years will be adjusted to
reflect an occupancy level of 95% as more
fully provided in Exhibit C.
Tenant's
Proportionate It is stipulated and agreed that for
Share: all purposes under this Lease the
Tenant's Proportionate Share is obtained
by dividing (i) the 125,279 rentable
square feet in the Premises (which
includes a pro rata share of the Common
Areas) by (ii) the total rentable square
feet in the Office Portion.
Office Portion: The Buildings, less the Retail Area
located on the first and second levels
thereof.
Retail Portion: The area used for retail purposes located
on the first and second levels of the
Buildings.
Common Areas: Areas within the Office Portion used as
common facilities, including, without
limitation, Building entrances and exits,
corridors, elevators lobbies, restrooms,
janitor closets, mechanical and
electrical equipment rooms and other
similar facilities for the use or benefit
of all tenants of the Buildings, or of a
particular floor therein.
Storage Space: Five thousand (5,000) rentable square
feet of storage space on level one of the
North Tower or such other location in the
(ii)
<PAGE>
Buildings at any time and from time to
time designated by Landlord.
Parking Garage: The parking garage associated with the
Buildings and currently part of the Plaza
of the Americas.
Project: The Buildings and the Parking Garage.
The foregoing Basic Lease Information is incorporated into and
made a part of the Lease identified above. If any conflict
exists between any Basic Lease Information and the Lease, then
the Lease shall control.
LANDLORD TENANT
K-P PLAZA LIMITED PARTNERSHIP, AMRESCO, INC.
a Texas limited partnership a Delaware corporation
By: Prime Property Management of
Texas, Ltd., Agent
By: Prime Group Management of
Texas, Inc.,
its General Partner
By: /s/ R. GREGG CHILTON By: /s/ R. D. [illegible]
-------------------- -------------------------
R. Gregg Chilton Its: President
Its: Vice President
Executed by Landlord this 13th day Executed by Tenant this 9th
day of February, 1996 day of February, 1996
(iii)
<PAGE>
TABLE OF CONTENTS
PAGE
----
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Increase or Decrease of Space . . . . . . . . . . . . . . . . . . . . . . 1
Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
a. Payment. . . . . . . . . . . . . . . . . . . . . . . . . . 2
b. Lease Year . . . . . . . . . . . . . . . . . . . . . . . . 3
c. Electrical Costs . . . . . . . . . . . . . . . . . . . . . 3
d. Annual Cost Statement. . . . . . . . . . . . . . . . . . . 4
e. Adjustments to Electrical Costs. . . . . . . . . . . . . . 4
f. Adjustments. . . . . . . . . . . . . . . . . . . . . . . . 5
Delinquent Payment; Handling Charges. . . . . . . . . . . . . . . . . . . 5
Security Deposit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
a. General. . . . . . . . . . . . . . . . . . . . . . . . . . 5
b. Return of Security Deposit . . . . . . . . . . . . . . . . 5
Landlord's Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . 5
a. General. . . . . . . . . . . . . . . . . . . . . . . . . . 5
b. Heating, Ventilating and Air Conditioning. . . . . . . . . 6
c. Electrical Service . . . . . . . . . . . . . . . . . . . . 7
d. Elevators. . . . . . . . . . . . . . . . . . . . . . . . . 7
e. Light Bulbs and Water. . . . . . . . . . . . . . . . . . . 7
f. Building Security. . . . . . . . . . . . . . . . . . . . . 7
g. Janitorial Services. . . . . . . . . . . . . . . . . . . . 8
h. Interruption of Services . . . . . . . . . . . . . . . . . 8
i. Building Staff . . . . . . . . . . . . . . . . . . . . . . 9
j. Sprinkler System . . . . . . . . . . . . . . . . . . . . . 9
k. Fire Stair Access. . . . . . . . . . . . . . . . . . . . . 9
Improvements; Alterations; Repairs; Maintenance . . . . . . . . . . . . . 9
a. Improvements; Alterations. . . . . . . . . . . . . . . . . 9
b. Alterations; Repairs; Maintenance. . . . . . . . . . . . . 10
c. Performance of Work. . . . . . . . . . . . . . . . . . . . 11
d. Mechanic's Liens . . . . . . . . . . . . . . . . . . . . . 11
Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Assignment and Subletting . . . . . . . . . . . . . . . . . . . . . . . . 12
a. Transfers: Consent . . . . . . . . . . . . . . . . . . . . 12
b. Cancellation . . . . . . . . . . . . . . . . . . . . . . . 13
c. Additional Compensation. . . . . . . . . . . . . . . . . . 13
Insurance; Waivers, Subrogation; Indemnity. . . . . . . . . . . . . . . . 13
a. Insurance. . . . . . . . . . . . . . . . . . . . . . . . . 13
b. Waiver of Liability. . . . . . . . . . . . . . . . . . . . 14
c. Waiver of Subrogation. . . . . . . . . . . . . . . . . . . 14
d. Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . 14
e. Landlord's Insurance . . . . . . . . . . . . . . . . . . . 15
f. Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Subordination; Attornment; Notice to
Landlord's Mortgagee. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
a. Subordination. . . . . . . . . . . . . . . . . . . . . . . 16
b. Attornment . . . . . . . . . . . . . . . . . . . . . . . . 16
c. Notice to Landlord's Mortgagee . . . . . . . . . . . . . . 16
Rules and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(iv)
<PAGE>
PAGE
----
Condemnation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
a. Total Taking . . . . . . . . . . . . . . . . . . . . . . . 17
b. Partial Taking - Landlord's and Tenant's Rights. . . . . . 17
c. Partial Taking - Landlord's Rights . . . . . . . . . . . . 18
d. Award. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Fire Or Other Casualty. . . . . . . . . . . . . . . . . . . . . . . . . . 18
a. Notice of Casualty . . . . . . . . . . . . . . . . . . . . 18
b. Damage by Casualty . . . . . . . . . . . . . . . . . . . . 18
c. Limit on Landlord's Obligation . . . . . . . . . . . . . . 19
d. Tenant's Business Operation. . . . . . . . . . . . . . . . 19
e. Termination Rights . . . . . . . . . . . . . . . . . . . . 19
f. Release of Liability . . . . . . . . . . . . . . . . . . . 19
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Remedies; Payment By Tenant; Non-Waiver . . . . . . . . . . . . . . . . . 21
Remedies of Tenant upon Default by Landlord . . . . . . . . . . . . . . . 22
Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
a. Tenant's Compliance with Laws. . . . . . . . . . . . . . . 23
b. Landlord's Compliance with Laws. . . . . . . . . . . . . . 24
c. Right to Contest Applicable Laws . . . . . . . . . . . . . 24
Hazardous Substances. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Surrender of Premises . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Holding Over. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Certain Rights Reserved by Landlord . . . . . . . . . . . . . . . . . . . 28
Landlord's Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
a. Landlord Transfer. . . . . . . . . . . . . . . . . . . . . 29
b. Landlord's Liability . . . . . . . . . . . . . . . . . . . 29
c. Force Majeure. . . . . . . . . . . . . . . . . . . . . . . 29
d. Brokerage. . . . . . . . . . . . . . . . . . . . . . . . . 30
e. Estoppel Certificates. . . . . . . . . . . . . . . . . . . 30
f. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . 30
g. Severability . . . . . . . . . . . . . . . . . . . . . . . 30
h. Amendments; and Binding Effect . . . . . . . . . . . . . . 30
i. Quiet Enjoyment. . . . . . . . . . . . . . . . . . . . . . 31
j. Captions . . . . . . . . . . . . . . . . . . . . . . . . . 31
k. No Merger. . . . . . . . . . . . . . . . . . . . . . . . . 31
l. No Offer . . . . . . . . . . . . . . . . . . . . . . . . . 31
m. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . 31
o. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . 31
(v)
<PAGE>
EXHIBITS PAGE
- -------- ----
EXHIBIT A - Outline of Premises . . . . . . . . . . . . . . . . . . . . . A-1
EXHIBIT B - Office Building Rules and Regulations . . . . . . . . . . . . B-1
EXHIBIT C - Office Operating Expense Escalator. . . . . . . . . . . . . . C-1
EXHIBIT D - Tenant Finish Work: Allowance. . . . . . . . . . . . . . . . D-1
EXHIBIT E - Basic Rental Schedule . . . . . . . . . . . . . . . . . . . . E-1
EXHIBIT F - Office Signage Criteria . . . . . . . . . . . . . . . . . . . F-1
EXHIBIT G - Office Parking. . . . . . . . . . . . . . . . . . . . . . . . G-1
EXHIBIT H - Building General Security Program . . . . . . . . . . . . . . H-1
EXHIBIT I - Early Occupancy . . . . . . . . . . . . . . . . . . . . . . . I-1
EXHIBIT J - Lease Buyout Allowance. . . . . . . . . . . . . . . . . . . . J-1
EXHIBIT K - Expansion Options . . . . . . . . . . . . . . . . . . . . . . K-1
EXHIBIT L - Right of Refusal. . . . . . . . . . . . . . . . . . . . . . . L-1
EXHIBIT M - Right of Refusal Space. . . . . . . . . . . . . . . . . . . . M-1
EXHIBIT N - Rooftop Communications. . . . . . . . . . . . . . . . . . . . N-1
EXHIBIT O - Renewal Options . . . . . . . . . . . . . . . . . . . . . . . O-1
EXHIBIT P - Market Rate . . . . . . . . . . . . . . . . . . . . . . . . . P-1
EXHIBIT Q - Comparable Buildings. . . . . . . . . . . . . . . . . . . . . Q-1
EXHIBIT R - Refurbishment Allowance . . . . . . . . . . . . . . . . . . . R-1
EXHIBIT S - Termination Option. . . . . . . . . . . . . . . . . . . . . . S-1
EXHIBIT T - Storage Space . . . . . . . . . . . . . . . . . . . . . . . . T-1
EXHIBIT U - Janitorial Specifications . . . . . . . . . . . . . . . . . . U-1
(vi)
<PAGE>
OFFICE LEASE
THIS OFFICE LEASE AGREEMENT (the "LEASE") is entered into as of
February __, 1996, between K-P PLAZA LIMITED PARTNERSHIP, a Texas limited
partnership ("Landlord"), and AMRESCO, INC. , a Delaware corporation
("TENANT").
DEFINITIONS 1. The definitions and basic provisions set
AND BASIC forth in the Basic Office Lease Information (the
PROVISIONS "Basic Lease Information") executed by Landlord
and Tenant contemporaneously herewith are
incorporated herein by reference for all purposes.
LEASE 2. Subject to the terms of this Lease, Landlord
GRANT leases to Tenant, and Tenant leases from Landlord,
the Premises. Landlord and Tenant hereby
stipulate and agree that:
(a) The rentable area of the Premises
(excluding the Storage Space) is 125,279 square
feet, consisting of 23,965 square feet on each of
the 17th, 22nd, 23rd, 24th and 25th floors of the
North Tower and 5,454 square feet on the 16th
floor of the North Tower; and
(b) The rentable area of the Office Portion
is one million twenty-eight thousand (1,028,000)
square feet.
Landlord and Tenant hereby agree to use the
foregoing numbers of rentable square feet for all
purposes hereunder and that those numbers are a
material part of the economic basis for the
execution of this Lease by Landlord to Tenant.
Such numbers shall not be adjusted unless the
rentable area of the Premises is increased or
decreased and an appropriate amendment to this
Lease is executed by Landlord and Tenant. In the
event the rentable area of the Premises is so
adjusted, Tenant's Proportionate Share shall also
be adjusted accordingly.
The rentable areas of the Premises and the Office
Portion have been computed in accordance with the
American National Standard method of measuring
Floor Area in Office Buildings of the Building
Owners and Managers Association International
(ANSI Z65.1-1980), approved July 31, 1980. All
space measurements for floors 17 and 22 through 25
have a conversion factor from usable to rentable
of 1.04 since they are single tenant floors, and
for the portion of the 16th floor, the conversion
factor is 1.14 since it is currently a multi
tenant floor.
INCREASE OR Upon written notice to Landlord received by
DECREASE OF Landlord contemporaneously with Tenant's Working
SPACE Drawings, Tenant shall have the right to increase
or decrease the rentable square footage of the
Premises by up to fifteen percent (15%). If
Tenant exercises its rights pursuant to this
Section to increase the size of its Premises, then
the maximum 15% increase in the Premises shall be
added to the Premises as follows:
(a) Any space on the 16th floor except NTT
Holdings, Inc. (Suite 1650, North Tower) and NTT
Holdings, Inc. existing right of refusal space
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(Suite 1651, North Tower). Provided that with
respect to Suite 1678, North Tower, delivery shall
not be required until forty-five (45) days after
Tenant has sent Landlord written notice of
Tenant's election to take such space.
(b) a portion of Suite 1940, North Tower
(with respect to Suite 1940, up to approximately
5,545 rentable square feet of space reasonably
acceptable to Tenant and Landlord if space in
Suite 1651 is leased by Tenant, or up to
approximately 6,448 rentable square feet of space
reasonably acceptable to Tenant and Landlord if
space in Suite 1651 is not leased by Tenant); and
(c) All such additional space shall be
leased upon the same terms and conditions as
herein provided.
If Tenant exercises its rights pursuant to this
Section to decrease the size of its Premises, then
the maximum 15% decrease shall be configured in a
manner as to facilitate Landlord's leasing of such
space and shall be deleted from the Premises as
follows:
(i) first, up to all of the space on
the 16th floor, North Tower; and
(ii) second, then space reasonably
acceptable to Tenant and Landlord on the 17th
floor, North Tower.
EXHIBIT A shall be amended accordingly to reflect
any such increase or decrease in space.
This Lease includes the right of Tenant to use the
Common Areas in common with other tenants in the
Building and to use Tenant's parking spaces (as
provided for in EXHIBIT G) in the Parking Garage
in common with other tenants in the Building.
Reference is hereby made to Exhibit T with respect
to Tenant's right to occupy the Storage Space.
Reference is hereby made to Exhibit G with respect
to Tenant's right to use spaces within the Parking
Garage.
TERM 3. The term of this Lease shall commence on the
Commencement Date, and expire at 5:00 p.m., on the
Expiration Date, unless earlier terminated as
provided herein (the "Term"). Reference is hereby
made to EXHIBIT O for certain rights granted to
Tenant to renew the term hereof.
The term "Term" or "term of this Lease" or similar
terms shall mean the Initial Term and any Renewal
Terms that may become effective pursuant to
EXHIBIT O.
RENT 4. a. PAYMENT. Tenant shall timely pay to
Landlord the Basic Rental as set forth on
EXHIBIT E and all additional sums to be paid by
Tenant to Landlord under this Lease, including the
amounts set forth in EXHIBIT C attached hereto,
without deduction or set off except as expressly
provided in this Lease, at Landlord's Address (or
such other address as Landlord may from time to
2
<PAGE>
time designate in writing to Tenant). Basic
Rental, adjusted as herein provided, shall be
payable monthly in advance. The first monthly
installment of Basic Rental shall be payable
contemporaneously with the execution of this
Lease, and a like monthly installment of Basic
Rental shall be due on the first day of the second
full calendar month of the Term and continuing
thereafter on the first day of each succeeding
calendar month during the Term.
b. The term "LEASE YEAR" shall mean any
period of twelve (12) months commencing on the
first day of the first full month of the Term or
any anniversary of such date or, if fewer than 12
months remain in the Term after any such
anniversary, the period commencing on such
anniversary date through the last day of the Term.
c. ELECTRICAL COSTS. Tenant shall pay to
Landlord, coincident with Tenant's payment of
Basic Rental, an amount equal to the product of
(i) the portion of the cost of all electricity
used by or in regard to the Plaza of the Americas
to the extent same are apportioned to the Office
Portion, the Common Areas located therein, the
equipment, machinery, facilities and property
located in the Office Portion or used or utilized
in connection with the operation or maintenance of
the Office Portion or any part thereof, whether or
not located in the Office Portion including, but
not limited to, the central chilled water plant
and all heating, ventilating and air conditioning
equipment and/or machinery, less the cost of all
electricity either (A) provided to other tenants
in the Buildings in excess of building standard
electricity as established by Landlord from time
to time in its reasonable judgment or
(B) separately metered for and separately billed
to other tenants in the Buildings (the net amount
established in this Section 4b(i) being the
"ELECTRICAL COSTS"), multiplied by (ii) Tenant's
Proportionate Share; provided, however, to the
extent all or any portion of the Premises is
separately metered as provided below, the
allocation of Electrical Costs as provided for in
this sentence shall be adjusted to reflect the
direct allocation of electricity to Tenant. The
allocation of Electrical Costs to the Office
Portion shall be determined based upon actual
consumption (to the extent measured and allocated
by meters or other devices) and/or load and usage
factors determined from time to time by Landlord's
engineer, and such other data and studies as may
be available to Landlord, and which, in Landlord's
reasonable judgment, provide a fair and equitable
basis for the allocation of such charges among the
tenants of the Development. In conjunction with
the above method of allocating Electrical Costs,
Landlord may, at its option at any time, install
separate metering for any utility service
(including electricity) for: (A) any floor of the
Buildings only a portion of which is included in
the Premises, or (B) any or all of the Premises
leased to Tenant. If Landlord's election to
require installation of separate meters is made
before final approval of Working Drawings as
provided in Exhibit D hereof, Tenant shall pay the
3
<PAGE>
cost of installation; if Landlord's election is
made at any time thereafter, Landlord shall pay
the cost of installation; at this time, Landlord
elects to require installation of separate meters
at Tenant's sole cost and expense. In the case of
(A) above, Tenant shall pay to Landlord,
coincident with Tenant's payment of Basic Rental
each month, an amount equal to the product of
(i) the cost of such separately metered utility
service or services used by all tenants occupying
the floor in question for the most recent month
for which such cost has been determined by
Landlord multiplied by (ii) a fraction, the
numerator of which is the number of rentable
square feet in the Premises on the floor in
question and the denominator of which is the total
number of rentable square feet on the floor in
question. In the case of (B) above, Tenant shall
pay to Landlord, coincident with Tenant's payment
of Basic Rental each month, an amount equal to the
cost of such separately metered utility service or
services for the most recent month for which such
cost has been determined by Landlord. The
maintenance and reading of such meter(s) shall be
at the expense of the Landlord but shall be
included in Basic Cost for purposes of Exhibit C
hereof.
d. ANNUAL COST STATEMENT. By April 1 of
each calendar year, or as soon thereafter as
practicable, Landlord shall furnish to Tenant a
statement of Landlord's actual Electrical Costs
(to be included in the Annual Cost Statement
provided for in EXHIBIT C hereof) for the previous
year adjusted as provided in Section 4e. If the
Annual Cost Statement reveals that Tenant paid
more for Electrical Costs than Tenant's
Proportionate Share of Electrical Costs in the
year for which such statement was prepared, then
Landlord shall at its option, either (i) apply
such excess against any rentals or other amounts
due or to become due hereunder or (ii) reimburse
Tenant such excess. If Tenant paid less than
Tenant's Proportionate Share of Electrical Costs,
then Tenant shall pay Landlord such deficiency
upon demand. Notwithstanding anything contained
in this Lease to the contrary, Tenant shall not be
obligated to pay to Landlord any annual deficiency
of Electrical Costs for which Tenant does not
receive written demand from Landlord by December
31 of the year immediately following the year in
which such Electrical Costs were incurred, unless
Landlord had not been billed for any such amount
by October 31 of such following year (such amounts
are herein called "UNBILLED ELECTRICAL COSTS"), in
which case Landlord shall promptly deliver to
Tenant written notice of Tenant's share of such
Unbilled Electrical Costs after Landlord's receipt
of the bill therefor. No payment of Electrical
Costs shall waive Tenant's audit rights set forth
on EXHIBIT C hereto.
e. ADJUSTMENTS TO ELECTRICAL COSTS. With
respect to any calendar year or partial calendar
year in which the Buildings were not occupied to
the extent of ninety-five percent (95%) of the
rentable area thereof, the Electrical Costs for
such period shall, for the purposes hereof, be
increased to the amount which would have been
4
<PAGE>
incurred had the Buildings been occupied to the
extent of ninety-five percent (95%) of the
rentable area thereof.
f. ADJUSTMENTS. Tenant must have the right
to audit Electricity Costs in accordance with the
procedures set forth in EXHIBIT C hereof.
DELINQUENT 5. All payments required of Tenant hereunder
PAYMENT; shall bear interest beginning ten (10) days after
HANDLING the date due until paid at the annual rate of 10%.
CHARGES
SECURITY 6. a. GENERAL. Contemporaneously with the
DEPOSIT execution of this Lease, Tenant shall pay to
Landlord the Security Deposit, which shall be held
by Landlord without liability for interest and as
security for the performance by Tenant of its
obligations under this Lease. The Security
Deposit is not an advance payment of rent or a
measure or limit of Landlord's damages upon a
Tenant Event of Default (defined below). Landlord
may, from time to time and without prejudice to
any other remedy, use all or a part of the
Security Deposit to perform any obligation which
Tenant was obligated, but failed, to perform
hereunder. Following any such application of the
Security Deposit, Tenant shall pay to Landlord on
demand the amount so applied in order to restore
the Security Deposit to the amount held by
Landlord prior to such application. Within a
reasonable time after the Term ends, provided
Tenant has performed all of its obligations
hereunder, Landlord shall return to Tenant the
balance of the Security Deposit not applied to
satisfy Tenant's obligations. If Landlord
transfers its interest in the Premises, then
Landlord may assign the Security Deposit to the
transferee and thereafter shall have no further
liability for the return of the Security Deposit.
b. RETURN OF SECURITY DEPOSIT. Provided
Tenant is not then in default under this Lease, on
each anniversary date of this Lease commencing
with the first anniversary hereof, Landlord shall
return to Tenant one-tenth (1/10) of its Security
Deposit ($25,056.00); provided, however, if Tenant
does not exercise its option to terminate this
Lease as provided for in EXHIBIT S hereof, the
balance of the Security Deposit then held by
Landlord shall be returned to Tenant on the last
day of the fifth year of the Term of this Lease.
LANDLORD'S 7. a. GENERAL. Landlord represents and
OBLIGATIONS warrants to Tenant that the Buildings' structure
and operational systems are in good condition and
suitable for office use. Landlord shall maintain
the Buildings, Building grounds, and Parking
Garage, including but not limited to, all
(i) Common Areas and service areas, (ii) roofs,
foundations,, parking surfaces, pavement, exterior
windows and load bearing items, (iii) exterior
surfaces of walls, (iv) plumbing, pipes and
conduits located in the common areas or service
areas (v) central heating, ventilation and air
conditioning, electrical, mechanical and plumbing
systems, including, but not limited to, those
servicing the Premises (other than excess
electrical equipment and other supplemental
5
<PAGE>
equipment installed by or for Tenant), and
(vi) structural and mechanical elements, including
without limitation, those relating to the
Premises, necessary to provide the services
described in this Lease. Landlord shall at all
times operate and maintain the Building in
accordance with standards at least as high as
customarily followed in the operation and
maintenance of those buildings listed on EXHIBIT Q
("Comparable Buildings"). Without limiting the
foregoing, Landlord shall provide the specific
facilities, utilities and services set forth in
this Section. Landlord shall maintain, or cause a
managing agent to maintain, an office in the
office complex in which the Building is located
and provide "on-site" property management of the
Building.
b. HEATING, VENTILATING AND AIR CONDITIONING.
(i) Landlord shall provide HVAC to maintain the
Premises at a dry bulb temperature of not less
than 72 degrees F in winter and not more than 75
degrees F in summer. The HVAC system shall
deliver to the Premises 1 CFM of conditioned air
per rentable square foot. Relative humidity shall
be maintained between 35% and 60% (except that the
maximum inside relative humidity shall, in any
event, be limited to that which will not cause
condensation on the windows) during Normal
Business Hours.
(ii) Landlord shall, upon reasonable advance
notice from Tenant, furnish Tenant HVAC services
at any time or times in addition to Normal
Business Hours; Tenant and its employees,
licensees and guests may have access to the
Premises twenty-four (24) hours per day, every day
of the year, provided, however, to the extent that
HVAC is required beyond Normal Business Hours, the
additional charge for such after hours HVAC shall
be $25.00 per floor per hour to the extent that
such use exceeds 200 total after hours HVAC per
year (if the Premises is separately metered,
Tenant shall be entitled to a credit for the
equivalent of 200 total hours of after hours HVAC
use per year).
(iii) In the event Tenant requires HVAC and
humidity control systems that necessitate the use
of self-contained units (the "Special Systems")
not served by the Building's chilled water system,
other than as a result of the failure of the
Building's systems to meet Tenant's requirements
as set forth above, Landlord shall furnish extra
electrical power to Tenant for Tenant's use in
installing and operating, at Tenant's expense, one
or more Special Systems. Tenant shall bear any
extra expense incurred by Landlord in furnishing
electrical power from the Building's system in
excess of six (6) watts per rentable square foot
(excluding any computer rooms) or in expanding the
Building"s system, if necessary, to provide
electrical power in excess of six (6) watts per
rentable square foot (excluding any computer
rooms) for any Special System. Any expansion of
the Building system, if necessary, shall be
subject to the prior written approval of Landlord.
Landlord agrees that such approval shall not
unreasonably be withheld or delayed.
6
<PAGE>
(iv) If Landlord cannot provide the HVAC
services in accordance with the requirements set
forth in this Section and Tenant so notifies
Landlord in writing thereof, unless Landlord and
Tenant agree to another remedy, Landlord agrees to
insulate existing uninsulated medium pressure
ducts in the Premises so that compliance with this
Section can be maintained if such installation
would bring about such compliance. Such work
required by the proceeding sentence shall be
performed upon prior notice to Tenant during hours
which are not Normal Business Hours and without
adversely interfering with Tenant's use and
occupancy of the Premises.
c. ELECTRICAL SERVICE. Landlord shall provide
an electrical distribution system and electrical
service for the Building during Normal Business
Hours. Landlord shall cause to be furnished all
electricity used in the Premises or in operating
any and all facilities serving the Premises;
PROVIDED, HOWEVER, that Tenant shall reimburse
Landlord for the direct expense incurred by
Landlord in furnishing to Tenant an average
connected load (excluding Landlord's building and
mechanical equipment) in excess of six (6) watts
per square foot at Landlord's bulk rate and
without markup.
d. ELEVATORS. Landlord shall provide passenger
and freight elevators serving the Premises, as
shown on EXHIBIT A attached hereto. The passenger
elevators shall be available during Normal
Business Hours, and at all other times there shall
be at least one (1) passenger elevator and one
(1) freight elevator available to serve the
Premises. Building access cards will be required
for elevator use after hours. The freight
elevator shall be available at all reasonable
times upon prior notice by Tenant to, and subject
to the reasonable scheduling requirements of, the
Building's managing agent.
e. LIGHT BULBS AND WATER. As part of the Tenant
Allowance, Tenant shall purchase and install all
initial cool white light bulbs and electronic
ballasts within thirty (30) days after
presentation by Tenant to Landlord of invoices for
such items. Landlord shall furnish and install
all replacement cool white light bulbs in
accordance with building standard and electronic
ballasts in the Premises and Common Areas and
shall furnish water, including chilled and heated
water, to serve the Premises as required for
lavatory and drinking purposes and any other uses
which are permitted pursuant to Section 9 hereof.
The fire stand pipe water system shall comply with
the NFPA code and applicable local laws; provided,
however that Landlord shall not be required to
comply with any such laws not applicable to
Landlord because Landlord has been "grandfathered"
under such laws but only so long as Landlord
remains grandfathered thereunder.
f. BUILDING SECURITY. (i) On a twenty-four (24)
hour basis every day of the year, Landlord shall
implement, maintain and enforce its existing
general security program for the Building and the
Parking Garage as described on Exhibit H attached
7
<PAGE>
hereto as such may be reasonably modified by
Landlord in accordance with security programs
utilized for Comparable Buildings.
(ii) Tenant, at its expense and with the
prior written approval of Landlord, may install
any additional safety and security systems or
devices in the Premises that Tenant may deem
appropriate. Landlord agrees that such approval
shall not be unreasonably withheld or delayed.
Tenant shall have the right, by installation of a
key system or otherwise, to control access to the
Premises and access of all elevators to floors
wholly occupied by Tenant; provided that Tenant's
use of any system shall not unreasonably interfere
with Landlord's access to the Premises or
Landlord's obligations to provide services or
perform any work under this Lease.
g. JANITORIAL SERVICES. Landlord shall keep the
Building and the Premises cleaned and maintained
in accordance with specifications set forth on
Exhibit U hereto as such may be from time to time
reasonably modified by Landlord in accordance with
specifications utilized for Comparable Buildings
(the "Janitorial Services"). The costs and
expenses of Janitorial Services will be included
in determining Basic Cost. During any period that
Landlord is not providing Janitorial Services to
the Premises, Basic Costs shall be adjusted to
exclude the cost of Janitorial services to the
Premises not being cleaned by Landlord.
h. INTERRUPTION OF SERVICES. (i) Landlord's
obligation to furnish services under this Section
shall be subject to the rules and regulations of
the supplier of such services and governmental
rules and regulations. Landlord may, upon not
less than 120-days' prior written notice to
Tenant, discontinue electric service to the
Premises; provided (1) such discontinuance is
required by law and applicable to all tenants in
the Building; (2) Landlord first arranges for a
direct connection thereof through the supplier of
such service; (3) Tenant shall not be required to
make further payments under Section 4c hereof; and
(4) Landlord shall permit its risers, conduits and
feeders serving the Premises to be used for the
purpose of supplying electric current to the
Premises. In the event such electric service is
discontinued, Tenant shall, however, be
responsible for contracting with the supplier of
such service and for paying all deposits for, and
costs relating to, such service.
(ii) Landlord shall use reasonable efforts to
restore any service that becomes unavailable;
however, such unavailability which is not the
result of any act or omission of Landlord or its
agents, contractors or employees or which is
outside the control of Landlord shall not render
Landlord liable for any damages caused thereby, be
a constructive eviction of Tenant, constitute a
breach of any implied warranty, or, except as
provided in the next sentence, entitle Tenant to
any abatement of Tenant's obligation hereunder.
However, if Tenant is prevented from making
reasonable use of the Premises or Tenant's parking
spaces for more than seven (7) consecutive
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business days because of the unavailability of any
such service, Tenant shall, commencing with the
seventh (7th) consecutive business day of such
unavailability, receive an abatement of the Basic
Rental and other sums owed hereunder based upon
the portion or portions of the Premises affected
by the interruption of service and the degree of
adverse effect of the interruption upon the normal
conduct of Tenant's business at the Premises,
until the interruption is remedied. If any
interruption of service due to a single occurrence
shall continue for more than sixty (60) days with
respect to all or a portion of the Premises that
are material to the operation of the Tenant's
business, Tenant, by written notice to Landlord
given at any time prior to the resumption of
service to a reasonable level, may terminate this
Lease, and, upon the giving of the notice, this
Lease shall terminate and expire on the date set
forth in the notice.
(iii) The remedies set forth in this Section
shall be in addition to any remedies that Tenant
may have at law or in equity and shall not affect
in any manner any claim to actual or constructive
eviction, breach of warranty or other claim for
damages or relief to which Tenant may be entitled
under applicable law.
i. BUILDING STAFF. Landlord shall employ, or
provide for, the services of a full-time, on-site
staff comparable to the staffs of Comparable
Buildings to maintain the Building, the Common
Areas, the Parking Garage and the Premises and to
perform all of the services that Landlord is
obligated to perform pursuant to this Lease.
j. SPRINKLER SYSTEM. The Plaza of the Americas
has been "grandfathered" with respect to the
requirements of being a fully sprinklered building
under the Dallas City Building Code. However, if
at any time during the term of this Lease, the
Project or Landlord is determined to no longer be
grandfathered under such Code, then Landlord, at
its sole expense, shall promptly make all
necessary changes to bring the Building into
compliance. Thereafter, at Landlord's sole
expense, Landlord shall maintain and repair the
system so that it is in Code compliance during the
term of this Lease.
k. FIRE STAIR ACCESS. Subject to compliance
with all applicable laws, rules, ordinances,
orders, regulations and other requirements,
present or future, Landlord shall allow fire stair
access between contiguous floors of the Premises
provided that Tenant installs at its expense a
security card system for ingress and egress.
Tenant shall provide Landlord with security cards
for use by Landlord as permitted by the terms of
this Lease.
IMPROVEMENTS; 8. a. IMPROVEMENTS; ALTERATIONS. Subject to
ALTERATIONS; the provisions of Section 15 hereof on casualty
REPAIRS; and Section 14 as to condemnation, Landlord will
MAINTENANCE keep and maintain in good repair and working order
all of the Buildings, the Common Areas, the
Parking Garage, and the roofs, foundations,
exterior windows and surfaces, and all structural
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and load bearing items or portions of the Project;
all plumbing, pipes, conduits and wiring,
including but not limited to all such items,
located between the exterior of the Building and
the interior surface of the walls of the Premises;
the central HVAC, electrical, mechanical and
plumbing systems servicing the Project including
but not limited to the Premises and all such items
as are necessary to provide the services described
in Section 7 of this Lease. Unless otherwise
provided in this Lease, Landlord, however, will
not be required to make any repairs or perform any
maintenance in connection with or resulting from
(a) any alteration or modification to the Premises
or equipment in the Project performed by, for, or
because of Tenant, (b) special equipment or
systems installed by, for, or because of Tenant,
(c) the installation, use or operation of Tenant's
property, fixtures and equipment, (d) the moving
of Tenant's property in or out of the Building or
in or about the Premises for Tenant's use or
occupancy of the Premises in violation of any of
the terms or provisions of this Lease, or (e) the
acts or omissions of Tenant or Tenant's employees,
agents, invitees, subtenants, licensees, or
contractors or fire or other casualty, except as
provided in Section 15 hereof or condemnation,
except as provided in Section 14 hereof. The cost
of all repairs and maintenance by Landlord
described in this Section 8 shall be included in
calculating Basic Costs as provided in EXHIBIT C
hereto. Except in the event of an emergency,
Landlord shall not unreasonably interfere with
Tenant's business operations.
b. ALTERATIONS; REPAIRS; MAINTENANCE.
Improvements to the Premises shall be installed at
the expense of Tenant only in accordance with
plans and specifications which have been
previously submitted to and approved in writing by
Landlord. After the initial Tenant improvements
are made, no alterations or physical additions in
or to the Premises may be made without written
consent of Landlord, which consent shall not be
unreasonably withheld or delayed. Tenant shall
not paint or install lighting or decorations,
signs, window or door lettering, or advertising
media of any type on or about the Premises which
is visible from outside the Premises without the
prior written consent of Landlord. Tenant shall
maintain the Premises (except for those portions
of the Premises which Landlord is obligated to
maintain pursuant to other provisions of this
Lease) in a clean, safe, operable, attractive
condition, and shall not permit or allow to remain
any waste or damage to any portion of the
Premises, except for reasonable wear and tear and
condemnation and fire and other casualty damage as
to which Section 14 and Section 15 control;
provided however, that Tenant shall not be
responsible for repairs or replacements of the
Buildings' base HVAC, plumbing, mechanical,
electrical or other systems (as opposed to excess
electrical equipment and other supplemental
equipment installed by or for Tenant, which Tenant
shall be obligated to maintain and repair), except
to the extent damage thereto results from the
negligence or wilful misconduct of Tenant, its
assignees, its subtenants or any of their
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respective agents, contractors or invitees.
Tenant shall repair or replace, subject to
Landlord's direction and supervision, any damage
to the Buildings caused by Tenant or Tenant's
agents, contractors, or invitees. If Tenant fails
to commence such repairs or replacements within 15
days after the occurrence of such damage and
thereafter diligently pursue such repairs to
completion, Landlord may make the same at Tenant's
cost, which shall be payable to Landlord within
ten days after Landlord has invoiced Tenant
therefor.
c. PERFORMANCE OF WORK. All work described
in this Section 8 shall be performed only by
Landlord or by contractors and subcontractors
mutually acceptable to Landlord and Tenant, except
that Hale & Associates shall be used as electrical
contractor so long as it is competitively priced.
Tenant shall cause all contractors and
subcontractors to procure and maintain insurance
coverage against such risks, in such amounts, and
with such companies as Landlord may reasonably
require. All such work shall be performed in
accordance with all legal requirements and in a
good and workmanlike manner so as not to damage
the Premises, the primary structure or structural
qualities of the Buildings, or plumbing,
electrical lines, or other utility transmission
facility. All such work which may affect the
HVAC, electrical system, or plumbing must be
approved by the Building's engineer of record.
d. MECHANIC'S LIENS. Tenant shall not
permit any mechanic's liens to be filed against
the Premises, the Buildings or the Development for
any work performed, materials furnished, or
obligation incurred by or at the request of
Tenant. If such a lien is filed, then Tenant
shall, within ten days after Landlord has
delivered notice of the filing to Tenant, either
pay the amount of the lien or diligently contest
such lien and deliver to Landlord a bond or other
security reasonably satisfactory to Landlord. If
Tenant fails to timely take either such action,
then Landlord may pay the lien claim without
inquiry as to the validity thereof, and any
amounts so paid, including expenses and interest,
shall be paid by Tenant to Landlord within ten
days after Landlord has invoiced Tenant therefor.
USE 9. Tenant and its permitted assignees and
subtenants, shall occupy and use the Premises only
for general office purposes. The Premises shall
not be used for any use (i) which is disreputable
or (ii) creates extraordinary fire hazards or
(iii) results in an increased rate of insurance on
the Buildings or its contents or (iv) which
involves the storage of any hazardous materials or
substances in violation of Section 20 hereof. If,
solely because of Tenant's violation of
Section 9(iii) hereof, the rate of insurance on
the Buildings or its contents increases, Tenant
shall pay to Landlord the amount of such increase
on demand; provided, however that if such payment
is not made within ten (10) days after written
demand from Landlord, such failure shall
constitute a Tenant Event of Default. Tenant
shall conduct its business and control its agents,
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employees, and invitees in such a manner as not to
create any nuisance or interfere with other
tenants or Landlord in its management of the
Buildings. Tenant shall conduct its business and
control its agents, employees, and invitees in
such a manner as not to create any nuisance or
unreasonably interfere with other tenants or
Landlord in its management of the Building.
Tenant and its permitted subtenants, and their
employees, licensees and guests, shall have access
to the Premises twenty-four (24) hours per day,
every day of the year.
Landlord, at its expense, shall provide to Tenant
such listings on the Building's directories in the
lobby of the Building as are provided other
tenants of the Building.
ASSIGNMENT 10. a. TRANSFERS: CONSENT. Tenant shall not,
AND without the prior written consent of Landlord
SUBLETTING (which Landlord shall not unreasonably withhold or
delay), (i) advertise that any portion of the
Premises is available for lease, (ii) assign,
transfer, or encumber this Lease or any estate or
interest herein, (iii) sublet any portion of the
Premises, or (iv) grant any license, concession,
or other right of occupancy of any portion of the
Premises for purposes other than in conjunction
with Tenant's business activities being conducted
by Tenant on the Premises as permitted by the
terms of this Lease (any of the events listed in
clauses (ii) through (iv) being a "TRANSFER"). If
Tenant requests Landlord's consent to a Transfer,
then Tenant shall provide Landlord with a written
description of all terms and conditions of the
proposed Transfer, copies of the proposed
documentation, and the following information about
the proposed transferee: name and address;
reasonably satisfactory information about its
business and business history; its proposed use of
the Premises; banking, financial, and other credit
information; and general references sufficient to
enable Landlord to determine the proposed
transferee's creditworthiness and character.
Acceptable reasons to withhold consent include,
but are not limited to, Landlord's disapproval of
transferee's type of business, creditworthiness of
transferee, and transferee's standing in the
business community. Tenant shall reimburse
Landlord for its reasonable attorneys' fees and
other out-of-pocket expenses incurred in
connection with considering any request for its
consent to a Transfer. Landlord's consent to a
Transfer shall not release Tenant from performing
its obligations under this Lease, but rather
Tenant and its transferee shall be jointly and
severally liable therefor as to the part of the
Premises Transferred to the transferee.
Landlord's consent to any Transfer shall not waive
Landlord's rights as to any subsequent Transfers.
If an Event of Default occurs while the Premises
or any part thereof are subject to a Transfer,
then Landlord, in addition to its other remedies,
may collect directly from such transferee all
rents becoming due to Tenant and apply such rents
against Rent. Tenant authorizes its transferees
to make payments of rent directly to Landlord upon
receipt of notice from Landlord to do so. The
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foregoing notwithstanding, Tenant may, without
requiring Landlord's consent but remaining liable
for the performance of this Lease (but with giving
Landlord written notice ten (10) days prior
thereto), sublet or assign all or any portion of
the Premises, to an entity, controlling,
controlled by or under common control with Tenant,
and such shall not be deemed a Transfer hereunder.
b. CANCELLATION. Landlord may, within 30
days after submission of Tenant's written request
for Landlord's consent to a Transfer, cancel this
Lease (or, as to a subletting or assignment,
cancel as to the portion of the Premises proposed
to be sublet or assigned) as of the date the
proposed Transfer was to be effective; provided,
however, this right of cancellation in Landlord
shall not apply to a Transfer that involves less
than a full floor if the term of such Transfer is
less than the earlier of the remaining Term of
this Lease or three years. If Landlord cancels
this Lease as to any portion of the Premises, then
this Lease shall cease for such portion of the
Premises and Tenant shall pay to Landlord all Rent
accrued through the cancellation date relating to
the portion of the Premises covered by the
proposed Transfer. Thereafter, Landlord may lease
such portion of the Premises to the prospective
transferee (or to any other person) without
liability to Tenant, except that Tenant shall be
entitled to receive from a releasing by Landlord
as received by Landlord the compensation it would
otherwise have received under this Section 10(c)
if Tenant had completed its proposed Transfer as
described in the notice provided to Landlord under
Section 10(b).
c. ADDITIONAL COMPENSATION. Tenant shall
pay to Landlord, immediately upon receipt thereof,
50% of all compensation received by Tenant for a
Transfer that exceeds the Rent allocable to the
portion of the Premises covered thereby provided,
however, Tenant shall be entitled to deduct from
such excess compensation an amount equal to
Tenant's direct and reasonable out-of-pocket
expenses incurred in connection with the Transfer.
Landlord shall have the right to review and
approve such costs and shall have the right to
review and approve any Transfer agreement (whether
in the form of an assignment or sublease
agreement), such approval not to be unreasonably
withheld or delayed.
INSURANCE; 11. a. INSURANCE. Tenant shall at its expense
WAIVERS; procure and maintain throughout the Term the
SUBROGATION; following insurance policies: (i) commercial
INDEMNITY general liability insurance in amounts of not less
than $5,000,000 per occurrence, insuring Tenant,
and Landlord and Landlord's agents as additional
insureds, for liability for injury to or death of
a person or persons or damage to property arising
from the use and occupancy of the Premises,
(ii) contractual liability insurance coverage
sufficient to cover Tenant's indemnity obligations
hereunder, (iii) insurance covering the full value
of Tenant's property and improvements, and other
property (including property of others), in the
Premises, and (iv) business interruption
insurance. Tenant's insurance shall provide
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primary coverage to Landlord when any policy
issued to Landlord provides duplicate or similar
coverage, and in such circumstance Landlord's
policy will be excess over Tenant's policy. Tenant
shall furnish certificates of such insurance and
such other evidence satisfactory to Landlord of
the maintenance of all insurance coverages
required hereunder, and Tenant shall obtain a
written obligation on the part of each insurance
company to notify Landlord at least 30 days before
cancellation or a material change of any such
insurance. All such insurance policies shall be
in form, and issued by companies, reasonably
satisfactory to Landlord.
Any insurance required by the terms of this Lease
to be carried by Tenant may be a blanket policy
(or policies) covering other related or affiliated
corporations. If any insurance is maintained
under a blanket policy, Tenant shall endorse
Section 11a(i) above to include a per location
aggregate.
b. WAIVER OF LIABILITY. Landlord shall not
be liable to Tenant or those claiming by, through,
or under Tenant for any injury to or death of any
person or persons or the damage to or theft,
destruction, loss, or loss of use of any Property
(a "LOSS") caused by casualty, theft, fire, third
parties, or any other matter beyond the control of
Landlord, or for any injury or damage or
inconvenience which may arise through repair or
alteration of any part of the Buildings, or
failure to make repairs, or from any cause except
Landlord's sole or gross negligence or misconduct.
c. WAIVER OF SUBROGATION. The parties
hereto waive any and all rights of recovery,
claim, action or cause of action, against each
other, their respective agents and employees, for
any loss or damage that may occur to the Premises
or the Building and to all property, whether real,
personal or mixed, located in the Premises or the
Building, by reason of fire, the elements, or any
other cause insured against under the terms of
standard fire and extended coverage insurance
policies of the type prescribed from time to time
for use in respect of the Building, the Premises,
Landlord's or Tenant's fixtures, personal
property, leasehold improvements or business,
regardless of cause or origin, including
negligence of the parties hereto, their respective
agents and employees, except Landlord only waives
any right or claim against Tenant to the extent
the same is insured against any insurance policies
covering such property or interests. Each party
agrees to provide the other with reasonable
evidence of its insurance carrier's consent to the
waiver of subrogation.
d. INDEMNITY. SUBJECT TO SECTION 11b.,
TENANT SHALL DEFEND, INDEMNIFY, AND HOLD HARMLESS
LANDLORD AND ITS AGENTS AND AFFILIATES, FROM AND
AGAINST ALL CLAIMS, DEMANDS, LIABILITIES, CAUSES
OF ACTION, SUITS, JUDGMENTS, AND EXPENSES
(INCLUDING ATTORNEYS' FEES) FOR ANY LOSS ARISING
FROM PERSONAL INJURY, BODILY INJURY, OR DEATH ON
ACCOUNT OF PROPERTY DAMAGE CAUSED BY, RESULTING
FROM, OCCURRING IN CONNECTION WITH OR ARISING
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DIRECTLY OUT OF THE ACTS OR OMISSIONS OF TENANT,
ITS OFFICERS, EMPLOYEES, SERVANTS, AGENTS, AND
CONTRACTORS WITH RESPECT TO THE PREMISES OR
BUILDING, ANY OCCURRENCE ON THE PREMISES OR FROM
TENANT'S FAILURE TO PERFORM ITS OBLIGATIONS UNDER
THIS LEASE (OTHER THAN A LOSS ARISING FROM THE
SOLE OR GROSS NEGLIGENCE OF LANDLORD OR ITS
AGENTS), EVEN THOUGH CAUSED OR ALLEGED TO BE
CAUSED BY THE JOINT, COMPARATIVE, OR CONCURRENT
NEGLIGENCE OR FAULT OF LANDLORD OR ITS AGENTS, AND
EVEN THOUGH ANY SUCH CLAIM, CAUSE OF ACTION, OR
SUIT IS BASED UPON OR ALLEGED TO BE BASED UPON THE
STRICT LIABILITY OF LANDLORD OR ITS AGENTS. THIS
INDEMNITY PROVISION IS INTENDED TO INDEMNIFY
LANDLORD AND ITS AGENTS AGAINST THE CONSEQUENCES
OF THEIR OWN NEGLIGENCE OR FAULT AS PROVIDED ABOVE
WHEN LANDLORD OR ITS AGENTS ARE JOINTLY,
COMPARATIVELY, OR CONCURRENTLY NEGLIGENT WITH
TENANT. THIS INDEMNITY PROVISION SHALL SURVIVE
TERMINATION OR EXPIRATION OF THIS LEASE.
e. LANDLORD'S INSURANCE. Landlord shall
maintain upon execution of this Lease:
(i) standard all-risk fire and casualty
insurance covering the Building in an amount
at least equal to eighty percent (80%) of the
current replacement cost of the Building, or
to ninety percent (90%) if the Building is
sprinkled; and
(ii) commercial general liability
insurance covering (i) bodily injury to,
illness of, or death of persons with limits
of liability of not less than $1,000,000 per
occurrence, and (ii) damage to property with
a limit of liability of not less than
$100,000 per occurrence; and
At all times during the term of this Lease,
Landlord shall use its best efforts to maintain
the insurance set forth in subsections (i) and
(ii) above and in all events shall maintain such
insurance coverage as is customarily carried in
respect of Comparable Buildings. The limits set
forth in subsection (ii) of this Section shall be
increased by Landlord from time to time during the
term of this Lease to at least the minimum limits
that are then customary in respect of Comparable
Buildings. All policies of insurance required
hereby shall provide, to the extent available,
that they will not be cancelled or modified upon
less than thirty (30) days' prior notice. At
Tenant's request Landlord shall furnish Tenant
with a certificate or certificates of insurance
certifying that the insurance coverage required
hereby is in force. Any insurance required by the
terms of this Lease to be carried by Landlord may
be under a blanket policy (or policies) covering
other properties of Landlord and/or other related
or affiliated corporations.
f. RISK. All personal property of Tenant,
its agents, employees or invitees, in and on the
Premises, shall be and remain at their sole risk,
and Landlord shall not be liable to them for any
damage to, or loss of, such personal property
arising from any act of negligence of any other
persons, or resulting from fire, explosion,
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falling plaster, rain or snow, or from the leaking
of the roof, or from the bursting, leaking or
overflowing of water, sewer or steam pipes, or
from heating or plumbing fixtures or from
electrical wires or fixtures, or from any other
cause whatsoever covered by Landlord's or Tenant's
insurance.
SUBORDINATION; 12. a. SUBORDINATION. This Lease shall be
ATTORNMENT; subordinate to any deed of trust, mortgage, or
NOTICE TO other security instrument (a "MORTGAGE"), or any
LANDLORD'S ground lease, master lease, or primary lease (a
MORTGAGEE "PRIMARY LEASE"), that now or hereafter covers all
or any part of the Premises (the mortgagee under
any Mortgage or the lessor under any Primary Lease
is referred to herein as "LANDLORD'S MORTGAGEE").
Contemporaneously with the execution of this Lease
by Landlord and Tenant, Landlord, Tenant and
Landlord's Mortgagee shall execute and deliver an
Agreement of Subordination, Non-Disturbance, and
Attornment reasonably satisfactory to all parties
thereto.
b. ATTORNMENT. Tenant shall attorn to any
party succeeding to Landlord's interest in the
Premises, whether by purchase, foreclosure, deed
in lieu of foreclosure, power of sale, termination
of lease, or otherwise, upon such party's request,
and shall execute such agreements confirming such
attornment as such party may reasonably request.
c. NOTICE TO LANDLORD'S MORTGAGEE. Tenant
shall not seek to enforce any remedy it may have
for any default on the part of the Landlord
without first giving written notice by certified
mail, return receipt requested, specifying the
default in reasonable detail, to any Landlord's
Mortgagee whose address has been given to Tenant,
and affording such Landlord's Mortgagee a
reasonable opportunity to perform Landlord's
obligations hereunder.
RULES 13. Tenant shall comply with the rules and
AND regulations of the Buildings which are attached
REGULATIONS hereto as Exhibit B. Landlord may, from time to
time, change such rules and regulations for the
safety, care, or cleanliness of the Buildings and
related facilities, provided that (a) Landlord
shall furnish Tenant With a copy of any changes to
such rules and regulations; (b) such changes are
applicable to all tenants of the Building and will
not unreasonably interfere with Tenant's use of
the Premises or cause Tenant to incur additional
monetary obligations; and (c) in the case of any
conflict or inconsistency between the provisions
of this Lease and such rules and regulations, as
changed, the provisions of this Lease shall
control. The Rules and Regulations, as changed in
accordance with this Section from time to time,
are hereinafter called the "Rules and
Regulations".
Landlord agrees that it shall (i) not discriminate
against Tenant in enforcing the Rules and
Regulations, (ii) not unreasonably withhold or
delay its consent from Tenant for any approval
required under the Rules and Regulations,
(iii) exercise its judgment in good faith in any
instance providing for the exercise of its
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judgment in the Rules and Regulations, and
(iv) enforce the Rules and Regulations against
other Tenants in the Project in an equitable
manner.
Anything to the contrary notwithstanding in the
Rules and Regulations, Landlord agrees that its
consent shall not be unreasonably withheld or
delayed with respect to (a) any signs,
advertisements or notices painted or affixed on or
to any windows (other than exterior windows) or
doors or other parts of the Premises or any
hallways or lobbies to such Premises, (b) any
delivery person to the Premises, (c) any machinery
of any kind (other than normal office equipment)
operated by Tenant in the Premises, (d) any
vending or dispensing machines of any kind which
may be contained in the Premises, (e) any person
or contractor not employed by Landlord which shall
be used to perform janitor work, window washing,
cleaning, repair, or other work in the Premises,
and (f) all holiday and other temporary or special
installations or Decorations which Tenant desires
to install in the Premises. Landlord also agrees
that Tenant shall be permitted to insert nails,
hooks or screws in the walls of the Premises to
hang its artwork without it being performed by
Building Maintenance personnel and, subject to
Article 17 hereof, Tenant shall be permitted to
install without Landlord's consent a card key
security system in addition to other door locks in
the Premises. In addition, Tenant shall not be
required to purchase, at its expense, hard chair
pads and use the same under all chairs which might
cause damage to the carpet.
CONDEMNATION 14. a. TOTAL TAKING. If the entire Buildings
are taken by right of eminent domain or conveyed
in lieu thereof (a "TAKING"), then this Lease
shall terminate as of the date of the Taking and,
subject to an apportionment of Basic Rental and
other sums due hereunder as of the date of the
Taking, no further rent shall be due hereunder.
b. PARTIAL TAKING - LANDLORD'S AND TENANT'S
RIGHTS. If a Taking of the Premises or the
Buildings prevents Tenant from conducting its
business in the Premises in a manner reasonably
comparable to that conducted immediately before
such Taking, then Landlord may, at its expense,
relocate Tenant to office space reasonably
comparable to the Premises, provided that Landlord
notifies Tenant of its intention to do so within
30 days after the Taking. Such relocation may be
for a portion of the remaining Term or the entire
Term; Landlord shall complete any such relocation
within 180 days after Landlord has notified Tenant
of its intention to relocate Tenant. If Landlord
does not elect to relocate Tenant following such
Taking, then Tenant may terminate this Lease as of
the date of such Taking by giving written notice
to Landlord within 60 days after the Taking, and
Rent shall be apportioned as of the date of such
Taking. If Landlord does not relocate Tenant and
Tenant does not terminate this Lease, then Basic
Rental shall be abated on a reasonable basis as to
that portion of the Premises rendered untenantable
by the Taking.
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c. PARTIAL TAKING - LANDLORD'S RIGHTS. If
any material portion, but less than all, of the
Buildings becomes subject to a Taking, or if
Landlord is required to pay any of the proceeds
received for a Taking to Landlord's Mortgagee,
then this Lease, at the option of Landlord,
exercised by written notice to Tenant within 30
days after such Taking, shall terminate and Rent
shall be apportioned as of the date of such
Taking. If Landlord does not so terminate this
Lease and does not elect to relocate Tenant, then
this Lease will continue, but if any portion of
the Premises has been taken, Basic Rental shall
abate as provided in the last sentence of Section
l4b.
d. AWARD. If any Taking occurs, then
Landlord shall receive the entire award or other
compensation for the Land, the Buildings, and
other improvements taken, and Tenant may
separately pursue a claim against the condemnor
for the value of Tenant's personal property which
Tenant is entitled to remove under this Lease,
moving costs, loss of business, and other claims
it may have.
FIRE OR 15. a. NOTICE OF CASUALTY. Tenant shall give
OTHER immediate written notice to Landlord of any damage
CASUALTY caused to the Premises by fire or other casualty.
b. DAMAGE BY CASUALTY. In the event that
the Premises or Office Portion shall be damaged or
destroyed by fire or other casualty insurable
under standard fire and extended coverage
insurance and Landlord does not elect to terminate
this Lease as hereinafter provided, Landlord shall
proceed with reasonable diligence and at its sole
cost and expense to rebuild and repair the
Premises. If the Office Portion or the Premises
shall (i) be destroyed or substantially damaged by
a casualty not covered by Landlord's insurance; or
(ii) be damaged by fire, tornado or other
casualty, so that rebuilding or repairs cannot, in
Landlord's sole judgment, reasonably be completed
within one hundred eighty (180) days after the
date of such damage; or (iii) be damaged to such
extent that the remaining term of this Lease is
not sufficient to amortize the cost of
reconstruction, then (A) Landlord may elect
whether to terminate this Lease as hereinafter
provided or to proceed to rebuild and repair the
Premises and (B) and Tenant may elect whether to
terminate this Lease as hereinafter provided.
Should either Landlord or Tenant elect to
terminate this Lease it shall give written notice
of such election to Tenant within ninety (90) days
after the occurrence of such casualty. If neither
Landlord nor Tenant should not elect to terminate
this Lease, Landlord shall proceed with reasonable
diligence and at its sole cost and expense to
rebuild and repair the Premises. In the event of
any damage or destruction to the Premises, Tenant
shall, upon notice from Landlord, forthwith
remove, at Tenant's sole cost and expense, such
portion or all of Tenant's shelves, bins,
machinery and other trade fixtures and all other
property belonging to Tenant or Tenant's licensees
from such portion or all of the Premises as
Landlord shall request.
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c. LIMIT ON LANDLORD'S OBLIGATION.
Landlords' obligation to rebuild and repair under
this Article 15 shall in any event be limited to
restoring that portion of the Work that Landlord
was initially obligated to perform under this
Lease to substantially the condition in which the
same existed prior to the casualty, and shall be
further limited to the extent of the insurance
proceeds available to Landlord for such
restoration, and Tenant agrees that promptly after
completion of such work by Landlord, it will
proceed with reasonable diligence and at its sole
cost and expense to rebuild, repair and restore
its signs, fixtures and equipment and other items
of the Work that Tenant was obligated to perform
under this Lease to substantially the condition in
which the same existed prior to the fire or other
casualty.
d. TENANT'S BUSINESS OPERATION. Tenant
agrees that during any period of reconstruction or
repair of the Premises it will continue the
operation of its business within the Premises to
the extent reasonably practicable. During the
period from the occurrence of the casualty until
Landlord's repairs are completed, the Basic Rental
shall abate pro rata to the extent that, and so
long as, any portion of the Premises is not
reasonably usable to such extent as may be fair
and reasonable under the circumstances, however,
there shall be no abatement of the other charges
provided for herein.
e. TERMINATION RIGHTS. Notwithstanding
anything herein to the contrary, in the event the
holder of any indebtedness secured by a mortgage
or deed of trust covering the Premises requires
that the insurance proceeds be applied to such
indebtedness, then Landlord shall have the right
to terminate this Lease by delivering written
notice of termination to Tenant within fifteen
(15) days after such requirement is made by any
such holder whereupon all rights and obligations
hereunder shall cease and terminate.
f. RELEASE OF LIABILITY. Each of Landlord
and Tenant hereby releases the other from any and
all liability or responsibility to the other or
anyone claiming through or under them by way of
subrogation or otherwise from any loss or damage
to property caused by fire or any other perils
insured in policies of insurance covering such
property, EVEN IF SUCH LOSS OR DAMAGE SHALL HAVE
BEEN CAUSED BY THE FAULT OR NEGLIGENCE OF THE
OTHER PARTY, OR ANYONE FOR WHOM SUCH PARTY MAY BE
RESPONSIBLE, INCLUDING ANY OTHER TENANTS OR
OCCUPANTS OF THE DEVELOPMENT; provided, however,
that this release shall be applicable and in force
and effect only to the extent that such release
shall be lawful at that time and in any event only
with respect to loss or damage occurring during
such times as the releasor's policies shall
contain a clause or endorsement to the effect that
any such release shall not adversely affect or
impair said policies or prejudice the right of the
releasor to recover thereunder and then only to
the extent of the insurance proceeds payable under
such policies. Each of Landlord and Tenant agrees
that it will request its insurance carriers to
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include in its policies such a clause or
endorsement. If extra cost shall be charged
therefore, each party shall advise the other
thereof and of the amount of the extra cost, and
the other party, at its election, may pay the
same, but shall not be obligated to do so. If
such other party fails to pay such extra cost, the
release provisions of this paragraph shall be
inoperative against such other party to the extent
necessary to avoid invalidation of such releasor's
insurance.
TAXES 16. Tenant shall be liable for all taxes levied
or assessed against personal property, furniture,
or fixtures placed by Tenant in the Premises. If
any taxes for which Tenant is liable are levied or
assessed against Landlord or Landlord's property
and Landlord elects to pay the same, or if the
assessed value of Landlord's property is increased
by inclusion of such personal property, furniture
or fixtures and Landlord elects to pay the taxes
based on such increase, then Tenant shall pay to
Landlord, upon demand, that part of such taxes for
which Tenant is primarily liable hereunder.
EVENTS OF 17. a. Each of the following occurrences shall
DEFAULT constitute an event of default by Tenant (each an
"TENANT EVENT OF DEFAULT":
(i) Tenant's failure to pay Rent, or any
other sums due from Tenant to Landlord under the
Lease, when due, provided, however, no more than
twice in any calendar year, Tenant shall be
entitled to ten (10) days prior written notice of
such failure before such failure shall be deemed a
default;
(ii) Tenant's failure to perform, comply
with, or observe any other agreement or obligation
of Tenant under this Lease within twenty (20) days
of written notice thereof from Landlord; provided,
however, in the event the same cannot be cured
with said twenty-day period, then the efforts to
cure shall have been commenced within said
twenty-day period and thereafter diligently
prosecuted;
(iii) The filing of a petition by or against
Tenant (A) in any bankruptcy or other insolvency
proceeding; (B) seeking any relief under any state
or federal debtor relief law; (D) for the
appointment of a liquidator or receiver for all or
substantially all of Tenant's property or for
Tenant's interest in this Lease; or (D) for the
reorganization or modification of Tenant's capital
structure;
(iv) The admission by Tenant that it cannot
meet its obligations as they become due or the
making by Tenant of an assignment for the benefit
of its creditors; and
(v) Tenant shall abandon, desert or vacate
40% or more of the Premises for twelve (12) or
more consecutive months.
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REMEDIES; b. Upon any Tenant Event of Default,
PAYMENT BY Landlord may, in addition to all other rights and
TENANT; remedies afforded Landlord hereunder or by law or
NON-WAIVER equity, take any of the following actions:
(i) Terminate this Lease by giving Tenant
written notice thereof, in which event, Tenant
shall pay to Landlord the sum of (A) all Rent
accrued hereunder through the date of termination,
(B) all amounts due under Section 17(c), and
(C) an amount equal to (x) the total Rent that
Tenant would have been required to pay for the
remainder of the Term discounted to present value
at a per annum rate equal to the "Prime Rate" as
published on the date this Lease is terminated by
The Wall Street Journal, Southwest Edition, in its
listing of "money rates" minus (y) the then
present fair rental value of the Premises for such
period, similarly discounted; or
(ii) Terminate Tenant's right to possession
of the Premises without terminating this Lease by
giving written notice thereof to Tenant, in which
event Tenant shall pay to Landlord (A) all Rent
and other amounts accrued hereunder to the date of
termination of possession, (B) all amounts due
from time to time under Section 17(c), and (C) all
Rent and other sums required hereunder to be paid
by Tenant during the remainder of the Term,
diminished by any net sums thereafter received by
Landlord through reletting the Premises during
such period. Landlord shall use reasonable
efforts to relet the Premises on such terms and
conditions as Landlord in its sole discretion may
determine (including a term different from the
Term, rental concessions, and alterations to, and
improvement of, the Premises); however, Landlord
shall not be obligated to relet the Premises
before leasing other portions of the Buildings.
Landlord shall not be liable for, nor shall
Tenant's obligations hereunder be diminished
because of, Landlord's failure to relet the
Premises or to collect rent due for such
reletting. Tenant shall not be entitled to the
excess of any consideration obtained by reletting
over the Rent due hereunder. Reentry by Landlord
in the Premises shall not affect Tenant's
obligations hereunder for the unexpired Term;
rather, Landlord may, from time to time, bring
action against Tenant to collect amounts due by
Tenant, without the necessity of Landlord's
waiting until the expiration of the Term. Unless
Landlord delivers written notice to Tenant
expressly stating that it has elected to terminate
this Lease, all actions taken by Landlord to
exclude or dispossess Tenant of the Premises shall
be deemed to be taken under this Section 17b(ii).
If Landlord elects to proceed under this
Section 17b(ii), it may at any time elect to
terminate this Lease under Section 17b(i).
(iii) The other terms and provisions of this
Section 17(b) to the contrary notwithstanding, in
the case of an Event of Default under
Section 17(a)(v) hereof, provided that Tenant has
given Landlord at least thirty (30) days prior
written notice of its anticipated default under
such Section 17(a)(v), Landlord's remedies shall
be limited to the following:
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(A) Upon thirty (30) days prior written
notice to Tenant, retake the portion of the
Premises abandoned, vacated or deserted by
Tenant in which event Tenant's obligations
under this Lease as to such portion of the
Premises including its obligations to pay
Rent shall terminate as of the end of said
thirty (30) day period as to the portion of
the Premises retaken by Landlord; or
(B) Upon thirty (30) days prior written
notice to Tenant (the "Termination Notice"),
retake all of the Premises; provided,
however, Tenant shall have six (6) months
from the date of receipt of such Termination
Notice to vacate the portion of the Premises
which it continues to occupy as of the date
of the Termination Notice; provided, further,
Tenant's obligations under this Lease
including its obligation to pay Rent shall
terminate as follows: (x) as to the portion
which has been vacated by Tenant at the time
of the Termination Notice, at the end of the
thirty (30) day notice period, and (y) as to
the portion occupied by Tenant at the time of
the Termination Notice, six (6) months after
the date of receipt of the Termination
Notice.
Additionally, without notice, Landlord may alter
locks or other security devices at the Premises to
deprive Tenant of access thereto, and Landlord
shall not be required to provide a new key or
right of access to Tenant.
c. Upon any Tenant Event of Default, Tenant
shall pay to Landlord all costs incurred by
Landlord (including court costs and reasonable
attorneys' fees and expenses) in (i) obtaining
possession of the Premises, (ii) removing and
storing Tenant's or any other occupant's property,
(iii) repairing, restoring, altering, remodeling,
or otherwise putting the Premises into condition
acceptable to a new tenant, (iv) if Tenant is
dispossessed of the Premises and this Lease is not
terminated, reletting all or any part of the
Premises (including brokerage commissions, cost of
tenant finish work, and other costs incidental to
such reletting), (v) performing Tenant's
obligations which Tenant failed to perform, and
(vi) enforcing, or advising Landlord of, its
rights, remedies, and recourses arising out of the
Tenant Event of Default.
d. Landlord's acceptance of Rent following
a Tenant Event of Default shall not waive
Landlord's rights regarding such Event of Default.
No waiver by Landlord of any violation or breach
of any of the terms contained herein shall waive
Landlord's rights regarding any future violation
of such term or violation of any other term.
REMEDIES OF 18. If Landlord shall default in the performance
TENANT UPON of any of Landlord's obligations hereunder, then
DEFAULT BY Tenant shall be entitled to any remedies that
LANDLORD Tenant may have at law or in equity. Further, to
the extent that Landlord shall default in the
performance of any of Landlord's obligations
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hereunder and such default continues for a period
of thirty (30) days after written notice by Tenant
has been received by Landlord (provided, no such
Event of Default shall exist if (i) such default
cannot be cured within such thirty (30) days, and
(ii) Landlord commences curing such failure within
such thirty (30) days and thereafter diligently
pursues remedy of such failure), then Tenant may
perform the obligations as Landlord's agent. The
payment of the costs and expenses incurred by
Tenant (including attorney's fees) shall be paid
by Landlord to Tenant with interest thereon at the
lesser of the "Prime Rate" plus 2% or the maximum
legal rate. In the case of any payment due Tenant
under this Lease, if Landlord shall fail to make
the payment within thirty (30) days after written
demand therefore, Tenant shall have the right to
deduct the amount due, including interest thereon
at the lesser of the Prime Rate plus 2% or the
maximum legal rate, without liability for
forfeiture as an offset against Basic Rental then
due or thereafter becoming due. The foregoing
notwithstanding, Tenant shall not seek to enforce
any remedy it may have for any default on the part
of Landlord without first giving written notice by
certified mail, return receipt requested,
specifying the default in reasonable detail, to
any Landlord's Mortgagee whose address has been
given to Tenant, and affording such Landlord's
Mortgagee an opportunity to perform Landlord's
obligations hereunder within fifteen (15) days
after expiration of the thirty (30) day period
afforded Landlord to cure the default; provided,
no such event of default shall exist if (i) such
default cannot be cured within such fifteen (15)
days and (ii) Landlord's Mortgagee commences
curing such failure within such fifteen (15) days
and thereafter diligently pursues remedy of such
failure.
COMPLIANCE 19. a. TENANT'S COMPLIANCE WITH LAWS. Tenant,
WITH LAWS at its expense, shall comply with all applicable
laws, rules, orders, ordinances, regulations and
other requirements, present or future
(collectively "Applicable Laws"), affecting the
Premises that are promulgated by any governmental
authority or agency having jurisdiction over the
Premises, including, without limitation, all
requirements of the Americans with Disabilities
Act of 1990 (Pub. L. 101-336, 104 Stat. 327, 42
U.S.C. 12101-12213 and 47 U.S.C. 225 and 611 (the
"ADA") and the rules and regulations thereunder,
in effect from time to time. In addition, Tenant,
at its expense, shall comply with any requirements
of the insurance companies insuring Landlord
against damage, loss or liability for accidents in
or connected with the Building to the extent that
the same shall affect or be applicable to
(i) Tenant's manner of use of the Premises other
than for general office purposes (as opposed to
its mere use thereof), (ii) alterations and
improvements made by Tenant to the Premises and
path of travel to the altered areas of the
Premises under Tenant's authority or (iii) a
breach by Tenant of its obligations under this
Lease. Tenant shall not at any time use or occupy
the Premises in violation of the Certificate of
Occupancy for the Building; provided that the
Certificate of Occupancy shall permit the use of
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the Premises contemplated by this Lease. Nothing
herein contained, however, shall be deemed to
impose any obligation upon Tenant to make any
structural changes or repairs or capital
improvements unless necessitated by reason of a
particular use by Tenant of the Premises other
than as general offices. Anything to the contrary
notwithstanding, Landlord shall be responsible for
compliance with the requirements of the ADA with
respect to any bathrooms for the Premises on a
multi-tenant floor (including, as of the date of
execution of this Lease, the 16th floor). TENANT
SHALL DEFEND, INDEMNIFY, AND HOLD HARMLESS
LANDLORD AND ITS AGENTS FROM AND AGAINST ALL
CLAIMS, DEMANDS, LIABILITIES, CAUSES OF ACTION,
SUITS, JUDGEMENTS AND EXPENSES (INCLUDING
REASONABLE ATTORNEY'S FEES) FOR ANY LOSS ARISING
FROM OR IN CONNECTION WITH ALTERATIONS AND
IMPROVEMENTS MADE BY TENANT TO THE PREMISES AND
THE PATH OF TRAVEL TO THE ALTERED AREAS OF THE
PREMISES UNDER TENANT'S AUTHORITY (OTHER THAN WITH
RESPECT TO BATHROOMS ON MULTI-TENANT FLOORS) IN
ORDER TO COMPLY WITH THE REQUIREMENTS OF THE ADA
AND THE RULES AND REGULATIONS THEREUNDER IN EFFECT
FROM TIME TO TIME.
b. LANDLORD'S COMPLIANCE WITH LAWS.
Landlord shall be responsible for complying with
all Applicable Laws affecting the design,
construction and operation of the Building
(including the Premises to the extent Tenant is
not required to comply therewith pursuant to
Section 19A) or relating to the performance by
Landlord of any duties or obligations to be
performed by it hereunder, including, without
limitation, all requirements of the ADA and the
rules and regulations issued thereunder, in effect
from time to time, with respect to alterations and
improvements to the Common Areas and facilities of
the Building and the path of travel to the altered
areas of the Common Areas and facilities and, with
respect to alterations and improvements required
because the Common Areas and facilities of the
Building are a place of public accommodation (as
such term is defined in the ADA). Without
limiting the foregoing, Landlord shall comply, or
cause the Building to comply, with all present and
future energy conservation and fire and safety
laws, regulations and codes. Landlord shall not
unreasonably interfere with the conduct of
Tenant's business in complying with the
requirements of this Section. LANDLORD SHALL
DEFEND, INDEMNIFY, AND HOLD HARMLESS TENANT AND
ITS AGENTS FROM AND AGAINST ALL CLAIMS, DEMANDS,
LIABILITIES, CAUSES OF ACTION, SUITS, JUDGEMENTS
AND EXPENSES (INCLUDING REASONABLE ATTORNEY'S
FEES) FOR ANY LOSS ARISING FROM OR IN CONNECTION
WITH THE LANDLORD'S WORK OR ALTERATIONS AND
IMPROVEMENTS MADE BY OR ON BEHALF OF LANDLORD TO
THE COMMON AREAS AND FACILITIES OF THE BUILDING
AND THE PATH OF TRAVEL TO THE ALTERED AREAS OF THE
COMMON AREAS AND FACILITIES AND, WITH RESPECT TO
ALTERATIONS AND IMPROVEMENTS REQUIRED BECAUSE THE
COMMON AREAS AND FACILITIES OF THE BUILDING ARE A
PLACE OF PUBLIC ACCOMMODATION (AS SUCH TERM IS
DEFINED IN THE ADA).
c. RIGHT TO CONTEST APPLICABLE LAWS. Either
party hereto may, at its expense (and, if
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necessary, in the name of, but without expense to,
the other party) contest, by appropriate
proceedings diligently prosecuted, the validity or
applicability to the Premises or the Building of
any Applicable Law and may postpone its compliance
therewith until the contest shall be decided;
provided that such party shall provide the other
party with security reasonably necessary to
prevent the other party from incurring any civil
or criminal liability or losing any of the other
party's interest in the Premises, the Land or the
Building.
HAZARDOUS 20. HAZARDOUS SUBSTANCES. (a) Landlord and
SUBSTANCES Tenant acknowledge that there is asbestos-containing
material ("ACMII) in the Building and that Landlord
has implemented an Operations and Maintenance program
to manage the condition of such ACM in the Building in
a controlled manner to reduce the likelihood of
disturbance. Such Operations and Maintenance
program is in accordance with an operations and
maintenance program manual ("OMP Manual") , a copy
of which has been delivered to Tenant, prepared by
Law Engineering Inc. Landlord has also developed
a Hazardous Communication Program ("Safety
Manual"), a copy of which has been delivered to
Tenant, to inform tenants in the Building of the
presence of any Hazardous Substances (as hereinafter
defined) in the Building. Upon reasonable prior notice
to Landlord, Tenant may (i) inspect any records and
files maintained by Landlord relating to the OMP Manual
or the Safety Manual and (ii) discuss the implementation
of the OMP Manual or the Safety Manual with an authorized
representative of Landlord.
b. Landlord represents that, to its
knowledge without any independent investigation or
due diligence, other than as disclosed in the OMP
Manual and the Safety Manual and other than with
respect to ordinary office products used in the
Project in compliance with applicable Hazardous
Substance Laws (as herein after defined) and stored
in the usual and customary manner and quantities,
Landlord has not received any unresolved, written
notice of any violation of any Hazardous Substance Laws.
Landlord makes no representation or warranty concerning
the operations or activities of other tenants or
occupants of the Building.
c. Tenant represents, warrants and
covenants that (i) Tenant's operations in, on or
under the Building shall be in compliance with all
applicable Hazardous Substance Laws, (ii) Tenant
shall not bring in the Building any Hazardous
Substances or permit to remain in the Building any
Hazardous Substances brought in by Tenant, except
ordinary office products used on the Premises in
compliance with applicable Hazardous Substance
Laws and stored in the usual and customary manner
and quantities, (iii) Tenant and its agents,
contractors and employees shall adhere to any
restrictions on the use, renovation or alteration
of the Premises identified in the OMP Manual or
the Safety Manual, (iv) Tenant shall immediately
give Landlord written notice (I) of any breach of
this Section 25. 01 (c) , (II) upon learning of
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the presence or release by Tenant of any Hazardous
Substances in, on, under or about the Building
(other than in compliance with this Section 25.01(c)),
or (III) upon receiving any notices from governmental
authorities pertaining to Hazardous Substances which
are brought in the Building by Tenant or, if brought
in the Building by Tenant, are permitted to remain in
the Building by Tenant, and (v) at Landlord's reasonable
prior written request and during hours which are not
Normal Business Hours, Tenant shall provide Landlord
or its agents with access to the Premises to conduct
such inspections and undertake such sampling and
testing activities, at Landlord's cost, as Landlord
deems necessary or desirable to determine whether
Tenant is in compliance with this provision; provided,
Landlord at its cost shall repair and restore any
damage to the Premises caused by such inspection,
sampling and testing activities.
d. In the event any cleanup, repair,
detoxification or similar action is required by
any governmental or quasi-governmental agency as a
result of the storage, release or disposal of
Hazardous Substances by Landlord, its agents,
employees or contractors, at any time, or by any
prior owner, possessor or operator of any part of
the Project and such action requires that Tenant
be closed for business or access be denied, then
(A) Landlord shall provide, at Tenant's option,
satisfactory alternative space (if such space is
reasonably available) for Tenant during the course
of the removal or encapsulation of the Hazardous
Substance or the implementation of the operation
and maintenance program at no cost whatsoever to
Tenant other than the Basic Rental and other
payments provided for under this Lease; or (B) the
Basic Rental and other payments for the Premises
will abate entirely during the period that
Tenant's business is closed for business or
Tenant's access to the Premises is denied. In the
event Landlord fails after thirty (30) days'
written notice from Tenant to initiate and pursue
with due diligence in a timely manner a response
to the presence of any Hazardous Substance at the
Project as required hereunder, Tenant may
terminate this Lease.
e. During the term and at the termination
of this Lease, Tenant, at its sole cost and
expense, shall cleanup, remove, remediate and
repair if required by any governmental or quasi
governmental agency and in conformance with the
requirements of applicable Hazardous Substance
Laws any soil and groundwater contamination or
other damage caused by the presence or release of
any Hazardous Substances in, on, under or about
the Building during the term of this Lease as a
result 'of the acts or omissions of Tenant or its
agents, contractors, employees or invitees.
f. As used herein, "Hazardous Substances"
shall mean and include those elements or compounds
which are contained in the list of hazardous
substances adopted by the United States
Environmental Protection Agency ("EPA") and the
list of toxic pollutants designated by Congress or
the EPA or any flammable substances, explosives,
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radioactive materials, hazardous materials,
hazardous wastes, toxic substances, pollutants,
pollution or related materials which are covered
by, or regulated under, any Federal, state, or
local statute, law, ordinance, code, rule,
regulation, order or decree regulating, relating
to, or imposing liability or standards of conduct
concerning, any hazardous, toxic or dangerous
waste, substance or material or pertaining to the
protection of human health or the environment, as
now or at any time hereafter in effect, including,
but not limited to, substances defined as
"hazardous substances", "hazardous materials",, or
"toxic substances" in the Comprehensive
Environmental Response, Compensation and Liability
Act of 1980, as amended, 42 U.S.C. Section 9601 et
sec.; the Hazardous Materials Transportation Act,
42 U.S.C. Section 1801 et sec.; the Resource
Conservation and Recovery Act, 42 U.S.C. Section
6901 et sec.; and those substances defined as
hazardous, toxic, hazardous wastes, toxic wastes,
or as hazardous or toxic substances by any law or
statute now or after this date in effect in Texas;
and in the regulations adopted and publications
promulgated pursuant to those laws (all
collectively "Hazardous Substance Laws").
SURRENDER OF 2l. No act by Landlord shall be deemed an
PREMISES acceptance of a surrender of the Premises, and no
agreement to accept a surrender of the Premises
shall be valid unless the same is made in writing
and signed by Landlord. At the expiration or
termination of this Lease, Tenant shall deliver to
Landlord the Premises with all improvements
located thereon in good repair and condition,
reasonable wear and tear (and condemnation and
fire or other casualty damage not caused by
Tenant, as to which Sections 14 and 15 shall
control) excepted, and shall deliver to Landlord
all keys to the Premises. Provided that Tenant
has performed all of its obligations hereunder,
Tenant may remove all unattached trade fixtures,
equipment, and furniture placed in the Premises by
Tenant (but Tenant shall not remove any such item
which is attached to the plumbing located in the
Premises or which was paid for, in whole or in
part, by Landlord), and shall remove such
alterations, additions, improvements, trade
fixtures, equipment, and furniture as Landlord may
request. Tenant shall repair all damage caused by
such removal. All trade fixtures, equipment,
furniture, alterations, additions, and
improvements not so removed shall be deemed to
have been abandoned by Tenant and may be
appropriated, sold, stored, destroyed, or
otherwise disposed of by Landlord without notice
to Tenant and without any obligation to account
for such items. The provisions of this Section 2l
shall survive the end of the Term.
HOLDING OVER 22. If Tenant fails to vacate the Premises at the
end of the Term, then Tenant shall be a tenant at
will and, in addition to all other damages and
remedies to which Landlord may be entitled for
such holding over, Tenant shall pay, in addition
to the other Rent, a daily Basic Rental equal to
the greater of (a) 150% of the daily Basic Rental
payable during the last month of the Term, or (b)
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the prevailing rental rate in the Buildings for
similar space.
CERTAIN 23. Provided that the exercise of such rights
RIGHTS does not unreasonably interfere with Tenant's
RESERVED BY occupancy of the Premises, Landlord shall have the
LANDLORD following rights:
a. To decorate and to make inspections,
repairs, alterations, additions, changes, or
improvements, whether structural or otherwise, in
and about the Buildings, or any part thereof; for
such purposes, to enter upon the Premises and,
during the continuance of any such work, to
temporarily close doors, entryways, public space,
and corridors in the Buildings; to interrupt or
temporarily suspend Building services and
facilities; and to change the arrangement and
location of entrances or passageways, doors, and
doorways, corridors, elevators, stairs, restrooms,
or other public parts of the Buildings;
b. To take such reasonable measures as
Landlord deems advisable for the security of the
Buildings and their occupants, including without
limitation searching all persons entering or
leaving the Buildings; evacuating the Buildings
for cause, suspected cause, or for drill purposes;
temporarily denying access to the Buildings; and
closing the Buildings after normal business hours
and on Saturdays, Sundays, and holidays, subject,
however, to Tenant's right to enter when the
Buildings are closed after normal business hours
under such reasonable regulations as Landlord may
prescribe from time to time which may include by
way of example, but not of limitation, that
persons entering or leaving the Buildings, whether
or not during normal business hours, identify
themselves to a security officer by registration
or otherwise and that such persons establish their
right to enter or leave the Buildings;
c. To change the name by which the
Buildings are or the Development is designated;
provided, however, Landlord shall not change the
name of the North Tower to that of a specialty
finance company which is a competitor of Tenant or
a tenant of the North Tower less than 275,000
square feet;
d. To enter the Premises at all reasonable
hours to show the Premises to prospective
purchasers, lenders, or tenants; and
e. Landlord reserves the right at any time
to make alterations, modifications, reductions,
expansions or additions to the Development,
including but not limited to the following: add
or remove buildings, structures or common areas;
acquire additional land or convey any portion of
the land; change the address or designation of the
Premises or the Buildings in which the Premises
are located; convert common areas into leasable
areas; provided, however, that no such changes
shall materially alter the size of the Premises or
deny reasonable ingress to and egress from the
Premises.
28
<PAGE>
LANDLORD'S 24. In addition to the statutory landlord's lien,
LIEN Tenant grants to Landlord, to secure performance
of Tenant's obligations hereunder, a security
interest in all equipment, fixtures, furniture,
improvements, and other personal property of
Tenant situated on the Premises which was acquired
by Tenant with funds provided by Landlord through
the Tenant Allowance and the Refurbishment
Allowance, and all proceeds therefrom (the
"COLLATERAL"), and the Collateral shall not be
removed from the Premises without the consent of
Landlord until all obligations of Tenant have been
fully performed. Upon the occurrence of a Tenant
Event of Default, Landlord may, in addition to all
other remedies, without notice or demand except as
provided below, exercise the rights afforded a
secured party under the Uniform Commercial Code of
the State of Texas (the "UCC"). In connection
with any public or private sale under the UCC,
Landlord shall give Tenant five-days' prior
written notice of the time and place of any public
sale of the Collateral or of the time after which
any private sale or other intended disposition
thereof is to be made, which is agreed to be a
reasonable notice of such sale or other disposition.
Tenant grants to Landlord a power of attorney to
execute and file any financing statement or other
instrument necessary to perfect Landlord's security
interest under this Section 20, which power is coupled
with an interest and shall be irrevocable during the
Term. Landlord may also file a copy of this Lease as
a financing statement to perfect its security interest
in the Collateral.
MISCELLANEOUS 25. a. LANDLORD TRANSFER. Landlord may transfer,
in whole or in part, the Buildings and any of its rights
under this Lease. If Landlord assigns its rights under
this Lease, then Landlord shall thereby be released from
any further obligations hereunder; provided, however,
that (i) Landlord's transferee must first assume in
writing (a copy of which must be delivered to Tenant)
all obligations of Landlord under this Lease, and
(ii) Landlord shall remain liable for all obligations
under this Lease arising or relating to the period
preceding such transfer.
b. LANDLORD'S LIABILITY. The liability of
Landlord to Tenant for any default by Landlord
under the terms of this Lease shall be limited to
Tenant's actual direct, but not consequential,
damages therefor and shall be recoverable only
from the interest of Landlord in the Buildings and
the Development, and Landlord shall not be
personally liable for any deficiency. This
section shall not be deemed to limit or deny any
remedies which Tenant may have in the event of
default by Landlord hereunder which do not involve
the personal liability of Landlord.
c. FORCE MAJEURE. Other than for Tenant's
monetary obligations under this Lease, whenever a
period of time is herein prescribed for action to
be taken by either party hereto, such party shall
not be liable or responsible for, and there shall
be excluded from the computation for any such
period of time, any delays due to strikes, riots,
acts of God, shortages of labor or materials, war,
29
<PAGE>
governmental laws, regulations, or restrictions,
or any other causes of any kind whatsoever which
are beyond the control of such party.
d. BROKERAGE. Landlord and Tenant each
warrant to the other that it has not dealt with
any broker or agent except for Cushman & Wakefield
of Texas, Inc. and Prime Group Management of
Texas, Inc., in connection with the negotiation or
execution of this Lease. Tenant and Landlord
shall each indemnify the other against all costs,
expenses, attorneys' fees, and other liability for
commissions or other compensation claimed by any
broker or agent claiming the same by, through, or
under the indemnifying party.
e. ESTOPPEL CERTIFICATES. From time to
time, Tenant shall furnish to any party designated
by Landlord, within ten days after Landlord has
made a request therefor, a certificate signed by
Tenant confirming and containing such factual
certifications and representations as to this
Lease as Landlord may reasonably request.
f. NOTICES. All notices and other
communications given pursuant to this Lease shall
be in writing and shall be (i) mailed by first
class, United States Mail, postage prepaid,
certified, with return receipt requested, and
addressed to the parties hereto at the address
specified in the Basic Lease Information, (ii)
hand delivered to the intended address, or (iii)
sent by prepaid telegram, cable, facsimile
transmission, or telex followed by a confirmatory
letter. Notice sent by certified mail, postage
prepaid, shall be effective three business days
after being deposited in the United States Mail;
all other notices shall be effective upon delivery
to the address of the addressee. The parties
hereto may change their addresses by giving notice
thereof to the other in conformity with this
provision.
g. SEVERABILITY. If any clause or
provision of this Lease is illegal, invalid, or
unenforceable under present or future laws, then
the remainder of this Lease shall not be affected
thereby and in lieu of such clause or provision,
there shall be added as a part of this Lease a
clause or provision as similar in terms to such
illegal, invalid, or unenforceable clause or
provision as may be possible and be legal, valid,
and enforceable.
h. AMENDMENTS; AND BINDING EFFECT. This
Lease may not be amended except by instrument in
writing signed by Landlord and Tenant. No
provision of this Lease shall be deemed to have
been waived by Landlord unless such waiver is in
writing signed by Landlord, and no custom or
practice which may evolve between the parties in
the administration of the terms hereof shall waive
or diminish the right of Landlord to insist upon
the performance by Tenant in strict accordance
with the terms hereof. The terms and conditions
contained in this Lease shall inure to the benefit
of and be binding upon the parties hereto, and
upon their respective successors in interest and
legal representatives, except as otherwise herein
30
<PAGE>
expressly provided. This Lease is for the sole
benefit of Landlord and Tenant, and, other than
Landlord's Mortgagee, no third party shall be
deemed a third party beneficiary hereof.
i. QUIET ENJOYMENT. Provided Tenant has
performed all of the terms and conditions of this
Lease to be performed by Tenant, Tenant shall
peaceably and quietly hold and enjoy the Premises
for the Term, without hindrance from Landlord or
any party claiming by, through, or under Landlord,
subject to the terms and conditions of this Lease.
j. CAPTIONS. The captions contained in
this Lease are for convenience of reference only,
and do not limit or enlarge the terms and
conditions of this Lease.
k. NO MERGER. There shall be no merger of
the leasehold estate hereby created with the fee
estate in the Premises or any part thereof if the
same person acquires or holds, directly or
indirectly, this Lease or any interest in this
Lease and the fee estate in the leasehold Premises
or any interest in such fee estate.
l. NO OFFER. The submission of this Lease
to Tenant shall not be construed as an offer, nor
shall Tenant have any rights under this Lease
unless Landlord executes a copy of this Lease and
delivers it to Tenant.
m. EXHIBITS. All exhibits and attachments
attached hereto are incorporated herein by this
reference.
Exhibit A - Outline of Premises
Exhibit B - Building Rules and Regulations
Exhibit C - Operating Expense Escalator
Exhibit D - Tenant Finish Work: Allowance
Exhibit E - Basic Rental Schedule
Exhibit F - Office Signage Criteria
Exhibit G - Parking
Exhibit H - Building General Security Program
Exhibit I - Early Occupancy
Exhibit J - Lease Buyout Allowance
Exhibit K - Expansion Options
Exhibit L - Right of Refusal
Exhibit M - Right of Refusal Space
Exhibit N - Rooftop Communications
Exhibit O - Renewal Options
Exhibit P - Market Rate
Exhibit Q - Comparable Buildings
Exhibit R - Refurbishment Allowance
Exhibit S - Termination Option
Exhibit T - Storage Space
Exhibit U - Janitorial Specifications
o. WAIVER. TO THE FULLEST EXTENT ALLOWED
BY LAW, (A) LANDLORD AND TENANT EXPRESSLY
ACKNOWLEDGE AND AGREE THAT LANDLORD IS NOT MAKING
AND HAS NOT MADE ANY IMPLIED WARRANTY HEREUNDER
(INCLUDING, WITHOUT LIMITATION, THAT THE PREMISES
ARE SUITABLE FOR TENANT'S INTENDED COMMERCIAL
PURPOSE), (B) EXCEPT AS OTHERWISE EXPRESSLY
PROVIDED HEREIN, LANDLORD AND TENANT AGREE THAT
TENANT'S OBLIGATIONS TO ABIDE BY THE TERMS AND
PROVISIONS HEREOF (INCLUDING WITHOUT LIMITATION
TENANT'S OBLIGATION TO PAY RENT HEREUNDER) ARE NOT
31
<PAGE>
DEPENDENT UPON THE CONDITION OF THE PREMISES OR
THE PERFORMANCE BY LANDLORD OF ITS OBLIGATIONS
HEREUNDER, AND (C) EXCEPT AS OTHERWISE EXPRESSLY
PROVIDED HEREIN, TENANT AGREES TO COMPLY WITH THE
TERMS AND PROVISIONS HEREOF (INCLUDING WITHOUT
LIMITATION TENANT'S OBLIGATION TO PAY RENT,
WITHOUT ABATEMENT, SETOFF OR DEDUCTION)
NOTWITHSTANDING ANY BREACH BY LANDLORD OF ITS
DUTIES OR OBLIGATIONS HEREUNDER, WHETHER EXPRESS
OR IMPLIED. IN NO EVENT, HOWEVER, SHALL THE
FOREGOING PROVISIONS OF THIS PARAGRAPH BE
CONSTRUED TO RELIEVE LANDLORD OF ITS OBLIGATIONS
EXPRESSLY SET FORTH HEREIN.
DATED as of the date first above written.
LANDLORD TENANT
K-P PLAZA LIMITED PARTNERSHIP, AMRESCO, INC.
a Texas limited partnership a Delaware corporation
By: Prime Property Management of
Texas, Ltd., Agent
By: Prime Group Management of
Texas, Inc.,
its General Partner
By: /s/ R. GREGG CHILTON By: /s/ R.D. ????????????
------------------------------ ------------------------------
R. Gregg Chilton Its: President
Its: Vice President
32
<PAGE>
EXHIBIT A
Outline of Premises
[To be provided at a later date]
<PAGE>
EXHIBIT B
OFFICE
BUILDING RULES AND REGULATIONS
The following rules and regulations shall apply to the
Premises, the Buildings, the parking garage associated
therewith, the Land and the appurtenances thereto except as
otherwise expressly provided otherwise:
1. Sidewalks, doorways, vestibules, halls, stairways,
and other similar areas shall not be obstructed by tenants
or used by any tenant for purposes other than ingress and
egress to and from their respective leased premises and for
going from one to another part of the Buildings.
2. Plumbing, fixtures and appliances shall be used
only for the purposes for which designed, and no sweepings,
rubbish, rags or other unsuitable material shall be thrown
or deposited therein. Actual damage resulting to any such
fixtures or appliances from misuse by a tenant or its
agents, employees or invitees, shall be paid by such tenant.
3. No signs, advertisements or notices shall be
painted or affixed on or to any windows or doors or other
part of the Buildings without the prior written consent of
Landlord.
4. Landlord shall provide all door locks in each
tenant's leased premises, at the cost of such tenant, and no
tenant shall place any additional door locks in its leased
premises without Landlord's prior written consent. Landlord
shall furnish to each tenant a reasonable number of keys to
such tenant's leased premises, at such tenant's cost, and no
tenant shall make a duplicate thereof.
5. Movement in or out of the Buildings of furniture
or office equipment, or dispatch or receipt by tenants of
any bulky material, merchandise or materials which require
use of elevators or stairways, or movement through the
Buildings entrances or lobby shall be conducted under
Landlord's supervision at such times and in such a manner as
Landlord may reasonably require. Each tenant assumes all
risks of and shall be liable for all damage to articles
moved and injury to persons or public engaged or not engaged
in such movement, including equipment, property and
personnel of Landlord if damaged or injured as a result of
acts in connection with carrying out this service for such
tenant.
6. Landlord may prescribe weight limitations and
determine the locations for safes and other heavy equipment
or items, which shall in all cases be placed in the
Buildings so as to distribute weight in a manner acceptable
to Landlord which may include the use of such supporting
devices as Landlord may require. All damages to the
Buildings caused by the installation or removal of any
property of a tenant, or done by a tenant's property while
in the Buildings, shall be repaired at the expense of such
tenant.
7. Corridor doors, when not in use, shall be kept
closed. Nothing shall be swept or thrown into the corridors,
halls, elevator shafts or stairways. No birds or animals
shall be brought into or kept in, on or about any tenant's
leased premises. No portion of any tenant's leased premises
shall at any time be used or occupied as sleeping or lodging
quarters.
B-1
<PAGE>
8. Tenant shall cooperate with Landlord's employees
in keeping its leased premises neat and clean. Tenant shall
not employ any person for the purpose of such cleaning other
than the Building's cleaning and maintenance personnel.
9. To ensure orderly operation of the Buildings, no
ice, mineral or other water, towels, newspapers, etc. shall
be delivered to any leased area except by persons approved
by Landlord.
10. Tenant shall not make or permit any improper,
objectionable or unpleasant noises or odors in the Buildings
or otherwise interfere in any way with other tenants or
persons having business with them.
11. No machinery of any kind (other than normal office
equipment) shall be operated by any tenant on its leased
area without Landlord's prior written consent, nor shall any
tenant use or keep in the Buildings any inflammable or
explosive fluid or substance.
12. Landlord will not be responsible for lost or
stolen personal property, money or jewelry from tenant's
leased premises or public or common areas regardless of
whether such loss occurs when the area is locked against
entry or not.
13. No vending or dispensing machines of any kind may
be maintained in any leased premises without the prior
written permission of Landlord, except Tenant may maintain
vending units in the Premises for food and beverages for
exclusive use of Tenant's employees and invitees.
14. All mail chutes located in the Buildings shall be
available for use by Landlord and all tenants of the
Buildings according to the rules of the United States Postal
Service.
15. Except as may otherwise be expressly provided in
Exhibit D hereof, Tenants shall refer all contractors,
contractor's representatives and installation technicians
rendering any service in connection with the leased premises
or the Buildings to Landlord for Landlord's supervision,
approval and control before the performance of any
contractual services. This provision shall apply to all
work performed in the Buildings including, but not limited
to, installations of telephones, telegraph equipment,
electrical devices and attachments, and any and all
installations of every nature affecting floors, walls,
woodwork, trim, windows, ceilings, equipment and any other
physical portions of the Buildings.
16. Tenants shall, before leaving their Premises,
close and lock all outside doors and shut off all utilities.
17. Tenants shall give Landlord prompt notice of all
accidents or defects in air conditioning equipment,
plumbing, electric facilities or any part or appurtenance of
the Premises.
18. Canvassing, soliciting, and peddling in the
Buildings, Development, or on the sidewalks or driveways
providing ingress and egress thereto is prohibited.
19. There shall not be used in any space, or in the
common areas of the Buildings or the Development, either by
any tenant or by jobbers or others employed by any tenant,
any hand trucks, except those equipped with rubber tires or
the like.
B-2
<PAGE>
20. Tenants shall not permit any portion of their
leased premises to be used for the sale of food, drink, or
tobacco, for the sale or consumption of alcoholic beverages
or illicit drugs, for a barber or manicure shop or for
retail sales to the general public, nor shall any tenant use
or occupy the Premises in a manner which would or could have
an adverse impact on the reputation of the Buildings or the
Development.
21. No person or contractor not employed by Landlord
shall be used to perform janitor work, window washing,
cleaning, repair or other work in the Premises without
Landlord's prior written consent. Landlord's janitors shall
not be hindered in the performance of their duties by
tenants or their agents, servants, employees or invitees.
22. Tenants shall make independent arrangements to
dispose of all crates which will not fit into office
wastepaper baskets.
23. Tenants shall be responsible for any damage to
carpeting and flooring as a result of rust or corrosion of
file cabinets, pot holders, roller chairs, and metal
objects.
24. If any tenant employs laborers or others outside
of the building, tenant shall not have such employees paid
in the Buildings or in the Development.
25. It is the express obligation of the Tenant to
inform in a timely manner each of its employees, agents,
invitees or guests of the Rules and Regulations of the
Buildings and to cause such parties to comply therewith.
26. All holiday and other temporary or special
installations or decorations which tenants desire to install
in the Premises must be first approved by Landlord and must
be flame retardant.
27. Unauthorized entry to mechanical or electrical
rooms within the Buildings or the Development by tenants or
their agents, invitees or contractors is prohibited.
28. Tenants shall not connect to or otherwise
interfere with or affect in any manner the emergency public
address system or any other safety system or device within
the Buildings or the Development.
29. Normal building operation hours are 7:00 a.m. to
6:00 p.m. Monday through Friday and 7:00 a.m. to 1:00 p.m.
on Saturday (the "Normal Business Hours").
B-3
<PAGE>
EXHIBIT C
OFFICE
OPERATING EXPENSE ESCALATOR
(a) Tenant shall pay an amount (per each rentable
square foot in the Premises) equal to the excess ("Excess")
from time to time of actual Basic Cost per rentable square
foot in the Buildings over the Expense Stop set forth in the
Basic Lease Information. Landlord may collect such amount
in a lump sum, to be due within 30 days after Landlord
furnishes to Tenant the Annual Cost Statement.
Alternatively, Landlord may make a good faith estimate of
the Excess to be due by Tenant for any calendar year or part
thereof during the Term, and, unless Landlord delivers to
Tenant a revision of the estimated Excess, Tenant shall pay
to Landlord, coincident with Tenant's payment of Basic
Rental, an amount equal to the estimated Excess for such
calendar year or part thereof divided by the number of
months in such calendar year during the Term. From time to
time during any calendar year, Landlord may estimate and
re-estimate the Excess to be due by Tenant for that calendar
year and deliver a copy of the estimate or re-estimate to
Tenant; however, Landlord may not re-estimate such Excess
more than once per calendar year after Landlord initially
estimates the Excess due for such year. Thereafter, the
monthly installments of Excess payable by Tenant shall be
appropriately adjusted in accordance with the estimations so
that, by the end of the calendar year in question, Tenant
shall have paid all of the Excess as estimated by Landlord.
Any amounts paid based on such an estimate shall be subject
to adjustment pursuant to paragraph (c) of this Exhibit when
actual Basic Cost is available for each calendar year.
(b) For the purposes of this Exhibit, the term "BASIC
COST" shall mean all expenses and disbursements of every
kind (subject to the limitations set forth below) which
Landlord incurs, pays or becomes obligated to pay in
connection with the ownership, operation, maintenance, and
management of the Plaza of the Americas to the extent same
are apportioned to the Office Portion by Landlord, in its
sole discretion, including but not limited to the following:
(i) Legal expenses, management fees and costs,
including without limitation, wages and salaries and other
compensation (including taxes, insurance and benefits
relating thereto) of all employees engaged in the operation,
repair, replacement, management, maintenance, and security
of the Plaza of the Americas, and central accounting costs
applicable to the Plaza of the Americas; however, in no
event shall the management fee exceed those typically paid
to other managers of other class A buildings in the CBD
which are not affiliated with the owners thereof;
(ii) All supplies and materials used in the
operation, maintenance, repair, replacement, and security of
the Plaza of the Americas;
(iii) Annual cost of all capital improvements made
to the Plaza of the Americas which although capital in
nature can reasonably be expected to reduce the normal
operating costs of the Plaza of the Americas but only to the
extent of any actual reductions, as well as all capital
improvements made in order to comply with any law hereafter
promulgated by any governmental authority relating to
energy, conservation, public safety or security, as
amortized over the useful economic life of such improvements
as determined by Landlord in its reasonable discretion
(without regard to the period over which such improvements
C-1
<PAGE>
may be depreciated or amortized for federal income tax
purposes);
(iv) Cost of all utilities, other than Electrical
Costs and the cost of utilities actually reimbursed to
Landlord or paid directly by tenants (including Tenant under
Section 4c. of this Lease);
(v) Cost of any insurance or insurance related
expense applicable to any or all of the entire Plaza of the
Americas including, but not limited to, the cost of self
insurance reserves, loss of rents coverage, fidelity bonds,
worker's compensation insurance and property, casualty and
liability insurance covering Landlord, its agents and
employees, and covering Landlord's personal property used in
connection with the operation of the Plaza of the Americas;
(vi) All taxes and assessments and governmental
charges whether federal, state, county or municipal, and
whether they be by taxing districts or authorities presently
taxing or by others, subsequently created or otherwise, and
any other taxes and assessments attributable to the Plaza of
the Americas (or its operation), and the grounds, parking
areas, driveways, and alleys around the Buildings,
excluding, however, federal and state taxes on income,
(collectively, "Taxes"); if the present method of taxation
changes so that in lieu of the whole or any part of any
Taxes levied on the Development, there is levied on Landlord
a capital tax directly on the rents received therefrom or a
franchise tax, assessment, or charge based, in whole or in
part, upon such rents for the Development, then all such
taxes, assessments, or charges, or the part thereof so
based, shall be deemed to be included within the term
"Taxes" for the purposes hereof;
(vii) Cost of repairs, replacements, and general
maintenance of the Plaza of the Americas, including the cost
of replacing any landscaping; excluding alterations
attributable solely to tenants of the Buildings other than
Tenant;
(viii) Cost of service or maintenance contracts with
independent contractors for the operation, maintenance,
repair, replacement, or security of the Plaza of the
Americas and equipment therein (including, without
limitation, alarm service, window cleaning, and elevator
maintenance); and
(ix) Landlord's cost of operating, insuring,
maintaining and repairing the parking garage for the Plaza
of the Americas to the extent not otherwise covered by
receipts generated by fees charged for the use of said
parking garage.
These are specifically excluded from the definition of the
term "Basic Cost" costs (1) for capital improvements made to
the Plaza of the Americas, (except for capital improvements
described in subparagraph (iii) above and items which,
though capital for accounting purposes, are properly
considered maintenance and repair items, such as painting of
common areas, replacement of carpet in elevator lobbies, and
the like , as opposed to costs for renovation of common
areas or other portions of the Building); (2) for repair,
replacements and general maintenance paid by proceeds of
insurance or by Tenant or other third parties, and
alterations attributable solely to tenants of the Plaza of
the Americas other than Tenant; (3) for renovating or
otherwise improving space for occupants of the Plaza of the
Americas or vacant space in the Plaza of the Americas; and
C-2
<PAGE>
(4) for federal income taxes imposed on or measured by the
income of Landlord from the operation of the Buildings;
(5) any direct costs associated with a sale or refinancing
of the Buildings; (6) for interest, amortization or other
payments on loans to Landlord; (7) for depreciation of the
Building; (8) for leasing commissions; (9) for legal
expenses, other than those incurred for the general benefit
of the Building's tenants (e.g., tax disputes); (10) for
renovating or otherwise improving space for occupants of the
Building or vacant space in the Building; (11) for overtime
or other expenses of Landlord in curing defaults or
performing work expressly provided in this Lease to be borne
at Landlord's expense; (12) for which Landlord is entitled
to be reimbursed by tenants of the Building other than
pursuant to provisions similar to Section 4(c) of this Lease
and this Exhibit; (13) for advertising and promotional
expenses; (14) incurred due to violation by Landlord of any
of the terms and conditions of this Lease or any other lease
relating to the Building; (15) for all items and services
for which Tenant reimburses Landlord outside of Basic Cost
or pays third persons or which Landlord provides selectively
to one or more tenants or occupants of the Building (other
than Tenant) without reimbursement; (16) for repairs
resulting from any defect in the original design or
construction of the Building or the Building equipment;
(17) for installing, operating and maintaining any specialty
service, such as an observatory, broadcasting facilities,
luncheon club, or athletic or recreational club; (18) for
salaries of officers and executives of Landlord other than
the building manager, (19) of any work, or service performed
for any tenant of the Building to a materially greater
extent or in a materially more favorable manner than that
furnished or offered generally to the tenants and other
occupants (including Tenant); and, without limiting the
generality of the foregoing, this exclusion shall be deemed
to include the cost of HVAC provided in excess of building
standard air conditioning; (20) of any work or service
performed for any facility other than the Building; (21) of
any item, which under generally accepted accounting
principles, is not properly classified as an expense, except
as provided in subparagraph (C) and clause (1) above;
(22) of any repair in accordance with any casualty provision
in excess of the deductible amounts under the insurance
maintained therefor or of any repair under any condemnation
provision of this Lease; (23) for rental under any ground
lease or other underlying lease; (24) for payments to any
person or entity related to Landlord which are in excess of
the amount which would have been paid in the absence of such
relationship; (25) for lease payments for rented equipment,
the cost of which equipment would not constitute an expense
under generally accepted accounting principles consistently
applied if the equipment were purchased; (26) for any
expenses for repairs or maintenance which were covered by
warranties in service contracts; (27) for Electrical Costs.
(c) The Annual Cost Statement shall include a
statement of Landlord's actual Basic Cost for the previous
year. If the Annual Cost Statement reveals that Tenant paid
more for Basic Cost than the actual Excess in the year for
which such statement was prepared, then Landlord shall, at
its option, either (i) apply such excess against Basic
Rental or other amounts due hereunder or (ii) reimburse
Tenant such excess. If Tenant paid less than the actual
Excess, then Tenant shall pay Landlord such deficiency upon
demand.
(d) With respect to any calendar year or partial
calendar year in which the Buildings are not occupied to the
extent of ninety-five percent (95%) of the rentable area
C-3
<PAGE>
thereof, the Basic Cost for such period shall, for the
purposes hereof, be increased to the amount which would have
been incurred had the Buildings been occupied to the extent
of ninety-five percent (95%) of the rentable area thereof.
(e) Notwithstanding the above provisions of this
Exhibit C, for purposes of determining Tenant's share of
Excess, Controllable Expenses (hereinafter defined) are
deemed not to increase (cumulatively) by more than 7% per
calendar year. Controllable Expenses are all Basic Cost
except expenses incurred for ad valorem taxes and
assessments, utilities, and insurance premiums. Examples of
this foregoing limitation on increases in Controllable
Expenses for the purpose of determining Tenant's share of
Excess for the calendar years beginning January 1, 1997 are
as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
MAXIMUM CUMULATIVE %
ASSUMED CUMULATIVE % INCREASE IN
CUMULATIVE % CAPS ON CONTROLLABLE
INCREASE IN INCREASES IN EXPENSES OVER
CONTROLLABLE CONTROLLABLE EXPENSE STOP USED
EXPENSES OVER EXPENSES OVER IN CALCULATING
CALENDAR YEAR EXPENSE STOP EXPENSE STOP BASIC COST
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Example No. 1
- ------------------------------------------------------------------------------------
1997 6% 7% 6%
- ------------------------------------------------------------------------------------
1998 16% 14% 14%
- ------------------------------------------------------------------------------------
1999 19% 21% 19%
- ------------------------------------------------------------------------------------
Example No. 2
- ------------------------------------------------------------------------------------
1997 9% 7% 7%
- ------------------------------------------------------------------------------------
1998 17% 14% 14%
- ------------------------------------------------------------------------------------
1999 24% 21% 21%
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
(f) The payment of any Excess or any Electrical Costs by
Tenant shall not preclude it from questioning the correctness of
any Annual Cost Statement which shall set forth Electrical Costs
as well as Basic Costs as set forth in this EXHIBIT C. Tenant
and its authorized representatives, through an independent
accounting firm meeting the qualifications described below and
using generally accepted accounting principles, shall have the
right to audit Landlord's records with respect to Basic Costs and
Electrical Costs for one (1) year after receipt of the Annual
Cost Statement for each Escalation Year or as set forth in
Section 4d as the Electrical Costs. If Tenant does not do so
within such periods, the Annual Cost Statement shall constitute a
final determination as between Landlord and Tenant of Basic Cost
for such Escalation Year and for Electrical Costs to which the
Annual Cost Statement relates and shall be conclusive and binding
upon Landlord and Tenant. To facilitate an audit by Tenant,
Landlord shall keep its books and records applicable to the Basic
Cost and Electrical Costs available to Tenant. Landlord shall
keep its books and records for Tenant to audit pursuant to this
provision notwithstanding the termination of this Lease. If an
audit reveals that Landlord's statement of Basic Cost and
Electrical Costs included in the Annual Cost Statement for an
Escalation Year was more than one hundred five percent (105%) of
Landlord's actual Basic Cost and Electrical Costs for that year,
then in addition to amounts owed to Tenant under other provisions
of this Lease, Landlord shall reimburse Tenant for the actual
costs of such audit. Otherwise, the expenses of the audit shall
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be borne by Tenant. The independent accounting firm shall be not
then currently engaged otherwise by Landlord or Tenant, shall be
selected by Tenant and approved by Landlord, shall be hired on a
noncontingency basis and shall have at least ten (10) years'
experience in auditing the operating statements of properties
that are similar in character to the Building. The determination
of the independent accountant, which shall be made and rendered
to the parties within thirty (30) days after the appointment of
the independent accountant, shall be final and conclusive upon
the parties. All information derived from each such audit shall
be kept confidential by Tenant (but Tenant shall be entitled to
disclose such information when required by law).
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EXHIBIT D
TENANT FINISH WORK: ALLOWANCE
Except as set forth in this Exhibit, Tenant accepts the
Premises in their "as is" condition on the date on which the
Lease is entered.
The Premises are currently vacant. From and after the date
this Lease has been executed by and is fully binding on all
parties hereto, Tenant shall have the right to commence
demolition of the current improvements on floors other than the
22nd, 16th and 17th and shall have full access to the Premises
during Normal Business Hours. Tenant shall have the right to
commence demolition of current improvements on floor 16 to the
extent that Tenant has committed to include portions thereof in
the Premises.
Tenant shall, no later than May 15, 1996, submit to
Landlord, for Landlord's approval, complete architectural and
engineering working drawings and complete plans and
specifications showing the proposed subdivision, layout and
finish of the Premises to be performed by Tenant as desired by
Tenant (such work shown on such working drawings which have been
approved by Landlord as provided in this Exhibit D being
hereinafter referred to as the "Work"), and in order to
facilitate the review of the Work shown on such working drawing
and specification, Tenant shall also provide Landlord a
construction schedule and construction budget. The working
drawings and specifications to be submitted to Landlord as
aforesaid shall be prepared by Tenant's architect, JPJ
Architects, or by any competent architect licensed in the State
of Texas reasonably satisfactory to Landlord, who shall be
engaged by the Tenant and who, at the Tenant's expense, shall
furnish all architectural and engineering services necessary for
the preparation of said working drawings and specifications and
in connection with securing the aforesaid approval thereof by
Landlord and with the securing by Tenant of such approvals as by
reason of the nature of the Work shown on said working drawings
and specifications may be required by any governmental authority.
Landlord shall notify Tenant of its approval or disapproval
of the working drawings and plans and specifications submitted by
Tenant within seven (7) business days after the receipt by
Landlord of the construction schedule, construction budget and
the working drawings and plans and specifications. If Landlord
shall not approve the working drawings or plans and
specifications as submitted by Tenant, which approval shall not
be unreasonably withheld, Landlord shall notify Tenant thereof
and of the particulars of such revisions therein as are required
by Landlord for the purpose of obtaining its said approval. As
promptly as possible after being so informed by Landlord, Tenant
shall submit to Landlord for Landlord's approval, working
drawings and plans and specifications, incorporating such
revisions or incorporating such modifications thereof as are
suggested by Tenant and approved by Landlord (said working
drawings and plans and specifications, as approved, being herein
called the "Working Drawings").
After approval by Landlord of the Working Drawings, Tenant,
through a contractor or contractors (which contractor or
contractors must carry appropriate insurance and must be approved
by Landlord in writing, such approval not to be unreasonably
withheld or delayed except that Hale & Associates shall be used
as the electrical contractor so long as it is competitively
priced), at its sole cost and expense, but subject to the
provisions in this Exhibit D, shall promptly commence, and shall
pursue with due diligence until completion all the Work shown on
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the Working Drawings which have been approved by Landlord as
provided in this Exhibit D and is Tenant's responsibility under
this Lease during Normal Business Hours as defined in Exhibit B,
except that portion of the Work that Landlord reasonably requires
to be performed during non-business hours, it being expressly
understood that demolition on floors, 16, 17 and 22 shall take
place during non-business hours. Tenant shall use the
contractors selected by it and approved by Landlord in connection
with the performance of all electrical and mechanical work to be
performed in the Premises as a portion of the Work and may use
its own construction manager to oversee the design and
construction of such Work. Landlord shall furnish water,
electricity, HVAC and any other utilities and adequate elevator
service to the Premises and shall furnish use of the loading
docks during the performance of any Work without charge to Tenant
during Normal Business Hours, and upon prior reasonable notice to
Landlord, during non-business hours. Landlord and/or its
affiliates shall not charge a construction management fee to
Tenant.
Landlord shall allow Tenant an allowance (the "Tenant
Allowance") in the amount of twenty-seven dollars and twenty-five
cents ($27.25) per square foot of rentable area of the Premises
(excluding the Storage Space). Such amount shall be applied
against architectural and engineering fees and expenses incurred
by Tenant in connection with the Work, including any amounts due
or paid by Landlord to JPJ Architects for services rendered
regarding any initial architectural "fit studies" or other
preliminary planning services for the Development, the costs of
labor and materials incurred by Tenant in having the Work done,
the cost of any auxiliary air conditioning units, permit and
filing fees, and any moving costs. Such Tenant Allowance shall
be adjusted if Tenant exercises its right pursuant to Section 2
hereof to add or contract the square footage of the Premises
prior to commencement of Work.
Tenant shall be entitled to request that Landlord advance up
to an additional Two Dollars ($2.00) per square foot of rentable
area of the Premises (the "Additional Allowance"). Such request
shall be accompanied by specifications of Tenant's proposed use
for the Additional Allowance. Within seven (7) business days
after receipt of such request, Landlord shall notify Tenant of
its approval or disapproval of the Additional Allowance, such
approval not to be unreasonably withheld or denied. If Landlord
approves of the Additional Allowance, the amount thereof shall be
amortized over the Term commencing with the Commencement Date
utilizing a 9.5% interest rate.
With respect to the Tenant Allowance, Tenant shall submit to
Landlord by the last day of each month (i) invoices from its
contractors, subcontractors, materialmen or suppliers setting
forth the amounts due and payable to them at the time of such
invoices for Work done and the preparation of plans and
specifications with respect thereto, and (ii) a certificate
signed by Tenant and Tenant's architect and certifying that the
Work to which such costs and expenses are attributable has been
performed (such items set forth in clauses (i) and (ii), the
"Work Cost Items"). Within twenty (20) days (but no earlier than
the twentieth day of the succeeding month) after submission of
the Tenant's Work Costs Items and unconditional lien releases
from such contractors, subcontractors, materialmen and suppliers
for Work done, Landlord shall pay directly to any contractor,
subcontractor, materialmen or supplier of Tenant the amount set
forth in the invoices up to the net amount, if any, due from
Landlord to Tenant for and in respect of the Tenant Allowance;
PROVIDED that Landlord agrees to hold such lien releases in
escrow pending payment to such contractors, subcontractors,
materialmen and suppliers. Within fifteen (15) days of payment,
Landlord shall forward to Tenant copies of checks evidencing
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payment of all such amounts due those contractors,
subcontractors, materialmen and suppliers.
Anything to the contrary notwithstanding, Tenant may use up
to fifty percent (50%) of any remaining Tenant Allowance as a
credit against the payment of Basic Rental or any other sums due
Landlord under this Lease.
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EXHIBIT E
BASIC RENTAL SCHEDULE
Basic Rental for the Term of this Lease shall be as follows:
<TABLE>
<CAPTION>
DATE BASIC RENTAL
---- ------------
<S> <C>
November 1, 1996 - October 31, 1997: $ 125,279.00 per month (which is based on a $12.00 per rentable square foot Basic Rental rate)
November 1, 1997 - October 31, 1998: $ 127,889.00 per month (which is based on a $12.25 per rentable square foot Basic Rental rate)
November 1, 1998 - October 31, 1999: $ 130,499.00 per month (which is based on a $12.50 per rentable square foot Basic Rental rate)
November 1, 1999 - October 31, 2000: $ 133,109.00 per month (which is based on a $12.75 per rentable square foot Basic Rental rate)
November 1, 2000 - October 31, 2001: $ 135,719.00 per month (which is based on a $13.00 per rentable square foot Basic Rental rate)
November 1, 2001 - October 31, 2002: $ 138,329.00 per month (which is based on a $13.25 per rentable square foot Basic Rental rate)
November 1, 2002 - October 31, 2003: $ 140,939.00 per month (which is based on a $13.50 per rentable square foot Basic Rental rate)
November 1, 2003 - October 31, 2004: $ 143,549.00 per month (which is based on a $13.75 per rentable square foot Basic Rental rate)
November 1, 2004 - October 31, 2005: $ 146,159.00 per month (which is based on a $14.00 per rentable square foot Basic Rental rate)
November 1, 2005 - October 31, 2006: $ 148,769.00 per month (which is based on a $14.25 per rentable square foot Basic Rental rate)
</TABLE>
Basic Rental and all other charges, including Electrical Costs, shall
be paid in full by Tenant in accordance with the terms of this Lease.
This Basic Rental Schedule may be affected by other provisions
contained in this Lease, including without limitation, Section 2 and Exhibit D.
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EXHIBIT F
OFFICE SIGNAGE CRITERIA
Landlord shall provide Tenant listing on the lobby directory
consistent with listings provided other tenants. In addition,
Tenant shall have the right to construct at its expense but with
Landlord's right of reasonable approval signage on each of the
floors constituting part of the Premises.
Subject to (a) the reasonable approval of Landlord as to
design, size, and location, and (b) receipt of all required
permits and approvals from the City of Dallas, Tenant shall have
the right to place a monument sign (20 square feet maximum per
side) in front of the North Tower and two plaques on the granite
facade of the North Tower, specifications and location of which
being within Landlord's reasonable discretion.
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EXHIBIT G
OFFICE
PARKING
Tenant shall be permitted, but not obligated, to use
one (1) undesignated vehicular parking spaces in the parking
garage associated with the Buildings (the "PARKING GARAGE")
for each 1,500 rentable square feet in the Premises, during
the Term at such rates and subject to such terms, conditions
and regulations as are from time to time charged or
applicable to patrons of the Parking Garage. However,
Landlord agrees to charge Tenant an initial rate of $65.00
per undesignated vehicular parking space per month, or
$150.00 per designated vehicular parking space per month,
for the first five years of the Term, with annual increases
not to exceed 10% per year during Lease Years 6 - 10. In
addition, Tenant's employees shall have the right to use, at
no expense to Tenant, any undesignated vehicular parking
spaces in the Parking Garage at any time after 6:00 p.m.
until 7:00 a.m. business days and all day Saturday and
Sunday.
Tenant, at its sole option, but no later than the
Commencement Date of this Lease, may designate all or any
portion of the spaces on Floor 4 of the Parking Garage
outlined on Exhibit G-2 otherwise referred to as spaces 4-17
as Tenant's designated parking spaces. Additionally,
Tenant, at its sole option, at any time, may designate
spaces on Floor 6 of the Parking Garage, outline on Exhibit
G-3 as Tenant's designated parking spaces.
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EXHIBIT H
BUILDING GENERAL SECURITY PROGRAM
BUILDING SECURITY
The Plaza of the Americas has 24 hours building security. These
Safety/Security Officers are trained in Fire/Safety and emergency procedures
and operations. All officers receive CPR training each year.
Landlord's Security Department is comprised of a Chief of Security, a
Fire/Safety Director, three shift Supervisors and sufficient officers to fill
three (3) shifts. Each shift works eight (8) hours and reports directly to
their Shift Supervisor. The shifts at the Plaza of the Americas are broken
down as follows:
1st Shift 7:00 a.m. - 3:30 p.m.
2nd Shift 3:00 p.m. - 11:30 p.m.
3rd Shift 11:00 p.m. - 7:00 a.m.
Officers on each shift are assigned to different posts, i.e., Lobby
Officer, Patrol Officer, Dockmaster. The security desk in each tower is
manned 24 hours per day, 7 days per week to control building access, assist
tenants and visitors, handle alarms, and monitor the Building CCTV system.
The Patrol Officer is constantly patrolling the garage, atrium and building
areas, making random patrols of the tenant spaces. This officer also responds
to tenant requests such as locking and unlocking doors, responding to
emergencies, conducting tenant escorts, jump starting tenant automobiles,
etc. Each officer carries a two-way radio.
The schedules are set up to have a minimum of five (5) Safety/Security
Officers on site at any given time. During Normal Business Hours, there are
seven (7) officers available including the Dockmaster and Chief of Security.
Landlord feels that sufficient personnel are available to respond to tenant
needs as well as assist in any emergency that may arise.
Intercoms located in the office tower lobbies and on each level of The
Plaza parking garage provide instant communication with security personnel.
The security team can also provide free classes in first aid, CPR,
personal safety, fire prevention and office/home security.
CCTV SYSTEM
Landlord currently has forty-one (41) cameras strategically located
throughout levels one and two of the complex. Thirty-two (32) of these
cameras are being continually recorded. These cameras are monitored at both
security desks by our Lobby Security Officers.
BUILDING ACCESS SYSTEM
To further upgrade Landlord's building access control, Landlord has
installed a state-of-the-art computer controlled Security Access Card System.
All tenants must have a valid security access card for entry after Normal
Business Hours. These access cards are to be used in certain after hours
elevators to gain access to a tenant approved floor or floors. Security
access cards are issued to persons listed in the Tenant After Hours Access
List which is provided to Landlord by tenant management. Officers
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are not allowed to open any door for anyone who is not on this list. Tenants
who do not have their access cards and whose names are present on this list
will be required to produce identification and sign in before access will be
granted. Tenants who are not listed will not be granted entry to the floor
until/unless approval has been received from proper tenant management
personnel.
As previously mentioned, Safety/Security Officers will always be
stationed in the main lobby of each tower and can be reached at the following
phone numbers at anytime:
North Tower Desk 720-8050
South Tower Desk 720-8051
Emergency Number 969-0099 (Emergencies Only)
Landlord's Security staff is always available to assist in tenant needs
or requests. Tenants should feel free to contact Landlord concerning any
problems or questions they may have. If Landlord is not able to resolve a
tenant's particular situation, Landlord will direct such tenant to someone
who can.
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EXHIBIT I
EARLY OCCUPANCY
Prior to the Commencement Date, Tenant may, at Tenant's sole option,
occupy all or any portion of the Premises for the period beginning August 1,
1996 and ending on October 31, 1996 (the "Early Occupancy"), provided that
(i) the Work described in Exhibit D has been completed for that portion of
the Premises to be occupied during Early Occupancy, except for punch-list
items, and (ii) a certificate of occupancy has been issued for that portion
of the Premises to be occupied during Early Occupancy. Tenant shall notify
Landlord of Tenant's desired first day of Early Occupancy in writing at least
seven (7) days prior to Early Occupancy move-in. During any Early Occupancy,
all terms and conditions of the Lease shall be in full force and effect,
except that no Basic Rental shall be due during Early Occupancy. It is
hereby expressly understood that Electrical Costs will be due and payable as
provided for in the Lease during any Early Occupancy.
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EXHIBIT J
LEASE BUYOUT ALLOWANCE
Landlord shall provide to Tenant a Lease Buyout Allowance of up to
$664,305.00 for use by Tenant and entities controlled by Tenant. Provided
this Lease has been fully executed and delivered between the parties and
further provided that Tenant is not then and has not been in default under
this Lease, Tenant shall become entitled to disbursement from Landlord
credited to the Lease Buyout Allowance upon the tender to Landlord of a
written request from Tenant to Landlord for a disbursement to effect a full
satisfaction and obtain a total release of Tenant's lease obligations at
Woodall Rodgers Tower (1845 Woodall Rodgers Freeway, Dallas, Texas), TollHill
West (5310 Harvest Hill Road, Dallas, Texas), and Sherry Lane Place (5956
Sherry Lane, Suite 1301, Dallas, Texas). Landlord may cause the disbursement
to be made to a closing agent of its choice for payment to the landlords at
Woodall Rodgers Tower (no more than 5 days before February 14, 1996),
TollHill West and Sherry Lane Place (no more than 5 days before March 1,
1996) in the name of Tenant (or entities controlled by Tenant who are the
actual tenants under the applicable leases) in exchange for a document,
release and/or receipt acceptable to Landlord; provided, however, upon
receipt of the following from Tenant: (i) evidence satisfactory to Landlord
that Tenant has made or has caused to be made such buyout payments to the
landlords and (ii) a document, release and/or receipt from said landlords
acceptable to Landlord as to such lease buyout, Landlord shall reimburse
Tenant for direct payments made to said landlords for lease buyout purposes.
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EXHIBIT K
EXPANSION OPTIONS
Provided Tenant is not then and has not been in default under this
Lease, Tenant shall have three (3) successive options (the "Expansion
Options", any one of which is hereinafter referred to as an "Expansion
Option") to increase the area of the leased Premises by up to 10,000 rentable
square feet per Expansion Option. The specific locations of space designated
for Tenant's Expansion (the "Expansion Space") shall be (i) in one contiguous
space consisting of up to 10,000 square feet of space or (ii) in separate
blocks of space contiguous to the Premises which when combined equal 10,000
square feet, in the following locations and in the following order of
selection:
(a) first, if required by Tenant, any space reasonably
acceptable to Tenant and Landlord which has been deleted
from the Premises pursuant to Section 2 hereof;
(b) second, if required by Tenant, any space not
leased in subparagraph "a" above, or space reasonably
acceptable to Tenant and Landlord located on the 16th or
19th floor of the North Tower; and
(c) third, if required by Tenant and subject to
existing rights of existing tenants, any space not leased in
subparagraph "a" or "b" or above, or space reasonably
acceptable to Tenant and Landlord located on the 18th floor
of the North Tower; and
(d) fourth, if required by Tenant, space not leased in
subparagraphs "a", "b", or "c" above, or space reasonably
acceptable to Tenant and Landlord located on either the 20th
or 21st floors of the North Tower.
Each Expansion Option shall be exercised (if at all) by delivery of
written notice to Landlord, at least six (6) months prior to the 37th, 61st
and 85th months of the Term of this Lease, respectively (each such deadline
by which Tenant must exercise an Expansion Option hereinafter referred to as
an "Exercise Date"). Each Expansion Option is independent of the other
Expansion Options and the failure by Tenant to exercise any Expansion Option
by the appropriate Exercise Date shall not prevent Tenant from exercising its
Expansion Option on the next succeeding Exercise Date. Following the
exercise by Tenant of an Expansion Option, Landlord shall deliver possession
of the Expansion Space on the 37th, 61st or 85th month of the term of this
Lease, respectively (each such date of delivery hereinafter referred to as a
"Delivery Date").
The Expansion Space shall be subject to the provisions of Exhibit D
and Section 8 of this Lease with respect to the Work to be performed therein,
except that (a) in the case of the first Expansion Option only, Landlord
shall allow Tenant an allowance in an amount equal to Tenant's Expansion
Share of twenty-five dollars and twenty-five cents ($25.25) per square foot
of rentable area of Expansion Space, which amount shall be applied against
architectural and engineering fees and expenses incurred by Tenant in
connection with the Work in the Expansion Space, and permit and filing fees;
and (b) in the case of the second and third Expansion Options, Landlord shall
allow Tenant the building standard tenant finish allowance available on the
date on which the Expansion Space subject to such options is added to the
leased Premises. As used in this Exhibit K, "Expansion Share" shall be the
percentage obtained by dividing the number of days between each applicable
Delivery Date and the Expiration Date of the initial Term (assuming a 365 day
year) by 3,650 days (i.e., 365 days x 10 year Lease Term). For example, if
the Delivery
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Date for Expansion Space is November 1, 1999 (i.e., the 37th
month of the initial Term) and the Expiration Date is October 31, 2006,
Landlord will allow Tenant an allowance in the amount of $17.68 per square
foot of rentable area of Expansion Space, in other words, $25.25 multiplied
by Tenant's Expansion Share of 70% (i.e., 2,550/3,650).
Basic Rental for the Expansion Space (if any) added on the first
Expansion Date shall be payable at the same rate per rentable square foot as
is then applicable to the balance of the leased Premises. Basic Rental for
the Expansion Space (if any) added on the 61st or 85th months of the term of
this Lease shall be at ninety-five percent (95%) of the Market Rate (as
defined in Exhibit P attached hereto). Rent for any Expansion Space shall be
payable in accordance with this Lease based upon the rentable area of the
Expansion Space, except that the Expense Stop for any Expansion Space added
to the leased Premises under the second or third Expansion Option shall be
updated to the first full Lease Year after the Delivery Date. Rent for the
Expansion Space shall commence ninety (90) days after the Delivery Date.
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EXHIBIT L
RIGHT OF REFUSAL
Provided Tenant is not then and has not been in default under this
Lease and subject to the rights of now existing tenants, Landlord shall not
lease or contract to lease the Right of Refusal Space (as defined in Exhibit
M hereof) to any other party until Landlord shall first have offered to lease
such Right of Refusal Space to Tenant again at the Market Rate (as defined in
Exhibit P attached hereto). Tenant may accept such offer by notifying
Landlord, within five (5) business days of receipt of Landlord's notice, of
Tenant's election to enter into an amendment of this Lease with Landlord for
the Right of Refusal Space offered by Landlord. Such leasing shall be on the
same terms and conditions as this Lease, with the same Expiration Date,
including Renewal Terms, except that the Basic Rental payable for the Right
of Refusal Space added to the Premises pursuant to these rights of refusal
shall be at the Market Rate and the Expense Stop for any Right of Refusal
Space added to the Premises pursuant to these rights of refusal shall be
updated to the first full Lease Year that the Right of Refusal Space is added
to the Premises. In the event that Tenant fails to notify Landlord of
acceptance of Landlord's offer to lease such Right of Refusal Space under
this Exhibit L within five (5) business days of receipt thereof, Landlord may
lease the Right of Refusal Space to another party. In the event such Right
of Refusal Space again becomes available for lease by Landlord, then Landlord
shall not lease such Space again until it has again complied with the terms
and conditions of this Exhibit L.
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EXHIBIT M
RIGHT OF REFUSAL SPACE
Space located on floors 15 through 25 of the North Tower, subject to
the occupancy and other rights of now existing tenants (such space being
herein referred to as the Right of Refusal Space).
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EXHIBIT N
ROOFTOP COMMUNICATIONS
Tenant may install, and once installed may modify, a microwave, dish,
antenna, satellite or other communications system on the roof of the North
Tower for use in connection with Tenant's business. The size and location of
such system shall be subject to Landlord's prior written approval. Landlord
agrees such approval shall not be unreasonably withheld or delayed. Tenant
shall not be required to pay to Landlord any Basic Rental or other payment
for the use of such space on the roof of the North Tower. Tenant shall
furnish detailed plans and specifications for the system, or any modification
to the system, to Landlord for its approval. Landlord agrees such approval
shall not unreasonably be withheld or delayed. The system shall be
installed, at Tenant's expense, by a contractor or contractors selected by
Tenant and approved by Landlord. Landlord agrees such approval shall not
unreasonably be withheld or delayed. The system installation may include the
use of any North Tower shafts required to bring Tenant's electrical wiring
from the roof area to the Premises. Tenant shall have access to the roof and
Tenant's equipment relating to the system at all times throughout the term of
this Lease if accompanied by a designated representative of Landlord;
provided, however, that in the case of an emergency, Tenant shall not be
required to be accompanied by Landlord's representative. Tenant shall be
responsible for procuring whatever licenses or permits may be required for
the use of the system or the operation of any equipment served thereby, and
Landlord makes no warranties whatsoever as to the permissibility of any
communication system under Applicable Laws. Tenant shall repair any damage to
the roof of the North Tower, resulting from the installation or use of any
communication system. Tenant shall further be responsible for the entire
cost of installation and maintenance of its communication system.
TENANT SHALL INDEMNIFY AND HOLD HARMLESS LANDLORD FROM ANY AND ALL
CLAIMS, DEMANDS, LIABILITIES, CAUSES OF ACTIONS, SUITS, JUDGMENTS AND
EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES) FOR ANY LOSS OR MATTER
ARISING FROM TENANT'S INSTALLATION OR MAINTENANCE OF THE COMMUNICATIONS
SYSTEM DESCRIBED IN THIS EXHIBIT N.
Tenant's communication system shall not constitute a nuisance or
unreasonably interfere with the operations of other tenants of the Buildings
or with the normal use of the area surrounding the Buildings by occupants
thereof. In the event Tenant's communication system constitutes a nuisance
or so unreasonably interferes, Tenant, at its option, shall correct or cure
any such nuisance or interference, or remove its system.
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EXHIBIT O
RENEWAL OPTIONS
Provided that Tenant is not then and has not been in default under
this Lease, Tenant shall have four (4) separate consecutive options to renew
the Term of this Lease with respect to all of the then leased Premises for
five (5) year periods (each a "Renewal Term"). Each option shall be
exercised by written notice to Landlord given at lease twelve (12) months
prior to the expiration of the initial Term or the then existing Renewal
Term, as applicable. Each Renewal Term shall be on the same provisions as
are contained herein for the initial Term or the preceding Renewal Term, as
the case may be, except as expressly provided herein to the contrary and
except for those which, by their terms, are inapplicable to a Renewal Term.
At any time after an option to renew has been exercised and the Basic
Rental payable during the Renewal Term determined, Landlord and Tenant, upon
request of either, shall execute an agreement supplementary hereto setting
out the date to which the Renewal Term shall extend and the Basic Rental
payable during the Renewal Term.
The Basic Rental for the first Renewal Term shall be ninety-five
percent (95%) of the Market Rate (as defined in Exhibit P attached hereto).
The Basic Rental for the second, third and fourth Renewal Terms shall be one
hundred (100%) percent of the Market Rate (as defined in Exhibit P attached
hereto). Rent for each Renewal Term shall be payable in accordance with this
Lease based upon the rentable area of the Premises renewed by Tenant, except
that the Expense Stop shall be updated to the last full Lease Year of the
initial Term or the preceding Renewal Term, as the case may be.
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EXHIBIT P
MARKET RATE
Market Rate shall be defined as the then fair market net rental value
of the Premises (a) in the case of the renewal options, as of the date of
commencement of the applicable Renewal Term, or (b) in the case of the second
and third Expansion Options or the rights of refusal, as of the applicable
Delivery Date, determined in accordance with the provisions set forth below.
The fair market net rental value of the Premises shall mean the net rental
that would be agreed to by Landlord and a new tenant, each of whom is
willing, but neither of whom is compelled, to enter into the lease
transaction. The fair market net rental value shall be determined on the
basis of the assumptions that (1) in the case of the renewal options, the
Expense Stop shall be updated to the last full Lease Year of the initial Term
or the preceding Renewal Term, as the case may be, and the fair market net
rental value shall be projected to the commencement date of the applicable
Renewal Term, and (2) in the case of the second and third Expansion Options
or the rights of refusal, the Expense Stop shall be updated to the first full
Lease Year after the applicable Delivery date, and the fair market net rental
value shall be projected to the applicable Delivery Date. The fair market
net rental value to be determined shall take into account any existing tenant
improvements and any special uses or rights afforded to the Tenant under the
Lease in connection with the Premises, and shall take into account the
following factors:
(i) Rental for comparable space in Comparable Buildings of
the size, age and condition of the Building (taking
into consideration, but not limited to, use, location
and/or floor level within the applicable building,
definition of net rentable area, space contiguity,
quality, condition, age and location of the applicable
buildings);
(ii) The rentable area of the Premises;
(iii) The length of the pertinent Renewal Term or Term of
Lease of the Expansion Space;
(iv) The extent to which the Tenant Allowance, Refurbishment
Allowance, Lease Buyout Allowance, rent credit, space
planning allowance, moving allowance, or similar
inducements given to Tenant are less or greater than
that which would have been given to a comparable new
tenant in a Comparable Building of the size, age and
condition of the Buildings; and
(v) The quality and credit worthiness of Tenant.
P-1
<PAGE>
EXHIBIT Q
COMPARABLE BUILDINGS
1. That certain office building located in the Dallas central
business district at 1601 Elm Street, Dallas, Texas and commonly known on the
date of this Lease as Thanksgiving Tower.
2. That certain office building located in the Dallas central
business district at 1999 Bryan Street, Dallas, Texas and commonly known on
the date of this Lease as Harwood at Bryan Corporate Center.
3. That certain office building located in the Dallas central
business district at 500 North Akard, Dallas, Texas and commonly known on the
date of this Lease as Lincoln Plaza.
4. That certain office building located in the Dallas central
business district at 2121 San Jacinto Street, Dallas, Texas and commonly
known on the date of this Lease as San Jacinto Tower.
5. That certain office building located in the Dallas central
business district at 1700 Pacific Avenue, Dallas, Texas and commonly known on
the date of this Lease as 1700 Pacific Avenue (formerly First City Center).
Q-1
<PAGE>
EXHIBIT R
REFURBISHMENT ALLOWANCE
Provided that Tenant is not then and has not been in default under
this Lease, or any extensions thereof, and further provided that Tenant has
not exercised its rights pursuant to Exhibit S herein, then, on the fifth
anniversary of the Term Commencement Date and on the commencement of each
Renewal Term, Landlord shall provide Tenant with a refurbishment allowance
(collectively, the "Refurbishment Allowance") in the amount of three dollars
($3.00) per square foot of rentable area of the then leased Premises
(excluding the Storage Space) as of the fifth anniversary of the Term
Commencement Date or the commencement of the applicable Renewal Term, as the
case may be. Any refurbishment of the Premises is subject to the provisions
of Exhibit D and Section 8 of this Lease with respect to Work to be
performed. The Refurbishment Allowance shall be applied against
architectural and engineering fees and expenses incurred by Tenant in
connection with any Work, the costs of labor and materials incurred by Tenant
in having the Work done, and any permit and filing fees.
R-1
<PAGE>
EXHIBIT S
TERMINATION OPTION
Tenant shall, at Tenant's sole option, have the one-time right to
terminate this Lease at the end of the sixtieth (60th) month of this Lease
provided that: (i) Tenant shall have given to Landlord at least twelve (12)
months prior written notice of such termination, and (ii) Tenant shall have
paid to Landlord, on or before the first day of the month of which the Lease
shall terminate, the amount of all unamortized upfront costs associated with
the Premises, including all Tenant Allowance, Lease Buyout Allowance and
leasing commissions, (each amortized over the Term of the Lease at a 9.5%
interest rate) in cash, plus a penalty of six (6) months average Basic Rental
for the entire Term of the Lease ($13.13 average Basic Rental rate multiplied
by the rentable square footage then under lease by Tenant multiplied by .5),
plus all Rent and other charges under the Lease allocable to the period
preceding such termination date. Any unamortized allowances, commissions and
Rent pertaining to any additional space leased by Tenant prior to Tenant
exercising this Termination Option will be included in the calculation of
Tenant's termination penalty. Tenant shall be entitled as an offset against
the amount due to Landlord pursuant to this Exhibit S, the amount of Security
Deposit which Landlord retains at the time of the termination pursuant to
this Exhibit S.
If Tenant exercises its right hereunder and fully performs its
obligations in accordance with this Exhibit S, then the Expiration Date for
purposes of this Lease will become the last day of the month of termination.
If this Termination Option is exercised by Tenant, Landlord may remove any
and all of Tenant's exterior signage, monument or other. These signage
changes may be made no earlier than the first day of the month of termination.
S-1
<PAGE>
EXHIBIT T
STORAGE SPACE
Throughout the term of this Lease, Tenant may occupy up to
approximately 5,000 rentable square feet of storage space (the "Storage
Space") on Level One of the North Tower, or in such other location within the
Buildings as may be reasonably determined by Landlord and consented to by
Tenant which consent shall not be unreasonably withheld or delayed. The
Storage Space will be offered to Tenant in its "AS IS" condition and Landlord
will not be responsible for any improvements or allowances regarding such
Storage Space. Rent for the Storage Space will be computed by multiplying
the actual Basic Cost per rentable square foot for the Buildings for the
applicable time period by the rentable square footage of the Storage Space.
Rent for the Storage Space shall be due and payable on a monthly basis in the
same manner in which Rent for the Premises is due and payable. So long as
Tenant does not use any electricity within the Storage Space, except when
retrieving items from storage, no Electrical Costs will be charged to Tenant.
Landlord shall have the right, from time to time, to substitute Tenant's
Storage Space for alternative storage space within the Buildings and
consented to by Tenant which consent shall not be unreasonably withheld or
delayed. Upon fifteen (15) days written notice from Landlord, Tenant shall
be required to relocate all of its items from its original Storage Space into
the alternative storage space in the Buildings designated by Landlord.
Except as expressly hereinabove set forth, Tenant's obligations under this
Lease shall apply to the Storage Space.
T-1
<PAGE>
EXHIBIT U
PLAZA OF THE AMERICAS
JANITORIAL SPECIFICATIONS
A. JANITORIAL SERVICE SPECIFICATIONS FOR TENANT SUITE AND COMMON AREAS ON
TENANT OCCUPIED FLOORS.
1. Daily Services
a. Secure all lights as soon as possible each night.
b. Vacuum all carpets and tops of all carpet protectors.
c. Dust mop all resilient and composition floors with dust cloths.
d. Dust all desks and and office furniture with treated dust cloths.
Dust all ledges, railings and other horizontal surfaces between 18"
and 70" from floor. Dust all electrical and communication cover
plates, such as light switch covers. Dust all signage in the
hallways and spot clean if necessary.
e. Papers and folders or other items on desks NOT to be moved.
f. Clean and sanitize all telephone receivers.
g. Empty all ash trays and ash urns. Clean and sanitize as required.
h. Empty all waste paper baskets and other trash containers, replace
liners as necessary. Clean and polish common area trash receptacles.
i. Remove fingerprints, dirt smudges, graffiti, etc., from all doors,
door knobs, frames, glass partitions, windows, mirrors, light
switches, walls, elevator doors and jambs, elevator thresholds,
elevator directional lamps, elevator call buttons and panels, and
elevator interiors.
j. Remove all trash from floors to the designated trash areas.
k. Return chairs and waste paper baskets to proper positions. Pictures
that are dusted should be returned to a level position.
l. Clean, sanitize and polish drinking fountains, including grills and
sides. Clean splash marks on adjacent walls.
m. Dust mop all service stairwells, and dust handrailing. Spot mop as
needed.
n. Police all interior public corridor planters.
o. Dust and remove debris from all metal door thresholds. Spot clean
doors, door frames, hardware, and kick plates. Spot clean glass
adjacent to suite doors.
p. Wipe clean smudged bright work.
U-1
<PAGE>
q. Spot clean all carpets, resilient and composition floors as required.
r. Service all walk-off mats as required.
s. Clean building directory glass.
t. Clean glasswork under handrails and glass lobby doors and windows.
Clean all glass furniture tops.
u. Clean and sanitize wet bar/snack areas, kitchens and counter tops.
Polish stainless steel.
v. For Main lobbies, dust all low reach areas including, but not
limited to, chair rungs, structural and furniture ledges, base boards,
window sills, door louvers for main lobbies.
2. Weekly Services
a. Dust all low reach areas including, but not limited to, chair rungs,
structural and furniture ledges, baseboards, window sills, door
louvers, wood paneling molding, cabinets, files, pictures, partitions,
and other vertical surfaces of office furniture.
b. Dust inside all door jambs.
c. Clean and polish all metal door thresholds.
d. Wipe clean and polish all bright work.
e. Wipe down handrails in stairwells and spot clean.
f. Dust all vinyl bases and clean baseboards.
g. Edge all carpeted areas, including along baseboards, edges,
furniture, under desks, behind moveable furniture and doors,
under and around plants, etc.
h. Move all plastic carpet protectors and thoroughly vacuum under and
around all desk and office furniture as required and return them to a
centered position.
i. Wet mop and spray buff all resilient and/or composition flooring.
Clean corners and edges.
j. Spot clean all lobby marble and granite walls.
k. Thoroughly clean all glass in tenant entry ways to suites, private
offices and partitions.
l. Wipe clean all signage.
m. Dust all high reach areas, including but not limited to, tops of
door frames, structural and furniture ledges, air conditioning
diffusers and return air grills, light diffusers, spot lights, fire
equipment, intercom boxes, extinguishers, and standpipes.
U-2
<PAGE>
3. Monthly Services
a. Vacuum upholstered furniture, fabric partitions and fabric walls.
b. Dust mop and polish all wood floors.
c. Wash all lobby marble and granite walls.
d. Wipe clean all baseboards.
e. Completely wet mop stairwells.
f. Show-scrub or otherwise recondition all resilient or composition
flooring to provide a level of appearance equivalent to a completely
refinished flooring.
4. Quarterly Services
a. Dust and/or vacuum window coverings along perimeter of building (to
include building standard vertical blinds), more often if necessary to
provide a neat appearance.
b. Shampoo carpets with an OWNER approved process.
c. Clean all light fixtures.
5. Semi-Annually
a. Strip and refinish polished surface floors of building lobbies.
6. General
a. No electrical extension cord marks are to be left of walls.
b. Personnel must remove electrical plugs from receptacles by grasping
plug, not whipping or pulling the cord.
B. RESTROOM SERVICES SPECIFICATIONS
1. Daily Services
a. Restock all restrooms with supplies from the Owners stock, including
paper towels, toilet tissue and hand soap as required. Place towels
in proper position. Operate each liquid hand soap dispenser to ensure
that it is functioning. Report any malfunctions to Owner.
b. Restock all sanitary napkin and tampon dispensers from CONTRACTORS
stock, as required.
c. Wash and polish all mirrors, dispensers, faucets, flushometers,
counter tops, and bright work with non-scratch disinfectant cleaners.
d. Wash and sanitize all toilets, both sides of toilet seats, urinals,
and sinks with non-scratch disinfectant germicidal cleaner. Wipe dry
all sinks. Operate each flush valve to ensure that it is functioning.
Report any malfunctions to Owner.
e. Remove stains, de-scale toilets, urinals and sinks as required.
U-3
<PAGE>
f. Sweep and damp mop all restroom floors and ceramic wall base with
disinfectant germicidal solution.
g. Empty all waste and sanitary napkin and tampon receptacles,
replace liners from Owner's stock.
h. Remove all restroom trash from building.
i. Wipe down partitions, including hinges and hardware.
j. Spot clean fingerprints, marks and graffiti from walls,
partitions, doors, hinges, frames door handles, glass, aluminum
and light switches as required.
k. Report any non-functioning soap dispensers, faucets, flush
valves, and towel dispensers to Owner.
l. Report any obvious damage to Owner.
2. Weekly Services
a. Clean all low reach and high reach areas including, but not
limited to, structural ledges, mirror tops, partition tops and
edges, air conditioning diffusers and return air grills, and access
doors.
b. Spot clean all tile walls.
c. Remove scuff marks from doors.
3. Monthly Services
a. Thoroughly clean, machine scrub, and reseal all ceramic tile
floors, using approved sealers.
b. Scrub all ceramic tile walls.
c. Wash down partitions, including doors, hinges, and seams.
C. PASSENGER ELEVATOR CLEANING SPECIFICATIONS
1. Daily Services
a. Spot clean interior surface of cab walls and doors and glass
partitions with Owner approved process.
b. Wipe down control panels.
c. Spot clean outside painted and metal surfaces of all elevator
doors and frames.
d. Spot clean all spills and stains.
e. Vacuum all cab floor carpeting thoroughly. Edge all carpeting
thoroughly.
f. Vacuum inside door tracks.
g. Wipe clean the exterior of all light fixtures.
h. Dust interior walls and ceiling of all cabs with Owner approved
process.
U-4
<PAGE>
2. Weekly Services
a. Thoroughly clean entire interior surfaces of all doors, door
tracks, and frames and outside painted and metal surfaces of all
doors, door tracks, frames and glass partitions. All surfaces which
are visible must be polished with Owner approved process.
b. Wipe clean the interior of all light fixtures where applicable.
3. Twice-Monthly Services
a. Shampoo and hot water extract with neutralizing rinse all
elevator cab floor carpets.
b. Thoroughly clean all wall surfaces in cabs.
c. Wipe clean entire cab ceiling above lighting diffusers.
D. SERVICE AREAS (HALLWAY, FREIGHT ELEVATOR AND LANDINGS AND DOCKS)
1. Daily Services
a. Sweep trash and debris.
b. Remove trash to designated area.
c. Damp mop hallways and elevator.
d. Wash down dock areas. Docks shall be dry by 7:00 a.m.
2. Monthly Services
a. Strip and wax vinyl tile flooring.
b. Clean hand rails.
3. Semi-Annual Services
a. Damp clean light fixtures and standpipes.
E. WOOD SURFACES (PUBLIC CORRIDORS AND TENANT SUITES)
1. Daily Services
a. Dust with dry static or tac cloth.
b. Spot clean with Owner approved cleaner.
F. ENTRANCES
1. Daily Services
a. Pull up all outside walk-off mats and thoroughly clean them.
b. Wash down walk-off mat wells and entrances.
c. Entrances shall be dry by 7:30 a.m.
U-5
<PAGE>
G. JANITOR CLOSETS
1. Daily Services
a. Keep all janitorial area doors closed at all times.
b. Leave area in clean, organized fashion, with empty trash cans.
c. Sweep floors.
d. Clean janitor sinks.
e. Wipe down electrical cords to prevent marking.
f. Keep shelves and supplies neat and orderly at all times.
g. Remove all flammable materials.
U-6
<PAGE>
EXHIBIT 10(ap)
DEWEY BALLANTINE
March 19 1996
MEMORANDUM FOR MESSRS. ROBUSTELLI & TRICKEY & MS. CORNELL:
Re: PRUDENTIAL/AMRESCO WAREHOUSES.
Enclosed for your records are the following closing
documents in connection with the above-referenced transaction:
1. Supplement No. 1 to the Custodial Agreement:
2. Interim Warehouse and Security Agreement and Secured
Note, dated February 23, 1996;
3. Interim Warehouse and Security Agreement and Secured Note
dated February 26, 1996;
4. Opinion of Counsel to AMRESCO.
Please feel free to contact me at (212) 259-8338 with any questions.
Best regards.
Faye Ricci
Enclosures
<PAGE>
SUPPLEMENT NO. 1 TO CUSTODIAL AGREEMENT
Dated as of February 26, 1996
Reference is made to the Amended and Restated Master Custodial
Agreement, dated as of November 1, 1995 (the "Custodial Agreement") between
AMRESCO Residential Mortgage Corporation (the "Owner") and Bankers Trust
Company of California, N.A., as Custodian (the "Custodian"), Capitalized terms
not otherwise defined herein shall have the meaning as set forth in the
Custodial Agreement.
With respect to only those portfolios of mortgage loans in which
Prudential Securities Realty Funding Corporation ("Prudential) is the Lender,
the following has been agreed upon by the undersigned:
SECTION 1.
(A) The last sentence of Section 21 of the Custodial Agreement is
hereby deleted in its entirety and replaced with the following:
"Further, unless Custodian receives contrary instructions from an
Authorized Representative of Owner or Registered Holder, any
Authorized Representative of Servicer is permitted to give
notices, requests and instructions under Section 3(c), 6 and 11 of
this Agreement on behalf of Owner; provided that if Servicer or
Owner has requested delivery of Custodial Files with respect
to any particular Loan Package, the Authorized Representatives of
the Registered Holder must consent to all such requests or deliver
to the Custodian a specific waiver".
(B) The last sentence of Section 3(c) of the Custodial Agreement
is hereby deleted in its entirety.
SECTION 2.
As amended by Section 1 hereof all provisions of the Custodial
Agreement are reconfirmed as of the date hereof. The Owner, in addition,
hereby reconfirms and remakes as of the date hereof each and every of its
representations, warranties and covenants set forth in the Custodial
Agreement.
<PAGE>
AMRESCO RESIDENTIAL MORTGAGE
CORPORATION
By: /s/ MICHAEL W. TRICKEY
------------------------------------
Name: Michael W. Trickey
Title: Vice President
BANKERS TRUST COMPANY OF CALIFORNIA,
N.A., as Custodian
By: /s/ JOANNA G. MCSWEENEY
-------------------------------------
Name: Joanna G. McSweeney
Title: Assistant Secretary
PRUDENTIAL SECURITIES REALTY FUNDING
CORPORATION, as Lender
By: /s/ ELIZABETH W. CASTAGNA
-------------------------------------
Name: Elizabeth W. Castagna
Title: Vice President & Treasurer
<PAGE>
APPROVAL AS TO LEGALITY
I, Karen H. Cornell, corporate counsel to the Borrower hereby confirm
that:
(a) I delivered, on November 1, 1995, the opinion letter, a copy of
which is attached hereto, (the "Opinion Letter") relating to the
Custodial Agreement.
(b) I have represented the Borrower in connection with its execution
and delivery of Supplement No. 1 to the Custodial Agreement (the
"Supplement") to which this Approval as to Legality is attached.
(c) I hereby extend, as of the date hereof, the opinions set forth in
the Opinion Letter to cover both the Supplement itself as well as
the transactions described on the Supplement confirm, as of the
date hereof, and subject to any and all assumptions and
qualifications set forth therein, the opinions set forth in the
Opinion Letter.
Yours truly,
KAREN H. CORNELL
-------------------------------
Karen H. Cornell
Corporate Counsel
Dated as of February 26, 1996
<PAGE>
EXECUTION COPY
============================================================
INTERIM WAREHOUSE AND
SECURITY AGREEMENT
by and between
PRUDENTIAL SECURITIES REALTY
FUNDING CORPORATION,
as Lender
and
AMRESCO RESIDENTIAL MORTGAGE CORPORATION,
as Borrower
Dated as of February 23, 1996
============================================================
<PAGE>
Table of Contents
Page
----
Section 1. The Loan. . . . . . . . . . . . . . . . 1
Section 2. Additional Conditions Precedent to
Advance; Required Characteristics
of Mortgage Loans, Correspondents
and Servicers. . . . . . . . . . . . 5
Section 3. Mortgage Files and Custodian. . . . . . 6
Section 4. Representations, Warranties and
Covenants. . . . . . . . . . . . . . 7
Section 5. Mandatory Prepayment of Loan. . . . . . 10
Section 6. Release of Mortgage Files following
Payment of Loan. . . . . . . . . . . 10
Section 7. The AMRESCO Note. . . . . . . . . . . . 11
Section 8. No Oral Modifications; Successors
and Assigns; Assignment of
Collateral . . . . . . . . . . . . . 11
Section 9. Reports . . . . . . . . . . . . . . . . 11
Section 10. Events of Default . . . . . . . . . . . 12
Section 11. Remedies Upon Default . . . . . . . . . 13
Section 12. Indemnification . . . . . . . . . . . . 14
Section 13. Power of Attorney . . . . . . . . . . . 15
Section 14. Agreement Constitutes Security
Agreement. . . . . . . . . . . . . . 15
Section 15. Lender May Act Through Affiliates . . . 15
Section 16. Notices . . . . . . . . . . . . . . . . 15
Section 17. Severability. . . . . . . . . . . . . . 16
Section 18. Counterparts. . . . . . . . . . . . . . 17
Section 19. Certain Definitions . . . . . . . . . . 17
<PAGE>
INTERIM WAREHOUSE AND SECURITY AGREEMENT
INTERIM WAREHOUSE AND SECURITY AGREEMENT, dated as of February 23,
1996 (as amended or otherwise modified from time to time, this "AGREEMENT")
among PRUDENTIAL SECURITIES REALTY FUNDING CORPORATION, a Delaware
corporation, having an office at 1220 N. Market Street, Wilmington, Delaware
19801 (the "LENDER"), and AMRESCO RESIDENTIAL MORTGAGE CORPORATION, a
Delaware corporation, having its principal office at 1845 Woodall Rodgers
Freeway, Suite 1700, Dallas, Texas 75201 (the "BORROWER").
WHEREAS, the Lender intends to lend and the Borrower intends to borrow
up to $200,000,000 (two hundred million dollars) to fund the purchase by the
Borrower of floating or fixed rate, first lien, residential, mortgage loans;
and
WHEREAS, the Lender's affiliate, Prudential Securities Incorporated
("PSI") will act as the sole or lead manager on the mortgage-backed
securities issuance (the "SECURITIZATION") to be sponsored by the Borrower
(or by an affiliate thereof) and collateralized by the Pledged Mortgage
Loans.
An index to the location of the definitions of the defined terms used
herein is set forth as Appendix I hereto.
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the parties hereto hereby agree as follows:
SECTION 1. THE LOAN.
A. Subject to the terms of this Agreement:
1. The Lender agrees to lend to the Borrower up to a maximum
of $200,000,000 (such Borrowing, the "Loan"), to be made in one or more
advances (each, an "ADVANCE"); PROVIDED, HOWEVER, that in no event shall the
outstanding debt (including, without limitation, the Loan), owed to the
Lender by the Borrower under any loan agreement (including, without
limitation, this Agreement), exceed $200,000,000. The Borrower agrees
that the Loan shall be used to warehouse adjustable or fixed rate,
first lien, residential mortgage loans that are to be included in the
Securitization (the "MORTGAGE LOANS"), as such Mortgage Loans are
identified to the Lender in writing and in electronic form from
time to time. All Mortgage Loans financed hereunder shall be closed
loans; I.E., this facility shall not be used for "wet" or "table"
fundings. The Lender may refuse to lend against any Mortgage Loan(s)
which the Lender reasonably believes will not be eligible for inclusion
in the securitized pool either (x) due to the characteristics of such
Mortgage Loan or (y) due to the expected aggregate characteristics of
the Mortgage Loans.
<PAGE>
2. Each Advance shall be made on a date prior to the Maturity
Date referred to below (each such date, a "FUNDING DATE"); PROVIDED that:
(i) the conditions precedent to the making of Advances set forth in
Section 2 hereof shall have been satisfied, and the representations and
warranties of the Borrower in Section 4 and Section 7 hereof shall be true
and correct on and as of such Funding Date as if made on and as of such
date;
(ii) no Event of Default shall have occurred and be continuing or would
exist after the making of the Advance on such Funding Date;
(iii) the Lender shall have received (A) in connection with each Advance,
a certificate from the Custodian referred to below to the effect that it has
reviewed the mortgage files relating to the Mortgage Loans being pledged in
connection with the Advance being made on such Funding Date and has found no
material deficiencies in such mortgage files (the "CUSTODIAN'S
CERTIFICATION"), it being acknowledged that the Custodian's Certification
may consist of an initial certification, which must be delivered on or prior
to the related Funding Date with respect to the notes and assignments of
mortgage, and a final certification with respect to the remainder of the
mortgage files within 30 days of such Funding Date and (B) prior to the
initial Advance, a legal opinion from counsel (which may be in-house
counsel) to the Borrower in the form of Exhibit B attached hereto;
(iv) the Borrower shall have delivered or caused to be delivered to the
Custodian all required documents with respect to the Mortgage Loans being
pledged on such Funding Date; and
(v) to the extent described in Section 5(C) hereof, no notice described
in said Section 5(C) shall have been received by PSI.
3. The Loan shall accrue interest daily on its outstanding principal
amount, with interest calculated for the actual number of days elapsed,
based on a 360-day year. The interest rate shall be (except as otherwise
provided in Section E(2) or Section 11(D) hereof) LIBOR plus 0.85 and
shall be reset on each business day. Interest which accrues during each
calendar month shall be payable on the 1st business day of the following
month, with any outstanding interest due and payable in its entirety on
the date of termination of this warehouse facility (including the Maturity
Date).
"LIBOR" shall mean, for each day, a fluctuating interest rate per annum
equal to the overnight London Interbank Offered Rate as determined by the
Lender from time to time.
Any amounts pre-paid under this Agreement prior to the Maturity Date
may be re-borrowed, subject to the terms and conditions of this Agreement,
until the Maturity Date.
2
<PAGE>
B. The amount of each Advance shall not exceed the lesser of:
1. 100% of the aggregate outstanding principal balance of the
Mortgage Loans (calculated as of the related Cut-Off Date or, if
the Borrower is using the proceeds of the Advance to purchase the
related Mortgage Loans at their aggregate outstanding principal
balance as of the settlement date for the purchase, then their
aggregate outstanding principal balance as of such settlement date)
proposed to be pledged to the Lender in connection with such
Advance, MINUS, in the event that a Collateral Deficiency Situation
exists as of the date of such Advance, the Restoration Amount as of
the date of such Advance; and
2. the product of (x) the Market Value of the Mortgage Loans
proposed to be pledged to the Lender in connection with such
Advance and (y) 0.95, MINUS, in the event that a Collateral
Deficiency Situation exists as of the date of such Advance, the
Restoration Amount as of the date of such Advance.
For purposes of this Agreement:
A COLLATERAL DEFICIENCY SITUATION shall be deemed to be existing
as of any day on which (x) the outstanding principal amount of the
Loan as of such day exceeds (y) the product of (I) the Market Value
of the Pledged Mortgage Loans (disregarding the Market Value of any
Mortgage Loans proposed to be pledged to the Lender on such day)
and (II) 0.95 by more than $250,000.
CUT-OFF DATE means, as of any date, the close of business on the
date set forth in the related Mortgage Loan Schedule (as defined in
the Amended and Restated Master Custodial Agreement). In no event
shall the Cut-Off Date precede by more than 30 days the date on
which the related Mortgage Loan Schedule is delivered.
MARKET VALUE means, as of any date and with respect to any
Mortgage Loans, the whole-loan servicing-retained fair market value
of such Mortgage Loans as of such date as determined by the Lender
(or an affiliate thereof) in its sole discretion.
MATURITY DATE means, the earlier of (i) April 30, 1996 and (ii)
the date on which the second quarter Securitization occurs. The
Maturity Date may be extended by Lender, in Lender's sole and
unreviewable discretion, on any date by the execution and delivery
of a Credit Increase Confirmation and Note Amendment in the form of
Exhibit C hereto.
PLEDGED MORTGAGE LOANS means, as of any date of determination,
any mortgage loans then held by the Custodian on behalf of the
Lender to secure the Loan.
RESTORATION AMOUNT means, as of any date of determination, the
amount, if any, by which (x) the outstanding principal amount of
the Loan as of such date (including accrued interest) exceeds (y)
the lesser of (i) the product of (I)
3
<PAGE>
the Market Value of the Pledged Mortgage Loans (disregarding the
Market Value of any Mortgage Loans proposed to be pledged to the
Lender on such date) and (II) 0.95 and (ii) the outstanding
principal balance of the Pledged Mortgage Loans (disregarding the
outstanding principal balance of any Mortgage Loans to be pledged
to the Lender on such date).
C. The Loan evidenced hereby shall mature on the Maturity Date and
all amounts outstanding hereunder shall be due and payable on the Maturity
Date.
D. The Loan is pre-payable at any time without premium or penalty, in
whole or in part; PROVIDED, that Pledged Mortgage Loans may not be removed
from this facility (including in connection with any prepayment of the Loan
in part) with the result that, in the Lender's sole reasonable determination,
the remaining Pledged Mortgage Loans, are, in the aggregate, materially
inferior as collateral as compared to the pool of Pledged Mortgage Loans
immediately prior to such removal. In addition, no Pledged Mortgage Loans
may be removed from this facility with the result that a Collateral
Deficiency Situation would then exist. Notwithstanding the foregoing,
however, a Pledged Mortgage Loan, may in any event be removed from this
facility if such Pledged Mortgage Loan has been paid in full by the
mortgagor. If the Borrower intends to prepay the Loan in whole or in
substantial part from a source other than the proceeds of the Securitization,
the Borrower shall give two business days' written notice to the Lender.
E.1. If the Loan is not extended by means of a Credit Increase
Confirmation and Note Amendment, the Loan shall immediately and automatically
become due and payable without any further action by the Lender on the then
scheduled Maturity Date, and in the event of non-payment in full on such
Maturity Date the Lender may exercise all rights and remedies available to it
as the holder of a first perfected security interest under the Uniform
Commercial Code of the State of New York (the "NEW YORK UCC").
2. If the Borrower awards a Securitization or whole-loan trade
involving any Pledged Mortgage Loans to a group of managers (or to an
investment banking house, agent, broker, or underwriter) which in PSI's
reasonable determination does not give PSI a fair allotment of the securities
issued in such Securitization, then the interest rate on the Loan shall
increase to LIBOR plus 2.40%, which higher rate shall retroactively be
applied as of the related Funding Date for all prior Advances or Pledged
Mortgage Loans so involved.
F. The Loan shall be evidenced by the secured promissory note of the
Borrower in the form attached hereto as Exhibit A (the "Secured Note").
G. In the event that the Loan is extended beyond its then
scheduled Maturity Date by means of a Credit Increase Confirmation and Note
Amendment, the factors set forth in the definitions of "Collateral Deficiency
Situation" and "Restoration Amount" may be revised downward by the Lender in
its sole discretion.
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SECTION 2. ADDITIONAL CONDITIONS PRECEDENT TO ADVANCE; REQUIRED
CHARACTERISTICS OF MORTGAGE LOANS, CORRESPONDENTS AND SERVICERS.
A. Not later than two business days prior to the proposed Funding
Date for an Advance the Borrower shall deliver to the Lender (i) a written
notice in the form of Exhibit D hereto and (ii) an electronic disk or tape,
in a mutually satisfactory form to be agreed upon detailing certain specified
characteristics of the Mortgage Loans proposed to be pledged in connection
with such Advance (each such schedule, a "MORTGAGE LOAN SCHEDULE"). The
"Mortgage Loan Schedule" as defined in the Borrower's "Continuing Loan
Purchase Agreement" with Long Beach Mortgage Company is considered to be in
satisfactory form.
B. It is the Lender's understanding that the Borrower's current
business strategy (the "PROGRAM") is to operate as a "conduit" for the
securitization of non-conforming credit mortgage loans (also referred to as
"B/C" mortgages) which the Borrower will purchase from others and with
respect to which the Borrower will retain one or more third-party contract
servicers.
In connection with the Program, the Borrower agrees as follows:
(i) the Borrower shall supply to the Lender and/or
its counsel copies of all purchase agreements ("PURCHASE
AGREEMENTS") and third-party servicing agreements
("SERVICING AGREEMENTS") (or, if such agreements have not
been finalized, the latest drafts of such agreements),
together with copies of all underwriting guidelines
applicable to any Mortgage Loans proposed to be financed
hereunder, not later than the second business day prior
to the proposed Funding Date (it being understood that if
the same agreements and guidelines apply to multiple
Funding Dates they only need to be furnished once);
(ii) the Lender may in its reasonable discretion
reject for financing hereunder any Mortgage Loans based
upon the identity of the entity selling such Mortgage
Loans to the Borrower (each such entity, a
"CORRESPONDENT"), or, if the originator of such Mortgage
Loans is not the Correspondent, upon the identity of such
originator, PROVIDED, that, in furtherance of the
foregoing the Borrower and the Lender agree to
communicate with reasonable frequency concerning the
Borrower's pipeline and upcoming trades, and PROVIDED
FURTHER that Long Beach Mortgage Company and Option One
Mortgage Corporation are approved originators as of the
date of this Agreement;
(iii) the Lender may in its sole discretion reject
for financing hereunder any Mortgage Loans based upon the
identity of the entity proposed to service such Mortgage
Loans; PROVIDED that the Lender may, as an alternative to
rejecting any such Mortgage Loans, require that the
Borrower name Advanta Mortgage Corp. USA ("ADVANTA
MORTGAGE") as the servicer and effect a servicing
transfer to Advanta Mortgage on the earliest date
practicable;
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(iv) each Servicing Agreement shall provide that
upon an Event of Default under this Agreement the
servicer may be terminated thereunder, with or without
cause, on not more than 30 days' prior notice, and
without the payment of any termination fee by the Lender;
the servicing fee under any Servicing Agreement will not
exceed 60 basis points; the Borrower shall terminate a
servicer at the request of the Lender if such servicer is
in default under the related Servicing Agreement; the
Borrower shall not transfer servicing with respect to any
Pledged Mortgage Loan without the Lender's prior consent;
each Servicing Agreement shall allow the Lender to direct
the servicer to remit collections directly to the Lender
if an Event of Default occurs hereunder; it is understood
and agreed that the foregoing provisions may be contained
in a side agreement or letter executed by the related
servicer and need not be set forth in the main text of a
Servicing Agreement;
(v) the Borrower hereby assigns to the Lender, as
collateral security for the Loan, all of the Borrower's
right, title and interest in and to each Servicing
Agreement each Purchase Agreement and the Amended and
Restated Master Custodial Agreement (collectively, the
"PROGRAM AGREEMENTS");
(vi) notwithstanding the collateral assignment
granted in clause (v) above, the Borrower agrees and
covenants with the Lender (x) to enforce diligently the
Borrower's rights and remedies set forth in the Program
Agreements and (y) to provide the Lender with prompt
written notice of any default or event which, with the
passage of time, will become a default, by any party to
any Program Agreement and of which the Borrower is aware.
C. The Borrower shall reimburse the Lender for any of the Lender's
reasonable out-of-pocket costs, including due diligence review costs and
reasonable attorney's fees, incurred by the Lender in determining the
acceptability to the Lender of (x) any Mortgage Loans, (y) any Program
Agreement or (z) the identity of any Correspondent, originator or servicer,
PROVIDED that (1) the attorney's fees payable in connection with the Lender's
counsel's review of the Program Agreements to be in place for the initial
Funding Date, together with all of the Lender's counsel's fees in connection
with the preparation of this Agreement shall not exceed $12,000 and (2) no
such costs shall be incurred with respect to Advanta Mortgage or Long Beach
Mortgage Company, each of which shall be considered an acceptable servicer.
The Borrower shall also pay, or reimburse the Lender if the Lender shall pay,
any termination fee which may be due to any servicer.
SECTION 3. MORTGAGE FILES AND CUSTODIAN. The Borrower shall deliver
to Bankers Trust Company of California, N.A. as custodian (the "CUSTODIAN")
on behalf of the Lender, the documents and instruments listed in Section 2 of
that certain Amended and Restated Master Custodial Agreement dated as of
November 1, 1995 (the "AMENDED AND RESTATED MASTER CUSTODIAL AGREEMENT")
among the Borrower, and the Custodian. Such documents and instruments
evidencing and relating to the Mortgage Loans, together with any proceeds
thereof, and together with the Borrower's
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right, title and interest in and to the Program Agreements are hereinafter
referred to as the "COLLATERAL". The Borrower hereby pledges all of its
right, title and interest in and to the Collateral to the Lender to secure
the repayment of principal of and interest on the Loan and all other amounts
owing by the Borrower to the Lender hereunder or under any other agreement or
arrangement (collectively, the "SECURED OBLIGATIONS").
SECTION 4. REPRESENTATIONS, WARRANTIES AND COVENANTS. A. The
Borrower represents and warrants to the Lender that:
1. It has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
2. It is duly licensed as a "Licensee" or is
otherwise qualified in each state in which it transacts
business and is not in default of such state's applicable
laws, rules and regulations. It has the requisite power
and authority and legal right to own and grant a lien on
all of its right, title and interest in and to the
Collateral, and to execute and deliver, engage in the
transactions contemplated by, and perform and observe the
terms and conditions of, this Agreement, each Program
Agreement, and the Secured Note.
3. At all times after the Custodian has received a
Mortgage Loan from the Borrower and until payment in full
of the Loan, the Borrower will not knowingly and
intentionally commit any act in violation of applicable
laws, or regulations promulgated with respect thereto.
4. The Borrower is solvent and is not in default
under any mortgage, borrowing agreement or other
instrument or agreement pertaining to indebtedness for
borrowed money, and the execution, delivery and
performance by the Borrower of this Agreement, the
Secured Note and the Program Agreements do not conflict
with any term or provision of the certificate of
incorporation or by-laws of the Borrower or any law,
rule, regulation, order, judgment, writ, injunction or
decree applicable to the Borrower of any court,
regulatory body, administrative agency or governmental
body having jurisdiction over the Borrower and will not
result in any violation of any such mortgage, instrument
or agreement.
5. All financial statements or certificates of the
Borrower, any Affiliate of the Borrower or any of its
officers furnished to the Lender are true and complete
and do not omit to disclose any material liabilities or
other facts relevant to the Borrower's or such
Affiliate's condition. As used in this Agreement,
"AFFILIATE" means AMRESCO and any entity controlled
(within the definition of "control" set forth in the
Securities and Exchange Act of 1934, as amended) by
AMRESCO. All such financial statements have been prepared
in accordance with GAAP. No financial statement or other
financial information as of a date later than that
supplied to the Lender, has been furnished by the
Borrower or AMRESCO to another lender of the Borrower or
AMRESCO that has not been furnished to the Lender.
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6. No consent, approval, authorization or order
of, registration or filing with, or notice to any
governmental authority or court is required under
applicable law in connection with the execution, delivery
and performance by the Borrower of this Agreement, the
Secured Note and the Program Agreements.
7. There is no action, proceeding or investigation
pending with respect to which the Borrower has received
service of process or, to the best of the Borrower's
knowledge threatened against it before any court,
administrative agency or other tribunal (A) asserting the
invalidity of this Agreement, the Secured Note or any
Program Agreement, (B) seeking to prevent the
consummation of any of the transactions contemplated by
this Agreement, the Secured Note or any Program
Agreement, or (C) which might materially and adversely
affect the validity of the Mortgage Loans or the
performance by it of its obligations under, or the
validity or enforceability of, this Agreement, the
Secured Note or any Program Agreement.
8. There has been no material adverse change in
the business, operations, financial condition, properties
or prospects of the Borrower or Material Affiliate which
has recourse debt outstanding to an entity other than
another Affiliate in an amount in excess of $1,000,000
(any such Affiliate, a "MATERIAL AFFILIATE") since the
date set forth in the financial statements supplied to
the Lender.
9. This Agreement, the Secured Note and the
Program Agreements have been (or, in the case of Program
Agreements not yet executed, will be) duly authorized,
executed and delivered by the Borrower, all requisite
corporate action having been taken, and each is valid,
binding and enforceable against the Borrower in
accordance with its terms except as such enforcement may
be affected by bankruptcy, by other insolvency laws, or
by general principles of equity.
B. With respect to every Mortgage Loan pledged to the Lender, the
Borrower represents and warrants to the Lender that:
1. Such Mortgage Loan and all accompanying collateral
documents are complete and authentic and all signatures
thereon are genuine.
2. Such Mortgage Loan arose from a bona fide loan,
complying with all applicable State and Federal laws and
regulations, to persons having legal capacity to contract
and is not subject to any defense, set-off or counterclaim.
3. No default has occurred in any provisions of such
Mortgage Loan.
4. To the best of the Borrower's knowledge, any property
subject to any security interest given in connection with such
Mortgage Loan is not subject to any other encumbrances other
than "permitted encumbrances" which may be allowed under the
related Purchase Agreement.
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5. The Borrower pledging such Mortgage Loan hereunder holds
good and indefeasible title to, and is the sole owner of, such
Mortgage Loan subject to no liens, charges, mortgages,
participations, encumbrances or rights of others or other liens
released simultaneously with such pledge.
6. Each Mortgage Loan conforms to the description thereof as
set forth on the related Mortgage Loan Schedule delivered to the
Custodian and the Lender.
7. All disclosures required by the Real Estate Settlement
Procedures Act, by Regulation X promulgated thereunder and by
Regulation Z of the Board of Governors of the Federal Reserve
System promulgated pursuant to the statute commonly known as the
Truth-in-Lending Act and the Notice of the Right of Rescission
required by said statute and regulation have been properly
made and given.
8. Such Mortgage Loan is not 31 or more days delinquent as of
the last payment due date for such Mortgage Loan.
9. Each representation and warranty made by the related
Correspondent in the related Purchase Agreement was true and correct
as of its date.
C. The Borrower covenants with the Lender that, during the term of this
facility:
1. The Borrower's stated net worth less intangible
assets (which include such assets as copyrights, patents,
trademarks, goodwill, computer programs, capitalized
advertising costs, organization costs, licenses, leases,
franchises, exploration permits, and import and export
permits, etc.) shall not be less than $24,000,000.
2. The Borrower's stated net worth less intangible
assets minus the amount of any receivable from AMRESCO,
INC. ("AMRESCO") or Affiliates shall not be less than
$10,000,000.
3. The Borrower's leverage ratio shall not exceed
10:1, such ratio being the ratio of (x) the Borrower's
total liabilities to (y) the Borrower's stated net worth
less intangible assets minus the amount of any receivable
from AMRESCO or Affiliates.
4. That AMRESCO will continue to maintain, for it
and its subsidiaries, insurance coverage with respect to
employee dishonesty, forgery or alteration, theft,
disappearance and destruction, robbery and safe burglary,
property (other than money and securities) and computer
fraud or an aggregate amount of at least $1,000,000,
which insurance shall name the Lender as a loss payee.
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SECTION 5. MANDATORY PREPAYMENT OF LOAN.
A. Upon discovery by the Borrower or the Lender of any breach of
any of the representations and warranties listed in Section 4(B) preceding,
the party discovering such breach shall promptly give notice of such
discovery to the others.
The Lender has the right to require, in its unreviewable discretion,
the Borrower to repay the Loan in part with respect to any Mortgage Loan
which breaches one or more of the representations and warranties listed in
Section 4(B) preceding or (ii) which is determined by the Lender to be
unacceptable for inclusion in such Securitization.
B. If any Mortgage Loan, as indicated on any Supplemental Mortgage
Loan Schedule delivered pursuant to Section 9(b) hereof, becomes 31 or more
days delinquent, the Lender may require the Borrower to prepay the Loan in
part with respect to such Mortgage Loan, or, with the Lender's consent,
deliver a qualifying substitute mortgage loan in its place.
C. If the Borrower awards the Securitization or any whole-loan
trade involving any Pledged Mortgage Loans to an investment banking house,
agent or underwriter other than PSI, or to a group of managers which in PSI's
reasonable determination does not give PSI a fair allotment of the securities
issued in such Securitization then (x) the Lender may demand that the
Borrower prepay any portion of the Loan evidenced hereby relating to the
dollar amount of the Mortgage Loans to be included in such Securitization or
whole loan trade, in which PSI has not been selected for participation, for
payment within five business days of the demand for prepayment, (y) the
Lender may refuse to make further Advances hereunder if such Advances would
relate to Mortgage Loans to be included in such Securitization or whole-loan
trade in which PSI has not been selected for participation and (z) the
interest rate on the Loan shall increase as set forth in Section 1(E)(2)
hereof. The Borrower shall give immediate notice, by facsimile transmission,
to the attention of Elizabeth Castagna at the Lender, Valerie Kay at PSI (fax
212-778-7401) and to Jim Fadel at PSI (fax 212-778-7401) of any decision to
award the lead manager role or to name any group of managers for any
Securitization or whole-loan trade involving any Pledged Mortgage Loans.
D. If, on any date other than a Funding Date, the Lender
determines that a Collateral Deficiency Situation exists, the Lender shall so
notify the Borrower, and the Borrower, within one business day, shall either
(i) pay to the Lender the Restoration Amount or (ii) deliver to the Custodian
on behalf of the Lender additional Mortgage Loans having an aggregate Market
Value at least equal to the Restoration Amount. The provisions of Section
1(B) shall govern with regard to a Collateral Deficiency Situation as of a
Funding Date.
SECTION 6. RELEASE OF MORTGAGE FILES FOLLOWING PAYMENT OF LOAN. The
Lender agrees to cause to be released from the lien hereof the documents
described in Section 2 of the Amended and Restated Master Custodial Agreement
at the request of the Borrower upon payment in full of the Loan, or, if a
partial payment of the Loan occurs, the documents relating to a PRO RATA
portion of the Pledged Mortgage Loans,
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PROVIDED, THAT, with respect to payments in full of a Pledged Mortgage Loan,
the Borrower agrees to (i) provide the Lender with a copy of a report from
the related Servicer indicating that such loan has been paid in full and (ii)
pay to the Lender in full the outstanding Advance with respect to such
Pledged Mortgage Loan. The Lender agrees to release such lien within one
Business Day after receipt of both (i) and (ii) from the immediately
preceding sentence.
SECTION 7. THE AMRESCO NOTE. The Borrower on the date hereof holds a
demand note from AMRESCO (the "AMRESCO NOTE") under which AMRESCO may borrow
and has already borrowed up to $25,000,000 at any time. The Borrower
represents that it has already made a demand for repayment by AMRESCO of
$10,000,000 under the AMRESCO Note, and has invested the proceeds of such
repayment in mortgage loans or in residual or interest only certificates in
similar securitizations (which may be the portion of Pledged Loans not
financed by this facility or other loans of similar quality to those then
held under this facility), or investment-grade fixed-income investments. The
Borrower covenants with the Lender (x) to make no further demands for
repayment of the AMRESCO Note without first informing the Lender and (y) to
make a demand for repayment under the AMRESCO Note if the Borrower's receipt
of the proceeds of such drawing are needed by the Borrower to pay any amounts
due to the Lender hereunder.
SECTION 8. NO ORAL MODIFICATIONS; SUCCESSORS AND ASSIGNS; ASSIGNMENT
OF COLLATERAL. No provisions of this Agreement shall be waived or modified
except by a writing duly signed by the authorized agents of the Lender and
the Borrower. This Agreement shall be binding upon the successors and
assigns of the parties hereto. The Borrower acknowledges and agrees that the
Lender may re-pledge, enter into repurchase transactions, and otherwise
re-hypothecate (including the granting of participation interests therein)
the Collateral for the Loan and/or the Secured Note, PROVIDED that no such
act shall in any way (x) affect the Borrower's rights to the Collateral, (y)
change the location of the Mortgage Loan documents, which shall remain with
the Custodian or (z) grant to any other person any direct rights against the
underlying mortgagors.
SECTION 9. REPORTS. A. The Borrower shall provide the Lender with an
electronic disk or tape (each, a "SUPPLEMENTAL MORTGAGE LOAN SCHEDULE")
within two business days following any request made by the Lender or any
affiliate thereof for such a report, but in any event at least once a month
within two business days of the Borrower's receipt of the related servicer's
monthly report, setting forth on a loan-by-loan basis, the current principal
balance outstanding of each Loan as of the end of the prior calendar month.
Such Supplemental Mortgage Loan Schedule will also contain information
concerning all Mortgage Loans then held in the warehouse facility, and shall
be in the format as may be agreed upon by the Borrower and the Lender from
time to time.
B. The Borrower shall furnish to Lender (x) promptly, copies of
any material and adverse notices (including, without limitation, notices of
defaults, breaches, potential defaults or potential breaches) given to or
received from its other lenders, (y) immediately, notice of the occurrence of
any "Event of Default" hereunder
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or of any situation which the Borrower, with the passage of time, reasonably
expects to develop into an "Event of Default" hereunder and (z) the following:
(i) consolidated audited financial statements of AMRESCO
INC. ("AMRESCO"), within 120 days of AMRESCO's fiscal year end;
(ii) Consolidated unaudited financial statements of AMRESCO
for each of AMRESCO's first three quarters of each fiscal year,
within 45 days after quarter end;
(iii) unaudited financial statements of the Borrower within 45
days after quarter end;
(iv) quarterly and annual consolidated financial statements of
AMRESCO reflecting material intercompany adjustments within 5
business days of their release; and
(v) copies of all SEC filings by the Borrower and its Affiliates,
within five business days of their filing with the SEC, PROVIDED,
THAT, AMRESCO will provide PSI with a copy of AMRESCO's annual 10-K
filed with the SEC no later than 90 days after the end of the year.
All required financial statements, information and reports shall be
prepared in accordance with U.S. GAAP, or, if applicable to SEC filings, SEC
accounting regulations.
SECTION 10. EVENTS OF DEFAULT. Each of the following shall
constitute an "Event of Default" hereunder:
A. Failure of the Borrower to (i) make any payment of interest or
principal or any other sum which has become due, whether by acceleration or
otherwise, under the terms of the Secured Note, this Agreement, any other
warehouse and security agreement or any other document evidencing or securing
indebtedness of the Borrower to the Lender or to any affiliate of the Lender,
or (ii) pay or deliver any Restoration Amount.
B. Any "event of default" by the Borrower under any agreement
(after the expiration of any applicable grace period under any such
agreement) relating to any indebtedness of the Borrower in excess of
$1,000,000 to any other lender, or the default by any Material Affiliate
under any agreement relating to any recourse indebtedness of any Material
Affiliate in an amount in excess of $1,000,000.
C. Assignment or attempted assignment by the Borrower of this
Agreement or any rights hereunder, without first obtaining the specific
written consent of Lender, or the granting by the Borrower of any security
interest, lien or other encumbrance on any Collateral to other than the
Lender.
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D. The filing by the Borrower or any Material Affiliate of a
petition for liquidation, reorganization, arrangement or adjudication as a
bankrupt or similar relief under the bankruptcy, insolvency or similar laws
of the United States or any state or territory thereof or of any foreign
jurisdiction; the failure of the Borrower or any Material Affiliate to secure
dismissal of any such petition filed against it within thirty (30) days of
such filing; the making of any general assignment by the Borrower or any
Material Affiliate for the benefit of creditors; the appointment of a
receiver or trustee for the Borrower or any Material Affiliate, or for any
part of the Borrower's or any Material Affiliate's assets; the institution by
the Borrower or any Material Affiliate of any other type of insolvency
proceeding (under the Bankruptcy Code or otherwise) or of any formal or
informal proceeding, for the dissolution or liquidation of, settlement of
claims against, or winding up of the affairs of, the Borrower or any Material
Affiliate; the institution of any such proceeding against the Borrower or any
Material Affiliate if the Borrower or any Material Affiliate shall fail to
secure dismissal thereof within thirty (30) days thereafter; the consent by
the Borrower or any Material Affiliate to any type of insolvency proceeding
against the Borrower or any Material Affiliate (under the Bankruptcy Code or
otherwise); the occurrence of any event or existence of any condition which
could be the ground, basis or cause for any proceeding or petition described
in this Section 10.
E. Any materially adverse change in the financial condition of the
Borrower or of AMRESCO or the existence of any other condition which, in the
Lender's sole determination, constitutes an impairment of the Borrower's
ability to perform its obligations under this Agreement or the Borrower's
obligations under the Secured Note, or in the case of AMRESCO, which
constitutes an impairment of AMRESCO's ability to perform its obligations
under the AMRESCO Note, and which condition is not remedied within ten (10)
days after written notice to the Borrower or AMRESCO thereof or, if the
conditions cannot be fully remedied within said ten days, substantial
progress has not been made within said ten days toward remedy of the
condition.
F. Any servicer terminates its Servicing Agreement with the
Borrower provided that no replacement servicer reasonably acceptable to the
Lender is found within 15 days of notice of such termination.
G. A breach by the Borrower of any representation, warranty or
covenant set forth in Section 4, Section 7 or Section 9 hereof or a use by
the Borrower of the proceeds of the Loan for a purpose other than as set
forth in Section 1(A) hereof.
SECTION 11. REMEDIES UPON DEFAULT. A. Upon the happening of one or
more Events of Default, the Lender may (x) refuse to make further Advances
hereunder and (y) immediately declare the principal of the Secured Note then
outstanding to be immediately due and payable, together with all interest
thereon and fees and expenses accruing under this Agreement; PROVIDED that,
upon the occurrence of the Event of Default referred to in Section 9(D), such
amounts shall immediately and automatically become due and payable without
any further action by any person or entity. Upon such declaration or such
automatic acceleration, the balance then outstanding on the
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Secured Note shall become immediately due and payable without presentation,
demand or further notice of any kind to the Borrower.
B. Upon the happening of one or more Events of Default, the Lender
shall have the right to obtain physical possession, and to commence an action
to obtain physical possession, of all files of the Borrower relating to the
Collateral and all documents relating to the Collateral which are then or may
thereafter come in to the possession of the Borrower or any third party
acting for the Borrower. The Lender shall be entitled to specific
performance of all agreements of the Borrower contained in this Agreement.
The Borrower and the Lender hereby acknowledge that the Lender's right to
obtain physical possession of the Collateral is deemed for all purposes to be
equivalent to the rights of "seizure of property or maintenance or
continuation of perfection of an interest in property" as specified under
Bankruptcy Code Sections 362(b) and 546(b)(2).
C. Upon the happening of one or more Events of Default, the Lender
shall have the right to direct all servicers then servicing any Pledged
Mortgage Loans to remit all collections on the Pledged Mortgage Loans to the
Lender, and if any such payments are received by the Borrower, the Borrower
shall not commingle the amounts received with other funds of the Borrower and
shall promptly pay them over to the Lender. In addition, the Lender shall
have the right to dispose of the Collateral as provided herein, or as
provided in the other documents executed in connection herewith, or in any
commercially reasonable manner, or as provided by law. Such disposition may
be on either a servicing-released or a servicing-retained basis. The Lender
shall be entitled to place the Mortgage Loans which it recovers after any
default in a pool for issuance of mortgage-backed securities at the
then-prevailing price for such securities and to sell such securities for
such prevailing price in the open market as a commercially reasonable
disposition of Collateral, subject to the applicable requirements of the New
York UCC. The Lender shall also be entitled to sell any or all of such
Mortgage Loans individually for the prevailing price as a commercially
reasonable disposition of Collateral subject to the applicable requirements
of the New York UCC. The specification in this Section of manners of
disposition of collateral as being commercially reasonable shall not preclude
the use of other commercially reasonable methods (as contemplated by the New
York UCC) at the option of the Lender.
D. Following the occurrence and during the continuance of an Event
of Default, interest shall accrue on the Loan at a default interest rate of
federal funds plus 5.00%.
SECTION 12. INDEMNIFICATION. The Borrower agrees to hold the Lender
harmless from and indemnifies the Lender against all liabilities, losses,
damages, judgments, costs and expenses of any kind which may be imposed on,
incurred by, or asserted against the Lender relating to or arising out of
this Agreement, the Secured Note, any Program Agreement or any transaction
contemplated hereby or thereby resulting from anything other than the
Lender's negligence or willful misconduct. The Borrower also agrees to
reimburse the Lender for all reasonable expenses in connection with the
enforcement of this Agreement, the Secured Note and any Program Agreement,
including without limitation the reasonable fees and disbursements of
14
<PAGE>
counsel. The Borrower's agreements in this Section shall survive the payment
in full of the Secured Note and the expiration or termination of this
Agreement. The Borrower hereby acknowledges that, notwithstanding the fact
that the Secured Note is secured by the Collateral, the obligations of the
Borrower under the Secured Note are recourse obligations of the Borrower.
SECTION 13. POWER OF ATTORNEY. The Borrower hereby authorizes the
Lender, at the Borrower's expense, to file such financing statement or
statements relating to the Collateral without the Borrower's signature
thereon as the Lender at its option may deem appropriate, and appoints the
Lender as the Borrower's attorney-in-fact to execute any such financing
statement or statements in the Borrower's name and to perform all other acts
which the Lender deems appropriate to perfect and continue the security
interest granted hereby and to protect, preserve and realize upon the
Collateral, including, but not limited to, the right to endorse notes,
complete blanks in documents, transfer servicing, and sign assignments on
behalf of the Borrower as its attorney-in-fact. This Power of Attorney is
coupled with an interest and is irrevocable without the Lender's consent.
Notwithstanding the foregoing, the power of attorney hereby granted may be
exercised only during the occurrence and continuance of any Event of Default
hereunder.
SECTION 14. AGREEMENT CONSTITUTES SECURITY AGREEMENT. This Agreement
is intended by the parties hereto to be governed by New York Law, and to
constitute a security agreement within the meaning of the New York UCC.
SECTION 15. LENDER MAY ACT THROUGH AFFILIATES. The Lender may, from
time to time, designate one or more affiliates for the purpose of performing
any action hereunder.
SECTION 16. NOTICES. All demands, notices and communications
relating to this Agreement shall be in writing and shall be deemed to have
been duly given if mailed, by registered or certified mail, return receipt
requested, or by overnight courier, or, if by other means, when received by
the other party or parties at the address shown below, or such other address
as may hereafter be furnished to the other party or parties by like notice.
Any such demand, notice or communication hereunder shall be deemed to have
been received on the date delivered to or received at the premises of the
addressee (as evidenced, in the case of registered or certified mail, by the
date noted on the return receipt).
15
<PAGE>
If to the Borrower:
c/o AMRESCO Residential Credit Corporation
3401 CentreLake Drive
Suite 480
Ontario, California 91761
Attention: President
Phone Number: (909) 605-7600
Fax Number: (909) 605-7619
with a copy to:
AMRESCO, INC.
1845 Woodall Rodgers Freeway
Suite 1700
Dallas, Texas 75201
Attention: General Counsel
Phone Number: (214) 953-7700
Fax Number: (214) 953-7757
If to the Lender:
Prudential Securities Realty Funding
Corporation
One Seaport Plaza, 27th Floor
Treasury Department
New York, New York 10292
Attention: Ms. Elizabeth Castagna
Phone Number: 212-214-7772
Fax Number: 212-214-7572
With copies to:
Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Attention: Valerie Kay
Phone Number: 212-778-4127
Fax Number: 212-778-7401
Chris DiAngelo
Dewey Ballantine
1301 Avenue of the Americas
New York, NY 10019
Phone Number: 212-259-6718
Fax Number: 212-259-6333
SECTION 17. SEVERABILITY. Any provision of this Agreement which is
prohibited, unenforceable or not authorized in any jurisdiction shall, as to
such
16
<PAGE>
jurisdiction, be ineffective to the extent of such prohibition,
unenforceability or non-authorization, without invalidating the remaining
provisions hereof or affecting the validity, enforceability or legality of
such provision in any other jurisdiction.
SECTION 18. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, and all
such counterparts shall together constitute one and the same instrument.
SECTION 19. CERTAIN DEFINITIONS. The following capitalized terms are
defined in the corresponding sections specified below:
"ADVANCE" - Section 1(A)(1).
"ADVANTA MORTGAGE" - Section 2(B)(iii).
"AFFILIATE" - Section 4(5).
"AGREEMENT" - Introductory Clause.
"AMRESCO" - Section 9(B)(i).
"AMRESCO NOTE" - Section 7.
"BORROWER" - Introductory Clause.
"COLLATERAL" - Section 3.
"COLLATERAL DEFICIENCY SITUATION" - Section 1(B)(2).
"CONTINUING LOAN PURCHASE AGREEMENT" - Section 2(A).
"CORRESPONDENT" - Section 2(B)(ii).
"CUSTODIAN" - Section 3.
"AMENDED AND RESTATED MASTER CUSTODIAL AGREEMENT" - Section 3.
"CUSTODIAN'S CERTIFICATION" - Section 1(A)(2)(iii).
"CUT-OFF DATE" - Section 1(B)(2).
"DEFAULT" - Section 14.
"EVENT OF DEFAULT" - Section 9(B).
"FUNDING DATE" - Section 1(A)(2).
"LENDER" - Introductory Clause.
17
<PAGE>
"LIBOR" - Section 1(A)(3).
"LOAN" - Section 1(A)(1).
"MARKET VALUE" - Section 1(B)(2).
"MATURITY DATE" - Section 1(B)(2).
"MATERIAL AFFILIATE" - Section 4(8).
"MORTGAGE LOANS" - Section 1(A)(1).
"MORTGAGE LOAN SCHEDULE" - Section 2(A).
"NET EQUITY AMOUNT" - Section 4(C)(2).
"NY UCC" - Section 1(E)(1).
"PLEDGED MORTGAGE LOANS" - Section (1)(B)(2).
"PROGRAM" - Section 2(B).
"PROGRAM AGREEMENTS" - Section 2(B)(iv).
"PSI" - Recitals.
"PURCHASE AGREEMENTS" - Section 2(B)(i).
"RESTORATION AMOUNT" - Section 1(B)(2).
"SECURED NOTE" - Section 1(F).
"SECURED OBLIGATIONS" - Section 3.
"Securitization" - Recitals.
"SERVICING AGREEMENTS" - Section 2(B)(i).
"SUPPLEMENTAL MORTGAGE LOAN SCHEDULE" - Section 9.
18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement the
day and year first above written.
AMRESCO RESIDENTIAL MORTGAGE
CORPORATION
By: /s/ Michael W. Trickey
----------------------------------
Name: Michael W. Trickey
Title: Vice President
PRUDENTIAL SECURITIES REALTY
FUNDING CORPORATION
By: /s/ Elizabeth W. Castagna
----------------------------------
Name: Elizabeth W. Castagna
Title: Vice President & Treasurer
19
<PAGE>
EXHIBIT A
SECURED NOTE
Dated as of February 23, 1996
FOR VALUE RECEIVED, the undersigned, AMRESCO RESIDENTIAL MORTGAGE
CORPORATION, a Delaware corporation organized under the laws of the State of
Delaware, whose address is 1845 Woodall Rodgers Freeway, Suite 1700, Dallas,
Texas 75201 (the "Borrower"), promises to pay to the order of PRUDENTIAL
SECURITIES REALTY FUNDING CORPORATION, a Delaware corporation, whose address
is One New York Plaza, New York, New York 10292 (the "Lender") on or before
the Maturity Date the amount then outstanding (including accrued interest)
under that certain Interim Warehouse and Security Agreement dated as of
February 23, 1996 (the "Agreement"). Initially, the maximum principal amount
which may be outstanding is $200,000,000. Capitalized terms used herein and
not defined herein shall have their respective meanings as set forth in the
Agreement.
The holder of this Note is authorized to record the date and amount
of each Advance and the date and amount of each repayment of principal
thereof on the schedule to be maintained by the Lender (which schedule may be
obtained upon borrower's request), and any such recordation shall constitute
prima facie evidence of the accuracy of the amount so recorded; provided that
the failure of the holder hereof to make such recordation (or any error in
such recordation) shall not affect the obligations of the Borrower hereunder
or under the Agreement.
MAXIMUM RATE OF INTEREST: It is intended that the rate of interest
herein shall never exceed the maximum rate, if any, which may be legally
charged on the Loan evidenced by this Note ("Maximum Rate"), and if the
provisions for interest contained in this Note would result in a rate higher
than the Maximum Rate, interest shall nevertheless be limited to the Maximum
Rate and any amounts which may be paid toward interest in excess of the
Maximum Rate shall be applied to the reduction of principal, or, at the
option of the Lender, returned to the Borrower.
DUE DATE: The Loan evidenced hereby not paid before the Maturity
Date shall be due and payable on the Maturity Date.
PLACE OF PAYMENT: All payments hereon shall be made, and all
notices to the Lender required or authorized hereby shall be given, at the
office of the Lender at the address designated in the heading of this Note,
or to such other place as the Lender may from time to time direct by written
notice to the Borrower.
PAYMENT AND EXPENSES OF COLLECTION: All amounts payable hereunder
are payable by wire transfer in immediately available funds to the account
number specified by the Lender, in lawful money of the United States.
Payments remitted by the Borrower via wire transfer initiated after 1:00 p.m.
New York City time shall be deemed to be received on the next business day.
The Borrower agrees to pay
<PAGE>
all costs of collection when incurred, including, without limiting the
generality of the foregoing, reasonable attorneys' fees through appellate
proceedings, and to perform and comply with each of the covenants,
conditions, provisions and agreements contained in every instrument now
evidencing or securing said indebtedness.
SECURITY: This Note is issued pursuant to the Agreement and is
secured by a pledge of the collateral described therein. Notwithstanding the
pledge of the collateral, the Borrower hereby acknowledges, admits and agrees
that the Borrower's obligations under this Note are recourse obligations of
the Borrower to which the Borrower pledges its full faith and credit.
DEFAULTS: Upon the happening of an Event of Default (as defined in
the Agreement), the Lender shall have all rights and remedies set forth in
the Agreement.
The failure to exercise any of the rights and remedies set forth in
the Agreement shall not constitute a waiver of the right to exercise the same
or any other option at any subsequent time in respect of the same event or
any other event. The acceptance by the Lender of any payment hereunder which
is less than payment in full of all amounts due and payable at the time of
such payment shall not constitute a waiver of the right to exercise any of
the foregoing rights and remedies at that time or at any subsequent time or
nullify any prior exercise of any such rights and remedies without the
express consent of Lender, except as and to the extent otherwise provided by
law.
WAIVERS: The Borrower waives diligence, presentment, protest and
demand and also notice of protest, demand, dishonor and nonpayments of this
Note, and expressly agree that this Note, or any payment hereunder, may be
extended from time to time, and consent to the acceptance of further
collateral, the release of any collateral for this Note, the release of any
party primarily or secondarily liable hereon, and that it will not be
necessary for the Lender, in order to enforce payment of this Note, to first
institute or exhaust Lender's remedies against the Borrower or any other
party liable hereon or against any collateral for this Note. None of the
foregoing shall affect the liability of the Borrower. No extension of time
for the payment of this Note, or an installment hereof, made by agreement by
the Lender with any person now or hereafter liable for the payment of this
Note, shall affect the liability under this Note of the Borrower, even if the
Borrower is not a party to such agreement; provided, however, the Lender and
the Borrower, by written agreement between them, may affect the liability of
the Borrower.
TERMINOLOGY: If more than one party joins in the execution of this
Note, the covenants and agreements herein contained shall be the joint and
several obligation of each and all of them and of their respective heirs,
executors, administrators, successors and assigns, and relative words herein
shall be read as if written in the plural when appropriate. Any reference
herein to the Lender shall be deemed to include and apply to every subsequent
holder of this Note. Words of masculine or neuter import shall be read as if
written in the neuter or masculine or feminine when appropriate.
A-2
<PAGE>
AGREEMENT: Reference is made to the Agreement for provisions as to
Advances, rates of interest, mandatory principal repayments, collateral and
acceleration. If there is any conflict between the terms of this Note and the
terms of the Agreement, the terms of the Agreement shall control.
APPLICABLE LAW: This Note shall be governed by and construed under
the laws of the State of New York, the laws of which the Borrower hereby
expressly elects to apply to this Note. The Borrower agrees that any action
or proceeding brought to enforce or arising out of this Note may be commenced
in the Supreme Court of the State of New York, or in the District Court of
the United States for the Southern District of New York.
AMRESCO RESIDENTIAL MORTGAGE
CORPORATION
By /s/ Thomas J. Andrus
--------------------------
Name: Thomas J. Andrus
Title: Treasurer
A-3
<PAGE>
EXHIBIT B
February 23, 1996
Bankers Trust Company of California, N.A.
3 Park Plaza
16th Floor
Irvine, California 92714
Prudential Securities Realty Funding Corporation
One New York Plaza
New York, NY 10292-2015
Re: Interim Funding Arrangement for
Mortgage Loans
---------------------------
Gentlemen:
I am the counsel to AMRESCO Residential Mortgage Corporation, a
Delaware corporation (the "Borrower"). I have represented the Borrower in
connection with the execution and delivery of the following documents:
(i) Interim Warehouse and Security Agreement, dated as of February 23,
1996 (the "Interim Warehouse and Security Agreement"), between the
Borrower and Prudential Securities Realty Funding Corporation
(the "Lender");
(ii) Secured Note executed as of February 23, 1996 by the Borrower
in favor of the Lender (the "Note");
(iii) Amended and Restated Amended and Restated Custodial Agreement,
dated as of November 1, 1995 (the "Amended and Restated Amended and
Restated Custodial Agreement"), among the Borrower and Bankers Trust
Company of California, N.A. (the "Custodian").
Capitalized terms used herein, but not defined herein, shall have the
meanings assigned to them in the Interim Warehouse and Security Agreement.
I have examined executed copies of the Interim Warehouse and
Security Agreement, the Note, and the Amended and Restated Custodial
Agreement. I have also examined originals or photostatic or certified copies
of all such corporate records
<PAGE>
of the Borrower and such certificates of public officials, certificates of
corporate officers, and other documents, and such questions of law, as I have
deemed appropriate and necessary as a basis for the opinions hereinafter
expressed. In making my examination and rendering the opinions herein
expressed, I have made the following assumptions: i) each party to each of
the Interim Warehouse and Security Agreement and the Amended and Restated
Custodial Agreement (other than the Borrower) has the power to enter into and
perform all of its obligations thereunder, (ii) the due authorization,
execution and delivery of each of the Interim Warehouse and Security
Agreement and the Amended and Restated Custodial Agreement by all parties
thereto (other than the Borrower), and (iii) the validity and binding effect
on all parties thereto (other than the Borrower) of each of the Interim
Warehouse and Security Agreement and the Amended and Restated Custodial
Agreement.
The opinions expressed below with respect to enforceability are
subject to the following additional qualifications:
(a) The effect of insolvency, reorganization, moratorium,
conservatorship, receivership, or other similar laws relating to or affecting
the rights of creditors of institutions having deposits insured by the
Federal Deposit Insurance Corporation in the event of insolvency,
reorganization, moratorium, conservatorship or receivership.
(b) The application of general principles of equity, including, but
not limited to, the right of specific performance (regardless of whether
enforceability is considered in a proceeding in equity or at law).
(c) The unenforceability of provisions to the effect that failure
to exercise or delay in exercising rights or remedies will not operate as a
waiver of any such rights or remedies, or to the effect that provisions
therein may only be waived in writing to the extent that an oral agreement
has been entered into modifying such provisions.
I am licensed to practice law in the State of __________, and, each
opinion hereinafter set forth is an opinion concerning only the law of the
State of ___________. All opinions expressed herein are based on laws,
regulations and policy guidelines currently enforced and may be affected by
future changes in law. Furthermore, no opinion is expressed herein regarding
the applicable state Blue Sky, legal investment or real estate syndication
laws.
Based upon the foregoing, and subject to the last paragraph hereof,
I am of the opinion that:
1. The Interim Warehouse and Security Agreement, the Note and the
Amended and Restated Custodial Agreement each constitutes the valid,
legal and binding agreement of the Borrower, and each is enforceable
against the Borrower in accordance with its terms.
2. No consent, approval, authorization or order of, registration or
filing with, or notice to, any governmental authority or court is
required under
B-2
<PAGE>
federal laws or the laws of the State of Delaware for the execution,
delivery and performance of the Interim Warehouse and Security
Agreement, the Note, or the Amended and Restated Custodial Agreement
as applicable, by the Borrower, except such of which as have been
obtained.
3. The execution, delivery and performance by the Borrower of the
Interim Warehouse and Security Agreement, the Note and the Amended and
Restated Custodial Agreement, does not conflict with or result in a
breach of, or constitute a default under any law, rule or regulation
of the federal government or of the State of Delaware.
4. The execution, delivery and performance of the Interim
Warehouse and Security Agreement, the Note and the Amended and
Restated Custodial Agreement by the Borrower will not result in a
default under any mortgage, borrowing agreement, or other instrument
or agreement pertaining to indebtedness for borrowed money to which
the Borrower is a party.
5. Upon the execution of the Interim Warehouse and Security
Agreement, a valid security interest in the Mortgage Loans and the
proceeds thereof is granted to the Lender, which security interest
would be a valid, first-priority, perfected security interest with
respect to such Mortgage Loans and the proceeds thereof upon the
filing of the appropriate financing statements with the Office[s] of
the Secretary of State of _________________.
This Opinion is furnished by me as counsel to the Borrower and is
solely for the benefit of the addressees hereof; except that this Opinion may
be relied upon by any holder in due course of the Note.
Yours truly,
B-3
<PAGE>
EXHIBIT C
CREDIT INCREASE CONFIRMATION AND
NOTE AMENDMENT
Dated ________________
Reference is made to (x) the Interim Warehouse and Security
Agreement, dated as of February 23, 1996 (the "Interim Warehouse Agreement")
between Prudential Securities Realty Funding Corporation (the "Lender") and
AMRESCO Residential Mortgage Corporation (the "Borrower") and (y) the Secured
Note dated as of February 23, 1996 (the "Note") from the Borrower to the
Lender.
SECTION 1.
The "Maturity Date" referenced in the Interim Warehouse
Agreement and in the Note shall be
___________________________.
[Any other changes.]
SECTION 2.
As amended by Section 1 hereof all provisions of the Interim
Warehouse Agreement and of the Note are reconfirmed as of the date hereof.
The Borrower, in addition, hereby reconfirms and remakes as of the date
hereof each and every of its representations, warranties and covenants set
forth in the Interim Warehouse Agreement.
<PAGE>
AMRESCO RESIDENTIAL MORTGAGE
CORPORATION
By:________________________________
Name:
Title:
PRUDENTIAL SECURITIES REALTY FUNDING
CORPORATION
By:________________________________
Name:
Title:
C-2
<PAGE>
APPROVAL AS TO LEGALITY
I, Karen Cornell, corporate counsel to the Borrower hereby confirm that:
I delivered, on _________, 1996, the opinion letter, a copy of which
is attached hereto (the "Opinion Letter") relating to the Interim
Warehouse Agreement and the Note.
I have represented the Borrower in connection with its execution and
delivery of the Credit Increase and Confirmation Amendment (the
"Confirmation") to which this Approval as to Legality is attached.
I hereby extend, as of the date hereof, the opinions set forth in the
Opinion Letter to cover both the Confirmation itself as well as the
transactions described on the Confirmation and confirm, as of the
date hereof, and subject to any and all assumptions and
qualifications set forth therein, the opinions set forth in the
Opinion Letter.
Yours truly,
________________________________
[Name]
Corporate Counsel
Dated: __________________
C-3
<PAGE>
FUNDING NOTICE
_________, 1996
Prudential Securities Realty
Funding Corporation
One New York Plaza
New York, NY 10292
Re: Interim Warehouse and Security Agreement
dated as of February 23, 1996 ("Agreement")
-------------------------------------------
Gentlemen:
Reference is made to the Agreement for defined terms used herein.
Pursuant to Section 2(A) of the Agreement, this letter constitutes notice
that the undersigned desires to obtain an Advance in the principal amount of
$____________, constituting ___% of the aggregate outstanding principal
balance of the Mortgage Loans shown on the attached Mortgage Loan Schedule,
as of the Cut-Off Date shown thereon.
This letter will further certify that: (1) the undersigned has no
notice or knowledge of any Event of Default; (2) the representations and
warranties in this agreement relating to the Mortgage Loans shown on the
attached Mortgage Loan Schedule are true and correct as of the date hereof;
(3) each of the conditions precedents to an Advance listed in Section 1(A)(2)
of the Agreement are true and correct as of the date hereof and shall be true
and correct on the date of the Advance requested herein, before and after
giving effect thereto.
AMRESCO RESIDENTIAL
MORTGAGE CORPORATION
______________________________By:
C-4
<PAGE>
SECURED NOTE
Dated as of February 23, 1996
FOR VALUE RECEIVED, the undersigned, AMRESCO RESIDENTIAL MORTGAGE
CORPORATION, a Delaware corporation organized under the laws of the State of
Delaware, whose address is 1845 Woodall Rodgers Freeway, Suite 1700, Dallas,
Texas 75201 (the "Borrower"), promises to pay to the order of PRUDENTIAL
SECURITIES REALTY FUNDING CORPORATION, a Delaware corporation, whose address
is One New York Plaza, New York, New York 10292 (the "Lender") on or before
the Maturity Date the amount then outstanding (including accrued interest)
under that certain Interim Warehouse and Security Agreement dated as of
February 23, 1996 (the "Agreement"). Initially, the maximum principal amount
which may be outstanding is $200,000,000. Capitalized terms used herein and
not defined herein shall have their respective meanings as set forth in the
Agreement.
The holder of this Note is authorized to record the date and amount
of each Advance and the date and amount of each repayment of principal
thereof on the schedule to be maintained by the Lender (which schedule may be
obtained upon borrower's request), and any such recordation shall constitute
prima facie evidence of the accuracy of the amount so recorded; provided that
the failure of the holder hereof to make such recordation (or any error in
such recordation) shall not affect the obligations of the Borrower hereunder
or under the Agreement.
MAXIMUM RATE OF INTEREST: It is intended that the rate of interest
herein shall never exceed the maximum rate, if any, which may be legally
charged on the Loan evidenced by this Note ("Maximum Rate"), and if the
provisions for interest contained in this Note would result in a rate higher
than the Maximum Rate, interest shall nevertheless be limited to the Maximum
Rate and any amounts which may be paid toward interest in excess of the
Maximum Rate shall be applied to the reduction of principal, or, at the
option of the Lender, returned to the Borrower.
DUE DATE: The Loan evidenced hereby not paid before the Maturity
Date shall be due and payable on the Maturity Date.
PLACE OF PAYMENT: All payments hereon shall be made, and all
notices to the Lender required or authorized hereby shall be given, at the
office of the Lender at the address designated in the heading of this Note,
or to such other place as the Lender may from time to time direct by written
notice to the Borrower.
PAYMENT AND EXPENSES OF COLLECTION: All amounts payable hereunder
are payable by wire transfer in immediately available funds to the account
number specified by the Lender, in lawful money of the United States.
Payments remitted by the Borrower via wire transfer initiated after 1:00 p.m.
New York City time shall be deemed to be received on the next business day.
The Borrower agrees to pay
<PAGE>
all costs of collection when incurred, including, without limiting the
generality of the foregoing, reasonable attorneys' fees through appellate
proceedings, and to perform and comply with each of the covenants,
conditions, provisions and agreements contained in every instrument now
evidencing or securing said indebtedness.
SECURITY: This Note is issued pursuant to the Agreement and is
secured by a pledge of the collateral described therein. Notwithstanding the
pledge of the collateral, the Borrower hereby acknowledges, admits and agrees
that the Borrower's obligations under this Note are recourse obligations of
the Borrower to which the Borrower pledges its full faith and credit.
DEFAULTS: Upon the happening of an Event of Default (as defined in
the Agreement), the Lender shall have all rights and remedies set forth in
the Agreement.
The failure to exercise any of the rights and remedies set forth in
the Agreement shall not constitute a waiver of the right to exercise the same
or any other option at any subsequent time in respect of the same event or
any other event. The acceptance by the Lender of any payment hereunder which
is less than payment in full of all amounts due and payable at the time of
such payment shall not constitute a waiver of the right to exercise any of
the foregoing rights and remedies at that time or at any subsequent time or
nullify any prior exercise of any such rights and remedies without the
express consent of Lender, except as and to the extent otherwise provided by
law.
WAIVERS: The Borrower waives diligence, presentment, protest and
demand and also notice of protest, demand, dishonor and nonpayments of this
Note, and expressly agree that this Note, or any payment hereunder, may be
extended from time to time, and consent to the acceptance of further
collateral, the release of any collateral for this Note, the release of any
party primarily or secondarily liable hereon, and that it will not be
necessary for the Lender, in order to enforce payment of this Note, to first
institute or exhaust Lender's remedies against the Borrower or any other
party liable hereon or against any collateral for this Note. None of the
foregoing shall affect the liability of the Borrower. No extension of time
for the payment of this Note, or an installment hereof, made by agreement by
the Lender with any person now or hereafter liable for the payment of this
Note, shall affect the liability under this Note of the Borrower, even if the
Borrower is not a party to such agreement; provided, however, the Lender and
the Borrower, by written agreement between them, may affect the liability of
the Borrower.
TERMINOLOGY: If more than one party joins in the execution of this
Note, the covenants and agreements herein contained shall be the joint and
several obligation of each and all of them and of their respective heirs,
executors, administrators, successors and assigns, and relative words herein
shall be read as if written in the plural when appropriate. Any reference
herein to the Lender shall be deemed to include and apply to every subsequent
holder of this Note. Words of masculine or neuter import shall be read as if
written in the neuter or masculine or feminine when appropriate.
<PAGE>
AGREEMENT: Reference is made to the Agreement for provisions as to
Advances, rates of interest, mandatory principal repayments, collateral and
acceleration. If there is any conflict between the terms of this Note and the
terms of the Agreement, the terms of the Agreement shall control.
APPLICABLE LAW: This Note shall be governed by and construed under
the laws of the State of New York, the laws of which the Borrower hereby
expressly elects to apply to this Note. The Borrower agrees that any action
or proceeding brought to enforce or arising out of this Note may be commenced
in the Supreme Court of the State of New York, or in the District Court of
the United States for the Southern District of New York.
AMRESCO RESIDENTIAL MORTGAGE
CORPORATION
By /s/ Thomas J. Andrus
--------------------------
Name: Thomas J. Andrus
Title: Treasurer
<PAGE>
AMRESCO, INC.
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1995 1994
----------- -----------
<S> <C> <C>
PRIMARY:
Net income $21,090,000 $18,748,000
----------- -----------
----------- -----------
Weighted average shares outstanding 24,137,358 22,958,502
Net effect of dilutive stock options based on the
Treasury stock method using average market price 516,963 720,737
----------- -----------
Total 24,654,321 23,679,239
----------- -----------
----------- -----------
Earnings per share $0.86 $0.79
----------- -----------
----------- -----------
FULLY DILUTED:
Net income $21,090,000 $18,748,000
Interest expense related to convertible debentures,
net of income tax expense 192,000
----------- -----------
Adjusted net income $21,282,000 $18,748,000
----------- -----------
----------- -----------
Weighted average shares outstanding, assuming
conversion of convertible debentures to 3,600,000
shares of common stock in November 1995 24,469,966 22,958,502
Net effect of dilutive stock options based on the
Treasury stock method using the higher of average
or ending market price 608,058 738,851
----------- -----------
Total 25,078,024 23,697,353
----------- -----------
----------- -----------
Earnings per share $0.85 $0.79
----------- -----------
----------- -----------
</TABLE>
<PAGE>
EXHIBIT 21
AMRESCO, INC. Delaware
AMRESCO 1994-N2, INC. Texas
AMRESCO ADVISORS, INC. Georgia
AMRESCO ASSET MANAGEMENT, INC. Texas
AMRESCO ASSET MARKETING ADVISORS, INC. Texas
AMRESCO ATLANTA INDUSTRIAL, INC. Delaware
AMRESCO CANADA INC. Alberta
AMRESCO CAPITAL CORPORATION Texas
AMRESCO EQUITIES CANADA, INC. Alberta
AMRESCO FINANCIAL I, INC. Delaware
AMRESCO FINANCIAL I, L.P. Delaware
AMRESCO FUNDING CORPORATION Delaware
AMRESCO-INSTITUTIONAL, INC. Delaware
AMRESCO JERSEY VENTURES LIMITED UK
AMRESCO MBS-I, INC. Delaware
AMRESCO MBS-II, INC. Delaware
AMRESCO MANAGEMENT, INC. Texas
AMRESCO MORTGAGE CAPITAL, INC. Delaware
AMRESCO NEW ENGLAND, INC. Delaware
AMRESCO NEW ENGLAND, L.P. Delaware
AMRESCO NEW ENGLAND II, INC. Delaware
AMRESCO NEW ENGLAND II, L.P. Delaware
AMRESCO NEW HAMPSHIRE, INC. Delaware
AMRESCO NEW HAMPSHIRE, L.P. Delaware
AMRESCO OVERSEAS, INC. Delaware
AMRESCO PRINCIPAL MANAGERS I, INC. Delaware
AMRESCO PRINCIPAL MANAGERS II, INC. Delaware
AMRESCO REALTY ADVISORS, INC. Texas
AMRESCO RESIDENTIAL CREDIT CORPORATION Delaware
AMRESCO RESIDENTIAL MORTGAGE CORPORATION Delaware
AMRESCO RESIDENTIAL SECURITIES CORPORATION Delaware
AMRESCO RHODE ISLAND, INC. Delaware
AMRESCO SERVICES CANADA, INC. Alberta
AMRESCO UK HOLDINGS LIMITED UK
AMRESCO UK LTD. UK
AMRESCO UK VENTURES LIMITED UK
AMRESCO VENTURES, INC. Delaware
ANH, INC. Georgia
ASI HOLDINGS, INC. Texas
ASSET MANAGEMENT RESOLUTION COMPANY Delaware
BCS ASSET MANAGEMENT CORPORATION Delaware
BCS MANAGEMENT CORP. I Delaware
BEI 1992-N1, INC. Texas
BEI 1993-N3, INC. Texas
BEI 1994-N1, INC. Texas
BEI ASSET MANAGERS, INC. Texas
BEI GOLEMBE FINANCIAL, INC. Georgia
BEI INSTITUTIONAL MANAGEMENT, INC. Georgia
BEI MULTI-POOL, INC. Texas
BEI PORTFOLIO INVESTMENTS, INC. Texas
<PAGE>
BEI PORTFOLIO MANAGERS, INC. Texas
BEI REAL ESTATE SERVICES, INC. Georgia
BEI REAL ESTATE SERVICES OF CALIFORNIA, INC. California
BEI REAL ESTATE SERVICES OF COLORADO, INC. Colorado
BEI SANJAC, INC. Texas
BEI SOUTHWEST, INC. Georgia
BEI VENTURES, INC. Florida
ENTERCHANGE, INC. Georgia
ENTERCHANGE GREAT LAKES, INC. Georgia
ENTERCHANGE MIDWEST, INC. Georgia
ENTERCHANGE NEW JERSEY, INC. Georgia
ENTERCHANGE SOUTHERN CALIFORNIA, INC. Georgia
GRANITE EQUITIES, INC. Delaware
HOLLIDAY FENOGLIO, INC. Delaware
LIFETIME HOMES OF NEW JERSEY, INC. New Jersey
LIFETIME HOMES OF SOUTH CAROLINA, INC. So. Carolina
LIFETIME INVESTMENTS OF NEW JERSEY, INC. New Jersey
NORTHSTAR MANAGEMENT CORPORATION Delaware
OAK CLIFF FINANCIAL, INC. Delaware
OLD MILL HOUSE LIMITED UK
PRESTON HOLLOW ASSET HOLDINGS, INC. Dalaware
SPINNAKER REALTY CORPORATION Florida
V.N.J. CORPORATION Colorado
WHITEROCK INVESTMENTS, INC. Delaware
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
AMRESCO, INC.
We consent to incorporation by reference in Registration Statements
No. 033-60015 and No. 033-58629 on Form S-8 and Registration Statement
No. 333-157 on Form S-3 of our report dated February 6, 1996, appearing in
this Annual Report on Form 10-K of AMRESCO, INC. for the year ended
December 31, 1995.
Deloitte & Touche LLP
Dallas, Texas
March 21, 1996
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Robert H. Lutz, Jr., Robert L. Adair III
and L. Keith Blackwell, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, acting alone, to sign, execute and file
with the Securities and Exchange Commission an Annual Report on Form 10-K for
the year ended December 31, 1995 for AMRESCO, INC. under the Securities
Exchange Act of 1934, including any amendment or amendments relating thereto,
with all exhibits and any and all documents required to be filed with respect
thereto, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as he might or could
do if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT H. LUTZ, JR. Chairman of the Board and March 22, 1996
- ------------------------------- Chief Executive Officer
Robert H. Lutz, Jr.
/s/ ROBERT L. ADAIR III Director, President and March 22, 1996
- ------------------------------- Chief Operating Officer
Robert L. Adair III
/s/ BARRY L. EDWARDS Executive Vice President and March 22, 1996
- ------------------------------- Chief Financial Officer
Barry L. Edwards (Principal Financial Officer)
/s/ JAMES P. COTTON, JR. Director March 21, 1996
- -------------------------------
James P. Cotton, Jr.
/s/ RICHARD L. CRAVEY Director March 23, 1996
- -------------------------------
Richard L. Cravey
/s/ GERALD E. EICKHOFF Director March 22, 1996
- -------------------------------
Gerald E. Eickhoff
</TABLE>
-1-
<PAGE>
<TABLE>
<S> <C> <C>
Director March __, 1996
- -------------------------------
William S. Green
/s/ AMY J. JORGENSEN Director March 24, 1996
- -------------------------------
Amy J. Jorgensen
/s/ JOHN J. McDONOUGH Director March 22, 1996
- -------------------------------
John J. McDonough
/s/ BRUCE W. SCHNITZER Director March 22, 1996
- -------------------------------
Bruce W. Schnitzer
/s/ RONALD B. KIRKLAND Vice President and Chief March 22, 1996
- ------------------------------- Accounting Officer
Ronald B. Kirkland (Principal Accounting Officer)
</TABLE>
-2-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
AMERESCO, INC. December 31, 1995, 10-K and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 16,139
<SECURITIES> 21,942
<RECEIVABLES> 21,895
<ALLOWANCES> 1,737
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 8,239
<DEPRECIATION> 2,335
<TOTAL-ASSETS> 521,713
<CURRENT-LIABILITIES> 0
<BONDS> 325,954
0
0
<COMMON> 1,334
<OTHER-SE> 159,460
<TOTAL-LIABILITY-AND-EQUITY> 521,713
<SALES> 0
<TOTAL-REVENUES> 110,486
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 73,307
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,921
<INCOME-PRETAX> 30,258
<INCOME-TAX> 11,593
<INCOME-CONTINUING> 18,665
<DISCONTINUED> 2,425
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,090
<EPS-PRIMARY> 0.86
<EPS-DILUTED> 0.85
</TABLE>
