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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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AMRESCO, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 59-1781257
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
L. KEITH BLACKWELL
700 NORTH PEARL STREET VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
SUITE 2400, LB 342 700 NORTH PEARL STREET
DALLAS, TEXAS 75201-7424 SUITE 2400, LB 342
(214) 953-7700 DALLAS, TEXAS 75201-7424
(Address, including zip code, and telephone number, including (214) 953-7700
area code, of registrant's principal executive offices) FAX: (214) 953-7757
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
MICHAEL M. BOONE ROBERT C. SCHWARTZ
HAYNES AND BOONE, LLP SMITH, GAMBRELL & RUSSELL
SUITE 3100 SUITE 1800
901 MAIN STREET 3343 PEACHTREE ROAD, N.E.
DALLAS, TEXAS 75202-3789 ATLANTA, GEORGIA 30326-1010
(214) 651-5000 (404) 264-2620
FAX: (214) 651-5940 FAX: (404) 264-2652
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE AMOUNT TO BE PER OFFERING REGISTRATION
REGISTERED REGISTERED SECURITY(2) PRICE(2) FEE
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Common Stock, par value $0.05
per share.................... 8,924,000 shares(1) $22.375 $199,674,500 $60,508
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(1) Includes 1,164,000 shares that are issuable upon exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) of Regulation C under the Securities Act of 1933.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THE PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
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SUBJECT TO COMPLETION, DATED OCTOBER 10, 1996
[AMRESCO LOGO]
7,760,000 SHARES OF COMMON STOCK
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Of the 7,760,000 shares of Common Stock, par value $0.05 per share
("Common Stock"), of AMRESCO, INC. (the "Company") offered hereby (the
"Offering"), 1,830,462 are being offered by the Company and 5,929,538 are being
offered by certain stockholders of the Company (the "Selling Stockholders"). The
Company will not receive any of the net proceeds from the sale of the shares of
Common Stock by the Selling Stockholders.
The Common Stock is traded on the Nasdaq National Market under the symbol
"AMMB." On October 8, 1996, the last reported sale price of the Common Stock on
the Nasdaq National Market was $23.125 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON
STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
CALCULATION OF REGISTRATION FEE
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PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS(2)
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Per Share......................... $ $ $ $
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Total (3)......................... $ $ $ $
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters.
(2) Before deducting expenses payable by the Company (including certain expenses
payable on behalf of the Selling Stockholders) estimated at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 1,164,000 additional shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the Price to
Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
---------------------
The Common Stock is offered severally by the Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters. The Underwriters reserve the right to reject orders in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the shares of Common Stock will be made on or about ,
1996.
THE ROBINSON-HUMPHREY COMPANY, INC.
PIPER JAFFRAY INC.
RAYMOND JAMES & ASSOCIATES, INC.
MONTGOMERY SECURITIES
J.C. BRADFORD & CO.
MORGAN KEEGAN & COMPANY, INC.
, 1996
<PAGE> 3
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In accordance with the
Exchange Act, the Company files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). The reports,
proxy statements and other information can be inspected and copied at the public
reference facilities that the Commission maintains at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at 7 World Trade Center, 13th Floor, New York, New York 10048, and Suite
1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of these
materials can be obtained at prescribed rates from the Public Reference Section
of the Commission at the principal offices of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. Such documents may also be obtained at the Web
site maintained by the Commission (http://www.sec.gov). The Company's Common
Stock is quoted on the Nasdaq National Market and such reports, proxy statements
and other information may be inspected at the National Association of Securities
Dealers, Inc., 1735 K. Street N.W., Washington, D.C. 20006. The Company's 8.75%
Senior Notes, Series 1996-A due 1999 and its 10% Senior Subordinated Notes due
2003 are listed on the New York Stock Exchange. Reports and other information
concerning the Company can be inspected at the offices of such Exchange, 20
Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Common Stock. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement, certain items of which are
contained in schedules and exhibits to the Registration Statement as permitted
by the rules and regulations of the Commission. Statements made in the
Prospectus concerning the contents of any documents referred to herein are not
necessarily complete. With respect to each such document filed with the
Commission as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description, and each such statement shall be deemed
qualified in its entirety by such reference.
Unless otherwise indicated, currency amounts in this Prospectus are stated
in United States dollars ("$" or "dollars").
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act, are hereby incorporated by reference in
this Prospectus: (i) Annual Report on Form 10-K for the year ended December 31,
1995, (ii) Current Report on Form 8-K dated February 2, 1996, (iii) Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996, (iv) Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996, and (v) Current Report on Form
8-K dated July 19, 1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus shall be
deemed to be incorporated by reference herein. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed superseded or modified for purposes of this Prospectus to the extent that
a statement contained herein (or in any other subsequently filed document which
also is incorporated by reference herein) modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, on the written or oral
request of any such person, a copy of any and all of the documents incorporated
by reference herein (other than exhibits to such documents which are not
specifically incorporated by reference in such documents). Written requests for
such copies should be directed to the Company, 700 North Pearl Street, Suite
2400, LB 342, Dallas, Texas 75201-7424, Attention: L. Keith Blackwell, Vice
President, General Counsel and Secretary. Telephone requests may be directed to
L. Keith Blackwell, Vice President, General Counsel and Secretary of the
Company, at (214) 953-7700.
2
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[Map of United States indicating (i) Corporate headquarters, (ii) office
locations by business lines and (iii) international offices in Toronto and
London.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
3
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SUMMARY
Certain terms used in this Prospectus are defined in the "Glossary"
included herein.
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information contained in this Prospectus does not give effect to
the exercise of the Underwriters' over-allotment option in respect to the Common
Stock.
Information contained or incorporated by reference in this Prospectus may
contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. The matters described in "Risk
Factors" and certain other factors noted throughout this Prospectus and in any
exhibits to the Registration Statement of which this Prospectus is a part,
constitute cautionary statements identifying important factors with respect to
any such forward-looking statements, including certain risks and uncertainties,
that could cause actual results to differ materially from those in such
forward-looking statements.
THE COMPANY
General. The Company is a leading specialty financial services company
engaged in residential mortgage acquisition and securitization, Asset Portfolio
acquisition and resolution, commercial mortgage banking and institutional real
estate investment advisory services. The residential capital markets business
involves acquiring, warehousing and securitizing portfolios of B&C loans. On
October 9, 1996, the Company signed the Quality Purchase Agreement pursuant to
which the Company agreed to purchase substantially all of the assets of Quality.
Quality originates B&C loans through a retail system comprised of approximately
50 offices in 31 states. See "Quality Acquisition." The Asset Portfolio
acquisition and resolution business involves acquiring at a substantial discount
to Face Value and managing and resolving Asset Portfolios to maximize cash
recoveries. The Company manages and resolves Asset Portfolios acquired by the
Company alone, acquired by the Company with co-investors and owned by third
parties. The commercial mortgage banking business involves the origination,
underwriting, placement, sale, securitization and servicing of commercial real
estate mortgages. The Company's institutional investment advisory subsidiary
provides real estate investment advice to various institutional investors
(primarily pension funds).
History. The Company is the product of the December 1993 merger of two
Asset Portfolio management and resolution service companies: BEI and the former
Asset Portfolio management and resolution unit of NationsBank of Texas. BEI was
a publicly held company that was engaged in the real estate and asset management
services businesses. The BEI Merger created one of the largest Asset Portfolio
management and resolution service companies in the United States. Since 1987,
the Company and its predecessors have managed over $30.0 billion (Face Value) of
Asset Portfolios. Since the BEI Merger, the Company has expanded its operations
into the residential and commercial mortgage banking and real estate pension
advisory businesses.
Business Strategy. The Company's original business of managing and
resolving Asset Portfolios for third parties developed as a result of the
takeover of failed thrifts and banks by the federal government's deposit
insurance agencies in the late 1980s. In 1994, the Company implemented a growth
strategy to expand its business lines and to take advantage of business
opportunities in those specialty finance markets that capitalize on the
Company's competitive strengths and reputation. The key elements of the
Company's business strategy now include:
o growing its participation in the acquisition and securitization of B&C
loans through AMRESCO Residential and entering the B&C loan origination
business with its acquisition of Quality;
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o increasing the amount that the Company invests for its own account in
Asset Portfolios and continuing to provide high quality management and
resolution services to co-investors and other third-party owners of Asset
Portfolios;
o expanding its presence in the commercial mortgage banking market through
greater market penetration and by increasing its participation in the
market for securitization of commercial mortgages;
o developing its institutional real estate investment advisory business to
complement the Company's existing business lines; and
o acquiring additional businesses which complement the Company's existing
core capabilities in specialty financial services.
The Company will continue to identify, develop and market specialized
financial products that combine and take advantage of the various complementary
skills existing within the Company's business groups as well as expand its
cross-marketing of products and services among its business lines.
RESIDENTIAL CAPITAL MARKETS
General. The Company acquires, warehouses and securitizes portfolios of B&C
loans. Borrowers under such loans may not satisfy the more rigid underwriting
standards of the traditional residential mortgage lending market for a number of
reasons, such as blemished credit histories (from past loan delinquencies or
bankruptcy), inability to provide income verification data or lack of
established credit history. The Company believes that this market is large and
is underserved by traditional lenders. Therefore, there is less competition in
this market and interest rates are higher than on mortgage loans for more
creditworthy borrowers. The Company believes that the higher interest rates
offered by the B&C loan market are attractive even after taking into account the
potentially greater credit risk associated with such borrowers.
During 1996, the Company has securitized approximately $1.1 billion in
residential mortgages in four public offerings of asset-backed securities. To
date, the Company has purchased portfolios of residential mortgages exclusively
from other financial services companies. Loan acquisitions are funded through
warehouse credit facilities arranged by the Company until the Company
accumulates in excess of $250.0 million principal amount of loans. The loans are
then conveyed to a special purpose trust that sells into the secondary market
various tranches of rated collateralized mortgage-backed securities representing
undivided interests in the revenue streams generated by the loans. Subordinated
Certificates issued by the trust are purchased by the Company. The Company
either retains these Subordinated Certificates or pools and sells them in
private sales. The Company does not service any residential loans it acquires.
The securities publicly sold to date by the Company have been rated "AAA" by
Standard & Poor's and "Aaa" by Moody's Investors Service, Inc. To achieve these
ratings the Company has used a combination of over-collateralization techniques
and financial guaranty insurance.
Quality Acquisition. On October 9, 1996, the Company entered into the
Quality Purchase Agreement whereby the Company will acquire substantially all
the assets of Quality for $65.0 million in cash and the assumption of warehouse
indebtedness existing as of closing. Quality originates B&C loans through a
nationwide network of approximately 50 offices in 31 states. These offices
enable Quality to maintain local relationships with over 4,500 Quality-approved
mortgage brokers. Since commencing its current line of business in 1992, Quality
has originated over $5.0 billion of residential loans through September 30,
1996. All of these loans have been sold into the secondary market or
securitized. The Company's strategy is to continue to develop Quality as an
originator of B&C loans, which will enhance and complement the Company's ability
to securitize and sell such loans in the secondary market. See "Quality
Acquisition."
ASSET ACQUISITION AND RESOLUTION
General. The Company manages and resolves Asset Portfolios acquired at
substantial discounts 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
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other collateral, the Company generally seeks Asset Portfolios that do not
include such assets. The Company does not invest in Asset Portfolios with known
environmental liabilities. Asset Portfolios purchased by the Company for its own
account are generally comprised of 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 traditional real estate loans. Asset Portfolios purchased by the
Company with co-investors generally include loans for which resolution is tied
primarily to the real estate securing the loan. While the majority of the Asset
Portfolios are located in the United States, the Company has opened offices in
Toronto and London through which it pursues Asset Portfolio acquisition
opportunities and manages its investments in Canada and Western Europe. The
Company may open other offices and seek strategic alliances in other
international markets. The Company also intends to continue to invest in
Subordinated Certificates.
Asset Portfolio Investment. The Company invests in Asset Portfolios by
purchasing them alone or with co-investors. The Face Values of Asset Portfolios
acquired solely by the Company have ranged between approximately $0.5 million
and approximately $96.8 million, whereas Asset Portfolios owned by it with co-
investors have ranged up to approximately $426.8 million, with investments by
the Company ranging from approximately $0.1 million to $17.6 million. The
Company generally funds its share of any investment with a combination of
borrowings under its existing credit lines and internal cash flow. At June 30,
1996, the Face Value of the Company's total investment in wholly-owned Asset
Portfolios aggregated approximately $440.6 million, which was composed of
approximately $341.8 million (77.6%) of collateralized business loans,
approximately $76.5 million (17.4%) of asset-backed securities, approximately
$12.5 million (2.8%) of real estate and approximately $9.8 million (2.2%) of
real estate loans.
The Company intends to organize investment funds to be marketed to
institutional investors that would invest in Subordinated Certificates of
residential and commercial mortgage securitizations. The Company believes that
because of its experience in evaluating and underwriting higher risk loans, it
can take advantage of investment opportunities that are presented by such
Subordinated Certificates. In the future, the majority of the Company's
investment in Subordinated Certificates will be through these funds. As a
policy, the Company will not sell Subordinated Certificates created in
securitizations organized by the Company to these funds.
Third Party Asset Management and Resolution Services. The Company provides
asset management and resolution services to third parties pursuant to contracts
with owners of Asset Portfolios (including partnerships, joint ventures and
other groups in which the Company is a co-investor). Management of Asset
Portfolios includes developing loan resolution strategies and resolving loans,
overseeing and managing collateral condition and performance, and providing
routine accounting services. Servicing contracts provide incentives for the
Company to resolve Asset Portfolios in order to maximize returns to third party
owners.
COMMERCIAL MORTGAGE BANKING
General. The Company performs a wide range of commercial mortgage banking
services, including originating, underwriting, placing, selling and servicing
commercial real estate loans through Holliday Fenoglio, ACC and AMRESCO
Services.
Commercial Mortgage Banking Business. Holliday Fenoglio primarily serves
commercial real estate developers and owners by originating commercial real
estate loans through its own commission-based mortgage bankers in its offices
located in Atlanta, Boca Raton, Buffalo, Dallas, Houston, Irvine, New York City,
Orlando and Portland (Oregon). Holliday Fenoglio originated approximately $2.1
billion of commercial real estate mortgages during 1995 and approximately $1.1
billion during the six months ended June 30, 1996. The loans originated by
Holliday Fenoglio generally are funded by institutional lenders, principally
insurance companies, and by Conduit Purchasers, with Holliday Fenoglio retaining
the Primary Servicer rights on more than a quarter of such loans. The Company
believes that Holliday Fenoglio's relationship and credibility with its
institutional lender network provide the Company with a competitive advantage in
the commercial mortgage banking industry.
ACC, which originated and underwrote approximately $447.1 million of
commercial real estate mortgages during 1995 and approximately $105.2 million
during the six months ended June 30, 1996, is a mortgage banker that originates
and underwrites commercial real estate loans that are funded primarily by
Conduit Purchasers and Fannie Mae. Accordingly, ACC unlike Holliday Fenoglio,
makes certain representa-
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tions and warranties concerning the loans it originates. These representations
cover title to the property, lien priority, environmental reviews and certain
other matters. ACC targets mortgage loans for commercial real estate properties
suitable for sale to Conduit Purchasers that accumulate loans for securitization
programs. ACC serves its market directly through ACC's offices located in
Dallas, Miami, Washington, D.C. and Winston-Salem, as well as through a network
of approximately 38 independent mortgage brokers located throughout the United
States. ACC has recently established a financing and advisory relationship with
a major Wall Street investment bank whereby ACC will originate commercial
mortgages, which will be funded and securitized by a partnership through which
ACC shares in the accumulation and securitization profits and risks. ACC is
approved by Fannie Mae to participate in its DUS program, which ACC believes
makes it a more competitive loan originator and underwriter of multifamily
mortgages. ACC is also an approved lender in the Freddie Mac multifamily
sales/servicer program in the states of Florida, North Carolina and South
Carolina. Through June 30, 1996, approximately 20.0% of the loans underwritten
by ACC were originated by Holliday Fenoglio, with Holliday Fenoglio and ACC each
receiving fees for their respective services.
Commercial Loan Servicing Business. The Company serves as a Primary
Servicer for whole loans and as a Master/Full Servicer for securitized pools of
commercial mortgages through AMRESCO Services. At June 30, 1996, the Company
acted as servicer with respect to approximately $10.9 billion of loans. The
dominant users of commercial loan servicers are commercial mortgage-backed bond
trusts and similar securitized commercial asset-backed loan portfolios made up
of numerous passive investors. The revenue stream from servicing contracts on
commercial mortgages is relatively predictable as prepayment penalties in
commercial mortgages discourage early loan payoffs, a risk that is more
significant to servicers of residential mortgage portfolios.
INSTITUTIONAL REAL ESTATE INVESTMENT ADVISORY
The Company provides real estate investment advice to various institutional
investors (primarily pension funds) seeking to invest a portion of their funds
in real estate and related investments. Although the Company is paid acquisition
and disposition fees by some of its clients, its principal form of revenue from
this activity is asset management fees, which are based on the cash flow of the
investments under management or are negotiated at the time of the client's
investment in a property.
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The Company is a Delaware corporation. The Company's principal executive
offices are located at 700 N. Pearl Street, Suite 2400, Dallas, Texas 75201-7424
and its telephone number at that address is (214) 953-7700.
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THE OFFERING
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Common Stock Offered by the
Company.......................... 1,830,462 shares
Common Stock Offered by the Selling
Stockholders..................... 5,929,538 shares
Common Stock Outstanding after the
Offering......................... 29,019,959 shares(1)
Nasdaq National Market Symbol...... AMMB
Use of Proceeds.................... The net proceeds from the sale of the Common Stock
offered hereby by the Company will be used to reduce the
Company's outstanding borrowings under the Revolving
Loan Agreement (including $65.0 million of borrowings
necessary to fund the purchase of Quality). After
application of such net proceeds, approximately $
million will be available for borrowing under the
Revolving Loan Agreement to be used for general
corporate purposes, which may include funding
investments in Asset Portfolios, Subordinated
Certificates and other financial instruments, acquiring
new businesses or making strategic investments in
companies that complement the Company's business lines
and strategies. See "Use of Proceeds."
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(1) Does not include (i) 1,776,164 shares of Common Stock issuable upon exercise
of outstanding stock options or 1,756,898 shares available for future grants
under the Company's Stock Option and Award Plan at September 30, 1996 or
(ii) 3,600,000 shares of Common Stock issuable upon conversion of the
Convertible Subordinated Debentures. See Note 11 of Notes to Consolidated
Financial Statements.
RISK FACTORS
Prior to making an investment decision, prospective purchasers should
consider all of the information set forth in this Prospectus and should evaluate
the statements set forth in "Risk Factors" beginning on page 13.
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SUMMARY HISTORICAL FINANCIAL AND OTHER DATA
The summary data presented below under the captions "Summary Income
Statement" and "Summary Balance Sheet Data" for and as of the end of each of the
fiscal years in the three-year period ended December 31, 1995 are derived from
the consolidated financial statements of the Company audited by Deloitte &
Touche LLP, which are included herein. In the opinion of management of the
Company, the data presented for the six months ended June 30, 1996 and 1995,
which are derived from the Company's unaudited consolidated financial
statements, reflect all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial position and results of
operations for such periods. Results for the six months ended June 30, 1996 are
not necessarily indicative of results for the entire fiscal year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------ --------------------------------------
1996 1995 1995(1) 1994(1) 1993
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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SUMMARY INCOME STATEMENT:
Revenues:
Asset management and resolution fees..... $ 18,037 $ 18,441 $ 41,295 $ 93,764 $ 118,552
Interest and other investment income..... 43,247 14,569 40,105 14,215 3,440
Mortgage banking fees.................... 14,937 8,324 24,382 6,176
Gain on sale of loans and investments,
net.................................... 5,789 46 1,382 839
Other revenues........................... 1,699 2,279 3,322 14,797 409
------- ------- ------- ------- --------
Total revenues.................... 83,709 43,659 110,486 129,791 122,401
Operating expenses, before interest
expense.................................. 50,268 30,840 73,307 92,337 77,970
------- ------- ------- ------- --------
Operating income, before interest
expense.................................. 33,441 12,819 37,179 37,454 44,431
Interest expense........................... 13,495 1,278 6,921 1,768 754
------- ------- ------- ------- --------
Income from continuing operations
before income taxes...................... 19,946 11,541 30,258 35,686 43,677
Income tax expense......................... 7,803 4,307 11,593 14,753 17,371
------- ------- ------- ------- --------
Income from continuing operations.......... 12,143 7,234 18,665 20,933 26,306
Gain (loss) from discontinued operations... 2,425 2,425 (2,185) (2,088)
------- ------- ------- ------- --------
Net income................................. $ 12,143 $ 9,659 $ 21,090 $ 18,748 $ 24,218
======= ======= ======= ======= ========
Earnings per share from continuing
operations:
Primary.................................. $ 0.44 $ 0.30 $ 0.76 $ 0.88 $ 2.33
Fully-diluted............................ $ 0.42 $ 0.30 $ 0.75 $ 0.88 $ 2.33
Earnings per share:
Primary.................................. $ 0.44 $ 0.40 $ 0.86 $ 0.79 $ 2.15
Fully-diluted............................ $ 0.42 $ 0.40 $ 0.85 $ 0.79 $ 2.15
Weighted average number of common shares
outstanding and common share
equivalents.............................. 27,469,186 24,305,838 24,654,321 23,679,239 11,288,688
</TABLE>
(Footnote appears on following page.)
9
<PAGE> 11
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
-------------------- --------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 14,650 $ 18,683 $ 16,139 $ 20,446 $ 43,442
Mortgage loans held for sale...................... 190,257 3,000 160,843
Investments:
Loans........................................... 164,656 80,569 138,180 32,631 33,795
Partnerships and joint ventures................. 32,246 44,021 34,694 22,491 2,503
Asset-backed and other securities............... 55,687 6,426 46,187 3,481
Real estate..................................... 16,050 7,393 5,686 14,054 2,504
Total assets...................................... 603,911 229,403 521,713 172,340 163,653
Notes payable..................................... 96,135 67,300 89,442 15,500 22,113
Warehouse loan payable............................ 181,024 2,856 153,158
Nonrecourse debt.................................. 25,856 8,622 38,354 959 6,000
Senior subordinated debt.......................... 57,500
Convertible subordinated debt..................... 45,000 45,000
Total indebtedness................................ 405,515 78,778 325,954 16,459 28,113
Stockholders' equity.............................. 174,196 123,388 160,794 113,586 91,699
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- --------------------------------------
1996 1995 1995 1994 1993
----------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER DATA(1):
Face Value of assets under management (at
period end)............................. $ 3,181,538 $3,174,959 $3,693,900 $3,031,800 $5,754,400
Commercial mortgage loans originated:
Face Value.............................. $ 1,184,015 $ 982,608 $2,573,400 $ 610,000
Number of loans......................... 195 169 444 106
Commercial mortgage loans serviced (at
period end):
Face Value.............................. $10,932,252 $2,812,414 $9,919,596 $2,555,000
Number of loans......................... 6,770 793 7,226 592
</TABLE>
- ---------------
(1) Summary Income Statement and Other Data for the fiscal years ended December
31, 1995 and 1994 reflect data for Holliday Fenoglio beginning August 1,
1994 and EQS beginning October 27, 1995, the effective date of their
acquisitions by the Company.
10
<PAGE> 12
SUMMARY PRO FORMA FINANCIAL DATA
The summary pro forma financial data presented below for and as of the six
months ended June 30, 1996 and for the year ended December 31, 1995 were
prepared by management of the Company utilizing the assumptions described in
"Unaudited Pro Forma Condensed Consolidated Financial Statements for the Quality
Acquisition."
The unaudited pro forma condensed consolidated financial statements are not
necessarily indicative of what the actual results of operations and financial
position of the Company would have been assuming the transaction had been
completed as set forth above, nor does it purport to represent the Company's
results of operations for future periods.
<TABLE>
<CAPTION>
PRO FORMA FOR PRO FORMA
THE SIX MONTHS FOR THE YEAR
ENDED ENDED
JUNE 30, 1996 DECEMBER 31, 1995
-------------- -----------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
SUMMARY INCOME STATEMENT:
Revenues:
Asset management and resolution fees...................... $ 18,037 $ 41,295
Interest and other investment income...................... 56,469 74,826
Mortgage banking fees..................................... 14,937 24,382
Gain on sale of loans and investments and loan origination
fees, net.............................................. 23,883 54,701
Loss on sale of real estate held for sale................. (994) (6,269)
Other revenues............................................ 2,496 5,311
------------ -----------
Total revenues.................................... 114,828 194,246
Operating expenses, before interest expense................. 84,821 125,025
------------ -----------
Operating income, before interest expense................... 30,007 69,221
Interest expense............................................ 22,549 31,972
------------ -----------
Income from continuing operations before taxes.............. 7,458 37,249
Income tax expense.......................................... 2,918 14,272
------------ -----------
Income from continuing operations........................... 4,540 22,977
Gain from discontinued operations........................... 2,425
------------ -----------
Net income.................................................. $ 4,540 $ 25,402
============ ===========
Earnings per share from continuing operations:
Primary................................................... $ 0.15 $ 0.87
Fully-diluted............................................. $ 0.17 $ 0.86
Earnings per share:
Primary................................................... $ 0.15 $ 0.96
Fully-diluted............................................. $ 0.17 $ 0.95
Weighted average number of common shares outstanding and
common share equivalents.................................. 29,299,648 26,484,783
</TABLE>
11
<PAGE> 13
<TABLE>
<CAPTION>
PRO FORMA
AS OF
JUNE 30, 1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
SUMMARY BALANCE SHEET DATA:
Cash and cash equivalents................................................. $ 23,358
Mortgage loans held for sale.............................................. 296,922
Advances and wet fundings................................................. 19,094
Investments:
Loans................................................................... 164,656
Partnerships and joint ventures......................................... 32,246
Asset-backed and other securities....................................... 82,402
Real estate............................................................. 18,762
Total assets.............................................................. 826,325
Notes payable............................................................. 148,619
Warehouse loans payable................................................... 330,390
Senior subordinated debt.................................................. 57,500
Convertible subordinated debt............................................. 45,000
Total indebtedness........................................................ 581,509
Stockholders' equity...................................................... 212,568
</TABLE>
12
<PAGE> 14
RISK FACTORS
Investors should carefully consider the following matters in connection
with an investment in the Common Stock in addition to the other information
contained or incorporated by reference in this Prospectus. Information contained
or incorporated by reference in this Prospectus may contain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which can be identified by the use of forward-looking terminology such
as "may," "will," "expect," "intend," "anticipate," "estimate" or "continue" or
the negative thereof or other variations thereon or comparable terminology. The
following matters and certain other factors noted throughout this Prospectus and
any exhibits to the Registration Statement of which this Prospectus is a part,
constitute cautionary statements identifying important factors with respect to
any such forward-looking statements, including certain risks and uncertainties,
that could cause actual results to differ materially from those in such
forward-looking statements.
CHANGE IN BUSINESS MIX AND MANAGEMENT OF GROWTH
In early 1994, the Company made the strategic decision to diversify its
business lines. The Company has entered the residential capital markets,
commercial mortgage banking and institutional real estate investment advisory
businesses through a combination of acquisitions and the internal startup of new
business lines, as well as increased its investments in Asset Portfolios. These
businesses contributed a substantial portion of the Company's revenue and
operating income in 1995, and the Company expects they will continue to
contribute a substantial portion of its revenue and operating income for the
foreseeable future. The rapid entry of the Company into these business lines has
resulted in increased demands on the Company's personnel and systems. As part of
its business strategy, the Company intends to acquire additional businesses
which complement the Company's core capabilities in specialty financial
services. The Company must successfully continue its assimilation of multiple
acquired businesses with differing markets, customer bases, financial products,
systems and managements. The Company's ability to support, manage and control
continued growth is dependent upon, among other things, its ability to hire,
train, supervise and manage its workforce and to continue to develop the skills
necessary for the Company to compete successfully in its new business lines.
There can be no assurance that the Company will successfully meet all of these
challenges.
On October 9, 1996, the Company entered into the Quality Purchase Agreement
pursuant to which the Company will acquire substantially all the assets of
Quality and thereby enter the retail B&C loan origination business. In addition
to the risks associated with diversifying into new business lines described
above, the Quality Acquisition presents several other specific risks. Quality
has experienced declining loan volumes, a high rate of employee turnover,
including high level management, and increased competition. The Company must
stabilize Quality's work force, strengthen Quality's senior and middle
management, upgrade Quality's information and data processing systems and
successfully integrate a nationwide retail B&C loan origination business with
its existing business lines. There can be no assurance that the Company will be
successful in all of these efforts.
NEED FOR ADDITIONAL FINANCING
General. The Company's ability to execute its business strategy depends to
a significant degree on its ability to obtain additional indebtedness and equity
capital. Other than as described in this Prospectus, the Company has no
commitments for additional borrowings or sales of equity capital and there can
be no assurance that the Company will be successful in consummating any such
future financing transactions on terms satisfactory to the Company, if at all.
Factors which could affect the Company's access to the capital markets, or the
costs of such capital, include changes in interest rates, general economic
conditions and the perception in the capital markets of the Company's business,
results of operations, leverage, financial condition and business prospects.
Each of these factors is to a large extent subject to economic, financial,
competitive and other factors beyond the Company's control. In addition,
covenants under the Company's current and future debt securities and credit
facilities may significantly restrict the Company's ability to incur additional
indebtedness and to issue Preferred Stock. The Company's ability to repay its
outstanding indebtedness at maturity may depend on its ability to refinance such
indebtedness, which could be adversely affected if the
13
<PAGE> 15
Company does not have access to the capital markets for the sale of additional
debt or equity securities through public offerings or private placements on
terms reasonably satisfactory to the Company.
Dependence on Warehouse Financing. The Company's commercial and residential
mortgage securitization businesses depend upon warehouse facilities with
financial institutions or institutional lenders to finance the Company's
purchase of loans on a short-term basis pending sale or securitization.
Implementation of the Company's growth strategy requires continued availability
of warehouse facilities and may require increases in the capacity of warehouse
facilities. There can be no assurance that such financing will be available on
terms reasonably satisfactory to the Company. The inability of the Company to
arrange additional warehouse facilities or to extend or replace existing
facilities when they expire would have a material adverse effect on the
Company's business, financial condition and results of operations and on the
Company's outstanding securities.
RISKS OF SECURITIZATION
Significance of Securitization. The Company currently believes that it will
become increasingly dependent upon its ability to securitize mortgage loans by
pooling and subsequently selling them in the secondary market in order to
generate revenues, earnings and cash flows. Accordingly, adverse changes in the
secondary mortgage market could impair the Company's ability to originate,
purchase and sell mortgage loans on a favorable or timely basis. Any such
impairment could have a material adverse effect upon the Company's business and
results of operations. The Company endeavors to effect public securitizations of
its loans on at least a quarterly basis. However, market and other
considerations, including the conformity of loans to insurance company and
rating agency requirements, could affect the timing of such transactions. Any
delay in the sale of loans beyond a quarter end would delay any expected gain on
sale beyond the given quarter and adversely affect the Company's reported
earnings for such quarter.
Importance of Credit Enhancement. In order to optimize access to the
secondary market for residential mortgage-backed securities, the Company may
rely on monoline insurance companies to provide, in exchange for premiums, a
guarantee on outstanding senior interests in the related securitization trusts
to enable it to obtain a "AAA/Aaa" rating for such interests. Any unwillingness
of monoline insurance companies to guarantee the senior interests in the
Company's loan pools could have a material adverse effect on the Company's
financial position, expected gain on sale and results of operations.
Retained Risks of Securitized Loans. The Company makes various
representations with respect to the loans that it pools and securitizes. The
Company's representations rely in part on similar representations made by the
originators of such loans when they were purchased by the Company. Accordingly,
the Company has a claim against the originator in the event of a breach of any
of these representations made by the originators. However, the Company's ability
to recover on any such claim is dependent on the financial condition of the
originator. There can be no assurance that the Company will not experience a
material loss in respect of any of these contingencies.
Investment in Subordinated Certificates. The Company derives a significant
portion of its reported income from its investment in Subordinated Certificates
created in securitizations completed by the Company. The earnings on such
Subordinated Certificates represent the excess of the interest and principal
paid by a borrower on a loan over the interest and principal passed through to
the investor acquiring an interest in such loan, less the normal servicing and
other fees and credit losses realized. When such loans are pooled, the Company
recognizes as a gain the estimated fair value of the Subordinated Certificates,
net of the Company's upfront costs of purchasing and securitizing the underlying
loans. The estimated fair value of the Subordinated Certificates is computed
using prepayment, default and interest rate assumptions that the Company
believes market participants would use for similar instruments at the time of
sale. Accordingly, no assurance can be given that these securities could in fact
be sold or recovered at its stated value on the balance sheet, if at all.
Contingent Risks. Although the Company sells substantially all the mortgage
loans which it originates or purchases, the Company retains some degree of
credit risk on substantially all loans sold. During the period of time that
loans are held pending sale, the Company is subject to the various business
risks associated with the lending business including the risk of borrower
default, the risk of foreclosure and the risk that a rapid increase
14
<PAGE> 16
in interest rates would result in a decline in the value of loans to potential
purchasers. The documents governing the Company's securitization program require
the Company to establish deposit accounts or build over-collateralization levels
through retention of distributions otherwise payable to the holders of the
Subordinated Certificates. Such amounts serve as credit enhancement for the
related trust and are therefore available to fund losses realized on loans held
by such trust. In addition, documents governing the Company's securitization
program require the Company to commit to repurchase or replace loans which do
not conform to the representations and warranties made by the Company at the
time of sale.
RISKS RELATED TO B&C LOANS
The B&C loan market is comprised of credit-impaired borrowers who generally
have significant equity in their homes and whose borrowing needs are not
currently met by traditional financial institutions. Loans made to such
borrowers may entail a higher risk of delinquency and higher losses than loans
made to more creditworthy borrowers. While the Company believes that the
underwriting criteria and collection methods it employs enable it to reduce the
higher risks inherent in loans made to credit-impaired borrowers, no assurance
can be given that such criteria or methods will afford adequate protection
against higher delinquencies, foreclosures or losses than anticipated and, as a
result, the Company's financial condition or results of operation could be
adversely affected.
CYCLICALITY OF AND COMPETITION IN THE ASSET ACQUISITION AND RESOLUTION BUSINESS
The Asset Portfolio acquisition and resolution business is affected by
long-term cycles in the general economy. In addition, the volume of domestic
Asset Portfolios available for purchase by investors or management by third
party servicers such as the Company has generally declined since 1993. The
Company cannot predict what will be a normal annual volume of Asset Portfolios
to be sold or outsourced for management and resolution. Moreover, 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 bids to purchase Asset Portfolios. The acquisition of Asset
Portfolios has become highly competitive in the United States. This may require
the Company to acquire Asset Portfolios at higher prices thereby lowering profit
margins on the resolutions of such Asset Portfolios. Under certain circumstances
the Company may choose not to bid for Asset Portfolios which it believes cannot
be acquired at attractive prices. As a result of all the above factors, Asset
Portfolio purchases may vary significantly from quarter to quarter.
GENERAL ECONOMIC CONDITIONS
Periods of economic slowdown or recession, rising interest rates or
declining demand for real estate may adversely affect certain segments of the
Company's business. Although such economic conditions may increase the number of
nonperforming loans available for sale to or for management by the Company, such
conditions could adversely affect the resolution of Asset Portfolios held by the
Company for its own account or managed for others, lead to a decline in prices
or demand for collateral underlying Asset Portfolios or, in the case of Asset
Portfolios held for the Company's own account, increase the cost of capital
invested by the Company and the length of time that capital is invested in a
particular Asset Portfolio, thereby negatively impacting the rate of return
realized from such Asset Portfolio. Economic downturns and rising interest rates
also may reduce the number of loan originations by the Company's commercial
mortgage banking business and negatively impact its commercial and residential
mortgage securitization activity.
In addition, periods of economic slowdown or recession, whether general,
regional or industry-related, may increase the risk of default on residential
mortgage loans and may have an adverse effect on the Company's business,
financial condition and results of operations. Such periods also may be
accompanied by decreased consumer demand for residential mortgages, resulting in
declining values of homes securing outstanding loans, thereby weakening
collateral coverage and increasing the possibility of losses in the event of
default. Significant increases in homes for sale during recessionary economic
periods may depress the prices at which foreclosed homes may be sold or delay
the timing of such sales. There can be no assurance that the housing markets
will be adequate for the sale of foreclosed homes and any material deterioration
of such markets could reduce recoveries from the sale of repossession inventory.
15
<PAGE> 17
CERTAIN COMMERCIAL LOAN ORIGINATION AND SERVICING RISKS
When borrowers are delinquent in making monthly payments on commercial
mortgage loans serviced by the Company, the Company is required to advance
interest payments with respect to such delinquent loans to the extent that the
Company deems such advances ultimately recoverable. These advances require
funding from the Company's capital resources but have priority of repayment from
collections or recoveries on the loans in the related pool in the succeeding
month. In the ordinary course of its business, the Company is subject to claims
made against it by borrowers and private investors arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentations, errors and omissions of
employees and officers of the Company (including its appraisers), incomplete
documentation and failures by the Company to comply with various laws and
regulations applicable to its business. The Company believes that liability with
respect to any currently asserted claims or legal actions is not likely to be
material to the Company's consolidated financial position or results of
operations; however, any claims asserted in the future may result in legal
expenses or liabilities which could have a material adverse effect on the
Company's financial position and results of operations.
As a participant in the Fannie Mae DUS program, the Company must accept a
first loss risk on loans originated by the Company. In addition, the Company
must also make certain representations and warranties concerning loans
originated by the Company and sold to Conduit Purchasers or Fannie Mae. These
representations cover such matters as title to the property, lien priority,
environmental reviews and certain other matters.
ASSET PERFORMANCE ASSUMPTIONS
The Company's business, financial condition, results of operations and
liquidity depend, to a material extent, on the performance of loans owned
directly or backing securities purchased and sold by the Company. The carrying
value of the Company's Asset Portfolios and certain other assets has been
determined in part using estimates of future cash flows based on assumptions
concerning future default and prepayment rates that are consistent with the
Company's historical experience and market conditions and present value discount
rates that the Company believes would be requested by an unrelated purchaser of
an identical stream of estimated cash flows. Management believes that the
Company's estimates of cash flows were reasonable at the time such estimates
were made. However, the actual rates of default and/or prepayment on such assets
may exceed those estimated and consequently may adversely affect anticipated
future cash flows, results of operations and reported earnings. The Company
periodically reviews its loss and prepayment assumptions in relation to current
performance of the loans and market conditions and, if necessary, provides for
the impairment of the respective asset. The Company's business, financial
condition and results of operations could be materially adversely affected by
such adjustments in the future. No assurance can be given that loan losses and
prepayments will not exceed the Company's estimates or that such assets could be
sold at their stated value on the balance sheet, if at all.
INTEREST RATES
Since certain of the Company's borrowings, including borrowings under the
Revolving Loan Agreement, are at variable rates of interest, the Company may be
impacted by increases in interest rates. In addition, the value of its
interest-earning assets and liabilities may be directly affected by the level of
and fluctuations in interest rates. The Company monitors the interest rate
environment and employs prefunding or other hedging strategies designed to
mitigate the impact of changes in interest rates. However, there can be no
assurance that the profitability of the Company would not be adversely affected
during any period of changes in interest rates. A significant decline in
interest rates could result in increased prepayment of outstanding loans.
A substantial and sustained increase in interest rates could adversely
affect the ability of the Company to originate loans and could reduce the gains
recognized by the Company upon their securitization and sale. A significant
decline in interest rates could decrease the size of the Company's residential
Subordinated Certificates by increasing the level of loan prepayments.
Fluctuating interest rates also may affect the net interest income earned by the
Company resulting from the difference between the yield to the Company on
16
<PAGE> 18
mortgage loans held pending sale and the interest paid by the Company for funds
borrowed under the Company's warehouse credit facilities or otherwise. In
addition, inverse or flattened interest yield curves could have an adverse
impact on the earnings of the Company because the loans pooled and sold by the
Company have long-term rates while the senior interests in the related trusts
are priced on the basis of intermediate rates.
GOVERNMENT REGULATION
The operations of the Company are subject to regulation by federal, state
and local government authorities, as well as to various laws and judicial and
administrative decisions, that impose requirements and restrictions affecting,
among other things, the Company's loan originations, credit activities, maximum
interest rates, finance and other charges, disclosures to customers, the terms
of secured transactions, collection, repossession and claims handling
procedures, multiple qualification and licensing requirements for doing business
in various jurisdictions, and other trade practices. Although the Company
believes that it is in compliance in all material respects with applicable
local, state and federal laws, rules and regulations, there can be no assurance
that more restrictive laws, rules or regulations will not be adopted in the
future that could make compliance more difficult or expensive, restrict the
Company's ability to originate, purchase or sell loans, further limit or
restrict the amount of interest and other charges earned on loans originated or
purchased by the Company, further limit or restrict the terms of loan
agreements, or otherwise adversely affect the business or prospects of the
Company. There are also, among other risks, uncertainties concerning the
business practice of paying back points to residential mortgage brokers.
RISKS OF HEDGING TRANSACTIONS
The Company has in the past and may in the future enter into interest rate
or foreign currency financial instruments used for hedging purposes. While
intended to reduce the effects of volatility in interest rate or foreign
currency price movements, such transactions could cause the Company to recognize
losses depending on the terms of the instrument and the interest rate or foreign
currency price movement. See Note 14 of Notes to Consolidated Financial
Statements included herein.
FOREIGN OPERATIONS
The Company's asset management and resolution business has entered into,
and intends to continue to enter into, contracts to purchase and to manage and
resolve Asset Portfolios located in Canada and Western Europe and may in the
future expand into other foreign countries. Foreign operations are subject to
various special risks, including currency translation risks and currency
exchange rate fluctuations (which the Company intends to mitigate with currency
hedging arrangements as available and economical) and exchange controls. Changes
in foreign exchange rates may have an adverse effect on the Company's financial
condition and results of operations. In addition, earnings of foreign operations
are subject to foreign income taxes that reduce cash flow available to meet debt
service requirements and other obligations of the Company, which may be payable
even if the Company has no earnings on a consolidated basis.
COMPETITION
All of the business lines in which the Company operates are highly
competitive. Some of the Company's principal competitors in certain business
lines are substantially larger and better capitalized than the Company. Because
of these resources, these companies may be better able than the Company to
obtain new customers, to acquire Asset Portfolios, to pursue new business
opportunities or to survive periods of industry consolidation. Moreover, there
cannot be any assurance that Asset Portfolio purchasers/owners for whom the
Company provides Asset Portfolio management services will not build their own
management and resolution staffs and reduce or eliminate their outsourcing of
these services.
The Company is experiencing greater competition in its residential capital
markets business. The Company has experienced increasing competition from other
Conduit Purchasers in the acquisition of B&C
17
<PAGE> 19
loan portfolios. In addition, the Company expects to encounter significant
competition in the B&C loan origination market, which it will enter through the
Quality Acquisition.
The Company believes that its ability to acquire Asset Portfolios for its
own account will be important to its future growth. Acquisitions of Asset
Portfolios are often based on competitive bidding, where there are dangers of
bidding too low (which generates no business), as well as of bidding too high
(which could win the Asset Portfolio at an economically unattractive price). In
addition, the increasing competition in this business line has caused the
Company to experience decreasing profit margins in its Asset Portfolio business
in order to remain a competitive bidder for Asset Portfolios and has caused the
Company to redeploy its capital in other more profitable product lines.
The Company also encounters significant competition in its other business
lines. The commercial mortgage banking business is highly fragmented with
certain large national competitors and significant localized competition. In
addition, within the commercial loan origination and residential mortgage
securitization business, access to and the cost of capital are critical to the
Company's ability to compete. The Company must compete with numerous
competitors, many of whom have superior access to capital sources and can
arrange or obtain lower cost capital for customers.
ANTI-TAKEOVER CONSIDERATIONS
The Company's Amended and Restated Certificate of Incorporation and Amended
and Restated Bylaws include a number of provisions that may have the effect of
encouraging persons considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with the Company's Board of Directors rather
than pursue non-negotiated takeover attempts. These provisions include a
staggered Board of Directors, authorized "blank check" preferred stock,
supermajority voting requirements on certain matters and prohibitions against
certain business combinations. The Indentures governing the Convertible
Subordinated Debentures, the Senior Subordinated Notes, and the Senior Notes
require the Company to repurchase all outstanding Debentures, Senior
Subordinated Notes and Senior Notes in the event of certain change of control
transactions. These anti-takeover provisions could have the effect of
discouraging or making more difficult a merger, tender offer, other business
combination or proxy contest, even if such event would be favorable to the
interests of the stockholders. See "Description of Capital Stock -- Delaware Law
and Certain Corporate Provisions."
18
<PAGE> 20
QUALITY ACQUISITION
THE QUALITY PURCHASE AGREEMENT
The Quality Purchase Agreement provides that the Company will purchase
substantially all of the assets of Quality, including certain subsidiaries, all
cash on hand, mortgage loans held, foreclosed residential real property held,
all accounts receivable, certain Subordinated Certificates retained from certain
prior securitizations of its loans, three office buildings in Irvine, California
and all furniture, fixtures and equipment on Quality's balance sheet as of the
date of closing. The Company will assume certain contracts and obligations,
principally short-term leases associated with Quality's branch offices,
obligations under Quality's health insurance plans and indebtedness incurred by
Quality in connection with all loans held by Quality and conveyed to the Company
at closing as well as indebtedness incurred with respect of the Subordinated
Certificates acquired by the Company. The purchase price is $65.0 million in
cash plus the assumption of warehouse indebtedness existing as of closing. The
Company will finance the Quality Acquisition through borrowings under the
Revolving Loan Agreement and intends to use the net proceeds of the sale of its
shares of Common Stock in the Offering, in part, to repay such borrowings.
It is anticipated that the Quality Acquisition will be consummated in
October 1996. The Quality Acquisition is subject to certain customary conditions
to closing, including regulatory approvals and confirmation of the sellers'
representations at closing. See "Unaudited Pro Forma Condensed Consolidated
Financial Statements for the Quality Acquisition" and "Use of Proceeds." No
assurance can be given that the Quality Acquisition will be consummated.
BUSINESS DESCRIPTION
Quality, which is based in Irvine, California, is an independent originator
of B&C loans. Quality originates B&C loans through a nationwide network of
approximately 50 branch offices in 31 states. Each branch office provides a
local "back office" for independent mortgage brokers. These offices enable
Quality to maintain local relationships with over 4,500 Quality-approved
mortgage brokers. At September 30, 1996, Quality employed approximately 475
people. The Company believes that the Quality Acquisition will enable the
Company to expand further its residential mortgage banking business and to
establish a substantial position as an originator of B&C loans. Quality has
originated, funded and sold in excess of $5.0 billion in such loans since
October 1, 1992.
Quality was incorporated in 1984 and, in 1991, was acquired by Calmac
Funding ("Calmac") for the purpose of commencing operations as an originator and
seller of B&C loans. Calmac arranged for DLJ Mortgage Capital, Inc. ("DLJ
Mortgage") to provide various lines of credit and to act as a Conduit Purchaser
for Quality's loan production, in exchange for which DLJ Mortgage received a 49%
equity interest in Quality. Since 1992, Quality has sold substantially all of
its loan volume to DLJ Mortgage through whole loan sales at prices below that
which the Company believes it could obtain in the future.
The Company believes that Quality's branch structure and approach to
origination allow Quality to have a local market presence without incurring high
fixed employee costs. The Company also believes that the large independent
broker network allows Quality to obtain some of the economic efficiencies
associated with a wholesale mortgage origination business without paying premium
prices for closed loans.
Although independent mortgage brokers are Quality's primary source for loan
production, in July 1995 Quality augmented its mortgage production sources by
establishing two new complementary divisions -- retail telemarketing and
wholesale conduit. These divisions were established to diversify Quality's
production capacity and to capture the relatively high origination fees
associated with B&C loan production. The retail telemarketing division markets
loan programs to homeowners through direct-response marketing. The wholesale
conduit division purchases closed loans directly from loan originators. At June
1, 1996, Quality had 85 approved partner institutions and had purchased loans
from 51 institutions. These new divisions currently account for approximately
2.0% of Quality's loan production, but the Company anticipates that these new
sources of production will grow in the future.
19
<PAGE> 21
When Quality initiated its B&C loan origination business, practically all
of its loan production was in California. Through the aggressive growth of its
nationwide branch network, Quality has substantially increased its loan
production in states other than California, thereby achieving substantial
geographic diversification. In calendar 1995, originations in California
accounted for approximately 29.3% of total loan originations and no other state
accounted for more than 6.9% of total originations. During the six months ended
June 30, 1996, originations in California accounted for approximately 24.2% of
total originations.
Quality underwrites and funds substantially all mortgage loans in its own
name. Quality employs appraisers who conduct a majority of all appraisal
reviews. Other appraisal reviews are performed by independent appraisers
approved by Quality, and are subsequently reviewed by Quality. Substantially all
of the loans that are originated by Quality are secured by first mortgages on
residential properties. Quality generally has not retained any mortgage
servicing rights or realized any of the operational or financial benefits of
securitizing its own loans.
During the twelve-months ended December 31, 1995, Quality closed and funded
approximately $1.4 billion in loans that were originated by approximately 4,200
brokers. Quality reviewed nearly 50,000 mortgage loan applications, of which
approximately 38% were approved and funded. The single and ten highest producing
independent brokers accounted for approximately 2.1% and 8.4%, respectively, of
Quality's loan originations during this twelve month period.
COMPANY STRATEGY AFTER THE ACQUISITION
One of the Company's current growth initiatives within its residential
capital markets business is to diversify its loan production sources. The
Company believes that the Quality Acquisition will provide an internal loan
production source that will significantly augment and balance its traditional
bulk purchases of third-party originated loans. This initiative is especially
important in the face of increasing competition for B&C loans.
Upon completion of the Quality Acquisition, the Company intends to promptly
rebuild Quality's senior management, which has suffered substantial attrition
during the past year. The Company is in the process of identifying a new senior
management team for the Quality business, which will include a combination of
Quality personnel, current Company personnel and newly-hired experienced
industry managers. The Company will also quickly move to strengthen the
management of Quality's extensive branch network. In addition, the Company
intends to restructure Quality's compensation and benefit framework in order to
reduce high employee turnover.
The Company expects to engage in extensive process reengineering and
upgrading of Quality's management information and data processing systems. The
Company believes that it can capture certain efficiencies through the
integration of Quality's systems with the Company's existing management
information and data processing systems. The Company is also in the process of
identifying a number of expense reductions that can be implemented in the near
future.
The Company believes that the Quality Acquisition can enhance the growth
and profitability of the Company's residential mortgage securitization business.
First, the Company will focus on rebuilding Quality's loan production volume.
The Company believes that it can achieve this goal through improving management
and employee morale and by offering more competitive loan products through its
independent broker network, which will be made possible by the Company's lower
cost of funds and by capturing securitization profits. Second, the Company
intends to institute new underwriting guidelines to increase the credit quality
of the loan product.
The Company also believes that capital investments in Quality's management
information and data processing systems and various identified cost containment
actions will yield material expense savings, permitting Quality to become more
cost competitive. One significant and immediate cost saving will result from the
termination of Quality's consulting contract with Calmac, pursuant to which
Calmac was paid approximately $3.2 million during the fiscal year ended
September 30, 1995. While the Company does not
20
<PAGE> 22
anticipate any material reductions in Quality's work force, the Company believes
that financial benefits from layoffs effected by Quality in late June 1996 will
be more fully reflected in future periods.
For the six months ended June 30, 1996, Quality recorded a charge to
operations to recognize an impairment loss on certain of its investments
totaling $7.5 million. As the assets associated with this adjustment are
included in the acquisition, no adjustment has been made to remove the effects
of the recording of this impairment loss.
The unaudited pro forma condensed consolidated financial statements for the
Quality Acquisition reflect the elimination of revenue from prepayment charges
and late payment fees attributable to rights not being acquired. The Company
believes that prepayment charges on loans made after the acquisition will become
a meaningful source of cash flow and revenue. The Company does not currently
anticipate retaining late payment fees as Quality has done in the past. Instead,
it expects to pass these fees on to the loan servicers. See "Unaudited Pro Forma
Condensed Consolidated Financial Statements for the Quality Acquisition."
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS FOR THE QUALITY ACQUISITION
The historical condensed consolidated financial statements consist of the
operations and financial position of the Company and Quality as of and for the
six months ended June 30, 1996 and the operations of the Company for the year
ended December 31, 1995 combined with the operations of Quality for the year
ended September 30, 1995, Quality's most recent fiscal year end.
The unaudited pro forma condensed consolidated balance sheet is presented
as if the Company had acquired substantially all of the assets of Quality as of
June 30, 1996 and the unaudited pro forma condensed consolidated statements of
income are presented as if the assets had been acquired on the first day of the
period presented. These presentations are made as if the Company had (i)
acquired substantially all of the assets and assumed the operating liabilities
of Quality, (ii) financed the Quality Acquisition with indebtedness incurred
under the Revolving Loan Agreement and (iii) issued an additional 1,830,462
shares of Common Stock, the proceeds of which were used to retire a portion of
the indebtedness incurred to fund the Quality Acquisition. The Company will
acquire any loans owned by Quality on the closing date and assume the related
warehouse indebtedness. Quality's mortgage warehouse is generally funded by such
indebtedness. The warehouse facility fluctuates significantly based on loan
origination volume and the timing of loan sales, consequently the total assets
acquired may vary substantially. These unaudited pro forma condensed
consolidated financial statements should be read in conjunction with the
historical consolidated financial statements and notes thereto of the Company
and Quality included herein. In management's opinion, all adjustments necessary
to reflect the effects of the acquisition of the assets and assumption of
liabilities of Quality and the capitalization of the acquisition have been made.
The unaudited pro forma condensed consolidated financial statements are not
necessarily indicative of what the actual results of operations and financial
position of the Company would have been assuming the transaction had been
completed as set forth above, nor does it purport to represent the Company's
results of operations for future periods.
21
<PAGE> 23
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
(A) (B)
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
COMPANY QUALITY ADJUSTMENTS COMPANY
---------- ---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 14,650 $ 8,708 $ 23,358
Temporary investments........................... 32,921 32,921
Accounts receivable and interest................ 18,469 654 19,123
Mortgage loans held for sale.................... 190,257 106,665 296,922
Advances and wet fundings....................... 19,094 19,094
Investments:
Loans......................................... 164,656 164,656
Partnerships and joint ventures............... 32,246 32,246
Asset-backed and other securities............. 55,687 26,715 82,402
Real estate................................... 16,050 2,712 18,762
Deferred income taxes........................... 12,201 7,277 $ (7,277)(C) 12,201
Premises and equipment, net..................... 6,373 8,114 14,487
Intangible assets............................... 52,394 45,883 (D) 98,277
Other assets.................................... 8,007 3,869 11,876
---------- ---------- ---------- ---------
Total assets.......................... $ 603,911 $ 183,808 $ 38,606 $ 826,325
========== ========== ========== =========
Liabilities:
Accounts payable................................ $ 8,502 $ 4,048 $ 4,000 (E) $ 16,550
Accrued employee compensation and benefits...... 9,522 9,522
Notes payable................................... 121,991 65,000 (F) 148,619
(38,372)(G)
Warehouse loans payable......................... 181,024 149,366 330,390
Senior subordinated debt........................ 57,500 57,500
Convertible debt................................ 45,000 45,000
Income taxes payable and deferred tax
liability..................................... 2,983 1,484 (1,484)(C) 2,983
Other liabilities............................... 3,193 3,193
---------- ---------- ---------- ---------
Total liabilities............................... 429,715 154,898 29,144 613,757
---------- ---------- ---------- ---------
Stockholder's equity:
Preferred stock.................................
Common stock.................................... 1,345 1 92 (G) 1,437
(1)(C)
Capital in excess of par........................ 107,655 2,137 38,280 (G) 145,935
(2,137)(C)
Reductions for employee stock................... (1,500) (1,500)
Treasury stock.................................. (160) (160)
Net unrealized gains (losses)................... (977) (977)
Retained earnings............................... 67,833 26,772 (26,772)(C) 67,833
---------- ---------- ---------- ---------
Total stockholders' equity...................... 174,196 28,910 9,462 212,568
---------- ---------- ---------- ---------
Total liabilities and stockholders' equity...... $ 603,911 $ 183,808 $ 38,606 $ 826,325
========== ========== ========== =========
</TABLE>
22
<PAGE> 24
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(A) Represents the historical unaudited condensed consolidated balance sheet of
the Company as of June 30, 1996.
(B) Represents the historical unaudited condensed consolidated balance sheet of
Quality as of June 30, 1996.
(C) Reflects the adjustment to record assets purchased and liabilities assumed
at their estimated fair values.
(D) Represents the estimated excess of purchase price over net assets acquired.
For purposes of these unaudited pro forma condensed consolidated financial
statements an estimated useful life of 15 years is utilized in calculating
amortization expense.
(E) Represents anticipated costs of the acquisition including professional
services and severance payments.
(F) Represents the anticipated indebtedness to be incurred to fund the
acquisition of Quality by the Company based on a purchase price of $65,000.
(G) Reflects the issuance of an additional 1,830,462 shares of Common Stock to
be sold by the Company. The proceeds, less estimated costs of the
registration of $3,500, are utilized to retire a portion of the additional
indebtedness incurred to fund the Quality Acquisition. For purposes of
these unaudited pro forma condensed consolidated financial statements, the
closing price of the Common Stock on September 30, 1996 of $22.875 was
used.
23
<PAGE> 25
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
(A) (B)
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
COMPANY QUALITY ADJUSTMENTS COMPANY
----------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Asset management and resolution fees....... $ 41,295 $ 41,295
Loan origination fees, net................. $ 12,642 12,642
Interest and other investment income....... 40,105 34,721 74,826
Mortgage banking fees...................... 24,382 24,382
Gain on sale of loans and investments,
net..................................... 1,382 40,677 42,059
Prepayment and late fees................... 14,281 $ (14,281)(C)
Loss on sale of real estate held for
sale.................................... (6,269) (6,269)
Other revenues............................. 3,322 1,989 5,311
----------- -------- --------- -----------
Total revenues..................... 110,486 98,041 (14,281) 194,246
----------- -------- --------- -----------
Expenses:
Personnel.................................. 52,852 33,423 (3,151)(D) 83,124
General and administrative................. 16,087 13,277 29,364
Interest................................... 6,921 23,114 1,937(E) 31,972
Depreciation and amortization.............. 2,294 1,436 2,819(F) 6,549
Provision for loss on investments.......... 3,914 3,914
Profit participation....................... 2,074 2,074
----------- -------- --------- -----------
Total expenses..................... 80,228 75,164 1,605 156,997
----------- -------- --------- -----------
Income from continuing operations before
income tax expense......................... 30,258 22,877 (15,886) 37,249
Income tax expense........................... 11,593 9,757 (7,078)(G) 14,272
----------- -------- --------- -----------
Income from continuing operations............ 18,665 13,120 (8,808) 22,977
Gain from discontinued operations, net of
taxes...................................... 2,425 2,425
----------- -------- --------- -----------
Net income................................... $ 21,090 $ 13,120 $ (8,808) $ 25,402
=========== ======== ========= ===========
Earnings per share from continuing
operations:
Primary................................. $ 0.76 $ 0.87(I)
Fully-diluted........................... $ 0.75 $ 0.86(I)
Earnings per share:
Primary................................. $ 0.86 $ 0.96(I)
Fully-diluted........................... $ 0.85 $ 0.95(I)
Weighted average number of common shares
outstanding and common share
equivalents................................ 24,654,321 26,484,783
</TABLE>
24
<PAGE> 26
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
(A) (B)
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
COMPANY QUALITY ADJUSTMENTS COMPANY
----------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Asset management and resolution fees....... $ 18,037 $ 18,037
Interest and other investment income....... 43,247 $ 13,222 56,469
Mortgage banking fees...................... 14,937 14,937
Gain on sale of loans and investments,
net..................................... 5,789 18,094 23,883
Prepayment and late fees................... 9,894 $ (9,894)(C)
Loss on sale of real estate................ (994) (994)
Other revenues............................. 1,699 797 2,496
----------- --------- ---------- -----------
Total revenues..................... 83,709 41,013 (9,894) 114,828
----------- --------- ---------- -----------
Expenses:
Personnel.................................. 35,631 15,753 (941)(D) 50,443
General and administrative................. 13,445 10,100 23,545
Interest................................... 13,495 8,085 969(E) 22,549
Depreciation and amortization.............. 1,160 930 1,198(F) 3,288
Provision for losses on investments........ 7,513 7,513(H)
Profit participation....................... 32 32
----------- --------- ---------- -----------
Total expenses..................... 63,763 42,381 1,226 107,370
----------- --------- ---------- -----------
Net income (loss) before income tax
expense.................................... 19,946 (1,368) (11,120) 7,458
Income tax expense (benefit)................. 7,803 (931) (3,954)(G) 2,918
----------- --------- ---------- -----------
Net income (loss)............................ $ 12,143 $ (437) $ (7,166) $ 4,540
=========== ========= ========== ===========
Earnings per share:
Primary.................................... $ 0.44 $ 0.15(I)
Fully-diluted.............................. $ 0.42 $ 0.17(I)
Weighted average number of common shares
outstanding and common share equivalents... 27,469,186 29,299,648
</TABLE>
25
<PAGE> 27
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(A) Represents the historical condensed consolidated statement of income of the
Company for the period indicated.
(B) Represents the historical condensed statement of income of Quality for the
period indicated.
(C) Reflects the removal of revenues related to accumulated rights to receive
prepayment fees and late fees which are not being acquired. The Company
does not expect to retain the rights to receive late fees. The Company will,
however, receive prepayment fees on new loans originated.
(D) Represents the removal of contract services fees paid to the selling
shareholder as this agreement will be terminated as a condition to the
acquisition.
(E) Represents interest expense on the additional indebtedness to be incurred to
fund the acquisition.
(F) Represents an adjustment to depreciation expense as a result of changes to
property and equipment as a result of the acquisition and an adjustment to
record amortization expense of $3,055 and $1,528 for the year ended
December 31, 1995 and for the six months ended June 30, 1996, respectively,
as a result of recording the acquired intangible assets of $45,883 and
utilizing an amortization period of 15 years.
(G) Reflects an adjustment to income tax expense to reflect the Company's
effective tax rate for the period.
(H) For the six months ended June 30, 1996, Quality recorded a charge to
operations to recognize an impairment loss on certain of its investments
totaling $7,513. As the assets associated with this adjustment are included
in the acquisition, no adjustment has been made to remove the effects of
the recording of this impairment loss.
(I) Assuming the issuance of the additional 1,164,000 shares of Common Stock
issuable upon exercise of the Underwriters' over-allotment option and those
proceeds being used to repay the indebtedness of the Company, the pro forma
earnings per share would be as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -----------------
<S> <C> <C>
Earnings per share from continuing operations:
Primary.................................................... $0.90 $0.18
Fully-diluted.............................................. $0.89 $0.19
Earnings per share:
Primary.................................................... $0.99 $0.18
Fully-diluted.............................................. $0.98 $0.19
Weighted average number of common shares outstanding and
common share equivalents................................... 27,648,783 30,463,648
</TABLE>
26
<PAGE> 28
USE OF PROCEEDS
The net proceeds to the Company from the sale by the Company of 1,830,462
shares of its Common Stock offered hereby (after deducting underwriting
discounts and estimated expenses of the Offering) will be approximately $
million (approximately $ million if the Underwriters' over-allotment option
is exercised in full). The Company will not receive any of the proceeds from the
shares of Common Stock sold by the Selling Stockholders. See "Selling
Stockholders."
The Company intends to use the net proceeds it receives to reduce the
Company's outstanding borrowings under the Revolving Loan Agreement, which had
an outstanding balance of approximately $61.4 million at September 30, 1996
(approximately $126.4 million on a pro forma basis for the Quality Acquisition).
For the six months ended June 30, 1996, the weighted average interest rate on
indebtedness under the Revolving Loan Agreement was 7.3% per annum. The
indebtedness under the Revolving Loan Agreement was incurred primarily in
connection with investments in Asset Portfolios, the Quality Acquisition (on a
pro forma basis) and other general corporate purposes. After application of the
net proceeds to the Company of the Offering, approximately $ million
(approximately $ million on a pro forma basis) would be available for
reborrowing under the Revolving Loan Agreement as of September 30, 1996 which
could be used for general corporate purposes, including funding investments in
Asset Portfolios, Subordinated Certificates and other financial instruments,
acquiring new businesses or making strategic investments in companies that
complement the Company's businesses. Other than as disclosed in this Prospectus,
the Company has no understandings or agreements in respect of any material
acquisition. See "Quality Acquisition" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
PRICE RANGE OF AND DIVIDENDS ON COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market under the symbol
"AMMB." The following table shows, for the calendar periods indicated, the range
of high and low last sale price per share for the Common Stock as quoted on the
Nasdaq National Market and the cash dividends per share.
<TABLE>
<CAPTION>
CASH
DIVIDENDS
HIGH LOW PER SHARE
------- ------- ---------
<S> <C> <C> <C>
1994
First Quarter.................................................. $ 8.500 $ 6.500 $ 0.050
Second Quarter................................................. 8.000 6.750 0.050
Third Quarter.................................................. 8.250 7.000 0.050
Fourth Quarter................................................. 8.750 5.500 0.050
1995
First Quarter.................................................. $ 7.125 $ 5.875 $ 0.050
Second Quarter................................................. 9.375 6.750 0.050
Third Quarter.................................................. 13.375 8.750 0.050
Fourth Quarter................................................. 13.375 9.750 0.050(1)
1996
First Quarter.................................................. $14.625 $11.750 $ --(1)
Second Quarter................................................. 19.375 14.500 --(1)
Third Quarter.................................................. 24.750 17.000 --(1)
Fourth Quarter (through October 7, 1996)....................... 23.250 22.375 --(1)
</TABLE>
- ---------------
(1) The Company discontinued paying cash dividends effective October 1995.
27
<PAGE> 29
The last reported sale price of the Common Stock on October 8, 1996, was
$23.125 per share. At September 30, 1996, the Company had approximately 2,900
stockholders of record.
Effective October 1995, the Company discontinued paying cash dividends. The
Board of Directors determined to retain all earnings to support anticipated
growth in the current operations of the Company and to finance future expansion.
The agreements governing certain of the Company's outstanding indebtedness
restrict the payment of cash dividends unless certain earnings tests are
satisfied. Future declarations and payments of dividends, if any, will be
determined in light of then-current conditions, including the Company's
earnings, operations, capital requirements, liquidity, financial condition,
restrictions in financing agreements and other factors deemed relevant by the
Board of Directors.
28
<PAGE> 30
CAPITALIZATION
The following table presents the capitalization of the Company at June 30,
1996, (i) on a historical basis, (ii) as adjusted for the Quality Acquisition
and (iii) as further adjusted to give effect to the Offering by the Company and
the application of the Company's share of the net proceeds of the Offering to
repay indebtedness under the Revolving Loan Agreement. This table should be read
in conjunction with "Use of Proceeds," the Company's Consolidated Financial
Statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-------------------------------------
AS FURTHER
ACTUAL AS ADJUSTED ADJUSTED
-------- ----------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Debt(1):
Notes payable.............................................. $ 96,135 $ 161,135 $
Warehouse loans payable.................................... 181,024 330,390 330,390
Nonrecourse debt........................................... 25,856 25,856 25,856
Senior Subordinated Notes.................................. 57,500 57,500 57,500
Convertible Subordinated Debentures........................ 45,000 45,000 45,000
-------- --------- ---------
Total debt................................................... 405,515 619,881
Stockholders' equity:
Common Stock, par value $0.05 per share; 50,000,000
authorized shares and 26,901,621 issued shares(2)....... 1,345 1,345
Capital in excess of par................................... 107,655 107,655
Reductions for employee stock.............................. (1,500) (1,500) (1,500)
Treasury stock, 24,339 shares.............................. (160) (160) (160)
Net unrealized gains (losses).............................. (977) (977) (977)
Retained earnings.......................................... 67,833 67,833 67,833
-------- --------- ---------
Total stockholders' equity................................... 174,196 174,196
-------- --------- ---------
Total capitalization......................................... $579,711 $ 794,077 $
======== ========= =========
</TABLE>
- ---------------
(1) Since June 30, 1996 through September 30, 1996, the Company has issued $57.5
million of Senior Notes, incurred $200.5 million of additional indebtedness
under the Warehouse Agreements and paid down $1.8 million of indebtedness
under the Revolving Loan Agreement. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 5 of Notes to the
Company's Consolidated Financial Statements.
(2) Does not include an aggregate of 2,064,040 shares of Common Stock reserved
for issuance upon the exercise of outstanding stock options, 3,600,000
shares reserved for issuance upon conversion of the Convertible Subordinated
Debentures or 1,756,898 shares available for future grants of options and
restricted stock under the Company's Stock Option and Award Plan. Since June
30, 1996 through September 30, 1996, options for an aggregate of 287,876
shares have been exercised and no shares of restricted stock have been
issued under the Company's Stock Option and Award Plan. See Note 11 of Notes
to the Company's Consolidated Financial Statements.
29
<PAGE> 31
SUMMARY HISTORICAL FINANCIAL AND OTHER DATA
The summary data presented below under the captions "Summary Income
Statement" and "Summary Balance Sheet Data" for and as of the end of each of the
fiscal years in the three-year period ended December 31, 1995 are derived from
the consolidated financial statements of the Company audited by Deloitte &
Touche LLP, which are included herein. In the opinion of management of the
Company, the data presented for the six months ended June 30, 1996 and 1995,
which are derived from the Company's unaudited consolidated financial
statements, reflect all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial position and results of
operations for such periods. Results for the six months ended June 30, 1996 are
not necessarily indicative of results for the entire fiscal year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- --------------------------------------
1996 1995 1995(1) 1994(1) 1993
----------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT:
Revenues:
Asset management and resolution fees..... $ 18,037 $ 18,441 $ 41,295 $ 93,764 $ 118,552
Interest and other investment income..... 43,247 14,569 40,105 14,215 3,440
Mortgage banking fees.................... 14,937 8,324 24,382 6,176
Gain on sale of loans and investments,
net.................................... 5,789 46 1,382 839
Other revenues........................... 1,699 2,279 3,322 14,797 409
----------- ---------- ---------- ---------- ----------
Total revenues.................... 83,709 43,659 110,486 129,791 122,401
Operating expenses, before interest
expense.................................. 50,268 30,840 73,307 92,337 77,970
----------- ---------- ---------- ---------- ----------
Operating income, before interest
expense.................................. 33,441 12,819 37,179 37,454 44,431
Interest expense........................... 13,495 1,278 6,921 1,768 754
----------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes...................... 19,946 11,541 30,258 35,686 43,677
Income tax expense......................... 7,803 4,307 11,593 14,753 17,371
----------- ---------- ---------- ---------- ----------
Income from continuing operations.......... 12,143 7,234 18,665 20,933 26,306
Gain (loss) from discontinued operations... 2,425 2,425 (2,185) (2,088)
----------- ---------- ---------- ---------- ----------
Net income................................. $ 12,143 $ 9,659 $ 21,090 $ 18,748 $ 24,218
=========== ========== ========== ========== ==========
Earnings per share from continuing
operations:
Primary.................................. $ 0.44 $ 0.30 $ 0.76 $ 0.88 $ 2.33
Fully-diluted............................ 0.42 0.30 0.75 0.88 2.33
Earnings per share:
Primary.................................. 0.44 0.40 0.86 0.79 2.15
Fully-diluted............................ 0.42 0.40 0.85 0.79 2.15
Weighted average number of common shares
outstanding and common share
equivalents.............................. 27,469,186 24,305,838 24,654,321 23,679,239 11,288,688
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
------------------------- --------------------------------------
1996 1995 1995 1994 1993
----------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 14,650 $ 18,683 $ 16,139 $ 20,446 $ 43,442
Mortgage loans held for sale............... 190,257 3,000 160,843
Investments:
Loans.................................... 164,656 80,569 138,180 32,631 33,795
Partnerships and joint ventures.......... 32,246 44,021 34,694 22,491 2,503
Asset-backed and other securities........ 55,687 6,426 46,187 3,481
Real estate.............................. 16,050 7,393 5,686 14,054 2,504
Total assets............................... 603,911 229,403 521,713 172,340 163,653
Notes payable.............................. 96,135 67,300 89,442 15,500 22,113
Warehouse loan payable..................... 181,024 2,856 153,158
Nonrecourse debt........................... 25,856 8,622 38,354 959 6,000
Senior subordinated debt................... 57,500
Convertible subordinated debt.............. 45,000 45,000
Total indebtedness......................... 405,515 78,778 325,954 16,459 28,113
Stockholders' equity....................... 174,196 123,388 160,794 113,586 91,699
</TABLE>
30
<PAGE> 32
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- --------------------------------------
1996 1995 1995 1994 1993
----------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER DATA(1):
Face Value of assets under management
(at period end).......................... $ 3,181,538 $3,174,959 $3,693,900 $3,031,800 $5,754,400
Commercial mortgage loans originated:
Face Value............................... $ 1,184,015 $ 982,608 $2,573,400 $ 610,000
Number of loans.......................... 195 169 444 106
Commercial mortgage loans serviced
(at period end):
Face Value............................... $10,932,252 $2,812,414 $9,919,596 $2,555,000
Number of loans.......................... 6,770 793 7,226 592
</TABLE>
- ---------------
(1) Summary Income Statement and Other Data for the fiscal years ended December
31, 1995 and 1994 reflect data for Holliday Fenoglio beginning August 1,
1994 and EQS beginning October 27, 1995, the effective date of their
acquisition by the Company.
31
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is engaged primarily in the businesses of residential mortgage
acquisition and securitization, Asset Portfolio acquisition and resolution,
commercial mortgage banking and institutional investment advisory services. The
Company's business may be affected by many factors, including fluctuations in
real estate and other asset values, the availability and price of commercial and
residential mortgages and Asset Portfolios to be purchased, and the level of and
fluctuations in interest rates, changes in the securitization market and
competition. In addition, the Company's operations require continued access to
short and long term sources of financing.
On December 31, 1993, AMRESCO, INC., formerly BEI, merged with Holdings.
The merger was accounted for as a "reverse acquisition" whereby Holdings was
deemed to have acquired BEI for financial reporting purposes. However, BEI,
renamed AMRESCO, INC., remains the continuing legal entity and registrant for
Commission filing purposes. Consistent with the reverse acquisition accounting
treatment, the historical financial statements of AMRESCO, INC. presented for
the year ended December 31, 1993 are the consolidated financial statements of
Holdings and differ from the consolidated financial statements of BEI as
previously reported. The results of operations of BEI have been included in the
Company's financial statements from the date of acquisition.
In 1994, the Company concluded all of its significant asset management
relationships with government agencies and financial institutions and began to
shift its focus toward investment activities and the development of new lines of
financial service businesses. Since the BEI Merger, the Company has extended its
business lines to offer a full range of residential and commercial mortgage
banking services, including the development of capital markets activities,
increased substantially the amount it invests in Asset Portfolios, developed its
institutional investment advisory business and disposed of certain non-core
business lines. These significant changes in the composition of the Company's
business are reflected in the Company's results of operations and may limit the
comparability of the Company's results from period to period.
AMRESCO Residential represented approximately 20% of revenues and 29% of
operating profit (before corporate, other and intercompany eliminations) of the
Company for the first six months of 1996. The Company believes that there are
significant opportunities in the B&C loan market, and consequently expects
AMRESCO Residential to represent an increasing proportion of revenues and
operating income of the entire Company for the foreseeable future.
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 six months ended June 30, 1996 and 1995 and for
the years ended December 31, 1995, 1994 and 1993. The results of operations of
acquired businesses are included in the Consolidated Financial Statements from
the date of acquisition. This discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto included in this Prospectus.
32
<PAGE> 34
The following is a summary of the Company's results of operations by
primary business line for the six months ended June 30, 1996 and 1995 and for
the years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- --------------------------------
1996 1995 1995 1994 1993
-------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Residential capital markets............ $ 16,866 $ 2,307
Asset acquisition and resolution....... 44,762 $34,704 81,144 $110,637 $122,944
Commercial mortgage banking............ 20,394 8,767 26,573 6,460
Institutional investment advisory...... 1,974 452
Corporate, other and intercompany
eliminations........................ (287) 188 10 12,694 (543)
-------- ------- -------- -------- --------
Total revenues................. 83,709 43,659 110,486 129,791 122,401
-------- ------- -------- -------- --------
Operating expenses:
Residential capital markets............ 6,623 1,694
Asset acquisition and resolution....... 23,447 16,770 37,691 52,741 51,678
Commercial mortgage banking............ 17,204 7,626 20,550 6,237
Institutional investment advisory...... 1,820 444
Corporate, other and intercompany
eliminations........................ 14,669 7,722 19,849 35,127 27,046
-------- ------- -------- -------- --------
Total operating expenses....... 63,763 32,118 80,228 94,105 78,724
-------- ------- -------- -------- --------
Operating profit:
Residential capital markets............ 10,243 613
Asset acquisition and resolution....... 21,315 17,934 43,453 57,896 71,266
Commercial mortgage banking............ 3,190 1,141 6,023 223
Institutional investment advisory...... 154 8
Corporate, other and intercompany
eliminations........................ (14,956) (7,534) (19,839) (22,433) (27,589)
-------- ------- -------- -------- --------
Total operating profit......... 19,946 11,541 30,258 35,686 43,677
Income tax expense....................... 7,803 4,307 11,593 14,753 17,371
-------- ------- -------- -------- --------
Income from continuing operations........ 12,143 7,234 18,665 20,933 26,306
Gain (loss) from discontinued
operations............................. 2,425 2,425 (2,185) (2,088)
-------- ------- -------- -------- --------
Net income............................... $ 12,143 $ 9,659 $ 21,090 $ 18,748 $ 24,218
======== ======= ======== ======== ========
</TABLE>
RESULTS OF OPERATIONS
Revenues from the Company's residential capital markets activities consist
of interest earned on residential mortgage loans purchased, gains on the
securitization and sale of such loans and other related securities and accrued
earnings on Subordinated Certificates purchased from securitization trusts. The
gains on securitization and sale of mortgage loans and other related securities
represent the amount by which the proceeds received (including the estimated
value of any Subordinated Certificates retained) exceed the basis of the assets
sold and the cost of securitization. When loans are securitized and sold, the
Subordinated Certificates retained are valued at the discounted present value of
the cash flow expected to be realized over the anticipated average life of the
assets sold less future estimated credit losses, estimated prepayments and
normal servicing and other fees relating to the assets sold. The discounted
present value of such Subordinated Certificates is computed using management's
assumptions of market discount rates (currently approximately 20%), prepayment
rates, default rates and other costs.
Revenues from the Company's asset management and resolution activities
primarily consist of fees charged for the management of Asset Portfolios
comprised of performing, nonperforming or underperforming commercial,
industrial, agricultural and real estate loans and for the successful resolution
of the assets within
33
<PAGE> 35
such Asset Portfolios. The asset base of each Asset Portfolio declines over the
life of the Asset Portfolio, thus reducing asset management fees as assets
within the Asset Portfolio are resolved. These fees are subject to fluctuation
based on the consideration received, timing of the sale or collection of the
managed assets and the attainment of specified earnings levels on behalf of
investors or investment partners. Certain direct costs 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 an Asset Portfolio is allocated to
individual assets within that Asset Portfolio based on their relative fair value
to the total purchase price. The difference between gross estimated cash flows
from loans and asset-backed and other securities and its present value is
accrued using the level yield method. The level yield method recognizes income
as the product of the recorded investment and the expected rate of return. The
expected rate of return is based upon estimated cash flows of the investments.
The recorded investment is reduced based on cash collections allocated to
principal. The Company periodically evaluates the recoverability of the recorded
investments by reviewing the estimated remaining amount and timing of cash flows
and adjusts, if necessary, investments or expected rates of return. 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 stockholders'
equity, net of tax effects.
Revenues from the Company's commercial mortgage banking activities are
earned from the origination and underwriting of commercial real estate mortgage
loans, the placement of such loans with permanent investors and the servicing of
loans. Loan placement and servicing fees, commitment fees and real estate
brokerage commissions are recognized as earned. Placement and servicing expenses
are charged to expense as incurred.
Revenues from the Company's 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.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
The Company reported revenues for the six months ended June 30, 1996 of
$83.7 million, a 92% increase from the same period in 1995. Operating profit
increased 73% over the same period in 1995 primarily due to the inclusion of
residential capital markets operations which were initiated in September 1995.
Commercial mortgage banking posted a significant increase in operating profit,
and asset acquisition and resolution operating profit rose 19%. Fully-diluted
earnings per share from continuing operations for the six months ended June 30,
1996 were $0.42, compared to $0.30 for the same period in 1995, a 40% increase.
Residential Capital Markets. The Company initiated the operation of the
residential capital markets business in September 1995. Revenues for the six
months ended June 30, 1996 consisted of $11.3 million in interest and other
investment income and $5.6 million in gains on securitizations and sale of
residential mortgage loans. Interest and other investment income primarily
consisted of interest earned on mortgage loans held for sale which averaged
$171.2 million during the six months ended June 30, 1996, compared to no such
34
<PAGE> 36
loans during the same period of 1995. The $5.6 million in gains was realized on
three securitizations and sales of a total of $799.5 million in residential
mortgage loans during the first six months of 1996.
Expenses for the six months ended June 30, 1996 were comprised of $5.3
million in interest expense, $0.7 million in personnel expense and $0.6 million
in other general and administrative expense. The $5.3 million interest expense
relates to borrowings under warehouse loans payable which funded the acquisition
of the mortgage loans held for sale.
Asset Acquisition and Resolution. Revenues for the first six months of 1996
were comprised of $16.1 million in asset management and resolution fees, $27.4
million in interest and other investment income, $1.1 million in other revenues
and $0.2 million in gain from sale of investments. The $10.1 million, or 29%,
increase in revenues from the same period of 1995 was primarily comprised of a
$12.8 million increase in interest and other investment income due to an
increase in aggregate investments of $102.2 million from June 30, 1995 and $0.5
million in reversed reserves on accounts receivable related to the expired RTC
asset management contract collections during the period, which increases were
offset in part by a $2.8 million decrease in asset management and resolution
fees due to the conclusion of significant government contracts during early 1995
due to a shift from primarily managing and investing in partnerships and joint
ventures to investing in wholly-owned Asset Portfolios.
Expenses for the six months ended June 30, 1996 were comprised of $10.7
million in personnel costs, $7.8 million in interest expense and $4.9 million in
other general and administrative expenses. The $6.7 million, or 40%, increase in
expenses over the same period in 1995 was primarily due to a $5.0 million
increase in interest expense and a $1.6 million increase in other general and
administrative expenses. The increase in interest expense was due to the
financing incurred for a $102.2 million increase in aggregate investments.
Commercial Mortgage Banking. Revenues for the six months ended June 30,
1996 consisted of $14.9 million in origination, underwriting and servicing
revenues and $5.5 million in investment and other income. Origination,
underwriting and servicing revenues increased $6.4 million and interest and
other investment income increased $5.2 million due to the inclusion of the
operations of the commercial loan servicing business acquired in October 1995
and increases in the loan originations and servicing volumes of the Company's
previously existing commercial mortgage banking operations.
Expenses for the six months ended June 30, 1996 were comprised of $12.6
million in personnel expense, $3.8 million in other general and administrative
expense and $0.8 million in interest expense. The $9.6 million increase in
expenses is primarily due to a $6.6 million increase in personnel expenses, a
$2.2 million increase in other general and administrative expense and a $0.8
million increase in interest expense. Expenses increased primarily due to the
inclusion of operations of the commercial loan servicing business acquired
during October 1995 and the growth in commercial mortgage banking operations
which were initiated late in 1994.
Institutional Investment Advisory. The Company acquired substantially all
of the assets of Acacia in November 1995. Revenues for the first six months of
1996 totaled $2.0 million and were earned in conjunction with providing real
estate investment advisory services to institutional and corporate investors,
including acquisition, portfolio/asset management and disposition services.
Expenses of $1.8 million were incurred, including $1.3 million in personnel
expense and $0.5 million in other general and administrative expenses.
Corporate and Other. Net revenues in this category for the six months ended
June 30, 1996 and 1995 were nominal. Expenses for the six months ended June 30,
1996 were $14.7 million, compared to $7.7 million during the same period in
1995, a 90% increase. The $6.9 million increase was primarily due to increases
in personnel costs and other overhead related to expanded operations since the
second quarter of 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company reported 1995 revenues of $110.5 million, a 15% decrease from
1994. Operating profit also decreased 15% over the same period. Revenues and
operating profit in 1994 included $10.0 million and $6.0 million, respectively,
related to the conclusion of an asset management contract. After adjustment for
this onetime conclusion fee, 1995 revenues decreased 8% while operating profits
increased 2%. Commercial
35
<PAGE> 37
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 onetime contract conclusion fee in 1994, a 3% increase.
Residential Capital Markets. The Company initiated the operations of the
residential capital markets business in September 1995. Revenues for the year
ended December 31, 1995 consisted of $2.3 million in interest and other
investment income. Interest and other investment income primarily consists of
interest earned on mortgage loans held for sale which totaled $142.7 million at
December 31, 1995.
Expenses for the year ended December 31, 1995 were comprised of $1.1
million in interest expense, $0.4 million in personnel expense and $0.2 million
in other general and administrative expenses. The $1.1 million interest expense
relates to borrowings under warehouse loans payable which funded the acquisition
of mortgage loans held for sale.
Asset Acquisition and Resolution. Revenues for 1995 were comprised of $20.6
million in asset management fees, $19.5 million in resolution fees, $36.9
million in interest and other investment income and $4.1 million in other
revenues, primarily consulting revenues and gains on sales of investments. The
$29.5 million, or 27%, decrease in revenues from 1994 was comprised of a $21.2
million decrease in management fees and a $32.4 million decrease in resolution
fees due to the conclusion of significant institutional and government contracts
during 1994 and early 1995. These declines were partially offset by a $23.0
million increase in interest and other investment income due to an increase in
aggregate investments of $138.6 million from December 31, 1994 and a $1.1
million increase in other revenues.
Expenses for the year ended December 31, 1995 were comprised of $21.1
million in personnel costs, $5.0 million in other general and administrative
expenses, $9.5 million in interest and $2.1 million in profit participation
expenses. The $15.1 million, or 29%, decrease in expenses was primarily due to
an $18.5 million decrease in personnel expenses and a $5.8 million decrease in
other general and administrative expenses, which decreases were partially offset
by a $7.2 million increase in interest expense and a $2.0 million increase in
profit participation expenses. Personnel and other general and administrative
expenses decreased as significant institutional and government contracts
concluded during 1994, including a related $3.7 million reduction in estimate of
accounts receivable bad debt reserve and other accrued expenses related to
certain concluding asset management contracts. The increase in interest expense
was due to the financing incurred for a $138.6 million increase in aggregate
investments at December 31, 1995 compared to December 31, 1994. The increase in
profit participation expense is primarily due to the $4.0 million received
related to certain expired RTC contracts, approximately 40% of which was owed to
a joint venture partner.
Commercial Mortgage Banking. Revenues for the year ended December 31, 1995
consisted of $24.4 million in origination, underwriting and servicing revenues,
$2.1 million in interest and other investment income and $0.1 million in other
income. Interest and other investment income increased $1.9 million and mortgage
banking revenues increased $18.2 million primarily due to the inclusion for an
entire year of the operations of Holliday Fenoglio, which was purchased in
August 1994, commencement of ACC's underwriting activities in the fourth quarter
of 1994 and the inclusion of securitized commercial loan servicing contracts
acquired from EQS in the fourth quarter of 1995.
Expenses for the year ended December 31, 1995 were comprised of $16.1
million in personnel expense, $4.1 million in other general and administrative
expense, and $0.3 million in interest expense. The $14.3 million increase is
primarily due to a $11.2 million increase in personnel expenses, a $2.8 million
increase in other general and administrative expense and a $0.3 million increase
in interest expense. Expenses increased due to the inclusion of operations of
Holliday Fenoglio, ACC and the contracts acquired from EQS.
Institutional Investment Advisory. After the Acacia Acquisition in November
1995, revenues of $0.5 million were earned as the result of providing real
estate investment advisory services to institutional and corporate investors,
including acquisition, portfolio/asset management and disposition services.
Expenses of $0.4 million were incurred, including $0.2 million in personnel
expense and $0.2 million in other general and administrative expenses.
36
<PAGE> 38
Corporate and Other. Revenues for the year ended December 31, 1995 were
nominal, compared to $12.7 million in 1994. The $12.7 million decrease in
revenues was primarily due to the $10.0 million conclusion fee on a significant
institutional asset management contract terminated in 1994 and $3.8 million
relating to the inclusion in 1994 of operations and sale of a subsidiary
acquired with BEI for the period prior to its sale in the first quarter of 1994.
Expenses for the year ended December 31, 1995 were $19.8 million, compared
to $35.1 million during 1994, a 44% decrease. The $15.3 million decrease was
primarily due to the inclusion of $6.0 million of expenses in 1994 related to
the conclusion of a significant institutional asset management contract as well
as reduced incentive compensation and severance costs.
Income Taxes. The Company must have future taxable income to realize
recorded deferred tax assets, including net operating loss carryforward tax
benefits obtained in the BEI Merger. Certain of these benefits expire beginning
in 1998 and are subject to annual utilization limitations. Management believes
that recorded deferred tax assets will be realized in the normal course of
business. The decrease in the effective income tax rate for the year ended
December 31, 1995 was primarily due to permanent tax differences related to
mortgages sold by a partnership in which the Company owns an interest for which
the acquired tax basis exceeded the book basis.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
The Company reported 1994 revenues of $129.8 million, a 6% increase from
1993, while operating profit decreased 18% over the same period. Revenues and
operating profit in 1994 included $10.0 million and $6.0 million, respectively,
related to the early conclusion of an asset management contract. The operations
of BEI are included from the date of acquisition, December 31, 1993. The
Company's commercial mortgage banking operations were initiated during 1994 with
the acquisition of Holliday Fenoglio in August 1994 and the commencement of
business by ACC during the fourth quarter of 1994. Additionally, during 1994,
the focus of the asset acquisition and resolution business began changing from
managing assets for institutional and governmental entities to the direct
ownership of Asset Portfolios acquired from nongovernmental sellers and the
management of Asset Portfolios for private third parties.
Asset Acquisition and Resolution. Revenues for the year ended December 31,
1994 included $41.8 million in management fees, $52.0 million in resolution
fees, $13.9 million in interest and other investment income and $2.9 million in
other revenues. Management fees decreased $8.9 million and resolution fees
declined $15.9 million during 1994 principally due to only eight months of
operations under a significant institutional asset management contract, as well
as reduced revenues from the government sector contracts as the contracts
continued to conclude. These declines were offset by a $9.7 million increase in
interest and investment income and gains on sales of assets and other revenues
of $2.8 million.
Expenses of $52.7 million for the year ended December 31, 1994 included
$39.6 million in personnel expenses, $10.7 million in other general and
administrative expenses, $2.3 million in interest expense and $0.1 million in
profit participations. The $1.1 million increase over the same period of 1993
was primarily due to a $6.6 million increase in other general and administrative
expenses and a $1.2 million increase in interest expense, which increases were
partially offset by a $3.8 million decline in personnel expenses and a $2.9
million decrease in profit participations. The increase in other general and
administrative expenses was primarily due to the inclusion of BEI operations in
1994. The increase in interest expense was due to the incurrence of debt to
facilitate increased investments. The decrease in personnel expense was
primarily related to a reduction in the number of personnel due to the
conclusion of personnel-intensive institutional and government asset management
contracts. The decrease in profit participations of $3.0 million was primarily
due to the modification of an asset management contract effective April 1 1993
that effected an exchange of profit participation in the Company's income before
taxes for a rebate of fees.
Commercial Mortgage Banking. Revenues of $6.4 million and expenses of $6.2
million were due to the acquisition of Holliday Fenoglio and the commencement of
business by ACC during 1994. Revenues in 1994 consisted of $0.2 million in
interest income and $6.2 million in commercial mortgage banking revenues,
37
<PAGE> 39
primarily origination, underwriting and servicing revenues. Expenses in 1994
consisted of $4.9 million in personnel expenses and $1.3 million in other
general and administrative expenses.
Corporate and Other. Other revenues for the year ended December 31, 1994
were $12.7 million, compared to a loss of $0.5 million in 1993. The $13.2
million increase in revenues was primarily due to the $10.0 million conclusion
fee on an institutional asset management contract and the $3.8 million in
revenue relating to the inclusion in 1994 of operations and sale of a subsidiary
acquired with BEI for the period prior to its sale in the first quarter of 1994.
Expenses for the year ended December 31, 1994 increased $8.1 million over 1993
to $35.1 million primarily due to the inclusion of $6.0 million of expenses
related to the conclusion of an institutional asset management contract in 1994.
Pro Forma Income Summary. Pro forma combined revenues for 1994 totaled
$139.3 million compared to $168.4 million for 1993, assuming the BEI Merger and
the Holliday Fenoglio acquisition had been consummated as of January 1, 1993.
The $29.1 million, or 17%, decrease was primarily due to a decrease in BEI
revenues of $15.3 million and a decrease in Holdings revenues of $13.8 million.
The decline in revenues was primarily related to the conclusion of certain asset
management contracts during 1994 and the sale of certain Company subsidiaries in
the first quarter of 1994. Pro forma income from continuing operations for 1994
totaled $21.8 million compared to $28.0 million for 1993, after removing the
impact of merger expenses, net gain on sales of subsidiaries and discontinued
operations, for a decrease of $6.2 million, or 22%. Earnings per share from
continuing operations were $0.91 for 1994, compared to $1.23 for the previous
year, a decrease of $0.32, or 26%.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $14.7 million and $16.1 million at June
30, 1996 and December 31, 1995, respectively. Cash flows from operating
activities plus principal cash collections on investments totaled $50.8 million
for the first six months of 1996, compared to $27.3 million for the same period
of 1995. The increase in cash flows from these activities resulted primarily
from increased investments.
The following table is a summary of cash flow activity (dollars in
millions):
<TABLE>
<CAPTION>
TWELVE MONTHS
SIX MONTHS ENDED
ENDED JUNE 30, DECEMBER 31,
----------------- ------------------
1996 1995 1995 1994
------ ------ ------- ------
<S> <C> <C> <C> <C>
Cash provided by operations and principal
collections on investments................... $ 50.8 $ 27.3 $ 77.9 $ 69.8
Cash provided by (used for) new capital and
borrowings, net.............................. 49.1 62.3 334.6 (11.7)
Cash used for purchase of investments.......... (86.6) (92.8) (221.8) (62.6)
Cash used for purchase of mortgage loans,
net.......................................... (68.8) (3.0) (160.8)
Cash used for purchase of subsidiaries......... (3.1) (3.1) (22.3) (17.8)
Interest coverage ratio(1)..................... 2.8x 11.4x 6.0x 24.4x
</TABLE>
- ---------------
(1) Interest coverage ratio means the ratio of earnings before interest, income
taxes, depreciation and amortization to cash interest expense.
38
<PAGE> 40
The following table shows the components of the Company's capital structure
as of June 30, 1996 and as of December 31, 1995 (dollars in millions):
<TABLE>
<CAPTION>
JUNE
30, % OF DECEMBER 31, % OF
1996(2) TOTAL 1995 TOTAL
------- ----- ------------ -----
<S> <C> <C> <C> <C>
Notes payable (excluding investment line(1))...... $ 89.1 16.3 $105.9 22.8
Mortgage warehouse debt........................... 181.0 33.1 153.2 33.0
Senior Subordinated Notes......................... 57.5 10.5
Subordinated Convertible Debentures............... 45.0 8.2 45.0 9.6
Stockholders' equity.............................. 174.2 31.9 160.8 34.6
</TABLE>
- ---------------
(1) The investment line under which $32.9 million and $21.9 million was
outstanding as of June 30, 1996 and December 31, 1995, respectively, is used
solely to acquire short term investments of high grade government securities
that secure the loan.
(2) Subsequent to June 30, 1996, the Company issued $57.5 million of Senior
Notes.
The following discussion summarizes the key components of the Company's
ongoing capital resources:
Parent Capital Arrangements. On August 12, 1996, the lenders' commitment
under the Revolving Loan Agreement was increased to $200.0 million. The interest
rate may be selected by the Company and tied to either the NationsBank of Texas'
variable rate (8.25% at June 30, 1996) or, for advances on a term basis up to
approximately 180 days, a rate equal to an adjusted LIBOR rate (5.5% at June 30,
1996 for a term of 30 days), or, on borrowings funded in foreign currency, an
adjusted currency rate (7.3% at June 30, 1996). At June 30, 1996, there was a
balance of $22.0 million at 7.0%, $19.0 million at 6.9%, $11.8 million at 7.3%,
$9.2 million at 7.4% and $1.2 million at 8.25%, for a total of $63.2 million
outstanding. The total balance outstanding at September 30, 1996 was $61.4
million. The Revolving Loan Agreement is secured by substantially all of the
assets of the Company not pledged under other credit facilities, including stock
of a majority of the Company's subsidiaries. The Revolving Loan Agreement
requires the Company to meet certain financial tests, including minimum
consolidated tangible net worth, maximum consolidated funded debt to
consolidated capitalization ratio, minimum fixed charge coverage ratio, minimum
interest coverage ratio, maximum consolidated funded debt to consolidated
earnings before interest, income taxes, depreciation and amortization ("EBITDA")
ratio and maximum corporate facility outstanding to consolidated EBITDA ratio.
The Revolving Loan Agreement contains covenants that, among other things, will
limit the incurrence of additional indebtedness, investments, asset sales, loans
to Stockholders, dividends, transactions with affiliates, acquisitions, mergers
and consolidations, liens and encumbrances and other matters customarily
restricted in such agreements. The Revolving Loan Agreement matures on May 31,
1998.
Since November 1995, the Company has completed three offerings of debt
instruments: (i) $45.0 million principal amount of Convertible Subordinated
Debentures, bearing interest at 8% per annum and due 2005, (ii) $57.5 million
principal amount of Senior Subordinated Notes, bearing interest at 10% per annum
and due 2003 and (iii) $57.5 million principal amount of Senior Notes bearing
interest at 8.75% per annum and due 1999. The net proceeds of this indebtedness
were used to repay indebtedness incurred under the Revolving Loan Agreement (or
its predecessor). In addition, the Company completed a public offering of
2,300,000 shares of its Common Stock in December 1995. The net proceeds
(approximately $25.1 million) were also used to repay indebtedness under the
predecessor to the Revolving Loan Agreement.
AMRESCO Residential. ARMC has arranged various warehouse facilities to
support its acquisition of loan portfolios. Currently ARMC has three such
facilities which are described below.
ARMC has arranged a warehouse facility (the "Prudential Warehouse
Facility") with Prudential Securities Realty Funding Corporation ("Prudential").
The Prudential Warehouse Facility is currently a $400.0 million credit facility
used to finance the acquisition and warehousing of certain residential mortgage
loans. At June 30, 1996, a total of $43.6 million was outstanding under the
Prudential Warehouse Facility bearing interest at 6.3% per annum. The Prudential
Warehouse Facility is secured by all residential mortgage loans acquired using
funds obtained under this facility.
39
<PAGE> 41
CS First Boston Mortgage Capital Corp. has agreed to provide ARMC with a
repurchase facility in an amount not to exceed $500.0 million (the "Repurchase
Facility"), to finance the acquisition and warehousing of certain residential
mortgage loans. As of June 30, 1996, $133.5 million was outstanding under the
Repurchase Facility bearing interest at 6.4% per annum. This facility is secured
by the mortgages acquired using funds obtained under the facility.
ARMC has also entered into a warehouse credit facility with Morgan Stanley
& Co. Incorporated with a maximum borrowing capacity of $200.0 million. No
indebtedness is outstanding under this facility.
On June 28, 1996, ARMC received approximately $39.8 million of proceeds
from the sale of certain Subordinated Certificates retained by the Company in
connection with the securitization and sale of residential mortgage loans. The
proceeds from this sale were used to reduce outstanding borrowings under the
Revolving Loan Agreement. Although ARMC intends, from time to time, to continue
to pursue opportunities to sell other Subordinated Certificates to generate
additional borrowing capacity under its Revolving Loan Agreement and reduce the
Company's capital exposure with respect to Subordinated Certificates, no
assurance can be given that such opportunities will be available in the future.
ACC. On April 28, 1995, ACC entered into a $25.0 million warehouse line of
credit agreement with NationsBank of Texas (as subsequently amended, the
"NationsBank Warehouse Facility") to support its commercial mortgage origination
and underwriting activities. This facility is secured by loans originated
through borrowings under this facility and bears interest at either the prime
rate announced from time to time by NationsBank of Texas or an Adjusted LIBOR
Rate (as defined in the facility) plus 1.65% or 2.0% based upon certain
enumerated factors. The Company is a guarantor of certain of ACC's obligations
under this facility. A total of $1.2 million bearing interest at 6.9% per annum
was outstanding at June 30, 1996. The NationsBank Warehouse Facility matures on
January 25, 1997.
On August 15, 1995, ACC entered into a warehouse line of credit agreement
with Residential Funding Corporation (as subsequently amended, the "RFC
Warehouse Facility") to facilitate multifamily mortgage loan underwriting and
origination. This facility is secured by the loans originated through borrowings
under this facility and the stated interest rate for this line is an adjusted
30-day LIBOR rate plus 3.0% or less as determined solely by the lender (8.3% at
June 30, 1996). At June 30, 1996, an advance of $2.8 million was outstanding.
Each borrowing under the RFC Warehouse Facility is generally due 60 to 80 days
after funding.
AMRESCO MBS I, Inc. On December 19, 1995, AMRESCO MBS I, Inc. entered into
a non-recourse Global Master Repurchase Agreement to support the purchase of
certain commercial mortgage pass-through certificates. A total of $16.3 million
was outstanding under this facility at June 30, 1996. This facility bears
interest at a rate of 30-day LIBOR plus 1.4% (6.9% at June 30, 1996). This
facility is secured by the Company's investments in certain asset-backed
securities. This facility matures on December 18, 1996.
During the next twelve months, the Company intends to pursue (i) expansion
of current businesses, including AMRESCO Residential, (ii) additional
investments in Asset Portfolios, both for its own account and as an investor
with various capital partners who acquire such investments, and (iii)
acquisitions of new businesses. The funds for such expansion, investments and
acquisitions are anticipated to be provided by cash flows and borrowings under
the Company's Revolving Loan Agreement. As a result, interest expense for 1997
is expected to be higher than interest expense for 1996.
The Company believes its funds on hand of $14.7 million at June 30, 1996,
cash flow from operations, its unused borrowing capacity under its credit lines
($914.5 million at June 30, 1996, excluding availability under a
lender-discretionary mortgage warehouse line which has no stated limit) and its
continuing ability to obtain financing should be sufficient to meet its
anticipated operating needs and capital expenditures, as well as planned new
acquisitions and investments, for at least the next twelve months. The magnitude
of the Company's acquisition and investment program will be governed by the
availability of capital.
IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," issued by the Financial Accounting Standards
Board, which is effective for fiscal years
40
<PAGE> 42
beginning after December 15, 1995, requires that an employer's financial
statements include certain disclosures about stock-based employee compensation
arrangements regardless of the method used to account for them. The Company
continues to measure compensation costs using APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and will therefore include pro forma disclosures
in the notes to the financial statements for all awards granted after December
31, 1994. The Company will disclose the pro forma net income and pro forma
earnings per share as if the fair value based accounting methods in SFAS No. 123
had been used to account for stock-based compensation cost in future financial
statement presentations.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities," issued by the Financial Accounting Standards
Board, is effective for transfers of financial assets and extinguishment of
liabilities occurring after December 31, 1996 and is to be applied
prospectively. The Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of liabilities.
The Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
Management does not believe the impact of the adoption of this Statement will
have a material impact on its financial position or results of operations.
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.
41
<PAGE> 43
BUSINESS
GENERAL
The Company is a leading specialty financial services company engaged in
residential mortgage acquisition and securitization, Asset Portfolio acquisition
and resolution, commercial mortgage banking and institutional real estate
investment advisory services. The residential capital markets business involves
acquiring, warehousing and securitizing portfolios of B&C loans. On October 9,
1996, the Company signed the Quality Purchase Agreement pursuant to which the
Company agreed to purchase substantially all of the assets of Quality. Quality
originates B&C loans through a retail system comprised of approximately 50
offices in 31 states. See "Quality Acquisition." The Asset Portfolio acquisition
and resolution business involves acquiring at a substantial discount to Face
Value and managing and resolving Asset Portfolios to maximize cash recoveries.
The Company manages and resolves Asset Portfolios acquired by the Company alone,
acquired by the Company with co-investors and owned by third parties. The
commercial mortgage banking business involves the origination, underwriting,
placement, sale, securitization and servicing of commercial real estate
mortgages. The Company's institutional investment advisory subsidiary provides
real estate investment advice to various institutional investors (primarily
pension funds).
BACKGROUND
History. The Company is the product of the December 1993 merger of two
Asset Portfolio management and resolution service companies: BEI and the former
Asset Portfolio management and resolution unit of NationsBank of Texas. BEI was
a publicly held company that was engaged in the real estate and asset management
services businesses. The BEI Merger created one of the largest Asset Portfolio
management and resolution service companies in the United States. Since 1987,
the Company and its predecessors have managed over $30.0 billion (Face Value) of
Asset Portfolios. Since the BEI Merger, the Company has expanded its operations
into the residential and commercial mortgage banking and real estate pension
advisory business.
Business Strategy. The Company's original business of managing and
resolving Asset Portfolios for third parties developed as a result of the
takeover of failed thrifts and banks by the federal government's deposit
insurance agencies in the late 1980s. In 1994, the Company implemented a growth
strategy to expand its business lines and to take advantage of business
opportunities in those specialty finance markets that capitalize on the
Company's competitive strengths and reputation. The key elements of the
Company's business strategy now include:
o growing its participation in the acquisition and securitization of B&C
loans through AMRESCO Residential and entering the B&C loan origination
business with its acquisition of Quality;
o increasing the amount that the Company invests for its own account in
Asset Portfolios and continuing to provide high quality management and
resolution services to co-investors and other third-party owners of Asset
Portfolios;
o expanding its presence in the commercial mortgage banking market through
greater market penetration and by increasing its participation in the
market for securitization of commercial mortgages;
o developing its institutional real estate investment advisory business to
complement the Company's existing business lines; and
o acquiring additional businesses which complement the Company's existing
core capabilities in specialty financial services.
The Company will continue to identify, develop and market specialized
financial products that combine and take advantage of the various complementary
skills existing within the Company's business groups as well as expand its
cross-marketing of products and services among its business lines.
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<PAGE> 44
RESIDENTIAL CAPITAL MARKETS
Through AMRESCO Residential, the Company acquires, warehouses and
securitizes portfolios of residential mortgages of borrowers who do not qualify
for conventional loans or whose borrowing needs are not met by traditional
residential mortgage lenders (B&C loans). Such borrowers may not satisfy the
more rigid underwriting standards of the traditional residential mortgage
lending market for a number of reasons, such as blemished credit histories (from
past loan delinquencies or bankruptcy), inability to provide income verification
data or lack of established credit history. The Company believes that this
market is large and is underserved by traditional lenders. Therefore, there is
less competition in this market and interest rates are higher than on mortgage
loans for more creditworthy borrowers. The Company primarily purchases first
lien mortgages. The Company believes that the higher interest rates offered by
the B&C loan market are attractive even after discounting for the potentially
greater credit risk associated with such borrowers.
During 1996 through the date of this Prospectus, the Company has
securitized approximately $1.1 billion in residential mortgages in four public
offerings of asset-backed securities. To date, the Company has purchased
portfolios of residential mortgages exclusively from other financial services
companies. Acquisitions are funded through warehouse credit facilities arranged
by the Company until the Company accumulates in excess of $250.0 million
principal amount of loans. The loans are then conveyed to a special purpose
trust that sells into the secondary market various tranches of rated
collateralized mortgage-backed securities representing undivided interests in
the revenue streams generated by the loans. Subordinated Certificates issued by
the trust are purchased by the Company. The Company either retains these
Subordinated Certificates or pools and sells them in private sales. The Company
does not service any residential loans it acquires. The securities publicly sold
to date by the Company have been rated "AAA" by Standard & Poor's and "Aaa" by
Moody's Investors Service, Inc. To achieve these ratings the Company has used a
combination of over-collateralization techniques and financial guaranty
insurance.
On October 9, 1996, the Company entered into the Quality Purchase Agreement
whereby the Company will acquire substantially all the assets of Quality for
$65.0 million in cash and the assumption of warehouse indebtedness existing as
of closing. Quality originates B&C loans through a nationwide network of
approximately 50 offices in 31 states. These offices enable Quality to maintain
local relationships with over 4,500 Quality-approved mortgage brokers. Since
commencing its current line of business in 1992, Quality has originated over
$5.0 billion of residential loans through September 30, 1996. All of these loans
have been sold into the secondary market or securitized. The Company's strategy
is to continue to develop Quality as an originator of B&C loans, which will
enhance and complement the Company's ability to securitize and sell such loans
in the secondary market. See "Quality Acquisition."
The Company pools the loans it purchases to create asset-backed securities
which it sells on a quarterly or more frequent basis, depending on the
availability of loans, profitability and other relevant factors. Securitization
is used by companies as a cost-competitive source of capital compared to
traditional corporate debt financing alternatives. The Company seeks to utilize
securitization structures that minimize the Company's capital requirements,
while still providing income to the Company. For example, the Company may sell
certificates for senior interests in a securitization, but retain subordinated
or interest-only certificates, some of which it may later elect to sell. The
Company then would have limited capital at risk, but would retain a portion of
the cash flow from the securitization. The Company also may seek to place
bundled residential mortgages through private securitization transactions such
as joint ventures with insurance companies and pension funds. The Company
utilizes the net proceeds from securitizations to purchase additional
residential mortgages and to pay down outstanding warehouse facilities. The
Company, through AMRESCO Residential, uses warehouse facilities with financial
institutions to finance its purchase of loans on a short-term basis pending
securitization. At September 30, 1996, AMRESCO Residential had an aggregate
borrowing capacity of $1.1 billion under three warehouse facilities of which
$783.5 million was available.
In its securitizations, the Company transfers residential mortgages to
newly-formed securitization trusts, which issue one or more classes of
asset-backed securities. The asset-backed securities are simultaneously sold to
investors (except for certain Subordinated Certificates which are purchased by
the Company and which are included in "Asset-Backed and Other Securities" in the
Company's Consolidated Financial Statements
43
<PAGE> 45
included herein). Each month, collections of principal and interest on the
residential mortgages are used by the trustee of the securitization trusts to
pay the holders of the related asset-backed securities, to build over-
collateralization by using excess interest to pay down principal on such
securities and to pay expenses, with any remaining cash flows paid to the
Subordinated Certificates. These remaining cash flows on Subordinated
Certificates purchased by the Company represent a substantial portion of the
Company's revenues. See "Risk Factors -- Changes in Business Mix and Management
of Growth" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations."
The Company arranges for credit enhancement to achieve a desired credit
rating on the asset-backed securities issued. The credit enhancement generally
involves four primary components: (i) a financial guaranty insurance policy;
(ii) servicer advances of scheduled interest and principal on delinquent loans;
(iii) over-collateralization of the securities; and (iv) use of Subordinated
Certificates to absorb losses.
The financial guarantee insurance policies used to date have been issued by
Financial Security Assurance, Inc. ("FSA") and MBIA Insurance Corporation
("MBIA"), which insure payments of principal and interest due on rated
asset-backed securities. Both FSA and MBIA and their respective subsidiaries
principally insure publicly and privately offered, asset-backed, collateralized
and municipal securities. The Company typically retains the unrated, uninsured
asset-backed securities, but has and may in the future elect to sell a portion
of such certificates to generate additional borrowing capacity under the
Revolving Loan Agreement and reduce the Company's capital exposure with respect
to such retained certificates.
A significant portion of the credit enhancement for the securities results
from the use of interest collected on the loans that exceeds the sum of the
interest payable to the holders of the senior asset-backed securities, the
monthly servicing fees and other amounts to pay down the principal on the
asset-backed securities. The application of cash collections in this manner
causes the security principal balance to decline more quickly than the principal
balance of the underlying collateral, thus causing over-collateralization. This
over-collateralization provides not only additional principal protection to the
security holders, but also a higher level of assets earning interest relative to
the level of senior securities on which interest must be paid. Initial and
ongoing target levels of over-collateralization must be achieved and maintained
on each securitization.
Once target levels of over-collateralization are achieved, distributions
otherwise payable to Subordinated Certificates are used on a monthly basis to
absorb any losses and maintain ongoing target over-collateralization levels. If
such cash flow is insufficient to absorb losses in a given period, a draw is
required under the financial guarantee insurance policy. In future periods, this
cash flow must be used to repay any such draws. Each insured securitization
trust has certain portfolio performance tests relating to levels of delinquency,
defaults and net losses on the loans in such trust. If any of these levels are
exceeded, the amount required to be used for additional over-collateralization
and not passed through to the Subordinated Certificates may be increased.
In June 1996, the Company successfully completed the private sale of
certain Subordinated Certificates for approximately $39.8 million. Although the
Company intends, from time to time, to continue to pursue opportunities to sell
other Subordinated Certificates to generate additional borrowing capacity under
the Revolving Loan Agreement and reduce the Company's capital exposure with
respect to such retained certificates, no assurance can be given that such
opportunities will be available in the future.
The Company does not service the loans acquired or securitized by it. When
the originator does not retain servicing rights, the Company selects third-party
servicers experienced in servicing B&C loans. The Company closely monitors the
performance of its loan servicers. Servicers are required to advance to the
securitization trust each month scheduled principal and interest due on
delinquent loans. The Company limits it servicer selection to those companies it
believes are sufficiently capitalized to meet these advance obligations. The
advancement of scheduled principal and interest contributes to the timely
payment of principal and interest on the securities.
ASSET ACQUISITION AND RESOLUTION BUSINESS
General. The Company manages and resolves Asset Portfolios acquired at
substantial discounts to Face Value by the Company alone and by the Company with
co-investors. The Company also manages and resolves
44
<PAGE> 46
Asset Portfolios owned by third parties. Management of Asset Portfolios includes
resolving loans and providing routine accounting services, monitoring
collections of interest and principal (if any), confirming (or advancing)
insurance premiums and tax payments due on collateral and generally overseeing
and managing, if necessary, collateral condition and performance. Asset
Portfolios generally include secured loans of varying qualities and collateral
types. The majority of the loans in the Asset Portfolios in which the Company
invests are in payment default at the time of acquisition. Although some Asset
Portfolios include foreclosed real estate and other collateral, the Company
generally seeks Asset Portfolios that do not include such assets. The Company
does not invest in Asset Portfolios with known environmental liabilities. Asset
Portfolios purchased by the Company for its own account are generally comprised
of 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 traditional real
estate loans. Asset Portfolios purchased by the Company with co-investors
generally include loans for which resolution is tied primarily to the real
estate securing the loan.
The Company obtains information on available Asset Portfolios from many
sources. Repeat business and referrals from Asset Portfolio sellers with whom
the Company previously has transacted business are an important and frequent
source of Asset Portfolios. The Company has developed relationships in which it
is a preferred Asset Portfolio purchaser from certain sellers. The Company
believes that it receives many Asset Portfolio solicitations that result
primarily from the Company's reputation as an active portfolio purchaser. Other
important sources of business include referrals from co-investors who seek the
Company's participation in Asset Portfolio purchases, focused contacts initiated
by senior management, public advertising of Asset Portfolios for sale and the
Company's nationwide presence.
Although the need for asset management and resolution services by
governmental agencies has substantially declined in recent years, the Company
believes that a permanent market for Asset Portfolio acquisition, management and
resolution services has emerged within the private sector. The Company believes
that many financial institutions now recognize that it is advantageous to use
outside contractors to manage and resolve Asset Portfolios for a variety of
reasons, including a desire to reduce overhead costs, inadequate staffing to
handle large volumes of Asset Portfolios or a need to avoid management and
personnel distractions with the intensive and time-consuming job of resolving
Asset Portfolios. These financial institutions include multinational, money
center, super regional and regional banking institutions in the United States,
Canada and Europe, as well as insurance companies in the United States.
Moreover, financial institutions have embraced the concept of packaging and
selling Asset Portfolios to investors as a means of disposing of nonperforming
and underperforming loans and improving the financial institution's balance
sheet. Consolidations within the banking industry have reinforced this trend.
Insurance companies, which historically have avoided outsourcing Asset Portfolio
management or selling Asset Portfolios, also are emerging as sellers of Asset
Portfolios due in part to the implementation of risk-based capital rules for
insurance companies. Additionally, there is a market for management and
resolution services for delinquent or nonperforming loans within performing
securitized loan pools. The Company believes that the significant volume of
annual performing loan securitizations makes this an attractive market in which
to participate.
The Company believes that opportunities for the acquisition, management and
resolution of Asset Portfolios are becoming increasingly evident in certain
international markets and that lenders in these markets are adopting many of the
Asset Portfolio management and resolution outsourcing techniques currently
utilized in the United States. Accordingly, the Company has opened offices in
Toronto (August 1994) employing 17 persons and London (October 1995) employing 6
persons, each at June 30, 1996, in order to take advantage of both investment
and servicing opportunities in Canada, the United Kingdom and certain other
Western European nations. The Company believes that the international markets
are less competitive and, as a result, provide more attractive investments and
greater profit margins. The Company may open other offices and seek strategic
alliances in other international markets. The Company had $248.5 million (Face
Value) in Canadian Asset Portfolios and $87.9 million (Face Value) in United
Kingdom Asset Portfolios under management as of June 30, 1996.
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
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<PAGE> 47
strategic focus to becoming an active Asset Portfolio investor for its own
account and a co-investor with other Asset Portfolio buyers. The Company
believes that as a direct investor in Asset Portfolios it has a significant
competitive advantage relative to the Company's competitors in the management
and resolution business. Moreover, the Company believes that direct investment
permits the Company to take advantage of the profit opportunities of Asset
Portfolio investing. The Company believes that it can gain market share in the
Asset Portfolio acquisition, management and resolution business due to its
financial strength, experience in managing and resolving Asset Portfolios,
national reputation and strategic relationships with sellers and purchasers of
Asset Portfolios, including financial institutions, large corporate buyers,
investment banking firms and sophisticated private investors.
For the six months ended June 30, 1996 and the year ended December 31,
1995, $44.8 million (53.5%) and $81.1 million (73.4%), respectively, of the
Company's gross revenues were attributable to its Asset Portfolio acquisition
and resolution business. The following table reflects the ownership composition
of the Asset Portfolios (based on their Face Value) under management by the
Company as of the dates indicated and further reflects the decline in the
management of Asset Portfolios for governmental agencies and the increase in the
Company's investment in Asset Portfolios since December 31, 1993. Certain
reclassifications of prior period amounts have been conformed to the current
year presentation.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
AS OF JUNE 30, -----------------------------------------------------------
1996 1995 1994 1993
----------------- ----------------- ----------------- -----------------
% OF % OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wholly-owned by the Company(1).... $ 440.6 13.9% $ 354.3 9.6% $ 140.4 4.6% $ 90.4 1.6%
Owned by the Company with co-
investors(2).................... 1,262.6 39.7 1,558.1 42.2 1,675.9 55.3 392.4 6.8
Owned by third parties:
Securitized mortgage pools...... 739.3 23.2 738.3 20.0 315.0 10.4 268.8 4.7
Government and other owners..... 739.0 23.2 1,043.2 28.2 900.5 29.7 5,002.8 86.9
-------- ----- -------- ----- -------- ----- -------- -----
Total under management... $3,181.5 100.0% $3,693.9 100.0% $3,031.8 100.0% $5,754.4 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
- ---------------
(1) Includes $76.5 million, $66.8 million, $13.9 million and $0.0 of
asset-backed securities, and $12.5 million, $1.7 million, $0.6 million and
$0.0 million of real estate as of June 30, 1996 and as of December 31, 1995,
1994 and 1993, respectively.
(2) Includes the securitized Asset Portfolios managed by the Company in which
the Company has invested, which aggregated $644.6 million, $775.3 million,
$973.8 million and $354.3 million as of June 30, 1996 and as of December 31,
1995, 1994 and 1993, respectively.
The following table reflects, by ownership category, the number of Asset
Portfolios managed by the Company and the number of assets included in such
portfolios as of June 30, 1996:
<TABLE>
<CAPTION>
NUMBER OF ASSET NUMBER OF
PORTFOLIOS ASSETS
--------------- ---------------
<S> <C> <C>
Wholly-owned by the Company............................. 42 1,176
Owned by the Company with co-investors.................. 29 1,149
Owned by third parties:
Securitized mortgage pools............................ 14 860
Government and other owners........................... 10 1,232
--
-----
Total under management........................ 95 4,417
== =====
</TABLE>
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<PAGE> 48
The following table reflects the Company's investment (at carrying value)
in Asset Portfolios as of the dates indicated below:
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
JUNE 30, ------------------------
1996 1995 1994 1993
-------- ------ ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Wholly-owned by the Company(1)....................... $192.6 $170.5 $34.4 $33.8
Owned by the Company with co-investors(2)............ 31.8 34.3 33.7 2.5
------ ------ ----- -----
Total...................................... $224.4 $204.8 $68.1 $36.3
====== ====== ===== =====
</TABLE>
- ---------------
(1) Includes $35.2 million, $33.9 million, $3.5 million and $0.0 million of
asset-backed securities, and $12.6 million, $0.5 million, $0.0 million and
$0.0 million of real estate as of June 30, 1996 and as of December 31, 1995,
1994 and 1993, respectively.
(2) Includes the securitized Asset Portfolios managed by the Company in which
the Company has invested, which aggregated $8.4 million, $8.9 million, $7.9
million and $1.7 million as of June 30, 1996 and as of December 31, 1995,
1994 and 1993, respectively.
Asset Portfolio Investment. The Company invests in Asset Portfolios by
purchasing them alone or with co-investors. As of June 30, 1996, the Company's
weighted average investment in all Asset Portfolios in which it was a
co-investor was 5.9% of the aggregate purchase price of such Asset Portfolios.
The Company generally funds its share of any investment with a combination of
borrowings under its then existing credit line and internal cash flow. Future
Asset Portfolio purchases will depend on the availability of Asset Portfolios
offered for sale, the availability of capital and the Company's ability to
submit successful offers to purchase Asset Portfolios. As a result, Asset
Portfolio purchases may vary significantly from quarter to quarter. The
following table reflects the Company's total purchases (at cost) of Asset
Portfolios by fiscal quarter over the past nine quarters:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
----------------------------------------------------------------------------------------------------
JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30,
1996 1996 1995 1995 1995 1995 1994 1994 1994
-------- --------- -------- --------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Wholly-owned by the
Company(1)............... $48,066 $24,548 $76,749 $45,987 $62,499 $15,539 $21,014 $ $ 6,941
Owned by the Company with
co-investors(2).......... 581 5,452 325 8,480 6,294 7,900 11,306 8,948
------- ------- ------- ------- ------- ------- ------- ------- -------
Total.............. $48,066 $25,129 $82,201 $46,312 $70,979 $21,833 $28,914 $11,306 $15,889
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes $2,822, $27,520, $13,248, $2,875 and $3,497 in the quarters ended
June 30, 1996, December 31, 1995, September 30, 1995, June 30, 1995 and June
30, 1994, respectively, for purchases of asset-backed securities, but does
not include any real estate assets.
(2) Includes $4,000, $1,601 and $2,000 of investments in securitized mortgage
pools purchased in the quarters ended December 31, 1994, June 30, 1994 and
March 31, 1994, respectively.
Prior to making an offer to purchase an Asset Portfolio, the Company
conducts an extensive investigation and evaluation of the individual loans
generally comprising 100% of the aggregate Face Value of all the loans therein,
except in rare instances where an unusually large number of smaller assets are
being purchased. This examination typically consists of analyzing the
information made available by the Asset Portfolio seller (generally, the
respective credit and collateral files for the loans), reviewing other relevant
material that may be available (including tax and judgment records), and
analyzing the underlying collateral (including conducting site inspections,
obtaining value opinions from third parties and consulting with any of the
Company's asset managers who have experience with the local market for such
assets). The Company also reviews information on the local economy and real
estate markets in the area in which the loan collateral is located. Because of
its broad, nationwide experience in managing assets, the Company often is able
to draw on its asset management experience in the specific market in which an
asset is located. Unlike the original lender,
47
<PAGE> 49
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. Generally, the Company does 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 nonperforming and
underperforming 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 June 30,
1996, the Company had paid an average purchase price of 54% of the aggregate
Face Value on all of its Asset Portfolios.
When an Asset Portfolio is acquired (whether for the Company's own account
or with co-investors), the Company assumes the management of the loans therein.
Management includes responsibility both for servicing and for resolving such
loans. The Company's asset managers are given the supporting due diligence
information and projections relating to each newly-acquired loan for which the
manager assumes management responsibility. Because asset managers are actively
involved in the Asset Portfolio evaluation process, it is not unusual for an
asset manager to be given management responsibility for the specific loans that
the asset manager assisted in evaluating in the due diligence or pricing
processes. The Company believes that by combining the resolution and evaluation
activities it achieves efficiency in loan resolution and accuracy in loan
evaluations.
Asset resolutions are typically accomplished through (i) negotiating with
debtors a discounted payoff, which may be accomplished through a refinancing by
the obligor with a lender other than the Company, or (ii) foreclosure and sale
of the collateral. The Company generally seeks consensual resolution of each
loan, having found that a negotiated resolution usually maximizes the Company's
or investor's rate of return. Historically, the Company has resolved the
majority of the assets within an Asset Portfolio within 18 months of
acquisition. The goal of the Company's asset resolution process is to maximize
in a timely manner the cash recovery on each loan in an Asset Portfolio.
In evaluating Asset Portfolios, the Company takes into account
concentrations of collateral located in specific regions of the United States,
Canada and the United Kingdom. As of June 30, 1996, the geographic dispersion of
each primary asset securing the loans in the Asset Portfolios in which the
Company had invested (whether for its own account or with co-investors) was as
follows:
<TABLE>
<CAPTION>
NUMBER
FACE VALUE % OF TOTAL OF ASSETS % OF TOTAL
---------- ---------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Northeast................................... $ 400.0 23.5% 986 42.4%
West........................................ 660.0 38.7 455 19.6
Southwest................................... 163.2 9.6 252 10.8
Midwest..................................... 77.0 4.5 79 3.4
Southeast................................... 291.8 17.1 423 18.2
-------- ----- ----- -----
United States Subtotal.................... 1,592.0 93.4% 2,195 94.4%
Canada...................................... 23.3 1.4 78 3.4
UK.......................................... 87.9 5.2 52 2.2
-------- ----- ----- -----
Total............................. $1,703.2 100.0% 2,325 100.0%
======== ===== ===== =====
</TABLE>
48
<PAGE> 50
The Company invests in both Asset Portfolios composed of collateralized
business loans and in Asset Portfolios composed of real estate collateralized
loans. Asset Portfolios purchased by the Company alone have tended to be
primarily composed of collateralized business loans, because many such Asset
Portfolios are within the size range generally sought by the Company. Asset
Portfolios composed primarily of real estate loans typically are larger and the
Company's investments in such portfolios usually are made with co-investors. At
June 30, 1996, the Face Value of the Company's total investment in wholly-owned
Asset Portfolios aggregated approximately $440.6 million, which was composed of
approximately $341.8 million (77.6%) of collateralized business loans,
approximately $9.8 million (2.2%) of real estate loans, approximately $76.5
million (17.4%) of asset-backed securities and approximately $12.5 million
(2.8%) of real estate.
In addition, as of June 30, 1996, the Asset Portfolios in which the Company
had invested (whether for its own account or with co-investors) included
approximately 2,325 individual assets. The Company has found that the market for
smaller portfolios is less competitive, because larger Asset Portfolio buyers
often elect not to consider these portfolios. In a recent industry trend, some
Asset Portfolio sellers are soliciting bids on portfolios consisting of small
groups of loans.
The Company also purchases Subordinated Certificates (typically composed of
problem loans to which the Company can apply its resolution expertise). The
Company believes that acceptance of this risk is similar to its Asset Portfolio
acquisition business, and that the risk is acceptable because the Company has
significant expertise in understanding loan valuations and will manage the loan
resolutions.
Investment Funds. The Company intends to expand its investing activities by
marketing to institutional investors the opportunity to invest in Subordinated
Certificates of residential and commercial mortgage securitizations through
investment funds being organized by the Company. The Company's equity investment
would range between 10% and 20% of the total funds invested. The Company
believes that it can apply to the underlying collateral the valuation and
underwriting expertise available in its Asset Portfolio acquisition and
resolution, commercial mortgage banking and residential capital markets business
groups, and thus take advantage of investment opportunities that are presented
by such Subordinated Certificates. The Company also believes that acquiring
Subordinated Certificates will generate opportunities for the Company's asset
management and servicing group. The majority of the Company's investment in
these Subordinated Certificates in the future will be through these funds. As a
policy, the Company will not sell Subordinated Certificates created in
securitizations organized by the Company to these funds. The funds will be
marketed through the Company's pension advisory group.
Third Party Asset Management and Resolution Services. The Company provides
asset management and resolution services to third parties pursuant to contracts
with owners of Asset Portfolios (including partnerships, joint ventures and
other groups in which the Company is a co-investor). Management of Asset
Portfolios includes developing loan resolution strategies and resolving loans,
overseeing and managing collateral condition and performance, and providing
routine accounting services.
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 June 30, 1996, covered Asset Portfolios with an aggregate
Face Value of approximately $1.5 billion. These contracts generally provide for
the payment of (i) a fixed annual management fee (generally between 50 and 75
basis points based on the Face Value or original purchase price of the loans)
with revenues declining as assets under management decrease, (ii) a resolution
fee (generally between 50 and 150 basis points based on the net cash collections
on loans and assets) and (iii) a negotiated incentive fee for the successful
resolution of loans or assets which is earned after a predetermined rate of
return for the portfolio owner or co-investor is achieved. Older Asset
Portfolios serviced by the Company are composed primarily of assets which were
sold by the RTC and the FDIC and generally contain relatively small loan
balances. As these portfolios are resolved, they are being replaced by Asset
Portfolios with relatively larger loan balances. This permits the Company to
achieve increased servicing efficiencies.
As part of its third-party asset management and resolution business, the
Company aggressively pursues contracts to serve as the designated Special
Servicer for pools of securitized commercial mortgages. After a loan within a
securitized pool of performing loans becomes delinquent or nonperforming, the
Master Servicer
49
<PAGE> 51
or Primary Servicer of the pool will contractually transfer responsibility for
resolution of that loan to the pool's designated Special Servicer. Special
Servicers earn an annual fee (typically approximately 50 basis points of the
Face Value of the delinquent or nonperforming loans subject to Special
Servicing), plus a 75 to 100 basis points resolution fee based on the total cash
flow from resolution of each such loan as it is received. As of June 30, 1996,
the Company was the designated Special Servicer for securitized pools holding
over $8.0 billion (Face Value) of loans, $739.3 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 participating
interests in the delinquent or nonperforming portion of a securitized portfolio
provides the Company a significant competitive advantage in pursuing Master/Full
and Special Servicer contracts.
COMMERCIAL MORTGAGE BANKING BUSINESS
General. The Company performs a wide range of commercial mortgage banking
services, including originating, underwriting, placement, selling and servicing
commercial real estate loans through its Holliday Fenoglio, ACC and AMRESCO
Services commercial mortgage banking units. For the year ended December 31, 1995
and the six month period ended June 30, 1996, $26.6 million (24.1%) and $20.4
million (24.4%), respectively, of the Company's gross revenues were attributable
to the Company's commercial mortgage banking business.
The Company believes that the commercial real estate mortgage banking
business offers significant growth opportunities. There are an estimated $1.0
trillion of commercial real estate mortgages outstanding within the United
States and the Company estimates that $125.0 billion to $150.0 billion in
commercial real estate mortgages are refinanced each year in addition to
mortgage financing of new construction. Originations of loans for new
construction projects are cyclical and are influenced by various factors
including interest rates, general economic conditions and demand patterns in
individual real estate markets. The commercial mortgage banking industry is
fragmented, composed primarily of small local or regional firms. The Company
anticipates that expensive technological demands, increasingly standardized
underwriting requirements, more demanding borrowers and lenders and the
emergence of a market for securitized commercial real estate mortgage pools will
likely push the commercial mortgage banking industry toward greater
consolidation. The Company believes that well-capitalized, full service,
nationwide mortgage banking firms offering a variety of mortgage banking and
loan management services will emerge from this consolidation. The Company's
objective is to improve its position as a major nationwide full service mortgage
banker to the commercial real estate industry. The Company intends to achieve
this goal through the internal development of its commercial mortgage banking
group and through strategic acquisitions of commercial mortgage bankers which
either serve key real estate markets in the United States or provide niche or
specialized services that enhance the Company's product line.
Commercial Mortgage Banking Business. As a leading full service commercial
mortgage broker and banker with offices in key markets throughout the United
States, the Company provides a wide range of real estate capital markets
services to owners and developers of the full range of commercial real estate
properties. The typical consumers of commercial real estate mortgage banking
services are both real estate developers and owners (as borrowers) and
investor/lenders (as funding sources). Due to the more specialized nature of
commercial mortgage lending and the smaller universe of lenders serving this
market (in each case relative to the residential mortgage market), borrowers
rely on commercial mortgage brokers and bankers to find competitive lenders, and
these lenders (particularly insurance companies and pension plans, which do not
generally have origination staffs located in multiple branches) rely on mortgage
brokers and bankers to source potential borrowers. Lenders generally include
banks, pension funds and insurance companies. In originating loans, Holliday
Fenoglio and ACC each work closely with both the borrower and potential lenders
from the time a loan prospect is first contacted, through the application and
proposal process and throughout the documentation of the loan to final funding.
Holliday Fenoglio and ACC each typically perform extensive due diligence and
market analysis for the lenders in this process.
Holliday Fenoglio was one of the largest commercial mortgage bankers in the
United States in 1995 (based on origination volume) and primarily serves
commercial real estate developers and owners by originating commercial real
estate loans. Holliday Fenoglio originated approximately $2.1 billion of commer-
50
<PAGE> 52
cial real estate loans during 1995 and approximately $1.1 billion during the six
months ended June 30, 1996. Holliday Fenoglio principally targets developers and
owners of higher-quality commercial and multifamily real estate properties.
Holliday Fenoglio services prospective borrowers through its own
commission-based mortgage bankers in its offices located in Atlanta, Boca Raton,
Buffalo, Dallas, Houston, New York City, Orlando and Portland (Oregon). The
loans originated by Holliday Fenoglio generally are funded by institutional
lenders, primarily insurance companies, and by Conduit Purchasers, with Holliday
Fenoglio retaining the Primary Servicer rights on approximately 20% of such
loans. The Company believes that Holliday Fenoglio's relationship and
credibility with its institutional lender network provide the Company a
competitive advantage in the commercial mortgage banking industry.
ACC, which originated approximately $447.1 million of mortgages during 1995
and approximately $105.2 million of mortgages during the six months ended June
30, 1996, is a mortgage banker that originates and underwrites commercial real
estate loans that are funded primarily by Conduit Purchasers. Accordingly, ACC
unlike Holliday Fenoglio, makes certain representations and warranties
concerning the loans it originates. These representations cover title to the
property, lien priority, environmental reviews and certain other matters. ACC
targets mortgage loans for commercial real estate properties that are suitable
for sale to Conduit Purchasers that accumulate loans for securitization
programs. ACC has established a financing and advisory relationship with a major
Wall Street investment bank whereby ACC will originate commercial mortgages,
which will be funded and securitized by a partnership. Through this
relationship, ACC will share in both the risk and the profit opportunities of a
Conduit Purchaser. By aligning its economic interest with the Conduit Purchaser
and jointly underwriting all loans purchased, the Company believes it can
significantly reduce the amount of time necessary to commit to a loan (by
avoiding duplicate underwriting evaluations) thereby enhancing its
competitiveness in this market. ACC serves its market directly through ACC's
offices located in Dallas, Miami, Washington, D.C. and Winston-Salem as well as
through a network of approximately 38 independent mortgage brokers located
throughout the United States. Through June 30, 1996, approximately 20.0% of the
loans underwritten by ACC were originated by Holliday Fenoglio, with Holliday
Fenoglio and ACC each receiving fees for their respective services.
The Company believes that it has certain additional significant advantages
in the commercial mortgage banking marketplace. First, through its relationships
with certain institutional investors, the Company is able to underwrite and sell
commercial mortgage loans, particularly in instances where the borrower needs
relatively quick access to funding for a particular project. Through a warehouse
credit facility arranged in early 1995, the Company is able to underwrite and
fund a loan and hold that loan for resale to a buyer. Second, because of the
Company's extensive experience in real estate markets, the Company believes it
can carefully evaluate the risks of such underwriting transactions in order to
minimize financial exposure to the Company in underwriting and/or warehousing a
loan.
ACC is approved by Fannie Mae to participate in its Delegated Underwriting
and Servicing ("DUS") program. An approved DUS lender is delegated the authority
to approve, commit and close loans for multifamily mortgages on a national basis
with the assurance that Fannie Mae will purchase the loans. In contrast to a
"prior approval" lender, DUS lenders do not need to obtain the approval of
Fannie Mae prior to making the loan. In return for the delegated authority to
make loans and the subsequent purchase of such loans by Fannie Mae, DUS lenders
must maintain a significant capital base, and retain a certain level of credit
risk on the loans they make. The DUS lender takes first loss risk up to 5% of
the loan amount, and above 5% Fannie Mae and the DUS lender share the loss, with
the DUS lender's maximum loss capped at 20% of the loan amount.
ACC is one of only 28 currently approved DUS lenders. While all DUS lenders
operate on a national basis, the Company believes that ten such lenders account
for the majority of DUS volume. The Company believes that ACC, as one of the few
DUS lenders, has certain competitive advantages in the multifamily mortgage
origination business. These advantages include the competitive pricing afforded
by Fannie Mae's position as the largest purchaser of housing related mortgages
in the nation and the ability to commit and close mortgages without the delay
and the accompanying market risks of such delay for an approval process by the
mortgage purchaser. For these reasons, the Company expects Fannie Mae loan
originations to become a
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<PAGE> 53
significant part of its commercial mortgage banking activities. Holliday
Fenoglio is expected to be a significant source of such loan originations.
ACC is also a member of the Freddie Mac multifamily seller/servicer program
in Florida, North Carolina and South Carolina and intends to expand into other
states. Through this program, the Company sells to Freddie Mac and services
multifamily apartment mortgages in these states.
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 nontraditional
financing involving hybrid forms of debt, equity participations and other
creative financing structures. Fees for equity or joint venture structures are
typically higher.
The table that follows reflects the loan origination activity, loan
origination and underwriting fee revenue and number of loan origination offices
for six months ended June 30, 1996 and the year ended December 31, 1995:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Loan origination:
Dollar volume........................................ $ 1,184.0 $ 2,573.4
Number of loans...................................... 195 444
Loan origination and underwriting fees earned.......... $ 9.8 $ 20.6
Number of loan origination offices..................... 11 11
</TABLE>
The Company has established relationships with over 200 institutional
lenders that include insurance companies, pension plans and Conduit Purchasers.
In 1995, the Company placed 444 loans with over 79 different lenders. For the
six months ended June 30, 1996, the Company placed 195 loans with over 48
different lenders. Forty-four institutional lenders have retained the Company as
their respective exclusive or semi-exclusive loan originator in selected cities
and regions.
Commercial Loan Servicing Business. The Company serves as a Primary
Servicer for whole loans and as a Master/Full Servicer for securitized pools of
commercial mortgages through AMRESCO Services. At June 30, 1996, the Company
acted as servicer with respect to approximately $10.9 billion of loans. See
"Asset Acquisition and Resolution Business -- Asset Management and Resolution
Services." The dominant users of commercial loan servicers are commercial
mortgage-backed bond trusts and similar securitized asset-backed loan portfolios
made up of numerous passive investors. Other lenders often contract with the
originating mortgage banker or other third-party servicer to manage collection,
accounting and other activities with respect to the loan. The revenue stream
from servicing contracts on commercial mortgages is relatively predictable as
prepayment penalties in commercial mortgages discourage early loan payoffs, a
risk that is more significant to servicers of residential mortgage portfolios.
Primary Servicing involves collecting monthly mortgage payments,
maintaining escrow accounts for the payment of ad valorem taxes and insurance
premiums on behalf of borrowers, remitting payments of principal and interest
promptly to investors in the underlying mortgages, reporting to those investors
on financial transactions related to such mortgages and generally administering
the loans. The Primary Servicer also must cause properties to be inspected
periodically, determine the adequacy of insurance coverage on each property,
monitor delinquent accounts for payment and, in cases of extreme delinquency,
institute and complete either appropriate forbearance arrangements or
foreclosure proceedings on behalf of investors. Primary Servicer rates are
determined by a bidding and negotiating process. At June 30, 1996, the Face
Value of the Company's Primary Servicing portfolio totaled approximately $3.1
billion.
Master Servicing involves providing administrative and reporting services
to securitized pools of mortgage-backed securities. Typically, mortgages
underlying mortgage-backed securities are serviced by a number of Primary
Servicers. Under most master servicing arrangements, the Primary Servicers
retain
52
<PAGE> 54
principal responsibility for administering the mortgage loans and the Master
Servicer acts as an intermediary in overseeing the work of the Primary
Servicers, monitoring their compliance with the issuer's standards and
consolidating their respective periodic accounting reports for transmission to
the issuer of the related securities. The Company occasionally is designated as
the Full Servicer for a pool of mortgages, in which case the Company acts as
Master, Primary and Special Servicer for the pool. Master/Full Servicers are
typically paid fees based on the Face Value of loans under management, and the
compensation is determined by a bidding and negotiating process. At June 30,
1996, the Face Value of the Company's Master/Full Servicing portfolio totaled
approximately $7.8 billion. The average life of these securitized pools is
expected to be approximately eight years.
The market for servicing performing loan pools constitutes a much larger
potential market than the market for servicing nonperforming and underperforming
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 for
the Company. The Company has previously participated in this market as a Primary
Servicer of commercial real estate loans for loans originated by the Company's
mortgage banking unit and for loans owned by investor clients.
Special Situation Lending. The Company has teamed with a major Wall Street
investment bank to provide financing to commercial real estate and business
borrowers for short-term financing or in situations where conventional financing
is unavailable. The Company will consider financing for asset acquisitions and
special use projects, "bridge" financing, bankruptcy and post-bankruptcy
financing, financings to accommodate discounted payoffs, debt restructurings and
"turnaround" situations, acquisitions of Asset Portfolios and the acquisition of
creditor positions in litigation or bankruptcy cases. These loans are generally
collateral-based, including commercial real estate, machinery and equipment. The
Company often approaches the winning bidder for an Asset Portfolio on which the
Company also bid to fund the winner's purchase. The Company believes it often
has a significant advantage in this lending market, because the Company
understands the unique characteristics of the market and has already evaluated
the specific Asset Portfolios. Typically special situation loans have a term of
six to 36 months and provide higher interest rate opportunities than
conventional loans. Through June 30, 1996, the Company had arranged $55.0
million of such loans with the Company funding $12.9 million of such loans and
the investment bank funding the balance.
INSTITUTIONAL REAL ESTATE INVESTMENT ADVISORY SERVICES
The Company believes that a market exists for quality real estate advisory
services to pension plans and other institutional investors in commercial real
estate. The Company believes that through the targeted hiring of high quality
personnel with proven track records and the purchase of advisory contracts from
other advisors, the Company can become a major provider of real estate advisory
services to institutional real estate investors, such as pension plans. The
Company's acquisition of substantially all of the advisory contracts and the
hiring of pension advisory personnel of Acacia was the first step in the
implementation of this strategy. The Company principally provides investment
advice to various institutional investors (primarily pension funds) seeking to
invest a portion of their funds in real estate and related investments. The
investors establish certain investment parameters with the Company (e.g., amount
of funds available for investment, type of property, geographic mix, form of
investment (loan, partnership, direct ownership), target rate of return and
investment term). The Company then seeks investment opportunities it believes
meet the investors' parameters. The investors exercise varying degrees of
control over the Company's investment decisions. Depending on the amount of
discretion granted 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.
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<PAGE> 55
As more fully described above in "-- Asset Acquisition and Resolution
Business -- Asset Portfolio Investment," the Company intends to organize and
market investment funds that will invest in Subordinated Certificates. The
Company intends to market these funds through the institutional investment
advisory group.
COMPETITION
The Company's competition varies by business line and geographic market.
Generally, competition within each of the business lines within which the
Company competes is fragmented, with national, local and regional competitors,
none of which dominates a particular business line. Certain of the Company's
competitors within each of its business lines are larger and have greater
financial resources than the Company.
The Company recently has encountered increased competition in the market
for B&C residential loans as more originators and Conduit Purchasers enter this
market. This could impact origination and acquisition volume and profit margins.
Certain of the Company's larger, national competitors have access to greater
financial resources and lower costs of capital. In addition, the Company
believes that its ability to acquire Asset Portfolios for its own account will
be important to its future growth. Recently, the Company has been encountering
increasing competition in the market for Asset Portfolios which could cause the
Company to experience decreasing profit margins in this business line in order
to remain a competitive bidder for Asset Portfolios. In addition, declining
profit margins presented by current bidding opportunities has caused the Company
to redeploy its capital in more profitable product lines. Asset Portfolio
acquisitions also require significant capital.
The Company also encounters significant competition in its other business
lines. The commercial mortgage banking business is highly fragmented with
certain large national competitors and significant localized competition. In
addition, within the commercial loan origination and residential mortgage
securitization business access to, and the cost of, capital are critical to the
Company's ability to compete. The Company must compete with numerous
competitors, many of which have superior access to capital sources and can
arrange or obtain lower cost capital for customers.
LEGAL PROCEEDINGS
The Company is involved from time to time in various legal proceedings
arising in the ordinary course of business. In connection with the Company's
loan servicing, asset management and resolution activities, the Company is
indemnified to varying degrees by the party on whose behalf the Company is
acting. The Company also maintains insurance that management believes is
adequate for the Company's operations. None of the legal proceedings in which
the Company is currently involved, either individually or in the aggregate (and
after consideration of available indemnities and insurance), is expected to have
a material adverse effect on the Company's business or financial condition.
EMPLOYEES
At June 30, 1996, the Company and its subsidiaries employed 795 persons.
317 persons were employed in the Company's asset acquisition and resolution
group, 310 in the Company's commercial mortgage banking and services group, 14
in its residential capital markets, 23 in its institutional investment advisory
services business and 131 in general administration. The Company believes that
its employee relations are generally good.
PROPERTIES
The Company leases approximately 130,600 square feet in the North Tower of
the Plaza of the Americas in Dallas, Texas for its centralized corporate
functions including executive, business development and marketing, accounting,
legal, human resources and support. This lease has an initial termination date
of October 31, 2006 and has an initial annual base rent of approximately $1.5
million. The Company also leases space for branch offices pursuant to leases
with varying terms.
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<PAGE> 56
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and a brief account of the business
experience of each person who is a director or executive officer of the Company.
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY AND PRINCIPAL
NAME AGE OCCUPATION DURING THE PAST FIVE YEARS
--- --- ---------------------------------------
<S> <C> <C>
Robert L. Adair III........... 52 Mr. Adair serves as director, President and Chief
Operating Officer of the Company (since December 1993).
Mr. Adair previously served as Executive Vice President
and director of BEI (1989 to December 1993). His term as a
director expires in 1997.
L. Keith Blackwell............ 55 Mr. Blackwell serves as Vice President (since February
1996), General Counsel and Secretary (since January 1994)
of the Company and previously served as General Counsel
and Secretary of Holdings (December 1993). Mr. Blackwell
previously was an investor and consultant (May 1992 to
December 1993) and served as Executive Vice President,
General Counsel and Secretary of First Gibraltar Bank,
FSB, a Federal savings bank (December 1988 to May 1992).
James P. Cotton, Jr........... 57 Mr. Cotton serves as a director of the Company (since
December 1993). His term expires in 1998. Mr. Cotton
previously served as Chairman of the Board of BEI (1986 to
December 1993). Mr. Cotton also serves as Chairman of the
Board and Chief Executive Officer of USBA Holdings, Ltd.,
a provider of products and services to financial
institutions (since 1990).
Richard L. Cravey............. 51 Mr. Cravey serves as a director of the Company. His term
expires in 1999. Mr. Cravey previously served in the
following positions: Chairman of the Board and Chief
Executive Officer of the Company (December 1993 to May
1994) and Chairman of the Board of Holdings (1992 to
December 1993). Mr. Cravey also holds the following
positions: Founder and Managing Director of Cravey, Green
& Wahlen Incorporated, a private risk capital investment
firm (since 1985), its investment management affiliate,
CGW Southeast Management Company (since 1991) and its
affiliates, CGW Southeast I, Inc. (the general partner of
CGW Southeast Partners I, L.P.) and CGW Southeast II, Inc.
(the general partner of CGW Southeast Partners II, L.P.)
(since 1991); and Director of Cameron Ashley Building
Products, Inc., a national distributor of home building
products (since 1994).
Barry L. Edwards.............. 49 Mr. Edwards serves as Executive Vice President and Chief
Financial Officer of the Company (since November 1994).
Mr. Edwards previously served as Vice President and
Treasurer of Liberty Corporation, an insurance holding
company (1979 to November 1994).
Gerald E. Eickhoff............ 49 Mr. Eickhoff serves as a director of the Company. His term
expires in 1999. Mr. Eickhoff also is a private investor
(since December 1993). He previously served as President,
Chief Executive Officer and director of BEI (1986 to
December 1993).
</TABLE>
55
<PAGE> 57
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY AND PRINCIPAL
NAME AGE OCCUPATION DURING THE PAST FIVE YEARS
---- --- ---------------------------------------
<S> <C> <C>
Harold E. Holliday, Jr........ 49 Mr. Holliday serves as President -- Commercial Mortgage
Bank of the Company (since February 1996). He previously
served as Chairman of the Board and Chief Executive
Officer of Holliday Fenoglio (since August 1994). Mr.
Holliday previously served as President of Holliday,
Fenoglio, Dockerty & Gibson, Inc., a mortgage banking
company (for more than five years prior to August 1994).
Amy J. Jorgensen.............. 43 Ms. Jorgensen serves as a director of the Company (since
1995). Her term expires in 1998. Ms. Jorgensen also serves
as Managing Director of Greenbriar Associates LLC, which
provides advice and executes transactions relating to real
estate assets and companies (since 1995). Ms. Jorgensen
previously served as President of the Jorgensen Company, a
consultant for real estate strategy and finance (April
1992 to September 1995) and as Managing Director in the
Real Estate Department of Morgan Stanley & Co.
Incorporated (1986 to February 1992).
Robert H. Lutz, Jr............ 47 Mr. Lutz serves as Chairman of the Board and Chief
Executive Officer of the Company (since May 1994). His
term as a director expires in 1999. Mr. Lutz previously
served as President of Allegiance Realty, a real estate
management company (November 1991 to May 1994) and
Executive Vice President of Cousins Properties (February
1990 to October 1991). Mr. Lutz is also a director of
Bristol Hotel Company (since 1995).
Michael N. Maberry............ 53 Mr. Maberry serves as President of ACC (since April 1994).
Mr. Maberry previously was a shareholder in the law firm
of Winstead, Secrest & Minick (April 1989 to April 1994).
John J. McDonough............. 60 Mr. McDonough serves as a director of the Company (since
1994). His term expires in 1997. Mr. McDonough also serves
or has served in the following positions: President and
Chief Executive Officer of McDonough Capital Company LLC,
a company through which Mr. McDonough conducts personal
and family investments (since February 1995); Chairman of
the Board of SoftNet Systems, Inc., a company that
develops, markets, installs and services information and
document management systems (since June 1995); Vice
Chairman and Chief Executive Officer (1993 to February
1995) of DENTSPLY International, Inc., a manufacturer of
dental supplies, dental equipment and medical x-ray
products; Chairman of the Board (1992 to 1993), Director
(1983 to 1992), Chief Executive Officer (1983 to 1993),
and President (1983 to 1991) of GENDEX Corporation, a
manufacturer of dental equipment and medical x-ray
products, which merged with DENTSPLY in June 1993;
Director (since 1992) of Newell Co., a New York Stock
Exchange-listed manufacturer of products for the
do-it-yourself hardware and housewares market; and
Director of AmNet Systems, Inc., a company that develops,
markets and installs electronic information and document
management for the healthcare industry (since 1995).
</TABLE>
56
<PAGE> 58
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY AND PRINCIPAL
NAME AGE OCCUPATION DURING THE PAST FIVE YEARS
---- --- ---------------------------------------
<S> <C> <C>
Scott J. Reading.............. 52 Mr. Reading serves as President of AMRESCO Residential
Credit Corporation (since August 1995). Mr. Reading
previously served as Managing Director of Household
Financial Services, Inc., a division of Household
International, Inc., a diversified financial services
company (June 1991 to August 1995).
Bruce W. Schnitzer............ 52 Mr. Schnitzer serves as a director of the Company. His
term expires in 1997. Mr. Schnitzer previously served as
Vice Chairman of the Board of BEI (1986 to December 1993).
Mr. Schnitzer also serves as Chairman of Wand Partners
Inc., an investment advisory company (since 1987);
Director of Penncorp Financial Group, Inc. (since 1990);
Director of Chartwell Re Corporation (since 1992);
Director of Nestor, Inc. (since 1994); and Chairman of New
London Capital PLC (since 1993).
Edwin A. Wahlen, Jr........... 48 Mr. Wahlen serves as a director of the Company (since May
1996). His term as director expires in 1998. Mr. Wahlen
also holds the following positions: Founder and Managing
Director of Cravey, Green & Wahlen Incorporated, a private
risk capital investment firm (since 1985), its investment
management affiliate, CGW Southeast Management Company
(since 1991) and its affiliates, CGW Southeast I, Inc.
(the general partner of CGW Southeast Partners I, L.P.)
and CGW Southeast II, Inc. (the general partner of CGW
Southeast Partners II, L.P.) (since 1991); and Director of
Cameron Ashley Building Products, Inc., a national
distributor of home building products (since 1996).
</TABLE>
57
<PAGE> 59
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the Common
Stock owned as of September 30, 1996, and as adjusted to reflect the sale of the
shares of Common Stock, by the Selling Stockholders set forth below
(collectively, the "Selling Stockholders").
The shares of Common Stock set forth below are held in two limited
partnerships, CGW Southeast Partners I, L.P. ("CGWI") and CGW Southeast Partners
II, L.P. ("CGWII"). Immediately prior to the closing of this Offering, the
shares of Common Stock (i) held by both partnerships will be distributed to
their respective partners as a liquidating distribution of CGWI's and CGWII's
holdings in the Company and (ii) to be distributed to the respective general
partner of CGWI and CGWII will be distributed to the stockholders and executive
officers of such general partners. Except as otherwise indicated, all shares
shown in the table below are held with sole voting and investment power.
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------- NUMBER OF --------------------------
SHARES PERCENT OF SHARES BEING SHARES PERCENT OF
BENEFICIALLY SHARES OFFERED BENEFICIALLY SHARES
SELLING STOCKHOLDERS OWNED OUTSTANDING FOR SALE OWNED OUTSTANDING
-------------------- ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Angela Z. Allen IRA(1).................. 6,938 * 3,469 3,469 *
John Gregory Berylson................... 6,937 * 3,468 3,469 *
Donald W. Burton........................ 2,311 * 1,155 1,156 *
Frankel, Hardwick, Tanenbaum & Fink..... 6,937 * 6,937 -0- -0-
Larence Park............................ 6,937 * 6,937 -0- -0-
Jack M. Berdy........................... 13,873 * 13,873 -0- -0-
Crandall C. Bowles...................... 9,248 * 9,248 -0- -0-
Collins Family Partnership.............. 13,873 * 6,936 6,937 *
Willard W. Geiger....................... 6,937 * 6,937 -0- *
Frances C. Hart......................... 9,248 * 9,248 -0- -0-
Donald R. Landgraf Trust................ 6,937 * 3,468 3,469 *
Terri A. Mallory........................ 11,562 * 5,781 5,781 *
PGF&M Venture 89........................ 4,626 * 4,626 -0- -0-
SO Concepts............................. 9,248 * 4,624 4,624 *
Brooks Schoen........................... 2,311 * 2,311 -0- -0-
Charles C. Schoen, III.................. 6,937 * 3,468 3,469 *
G. Bickley Stevens, II.................. 1,156 * 578 578 *
Wallace P. Whitley...................... 11,562 * 11,562 -0- -0-
Stanley C. Weiss........................ 2,311 * 1,155 1,156 *
Citibank N.A. as Trustee of the Delta
Master Trust.......................... 462,422 1.7 462,422 -0- -0-
National Life Insurance Company......... 92,485 * 92,485 -0- -0-
BellSouth Master Pension Trust(2)....... 3,069,465 11.3 3,069,465 -0- -0-
Landmark Equity Partners III, L.P....... 924,846 3.4 924,846 -0- -0-
Ontario Municipal Employees Retirement
Board................................. 462,422 1.7 462,422 -0- -0-
Richard L. Cravey(3)(4)................. 532,160 2.0 266,080 266,080 *
William A. Davies(3).................... 9,251 * 9,251 -0- -0-
William S. Green(3)(5).................. 470,505 1.7 235,253 235,252 *
Bart A. McLean(3)....................... 4,626 * 4,626 -0- -0-
Edwin A. Wahlen, Jr.(3)(6).............. 532,160 2.0 266,080 266,080 *
LeSelect WSG/DGG
Interests, L.P.(5).................... 61,657 * 30,828 30,829 *
</TABLE>
- ---------------
* Less than 1%
(Footnotes appear on following page)
58
<PAGE> 60
(1) Angela Z. Allen, the beneficiary of the Angela Z. Allen IRA, also owns
directly 3,468.23 shares of Common Stock.
(2) The business address for the BellSouth Master Pension Trust is 1155
Peachtree St., Atlanta, Georgia 30367.
(3) Messrs. Cravey, Davies, Green, McLean and Wahlen are all managing directors
of CGW Southeast Management Company, an investment management company, and
its affiliates, CGW Southeast I, Inc. (the general partner of CGWI) and CGW
Southeast II, Inc. (the general partner of CGWII). Prior to the distribution
of the Common Stock, CGWI held an aggregate of 4,370,248 shares of Common
Stock and CGWII held an aggregate of 2,415,918 shares of Common Stock. The
business address for CGWI, CGWII and Messrs. Cravey, Davies, Green, McLean
and Wahlen is Twelve Piedmont Center, Suite 210, Atlanta, Georgia 30305.
Messrs. Cravey, Davies, Green, McLean and Wahlen may be deemed to
beneficially own the shares of Common Stock held of record by CGWI and CGWII
prior to the distribution of said shares to the respective partners because
they are managing directors of the respective corporate general partner and
may therefore be deemed to share voting and investment power with respect to
the shares owned of record by each partnership. In addition, prior to the
distribution, each such limited partnership may be deemed to beneficially
own the shares owned by the other as a result of such common control.
Messrs. Cravey, Davies, Green, McLean and Wahlen disclaim beneficial
ownership of such shares, other than shares allocable to them individually.
See "--Certain Transactions with the Selling Stockholders" below for a
description of certain other prior or existing relationships between the
Company and any of the Selling Stockholders.
(4) See "Management" for a description of certain of Mr. Cravey's current and
prior relationships with the Company.
(5) Mr. Green was a director of the Company from December 1993 through May 1996.
LeSelect WSG/DGG Interests, L.P. is a partnership controlled by Mr. Green.
Mr. Green may be deemed to beneficially own the shares of Common Stock held
by LeSelect WSG/DGG Interests, L.P., and vice-versa, due to such control.
(6) Mr. Wahlen was elected a director of the Company in May 1996.
CERTAIN TRANSACTIONS WITH THE SELLING STOCKHOLDERS
CGWI, CGWII, Mr. James P. Cotton, Jr. and Mr. Gerald E. Eickhoff entered
into a voting agreement (the "Voting Agreement") on December 29, 1993, pursuant
to which the parties thereto agreed to vote for four designees nominated by CGWI
and GCWII and for four designees collectively nominated by Messrs. Cotton and
Eickhoff. The Voting Agreement also provides that CGWI and CGWII and Messrs.
Cotton and Eickhoff have the right to reject, upon a showing of reasonable
cause, any of the other party's nominees. The Voting Agreement shall terminate
upon completion of the sale of the shares of Common Stock of GCWI and CGWII
offered hereby.
See "Description of Capital Stock -- Common Stock -- Registration Rights"
for a description of certain registration rights held by CGWI and CGWII.
Pursuant to the terms of certain agreements for consulting services between
the Company and CGWI and CGWII in effect until December 31, 1996, CGWI and CGWII
have been engaged to render certain advisory and consulting services to the
Company in connection with corporate finance matters. The agreements currently
provide for base payments of $30,000 per month to CGWI and CGWII, with
additional payments of up to $30,000 per month being allowed in the discretion
of the Compensation Committee. Such discretionary payments totaled $360,000 for
1995. Messrs. Cravey, Davies, Green, McLean and Wahlen are each managing
directors of the corporate general partner of CGWI and CGWII.
59
<PAGE> 61
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock, par
value $0.05 per share, and 5,000,000 shares of Preferred Stock, par value $1.00
per share. As of September 30, 1996, the Company had issued and outstanding
27,189,497 shares of Common Stock and no shares of Preferred Stock. As of such
date, there were approximately 2,900 holders of record of the outstanding shares
of Common Stock.
The following summary of the Company's Common Stock and Preferred Stock is
qualified in its entirety by reference to the Company's Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation"), its Amended
and Restated Bylaws (the "Bylaws"), and the Delaware General Corporation Law, as
amended (the "DGCL").
COMMON STOCK
Subject to such preferential rights as may be granted by the Board of
Directors in connection with any issuances of Preferred Stock, holders of shares
of Common Stock are entitled to receive such dividends as may be declared by the
Board of Directors in its discretion from funds legally available therefor. From
October 1993 through October 1995, the Company paid a quarterly dividend of
$0.05 per share on shares of Common Stock. In October 1995, the Company
announced that it would discontinue its policy of paying cash dividends. The
Board of Directors determined to retain all earnings to support anticipated
growth in the current operations of the Company and to finance future expansion.
The Company's Revolving Loan Agreement, Indenture governing the Senior Notes,
the Senior Subordinated Notes Indenture and the Convertible Subordinated
Debenture Indenture restrict the payment of cash dividends unless certain
earnings tests are satisfied. Additional restrictions on the payment of cash
dividends may be imposed in connection with future issuances of Preferred Stock
and indebtedness by the Company. Further declarations and payments of cash
dividends, if any, will also be determined in light of then-current conditions,
including the Company's earnings, operations, capital requirements, liquidity,
financial condition, restrictions in financing agreements and other factors
deemed relevant by the Board of Directors. Upon the liquidation, dissolution or
winding up of the Company, after payment of creditors, the remaining net assets
of the Company will be distributed pro rata to the holders of Common Stock,
subject to any liquidation preference of the holders of Preferred Stock. There
are no preemptive rights, conversion rights, or redemption or sinking fund
provisions with respect to the shares of Common Stock. All of the outstanding
shares of Common Stock are duly and validly authorized and issued, fully paid
and nonassessable.
Holders of Common Stock are entitled to one vote per share of Common Stock
held of record on all such matters submitted to a vote of the stockholders.
Holders of the shares of Common Stock do not have cumulative voting rights. As a
result, the holders of a majority of the outstanding shares of Common Stock
voting for the election of directors can elect all the directors, and, in such
event, the holders of the remaining shares of Common Stock will not be able to
elect any persons to the Board of Directors.
PREFERRED STOCK
The Board of Directors may, without approval of the Company's stockholders,
from time to time, authorize the issuance of Preferred Stock in one or more
series for such consideration and, within certain limits, with such relative
rights, preferences and limitations as the Board of Directors may determine. The
relative rights, preferences and limitations that the Board of Directors has the
authority to determine as to any such series of Preferred Stock include, among
other things, dividend rights, voting rights, conversion rights, redemption
rights and liquidation preferences. Because the Board of Directors has the power
to establish the relative rights, preferences and limitations of each series of
Preferred Stock, it may afford to the holders of any such series, preferences
and rights senior to the rights of the holders of shares of Common Stock.
Although the Board of Directors has no intention at the present time of doing
so, it could cause the issuance of Preferred Stock that could discourage an
acquisition attempt or other transactions that some, or majority of, the
stockholders might believe to be in their best interests or in which the
stockholders might receive a premium for their shares of Common Stock over the
market price of such shares.
60
<PAGE> 62
ANTI-TAKEOVER CONSIDERATIONS
The Company is subject to the provisions of Section 203 of the DGCL. In
general, this statute prohibits a publicly-held Delaware corporation from
engaging, under certain circumstances, in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person becomes an interested stockholder, unless either
(i) prior to the date at which the stockholder became an interested stockholder
the Board of Directors approved either the business combination or the
transaction in which the person becomes an interested stockholder, (ii) the
stockholder acquires more than 85% of the outstanding voting stock of the
corporation (excluding shares held by directors who are officers or held in
certain employee stock plans) upon consummation of the transaction in which the
stockholder becomes an interested stockholder or (iii) the business combination
is approved by the Board of Directors and by two-thirds of the outstanding
voting stock of the corporation (excluding shares held by the interested
stockholder) at a meeting of the stockholders (and not by written consent) held
on or subsequent to the date on which the person became an "interested
stockholder" of the business combination. An "interested stockholder" is a
person who, together with affiliates and associates, owns (or is an affiliate or
associate of the corporation and, together with affiliates and associates, at
any time within the prior three years did own) 15% or more of the corporation's
voting stock. Section 203 defines a "business combination" to include, without
limitation, mergers, consolidations, stock sales and asset based transactions
and other transactions resulting in a financial benefit to the interested
stockholder.
The Company's Certificate of Incorporation and Bylaws contain a number of
provisions relating to corporate governance and to the rights of stockholders.
Certain of these provisions may be deemed to have a potential "anti-takeover"
effect in that such provisions may delay, defer or prevent a change of control
of the Company. These provisions include (i) the classification of the Board of
Directors into three classes, each class serving for staggered three-year terms;
(ii) the authority of the Board of Directors to determine the size of the Board
of Directors, subject to certain minimums and maximums; (iii) the authority of
certain members of the Board of Directors to fill vacancies on the Board of
Directors; (iv) a requirement that special meetings of stockholders may be
called only by the Board of Directors, the Chairman of the Board or holders of
at least one-tenth of all the shares entitled to vote at the meeting; (v) the
elimination of stockholder action by written consent; (vi) the authority of the
Board of Directors to issue series of Preferred Stock with such voting rights
and other powers as the Board of Directors may determine; (vii) the requirement
that the Article in the Certificate of Incorporation creating the staggered
board may only be amended by the vote of at least 66 2/3% of the voting
securities of the Company; (viii) the prohibition on amending or rescinding,
before December 31, 1996, the Article in the Certificate of Incorporation
related to the filling of vacancies on the Board of Directors; and (ix) a
requirement that any business combination between the Company and a beneficial
owner of more than five percent of any class of an equity security of the
Company must be approved by the holders of a majority of the Company's
securities, excluding those securities held by such beneficial owner, voted at a
meeting called for the purpose of approving such business combination.
The Indentures governing the Convertible Subordinated Debentures, the
Senior Subordinated Notes and the Senior Notes require the Company to repurchase
all outstanding Debentures, Senior Subordinated Notes and Senior Notes in the
event of certain change of control transactions.
INDEMNIFICATION AND LIMITED LIABILITY
The Company's Certificate of Incorporation and Bylaws require the Company
to indemnify the directors and officers of the Company to the fullest extent
permitted by law. In addition, as permitted by the DGCL, the Company's
Certificate of Incorporation and Bylaws provide that no director of the Company
will be personally liable to the Company or its stockholders for monetary
damages for such director's breach of duty as a director. This limitation of
liability does not relieve directors from liability for (i) any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) any liability under Section 174 of the DGCL for unlawful
distributions or (iv) any transaction from which the director derived an
improper personal benefit. This provision of the Certificate of Incorporation
will limit the remedies available to a stockholder who is dissatisfied with a
decision of the Board of Directors protected by this provision, and such
stockholder's only
61
<PAGE> 63
remedy in that circumstance may be to bring a suit to prevent the action of the
Board of Directors. In many situations, this remedy may not be effective,
including instances when stockholders are not aware of a transaction or an event
prior to action of the Board of Directors in respect of such transaction or
event.
Subject to certain limitations, the Company's officers and directors are
insured against losses arising from claims made against them for wrongful acts
which they may become obligated to pay or for which the Company may be required
to indemnify them.
REGISTRATION RIGHTS
The Company has entered into an agreement granting registration rights (the
"Registration Rights Agreement") with certain holders of Common Stock. Pursuant
to the Registration Rights Agreement, these holders may exercise demand or
"piggyback" registration rights with respect to shares of Common Stock held by
them. The Company is obligated to register stock on only two occasions pursuant
to the demand registration rights. The Registration Rights Agreement has a term
of three years (ending on December 31, 1996) for demand registration rights and
five years (ending on December 31, 1998) for "piggyback" registration rights.
These registration rights are subject to certain conditions and limitations,
including the right of underwriters to restrict the number of shares offered in
a registration.
OTHER MATTERS
The Common Stock is listed on Nasdaq National Market under the symbol
"AMMB." Sun Trust Bank, Atlanta, Georgia, is the transfer agent and registrar
for the Common Stock.
62
<PAGE> 64
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for whom The Robinson-Humphrey Company, Inc., Piper
Jaffray Inc., Raymond James & Associates, Inc., Montgomery Securities, J.C.
Bradford & Co. and Morgan Keegan & Company, Inc. are acting as representatives
(collectively, the "Representatives"), have severally agreed to purchase from
the Company and the Selling Stockholders, and the Company and the Selling
Stockholders have agreed to sell to the Underwriters, the number of shares of
Common Stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
The Robinson-Humphrey Company, Inc. ...................................
Piper Jaffray Inc. ....................................................
Raymond James & Associates, Inc. ......................................
Montgomery Securities..................................................
J.C. Bradford & Co. ...................................................
Morgan Keegan & Company, Inc. .........................................
---------
Total........................................................ 7,760,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase all shares of Common
Stock offered hereby if any are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the Price to Public set forth on the cover page of this Prospectus
and to certain dealers at such price less a concession not in excess of
$ per share. The Underwriters may allow, and such dealers may reallow,
a concession not in excess of $ per share in sales to certain other
dealers. After the Offering, the Price to Public and other selling terms may be
changed.
The Company, each of its directors and executive officers and the Selling
Stockholders have agreed that they will not offer, sell or otherwise dispose of
any shares of Common Stock (other than the shares offered by the Company and the
Selling Stockholders in this offering), subject to certain exceptions, for a
period of 120 days from the date of this Prospectus without the prior written
consent of the Representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to 1,164,000 additional shares
of Common Stock to cover over-allotments, if any, at the public offering price
less the underwriting discount, as set forth on the cover page of this
Prospectus. If the Underwriters exercise their over-allotment option, the
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the foregoing table, bears to the
7,760,000 shares of Common Stock offered hereby. The Underwriters may exercise
such option only to cover over-allotments in connection with the sale of the
shares of Common Stock offered hereby.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
In connection with the Offering, certain underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage in passive market making
transactions in the Common Stock on the Nasdaq National Market in accordance
with Rule 10b-6A under the Securities Exchange Act of 1934, as amended, during
the two business day period before commencement of offers of sales of the Common
Stock. The passive market making transactions must comply with applicable volume
and price limits and be identified as such. In general, a passive market maker
may display its bid at a price not in excess of the highest independent bid for
the security; however if all independent bids are lowered below the passive
market marker's bid, such bid must then be lowered when certain purchase limits
are exceeded.
63
<PAGE> 65
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by L. Keith Blackwell, General Counsel of the Company. Certain other
legal matters will be passed upon for the Company by Haynes and Boone, LLP,
Dallas, Texas. Certain legal matters relating to the Common Stock offered hereby
will be passed upon for the Underwriters by Smith, Gambrell & Russell, Atlanta,
Georgia.
EXPERTS
The financial statements of the Company as of December 31, 1994 and 1995
and for each of the three years in the period ended December 31, 1995 included
and incorporated by reference in this Prospectus, and the financial statements
from which the Summary Financial and Other Data have been derived, have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein. Such financial statements and Summary Financial and
Other Data have been included herein and elsewhere in the Registration Statement
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
The consolidated balance sheets of Quality as of September 30, 1994 and
1995, and the consolidated statements of income, stockholders' equity and cash
flows for each of the years in the period ended September 30, 1995, included in
this Prospectus, have been included herein in reliance of the report of Coopers
& Lybrand L.L.P., independent accountants, given on the authority of that firm
as experts in accounting and auditing.
64
<PAGE> 66
GLOSSARY
The following are certain defined terms which may be used in this
Prospectus and any accompanying Prospectus:
"ACACIA" means 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.
"AMRESCO SERVICES" means a division of AMRESCO Management, Inc., a
subsidiary of the Company.
"ARMC" means AMRESCO Residential Mortgage Corporation, a subsidiary of the
Company.
"ASSET PORTFOLIO" means a pool or portfolio of performing, nonperforming or
underperforming commercial, industrial, agricultural and/or real estate loans.
"B&C LOAN" means a residential mortgage loan to borrowers who do not
qualify for conventional loans or whose borrowing needs are not met by
traditional residential mortgage lenders. Such borrowers may not satisfy the
more rigid underwriting standards of the traditional residential mortgage
lending market for a number of reasons, such as blemished credit histories (from
past loan delinquencies or bankruptcy), inability to provide income verification
data or lack of established credit history.
"BEI" means BEI Holdings, Ltd.
"BEI MERGER" means the merger of Holdings with and into a subsidiary of BEI
on December 31, 1993.
"COMPANY" means, unless otherwise stated in this Prospectus or unless the
context otherwise requires, the Company and each of its subsidiaries.
"CONDUIT PURCHASERS" means investment bankers and other financial
intermediaries who purchase or otherwise accumulate pools or portfolios of loans
having common features (e.g., real estate mortgages, etc.), with the intent of
securitizing such loan assets and selling them to a trust that obtains its funds
by selling undivided interests in the revenue streams generated by the loans to
public or private investors.
"CONVERTIBLE SUBORDINATED DEBENTURES" means the Company's 8% Convertible
Subordinated Debentures due 2005.
"CONVERTIBLE SUBORDINATED DEBENTURE INDENTURE" means that certain Indenture
dated November 27, 1995, as amended, governing the Convertible Subordinated
Debentures.
"CREDIT AGREEMENTS" means the Revolving Loan Agreement and the Warehouse
Agreements.
"CREDIT ENHANCEMENT" means the method by which a seller of asset-backed
securities achieves a higher credit rating with respect to such securities than
the credit rating of the assets collateralizing such securities. Credit
enhancement is often achieved through the use of financial guaranty insurance
policies.
"DUS" means the Delegated Underwriting and Servicing program established by
Fannie Mae that permits a DUS approved lender to commit and close loans for
multifamily mortgages for resale to Fannie Mae without Fannie Mae's prior
approval of such loans.
"EQS" means, collectively, EQ Services, Inc. and Equitable Real Estate
Investment Management, Inc.
"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.
"FULL SERVICER" means an entity which serves as Primary Servicer, Master
Servicer and Special Servicer on an Asset Portfolio.
"HOLDINGS" means AMRESCO Holdings, Inc.
"HOLLIDAY FENOGLIO" means Holliday Fenoglio, Inc., a subsidiary of the
Company.
65
<PAGE> 67
"MASTER SERVICER" means an entity which provides administrative services
with respect to securitized pools of mortgage-backed securities.
"NATIONSBANK CONTRACT" means the asset management contract, as amended,
originally dated July 1, 1992, among the Company, NationsBank Corporation and
certain of its bank subsidiaries.
"NATIONSBANK OF TEXAS" means NationsBank of Texas, N.A.
"PRIMARY SERVICER" means an entity which provides various administrative
services with respect to loans such as collecting monthly mortgage payments,
maintaining escrow accounts for the payment of ad valorem taxes and insurance
premiums on behalf of borrowers, remitting payments of principal and interest
promptly to investors in mortgages or the Master Servicer of a pool and
reporting to those investors or the Master Servicer on financial transactions
related to such mortgages.
"QUALITY" means Quality Mortgage USA, Inc., a California corporation.
"QUALITY ACQUISITION" means the Company's purchase of substantially all the
assets, and the assumption of certain liabilities, of Quality Mortgage USA, Inc.
See "Quality Acquisition."
"QUALITY PURCHASE AGREEMENT" means that certain agreement dated October 9,
1996 by and among ARMC and Quality, Calmac Funding, Russell and Rebecca Jedinak,
DLJ Mortgage Capital, Inc., and DLJ Quality Partners, L.P.
"REVOLVING LOAN AGREEMENT" means the First Amended and Restated Revolving
Loan Agreement dated as of April 25, 1996 and as subsequently amended, among the
Company, NationsBank of Texas, as Agent, and the lenders which are parties
thereto from time to time.
"RTC" means the Resolution Trust Corporation.
"SECURITIZATION" and "SECURITIZED" mean a transaction in which loans
originated or purchased by an entity are sold to special purpose entities
organized for the purpose of issuing asset-backed securities.
"SENIOR NOTES" means the Company's Senior Notes, Series 1996-A Due 1999.
"SENIOR SUBORDINATED NOTES" means the Company's 10% Senior Subordinated
Notes due 2003.
"SENIOR SUBORDINATED NOTES INDENTURE" means the Indenture dated February 2,
1996, governing the Senior Subordinated Notes.
"SPECIAL SERVICER" means an entity which provides asset management and
resolution services with respect to nonperforming or underperforming loans
within a pool of performing loans and/or mortgages.
"SUBORDINATED CERTIFICATES" means the unrated and uninsured tranches of
collateralized residential or commercial mortgage-backed securities.
"WAREHOUSE" means a type of lending arrangement whereby loans funded or
purchased and held for sale are financed by financial institutions or
institutional lenders on a short-term basis and secured by the underlying loans.
"WAREHOUSE AGREEMENTS" mean all warehouse loan facilities entered into by
the Company from time to time.
66
<PAGE> 68
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AMRESCO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets, December 31, 1994 and 1995, and June 30, 1996
(unaudited)......................................................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1993, 1994 and 1995
and the Six Months Ended June 30, 1995 and 1996 (unaudited)......................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1993,
1994 and 1995 and the Six Months Ended June 30, 1996 (unaudited).................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995................................................................................ F-6
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1995 and 1996
(unaudited)......................................................................... F-7
Notes to Consolidated Financial Statements............................................ F-8
QUALITY MORTGAGE USA, INC.
Report of Independent Accountants..................................................... F-26
Consolidated Balance Sheets, September 30, 1994 and 1995.............................. F-27
Consolidated Statements of Income for the Years Ended September 30, 1993, 1994 and
1995................................................................................ F-28
Consolidated Statements of Stockholders' Equity for the Years Ended September 30,
1993, 1994 and 1995................................................................. F-29
Consolidated Statements of Cash Flows for the Years Ended September 30, 1993, 1994
and 1995............................................................................ F-30
Notes to Consolidated Financial Statements............................................ F-31
Consolidated Balance Sheets, June 30, 1995 and 1996 (unaudited)....................... F-40
Consolidated Statements of Income for the Six Months Ended June 30, 1995 and 1996
(unaudited)......................................................................... F-41
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1995 and 1996
(unaudited)......................................................................... F-42
Notes to Consolidated Financial Statements (unaudited)................................ F-43
</TABLE>
F-1
<PAGE> 69
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, 1994 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended December 31, 1993, 1994 and 1995. 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, 1994 and 1995, and the results of their operations and their
cash flows for the years ended December 31, 1993, 1994 and 1995, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 6, 1996
F-2
<PAGE> 70
AMRESCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents.................................... $ 20,446 $ 16,139 $ 14,650
Temporary investments (Note 7)............................... 21,942 32,921
Accounts receivable, net of reserves of $4,929, $1,737 and
$1,182,
respectively............................................... 20,682 20,158 18,469
Mortgage loans held for sale (Notes 4 and 7)................. 160,843 190,257
Investments (Note 7):
Loans (Note 4)............................................. 32,631 138,180 164,656
Partnerships and joint ventures............................ 22,491 34,694 32,246
Asset-backed and other securities (Note 5)................. 3,481 46,187 55,687
Real estate................................................ 14,054 5,686 16,050
Deferred income taxes (Note 8)............................... 17,207 12,184 12,201
Premises and equipment, net of accumulated depreciation of
$1,082, $2,335 and $3,518, respectively.................... 4,301 5,904 6,373
Intangible assets, net of accumulated amortization of $1,226,
$4,136 and $6,780, respectively (Note 2)................... 30,668 51,878 52,394
Other assets (Note 6)........................................ 6,379 7,918 8,007
-------- -------- --------
TOTAL ASSETS................................................. $172,340 $521,713 $603,911
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable........................................... $ 12,045 $ 14,124 $ 8,502
Accrued employee compensation and benefits (Note 12)....... 18,460 10,487 9,522
Notes payable (Note 7)..................................... 16,459 127,796 121,991
Warehouse loan payable (Note 7)............................ 153,158 181,024
Senior Subordinated Notes (Note 7)......................... 57,500
Convertible debt (Note 7).................................. 45,000 45,000
Income taxes payable (Note 8).............................. 1,219 2,897 2,983
Net liabilities of discontinued operations (Note 10)....... 954
Other liabilities (Note 9)................................. 9,617 7,457 3,193
-------- -------- --------
TOTAL LIABILITIES.................................. 58,754 360,919 429,715
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' 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; 23,592,647, 26,689,331 and 26,901,621 issued in
1994, 1995 and 1996, respectively....................... 1,180 1,334 1,345
Capital in excess of par................................... 74,691 106,054 107,655
Reductions for employee stock.............................. (429) (2,238) (1,500)
Treasury stock, $0.05 par value, 24,339 shares in 1995 and
1996.................................................... (160) (160)
Unrealized gains (losses) (Note 5)......................... (62) 114 (977)
Retained earnings.......................................... 38,206 55,690 67,833
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY......................... 113,586 160,794 174,196
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................... $172,340 $521,713 $603,911
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 71
AMRESCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Asset management and resolution fees (Note
3)........................................ $ 118,552 $ 93,764 $ 41,295 $ 18,441 $ 18,037
Interest and other investment income......... 3,440 14,215 40,105 14,569 43,247
Mortgage banking fees........................ 6,176 24,382 8,324 14,937
Gain on sale of loans and investments, net... 1,382 46 5,789
Other revenues (Note 3)...................... 409 15,636 3,322 2,279 1,699
---------- ---------- ---------- ---------- ----------
Total revenues....................... 122,401 129,791 110,486 43,659 83,709
---------- ---------- ---------- ---------- ----------
EXPENSES:
Personnel (Note 12).......................... 63,618 68,143 52,852 22,976 35,631
General and administrative................... 9,417 22,908 16,910 6,956 13,445
Interest (Note 7)............................ 754 1,768 6,921 1,278 13,495
Depreciation................................. 1,898 1,211 1,471 546 1,160
Profit participations........................ 3,037 75 2,074 362 32
---------- ---------- ---------- ---------- ----------
Total expenses....................... 78,724 94,105 80,228 32,118 63,763
---------- ---------- ---------- ---------- ----------
Income from continuing operations before income
taxes........................................ 43,677 35,686 30,258 11,541 19,946
Income tax expense (Note 8).................... 17,371 14,753 11,593 4,307 7,803
---------- ---------- ---------- ---------- ----------
INCOME FROM CONTINUING
OPERATIONS................................... 26,306 20,933 18,665 7,234 12,143
Gain (loss) from discontinued operations, net
of income taxes (Note 10).................... (2,088) (2,185) 2,425 2,425
---------- ---------- ---------- ---------- ----------
NET INCOME..................................... $ 24,218 $ 18,748 $ 21,090 $ 9,659 $ 12,143
========== ========== ========== ========== ==========
Earnings per share from continuing operations:
Primary...................................... $ 2.33 $ 0.88 $ 0.76 $ 0.30 $ 0.44
Fully-diluted................................ $ 2.33 $ 0.88 $ 0.75 $ 0.30 $ 0.42
Earnings per share:
Primary...................................... $ 2.15 $ 0.79 $ 0.86 $ 0.40 $ 0.44
Fully-diluted................................ $ 2.15 $ 0.79 $ 0.85 $ 0.40 $ 0.42
Weighted average number of common shares
outstanding and common share equivalents..... 11,288,688 23,679,239 24,654,321 24,305,838 27,469,186
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 72
AMRESCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
$0.05 PAR VALUE
CONVERTIBLE COMMON ------------------- CAPITAL IN
PREFERRED STOCK, NUMBER OF EXCESS OF
STOCK NO PAR SHARES AMOUNT PAR
----------- -------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
JANUARY 1, 1993........................................................... $ 12,696 $ 3,090 $ $
Cancellation of stock and notes receivable (Note 11)...................... (179)
Employee stock compensation (Note 11)..................................... 1,188
Dividends paid ($.35 per share)...........................................
Conversion of convertible preferred stock (Note 2)........................ (12,696) 12,696
Conversion of common stock (Note 2)....................................... (16,795) 11,120,530 556 16,239
Issuance of common stock for acquisition (Note 2)......................... 11,189,287 560 50,873
Net income................................................................
--------- -------- ---------- ------ --------
DECEMBER 31, 1993......................................................... 22,309,817 1,116 67,112
--------- -------- ---------- ------ --------
Exercise of stock options (Note 11)....................................... 711,590 35 1,560
Issuance of common stock for acquisition (Note 2)......................... 571,240 29 4,291
Tax benefits from employee stock compensation............................. 1,728
Repayments of notes receivable for officer's shares (Note 11).............
Dividends paid ($.20 per share)...........................................
Foreign currency translation adjustments..................................
Net income................................................................
--------- -------- ---------- ------ --------
DECEMBER 31, 1994......................................................... 23,592,647 1,180 74,691
--------- -------- ---------- ------ --------
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
Amortization of unearned stock compensation (Note 11).....................
Tax benefits from employee stock compensation............................. 1,977
Repayment of notes receivable for officers' shares (Note 11)..............
Settlement of notes receivable for officers' shares with common stock
(14,339 shares).........................................................
Acquisition of treasury stock (10,000 shares).............................
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
--------- -------- ---------- ------ --------
PERIOD JANUARY 1, 1996 TO JUNE 30, 1996 (UNAUDITED)
Exercise of stock options................................................. 164,384 8 704
Issuance of common stock for earnout...................................... 57,186 3 774
Cancellation of common stock restricted for unearned stock compensation... (9,280) (79)
Amortization of unearned stock compensation...............................
Tax benefits from employee stock compensation............................. 202
Foreign currency translation adjustments..................................
Unrealized loss on securities available for sale, net.....................
Net income................................................................
--------- -------- ---------- ------ --------
JUNE 30, 1996 (unaudited)................................................. $ $ 26,901,621 $1,345 $107,655
========= ======== ========== ====== ========
<CAPTION>
REDUCTIONS NET
FOR UNREALIZED
EMPLOYEE TREASURY GAINS RETAINED
STOCK STOCK (LOSSES) EARNINGS
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
JANUARY 1, 1993........................................................... $ (786) $ $ $ 3,735
Cancellation of stock and notes receivable (Note 11)...................... 179
Employee stock compensation (Note 11).....................................
Dividends paid ($.35 per share)........................................... (3,875)
Conversion of convertible preferred stock (Note 2)........................
Conversion of common stock (Note 2).......................................
Issuance of common stock for acquisition (Note 2).........................
Net income................................................................ 24,218
-------- ------ ------ -------
DECEMBER 31, 1993......................................................... (607) 24,078
-------- ------ ------ -------
Exercise of stock options (Note 11).......................................
Issuance of common stock for acquisition (Note 2).........................
Tax benefits from employee stock compensation.............................
Repayments of notes receivable for officer's shares (Note 11)............. 178
Dividends paid ($.20 per share)........................................... (4,620)
Foreign currency translation adjustments.................................. (62)
Net income................................................................ 18,748
-------- ------ ------ -------
DECEMBER 31, 1994......................................................... (429) (62) 38,206
-------- ------ ------ -------
Common stock offering (Note 11)...........................................
Exercise of stock options (Note 11).......................................
Issuance of common stock for earnout (Note 2).............................
Issuance of common stock for unearned stock compensation (Note 11)........ (2,397)
Amortization of unearned stock compensation (Note 11)..................... 279
Tax benefits from employee stock compensation.............................
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).......................................... (3,606)
Foreign currency translation adjustments.................................. 111
Unrealized gain on investments available for sale, net (Note 5)........... 65
Net income................................................................ 21,090
-------- ------ ------ -------
DECEMBER 31, 1995......................................................... (2,238) (160) 114 55,690
-------- ------ ------ -------
PERIOD JANUARY 1, 1996 TO JUNE 30, 1996 (UNAUDITED)
Exercise of stock options.................................................
Issuance of common stock for earnout......................................
Cancellation of common stock restricted for unearned stock compensation... 79
Amortization of unearned stock compensation............................... 659
Tax benefits from employee stock compensation.............................
Foreign currency translation adjustments.................................. (243)
Unrealized loss on securities available for sale, net..................... (848)
Net income................................................................ 12,143
-------- ------ ------ -------
JUNE 30, 1996 (unaudited)................................................. $ (1,500) $ (160) $ (977) $67,833
======== ====== ====== =======
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
JANUARY 1, 1993........................................................... $ 18,735
Cancellation of stock and notes receivable (Note 11)......................
Employee stock compensation (Note 11)..................................... 1,188
Dividends paid ($.35 per share)........................................... (3,875)
Conversion of convertible preferred stock (Note 2)........................
Conversion of common stock (Note 2).......................................
Issuance of common stock for acquisition (Note 2)......................... 51,433
Net income................................................................ 24,218
---------
DECEMBER 31, 1993......................................................... 91,699
---------
Exercise of stock options (Note 11)....................................... 1,595
Issuance of common stock for acquisition (Note 2)......................... 4,320
Tax benefits from employee stock compensation............................. 1,728
Repayments of notes receivable for officer's shares (Note 11)............. 178
Dividends paid ($.20 per share)........................................... (4,620)
Foreign currency translation adjustments.................................. (62)
Net income................................................................ 18,748
---------
DECEMBER 31, 1994......................................................... 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)
Foreign currency translation adjustments.................................. 111
Unrealized gain on investments available for sale, net (Note 5)........... 65
Net income................................................................ 21,090
---------
DECEMBER 31, 1995......................................................... 160,794
---------
PERIOD JANUARY 1, 1996 TO JUNE 30, 1996 (UNAUDITED)
Exercise of stock options................................................. 712
Issuance of common stock for earnout...................................... 777
Cancellation of common stock restricted for unearned stock compensation...
Amortization of unearned stock compensation............................... 659
Tax benefits from employee stock compensation............................. 202
Foreign currency translation adjustments.................................. (243)
Unrealized loss on securities available for sale, net..................... (848)
Net income................................................................ 12,143
---------
JUNE 30, 1996 (unaudited)................................................. $ 174,196
=========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 73
AMRESCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
-------- -------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income....................................................................... $ 24,218 $ 18,748 $ 21,090
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................................ 2,955 3,028 4,334
Provision for loss (gain on sale) of discontinued operation.................. 1,645 (2,425)
Write-off of intangible related to contract conclusion....................... 2,827
Deferred tax provision (benefit)............................................. (1,650) 966 5,023
Loss from disposition of premises and equipment.............................. 198 67
Employee stock compensation.................................................. 1,188 279
Increase (decrease) in cash for changes in (exclusive of assets and
liabilities acquired in business combinations):
Accounts receivable........................................................ 3,287 17,855 4,757
Purchase of mortgage loans held for sale and related securities, net....... (160,843)
Proceeds from warehouse loans payable, net................................. 153,158
Other assets............................................................... (3,848) 1,908 (3,990)
Accounts payable........................................................... (4,924) (4,768) (2,272)
Income taxes payable....................................................... (2,699) 678 61
Other liabilities.......................................................... 17,391 (4,137) (11,577)
-------- -------- ---------
Net cash provided by operating activities................................ 35,918 38,948 7,662
-------- -------- ---------
INVESTING ACTIVITIES:
Purchase of temporary investments, net......................................... (21,942)
Purchase of investments........................................................ (36,894) (59,099) (166,180)
Collections on investments..................................................... 3,099 30,815 57,208
Purchase of investments available for sale..................................... (3,481) (55,665)
Collections on investments available for sale.................................. 13,067
Cash used for purchase of subsidiaries......................................... (17,830) (22,323)
Proceeds from sales of subsidiaries............................................ 1,385 6,250
Cash and cash equivalents acquired through BEI merger.......................... 18,521
Purchase of premises and equipment............................................. (852) (2,141) (2,384)
-------- -------- ---------
Net cash used in investing activities.................................... (16,126) (50,351) (191,969)
-------- -------- ---------
FINANCING ACTIVITIES:
Proceeds from notes payable and other debt..................................... 42,426 19,894 565,311
Repayment of notes payable and other debt...................................... (19,129) (31,547) (408,974)
Payment of dividends........................................................... (3,875) (3,441) (4,785)
Proceeds from common stock offering............................................ 25,110
Stock options exercised........................................................ 1,595 1,256
Tax benefit of employee stock compensation..................................... 1,728 1,977
Tax effect of unrealized gains and losses...................................... (44)
Acquisition of treasury stock.................................................. (71)
Repayment of notes receivable for officers' shares............................. 178 220
-------- -------- ---------
Net cash provided by (used in) financing activities...................... 19,422 (11,593) 180,000
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents............................. 39,214 (22,996) (4,307)
Cash and cash equivalents, beginning of period................................... 4,228 43,442 20,446
-------- -------- ---------
Cash and cash equivalents, end of period......................................... $ 43,442 $ 20,446 $ 16,139
======== ======== =========
SUPPLEMENTAL DISCLOSURES:
Interest paid.................................................................. $ 678 $ 1,533 $ 5,494
Income taxes paid.............................................................. 23,460 8,507 4,813
Conversion of convertible preferred stock to common stock...................... 12,696
Common stock issued for purchase of mortgage banking subsidiary and related
earnout...................................................................... 4,320 777
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-6
<PAGE> 74
AMRESCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1995 1996
-------- ---------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................................................. $ 9,659 $ 12,143
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization........................................................... 1,763 3,980
Gain on sale of discontinued operation.................................................. (2,425)
Gain on sale of mortgage loans and related securities................................... (5,591)
Deferred tax benefit.................................................................... 1,853 499
Loss from disposition of premises and equipment......................................... 72
Employee stock compensation............................................................. 74 659
Increase (decrease) in cash for changes in:
Accounts receivable................................................................... 12,108 1,689
Accrued interest receivable........................................................... (2,944)
Purchase of mortgage loans held for sale and related securities, net.................. (3,000) (68,823)
Proceeds from warehouse loans payable, net............................................ 27,866
Other assets.......................................................................... 1,841 (825)
Accounts payable...................................................................... 88 (1,739)
Income taxes payable.................................................................. 771 86
Other liabilities..................................................................... (20,195) (5,472)
-------- ---------
Net cash provided by (used in) operating activities................................. 2,609 (38,472)
-------- ---------
INVESTING ACTIVITIES:
Purchase of temporary investments, net.................................................... (10,979)
Purchase of investments................................................................... (92,811) (82,332)
Collections on investments................................................................ 24,681 47,940
Purchase of investments available for sale................................................ (4,255)
Collections on investments available for sale............................................. 1,560
Cash used for purchase of subsidiaries.................................................... (3,106) (3,106)
Proceeds from sale of interest in securitizations......................................... 39,775
Proceeds from sales of subsidiaries....................................................... 6,250
Purchase of premises and equipment........................................................ (932) (1,629)
-------- ---------
Net cash used in investing activities............................................... (65,918) (13,026)
-------- ---------
FINANCING ACTIVITIES:
Proceeds from notes payable and other debt................................................ 98,831 325,491
Repayment of notes payable and other debt................................................. (36,512) (276,396)
Payment of dividends...................................................................... (2,371)
Stock options exercised................................................................... 902 712
Tax benefit of employee stock compensation................................................ 678 202
Acquisition of treasury stock............................................................. (71)
Repayment of notes receivable for officers' shares........................................ 89
-------- ---------
Net cash provided by financing activities........................................... 61,546 50,009
-------- ---------
Net decrease in cash and cash equivalents................................................... (1,763) (1,489)
Cash and cash equivalents, beginning of period.............................................. 20,446 16,139
-------- ---------
Cash and cash equivalents, end of period.................................................... $ 18,683 $ 14,650
======== =========
SUPPLEMENTAL DISCLOSURES:
Interest paid............................................................................. $ 1,524 $ 14,260
Income taxes paid......................................................................... 1,683 4,507
Exchange of loans for interest in securitization.......................................... 47,578
Common stock issued for purchase of mortgage banking subsidiary and related earnout....... 777 777
Common stock issued (canceled) for unearned stock compensation............................ 649 (79)
Accounts payable recorded in connection with acquisitions................................. 1,295
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 75
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.
Interim Financial Statements (Unaudited) -- The accompanying financial
statements for the interim periods ended June 30, 1995 and 1996 are unaudited
and have been prepared in accordance with generally accepted accounting
principles for condensed interim financial statements and Article 10 of
Regulation S-X. In the opinion of the Company, all adjustments necessary to
fairly present the financial position, results of operations, and cash flows
have been reflected in the financial statements for the periods ended June 30,
1995 and 1996.
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.
F-8
<PAGE> 76
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 was insignificant to its financial condition and results
of operations.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities," issued by the Financial Accounting Standards
Board, is effective for transfers of financial assets and extinguishment of
liabilities occurring after December 31, 1996 and is to be applied
prospectively. The Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of liabilities.
The Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
Management does not believe the impact of the adoption of this Statement will
have a material impact on its financial position or results of operations of the
Company.
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.
Securitization and Sale of Assets -- Revenues from the Company's
residential capital markets activities consist of interest earned on residential
mortgage loans purchased, gains on the securitization and sale of such loans and
other related securities, accrued earnings on certificates purchased or retained
from securitization trusts and gains on sales, if any, of such retained
certificates. The gains on the securitization and sale of mortgage loans and
other related securities represent the amount by which the proceeds received
(including the estimated value of any certificates retained) exceed the sum of
the basis of the assets sold and the cost of securitization. When assets are
securitized and sold, the certificates retained are valued at the discounted
present value of the cash flow expected to be realized over the anticipated
average life of the assets sold less future estimated credit losses and normal
servicing and other fees relating to the assets sold. The discounted
F-9
<PAGE> 77
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
present value of such certificates is computed using management's assumptions of
market discount rates (currently approximately 20%), prepayment rates, default
rates and other costs.
Interest income on mortgage loans held for sale and retained interests in
securitizations is recorded as earned. Interest income represents the interest
earned on the loans during the warehousing period (the period prior to their
securitization) and the recognition of interest income on the securities
retained after securitization, which generally is the recognition of the
increased time value of the discounted estimated cash flows.
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 was insignificant to its financial condition and results of operations.
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
F-10
<PAGE> 78
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 principles requires management to make
estimates and assumptions that affect reported amounts of certain assets,
liabilities, revenues and expenses. 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 periods presented.
2. ACQUISITIONS
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 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.
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, 1994 and 1995,
$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 agreements........................................ 18,907
Other assets............................................................... 78
-------
Net assets acquired.............................................. $22,200
=======
</TABLE>
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.
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
F-11
<PAGE> 79
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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.
The following pro forma consolidated results of operations for the twelve
months ended December 31, 1993 and 1994 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>
1993 1994
-------- --------
<S> <C> <C>
Revenues....................................................... $168,367 $139,275
Income from continuing operations.............................. 28,001 21,846
Earnings per share from continuing operations.................. 1.23 0.91
</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, 1993, 1994 and 1995.
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
F-12
<PAGE> 80
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
5. ASSET-BACKED AND OTHER SECURITIES
Securities available for sale, carried at estimated fair value, at December
31, 1994 and 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAIN LOSS FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1994:
Asset-backed securities.................. $ 3,481 $ 3,481
======= =======
1995:
Asset-backed securities.................. $33,930 $325 $ (217) $ 34,038
Interest-only securities................. 12,149 12,149
------- ---- ----- -------
Total............................ $46,079 $325 $ (217) $ 46,187
======= ==== ===== =======
</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, 1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Deferred compensation agreements with former officers.............. $1,629 $1,848
Prepaid expenses................................................... 412 1,605
Notes receivable................................................... 525 525
Income taxes receivable............................................ 1,135
Other.............................................................. 2,678 3,940
------ ------
Total other assets....................................... $6,379 $7,918
====== ======
</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 $850,000 and
F-13
<PAGE> 81
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$1,738,000 at December 31, 1994 and 1995, 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,
1994 and 1995 is $1,331,000 and $1,191,000, 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%.
7. NOTES PAYABLE AND OTHER DEBT
Notes payable and other debt at December 31, 1994 and 1995 and June 30,
1996, consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
NOTES PAYABLE:
$200,000,000 revolving credit line agreement with a
syndicate of lenders for:
Advances on 30-day terms at 6.94% to 7.35%............. $ 62,014
Advances at a prime rate of 8.25%...................... 1,200
$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
$80,000,000 revolving investment loan agreement with the
Bank................................................... 21,942 32,921
Nonrecourse debt payable to two financial services
companies.............................................. 959 38,354 25,856
------- -------- ---------
Total notes payable............................... $16,459 $127,796 $ 121,991
======= ======== =========
</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
F-14
<PAGE> 82
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Effective June 13, 1996, the Company entered into a First Amendment of the
First Amended and Restated Revolving Loan Agreement (the "Revolving Loan
Agreement") with a syndicate of lenders, led by NationsBank of Texas N.A., which
matures on May 31, 1998 and replaced its September 29, 1995, revolving loan
agreement. The syndicates' current commitment under the $200,000,000 revolving
loan agreement was limited to a total of $185,000,000 at June 30, 1996. The
additional $15,000,000 under the revolving loan agreement became available to
the Company on August 12, 1996.
Prior to entering into the $75,000,000 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. Effective March 5, 1996, this revolving
investment loan agreement was increased to $80,000,000. 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 tranches 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 tranche 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>
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
WAREHOUSE LOANS PAYABLE (IN THOUSANDS):
$25,000,000 Warehouse loans payable at 6.94% to 8.25%...... $ 8,987 $ 3,969
Warehouse loans payable to two financial services
companies:
Advances on 60 day terms at 6.35%....................... 144,171 177,055
-------- ---------
Total Warehouse Loans Payable...................... $153,158 $ 181,024
======== =========
</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
F-15
<PAGE> 83
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to have up to three tranches 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.
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).
Pursuant to a Commitment Letter dated May 29, 1996, CS First Boston
Mortgage Capital Corp. agreed to provide AMRESCO Residential Mortgage
Corporation, a subsidiary of the Company, with a repurchase facility in an
amount not to exceed $500,000,000 (the "Repurchase Facility"), which
supplements, forms a part of and is subject to a Global Master Repurchase
Agreement dated May 28, 1996 to finance the acquisition and warehousing of
residential mortgage loans. As of June 28, 1996, $133,500,000 was outstanding
under the Repurchase Facility. Indebtedness under the Repurchase Facility bears
interest at a rate of LIBOR (5.50% at June 28, 1996 for a term of 90 days) plus
0.85% to 2.1% based upon the purchase price, market value and unpaid principal
amount of mortgage loans related to each repurchase transaction. Indebtedness
under the Repurchase Facility is secured by a first priority security interest
in the mortgage loans acquired with funds advanced under the Repurchase
Facility.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
OTHER DEBT (IN THOUSANDS):
Senior Subordinated Notes at 10%, due January 15, 2003.... $ 57,500
Convertible Subordinated Debt at 8%, due December 15,
2005................................................... $ 45,000 45,000
-------- ---------
Total Other Debt.................................. $ 45,000 $ 102,500
======== =========
</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
F-16
<PAGE> 84
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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 matured on April 30, 1996.
Effective February 26, 1996, a wholly-owned subsidiary of the Company entered
into a $400,000,000 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 matured on July 31, 1996. The combined amounts outstanding under
mortgage warehouse lines of credit with Prudential cannot exceed $220,000,000 at
any time.
F-17
<PAGE> 85
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On July 16, 1996, the Company completed a sale of $57,500,000 principal
amount of Senior Notes. The net proceeds (aggregating approximately $55,775,000)
from such sale were used to repay borrowings under the Revolving Loan Agreement.
The Senior Notes bear interest at a rate of 8.75% per annum and will mature on
July 1, 1999. There is no sinking fund or amortization of principal prior to
maturity. The capitalized debt offering costs will be included in intangibles
and amortized over three years. The Senior Notes will not be redeemable prior to
July 1, 1999. The Senior Notes will be unsecured senior obligations of the
Company and subordinated to the rights of holders of secured unsubordinated
indebtedness of the Company to the extent of the value of the collateral
securing such indebtedness. There are certain limited restrictions on the
ability of the Company to, among other things, create or incur any additional
senior debt, pay dividends or make certain other restricted payments.
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.
As of December 31, 1995, the aggregate amounts of notes payable and other
debt that were scheduled to mature during the next five years were 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, 1993, 1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal.............................................. $14,533 $ 9,665 $ 6,040
State................................................ 3,096 2,609 2,147
------- ------- -------
Total current tax expense.................... 17,629 12,274 8,187
Deferred tax expense (benefit)......................... (1,650) 966 5,023
------- ------- -------
Total income tax expense..................... $15,979 $13,240 $13,210
======= ======= =======
</TABLE>
A reconciliation of income taxes on reported pretax income at statutory
rates to actual income tax expense for the years ended December 31, 1993, 1994
and 1995, is as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
--------------- --------------- ---------------
DOLLARS RATE DOLLARS RATE DOLLARS RATE
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory rates............... $14,069 35% $11,196 35% $12,005 35%
State income taxes, net of Federal tax
benefit................................... 1,910 5% 1,606 5% 1,205 4%
Other....................................... 438 1%
------- ------- -------
Total income tax expense.......... $15,979 40% $13,240 41% $13,210 39%
======= ======= =======
Income tax expense attributable to
continuing operations..................... $17,371 $14,753 $11,593
Income tax expense (benefit) attributable to
discontinued operations................... (1,392) (1,513) 1,617
------- ------- -------
Total income tax expense.......... $15,979 $13,240 $13,210
======= ======= =======
</TABLE>
F-18
<PAGE> 86
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets at December 31, 1994 and 1995, consist of the
tax effects of temporary differences related to the following (in thousands):
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Allowance for uncollectible accounts receivable.................. $ 1,386 $ 594
Equipment, furniture and fixtures................................ 235
Intangible assets................................................ 2,691 1,759
Investment in subsidiaries....................................... 930 477
Accrued employee compensation.................................... 3,261 2,085
Net operating loss carryforwards................................. 6,775 5,334
AMT credit carryforwards......................................... 602 602
Other............................................................ 2,002 2,008
------- -------
Deferred tax asset before valuation allowance.......... 17,882 12,859
Valuation allowance.............................................. (675) (675)
------- -------
Net deferred tax asset................................. $17,207 $12,184
======= =======
</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>
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.
F-19
<PAGE> 87
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. OTHER LIABILITIES
The following table summarizes the components of other liabilities at
December 31, 1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Accrued interest................................................... $ 325 $ 1,752
Deferred compensation obligations (Note 6)......................... 1,331 1,191
Dividends payable.................................................. 1,179
Payable to partners................................................ 3,907 2,349
Other.............................................................. 2,875 2,165
------- -------
Total other liabilities.................................. $ 9,617 $ 7,457
======= =======
</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, 1994 and 1995, 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 $5,500,000
and $4,542,000 for the year ended December 31, 1993, and the eleven months ended
November 30, 1994, respectively. The loss from discontinued operations for the
year ended December 31, 1993 and the eleven months ended November 30, 1994 was
$2,088,000 and $1,287,000, respectively, net of $1,392,000 and $891,000 income
tax benefit, respectively. The loss from the discontinued operations for the
period December 1, 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.
F-20
<PAGE> 88
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
1993, 1994 and 1995, is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER 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 stockholders' agreement (the
"Stockholder 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 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
Stockholder Agreements. In the event of termination of employment prior to
December 2002, the Company could cancel unvested
F-21
<PAGE> 89
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
stockholders' equity for financial reporting purposes. At December 31, 1994 and
1995, reductions for employee stock included notes receivable for officers'
shares of $429,000 and $120,000, respectively. During 1993, $179,000 in notes
receivable for officers' shares and the related common stock were canceled.
During 1994, a $178,000 note receivable was repaid. During 1995, $309,000 in
officers' notes receivable were collected, including $220,000 in cash and
$89,000 in common stock.
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 $0.85 and $0.77, respectively, for
the year ended December 31, 1994, and $0.74 and $0.83, respectively for the year
ended December 31, 1995.
12. EMPLOYEE COMPENSATION AND BENEFITS
Accrued employee compensation and benefits at December 31, 1994 and 1995,
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, 1994 and 1995, a total of
$5,144,000 and $1,423,000, 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 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
F-22
<PAGE> 90
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
years ended December 31, 1993, 1994 and 1995, the Company made profit sharing
contributions of $1,700,000, $1,312,000 and $1,218,000, 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, 1993, 1994 and 1995, was approximately
$3,116,000, $4,386,000, and $3,655,000, 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 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.
F-23
<PAGE> 91
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1994 DECEMBER 31, 1995
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents................. $ 20,446 $ 20,446 $ 16,139 $ 16,139
Temporary investments..................... 21,942 21,942
Accounts receivable....................... 20,682 20,682 20,158 20,158
Mortgage loans held for sale.............. 160,843 161,841
Investments:
Loans.................................. 32,631 38,000 138,180 147,000
Partnerships and joint ventures........ 22,491 25,200 34,694 38,000
Asset-backed securities................ 3,481 3,500 46,187 46,187
Liabilities:
Accounts payable.......................... 12,045 12,045 14,124 14,124
Notes payable and other debt.............. 16,459 16,459 325,954 326,354
Off-Balance Sheet:
Interest rate swap........................ (251)
Forward contracts......................... (998)
Letters of credit ($833 and $239,
respectively).......................... -- --
</TABLE>
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
F-24
<PAGE> 92
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pertinent information available to management as of December 31, 1994 and 1995.
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. 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,
1994 and 1995 (in thousands, except per share amounts):
<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
Earnings per share from continuing operations:
Primary....................................... 0.23 0.23 0.37 0.05
Fully-diluted................................. 0.23 0.23 0.37 0.05
Earnings per share:
Primary....................................... 0.21 0.22 0.36 0.00
Fully-diluted................................. 0.21 0.22 0.36 0.00
</TABLE>
Nonrecurring revenues of $10,000,000 related to the conclusion of the
NationsBank Contract were recorded during the third quarter of 1994.
Nonrecurring accruals for the loss on discontinued operations were made during
the fourth quarter of 1994.
<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
Earnings per share from continuing operations:
Primary....................................... 0.13 0.17 0.21 0.25
Fully-diluted................................. 0.13 0.17 0.21 0.24
Earnings per share:
Primary....................................... 0.13 0.27 0.21 0.25
Fully-diluted................................. 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-25
<PAGE> 93
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Quality Mortgage USA, Inc.
We have audited the accompanying consolidated balance sheets of Quality
Mortgage USA, Inc. as of September 30, 1994 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended September 30, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 audits to obtain
reasonable assurance about whether the consolidated 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Quality Mortgage USA, Inc. as of September 30, 1994 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 30, 1995, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
December 15, 1995
F-26
<PAGE> 94
QUALITY MORTGAGE USA, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1994 AND 1995
<TABLE>
<CAPTION>
ASSETS
1994 1995
------------ ------------
<S> <C> <C>
Cash and cash equivalents....................................... $ 19,149,278 $ 19,912,703
Advances and wet fundings....................................... 12,545,988 25,814,662
Investments, net................................................ 8,115,504 4,194,470
Mortgage loans held for sale, net............................... 147,183,263 197,216,733
Interest receivable............................................. 647,510 1,566,896
Real estate held for sale, net.................................. 8,695,679 3,555,041
Second trust deed receivables................................... 360,208 1,171,330
Other assets.................................................... 2,372,112 1,705,608
Property and equipment, net..................................... 6,481,475 8,284,924
Deferred tax asset.............................................. 4,129,419 7,277,263
------------ ------------
Total assets.......................................... $209,680,436 $270,699,630
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Related party notes payable................................... $161,938,552 $230,947,747
Accounts payable and accrued expenses......................... 7,052,415 7,335,756
Income taxes payable.......................................... 3,048,631 3,955,915
Deferred tax liability........................................ 647,175 621,373
------------ ------------
Total liabilities..................................... 172,686,773 242,860,791
------------ ------------
Commitments and contingencies
Stockholders' equity:
Series A common stock, no par value, 200 shares authorized,
issued and outstanding..................................... 198 198
Additional paid-in capital.................................... 1,999,900 2,137,398
Retained earnings............................................. 34,993,565 25,701,243
------------ ------------
Total stockholders' equity............................ 36,993,663 27,838,839
------------ ------------
Total liabilities and stockholders' equity............ $209,680,436 $270,699,630
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE> 95
QUALITY MORTGAGE USA, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Loan origination fees, net........................ $17,730,971 $19,611,880 $12,641,985
Interest.......................................... 12,933,549 18,555,495 34,721,394
Gain on sale of mortgage loans.................... 31,814,823 51,040,622 40,676,945
Prepayment fees................................... 866,131 3,828,432 9,643,739
Late fees......................................... 922,279 2,237,300 4,636,992
Trust deed revenues............................... 11,064 1,567,147
Gain (loss) on sale of real estate held for
sale........................................... 36,816 (4,398,734) (6,268,944)
Other............................................. 112,579 329,806 422,127
----------- ----------- -----------
64,417,148 91,215,865 98,041,385
----------- ----------- -----------
Operating expenses:
Interest.......................................... 6,184,908 10,240,173 23,113,640
Commissions....................................... 3,067,252 5,161,164 5,837,811
Salaries.......................................... 11,357,468 23,271,379 27,585,478
Professional and consulting fees.................. 2,469,936 3,293,756 3,906,046
Selling, general and administrative............... 2,556,057 6,507,248 7,645,938
Provision for losses on investments............... 3,914,364
Provision for losses on mortgage loans held for
sale........................................... 2,200,000
Provision for losses on real estate held for
sale........................................... 2,597,411
Rent and other occupancy costs.................... 879,369 1,307,284 1,724,583
Depreciation and amortization..................... 487,770 967,168 1,436,406
----------- ----------- -----------
27,002,760 55,545,583 75,164,266
----------- ----------- -----------
Income before provision for income taxes............ 37,414,388 35,670,282 22,877,119
Provision for income taxes.......................... 16,841,250 17,423,788 9,756,946
----------- ----------- -----------
Net income.......................................... $20,573,138 $18,246,494 $13,120,173
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE> 96
QUALITY MORTGAGE USA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
CLASS A CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL
-------------------- --------------- ------------------ PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ----------- ------ ------ ------ --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, October 1,
1992................... 100 $100 $1,999,900 $ 4,799,785 $ 6,799,785
Dividends paid........... (2,830,747) (2,830,747)
Issuance of preferred
stock as common stock
dividend............... 100 $ 5,458,750 (5,458,750)
Net income............... 20,573,138 20,573,138
---- ----------- --- ---- ----- --------- ---------- ----------- ------------
Balances, September 30,
1993................... 100 5,458,750 100 100 1,999,900 17,083,426 24,542,176
Dividends paid........... (336,355) (336,355)
Redemption of preferred
stock.................. (100) (5,458,750) (5,458,750)
Common stock split....... 2
Issuance of common
stock.................. 98 98 98
Net income............... 18,246,494 18,246,494
---- ----------- --- ---- ----- --------- ---------- ----------- ------------
Balances, September 30,
1994................... 200 198 1,999,900 34,993,565 36,993,663
Dividends paid........... (22,412,495) (22,412,495)
Issuance of common
stock.................. 6.87 $ 137,498 137,498
Common stock reacquired
pursuant to the terms
of a separation
agreement.............. (6.87) (137,498) 137,498
Net income............... 13,120,173 13,120,173
---- ----------- --- ---- ----- --------- ---------- ----------- ------------
Balances, September 30,
1995................... 200 $198 $ $2,137,398 $ 25,701,243 $ 27,838,839
==== =========== === ==== ===== ========= ========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE> 97
QUALITY MORTGAGE USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 20,573,138 $ 18,246,494 $ 13,120,173
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Depreciation and amortization.................. 487,770 967,168 1,436,406
(Gain) loss on sale of real estate held for
sale......................................... (36,816) 4,398,734 6,268,944
Provision for losses on investments, mortgage
loans and real estate held for sale.......... 4,797,411 3,914,364
Increase in advances and wet fundings.......... (563,032) (11,982,956) (13,268,674)
(Increase) decrease in mortgage loans held for
sale......................................... (38,171,754) 33,565,148 (50,033,470)
(Increase) decrease in interest receivable..... (184,803) 249,227 (919,386)
Increase in second trust deed receivables...... (285,158) (811,122)
(Increase) decrease in other assets............ (2,479,074) (129,464) 666,504
Decrease (increase) in deferred taxes, net..... 106,366 (3,482,244) (3,173,646)
Increase in accounts payable and accrued
expenses..................................... 1,173,540 4,653,766 283,341
(Decrease) increase in income taxes payable.... (2,241,622) 3,048,631 907,284
Increase in deferred revenue................... 832,553
------------ ------------ ------------
Net cash (used) provided by operating
activities.............................. (20,503,734) 54,046,757 (41,609,282)
------------ ------------ ------------
Cash flows from investing activities:
(Increase) decrease in investments classified as
held-to-maturity............................... (8,115,504) 7,502,142
Increase in investments classified as
available-for-sale............................. (1,328,472)
Capital expenditures.............................. (5,315,555) (2,070,477) (3,239,854)
Purchase of real estate held for sale............. (4,335,367) (36,226,778) (24,133,326)
Proceeds from sale of real estate................. 1,152,326 23,754,810 23,005,019
------------ ------------ ------------
Net cash (used) provided by investing
activities.............................. (8,498,596) (22,657,949) 1,805,509
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings (payments) on related party notes
payable........................................ 39,301,904 (23,993,512) 62,842,195
Dividends paid.................................... (2,830,747) (336,355) (22,412,495)
Redemption of preferred stock..................... (5,458,750)
Proceeds from sale of stock....................... 98 137,498
------------ ------------ ------------
Net cash provided (used) by financing
activities.............................. 36,471,157 (29,788,519) 40,567,198
------------ ------------ ------------
Net increase in cash and cash
equivalents............................. 7,468,827 1,600,289 763,425
Cash and cash equivalents, beginning of year........ 10,080,162 17,548,989 19,149,278
------------ ------------ ------------
Cash and cash equivalents, end of year.............. $ 17,548,989 $ 19,149,278 $ 19,912,703
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest....................................... $ 6,098,501 $ 10,405,577 $ 22,635,519
============ ============ ============
Income taxes................................... $ 19,891,867 $ 13,941,964 $ 7,761,000
============ ============ ============
</TABLE>
During the year ended September 30, 1995, the Company partially financed
its purchase of investments classified as available-for-sale with a related
party note payable of $6,167,000.
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE> 98
QUALITY MORTGAGE USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1994 AND 1995 AND
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994 AND 1995
1. ORGANIZATION AND BASIS OF PRESENTATION:
Quality Mortgage USA, Inc., a California corporation, originates, purchases
and sells primarily "B" and "C" grade residential mortgage loans collateralized
by one to four single family homes throughout the United States and is approved
as a nonsupervised mortgagee by the United States Department of Housing and
Urban Development. The aggregate amount of loans originated or purchased during
the years ended September 30, 1993, 1994 and 1995 was approximately $1.192
billion, $1.314 billion and $1.607 billion, respectively. The common stock of
Quality Mortgage USA, Inc. is owned 51% by Calmac Funding ("Calmac"), a Nevada
corporation, and 49% by DLJ Mortgage Capital, Inc. ("DLJ"), a Delaware
corporation.
The accompanying consolidated financial statements include the accounts of
Quality Mortgage USA, Inc. and all of its wholly-owned subsidiaries
(collectively, the "Company") as follows:
- QMI Properties, Inc., a California corporation, owns and operates the
Company's corporate office facilities in Irvine, California.
- Save-More Insurance Services, Inc., a California corporation, acts as an
insurance agent selling homeowners, property and various other insurance
products primarily to mortgagees of Quality Mortgage USA, Inc.
- Commonwealth Trust Deed Services, Inc., a California corporation, acts as
a trustee for foreclosed mortgage loans collateralized by California
property originated or acquired by Quality Mortgage USA, Inc.
- Quality Trustee, Inc., a California corporation, performs certain trust
deed recording services on foreclosed mortgage loans originated or
acquired by Quality Mortgage USA, Inc.
All significant intercompany balances and transactions have been
eliminated.
2. SIGNIFICANT ACCOUNTING POLICIES:
Cash and Equivalents
Cash and cash equivalents consist of cash in banks, money market and mutual
funds and short-term investments with maturities of three months or less on the
date of acquisition. The carrying amount of cash equivalents approximates fair
value.
Advances and Wet Fundings
Advances and wet fundings consist of funds advanced for the purpose of
funding mortgage loans in certain states which require loan proceeds to be
transferred to the closing agent or escrow company prior to the loan closing.
Execution of these loan transactions normally occur three to five days following
distribution of the loan funds.
Investments
In May 1993, the Financial Accounting Standards Board issued Statement No.
115, "Accounting for Certain Investments in Debt and Equity Securities." This
Statement addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for investments in
debt securities, and requires that these investments be classified as either
held-to-maturity, available-for-sale or trading securities. The Statement is
effective for fiscal years beginning after December 15, 1993 and the
F-31
<PAGE> 99
QUALITY MORTGAGE USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company elected to adopt this Statement on October 1, 1994. The adoption of this
Statement was not material to the Company's 1995 financial statements.
Investments consist of government agency debt, Class C mortgage
pass-through certificates and interest only strips with maturities exceeding
three months on the date of acquisition. The Company classified the investments
as held-to-maturity, except for the Class C mortgage pass-through certificates
which are classified as available-for-sale. The Company assesses whether there
has been an impairment in the value of investments by considering factors such
as related fair market values and estimated future cash flows.
Mortgage Loans Held For Sale
Mortgage loans held for sale are stated at the lower of aggregate cost or
aggregate estimated fair value, with fair value primarily based upon outstanding
commitments that the Company has received from investors for the purchase of
such mortgages. Interest income is recognized using the actuarial interest
method. Gains or losses on sales of mortgage loans are recorded at the time in
which all risks and rewards have been transferred to the buyer.
Real Estate Held For Sale
Real estate held for sale consists of residential real estate located
primarily in Southern California and is stated at the lower of cost or estimated
net realizable value.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is provided using the straight-line method over
the estimated useful lives of the assets which range from three to thirty years.
Leasehold improvements are amortized on the straight-line method over the
estimated useful life of the asset or the terms of the lease, whichever is
shorter. Maintenance and repairs are expensed as incurred while renewals and
betterments are capitalized. Upon the sale or retirement of property and
equipment, the accounts are relieved of the cost and the related accumulated
depreciation, and any resulting gain or loss is included in operations.
Loan Origination Fees
Loan origination fees consist of amounts received in connection with the
origination of residential mortgage loans and are presented net of related
direct loan origination costs. Loan origination fees and direct loan origination
costs for mortgage loans held for sale are deferred until the related loans are
sold.
Income Taxes
The Company utilizes Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The provision for income taxes represents the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
F-32
<PAGE> 100
QUALITY MORTGAGE USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Risks and Uncertainties
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of second trust deed notes. As
of September 30, 1994 and 1995, substantially all of these notes were
collateralized by properties located in California.
At September 30, 1994 and 1995, the Company had amounts on deposit with
financial institutions that were in excess of the federally insured limit of
$100,000. In October 1994 and 1995, the Company invested the majority of these
balances in United States Treasury Bills and mutual funds.
Impact of New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement
is effective for financial statements for fiscal years beginning after December
15, 1995. Management believes that adoption of this standard will not have a
material effect on the financial position or results of operations of the
Company.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" ("SFAS 122"), which is effective for fiscal years beginning after
December 15, 1995. The Company intends to adopt the provisions of SFAS 122 in
fiscal year 1996. SFAS 122 eliminates the accounting distinction between rights
to service mortgage loans for others that are acquired through loan origination
activities and those acquired through purchase transactions. The Statement also
requires that impairment of capitalized mortgage servicing rights be measured
based on the fair value of those rights. Management believes that the adoption
of this pronouncement will not significantly impact the Company's consolidated
financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." This statement is effective for financial statements for fiscal
years beginning after December 15, 1995. Management is currently studying the
effects of adopting this standard.
Reclassifications
Certain prior period amounts have been reclassified to conform with the
current period presentation.
3. CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of the following at September 30:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Short-term investments.................................... $14,431,502 $ 9,855,902
Other cash deposits....................................... 4,717,776 10,056,801
----------- -----------
$19,149,278 $19,912,703
=========== ===========
</TABLE>
F-33
<PAGE> 101
QUALITY MORTGAGE USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Short-term investments consist of a United States Treasury Bill, government
money market funds and Treasury money market funds. The maturity date for The
United States Treasury Bill held at September 30, 1995 is November 11, 1995.
4. INVESTMENTS:
Investments, net consist of the following at September 30:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Treasury securities........................................... $8,115,504
Class C mortgage pass-through certificates, due in December
2024........................................................ $3,581,108
Interest only strips, due in October and December 2024........ 613,362
---------- ----------
$8,115,504 $4,194,470
========== ==========
</TABLE>
In December 1994, the Company purchased Class C mortgage pass-through
certificates with a face value of $11,012,293 for $7,495,472, the then estimated
fair market value of the certificates, from DLJ. In conjunction with this
purchase, the Company borrowed $6,167,000 from DLJ under substantially the same
terms as described in Note 8. Subsequent to the purchase of the certificates,
the Company wrote down its investment by $3,914,364 as management believed an
other-than-temporary impairment had occurred.
5. MORTGAGE LOANS HELD FOR SALE:
Mortgage loans held for sale, net consist of the following at September 30:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Principal balance outstanding........................... $149,243,064 $199,044,085
Premium paid on purchased loans......................... 735,882 1,171,330
Deferred loan fees, net................................. (595,683) (798,682)
Allowance for estimated losses.......................... (2,200,000) (2,200,000)
------------ ------------
$147,183,263 $197,216,733
============ ============
Weighted average interest rate.......................... 9.95% 11.19%
============ ============
</TABLE>
Premium paid on purchased loans represents the amount above par that the
Company paid for certain loans that are held for sale as discussed in Note 8.
Deferred loan fees, net represent loan origination fees received in
connection with the origination of residential mortgage loans, and are net of
direct loan origination costs, related to mortgage loans held for sale. Such
fees and costs are deferred until the related loans are sold.
6. REAL ESTATE HELD FOR SALE:
Through various Pooling and Servicing Agreements between Lomas Mortgage
USA, Inc. (the "Servicer"), DLJ and Bankers Trust Company, the Company is
provided with a first right of refusal to purchase mortgaged property acquired
or about to be acquired by foreclosure from the Servicer. Under the agreement,
the Company will forfeit the right to acquire properties from a particular trust
if the Company elects not to purchase any two mortgaged properties. The Pooling
and Servicing Agreements provide that the purchase price for any mortgaged
property acquired by the Company be equal to the sum of the outstanding
principal balance of the related mortgage loan plus accrued interest thereon and
the amount of any unreimbursed advances. During April 1995, the Company
discontinued its policy of purchasing mortgaged property acquired or about to be
acquired by foreclosure by the Servicer.
F-34
<PAGE> 102
QUALITY MORTGAGE USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of September 30, 1995, the Company has thirty-two properties primarily
located in Southern California that are held for sale with an aggregate basis of
$5,169,902, net of a $1,614,861 reserve to reduce their carrying value to the
estimated net realizable value. Estimated net realizable value is equal to the
appraised value of the individual properties less sales commissions and other
anticipated costs of disposition.
The Company may provide mortgage loans to purchasers in order to facilitate
the sale of the Company's real estate held for sale. As of September 30, 1994
and 1995, the Company had loans outstanding of $656,201 and $4,913,057,
respectively, collateralized by first trust deeds in the respective property, to
purchasers of the Company's real estate held for sale. Such amounts are included
in mortgage loans held for sale, net on the accompanying balance sheets.
The Company also provided second trust deeds in conjunction with the sale
transactions described above totalling $360,208 and $1,719,679 as of September
30, 1994 and 1995, respectively.
7. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at September 30:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Office buildings.......................................... $ 3,823,854 $ 5,905,635
Computer hardware and software............................ 2,283,531 2,782,184
Office machinery and equipment............................ 1,104,753 1,538,306
Furniture and fixtures.................................... 474,780 637,178
Leasehold improvements.................................... 256,708 320,178
----------- -----------
7,943,626 11,183,481
Less, accumulated depreciation and amortization......... (1,462,151) (2,898,557)
----------- -----------
$ 6,481,475 $ 8,284,924
=========== ===========
</TABLE>
8. RELATED PARTY TRANSACTIONS:
DLJ Repurchase Agreement
The Company has entered into a Whole Loan Master Repurchase Agreement with
DLJ (the "DLJ Agreement") whereby the Company sells substantially all mortgage
loans originated and acquired during the year. The aggregate amount of loans
sold to DLJ during the year ended September 30, 1993, 1994 and 1995 was
approximately $965 million, $1.320 billion and $1.421 billion, respectively,
which resulted in gains of $31.8 million, $51.2 million and $39.6 million,
respectively. Under the DLJ Agreement, the Company sells loans servicing
released. However, the Company retains the rights to receive prepayment
penalties and late charges as they are collected by the Servicer assigned by
DLJ.
Under the terms of the DLJ Agreement, the Company is required to maintain
minimum balances of $5,500,000 in custodial bank accounts with Bankers Trust
Company (the "Custodian") which serve as collateral against any breach of
representations and warranties of the Company with respect to mortgage loans
held for sale. The Company had $6,618,017 and $5,786,022 on deposit in these
accounts at September 30, 1994 and 1995, respectively.
The Company has a line of credit under the DLJ agreement which provides for
up to $300,000,000, of which advances at September 30, 1994 and 1995 totalled
$149,392,564 and $198,966,085, respectively. Repayment of principal and interest
are due and payable at the earlier of six months from the advance date or the
sale of the related loans. The interest rate on advances is equal to DLJ's cost
of funds plus .125%, not to exceed the thirty-day LIBOR rate plus 1.375%. The
effective interest rates as of September 30, 1994 and 1995 were 6.75% and 7.75%,
respectively. Borrowings are collateralized by the underlying mortgage loans.
F-35
<PAGE> 103
QUALITY MORTGAGE USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Wet Funding Line
In July 1994, the Company executed a separate Whole Loan Financing
Facility, Tri-Party Custody Agreement, Pledge Agreement and Promissory Note
(together, the "Financing Program") with DLJ and the Custodian. Under the
Financing Program, the Company can borrow up to $100,000,000 for the purpose of
funding mortgage loans whose loan documents have not yet been shipped to the
Custodian. Advances are ultimately collateralized with mortgage loans originated
in the Company's name. Interest rates on advances made pursuant to the Financing
Program vary and are mutually agreed upon. As of September 30, 1994 and 1995,
the effective interest rates approximated the rates on the DLJ line of credit.
At September 30, 1994 and 1995, $12,545,988 and $25,814,662 were outstanding
under this Financing Program, respectively.
Consulting Agreement
The Company has a five-year consulting agreement with Calmac whereby Calmac
will provide marketing, administrative, cost containment and expense reduction
services to the Company. The provisions of the agreement stipulate minimum
amounts be paid over the term of the agreement and, under certain conditions,
upon termination. The Company records such payments as professional and
consulting fees.
EFI Purchase Agreement
The Company has a Whole Loan Master Repurchase Agreement with Express
Funding, Inc. ("EFI"), a related entity which is 100% owned by an officer of the
Company. Under this agreement, the Company will purchase substantially all
mortgage loans originated by EFI at market prices generally in excess of par
value. The Company subsequently sells these loans to DLJ pursuant to the terms
of the DLJ Agreement. During the years ended September 30, 1993, 1994 and 1995,
the Company purchased a total of $2,506,800, $117,500,502, and $490,984,561,
respectively, of mortgage loans from EFI. Total premiums paid on mortgage loans
purchased from EFI totalled $73,000, $3,525,000 and $6,206,855 for the years
ended September 30, 1993, 1994 and 1995, respectively.
Other
During the year ended September 30, 1995, the Company paid $266,503 for
appraisal services provided by an entity owned by Calmac.
9. INCOME TAXES:
The following table presents the current and deferred income tax provision
(benefit) for federal and state income taxes for the years ended September 30:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal................................... $12,388,195 $16,153,785 $ 9,340,300
State..................................... 4,453,055 4,752,246 3,590,293
Deferred:
Federal................................... (2,990,824) (2,205,756)
State..................................... (491,419) (967,891)
----------- ----------- -----------
$16,841,250 $17,423,788 $ 9,756,946
=========== =========== ===========
</TABLE>
The difference between the federal statutory tax rate and the Company's
effective tax rate is the result primarily of state income taxes, net of their
federal effect.
F-36
<PAGE> 104
QUALITY MORTGAGE USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The significant temporary differences that give rise to the deferred tax
benefit consist primarily of state income taxes and reserves for real estate and
mortgage loans held for sale, as well as income from investments.
The components of the deferred income tax asset and (liability) at
September 30 are as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accrued salaries.......................................... $ 180,143 $ 137,470
State taxes............................................... 1,663,286 743,585
REO reserve............................................... 1,198,652 750,426
Mortgage reserve.......................................... 789,990 1,022,340
Litigation reserve........................................ 232,350 348,525
Investment income......................................... 3,964,534
Fair market value adjustment.............................. 273,420
Other..................................................... 64,998 36,963
---------- ----------
$4,129,419 $7,277,263
========== ==========
Deferred tax liabilities:
Loan origination costs.................................... $ 474,980 $ 612,326
Other..................................................... 172,195 9,047
---------- ----------
$ 647,175 $ 621,373
========== ==========
</TABLE>
The Company did not record a valuation allowance against the deferred
income tax assets in 1994 or 1995.
10. COMMON AND PREFERRED STOCK:
During the year ended September 30, 1993, the Company amended its Articles
of Incorporation to authorize 200 shares of voting Class A common stock, 10
shares of nonvoting Class B common stock and 100 shares of preferred stock. All
previously outstanding common shares were reconstituted as Class A common stock.
Concurrently, the Board declared a $5,458,750 common stock dividend payable
in Series A preferred stock and the Company issued 100 shares of Series A
preferred stock to the sole common stockholder. The preferred stockholders are
entitled to cumulative quarterly dividends at the rate 9% per annum based on the
liquidation preference of $54,588 per share. During the year ended September 30,
1994, the Company redeemed all 100 shares of Series A preferred stock for
$5,458,750.
During the year ended September 30, 1994, the Board of Directors approved a
stock split which converted each share of the Company's Class A common stock
into 1.02 shares. Immediately thereafter, the Company issued 98 shares of Class
A common stock to DLJ for $98 pursuant to a Stock Purchase Agreement.
During the year ended September 30, 1995, the Company issued 6.87 shares of
Class B common stock to an officer of the Company for cash of $137,498. In
connection with such officer's separation agreement, these shares were
reacquired by the Company.
F-37
<PAGE> 105
QUALITY MORTGAGE USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair value of the Company's financial instruments has been
determined by the Company using appropriate market information and valuation
methodologies. Considerable judgment is required to develop the estimates of
fair value thus, the estimates provided herein are not necessarily indicative of
the amounts that could be realized in a current market exchange. Estimated fair
values at September 30, 1994 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1994 1995
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(IN 000'S)
<S> <C> <C> <C> <C>
Financial assets:
Cash and equivalents...................... $ 19,149 $ 19,149 $ 19,913 $ 19,913
Investments............................... 8,116 8,116 4,194 4,194
Mortgage loans held for sale.............. 147,183 151,529 197,217 203,330
Financial liabilities:
Related party notes payable............... 161,939 161,939 230,948 230,948
</TABLE>
Fair value of related party notes payable is estimated using rates
currently available to the Company with similar terms.
12. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is a defendant in certain lawsuits involving litigation related
to the business in which it is engaged. Although the ultimate outcome of such
matters is uncertain, the Company believes, based on the opinions of in-house
and external counsel, that any liability which may result from disposition of
these lawsuits will not have a material effect on the Company's consolidated
financial statements or results of operations.
Operating Leases
The Company leases various branch office locations under operating leases.
Lease terms range from six to thirty-six months and the majority of the
Company's operating leases include options to extend the lease term. Future
minimum lease payments at September 30, 1995 under these obligations are as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING SEPTEMBER 30,
- -----------------------------------
<S> <C>
1996.......................................................... $496,213
1997.......................................................... 47,154
1998.......................................................... 12,777
--------
$556,144
========
</TABLE>
Subsequent to September 30, 1995, the Company entered into additional
operating leases with similar terms for office space.
Loan Servicing Agreements
The Company has a servicing agreement with Lomas Mortgage USA, Inc.
("Lomas"), DLJ and Bankers Trust Company under which Lomas services mortgage
loans originated by the Company. Annual servicing fees retained by Lomas
pursuant to this agreement are .40% to .48% of each mortgage loan's
F-38
<PAGE> 106
QUALITY MORTGAGE USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding principal balance. The agreement has no stated expiration date but
can be terminated by the Company or by Lomas with thirty days written notice.
During the year ended September 30, 1994, the Company entered into a
separate Services Agreement with Lomas whereby Lomas employed personnel to
exclusively perform special services related to mortgage loans which were
delinquent and/or in default and had been referred for foreclosure. Under the
terms of the Services Agreement, the Company shall pay Lomas its costs and
expenses incurred in the performance of such services based on an operating
budget approved by both parties.
Custody Agreement
The Company has a mortgage loan custody agreement with Bankers Trust
Company to hold mortgage notes for the Company for a specified fee. The
agreement has no stated expiration date but can be terminated by the Company or
by Bankers Trust Company with 90 days written notice.
Loans Serviced
In July 1995, the Company began servicing mortgage loans. At September 30,
1995, the Company services loans with principal balances totalling approximately
$35,579,936. The average annual servicing fee received by the Company was
approximately 50 basis points times the principal balance serviced.
Custodial funds amounted to $542,469 at September 30, 1995. Such funds,
which are maintained by the Company on behalf of various parties, are deposited
in trust bank accounts and are excluded from assets and liabilities in the
accompanying balance sheets.
F-39
<PAGE> 107
QUALITY MORTGAGE USA, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1995 AND 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Cash and cash equivalents....................................... $ 3,171,165 $ 8,707,506
Advances and wet fundings....................................... 17,634,616 19,094,035
Investments, net................................................ 25,128,565 26,715,045
Mortgage loans held for sale, net............................... 290,285,523 106,664,365
Interest receivable............................................. 2,287,887 654,077
Real estate held for sale, net.................................. 6,227,239 2,711,946
Second trust deed receivables................................... 1,664,265 1,748,558
Other assets.................................................... 572,488 2,121,238
Property and equipment, net..................................... 8,386,721 8,113,839
Deferred tax asset.............................................. 4,355,419 7,277,263
------------ ------------
Total assets.......................................... $359,713,888 $183,807,872
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Related party notes payable................................... $314,428,032 $149,365,677
Accounts payable and accrued expenses......................... 7,453,562 4,047,585
Income taxes payable.......................................... 2,300,200 863,165
Deferred tax liability........................................ 647,175 621,373
------------ ------------
Total liabilities..................................... 324,828,969 154,897,800
------------ ------------
Commitments and contingencies
Stockholders' equity:
Series A common stock, no par value, 200 shares authorized,
issued and outstanding..................................... 198 198
Class B common stock, no par value............................ 137,498 137,498
Additional paid-in capital.................................... 1,999,900 1,999,900
Retained earnings............................................. 32,747,323 26,772,476
------------ ------------
Total stockholders' equity............................ 34,884,919 28,910,072
------------ ------------
Total liabilities and stockholders' equity............ $359,713,888 $183,807,872
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE> 108
QUALITY MORTGAGE USA, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Revenue:
Gain on sale of mortgage loans and loan origination fees, net... $23,792,682 $18,094,248
Interest........................................................ 18,669,692 13,222,011
Prepayment fees................................................. 4,463,834 6,940,877
Late fees....................................................... 2,404,147 2,953,000
Trust deed revenues............................................. 897,789 512,806
Loss on sale of real estate held for sale....................... (3,498,860) (993,783)
Other........................................................... 205,843 283,726
----------- -----------
46,935,127 41,012,885
----------- -----------
Operating expenses:
Interest........................................................ 13,600,634 8,085,282
Commissions..................................................... 2,634,619 3,142,848
Salaries........................................................ 11,855,026 12,609,795
Professional and consulting fees................................ 1,119,864 2,055,628
Selling, general and administrative............................. 4,045,228 6,780,613
Provision for losses on investments............................. 7,513,450
Provision for losses on real estate held for sale............... 982,550
Rent and other occupancy costs.................................. 833,581 1,263,310
Depreciation and amortization................................... 723,135 930,203
----------- -----------
35,794,637 42,381,129
----------- -----------
Income (loss) before provision (benefit) for income taxes......... 11,140,490 (1,368,244)
Provision (benefit) for income taxes.............................. 4,944,446 (931,096)
----------- -----------
Net income (loss)................................................. $ 6,196,044 $ (437,148)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
<PAGE> 109
QUALITY MORTGAGE USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................ $ 6,196,044 $ (437,148)
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Depreciation and amortization............................. 723,135 930,203
Decrease in advances and wet fundings..................... 6,502,691 5,525,607
(Increase) decrease in mortgage loans held for sale....... (26,615,472) 77,434,408
(Increase) decrease in interest receivable................ (413,420) 879,697
Decrease (increase) in other assets....................... 7,734,575 (2,322,073)
Increase in deferred taxes, net........................... (226,000) (237,009)
Increase (decrease) in accounts payable and accrued
expenses................................................ 710,710 (2,402,385)
Increase (decrease) in income taxes payable............... 1,457,036 (813,382)
----------- ------------
Net cash (used) provided by operating activities..... (3,930,701) 78,557,918
----------- ------------
Cash flows from investing activities:
Decrease (increase) in investments........................... 4,016,199 (3,437,566)
Capital expenditures......................................... (2,654,316) (788,947)
----------- ------------
Net cash provided (used) by investing activities..... 1,361,883 (4,226,513)
----------- ------------
Cash flows from financing activities:
Net borrowings (payments) on related party notes payable..... 11,791,642 (68,442,678)
Dividends paid............................................... (8,841,162)
Proceeds from sale of stock.................................. 137,498
----------- ------------
Net cash provided (used) by financing activities..... 3,087,978 (68,442,678)
----------- ------------
Net increase in cash equivalents..................... 519,160 5,888,727
Cash and cash equivalents, beginning of year................... 2,652,005 2,818,779
----------- ------------
Cash and cash equivalents, end of year......................... $ 3,171,165 $ 8,707,506
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
<PAGE> 110
QUALITY MORTGAGE USA, INC.
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1995 AND 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Quality Mortgage USA, Inc., a California corporation, originates, purchases
and sells primarily "B" and "C" grade residential mortgage loans collateralized
by one to four single family homes throughout the United States and is approved
as a nonsupervised mortgagee by the United States Department of Housing and
Urban Development. The common stock of Quality Mortgage USA, Inc. is owned 51%
by Calmac Funding ("Calmac"), a Nevada corporation, and 49% by DLJ Mortgage
Capital, Inc. ("DLJ"), a Delaware corporation.
The accompanying consolidated financial statements include the accounts of
Quality Mortgage USA, Inc. and all of its wholly-owned subsidiaries
(collectively, the "Company") as follows:
- - QMI Properties, Inc., a California corporation, owns and operates the
Company's corporate office facilities in Irvine, California.
- - Save-More Insurance Services, Inc., a California corporation, acts as an
insurance agent selling homeowners, property and various other insurance
products primarily to mortgagees of Quality Mortgage USA, Inc.
- - Commonwealth Trust Deed Services, Inc., a California corporation, acts as a
trustee for foreclosed mortgage loans collateralized by California property
originated or acquired by Quality Mortgage USA, Inc.
- - Quality Trustee, Inc., a California corporation, performs certain trust deed
recording services on foreclosed mortgage loans originated or acquired by
Quality Mortgage USA, Inc.
All significant intercompany balances and transactions have been
eliminated.
The financial statements as of June 30, 1995 and 1996, and for the six
months then ended, are unaudited but include all adjustments (consisting of
normal recurring accruals only) which management considers necessary to present
fairly the Company's financial position as of June 30, 1995 and 1996, and the
results of operations and cash flows for the six months then ended. The results
of operations and cash flows for the six months ended June 30, 1995 and 1996 are
not necessarily indicative of results for the respective fiscal years or for
other interim periods.
F-43
<PAGE> 111
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Summary............................... 4
Risk Factors.......................... 13
Quality Acquisition................... 19
Unaudited Pro Forma Condensed
Consolidated Financial Statements
for the Quality Acquisition......... 21
Use of Proceeds....................... 27
Price Range of and Dividends on Common
Stock............................... 27
Capitalization........................ 29
Summary Historical Financial and Other
Data................................ 30
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 32
Business.............................. 42
Management............................ 55
Selling Stockholders.................. 58
Description of Capital Stock.......... 60
Underwriting.......................... 63
Legal Matters......................... 64
Experts............................... 64
Glossary.............................. 65
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
7,760,000 SHARES
[AMRESCO LOGO]
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
THE ROBINSON-HUMPHREY
COMPANY, INC.
PIPER JAFFRAY INC.
RAYMOND JAMES &
ASSOCIATES, INC.
MONTGOMERY SECURITIES
J.C. BRADFORD & CO.
MORGAN KEEGAN &
COMPANY, INC.
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 112
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............... $ 60,508
--------
NASD Filing Fee................................................... 20,468
--------
Nasdaq National Market Listing Fee................................ 17,500
--------
Printing Expenses................................................. *
Accounting Fees and Expenses...................................... *
Legal Fees and Expenses (including fees of Selling Stockholders'
counsel)........................................................ *
Blue Sky Fees and Expenses (including counsel fees)............... *
Fees of Transfer Agent and Registrar.............................. *
Miscellaneous Expenses............................................ *
--------
TOTAL................................................... $ *
========
</TABLE>
- ---------------
* To be supplied by amendment.
All of the above expenses except the Securities and Exchange Commission
registration fee, the NASD filing fee and the Nasdaq National Market listing fee
are estimated. All of such expenses will be borne by the Company.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") and the Company's Amended and Restated Bylaws (the "Bylaws")
provide that the Company shall indemnify, to the full extent permitted by law,
any person against liabilities arising from their service as directors,
officers, employees or agents of the Company. Section 145 of the DGCL empowers a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section 145 also empowers a corporation to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses (including attorney's fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards, except
that no indemnification may be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation
unless, and only to the extent that, the Court of Chancery or the court in which
such action was brought shall determine that despite the adjudication of
liability such person is fairly and reasonably entitled to indemnify for such
expenses which the court shall deem proper.
Section 145 further provides that indemnification provided for by Section
145 shall not be deemed exclusive of any other rights to which the indemnified
party may be entitled, and that the corporation is empowered to purchase and
maintain insurance on behalf of a director or officer of the corporation against
any liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such,
II-1
<PAGE> 113
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
The Certificate and the Bylaws provide that no director of the Company
shall be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or
(iv) for any transaction from which the director derived an improper personal
benefit. Any repeal or modification of this provision related to director's
liability shall not adversely affect any right or protection of a director of
the Company existing immediately prior to such repeal or modification. Further,
if the DGCL shall be repealed or modified, the elimination of liability of a
director provided in the Certificate and the Bylaws shall be to the fullest
extent permitted by the DGCL as so amended.
Reference is also made to the indemnification provisions contained in the
Underwriting Agreement (a form of which will be filed as Exhibit 1.1 hereto)
with respect to undertakings to indemnify the Company, its directors, officers
and controlling persons within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), against certain liabilities, including
liabilities under the Securities Act or otherwise.
Pursuant to Registration Rights Agreements with certain stockholders of the
Company, the Company has agreed to indemnify such stockholders (including the
Selling Stockholders) against certain liabilities, including liabilities under
the Securities Act or otherwise. For the undertaking with respect to
indemnification, see Item 17 herein.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
1.1* -- Form of Underwriting Agreement.
2.1** -- Asset Purchase Agreement dated October 9, 1996 by and among AMRESCO
Residential Mortgage Corporation, on the one hand, and Quality
Mortgage USA, Inc., Calmac Funding, Inc., DLJ Mortgage Capital, Inc.,
DLJ Quality Partners, L.P., Russell Jedinak and Rebecca Jeninak, on
the other hand.
4.1 -- Restated Certificate of Incorporation, as amended, filed as Exhibit
3.1 to the Registrant's Form 10-Q for the quarter ended September 30,
1995, as amended by Form 10-Q/A No. 1 dated October 25, 1995, which
exhibit is incorporated herein by reference.
4.2 -- Amended and Restated Bylaws as of May 23, 1994, filed as Exhibit 3(f)
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, which exhibit is incorporated herein by
reference.
4.3 -- First Amended and Restated Revolving Loan Agreement, dated as of
April 25, 1996, among the Company and Other Entities Designated
Within as Borrowers and NationsBank of Texas, N.A. as Agent and
NationsBank of Texas, N.A. and Other Entities Designated Within as
Lenders, filed as Exhibit 10(a) to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1996, which exhibit
is incorporated herein by reference.
4.4 -- Specimen Common Stock Certificate filed as Exhibit 4.4 to the
Company's Registration Statement on Form S-3 (No. 33-63683), which
exhibit is incorporated herein by reference.
4.5 -- Indenture, dated as of November 27, 1995, between the Company and
First Interstate Bank of Texas, National Association in respect of
the Company's 8% Convertible Subordinated Debentures due 2005, filed
as Exhibit 4.5 to the Company's Registration Statement on Form S-3
(No. 33-63683), which exhibit is incorporated herein by reference.
</TABLE>
II-2
<PAGE> 114
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
4.6 -- Indenture, dated as of January 15, 1996, between the Company and Bank
One, Columbus, N.A., as trustee, filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K dated February 2, 1996, which
exhibit is incorporated herein by reference.
4.7 -- Indenture, dated as of July 1, 1996, between the Company and Comerica
Bank, as trustee, filed as Exhibit 4.1 to the Company's Current
Report on Form 8-K dated July 19, 1996, which exhibit is incorporated
herein by reference.
4.8* -- First Supplemental Indenture dated as of April 1, 1996 to Indenture
dated as of November 27, 1995 by and between AMRESCO, INC. and First
Interstate Bank of Texas, National Association.
4.9 -- First Amendment to First Amended and Restated Revolving Loan
Agreement, dated as of June 13, 1996, among AMRESCO, INC. and Other
Entities Designated Within as borrowers and NationsBank of Texas,
N.A. as Agent and NationsBank of Texas, N.A. and Other Entities
Designated Within as Lenders filed as Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1996, which exhibit is incorporated herein by reference.
4.10 -- Officers' Certificate and Company Order dated as of July 19, 1996,
establishing the terms of the Senior Notes filed as Exhibit 4.2 to
the Company's Current Report on Form 8-K dated July 19, 1996, which
exhibit is incorporated herein by reference.
5.1* -- Form of Opinion of L. Keith Blackwell, General Counsel of the
Company, as to the validity of Common Stock to be offered.
23.1* -- Consent of L. Keith Blackwell, contained in the opinion filed as
Exhibit 5.1.
23.2* -- Consent of Deloitte & Touche LLP.
23.3* -- Consent of Coopers & Lybrand L.L.P.
24.1* -- Power of Attorney of the Directors and certain Executive Officers of
the Company.
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 115
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 116
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on the 9th day of October,
1996.
AMRESCO, INC.
By: /s/ L. KEITH BLACKWELL
------------------------------------
L. Keith Blackwell
Vice President, General Counsel
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the 9th day of October, 1996:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ----------------------------------------------
<C> <S>
Robert H. Lutz, Jr.* Chairman of the Board and
- --------------------------------------------- Chief Executive Officer
Robert H. Lutz, Jr.
Robert L. Adair III* Director, President and Chief Operating
- --------------------------------------------- Officer
Robert L. Adair III
Barry L. Edwards* Executive Vice President and (Principal
- --------------------------------------------- Financial Officer)
Barry L. Edwards
James P. Cotton, Jr.* Director
- ---------------------------------------------
James P. Cotton, Jr.
Director
- ---------------------------------------------
Richard L. Cravey
Gerald E. Eickhoff* Director
- ---------------------------------------------
Gerald E. Eickhoff
Amy J.Jorgensen* Director
- ---------------------------------------------
Amy J. Jorgensen
John J.McDonough* Director
- ---------------------------------------------
John J. McDonough
Bruce W.Schnitzer* Director
- ---------------------------------------------
Bruce W. Schnitzer
Edwin A. Wahlen,Jr.* Director
- ---------------------------------------------
Edwin A. Wahlen, Jr.
Ronald B. Kirkland* Vice President and Chief Accounting Officer
- --------------------------------------------- (Principal Accounting Officer)
Ronald B. Kirkland
</TABLE>
II-5
<PAGE> 117
L. Keith Blackwell, by signing his name hereto, does sign and execute this
Registration Statement on behalf of each of the above-named officers and
directors of the Registrant on this 9th day of October, 1996, pursuant to powers
of attorneys executed on behalf of the Registrant and each of such officers and
directors, and contemporaneously filed herewith with the Securities and Exchange
Commission.
* /s/ L. KEITH BLACKWELL
- ------------------------------------
L. Keith Blackwell
Attorney-in-Fact
II-6
<PAGE> 118
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. EXHIBIT PAGE
- ---------- ---------------------------------------------------------------------- -----------
<C> <S> <C>
1.1* -- Form of Underwriting Agreement.
2.1** -- Asset Purchase Agreement dated October 9, 1996 by and among AMRESCO
Residential Mortgage Corporation, on the one hand, and Quality
Mortgage USA, Inc., Calmac Funding, Inc., DLJ Mortgage Capital, Inc.,
DLJ Quality Partners, L.P., Russell Jedinak and Rebecca Jeninak, on
the other hand.
4.1 -- Restated Certificate of Incorporation, as amended, filed as Exhibit
3.1 to the Registrant's Form 10-Q for the quarter ended September 30,
1995, as amended by Form 10-Q/A No. 1 dated October 25, 1995, which
exhibit is incorporated herein by reference.
4.2 -- Amended and Restated Bylaws as of May 23, 1994, filed as Exhibit 3(f)
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, which exhibit is incorporated herein by
reference.
4.3 -- First Amended and Restated Revolving Loan Agreement, dated as of
April 25, 1996, among the Company and Other Entities Designated
Within as Borrowers and NationsBank of Texas, N.A. as Agent and
NationsBank of Texas, N.A. and Other Entities Designated Within as
Lenders, filed as Exhibit 10(a) to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1996, which exhibit
is incorporated herein by reference.
4.4 -- Specimen Common Stock Certificate filed as Exhibit 4.4 to the
Company's Registration Statement on Form S-3 (No. 33-63683), which
exhibit is incorporated herein by reference.
4.5 -- Indenture, dated as of November 27, 1995, between the Company and
First Interstate Bank of Texas, National Association in respect of
the Company's 8% Convertible Subordinated Debentures due 2005, filed
as Exhibit 4.5 to the Company's Registration Statement on Form S-3
(No. 33-63683), which exhibit is incorporated herein by reference.
4.6 -- Indenture, dated as of January 15, 1996, between the Company and Bank
One, Columbus, N.A., as trustee, filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K dated February 2, 1996, which
exhibit is incorporated herein by reference.
4.7 -- Indenture, dated as of July 1, 1996, between the Company and Comerica
Bank, as trustee, filed as Exhibit 4.1 to the Company's Current
Report on Form 8-K dated July 19, 1996, which exhibit is incorporated
herein by reference.
4.8* -- First Supplemental Indenture dated as of April 1, 1996 to Indenture
dated as of November 27, 1995 by and between AMRESCO, INC. and First
Interstate Bank of Texas, National Association.
4.9 -- First Amendment to First Amended and Restated Revolving Loan
Agreement, dated as of June 13, 1996, among AMRESCO, INC. and Other
Entities Designated Within as borrowers and NationsBank of Texas,
N.A. as Agent and NationsBank of Texas, N.A. and Other Entities
Designated Within as Lenders filed as Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1996, which exhibit is incorporated herein by reference.
4.10 -- Officers' Certificate and Company Order dated as of July 19, 1996,
establishing the terms of the Senior Notes filed as Exhibit 4.2 to
the Company's Current Report on Form 8-K dated July 19, 1996, which
exhibit is incorporated herein by reference.
</TABLE>
<PAGE> 119
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. EXHIBIT PAGE
- ---------- ---------------------------------------------------------------------- -----------
<C> <S> <C>
5.1* -- Opinion of L. Keith Blackwell, General Counsel of the Company, as to
the validity of Common Stock to be offered.
23.1* -- Form of Consent of L. Keith Blackwell, contained in the opinion filed
as Exhibit 5.1.
23.2* -- Consent of Deloitte & Touche LLP.
23.3* -- Consent of Coopers & Lybrand L.L.P.
24.1* -- Power of Attorney of the Directors and certain Executive Officers of
the Company.
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
AMRESCO, INC.
COMMON STOCK
------------------------------------------------
UNDERWRITING AGREEMENT
------------------------------------------------
, 1996
----------------
THE ROBINSON-HUMPHREY COMPANY, INC.
PIPER JAFFRAY INC.
RAYMOND JAMES & ASSOCIATES, INC.
J.C. BRADFORD & CO.
MONTGOMERY SECURITIES
MORGAN KEEGAN & COMPANY, INC.
As representatives of the several
Underwriters named in Schedule I hereto,
c/o The Robinson-Humphrey Company, Inc.
3333 Peachtree Road, N.E.
Atlanta, Georgia 30326
Dear Sirs:
AMRESCO, INC., a Delaware corporation (the "Company") proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
1,830,462 shares of common stock, par value $.05 per share (the "Common
Stock"), of the Company (the "Company Firm Shares"), and the shareholders of
the Company named in Schedule II hereto (the "Selling Shareholders") propose,
subject to the terms and conditions stated herein, to sell to the Underwriters
an aggregate of 5,929,538 shares of Common Stock in the respective amounts set
forth opposite their names in Schedule II hereto (such shares together with the
Company Firm Shares, the "Firm Shares") and, at the election of the
Underwriters, subject to the terms and conditions stated herein, the Company
and the Selling Shareholders propose to sell to the Underwriters (for the sole
purpose of covering over- allotments in connection with the sale of the Firm
Shares) an aggregate of up to 1,164,000 additional shares of Common Stock (the
"Optional Shares") (the Firm Shares and the Optional Shares that the
Underwriters elect to purchase pursuant to Section 2 hereof are collectively
called the "Shares"). In your capacity as representatives of the several
Underwriters, you are referred to herein as the "Representatives."
1. (a) REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, each of the Underwriters that:
(i) A registration statement on Form S-3 (File No.
33-_________) with respect to the Shares, including a prospectus
subject to completion, has been filed by the Company with the
Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"), and one or more
amendments to such registration statement has been so filed.
After the execution of this Agreement, the Company will file with
the Commission either (A) if such registration statement, as it
may have been amended, has become effective under the Act and
information has been omitted therefrom in accordance with Rule
430A under the Act, a prospectus in the form most recently
included in an amendment to such registration statement with such
changes or insertions as are required by Rule 430A or permitted
by Rule 424(b) under the Act and as have been provided to and
approved by the Representatives, or (B) if such registration
statement, as amended, has not become effective under the Act, an
amendment to
<PAGE> 2
such registration statement, including a form of prospectus, a
copy of which amendment has been provided to and approved by the
Representatives prior to the execution of this Agreement. As
used in this Agreement, the term "Registration Statement" means
such registration statement, as amended at the time when it was
or is declared effective, including (i) all financial statements,
schedules and exhibits thereto, (ii) all documents incorporated
by reference therein filed under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and (iii) any information
omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus (as hereinafter defined); the term
"Preliminary Prospectus" means each prospectus subject to
completion included in such registration statement or any
amendment or post-effective amendment thereto (including the
prospectus subject to completion, if any, included in the
Registration Statement at the time it was or is declared
effective), including all documents incorporated by reference
therein filed under the Exchange Act; and the term "Prospectus"
means the prospectus first filed with the Commission pursuant to
Rule 424(b) under the Act or, if no prospectus is required to be
so filed, such term means the prospectus included in the
Registration Statements, in either case including all documents
incorporated by reference therein filed under the Exchange Act.
Any reference in this Agreement to an "amendment or supplement"
to any Preliminary Prospectus or the Prospectus or an "amendment"
to any registration statement (including the Registration
Statement) shall be deemed to include any document incorporated
by reference therein and filed with the Commission under the
Exchange Act after the date of such Preliminary Prospectus,
Prospectus or Registration Statement, as the case may be. As
used herein, any reference to any statement or information as
being "made", "included", "contained", "disclosed", or "set
forth" in any Preliminary Prospectus, a Prospectus or any
amendment or supplement thereto, or the Registration Statement or
any amendment thereto (or other similar references) shall refer
both to information and statements actually appearing in such
document as well as information and statements incorporated by
reference therein.
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued and no proceeding for that
purpose has been instituted or overtly threatened by the
Commission or the securities authority of any state or other
jurisdiction in which the Shares are to be offered or sold. If
the Registration Statement has become effective under the Act, no
stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued and no proceeding
for that purpose has been instituted or overtly threatened or, to
the Company's knowledge, contemplated by the Commission or the
securities authority of any state or other jurisdiction in which
the Shares are to be offered or sold.
(iii) When any Preliminary Prospectus and any amendment
or supplement thereto was filed with the Commission it (A)
contained all statements required to be stated therein in
accordance with, and complied in all material respects with the
requirements of, the Act and the rules and regulations of the
Commission thereunder, and (B) did not include any untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
When the Registration Statement or any amendment thereto was or
is declared effective, and at each Time of Delivery (as
hereinafter defined), it (A) contained or will contain all
statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the
requirements of, the Act and the rules and regulations of the
Commission thereunder, and (B) did not or will not include any
untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. When
the Prospectus or any amendment or supplement thereto is filed
with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or such amendment or supplement is not required to be
so filed, when the
-2-
<PAGE> 3
Registration Statement or the amendment thereto containing such
amendment or supplement to the Prospectus was or is declared
effective) and at each Time of Delivery, the Prospectus, as
amended or supplemented at any such time, (A) contained or will
contain all statements required to be stated therein in
accordance with, and complied or will comply in all material
respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder, and (B) did not or will
not include any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were
made, not misleading. The foregoing provisions of this paragraph
(iii) do not apply to statements or omissions made in any
Preliminary Prospectus and any amendment or supplement thereto,
the Registration Statement or any amendment thereto, or the
Prospectus or any amendment or supplement thereto in reliance
upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives
specifically for use therein.
(iv) The descriptions in the Registration Statement and
the Prospectus of statutes, legal and governmental proceedings or
contracts and other documents are accurate and fairly present in
all material respects the information required to be shown; and
there are no statutes or legal or governmental proceedings
required to be described in the Registration Statement or the
Prospectus that are not described as required and there are no
contracts or documents of a character that are required to be
described in the Registration Statement or the Prospectus or to
be filed as exhibits to the Registration Statement that are not
described and filed as required.
(v) The documents or information incorporated by
reference in the Prospectus, when such documents or the documents
from which such information was incorporated, including any
amendments to such documents, were filed with the Commission,
conformed in all materials respects to the requirements of the
Exchange Act and the rules and regulations of the Commission
thereunder, and none of such documents or information contained
an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which
they were made, not misleading, and any further documents so
filed and incorporated by reference in the Prospectus, when such
documents are filed with the Commission, will conform in all
material respects to the requirements of the Exchange Act and the
rules and regulations of the Commission thereunder and will not
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which
they were made, not misleading.
(vi) Each of the Company and its material subsidiaries
(which consist of Holliday Fenoglio, Inc., AMRESCO Management,
Inc., AMRESCO Residential Credit Corporation, AMRESCO Capital
Corporation, AMRESCO New England, Inc. and Oak Cliff Financial,
Inc. (the "Material Subsidiaries")) has been duly incorporated,
is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation, and has full corporate
power and authority to own or lease its properties and conduct
its business as described in the Prospectus. The Company has
full corporate power and authority to enter into this Agreement
and to perform its obligations hereunder. Each of the Company and
its subsidiaries is duly qualified to transact business as a
foreign corporation and is in good standing under the laws of
each other jurisdiction in which it owns or leases properties, or
conducts any business, so as to require such qualification,
except where the failure to so qualify would not have a material
adverse effect on the financial position, results of operations
or business of the Company and its subsidiaries taken as a whole.
-3-
<PAGE> 4
(vii) The Company's authorized, issued and outstanding
capital stock is as disclosed in the Prospectus. All of the
issued shares of capital stock of the Company have been duly
authorized and validly issued, are fully paid and nonassessable
and conform to the description of the Common Stock contained in
the Prospectus. None of the issued shares of capital stock of
the Company or its predecessors or any of its subsidiaries has
been issued or is owned or held in violation of any preemptive
rights of shareholders, and no person or entity (including any
holder of outstanding shares of capital stock of the Company or
its subsidiaries) has any preemptive or other rights to subscribe
for any of the Shares.
(viii) All of the issued shares of capital stock of each
of the Company's subsidiaries have been duly authorized and
validly issued, are fully paid and nonassessable and are owned
beneficially by the Company free and clear of all liens, security
interests, pledges, charges, encumbrances, defects, shareholders'
agreements, voting trusts, equities or claims of any nature
whatsoever.
(ix) Except as disclosed in the Prospectus, there are no
outstanding (A) securities or obligations of the Company or any
of its subsidiaries convertible into or exchangeable for any
capital stock of the Company or any such subsidiary, (B)
warrants, rights or options to subscribe for or purchase from the
Company or any such subsidiary any such capital stock or any such
convertible or exchangeable securities or obligations, or (C)
obligations of the Company or any such subsidiary to issue any
shares of capital stock, any such convertible or exchangeable
securities or obligations, or any such warrants, rights or
options.
(x) Since the date of the most recent audited financial
statements included in the Prospectus, neither the Company nor
any of its subsidiaries has sustained any material loss or
interference with its business, which loss or interference was
material to the Company and its subsidiaries taken as a whole,
from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as disclosed
in or contemplated by the Prospectus.
(xi) Since the respective dates as of which information
is given in the Registration Statement and the Prospectus, (A)
neither the Company nor any of its subsidiaries has incurred any
liabilities or obligations, direct or contingent, or entered into
any transactions, not in the ordinary course of business, that
are material to the Company and its subsidiaries taken as a
whole, (B) the Company has not purchased any of its outstanding
capital stock or declared, paid or otherwise made any dividend or
distribution of any kind on its capital stock, (C) there has not
been any change in the capital stock (except as a result of
shares issued upon exercise of stock options pursuant to existing
stock option plans of the Company and its subsidiaries),
long-term debt or, otherwise than in the ordinary course of
business consistent with past practice, short-term debt of the
Company or any of its subsidiaries, and (D) there has not been
any material adverse change, or any development involving a
prospective material adverse change, in or affecting the
financial position, results of operations or business of the
Company and its subsidiaries taken as a whole, in each case other
than as disclosed in or contemplated by the Prospectus.
(xii) The Shares to be issued and sold by the Company
have been duly authorized and, when issued and delivered against
payment therefor as provided herein, will be validly issued and
fully paid and nonassessable and will conform to the description
of the Common Stock contained in the Prospectus; and the
certificates evidencing the Shares will comply with all
applicable requirements of Delaware law.
-4-
<PAGE> 5
(xiii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and
any person granting such person the right to require the Company
to file a registration statement under the Act with respect to
any securities of the Company owned or to be owned by such person
or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement (or
any such right has been effectively waived) or any securities
being registered pursuant to any other registration statement
filed by the Company under the Act.
(xiv) All offers and sales of the Company's capital stock
prior to the date hereof were at all relevant times duly
registered under the Act or exempt from the registration
requirements of the Act and were duly registered or the subject
of an available exemption from the registration requirements of
the applicable state securities or blue sky laws.
(xv) Neither the Company nor any of its subsidiaries is,
and no event has occurred that with the giving of notice or
passage of time or both would cause the Company or any of its
subsidiaries to be, in violation of its Articles or Certificate
of Incorporation or Bylaws or in default under any indenture,
mortgage, deed of trust, loan agreement, lease or other agreement
or instrument to which the Company or any of its subsidiaries is
a party or to which any of their respective properties or assets
are subject and which is material to the Company and its
subsidiaries taken as a whole.
(xvi) The issue and sale of the Shares to be issued and
sold by the Company and the performance of this Agreement and the
consummation of the transactions herein contemplated will not
conflict with, or (with or without the giving of notice or the
passage of time or both) result in a breach or violation of any
of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement, lease or
other material agreement or instrument to which the Company or
any of its subsidiaries is a party or to which any of their
respective properties or assets is subject and which is material
to the Company and its subsidiaries taken as a whole, nor will
such action conflict with or violate any provision of the
Articles or Certificate of Incorporation or Bylaws of the Company
or any of its subsidiaries or any statute, rule or regulation or
any order, judgment or decree of any court or governmental agency
or body having jurisdiction over the Company or any of its
subsidiaries or any of their respective properties or assets.
(xvii) The Company and its subsidiaries have good and
marketable title in fee simple to all real property, if any, and
good title to all personal property owned by them, in each case
free and clear of all liens, security interests, pledges,
charges, encumbrances, mortgages and defects, except such as are
disclosed in the Prospectus or such as do not materially and
adversely affect the value of those properties which individually
or in the aggregate are material to the Company and its
subsidiaries taken as a whole and do not interfere with the use
made or proposed to be made of such property by the Company or
any one of its subsidiaries, as the case may be; and any real
property and buildings held under lease by the Company or any of
its subsidiaries are held under valid, subsisting and enforceable
leases, with such exceptions as are disclosed in the Prospectus
or are not material and do not interfere with the use made or
proposed to be made of such property and buildings by the Company
or such subsidiary.
(xviii) No consent, approval, authorization, order or
declaration of or from, or registration, qualification or filing
with, any court or governmental agency or body is required for
the sale of the Shares or the consummation of the transactions
contemplated by this Agreement, except the registration of the
Shares under the Act (which, if the Registration Statement is not
effective as of the time of execution hereof, shall be obtained
as provided in
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<PAGE> 6
this Agreement) and such as may be required under state
securities or blue sky laws in connection with the offer, sale
and distribution of the Shares by the Underwriters.
(xix) There is no litigation, arbitration, claim,
proceeding (formal or informal) or investigation pending or
overtly threatened (or any basis therefor) in which the Company
or any of its subsidiaries is a party or of which any of their
respective properties or assets are the subject which, if
determined adversely to the Company or any such subsidiary, could
reasonably be expected to have, individually or in the aggregate,
a material adverse effect on the financial position, results of
operations or business of the Company and its subsidiaries, taken
as a whole. Neither the Company nor any of its subsidiaries is
in violation of, or in default with respect to, any statute,
rule, regulation, order, judgment or decree, except as do not and
will not individually or in the aggregate have a material adverse
effect on the financial position, results of operations or
business of the Company and its subsidiaries, taken as a whole,
and neither the Company nor any of its subsidiaries is required
to take any action in order to avoid any such violation or
default.
(xx) Deloitte & Touche LLP, who have certified certain
financial statements of the Company and its consolidated
subsidiaries, are and were during the periods covered by their
reports included in the Registration Statement and the
Prospectus, independent public accountants as required by the Act
and the Exchange Act and the respective rules and regulations of
the Commission thereunder.
(xxi) The consolidated financial statements and schedules
(including the related notes) of the Company and its consolidated
subsidiaries and predecessor and acquired businesses included in
the Registration Statement, the Prospectus or any Preliminary
Prospectus were prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods
involved and fairly present the financial position and results of
operations of the Company and its subsidiaries or its predecessor
or acquired businesses, as the case may be, at the dates and for
the periods presented. The other financial and statistical
information and data included in the Registration Statement, the
Prospectus or any Preliminary Prospectus set forth under the
captions "Summary Financial and Other Data" and "Summary" in the
Prospectus are, in all material respects, accurately presented
and prepared on a basis consistent with such financial statements
and the books and records of the Company.
(xxii) This Agreement has been duly authorized, executed
and delivered by the Company and constitutes the valid and
binding agreement of the Company enforceable against the Company
in accordance with its terms, subject, as to enforcement, to
applicable bankruptcy, insolvency, reorganization and moratorium
laws and other laws relating to or affecting the enforcement of
creditors' rights generally and to general equitable principles.
(xxiii) Neither the Company nor any of its officers,
directors or affiliates has (A) taken, directly or indirectly,
any action designed to cause or result in, or that has
constituted or might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares, or (B)
since the filing of the Registration Statement, sold, or paid
anyone any compensation for soliciting purchases of, the Shares.
(xxiv) The Company has obtained for the benefit of the
Company and the Underwriters from each of its directors,
executive officers and the Selling Shareholders a written
agreement that for a period of 180 days from the date of the
Prospectus such director, executive officer or Selling
Shareholder will not, without the written consent of the
Representatives, offer, pledge,
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<PAGE> 7
sell, contract to sell, grant any option for the sale of, or
otherwise dispose of (or announce any offer, pledge, sale, grant
of an option to purchase or other disposition), directly or
indirectly, any shares of Common Stock or securities convertible
into, or exercisable or exchangeable for, shares of Common Stock.
(xxv) Neither the Company nor any of its subsidiaries,
nor any director, officer, agent, employee or other person
associated with or acting on behalf of the Company or any such
subsidiary has, directly or indirectly: used any corporate funds
for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity; made any
unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or
campaigns from corporate funds; violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended; or made any
bribe, rebate, payoff, influence payment, kickback or other
unlawful payment.
(xxvi) To the Company's knowledge, the operations of the
Company and its subsidiaries with respect to any real property
currently leased or owned or by any means controlled by the
Company or any subsidiary (the "Real Property") are in compliance
with all federal, state, and local laws, ordinances, rules, and
regulations relating to occupational health and safety and the
environment (collectively, "Laws"), except where the failure to
so comply would not have a material adverse effect on the
Company's business or results of operations, and the Company and
its subsidiaries have all licenses, permits and authorizations
necessary to operate under all Laws and are in compliance with
all terms and conditions of such licenses, permits and
authorizations, except where such failure would not have a
material adverse effect on the Company's and its subsidiaries'
business or results of operations taken as a whole; neither the
Company nor any subsidiary has authorized, conducted or has
knowledge of the generation, transportation, storage, use,
treatment, disposal or release of any hazardous substance,
hazardous waste, hazardous material, hazardous constituent, toxic
substance, pollutant, contaminant, petroleum product, natural
gas, liquefied gas or synthetic gas defined or regulated under
any environmental law on, in or under any Real Property in
violation of any Laws except where such violation would not have
a material adverse effect on the Company's business or results of
operations; and there is no material pending or threatened claim,
litigation or any administrative agency proceeding, nor has the
Company or any subsidiary received any written or oral notice
from any governmental entity or third party that: (A) alleges a
violation of any Laws by the Company or any subsidiary; (B)
alleges the Company or any subsidiary is a liable party under the
Comprehensive Environmental Response, Compensation, and Liability
Act, 42 U.S.C. Section 9601 et seq. or any state superfund law;
(C) alleges possible contamination of the environment by the
Company or any subsidiary; or (D) alleges possible contamination
of the Real Property, except as to each of the above, for any
violations, liability or contamination that would not have a
material adverse effect on the Company's and its subsidiaries'
business or results of operations taken as a whole.
(xxvii) The Company and its subsidiaries own or have the
right to use all patents, patent applications, trademarks,
trademark applications, trade names, service marks, copyrights,
franchises, trade secrets, proprietary or other confidential
information and intangible properties and assets (collectively,
"Intangibles") necessary to their respective businesses as
presently conducted or as the Prospectus indicates the Company or
such subsidiary proposes to conduct; to the Company's knowledge,
neither the Company nor any subsidiary has infringed or is
infringing, and neither the Company nor any subsidiary has
received notice of infringement with respect to, asserted
Intangibles of others; and, to the Company's knowledge, there is
no infringement by others of Intangibles of the Company or any of
its subsidiaries which would have a material adverse effect on
the Company and its subsidiaries taken as a whole.
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<PAGE> 8
(xxviii) The Company and each of its subsidiaries are
insured by insurers of recognized financial responsibility
against such losses and risks and in such amounts as are prudent
and customary in the businesses in which they are engaged by
similarly-situated companies; and neither the Company nor any
such subsidiary has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a
comparable cost, except as disclosed in the Prospectus.
(xxix) Each of the Company and its subsidiaries makes and
keeps accurate books, records and accounts, which, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of its assets and maintains a system of internal
accounting controls sufficient to provide reasonable assurance
that (A) transactions are executed in accordance with
management's general and specific authorization, (B) transactions
are recorded as necessary to permit preparation of the Company's
consolidated financial statements in accordance with generally
accepted accounting principles and to maintain accountability for
the assets of the Company, (C) access to the assets of the
Company and each of its subsidiaries is permitted only in
accordance with management's general and specific authorization,
and (D) the recorded accountability for assets of the Company and
each of its subsidiaries is compared with existing assets at
reasonable intervals and appropriate action is taken with respect
to any differences.
(xxx) No subsidiary of the Company is currently
prohibited, directly or indirectly, from paying any dividends to
the Company, from making any other distributions on such
subsidiary's capital stock, from repaying to the Company any
loans or advances to such subsidiary or from transferring any of
such subsidiary's property or assets to the Company or any other
subsidiary of the Company, except as disclosed in the Prospectus.
(xxxi) The Company and its subsidiaries have filed all
foreign, federal, state and local tax returns that are required
to be filed by them and, other than taxes the Company or its
subsidiaries are contesting, have paid all taxes shown as due on
such returns as well as all other taxes, assessments and
governmental charges that are due and payable; and no deficiency
with respect to any such return has been assessed or proposed.
(xxxii) The Company is not, will not become as a result of
the transactions contemplated hereby, and does not intend to
conduct its business in a manner that would cause it to become,
an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company
Act of 1940.
(xxxiii) The Common Stock is registered pursuant to Section
12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and is qualified as a Nasdaq National Market
security of The Nasdaq Stock Market, Inc. The Company has taken
no action designed to terminate, or likely to have the effect of
terminating, the registration of the Common Stock under the
Exchange Act or qualification of the Common Stock on the Nasdaq
National Market, nor has the Company received any notification
that the Commission or the NASD is contemplating terminating such
registration or qualification.
(xxxiv) The conditions for use of a Registration Statement on
Form S-3 set forth in the General Instructions to Form S-3 have
been satisfied with respect to the Company and the transactions
contemplated by this Agreement and the Registration Statement.
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<PAGE> 9
(b) REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS.
Each Selling Shareholder, severally and not jointly, represents and warrants
to, and agrees with, each of the several Underwriters and the Company that:
(i) Such Selling Shareholder has full right, power
(corporate and other) and authority to enter into this Agreement,
the Power of Attorney and the Custody Agreement (as hereinafter
defined) and to sell, assign, transfer and deliver to the
Underwriters the Shares to be sold by such Selling Shareholder
hereunder; and the execution and delivery of this Agreement, the
Power of Attorney and the Custody Agreement have been duly
authorized by all necessary action of such Selling Shareholder.
(ii) Such Selling Shareholder has duly executed and
delivered this Agreement, the Power of Attorney and the Custody
Agreement, and each constitutes the valid and binding agreement
of such Selling Shareholder enforceable against such Selling
Shareholder in accordance with its terms, subject, as to
enforcement, to applicable bankruptcy, insolvency, reorganization
and moratorium laws and other laws relating to or affecting the
enforcement of creditors' rights generally and to general
equitable principles.
(iii) No consent, approval, authorization, order or
declaration of or from, or registration, qualification or filing
with, any court or governmental agency or body is required for
the sale of the Shares to be sold by such Selling Shareholder or
the consummation of the transactions contemplated by this
Agreement, the Power of Attorney or the Custody Agreement, except
the registration of such Shares under the Act (which, if the
Registration Statement is not effective as of the time of
execution hereof, shall be obtained as provided in this
Agreement) and such as may be required under state securities or
blue sky laws in connection with the offer, sale and distribution
of such Shares by the Underwriters.
(iv) The sale of the Shares to be sold by such Selling
Shareholder and the performance of this Agreement, the Power of
Attorney and the Custody Agreement and the consummation of the
transactions herein and therein contemplated will not conflict
with, or (with or without the giving of notice or the passage of
time or both) result in a breach of violation of any of the terms
or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement, lease or other agreement
or instrument to which such Selling Shareholder is a party or to
which any of such Selling Shareholder's respective properties or
assets is subject, nor will such action conflict with or violate
any provision of the Articles of Incorporation or Bylaws or other
governing instruments of such Selling Shareholder or any of such
Selling Shareholder's subsidiaries or any statute, rule or
regulation or any order, judgment or decree of any court or
governmental agency or body having jurisdiction over such Selling
Shareholder or any of such Selling Shareholder's properties or
assets.
(v) Such Selling Shareholder has, and immediately prior
to each Time of Delivery (as hereinafter defined), such Selling
Shareholder will have, good and valid title to the Shares to be
sold by such Selling Shareholder hereunder, free and clear of all
liens, security interests, pledges, charges, encumbrances,
defects, shareholders' agreements, voting trusts, equities or
claims of any nature whatsoever; and, upon delivery of such
Shares against payment therefor as provided herein, good and
valid title to such Shares, free and clear of all liens, security
interests, pledges, charges, encumbrances, defects, shareholders'
agreements, voting trusts, equities or claims of any nature
whatsoever, will pass to the several Underwriters.
(vi) Neither such Selling Shareholder nor any of such
Selling Shareholder's officers, directors or affiliates has (A)
taken, directly or indirectly, any action designed to cause or
result
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<PAGE> 10
in, or that has constituted or might reasonably be expected to
constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Shares, or (B) since the filing of the Registration Statement (l)
sold, bid for, purchased or paid anyone any compensation for
soliciting purchases of, the Shares or (2) paid or agreed to pay
to any person any compensation for soliciting another to purchase
any other securities of the Company.
(vii) With respect to statements made concerning such
Selling Shareholder, when any Preliminary Prospectus was filed
with the Commission it (A) contained all statements required to
be stated therein in accordance with, and complied in all
material respects with the requirements of, the Act and the rules
and regulations of the Commission thereunder, and (B) did not
include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were
made, not misleading. With respect to statements made concerning
such Selling Shareholder, when the Registration Statement or any
amendment thereto was or is declared effective and at each Time
of Delivery (as hereinafter defined), it (A) contained or will
contain all statements required to be stated therein in
accordance with, and complied or will comply in all material
respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder, and (B) did not or will
not include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein
not misleading. With respect to statements made concerning such
Selling Shareholder, when the Prospectus or any amendment or
supplement thereto is filed with the Commission pursuant to Rule
424(b) (or, if the Prospectus or such amendment or supplement is
not required to be so filed, when the Registration Statement or
the amendment thereto containing such amendment or supplement to
the Prospectus was or is declared effective), and at each Time of
Delivery, the Prospectus, as amended or supplemented at any such
time, (A) contained or will contain all statements required to be
stated therein in accordance with, and complied or will comply in
all material respects with the requirements of, the Act and the
rules and regulations of the Commission thereunder and (B) did
not or will not include any untrue statement of a material fact
or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which
they were made, not misleading. The foregoing provisions of this
paragraph (vii) do not apply to statements or omissions made in
any Preliminary Prospectus, the Registration Statement or any
amendment thereto or the Prospectus or any amendment or
supplement thereto in reliance upon and in conformity with
written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein.
(viii) Such Selling Shareholder, without undertaking any
independent investigation, is not aware that any of the
representations or warranties set forth in Section 1(a) above is
untrue or inaccurate in any material respect. Such Selling
Shareholder has also reviewed the Preliminary Prospectus, the
Registration Statement and the Prospectus and with respect to
such documents, has no knowledge of any untrue statement of a
material fact or omission of any material fact necessary in order
to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.
In order to document the Underwriters' compliance with the reporting
and withholding provisions of the Internal Revenue Code of 1986, as amended,
with respect to the transactions herein contemplated, each of the Selling
Shareholders agrees to deliver to you prior to or at each Time of Delivery (as
hereinafter defined) a properly completed and executed United States Treasury
Department Form W-9 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).
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<PAGE> 11
Each of the Selling Shareholders represents and warrants that
certificates in negotiable form representing all of the Shares to be sold by
such Selling Shareholder hereunder have been placed in custody under a Custody
Agreement, in the form heretofore furnished to and approved by you, duly
executed and delivered by such Selling Shareholder to SunTrust Bank, as
custodian (the "Custodian"), and that such Selling Shareholder has duly
executed and delivered a Power of Attorney, in the form heretofore furnished to
and approved by you, appointing the persons indicated in Schedule II hereto as
such Selling Shareholder's attorneys-in-fact (the "Attorneys-in-Fact") with
authority to execute and deliver this Agreement on behalf of such Selling
Shareholder, to determine the purchase price to be paid by the Underwriters to
the Selling Shareholders as provided in Section 2 hereof, to authorize the
delivery of the Shares to be sold by such Selling Shareholder hereunder, and
otherwise to act on behalf of such Selling Shareholder in connection with the
transactions contemplated by this Agreement and the Custody Agreement.
Each of the Selling Shareholders specifically agrees that the Shares
represented by the certificates held in custody for such Selling Shareholder
under the Custody Agreement are subject to the interests of the Underwriters
hereunder, and that the arrangements made by such Selling Shareholder for such
custody, and the appointment by such Selling Shareholder of the
Attorneys-in-Fact by the Power of Attorney, are irrevocable. Each of the
Selling Shareholders specifically agrees that the obligations of the Selling
Shareholders hereunder shall not be terminated by operation of law, whether by
the death or incapacity of any individual Selling Shareholder or, in the case
of an estate or trust, by the death or incapacity of any executor or trustee or
the termination of such estate or trust, or in the case of a partnership or
corporation, by the dissolution of such partnership or corporation, or by the
occurrence of any other event.
2. PURCHASE AND SALE OF SHARES. Subject to the terms and conditions
herein set forth, (a) the Company and each Selling Shareholder agree, severally
and not jointly, to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company
and each Selling Shareholder, at a purchase price of $_________ per share, the
number of Firm Shares (to be adjusted by the Representatives so as to eliminate
fractional shares) determined by multiplying the aggregate number of Shares to
be sold by the Company and the Selling Shareholders as set forth opposite their
respective names in Schedule II hereto by a fraction, the numerator of which is
the aggregate number of Firm Shares to be purchased by such Underwriter as set
forth opposite the name of such Underwriter in Schedule I hereto, and the
denominator of which is the aggregate number of Firm Shares to be purchased by
the Underwriters from the Company and the Selling Shareholders hereunder, and
(b) in the event and to the extent that the Underwriters shall exercise the
election to purchase Optional Shares as provided below, the Company and each of
the Selling Shareholders agree to sell to each of the Underwriters, and each of
the Underwriters agrees, severally and not jointly, to purchase from the
Company and each Selling Shareholder, at the purchase price per share set forth
in clause (a) of this Section 2, that portion of the number of Optional Shares
as to which such election shall have been exercised (to be adjusted by the
Representatives so as to eliminate fractional shares) determined by multiplying
such number of Optional Shares to be sold by the Company and the Selling
Shareholders by a fraction, the numerator of which is the maximum number of
Optional Shares that such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule II hereto and the denominator
of which is the maximum number of the Optional Shares that all of the
Underwriters are entitled to purchase hereunder.
The Company and each of the Selling Shareholders, as and to the extent
indicated in Schedule I hereto, severally and not jointly, hereby grant to the
Underwriters the right to purchase at their election in whole or in part from
time to time up to an aggregate of 1,164,000 Optional Shares, at the purchase
price per share set forth in clause (a) in the paragraph above, for the sole
purpose of covering over-allotments in the sale of Firm Shares. Any such
election to purchase Optional Shares shall be made in proportion to the maximum
number of Optional Shares to be sold by each of the Selling Shareholders as set
forth in Schedule I hereto. Any such election to purchase Optional Shares may
be exercised by written notice from the Representatives to the Company, given
from time to time within a period of 30 calendar days after the date
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<PAGE> 12
of this Agreement and setting forth the aggregate number of Optional Shares to
be purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
hereinafter defined) or, unless the Representatives and the Company otherwise
agree in writing, earlier than two or later than ten business days after the
date of such notice. In the event you elect to purchase all or a portion of
the Optional Shares, the Company and each of the Selling Shareholders agree to
furnish or cause to be furnished to you the certificates, letters and opinions,
and to satisfy all applicable conditions, set forth in Section 7 hereof at each
Subsequent Time of Delivery (as hereinafter defined).
3. OFFERING BY THE UNDERWRITERS. Upon the authorization by the
Representatives of the release of the Shares, the several Underwriters propose
to offer the Shares for sale upon the terms and conditions disclosed in the
Prospectus.
4. DELIVERY OF SHARES; CLOSING. Certificates in definitive form for
the Shares to be purchased by each Underwriter hereunder, and in such
denominations and registered in such names as The Robinson-Humphrey Company,
Inc. may request upon at least 48 hours' prior notice to the Company shall be
delivered by or on behalf of the Company and the Selling Shareholders to the
Representatives for the account of such Underwriter, against payment by such
Underwriter on its behalf of the purchase price therefor, by wire transfer to
accounts designated by the Company and each of the Selling Shareholders in
immediately available funds. The closing of the sale and purchase of the
Shares shall be held at the offices of Smith, Gambrell & Russell, 3343
Peachtree Road, N.E., Atlanta, Georgia 30326, except that physical delivery of
such certificates shall be made at the office of The Depository Trust Company,
55 Water Street, New York, New York 10041. The time and date of such delivery
and payment shall be, with respect to the Firm Shares, at 10:00 a.m., Atlanta
time, on the third (or, if the Shares are priced, as contemplated by Rule
15c6-1(c), promulgated pursuant to the Exchange Act, after 4:30 p.m.
Washington, D.C. time, the fourth) full business day after this Agreement is
executed or at such other time and date as the Representatives, the Company and
the Attorneys-in-Fact, on behalf of the Selling Shareholders, may agree upon in
writing, and, with respect to the Optional Shares, at 10:00 a.m., Atlanta time,
on the date specified by the Representatives in the written notice given by the
Representatives of the Underwriters' election to purchase all or part of such
Optional Shares, or at such other time and date as the Representatives and the
Company may agree upon in writing. Such time and date for delivery of the Firm
Shares is herein called the "First Time of Delivery," such time and date for
delivery of any Optional Shares, if not the First Time of Delivery, is herein
called a "Subsequent Time of Delivery," and each such time and date for
delivery is herein called a "Time of Delivery." The Company will make such
certificates available for checking and packaging at least 24 hours prior to
each Time of Delivery at the office of The Depository Trust Company, 55 Water
Street, New York, New York 10041 or at such other location in New York, New
York specified by the Representatives in writing at least 48 hours prior to
such Time of Delivery.
5. (a) COVENANTS OF THE COMPANY. The Company covenants and agrees
with each of the Underwriters:
(i) If the Registration Statement has been declared
effective prior to the execution and delivery of this Agreement, the
Company will file the Prospectus with the Commission pursuant to and
in accordance with Rule 424(b)(1) (or, if applicable and if consented
to by the Representatives, Rule 424(b)(4)) not later than the earlier
of (A) the second business day following the execution and delivery of
this Agreement or (B) the fifteenth business day after the date on
which the Registration Statement is declared effective. The Company
will advise you promptly of any such filing pursuant to Rule 424(b).
(ii) The Company will not file with the Commission the
Prospectus or the amendment referred to in the second sentence of
Section l(a)(i) hereof, any amendment or supplement to the Prospectus
or any amendment to the Registration Statement unless the
Representatives have received
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<PAGE> 13
a reasonable period of time to review any such proposed amendment or
supplement and consented to the filing thereof and will use its best
efforts to cause any such amendment to the Registration Statement to
be declared effective as promptly as possible. Upon the reasonable
request of the Representatives or counsel for the Underwriters, the
Company will promptly prepare and file with the Commission, in
accordance with the rules and regulations of the Commission, any
amendments to the Registration Statement or amendments or supplements
to the Prospectus that may be necessary or advisable in connection
with the distribution of the Shares by the several Underwriters and
will use its best efforts to cause any such amendment to the
Registration Statement to be declared effective as promptly as
possible. If required, the Company will file any amendment or
supplement to the Prospectus with the Commission in the manner and
within the time period required by Rule 424(b) under the Act. The
Company will advise the Representatives, promptly after receiving
notice thereof, of the time when the Registration Statement or any
amendment thereto has been filed or declared effective or the
Prospectus or any amendment or supplement thereto has been filed and
will provide evidence to the Representatives of each such filing or
effectiveness.
(iii) The Company will advise the Representatives
promptly after receiving notice or obtaining knowledge of (A) the
issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or any part thereof or any
order preventing or suspending the use of any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, (B) the
suspension of the qualification of the Shares for offer or sale in any
jurisdiction or of the initiation or threatening of any proceeding for
any such purpose, or (C) any request made by the Commission or any
securities authority of any other jurisdiction for amending the
Registration Statement, for amending or supplementing the Prospectus
or for additional information. The Company will use its best efforts
to prevent the issuance of any such stop order and, if any such stop
order is issued, to obtain the withdrawal thereof as promptly as
possible.
(iv) If the delivery of a Prospectus relating to the
Shares is required under the Act at any time prior to the expiration
of nine months after the date of the Prospectus and if at such time
any events have occurred as a result of which the Prospectus as then
amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in light of the circumstances under which
they were made, not misleading, or if for any reason it is necessary
during such same period to amend or supplement the Prospectus or to
file under the Exchange Act any document incorporated by reference in
the Prospectus to comply with the Act or the Exchange Act or the
respective rules and regulations thereunder, the Company will promptly
notify the Representatives and upon the request of the Representatives
(but at the Company's expense) prepare and file with the Commission an
amendment or supplement to the Prospectus or any such incorporated
document that corrects such statement or omission or effects such
compliance and will furnish without charge to each Underwriter and to
any dealer in securities as many copies of such amended or
supplemented Prospectus as you may from time to time reasonably
request. If the delivery of a prospectus relating to the Shares is
required under the Act at any time nine months or more after the date
of the Prospectus, upon request of the Representatives but at the
expense of such Underwriter, the Company will prepare and deliver to
such Underwriter as many copies as the Representatives may request of
an amended or supplemented Prospectus complying with Section 10(a)(3)
of the Act. Without limiting the application of this sentence, the
Company will use its best efforts to, not later than (A) 6:00 p.m.,
New York City time, on the date of determination of the public
offering price, if such determination occurred at or prior to 12:00
Noon, New York City time, on such date or (B) 6:00 p.m., New York City
time, on the business day following the date of determination of the
public offering price, if such determination occurred after 12:00
Noon, New York City time, on such date, deliver to the
Representatives, without charge, as many copies of the Prospectus and
any amendment or supplement thereto as the Representatives may
reasonably request for purposes of confirming orders that are expected
to settle
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<PAGE> 14
on the First Time of Delivery. Neither the Representatives' consent
to, nor the Underwriters' delivery of, any such amendment or
supplement shall constitute a waiver of any of the conditions set
forth in Section 7.
(v) The Company promptly from time to time will take
such action as the Representatives may reasonably request to qualify
the Shares for offering and sale under the securities or blue sky laws
of such jurisdictions as the Representatives may request and will
continue such qualifications in effect for as long as may be necessary
to complete the distribution of the Shares, provided that in
connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process
in any jurisdiction.
(vi) The Company will promptly provide the
Representatives, without charge, (A) two manually executed copies of
the Registration Statement as originally filed with the Commission and
of each amendment thereto, including all documents or information
incorporated by reference therein, (B) for each other Underwriter a
conformed copy of the Registration Statement and of each amendment
thereto, without exhibits but including all documents or information
incorporated by reference therein, and (C) so long as a prospectus
relating to the Shares is required to be delivered under Act, as many
copies of each Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto as the Representatives may reasonably
request.
(vii) As soon as practicable, but in any event not later
than the last day of the fifteenth month after the effective date of
the Registration Statement, the Company will make generally available
to its security holders an earnings statement of the Company and its
subsidiaries, if any, covering a period of at least 12 months
beginning after the effective date of the Registration Statement
(which need not be audited) complying with Section 11(a) of the Act
and the rules and regulations thereunder.
(viii) During the period beginning from the date hereof
and continuing to and including the date 180 days after the date of
the Prospectus, the Company will not, without the prior written
consent of the Representatives, offer, pledge, issue, sell, contract
to sell, grant any option for the sale of, or otherwise dispose of (or
announce any offer, pledge, sale, grant of an option to purchase or
other disposition), directly or indirectly, any shares of Common Stock
or securities convertible into, exercisable or exchangeable for,
shares of Common Stock, except as provided in Section 2, except for
(A) the grant of stock options and restricted stock under existing
stock option and restricted stock plans of the Company, (B) the
issuance of Common Stock upon the exercise of stock options or
warrants outstanding on the date of this Agreement to the extent that
such stock options or warrants are disclosed in the Prospectus and (C)
except pursuant to the conversion of the Company's 8% Convertible
Subordinated Debentures due 2005 as disclosed in the Prospectus.
(ix) During a period of five years from the effective
date of the Registration Statement, the Company will furnish to the
Representatives and, upon request, to each of the other Underwriters,
without charge, (A) copies of all reports or other communications
(financial or other) furnished to shareholders, and (B) as soon as
they are available, copies of any reports and financial statements
furnished to or filed with the Commission or any national securities
exchange.
(x) Prior to the termination of the underwriting
syndicate contemplated by this Agreement, the Company will not, and
will use its best efforts to cause its officers, directors or
affiliates not to (A) take, directly or indirectly, any action
designed to cause or to result in, or that might reasonably be
expected to constitute, the stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of any
of the Shares or, (B) sell, or pay anyone any compensation for
soliciting purchases of, the Shares.
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<PAGE> 15
(xi) The Company will apply the net proceeds from the
offering in the manner set forth under "Use of Proceeds" in the
Prospectus.
(xii) The Company will use its best efforts to cause the
Shares to be listed on the Nasdaq National Market at each Time of
Delivery and will use its best efforts to cause the Shares to be so
listed for at least one year from the date hereof.
(xiii) The Company will file promptly all reports and any
definitive proxy or information statements required to be filed by the
Company with the Commission pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of the Prospectus and
for so long as the delivery of a prospectus is required in connection
with the offering, sale and distribution of the Shares.
(b) COVENANTS OF THE SELLING SHAREHOLDERS. Each Selling
Shareholder covenants and agrees with each of the Underwriters:
(i) During the period beginning from the date hereof
and continuing to and including the date 180 days after the date of
the Prospectus, such Selling Shareholder will not, without the prior
written consent of the Representatives, offer, pledge, sell, contract
to sell, grant any option for the sale of, or otherwise dispose of (or
announce any offer, pledge, sale, grant of an option to purchase or
other disposition), directly or indirectly, any shares of Common Stock
or securities convertible into, exercisable or exchangeable for,
shares of Common Stock, except as provided in Section 2.
(ii) Neither such Selling Shareholder (nor any of its
officers, directors or affiliates) will (A) take, directly or
indirectly, prior to the termination of the underwriting syndicate
contemplated by this Agreement, any action designed to cause or to
result in, or that might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of any of the Shares, (B)
sell, bid for, purchase or pay anyone any compensation for soliciting
purchases of, the Shares, or (C) pay to or agree to pay any person any
compensation for soliciting another to purchase any other securities
of the Company.
6. EXPENSES. The Company and the Selling Shareholders will pay all
costs and expenses incident to the performance of their obligations under this
Agreement in such proportions as they agree among themselves, whether or not
the transactions contemplated hereby are consummated or this Agreement is
terminated pursuant to Section 10 hereof, including, without limitation, all
costs and expenses incident to (i) the fees, disbursements and expenses of the
Company's counsel and accountants in connection with the registration of the
Shares under the Act and all other expenses in connection with the preparation,
printing and, if applicable, filing of the Registration Statement (including
all amendments thereto), any Preliminary Prospectus, the Prospectus and any
amendments and supplements thereto, this Agreement and any blue sky memoranda;
(ii) the delivery of copies of the foregoing documents to the Underwriters;
(iii) the filing fees of the Commission and the National Association of
Securities Dealers, Inc. relating to the Shares; (iv) the preparation, issuance
and delivery to the Underwriters of any certificates evidencing the Shares,
including transfer agent's and registrar's fees; (v) the qualification of the
Shares for offering and sale under state securities and blue sky laws,
including filing fees and reasonable fees and disbursements of counsel for the
Underwriters relating thereto; (vi) any listing of the Shares on the Nasdaq
National Market; and (vii) any expenses for travel, lodging and meals incurred
by the Company and any of its officers, directors and employees in connection
with any meetings with prospective investors in the Shares. It is understood,
however, that, except as provided in this Section, Section 8 and Section 10
hereof, the Underwriters will pay all of their own costs and expenses,
including the fees of their counsel, stock transfer taxes on resale of any of
the Shares by them, and any advertising expenses relating to the offer and sale
of the Shares.
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<PAGE> 16
7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of
the Underwriters hereunder to purchase and pay for the Shares to be delivered
at each Time of Delivery shall be subject, in their discretion, to the accuracy
of the representations and warranties of the Company and the Selling
Shareholders contained herein as of the date hereof and as of such Time of
Delivery, to the accuracy of the statements of Company officers made pursuant
to the provisions hereof, to the performance by the Company and the Selling
Shareholders of their respective covenants and agreements hereunder, and to the
following additional conditions precedent:
(a) If the registration statement as amended to date has not
become effective prior to the execution of this Agreement, such registration
statement shall have been declared effective not later than 5:00 p.m., Atlanta
time, on the date of this Agreement or such later date and/or time as shall
have been consented to by the Representatives in writing. The Prospectus and
any amendment or supplement thereto shall have been filed with the Commission
Pursuant to Rule 424(b) within the applicable time period prescribed for such
filing and in accordance with Section 5(a) of this Agreement; no stop order
suspending the effectiveness of the Registration Statement or any part thereof
shall have been issued and no proceedings for that purpose shall have been
instituted, overtly threatened or, to the knowledge of the Company and the
Representatives, contemplated by the Commission; and all requests for
additional information on the part of the Commission shall have been complied
with to your reasonable satisfaction.
(b) Smith, Gambrell & Russell, counsel for the Underwriters,
shall have furnished to the Representatives such opinion or opinions, dated
such Time of Delivery, with respect to the incorporation of the Company, the
validity of the Shares being delivered at such Time of Delivery, the
Registration Statement, the Prospectus, and other related matters as you may
reasonably request, and the Company shall have furnished to such counsel such
documents as they reasonably request for the purpose of enabling them to pass
upon such matters.
(c) The Representatives shall have received an opinion, dated
such Time of Delivery, of Haynes and Boone, L.L.P., counsel for the Company, in
form and substance satisfactory to the Representatives and their counsel, to
the effect that:
(i) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the State
of Delaware and has the corporate power and authority to own or lease
its properties and conduct its business as described in the
Prospectus. The Company is duly qualified to transact business as a
foreign corporation and is in good standing under the laws of each
other jurisdiction in which the Company has advised us that the
Company owns or leases material property, or conducts material
business, so as to require such qualification, except where management
of the Company has advised us that the failure to so qualify would
not, in such management's opinion, have a material adverse effect on
the financial position of the Company and its subsidiaries, taken as a
whole.
(ii) Each of the Material Subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation and has the
corporate power and authority to own or lease its properties and
conduct its business as described in the Prospectus. Each of the
Material Subsidiaries of the Company is duly qualified to transact
business as a foreign corporation and is in good standing under the
laws of each other jurisdiction in which the Company has advised us
that the Subsidiary owns or leases material property, or conducts
material business, so as to require such qualification, except where
management of the Company has advised us that the failure to so
qualify would not, in such management's opinion, have a material
adverse effect on the financial position of the Company and its
subsidiaries, taken as a whole.
-16-
<PAGE> 17
(iii) The Company's authorized, issued and outstanding
capital stock is as disclosed in the Prospectus. All of the issued
shares of capital stock of the Company (including the Shares to be
sold by the Selling Shareholders) have been duly authorized and
validly issued, are fully paid and nonassessable, and conform to the
description of the Common Stock contained in the Prospectus under the
caption "Description of Capital Stock." To such counsel's actual
knowledge, none of the issued shares of capital stock of the Company,
its predecessors or the Material Subsidiaries has been issued in
violation of any preemptive rights of shareholders, and no person or
entity (including any holder of outstanding shares of capital stock of
the Company) has any preemptive or, to the actual knowledge of such
counsel, other rights to subscribe for any of the Shares.
(iv) All of the shares of capital stock of each of the
Material Subsidiaries have been duly authorized and validly issued,
are fully paid and nonassessable, and, to such counsel's actual
knowledge, are owned beneficially by the Company without notice of any
adverse claims, except for security interests in a majority of the
present and future capital stock of all of the Material Subsidiaries
granted by the Company pursuant to the Revolving Loan Agreement.
[VERIFY EXCEPTION]
(v) To such counsel's actual knowledge and except as
disclosed in the Prospectus, there are no outstanding (A) securities
or obligations of the Company or any of its subsidiaries convertible
into or exchangeable for any capital stock of the Company or any such
subsidiary, (B) warrants, rights or options to subscribe for or
purchase from the Company or any such subsidiary any such capital
stock or any such convertible or exchangeable securities or
obligations, or (C) obligations of the Company or any such subsidiary
to issue any shares of capital stock, any such convertible or
exchangeable securities or obligations, or any such warrants, rights
or options.
(vi) The Shares to be issued and sold by the Company
have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided herein, will be
validly issued and fully paid and nonassessable and will conform to
the description of the Common Stock contained in the Prospectus; the
form of certificate evidencing the Shares complies with all applicable
requirements of the Delaware General Corporation Law; and the Shares
to be issued and sold by the Company have been listed on the Nasdaq
National Market System.
(vii) To the actual knowledge of such counsel, except as
disclosed in the Prospectus, there are no contracts, agreements or
understandings between the Company and any person granting such person
the right to require the Company to file a registration statement
under the Act with respect to any securities of the Company owned or
to be owned by such person or to require the Company to include such
securities in the Shares registered pursuant to the Registration
Statement (or any such right has been effectively waived) or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Act.
(viii) Each sale of the Company's capital stock during the
period from December 13, 1993 through each Time of Delivery was, at
the time of each such sale, registered or exempt from the
registration requirements of the Act and applicable state securities
or blue sky laws.
(ix) To such counsel's actual knowledge, (A) neither the
Company nor any of the Material Subsidiaries has violated its
respective Certificate of Incorporation or Bylaws and (B) neither the
Company nor any of the Material Subsidiaries has breached or otherwise
violated any existing obligation under any material agreement to which
the Company or any of the Material Subsidiaries is a party, in either
case where any such breach or violation would have a material adverse
effect on the financial position of the Company and its subsidiaries,
taken as a whole.
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<PAGE> 18
(x) Execution and delivery by the Company of, and
performance of its obligations in, this Agreement do not (i) violate
the Company's Certificate of Incorporation or Bylaws, (ii) breach, or
result in a default under, any material indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument to which
the Company or any of its Material Subsidiaries is a party or by which
any of them is bound or to which any of their property or assets is
subject and which has been filed by the Company as an exhibit to its
most recent Annual Report on Form 10-K or any interim Quarterly Report
on Form 10-Q, or (iii) breach or otherwise violate applicable
provisions of any statutory law or regulation or any order, judgment
or decree of any court or governmental agency or body having
jurisdiction over the Company or any of its Material Subsidiaries or
any of their respective properties and which is known to such counsel.
(xi) Except for permits and similar authorizations
required under the Act and the blue sky laws of certain jurisdictions
and for permits and authorizations which have been obtained and
registrations which have been effected, no consent, approval,
authorization, registration or order of any court or governmental
agency or body is required in connection with the sale of the Shares
to be issued and sold by the Company.
(xii) To such counsel's actual knowledge, neither the
Company nor any of the Material Subsidiaries is named as a party to
any pending or overtly threatened litigation, arbitration, claim or
proceeding that is material to the Company and its subsidiaries taken
as a whole or of which any of their respective properties or assets is
the subject, except as disclosed in the Prospectus.
(xiii) To such counsel's actual knowledge, neither the
Company nor any of the Material Subsidiaries has (A) breached or
otherwise violated any existing obligation of the Company under any
court order that names the Company as a party, or (B) violated
applicable provisions of statutory law or regulation, in either case
where any such breach or violation would have a material adverse
effect on the financial position of the Company and its subsidiaries,
taken as a whole.
(xiv) This Agreement has been duly authorized, executed
and delivered by the Company.
(xv) The Registration Statement and the Prospectus and
each amendment or supplement thereto (other than the financial
statements and related schedules therein, as to which such counsel
need express no opinion), as of their respective effective or issue
dates, complied as to form in all material respects with the
applicable requirements of the Act and the Exchange Act and the
respective rules and regulations thereunder. The statements contained
in the Prospectus under the captions "Business," "Recent Developments
- Acquisition of __________________," "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity
and Capital Resources" and "Description of Capital Stock," [OTHERS?]
insofar as they purport to summarize the provisions of statutes, legal
and governmental proceedings or contracts and other documents, are
materially accurate and fairly present in all material respects the
information required to be shown. To such counsel's actual knowledge,
any statute, legal and governmental proceeding or contract or document
known to such counsel and of a character required to be described or
incorporated by reference in the Registration Statement or the
Prospectus has been so described or incorporated by reference therein;
and to such counsel's actual knowledge, any contract, agreement or
document known to such counsel and required to filed as an exhibit to
the Registration Statement has been filed as an exhibit to or has been
incorporated by reference into the Registration Statement.
(xvi) The documents incorporated by reference in the
Prospectus or from which information is so incorporated by reference
(other than the financial statements and related schedules
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<PAGE> 19
therein, as to which such counsel need express no opinion), when they
were filed with the Commission complied on their face as to form in
all material respects with the requirements of the Exchange Act, and
the rules and regulations of the Commission thereunder.
(xvii) To such counsel's actual knowledge, the conditions
for use of Form S-3 have been satisfied with respect to the
Registration Statement.
(xviii) The Registration Statement is effective under the
Act; any required filing of the Prospectus pursuant to Rule 424(b) has
been made in the manner and within the time period required by Rule
424(b); to such counsel's actual knowledge, (i) no stop order
suspending the effectiveness of the Registration Statement or any part
thereof has been issued and (ii) no proceedings for that purpose have
been instituted or threatened or are contemplated by the Commission.
(xix) The Company is not, and immediately after the
consummation of the Offering in accordance with this Agreement will
not be, required to be registered under the Investment Company Act of
1940, as amended, as an "investment company" and, to the actual
knowledge of such counsel is not a company "controlled" by an
"investment company" within the meaning of the Investment Company Act
of 1940, as amended.
Such counsel shall also state that during the course of their
representation of the Company and based upon their participation in the
preparation of the Registration Statement, they have no reason to believe that
the Registration Statement, or any further amendment thereto made prior to such
Time of Delivery, on its effective date and as of such Time of Delivery,
contained or contains any untrue statement of a material fact or omitted or
omits to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus, or any
amendment or supplement thereto made prior to such Time of Delivery, as of its
issue date and as of such Time of Delivery, contained or contains any untrue
statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading (provided that such
counsel need express no belief regarding the financial statements and related
schedules and other financial data contained in the Registration Statement, any
amendment thereto, or the Prospectus, or any amendment or supplement thereto).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem proper, on certificates of responsible
officers of the Company and public officials. In addition, such opinion shall
state that it is governed by and shall be interpreted in accordance with the
Legal Opinion Accord of the ABA Section of Business Law (1991) (the "Accord"),
provided that the incorporation in such opinion of the Accord shall not (i)
include an incorporation of the exclusion contained in Section 19(a) of the
Accord (insofar as such exclusion relates to federal securities laws and with
respect to paragraph (viii) above, state securities laws), or (ii) be deemed to
exclude the other areas of law enumerated in Section 19 of the Accord from any
confirmations contained in such opinion relating to the absence of litigation
or the absence of violation of laws, insofar as such confirmations relate to or
confirm the Actual Knowledge (as defined in the Accord) of such counsel.
(d) The Representatives shall have received an opinion, dated
such Time of Delivery, of Alston & Bird, counsel for the Selling Shareholders
in form and substance satisfactory to the Representatives and their counsel, to
the effect that:
(i) Each of the Selling Shareholders has full right,
power (corporate and other) and authority to enter into this
Agreement, the Power of Attorney and the Custody Agreement and to
sell, assign, transfer and deliver to the Underwriters the Shares to
be sold by such Selling Shareholder
-19-
<PAGE> 20
hereunder and the execution and delivery of this Agreement, the Power
of Attorney and the Custody Agreement have been duly authorized by all
necessary action of such Selling Shareholder.
(ii) This Agreement, a Power of Attorney and a Custody
Agreement have been duly executed and delivered by such Selling
Shareholder, each of which is enforceable against such Selling
Shareholder in accordance with its terms subject, as to enforcement,
to applicable bankruptcy, insolvency, fraudulent transfer,
reorganization and moratorium laws and other laws relating to or
affecting the enforcement of creditors' rights generally and to
general equitable principles (except that the right to indemnity and
contribution may be limited by federal or state securities laws)
(provided that such counsel need express no opinion regarding the
irrevocability of the Power of Attorney and Custody Agreement).
(iii) The sale of the Shares to be sold by such Selling
Shareholder at such Time of Delivery and the performance of this
Agreement, the Power of Attorney and the Custody Agreement and the
consummation of the transactions herein and therein contemplated will
not conflict with, or (with or without the giving of notice or the
passage of time or both) result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement, lease or other material
agreement or instrument known to such counsel to which such Selling
Shareholder is a party or to which any of such Selling Shareholder's
properties or assets is subject, nor will such action conflict with or
violate any provision of the Articles of Incorporation or Bylaws or
other governing instruments of such Selling Shareholder or any
statute, rule or regulation or any order, judgment or decree of any
court or governmental agency or body having jurisdiction over such
Selling Shareholder or any of such Selling Shareholder's properties or
assets.
(iv) No consent, approval, authorization, order or
declaration of or from, or registration, qualification or filing with,
any court or governmental agency or body is required for the issue and
sale of the Shares being sold by such Selling Shareholder or the
consummation of the transactions contemplated by this Agreement, the
Power of Attorney or the Custody Agreement, except the registration of
such Shares under the Act and such as may be required under state
securities or blue sky laws in connection with the offer, sale and
distribution of such Shares by the Underwriters.
(v) Upon delivery to the Underwriters, good and valid
title to the Shares to be sold by such Selling Shareholder hereunder,
free and clear of all liens, encumbrances, equities, claims,
restrictions, security interests, voting trusts or other defects of
title whatsoever, will have been transferred to the Underwriters (whom
such counsel may assume to be bona fide purchasers) who have purchased
Shares hereunder. To the best of such counsel's knowledge, there are
no such liens, encumbrances, equities, claims, restrictions, security
interests, voting trusts or other defects of title.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem proper, on certificates of responsible
officers of the Company, the Selling Shareholders and public officials,
provided that such counsel shall state that they believe that both the
Representative and such counsel are justified in relying on such certificate.
(e) The Representatives shall have received from Deloitte &
Touche LLP letters dated, respectively, the date hereof (or, if the
Registration Statement has been declared effective prior to the execution and
delivery of this Agreement, dated such effective date and the date of this
Agreement) and each Time of Delivery, in form and substance satisfactory to the
Representatives, to the effect set forth in Annex I hereto. In the event that
the letters referred to in this Section 7(f) set forth any changes, decreases
or increases in the items specified in paragraph (v) of Annex I, it shall be a
further condition to the obligations
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<PAGE> 21
of the Underwriters that (i) such letters shall be accompanied by a written
explanation by the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (ii) such changes,
decreases or increases do not, in the sole judgment of the Representatives,
make it impracticable or inadvisable to proceed with the purchase, sale and
delivery of the Shares being delivered at such Time of Delivery as contemplated
by the Registration Statement, as amended as of the date of such letter.
(f) Since the date of the latest audited financial statements
included in the Prospectus, neither the Company nor any of its subsidiaries
shall have sustained (i) any loss or interference with their respective
businesses from fire, explosion, flood, hurricane or other calamity, whether or
not covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as disclosed in or contemplated by the
Prospectus, or (ii) any change, or any development involving a prospective
change (including without limitation a change in management or control of the
Company), in or affecting the position (financial or otherwise), results of
operations, net worth or business prospects of the Company and its
subsidiaries, otherwise than as disclosed in or contemplated by the Prospectus,
the effect of which, in either such case, is in your judgment so material and
adverse as to make it impracticable or inadvisable to proceed with the
purchase, sale and delivery of the Shares being delivered at such Time of
Delivery as contemplated by the Registration Statement, as amended as of the
date hereof.
(g) Subsequent to the date hereof there shall not have occurred
any of the following: (i) any suspension or limitation in trading in securities
generally on the New York Stock Exchange, or any setting of minimum prices for
trading on such exchange, or in the Common Stock by the Commission or the
Nasdaq National Market; (ii) a moratorium on commercial banking activities in
New York declared by either federal or state authorities; (iii) any downgrading
in the rating of any debt securities of the Company by any "nationally
recognized statistical rating organization" (as defined for purposes of Rule
436(g) under the Act), or any public announcement that any such organization
has under surveillance or review its rating of any debt securities of the
Company (other than an announcement with positive implications of a possible
upgrading, and no implication of a possible downgrading, of such rating); or
(iv) any outbreak or escalation of hostilities involving the United States,
declaration by the United States of a national emergency or war or any other
national or international calamity or emergency if the effect of any such event
specified in this clause (iv) in your judgment makes it impracticable or
inadvisable to proceed with the purchase, sale and delivery of the Shares being
delivered at such Time of Delivery as contemplated by the Registration
Statement, as amended as of the date hereof.
(h) The Company shall have furnished to the Representatives at
such Time of Delivery certificates of officers of the Company and the Selling
Shareholders shall have furnished certificates of the Selling Shareholders,
satisfactory to the Representatives, as to the accuracy of the representations
and warranties of the Company and such Selling Shareholders respectively herein
at and as of such Time of Delivery, as to the performance by the Company and
such Selling Shareholders of all of its and their respective obligations
hereunder to be performed at or prior to such Time of Delivery, and as to such
other matters as the Representatives may reasonably request, and the Company
and the Selling Shareholders shall have furnished or caused to be furnished
certificates as to the matters set forth in subsections (a) and (g) of this
Section 7, and as to such other matters as the Representatives may reasonably
request.
(i) The Shares shall be listed on the Nasdaq National Market.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon: (i) any untrue statement or
alleged untrue statement made by the Company in Section 1(a)
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<PAGE> 22
of this Agreement; (ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or (B) any application or other document, or any amendment
or supplement thereto, executed by the Company or based upon written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to qualify the Shares under the securities or blue sky laws thereof or
filed with the Commission or any securities association or securities exchange
(each an "Application"); or (iii) the omission or alleged omission to state in
the Registration Statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or any
Application a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating, defending against or appearing as a third-party witness in
connection with any such loss, claim, damage, liability or action; provided,
however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage, liability or action arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement or any amendment thereto,
any Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto or any Application in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives expressly for use therein; provided further, however, that the
Company shall not be liable to any Underwriter in respect of any Preliminary
Prospectus to the extent that (i) the Prospectus did not contain the untrue
statement or alleged untrue statement or omission or alleged omission giving
rise to such loss, claim, damage, liability or action, (ii) the Prospectus was
not sent or given to the purchaser of the Shares in question at or prior to the
time at which the written confirmation of the sale of such Shares was sent or
given to such person, and (iii) the failure to deliver such Prospectus was not
the result of the Company's noncompliance with its obligations under Sections
5(a) (ii) and 5(a) (vi) hereof. The Company will not, without the prior
written consent of each Underwriter, settle or compromise or consent to the
entry of any judgment in any pending or threatened claim, action, suit or
proceeding (or related cause of action or portion thereof) in respect of which
indemnification may be sought hereunder (whether or not such Underwriter is a
party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of such Underwriter
from all liability arising out of such claim, action, suit or proceeding (or
related cause of action or portion thereof).
(b) Each of the Selling Shareholders, severally (and not jointly)
agrees to indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon: (i) any untrue statement or alleged untrue statement made by such
Selling Shareholder in Section 1(b) of this Agreement; or (ii) with respect to
statements made concerning such Selling Shareholder, any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto, or any Application or which arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading with respect to such Selling Shareholder, and will
reimburse each Underwriter for any legal or other expenses reasonably incurred
by such Underwriter in connection with investigating, defending against or
appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that no such Selling
Shareholder shall be liable in any such case to the extent that any such loss,
claim, damage, liability or action arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto or any
Application in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the Representatives
expressly for use therein; provided further, however, that no Selling
Shareholder shall be liable to any Underwriter in respect of any Preliminary
Prospectus to the extent that (i) the Prospectus did not contain the untrue
statement or
-22-
<PAGE> 23
alleged untrue statement or omission or alleged omission giving rise to such
loss, claim, damage, liability or action, (ii) the Prospectus was not sent or
given to the purchaser of the Shares in question at or prior to the time at
which the written confirmation of sale of such Shares was sent or given to such
person, and (iii) the failure to deliver such Prospectus was not the result of
the Company's noncompliance with its obligations under Sections 5(a) (ii) and
5(a) (vi) hereof). No Selling Shareholder will, without the prior written
consent of the Representatives, settle or compromise or consent to the entry of
any judgment in any pending or threatened claim, action, suit or proceeding (or
related cause of action or portion thereof) in respect of which indemnification
may be sought hereunder (whether or not such Underwriter is a party to such
claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of such Underwriter from all
liability arising out of such claim, action, suit or proceeding (or related
cause of action or portion thereof).
(c) Each Underwriter, severally but not jointly, agrees to
indemnify and hold harmless the Company and each Selling Shareholder against
any losses, claims, damages or liabilities to which the Company or any Selling
Shareholder may become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of
any material fact contained in the Registration Statement or any amendment
thereto, the Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or any Application or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through the Representatives expressly for use therein; and will
reimburse the Company and each Selling Shareholder for any legal or other
expenses reasonably incurred by the Company or such Selling Shareholder in
connection with investigating or defending any such loss, claim, damage,
liability or action.
(d) Promptly after receipt by an indemnified party under
subsection (a), (b) or (c) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify the indemnifying
party in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection or unless the
indemnifying party is materially prejudiced by such omission. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to the
indemnifying party); provided, however, that if the defendants in any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be one or more
legal defenses available to it or other indemnified parties which are different
from or additional to those available to the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such
action on behalf of such indemnified party and such indemnified party shall
have the right to select separate counsel to defend such action on behalf of
such indemnified party. After such notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and approval
by such indemnified party of counsel appointed to defend such action, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses, other than reasonable costs of
investigation, subsequently incurred by such indemnified party in connection
with the defense thereof, unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
or (ii) the indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party or (iii) the
indemnifying party shall
-23-
<PAGE> 24
have failed to assume the defense thereof. Nothing in this Section 8(d) shall
preclude an indemnified party from participating at its own expense in the
defense of any such action so assumed by the indemnifying party.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company and the Selling Shareholders,
respectively on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company and the Selling
Shareholders, respectively on the one hand and the Underwriters on the other in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Selling Shareholders, respectively on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by
the Company and the Selling Shareholders, respectively bear to the total
underwriting discounts and commissions received by the Underwriters. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or the Selling Shareholders on the one hand or the Underwriters on
the other and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company,
the Selling Shareholders and the Underwriters agree that it would not be just
and equitable if contributions pursuant to this subsection (e) were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to
above in this subsection (e) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (e), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (e) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling Shareholders
under this Section 8 are several and not joint and shall be in addition to any
liability which the Company or such Selling Shareholders may otherwise have and
shall extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the obligations of
the Underwriters under this Section 8 shall be in addition to any liability
which the respective Underwriters may otherwise have and shall extend, upon the
same terms and conditions, to each officer and director of the Company and any
Selling Shareholder and to each person, if any, who controls the Company or any
Selling Shareholder within the meaning of the Act. Notwithstanding the
foregoing, the liability of each Selling Shareholder to the Underwriters
arising on account of the offering, whether such liability arises under this
Agreement or otherwise, shall not exceed the amount set forth in Section 8(g)
of this Agreement.
-24-
<PAGE> 25
(g) Notwithstanding anything to the contrary in this Section 8,
the liability of each Selling Shareholder for indemnification and contribution
under this Section 8 shall be limited to an amount equal to the net proceeds
received by such Selling Shareholder from the Underwriters in the offering.
9. DEFAULT OF UNDERWRITERS.
(a) If any Underwriter defaults in its obligation to purchase
Shares at a Time of Delivery, the Representatives may in their discretion
arrange for the Representatives or another party or other parties to purchase
such Shares on the terms contained herein. If within thirty-six (36) hours
after such default by any Underwriter the Representatives do not arrange for
the purchase of such Shares, the Company and the Selling Shareholders shall be
entitled to a further period of thirty-six (36) hours within which to procure
another party or other parties satisfactory to the Representatives to purchase
such Shares on such terms. In the event that, within the respective prescribed
periods, the Representatives notify the Company and the Selling Shareholders
that the Representatives have so arranged for the purchase of such Shares, or
the Company and the Selling Shareholders notify the Representatives that they
have so arranged for the purchase of such Shares, the Representatives or the
Company and the Selling Shareholders shall have the right to postpone a Time of
Delivery for a period of not more than seven days in order to effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees
to file promptly any amendments to the Registration Statement or the Prospectus
that in the opinion of the Representatives may thereby be made necessary. The
cost of preparing, printing and filing any such amendments shall be paid for by
the Underwriters. The term "Underwriter" as used in this Agreement shall
include any person substituted under this Section with like effect as if such
person had originally been a party to this Agreement with respect to such
Shares. The thirty-six (36) hour periods referred to in this subsection (a)
shall not include the hours between (i) 5:00 p.m., Atlanta time, on any Friday
through 9:00 a.m. Atlanta time, the following Monday or (ii) 5:00 p.m., Atlanta
time, on the day preceding a day on which the New York Stock Exchange is closed
for trading (a "holiday") through 9:00 a.m., Atlanta time, on the day following
that holiday.
(b) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by the
Representatives and the Company and the Selling Shareholders as provided in
subsection (a) above, the aggregate number of such Shares which remains
unpurchased does not exceed one-eleventh of the aggregate number of Shares to
be purchased at such Time of Delivery, then the Company and the Selling
Shareholders shall have the right to require each non-defaulting Underwriter to
purchase the number of Shares which such Underwriter agreed to purchase
hereunder at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the number
of Shares which such Underwriter agreed to purchase hereunder) of the Shares of
such defaulting Underwriter or Underwriters for which such arrangements have
not been made, but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
10. TERMINATION.
(a) This Agreement may be terminated with respect to the Firm
Shares or any Optional Shares in the sole discretion of the Representatives by
notice to the Company given prior to the First Time of Delivery or any
Subsequent Time of Delivery, respectively, in the event that (i) any condition
to the obligations of the Underwriters set forth in Section 7 hereof has not
been satisfied, or (ii) the Company or the Selling Shareholders shall have
failed, refused or been unable to deliver the Shares or to perform all
obligations and satisfy all conditions on their respective parts to be
performed or satisfied hereunder at or prior to such Time of Delivery, in
either case other than by reason of a default by any of the Underwriters. If
this Agreement is terminated pursuant to this Section 10(a), the Company and
the Selling Shareholders, pro rata in accordance with the number of Shares
proposed to be sold hereunder will reimburse the Underwriters severally upon
demand for all out-of-pocket expenses (including counsel fees and
-25-
<PAGE> 26
disbursements) that shall have been incurred by them in connection with the
proposed purchase and sale of the Shares. Neither the Company nor any Selling
Shareholder shall in any event be liable to any of the Underwriters for the
loss of anticipated profits from the transactions covered by this Agreement.
(b) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters by you and the
Company and the Selling Shareholders as provided in Section 9(a), the aggregate
number of such Shares which remains unpurchased exceeds one-eleventh of the
aggregate number of Shares to be purchased at such Time of Delivery, or if the
Company and the Selling Shareholders shall not exercise the right described in
Section 9(b) to require non-defaulting Underwriters to purchase Shares of a
defaulting Underwriter or Underwriters, then this Agreement (or, with respect
to a Subsequent Time of Delivery, the obligations of the Underwriters to
purchase and of the Company to sell the Optional Shares) shall thereupon
terminate, without liability on the part of any non-defaulting Underwriter, the
Company or the Selling Shareholders, except for the expenses to be borne by the
Company, the Selling Shareholders and the Underwriters as provided in Section 6
hereof and the indemnity and contribution agreements in Section 8 hereof; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
11. SURVIVAL. The respective indemnities, agreements,
representations, warranties and other statements of the Company, its officers,
the Selling Shareholders and the several Underwriters, as set forth in this
Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person referred to in Section 8(e) or the
Company, any Selling Shareholder or any officer or director or controlling
person of the Company or any Selling Shareholder referred to in Section 8(e),
and shall survive delivery of and payment for the Shares. The respective
agreements, covenants, indemnities and other statements set forth in Sections 6
and 8 hereof shall remain in full force and effect, regardless of any
termination or cancellation of this Agreement.
12. NOTICES. All communications hereunder shall be in writing and,
if sent to any of the Underwriters, shall be mailed, delivered or telegraphed
and confirmed in writing to you in care of The Robinson-Humphrey Company, Inc.,
3333 Peachtree Road, N.E., Atlanta, Georgia 30326, Attention: Corporate Finance
Department (with a copy to Smith, Gambrell & Russell, 3343 Peachtree Road,
Atlanta, Georgia 30326, Attention: Robert C. Schwartz); if to any Selling
Shareholder shall be sufficient in all respects if delivered or sent by
registered mail to counsel for such Selling Shareholder at its address set
forth in Schedule II hereto; and if sent to the Company, shall be mailed,
delivered or telegraphed and confirmed in writing to the Company at AMRESCO,
Inc., 1845 Woodall Rogers Freeway, Dallas, Texas 75201, Attention: Robert H.
Lutz, Jr., with a copy to the General Counsel of the Company.
13. REPRESENTATIVES. The Representatives will act for the several
Underwriters in connection with the transactions contemplated by this
Agreement, and any action under this Agreement taken by you jointly or by The
Robinson-Humphrey Company, Inc. will be binding upon all the Underwriters.
14. BINDING EFFECT. This Agreement shall be binding upon, and inure
solely to the benefit of, the Underwriters, the Company and the Selling
Shareholders and to the extent provided in Sections 8 and 10 hereof, the
officers and directors and controlling persons referred to therein and their
respective heirs, executors, administrators, successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
Agreement. No purchaser of any of the Shares from any Underwriter shall be
deemed a successor or assign by reason merely of such purchase.
15. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Georgia without giving effect to
any provisions regarding conflict of laws.
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<PAGE> 27
16. COUNTERPARTS. This Agreement may be executed by any one or more
of the parties hereto in any number of counterparts, each of which shall be
deemed to be an original, but all such counterparts shall together constitute
one and the same instrument.
-27-
<PAGE> 28
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us one of the counterparts hereof, and
upon the acceptance hereof by The Robinson-Humphrey Company, Inc., on behalf of
each of the Underwriters, this letter will constitute a binding agreement among
the Underwriters and the Company. It is understood that your acceptance of
this letter on behalf of each of the Underwriters is pursuant to the authority
set forth in the Master Agreement among Underwriters, a copy of which shall be
submitted to the Company for examination, upon request, but without warranty on
your part as to the authority of the signers thereof.
Very truly yours,
AMRESCO, INC.
By:
-----------------------------------
Name: Robert H. Lutz, Jr.
Title: Chairman and Chief
Executive Officer
SELLING SHAREHOLDERS
By:
-----------------------------------
William A. Davies, Attorney-in-Fact
acting on behalf of each of the
Selling Shareholders named in
Schedule II to this Agreement
The foregoing Agreement is hereby confirmed
and accepted as of the date first written above
at Atlanta, Georgia.
THE ROBINSON-HUMPHREY COMPANY, INC.
PIPER JAFFRAY INC.
RAYMOND JAMES & ASSOCIATES, INC.
J.C. BRADFORD & CO.
MONTGOMERY SECURITIES
MORGAN KEEGAN & COMPANY, INC.
BY: THE ROBINSON-HUMPHREY COMPANY, INC.
By:
-------------------------------------
(Authorized Representative)
On behalf of each of the Underwriters
-28-
<PAGE> 29
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Optional
Total Shares to be
Number of Firm Purchased if
Shares to be Maximum Option
Underwriter Purchased Exercised
----------- --------------- --------------
<S> <C> <C>
The Robinson-Humphrey Company, Inc. . . . .
Piper Jaffray Inc. . . . . . . . . . . . .
Raymond James & Associates, Inc. . . . . .
J.C. Bradford & Co. . . . . . . . . . . . .
Montgomery Securities . . . . . . . . . . .
Morgan Keegan & Company, Inc. . . . . . . .
--------- ---------
Total. . . . . . . . . . . . . . . 7,760,000 1,164,000
========= =========
</TABLE>
<PAGE> 30
SCHEDULE II
<TABLE>
<CAPTION>
Number of
Total Optional
Number of Firm Shares to be
Shares to be Sold if Maximum
Selling Shareholders(l) Purchased Option Exercised
------------------------ ------------- -----------------
<S> <C> <C>
Angela Z. Allen IRA . . . . . . . . . . . . . . . . . . .
John Gregory Berylson . . . . . . . . . . . . . . . . . .
Donald W. Burton . . . . . . . . . . . . . . . . . . . .
Frankel, Hardwick, Tanebaum & Fink . . . . . . . . . . .
Frances A. Close . . . . . . . . . . . . . . . . . . . .
John J. McDonough . . . . . . . . . . . . . . . . . . . .
Larence Park . . . . . . . . . . . . . . . . . . . . . .
Jack M. Berdy, M.D. . . . . . . . . . . . . . . . . . . .
Crandall C. Bowles . . . . . . . . . . . . . . . . . . .
Collins Family Partnership . . . . . . . . . . . . . . .
Willard W. Geiger . . . . . . . . . . . . . . . . . . . .
Terri A. Mallory . . . . . . . . . . . . . . . . . . . .
PGF&M Venture 89 . . . . . . . . . . . . . . . . . . . .
SO Concepts . . . . . . . . . . . . . . . . . . . . . . .
Brooks Schoen . . . . . . . . . . . . . . . . . . . . . .
G. Bickley Stevens, II . . . . . . . . . . . . . . . . .
Wallace P. Whitley . . . . . . . . . . . . . . . . . . .
CitiBank as Trustee of the Delta Master Trust . . . . . .
National Life Insurance Company . . . . . . . . . . . . .
William A. Davies . . . . . . . . . . . . . . . . . . . .
Richard L. Cravey . . . . . . . . . . . . . . . . . . . .
Charles C. Schoen, III . . . . . . . . . . . . . . . . .
Loring L. Stevens . . . . . . . . . . . . . . . . . . . .
BellSouth Master Pension Trust . . . . . . . . . . . . .
Ontario Municipal Employees Retirement Board . . . . . .
Landmark Equity Partners III, L.P. . . . . . . . . . . .
Bart A. McLean . . . . . . . . . . . . . . . . . . . . .
Edwin A. Wahlen, Jr. . . . . . . . . . . . . . . . . . .
William S. Green . . . . . . . . . . . . . . . . . . . .
LeSelect WDG/DGG Interests, L.P. . . . . . . . . . . . .
--------- -----------
Total . . . . . . . . . . . . . . . . . . 5,929,538
========= ===========
</TABLE>
(1) Each of the Selling Shareholders has executed and delivered a Power of
Attorney appointing William A. Davies and Robert L. Adair, II such
Selling Shareholder's Attorneys-in-Fact and is represented by Alston &
Bird, One Atlantic Center, 1201 West Peachtree Street, Atlanta,
Georgia 30309-3424, Attention: Sidney J. Nurkin, Esq.
ANNEX I
<PAGE> 31
Pursuant to Section 7(e) of the Underwriting Agreement, Deloitte &
Touche, L.L.P. shall furnish letters to the Underwriters to the effect that:
(i) they are independent public accountants with respect to the
Company and its consolidated subsidiaries within the meaning the Act
and the respective applicable published rules and regulations
thereunder;
(ii) in their opinion, the consolidated financial statements and
schedules audited by them and included in the Prospectus and the
Registration Statement comply as to form in all material respects with
the applicable accounting requirements of the Act and the related
published rules and regulations thereunder;
(iii) the financial statements of the Company as of and for the
six month period ended June 30, 1996 were reviewed by them in
accordance with the standards established by the American Institute of
Certified Public Accountants and based upon their review they are not
aware of any material modifications that should be made to such
financial statements for them to be in conformity with generally
accepted accounting principles, and such financial statements comply as
to form in all material respects with the applicable accounting
requirements of the Act and the applicable rules and regulations
thereunder;
(iv) On the basis of limited procedures, not constituting an
audit in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and
other information referred to below, a reading of the latest available
interim financial statements of the Company and its subsidiaries,
inspection of the minute books of the Company and its subsidiaries
since the date of the latest audited financial statements included in
the Prospectus, inquiries of officials of the Company and its
subsidiaries responsible for financial accounting matters and such
other inquiries and procedures as may be specified in such letter,
nothing came to their attention that caused them to believe that:
(A) the unaudited consolidated condensed financial
statements of the Company and its consolidated subsidiaries
included in the Registration Statement and the Prospectus do not
comply in form in all material respects with the applicable
accounting requirements of the Act and the Exchange Act and the
respective related published rules and regulations thereunder or
are not in conformity with generally accepted principles applied
on the basis substantially consistent with that of the audited
consolidated financial statements included in the Registration
Statement and the Prospectus;
(B) as of a specified date not more than 5 days prior to
the date of such letter, there were any changes in the capital
stock (other than the issuance of capital stock upon exercise of
options which were outstanding on the date of the latest balance
sheet included in the Prospectus) or any increase in inventories
or the long-term debt or short-term debt of the Company and its
subsidiaries, or any decreases in net current assets or net
assets or other items specified by the Representatives, or any
increases in any items specified by the Representatives, in each
case as compared with amounts shown in the latest balance sheet
included in the Prospectus, except in each case for changes,
increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
(C) for the period from the date of the latest financial
statements included in the Prospectus to the specified date
referred to in Clause (B) there were any decreases in net sales
or operating income or the total or per share amounts of net
income or other items specified by
-2-
<PAGE> 32
the Representatives, or any increases in any items specified by
the Representatives, in each case as compared with the comparable
period of the preceding year and with any other period of
corresponding length specified by the Representatives, except in
each case for increases or decreases which the Prospectus
discloses have occurred or may occur which are described in such
letter; and
(v) In addition to the audit referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of
minute books, inquiries and other procedures referred to in paragraph
(iv) above, they have carried out certain specified procedures, not
constituting an audit in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives which are derived from
the general accounting records of the Company and its subsidiaries,
included in the Registration Statement and the Prospectus, or which
appear in Part II of, or in exhibits and schedules to, the
Registration Statement specified by the Representatives, and have
compared certain of such amounts, percentages and financial
information with the accounting records of the Company and its
subsidiaries and have found them to be in agreement.
References to the Registration Statement and the Prospectus in this
Annex I shall include any amendment or supplement thereto at the date of such
letter.
-3-
<PAGE> 1
================================================================================
EXHIBIT 4.8
AMRESCO, INC.,
Issuer
AND
FIRST INTERSTATE BANK OF TEXAS, NATIONAL ASSOCIATION,
Trustee
----------------------
FIRST SUPPLEMENTAL INDENTURE
Dated as of April 1, 1996
to
INDENTURE
Dated as of November 27, 1995
----------------------
$45,000,000
8% Convertible Subordinated Debentures Due 2005
================================================================================
<PAGE> 2
FIRST SUPPLEMENTAL INDENTURE, dated as of April 1, 1996, between
AMRESCO, INC., a Delaware corporation (the "Company"), and FIRST INTERSTATE
BANK OF TEXAS, NATIONAL ASSOCIATION, Trustee, (the "Trustee").
W I T N E S S E T H:
WHEREAS, the Company has heretofore executed and delivered to the
Trustee a certain indenture, dated as of November 27, 1996 (the "Indenture"),
pursuant to which $45,000,000 aggregate principal amount of 8% Convertible
Subordinated Debentures Due 2005 of the Company (collectively, the
"Debentures") were issued; and
WHEREAS the Company desires and has requested the Trustee to join with
it in the execution and delivery of this First Supplemental Indenture for the
purpose of amending Sections 201, 202, 203 and 305 of the Indenture in the
manner set forth below; and
WHEREAS, Section 901 of the Indenture provides that a supplemental
indenture may be entered into between the Company and the Trustee without the
consent of holders of Debentures for certain purposes; and
WHEREAS, the Company has furnished the Trustee with an Officer's
Certificate complying with the requirements of Section 102 of the Indenture and
stating that all conditions precedent provided for in the Indenture with
respect to this First Supplemental Indenture have been complied with; and
WHEREAS, the Company has furnished the Trustee with an Opinion of
Counsel complying with the requirements of Section 102 of the Indenture and
stating that in the opinion of such counsel all conditions precedent provided
for in the Indenture with respect to this First Supplement Indenture have been
complied with; and
WHEREAS, all things necessary to make this First Supplemental Indenture
a valid agreement of the Company and the Trustee and a valid amendment of and
supplement to the Indenture have been done;
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Debentures by the holders thereof it is mutually covenanted and agreed for the
equal and proportionate benefit of all holders of the Debentures, as follows:
-1-
<PAGE> 3
Section 1.01 Amendment of Section 201 of the Indenture.
The first sentence of the first paragraph of Section 201 of the
Indenture is hereby amended by deleting therefrom the parenthetical "(in
addition to the legend set forth in Section 203 below)".
Section 1.02 Amendment of Section 202 of the Indenture.
The restrictive legend set forth entirely in capitalized letters set
forth below and comprising the first full paragraph of Section 202 of the
Indenture is hereby deleted in its entirety:
THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS
SECURITY HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT") OR WITH ANY SECURITIES ACT
REGULATORY AUTHORITY OF ANY STATE OR OTHER JURISDICTION OF THE UNITED
STATES. UNTIL 40 DAYS AFTER THE ORIGINAL ISSUE DATE OF THIS SECURITY
(THE "RESTRICTED PERIOD"), THE SALE, PLEDGE OR TRANSFER OF THIS
SECURITY AND THE COMMON STOCK INTO WHICH IT MAY BE CONVERTED EACH IS
SUBJECT TO CERTAIN CONDITIONS AND RESTRICTIONS. THE HOLDER HEREOF, BY
PURCHASING OR OTHERWISE ACQUIRING THIS SECURITY, ACKNOWLEDGES THAT
THIS SECURITY AND THE COMMON STOCK INTO WHICH IT MAY BE CONVERTED HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT AND AGREES FOR THE
BENEFIT OF THE ISSUER THAT THIS SECURITY AND THE COMMON STOCK ISSUABLE
UPON CONVERSION OF THIS SECURITY WILL BEAR A COMPARABLE LEGEND AND MAY
BE REOFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY IN
COMPLIANCE WITH THE SECURITIES ACT AND OTHER APPLICABLE LAWS OF THE
STATES, TERRITORIES AND POSSESSIONS OF THE UNITED STATES GOVERNING THE
OFFER AND SALE OF SECURITIES, AND PRIOR TO THE EXPIRATION OF THE
RESTRICTED PERIOD, ONLY (A)(1) IN AN OFFSHORE TRANSACTION IN
ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT OR (2) TO THE
COMPANY AND (B) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF
THE STATES OF THE UNITED STATES.
Section 1.03 Amendment to Section 203 of the Indenture.
The eleventh full paragraph of Section 203 of the Indenture set forth
below is hereby deleted in its entirety:
- 2 -
<PAGE> 4
With respect to the registration of any proposed transfer of a
Security to any person who is not a U.S. Person as defined under
Regulation S promulgated under the Securities Act (a "Non-U.S.
Person"), the Security Registrar shall register the transfer of any
Security only if (A) the transferor furnishes to the Company and the
Security Registrar such certifications, legal opinions or other
information as they may reasonably require to confirm that such
transfer is being made pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the
Securities Act, (B) the proposed transferee has delivered to the
Security Registrar a certificate in a form satisfactory to the Company
and (C) an Officer of the Company approves the transfer in writing,
whereupon the Security Registrar shall reflect on its books and
records the date and amount transferred, and the Company shall execute
and the Trustee or the Authenticating Agent shall authenticate and
deliver one or more Securities of like tenor and amount.
Section 1.04 Amendment of Section 305 of the Indenture.
The seventh full paragraph of Section 305 of the Indenture set forth
below is hereby deleted in its entirety:
With respect to the registration of any proposed transfer of a
Security to any person who is not a U.S. Person as defined under
Regulation S promulgated under the Securities Act (a "Non-U.S.
Person"), the Security Registrar shall register the transfer of any
Security only if (A) the transferor furnishes to the Company and the
Security Registrar such certifications, legal opinions or other
information as they may reasonably require to confirm that such
transfer is being made pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the
Securities Act, (B) the proposed transferee has delivered to the
Security Registrar a certificate in a form satisfactory to the Company
and (C) an Officer of the Company approves the transfer in writing,
whereupon the Security Registrar shall reflect on its books and
records the date and amount transferred, and the Company shall execute
and the Trustee or the Authenticating Agent shall authenticate and
deliver one or more Securities of like tenor and amount.
ARTICLE TWO
Section 2.01 Defined Terms. All terms used in this First
Supplemental Indenture not otherwise defined herein shall have the meanings
ascribed thereto in the Indenture.
Section 2.02 Execution in Counterparts. This first Supplemental
Indenture may be executed in any number of counterparts. Each such counterpart
shall be an
- 3 -
<PAGE> 5
original, but such counterparts shall together constitute one and the same
instrument.
Section 2.03 Confirmation of Indenture. Except as amended and
supplemented hereby, all of the provisions of the Indenture shall remain and
continue in full force and effect and are hereby confirmed in all respects.
IN WITNESS WHEREOF, the Company has caused this First Supplemental
Indenture to be duly executed and the Trustee has caused this First
Supplemental Indenture to be duly executed, all as of the day and year first
above written.
AMRESCO, INC.
By: /s/ BARRY L. EDWARDS
------------------------------------------
Name: Barry L. Edwards
-------------------------------------
Title: Executive Vice President
------------------------------------
FIRST INTERSTATE BANK OF TEXAS,
NATIONAL ASSOCIATION, Trustee
By: /s/ DENNIS J. ROEMLEIN
------------------------------------------
Name: Dennis J. Roemlein
-------------------------------------
Title: Vice President
------------------------------------
- 4 -
<PAGE> 1
EXHIBIT 5.1
[AMRESCO, INC. LETTERHEAD]
October ______, 1996
AMRESCO, INC.
700 North Pearl Street
Suite 2400, LB 342
Dallas, Texas 75201-7424
Re: Registration on Form S-3 of 8,924,000 shares of Common Stock, par value
$0.05 per share, of AMRESCO, INC.
Gentlemen:
I am general counsel of AMRESCO, INC., a Delaware corporation (the
"Company"), in connection with the registration and sale of up to 8,924,000
shares of Common Stock, par value $0.05 per share, of the Company (the
"Shares"), composed of up to 2,994,462 Shares (the "Company Shares") to be
issued and sold by the Company and up to 5,929,538 Shares (the "Selling
Stockholders' Shares") to be sold by the Selling Stockholders named in the
Underwriting Agreement (the "Selling Shareholders") pursuant to the
Underwriting Agreement (the "Underwriting Agreement") to be entered into among
the Company, the Selling Stockholders and Robinson-Humphrey Company, Inc.,
Piper Jaffray Inc., Raymond James & Associates, Inc., Montgomery Securities,
J.C. Bradford & Co. and Morgan Keegan & Company, Inc., as the Representatives
of the several Underwriters to be named in a schedule to the Underwriting
Agreement (the "Underwriters").
I have examined such documents, records and matters of law as I have
deemed necessary for purposes of this opinion. Based on the foregoing, I am of
the opinion that (i) the Company Shares are duly authorized and, when issued
and delivered to the Underwriters pursuant to the Underwriting Agreement
against payment of the consideration therefor as provided therein, will be
validly issued, fully paid and nonassessable, and (ii) the Selling
Stockholders' Shares are duly authorized, validly issued, fully paid and
nonassessable.
In rendering the foregoing opinion, I have relied as to certain
factual matters upon certificates of officers of the Company, the Selling
Stockholders and public officials, and I have not independently checked or
verified the accuracy of the statements contained therein.
I hereby consent to the filing of this opinion as Exhibit 5.1 to
Registration Statement No. 333-___________ on Form S-3 filed by the Company to
effect registration of the Shares under the Securities Act of 1933, as amended,
and to the reference to me under the caption "Legal Matters" in the Prospectus
constituting a part of such Registration Statement.
Very truly yours,
L. Keith Blackwell
General Counsel and Secretary
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in and the incorporation by reference in this
Registration Statement of AMRESCO, INC. and Subsidiaries on Form S-3 of our
report dated February 6, 1996, appearing in the Annual Report on Form 10-K of
AMRESCO, INC. and Subsidiaries for the year ended December 31, 1995, and to the
reference to us under the headings "Summary Financial and Other Data" and
"Experts" in the Prospectus, which is part of this Registration Statement.
Deloitte & Touche LLP
Dallas, Texas
October 9, 1996
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement of AMRESCO, INC.
on Form S-3 (File No. 333- ) of our report dated December 15, 1995, on our
audits of the consolidated financial statements of Quality Mortgage USA, Inc. We
also consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Newport Beach, California
October 9, 1996
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitute 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 along, to sign, execute and file
with the Securities and Exchange Commission and any state securities regulatory
board or commission any documents relating to the proposed issuance and
registration of the securities offered pursuant to the Registration Statement
of AMRESCO, INC. on Form S-3 under the Securities Act of 1933, including any
amendment or amendments relating thereto, with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority, 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 Chief October 7, 1996
- --------------------------------- Executive Officer
Robert H. Lutz, Jr.
/s/ ROBERT L. ADAIR III Director, President and Chief October 7, 1996
- --------------------------------- Operating Officer
Robert L. Adair III
/s/ BARRY L. EDWARDS Executive Vice President and Chief October 7, 1996
- --------------------------------- Financial Officer
Barry L. Edwards (Principal Financial Officer)
/s/ JAMES P. COTTON, JR. Director October 7, 1996
- ---------------------------------
James P. Cotton, Jr.
Director October ___, 1996
- ---------------------------------
Richard L. Cravey
/s/ GERALD E. EICKHOFF Director October 7, 1996
- ---------------------------------
Gerald E. Eickhoff
/s/ AMY J. JORGENSEN Director October 7, 1996
- ---------------------------------
Amy J. Jorgensen
Director October 7, 1996
/s/ JOHN J. MCDONOUGH
- ---------------------------------
John J. McDonough
/s/ BRUCE W. SCHNITZER Director October 7, 1996
- ---------------------------------
Bruce W. Schnitzer
/s/ EDWIN A. WAHLEN, JR. Director October 7, 1996
- ---------------------------------
Edwin A. Wahlen, Jr.
/s/ RONALD B. KIRKLAND Vice President and Chief Accounting October 7, 1996
- --------------------------------- Officer (Principal Accounting Officer)
Ronald B. Kirkland
</TABLE>
