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Filed pursuant to Rule 424(b)(4)
Registration No. 333-36105
PROSPECTUS
AMRESCO, INC.
1,790,352 SHARES OF COMMON STOCK
The shares of Common Stock, $0.05 par value per share (the "Common
Stock"), of AMRESCO, INC. (the "Company") covered by this Prospectus are shares
which may be offered and sold (the "Offering"), from time to time, by certain
shareholders of the Company (including trusts, limited partnerships or other
limited liability entities to which one or more current shareholders of the
Company may transfer all or some of their shares of Common Stock)
(collectively, the "Selling Shareholders"). See "SELLING SHAREHOLDERS." All of
the shares covered hereby will be sold only by the Selling Shareholders. This
Prospectus does not purport to cover the initial issuance by the Company of the
shares of Common Stock, but only the reoffer and resale of such shares by the
Selling Shareholders. The Company will not receive any of the proceeds from the
sale of the shares of Common Stock by the Selling Shareholders.
The Selling Shareholders may from time to time sell the shares of
Common Stock covered by this Prospectus to or through one or more underwriters,
and may also sell shares of Common Stock directly to other purchasers or
through agents, on the Nasdaq National Market in ordinary brokerage
transactions, in negotiated transactions, or otherwise, at market prices
prevailing at the time of sale, at prices related to the then prevailing market
price or at negotiated prices. See "PLAN OF DISTRIBUTION."
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "AMMB."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN
FACTORS 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.
_____________________
The date of this Prospectus is October 1, 1997
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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
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Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Incorporation of Certain Documents by Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Selling Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Description of Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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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 and information
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 website maintained by the Commission
(http://www.sec.gov). The Company's Common Stock is quoted on the Nasdaq
National Market and such reports, proxy and information statements and other
information may be inspected at the National Association of Securities Dealers,
Inc., 1735 K. Street N.W., Washington, D.C. 20006. The Company's 10% Senior
Subordinated Notes, Senior Notes and 10% Senior Subordinated Notes due 2004 are
listed for trading on the New York Stock Exchange. Reports, proxy and
information statements 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
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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.
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, 1996 (filed March 31, 1997; File No. 001-11599), (ii) Current Report on
Form 8-K dated March 7, 1997 (filed March 7, 1997; File No. 001-11599), (iii)
Current Report on Form 8-K dated March 12, 1997 (filed March 27, 1997; File No.
001- 11599), (iv) Quarterly Report on Form 10-Q for the quarter ended March
31, 1997 (filed May 15, 1997; File No. 001- 11599), (v) Current Report on Form
8-K dated May 28, 1997 (filed May 30, 1997; File No. 001-11599), (vi) Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997 (filed August 13, 1997;
File No. 001-11599), (vii) Registration Statement on Form 8-A, as amended by
Form 8-A/A No. 1, dated November 7, 1996 (filed November 7, 1996; File No. 001-
11599), and (ix) Registration Statement on Form 8-A dated May 28, 1997 (filed
May 30, 1997; File No. 000-08630).
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus shall
be deemed to be incorporated by reference herein. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed superseded or modified for purposes of this Prospectus to the extent
that a statement contained herein (or in any other subsequently filed document
which also is incorporated by reference herein) modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, on the written or oral
request of any such person, a copy of any or all of the documents incorporated
by reference 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, 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.
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CERTAIN DEFINITIONS
The following are certain defined terms which may be used in this
Prospectus:
"ACC" means AMRESCO Capital, L.P., a subsidiary of the Company.
"AMRESCO SERVICES" means a division of AMRESCO Services, L.P., 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.
"CLC" means Commercial Lending Corporation, a Nevada corporation (now
renamed as "AMRESCO Commercial Lending Corporation").
"CLC ACQUISITION" means the Company's purchase of all of the
outstanding capital stock of CLC and of certain assets of CLC IO, a sister
company of CLC.
"CLC IO" means CLC IO, Inc., a Nevada corporation.
"COMPANY" means, unless otherwise stated in this Prospectus or unless
the context otherwise requires, the Company and each of its subsidiaries.
"CONDUIT PURCHASERS" means investment bankers and other financial
intermediaries who purchase or otherwise accumulate pools or portfolios of
loans having common features (e.g., real estate mortgages, etc.), with the
intent of securitizing such loan assets and selling them to a trust that
obtains its funds by selling ownership interests in the trust to public or
private investors.
"CONVERTIBLE SUBORDINATED DEBENTURES" means the Company's 8%
Convertible Subordinated Debentures due 2005.
"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.
"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.
"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.
"HOLLIDAY FENOGLIO" means Holliday Fenoglio, L.P., a subsidiary of
the Company.
"MASTER SERVICER" means an entity which provides administrative
services with respect to securitized pools of mortgage-backed securities.
"PREFERRED STOCK" means the Company's preferred stock, par value $1.00
per share.
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"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 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 operating assets, and the assumption of certain liabilities, of Quality
Mortgage USA, Inc.
"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 banks which
are parties thereto from time to time.
"RULE 144" means Rule 144 promulgated under the Securities Act.
"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, mortgage-backed or
commercial loan-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 and the Company's Senior Subordinated Notes due
2004, collectively.
"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 which
are included under the caption "Retained Interests in Securitizations trading"
in the Company's consolidated balance sheet.
"SUB-PRIME 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.
"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.
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THE COMPANY
The Company is a leading specialty financial services company engaged
in residential mortgage banking, commercial mortgage banking, asset management
and commercial finance.
RESIDENTIAL MORTGAGE BANKING
The Company originates, acquires, warehouses and securitizes sub-prime
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 sub-prime loan market are attractive even after taking into
account the potentially greater credit risk associated with such borrowers.
COMMERCIAL MORTGAGE BANKING
The Company performs a wide range of commercial mortgage banking
services, including originating, underwriting, placing, selling, securitizing
and servicing commercial real estate loans through Holliday Fenoglio, ACC and
AMRESCO Services.
Holliday Fenoglio primarily serves commercial real estate developers
and owners by originating commercial real estate loans and acting as a broker
on commercial real estate sales through its own commission-based mortgage
bankers. The loans originated by Holliday Fenoglio generally are funded by
institutional lenders, principally insurance companies, and by ACC and other
Conduit Purchasers. Holliday Fenoglio generally retains Primary Servicer rights
on a portion of the loans originated by it. 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 is a mortgage banker that originates, underwrites and securitizes
commercial real estate loans that are funded primarily by Conduit Purchasers
and Fannie Mae. ACC has established AMRESCO Commercial Mortgage Funding, L.P.,
a Delaware limited partnership with an affiliate of Goldman Sachs & Co. The
partnership funds a significant portion of ACC's commercial real estate loan
originations and ACC and the Goldman Sachs & Co. affiliate share equally in the
accumulation and securitization profits and risks.. ACC serves its market
directly through branch offices as well as through a network of independent
mortgage brokers, including Holliday Fenoglio. 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 seller/servicer program in the
states of Florida, North Carolina and South Carolina.
AMRESCO Services serves as a Primary Servicer for whole loans and as a
Master/Full Servicer for securitized pools of commercial mortgages. The
dominant users of commercial loan servicers are commercial mortgage-backed bond
trusts and similar securitized commercial asset-backed loan portfolios held by
numerous passive investors. Historically, the revenue stream from servicing
contracts on commercial mortgages has been relatively predictable due in part
to prepayment penalties in commercial mortgages that tend to discourage early
loan payoffs.
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ASSET MANAGEMENT
The Company manages and resolves Asset Portfolios acquired at a
discount to Face Value by the Company alone and by the Company with
co-investors. The Company also manages and resolves Asset Portfolios owned by
third parties. Asset Portfolios generally include fee owned real estate and
secured loans of varying qualities and collateral types. The majority of the
loans in the Asset Portfolios in which the Company invests are in default at
the time of acquisition. Asset Portfolios purchased by the Company are
currently comprised of real estate secured loans and 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. While the majority of
the Asset Portfolios managed or owned by the Company 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 and a major Wall Street bank were
recently awarded a contract to buy an Asset Portfolio in Mexico. The Company
may seek further opportunities in Mexico. The Company may open offices and
seek strategic alliances in international markets.
The Company provides real estate investment advice to various
institutional investors (primarily pension funds) seeking to invest in real
estate and related investments. Although the Company is paid acquisition,
disposition and performance-based incentive 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 or value of the investments under management.
COMMERCIAL FINANCE
The Company's commercial finance business was formally commenced in 1996. The
Company intends to expand its commercial finance business through acquisitions
of targeted niche finance companies and internal start-ups. The Company's
commercial finance business currently involves: (i) providing high yield debt
financing for the real estate and communications industries and for businesses
and projects which are unable to access traditional lending sources, (ii)
providing construction financing for builders of single family residences,
(iii) originating, acquiring, warehousing, securitizing and servicing loans to
franchises with single franchise and multiple franchise operations, and other
small business owners, and (iv) equipment leasing and related financing
activities.
The Company is a Delaware corporation. The Company's principal
executive offices are located at and its mailing address is 700 North Pearl
Street, Suite 2400, Dallas, Texas 75201 and its telephone number at that
address is (214) 953-7700.
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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.
RISKS ASSOCIATED WITH RAPID GROWTH AND ENTRY IN NEW BUSINESS
In early 1994, the Company made the strategic decision to diversify
its business lines. The Company has entered the residential mortgage banking,
commercial mortgage banking, commercial finance and institutional real estate
investment advisory businesses through a combination of acquisitions and the
internal start-up of new business lines. These businesses recently have
contributed a substantial portion of the Company's operating profit and the
Company expects they will continue to contribute a substantial portion of its
revenue and operating income for the foreseeable future. The Company has also
increased its investments in Asset Portfolios. 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. An
inability to assimilate acquired businesses could have an adverse effect on the
Company's financial condition and results of operations. 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.
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. 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 and competitive
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 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 residential mortgage
banking, commercial mortgage banking and commercial finance securitization
businesses depend upon warehouse facilities with financial institutions or
institutional lenders to finance the Company's origination and 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.
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RISKS OF SECURITIZATION
Significance of Securitization. The Company currently believes that
it will become increasingly dependent upon its ability to securitize mortgage
loans and other 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 market for such loans 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 a securitization of its residential mortgage loans on at least a
quarterly basis and its commercial mortgage and commercial finance loans on at
least a semi-annual 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 the reporting period in which such sale is anticipated to occur would
delay any expected gain on sale and adversely affect the Company's reported
earnings for reporting period.
Investment in Subordinated Certificates. The Company invests in
Subordinated Certificates created in securitizations completed by the Company
or purchased from third parties. The Subordinated Certificates entitle the
holder to the excess of the interest and principal paid by borrowers on the
loans pooled in the securitization over the interest and principal passed
through to other investors in the securities created in the securitization
transaction, less the normal servicing and other fees and credit losses
realized. 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. These assumptions may not reflect actual future results.
Accordingly, no assurance can be given that these securities could in fact be
sold or recovered at their stated values on the balance sheet, if at all.
Contingent Risks. Although the Company sells substantially all the
mortgage loans and other 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
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.
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. In the
event of a breach of its representations, the Company may be required to
repurchase or replace the related loan using its own funds. While the Company
may have a claim against the originator in the event of a breach of any of
these representations made by the originators, the Company's ability to recover
on any such claim will be 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.
Importance of Credit Enhancement. To market residential
mortgage-backed, commercial mortgage-backed and commercial loan-backed
securities, the Company has in the past used various means of credit
enhancement to obtain a "AAA/Aaa" rating for such securities. In its
residential mortgage-backed and commercial loan-backed securitizations, the
Company has relied to a significant extent on monoline insurance companies to
provide such credit enhancement. Any unwillingness of
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monoline insurance companies to guarantee the senior interests in the Company's
loan pools could have a material adverse effect on the Company's financial
position and results of operations.
RISKS RELATED TO SUB-PRIME LOANS
The sub-prime 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.
SERVICING RISKS; BORROWER DELINQUENCIES AND CLAIMS
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, Subordinated Certificates and certain
other assets have 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 the carrying values of such assets, 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
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<PAGE> 11
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
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 interest in the related trusts
are priced on the basis of intermediate rates.
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 movements.
FOREIGN OPERATIONS; CURRENCY RISKS
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, Mexico 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.
CYCLICALITY OF AND COMPETITION IN THE ASSET MANAGEMENT BUSINESS
The asset management 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 as large pools of distressed
assets acquired by governmental agencies in the 1980's and early 1990's have
been resolved or sold. 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
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<PAGE> 12
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
residential mortgage banking, commercial mortgage banking and commercial
finance businesses and negatively impact its securitization activity.
In addition, periods of economic slowdown or recession, whether
general, regional or industry-related, may increase the risk of default on
mortgage loans and other 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
collateral.
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.
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
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<PAGE> 13
capitalized than the Company. Because of these resources, these companies may
be better able than the Company to obtain new customers, to acquire Asset
Portfolios, to pursue new business opportunities or to survive periods of
industry consolidation.
The Company is experiencing greater competition in its residential
mortgage banking business. The Company has experienced increasing competition
from other Conduit Purchasers in the acquisition of Sub-prime loan portfolios.
In addition, the Company expects to encounter significant competition in the
Sub-prime loan origination market.
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 businesses, 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 of capital for customers.
The Company also encounters significant competition in its other
business lines. 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.
ANTI-TAKEOVER CONSIDERATIONS
The Company's Restated Certificate of Incorporation, as amended, 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, super majority voting requirements on certain matters and prohibitions
against certain business combinations. The Indentures governing the Senior
Subordinated Notes and Senior Notes require the Company to repurchase all
outstanding Senior Subordinated Notes due 2003, Senior Subordinated Notes and
Senior Notes in the event of certain change of control transactions. In
addition, on May 28, 1997, the Company adopted a Stockholders Rights Plan
pursuant to which rights were distributed to stockholders of record as of June
9, 1997. The Stockholders Rights Plan provides, among other things, that if a
person (or group of affiliated or associated persons) acquires (or ten (10)
days after the commencement of a tender offer to acquire) "beneficial
ownership" of 15% or more of the outstanding shares of Common Stock, the rights
previously distributed to stockholders, other than those owned by such
acquiring person or group, will become exercisable. Under the Stockholders
Rights Plan, the acquisition of 15% or more of the outstanding Common Stock or
the completion of the tender offer will entitle the holder to purchase shares
of Common Stock having a market value equal to twice the purchase price of the
right. 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."
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<PAGE> 14
FORWARD-LOOKING STATEMENTS
This Prospectus and any Prospectus Supplement may contain or
incorporate by reference forward-looking statements. The factors identified
under "Risk Factors" are important factors (but not necessarily all important
factors) that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, the
Company (or its subsidiaries).
Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, the Company
cautions that, while such assumptions or bases are believed to be reasonable
and are made in good faith, assumed facts or bases almost always vary from
actual results, and the differences between assumed facts or bases and actual
results can be material, depending upon the circumstances. Where, in any
forward- looking statement, the Company (or its subsidiaries), or its
management, express an expectation or belief as to future results, such
expectation or belief is expressed in good faith and is believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe", "expect", "estimate", "project" and "anticipate" and similar
expressions identify forward-looking statements.
RECENT DEVELOPMENTS
COMMERCIAL LENDING CORPORATION ACQUISITION
On March 31, 1997, the Company purchased all of the outstanding
capital stock of CLC, an originator, securitizer and servicer of franchise and
commercial mortgage loans, for (i) 1,335,203 shares of Common Stock and (ii) an
additional number of shares of Common Stock issuable periodically based on the
operating performance of CLC from March 31, 1997 through March 31, 2000 (the
"CLC Earnout"). In addition, the Company acquired certain management contract
rights from CLC IO, a sister company of CLC, for (i) 600,336 shares of Common
Stock and (ii) an additional number of shares of Common Stock to be issued
after CLC's next securitization. On July 17, 1997, the Company issued an
additional 159,405 shares of Common Stock to CLC IO in connection with the
completion of CLC's first post-CLC Acquisition securitization and in
satisfaction of the Company's obligation to issue additional shares of Common
Stock to CLC IO.
OFFERING OF SENIOR SUBORDINATED NOTES DUE 2004
On March 12, 1997, the Company completed a public offering of $192.5
million aggregate principal amount of Senior Subordinated Notes due 2004. The
Senior Subordinated Notes due 2004 were registered pursuant to the Company's
$250.0 million shelf registration statement, which was declared effective by
the Securities and Exchange Commission on July 1, 1996. The Senior Subordinated
Notes offering was the second takedown from such shelf registration statement.
The first takedown was the $57.5 million offering of the Senior Notes. The
price to the public of the $192.5 million second takedown was 99.701% and the
underwriting discount was 2.75%. The net proceeds of the offering were used to
reduce outstanding bank borrowings. The Senior Subordinated Notes due 2004
mature on March 15, 2004 and are not redeemable prior to maturity. Interest on
the Senior Subordinated Notes due 2004 is payable semi-annually on March 15 and
September 15 of each year, at the rate of 10% per annum beginning September 15,
1997. The Senior Subordinated Notes due 2004 are not secured.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Common
Stock by the Selling Shareholders.
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<PAGE> 15
SELLING SHAREHOLDERS
This Prospectus covers offers from time to time by each Selling
Shareholder of the Common Stock owned by such person. The registration of the
shares of Common Stock offered for resale hereby is pursuant to the CLC
Registration Rights Agreement.
The following table lists the name of each Selling Shareholder, the
number of shares of Common Stock owned by each Selling Shareholder before this
Offering, the number of shares of Common Stock that may be offered by each
Selling Shareholder pursuant to this Prospectus and the number of shares of
Common Stock to be owned by each Selling Shareholder upon completion of the
Offering if all shares registered hereby are sold. The information below is as
of the date of this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF SHARES NUMBER OF SHARES
NAME OF SHARES OWNED BEING REGISTERED OWNED AFTER
SELLING SHAREHOLDER BEFORE THIS OFFERING FOR RESALE THIS OFFERING(1)
- ------------------- -------------------- ----------------- ------------------
<S> <C> <C> <C>
CLC IO, Inc. (2) 56,337 56,337 0
Lowell Fulkerson (2) (3) 489,388 225,851 263,537
Todd Lindsey (2) (3) 481,696 481,696 0
John Prehn (2) (3) 493,234 493,234 0
Peter Wachtell (2) (3) 493,234 493,234 0
Matt Moore (3) 81,055 40,000 41,055
--------- --------- -------
TOTAL 2,094,944 1,790,352 (4) 304,592
========= ========= =======
</TABLE>
__________________________
(1) Assumes all shares held by such Selling Shareholder and registered
hereby will be offered and sold.
(2) Mr. Fulkerson, Mr. Lindsey, Mr. Prehn and Mr. Wachtell each owns 25%
of the issued and outstanding shares of capital stock of CLC IO. For
purposes of the disclosure set forth in this table, each of the
foregoing individuals may be deemed to beneficially own the 56,337
shares of Common Stock owned of record by CLC IO. Messrs. Fulkerson,
Lindsey, Prehn and Wachtell each disclaims beneficial ownership of CLC
IO's shares of Common Stock. The information set forth in this table
for Messrs. Fulkerson, Lindsey, Prehn and Wachtell does not reflect
ownership by such individuals of any shares of Common Stock owned of
record by CLC IO. CLC IO may transfer (by dividend or other
distribution) some or all of its shares of Common Stock to Messrs.
Fulkerson, Lindsey, Prehn and Wachtell. This Prospectus also covers
sales of such shares by such individuals. On May 9, 1997, CLC IO
declared a dividend of an aggregate of 544,000 shares of Common Stock,
thus distributing 136,000 shares of Common Stock to each of Mr.
Fulkerson, Mr. Lindsey, Mr. Prehn and Mr. Wachtell, respectively. The
information set forth in this table reflects such transactions.
(3) Certain Selling Stockholders, other than CLC IO, may transfer some or
all of their shares of Common Stock into trusts, limited partnerships
or other limited liability entities, in which case, sales of the
Common Stock may be made by such trusts, limited partnerships or other
limited liability entities. This Prospectus also covers any sales of
Common Stock by such trusts, limited partnerships or other limited
liability entities.
(4) This Prospectus relates to an aggregate of 1,790,352 shares of Common
Stock, 1,590,947 of which previously were registered on Registration
Statement No. 333-25353. As of the date hereof, the Selling
Shareholders had sold an aggregate of 246,000 shares of Common Stock
pursuant to the Prospectus contained in Registration Statement No.
333-25353. The information set forth in this table does not reflect
such sales.
On March 31, 1997, the Company issued shares of Common Stock to the
Selling Shareholders in connection with the acquisition by the Company of all
the outstanding capital stock of CLC and certain management contract rights
from CLC IO, a sister company of CLC. See "RECENT DEVELOPMENTS -- Commercial
Lending Corporation Acquisition" for a more complete description of this
transaction. In connection with the CLC Acquisition, the Company agreed to
register for sale under the Securities Act the shares of Common Stock acquired
by the Selling Shareholders pursuant
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<PAGE> 16
to the CLC Acquisition. The Company and the Selling Shareholders also agreed
to indemnify each other against certain civil liabilities under the Securities
Act. See "DESCRIPTION OF CAPITAL STOCK -- Registration Rights" for a more
complete description of the foregoing registration rights.
On July 17, 1997, the Company issued an additional 159,405 shares of
Common Stock to CLC IO pursuant to a post- closing adjustment provided for in
the transaction agreements relating to the CLC Acquisition. Effective August
1, 1997, CLC IO distributed 159,404 of such shares to CLC IO's shareholders as
follows: 39,851 shares to Mr. Fulkerson, 39,851 shares to Mr. Lindsey, 39,851
shares to Mr. Prehn and 39,851 shares to Mr. Wachtell. CLC IO retained one
such share of Common Stock to avoid the issuance of fractional interests
therein. See "RECENT DEVELOPMENTS -- Commercial Lending Corporation
Acquisition" for a more complete description of the CLC Acquisition.
Messrs. Fulkerson, Lindsey, Prehn, Wachtell and Moore owned all of the
outstanding capital stock of CLC prior to the CLC Acquisition. Messrs.
Fulkerson, Lindsey, Prehn, Wachtell and Moore each was a director and officer
of CLC. Messrs. Fulkerson, Lindsey, Prehn and Moore each continues to serve
(pursuant to respective employment agreements with the Company) as an officer
of CLC, which now is a wholly-owned subsidiary of the Company. Mr. Wachtell
now serves as a consultant to CLC pursuant to a consulting agreement with the
Company. Messrs. Fulkerson, Lindsey, Prehn and Wachtell are stockholders of
CLC IO.
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<PAGE> 17
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 150,000,000 shares of Common Stock
and 5,000,000 shares of Preferred Stock. As of August 29, 1997, the Company
had issued and outstanding 36,404,662 shares of Common Stock and no shares of
Preferred Stock. As of such date, there were approximately 2,800 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 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. Since October 1995, the Company has not paid cash
dividends. The Board of Directors currently intends 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 and the
indentures governing certain of the Company's debt securities 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 additional shares or series of
Preferred Stock which may then be outstanding. There are no preemptive rights,
conversion rights, or redemption or sinking fund provisions with respect to the
shares of Common Stock. All of the outstanding shares of Common Stock are duly
and validly authorized and issued, fully paid and non-assessable.
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
shareholders. With respect to any act or action required of or by the holders
of the Common Stock, the affirmative vote of a majority of the shares of Common
Stock present in person or represented by proxy at a meeting and entitled to
vote thereon is sufficient to authorize, affirm, ratify or consent to such act
or actions, except as otherwise provided by law or in the Certificate of
Incorporation. The DGCL requires the approval of the holders of a majority of
the outstanding stock entitled to vote for certain extraordinary corporate
transactions, such as a merger, sale of substantially all assets, dissolution
or amendment of the Certificate of Incorporation. 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
shareholders, 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
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<PAGE> 18
rates, 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. In connection with the
Stockholder Rights Plan described below, the Board of Directors has authorized
the issuance of 100,000 shares of Series A Preferred Stock. As of September
18, no shares of Series A Preferred Stock have been issued. Although the Board
of Directors has no intention at the present time of doing so, it could cause
the issuance of additional shares or series of Preferred Stock that could
discourage an acquisition attempt or other transaction that some, or a majority
of, the shareholders might believe to be in their best interest or in which the
shareholders might receive a premium for their shares of Common Stock over the
market price of such shares.
STOCKHOLDER RIGHTS PLAN
On May 28, 1997, the Board of Directors of the Company declared a
dividend of one right to purchase one one- thousandth of a share of Series A
Preferred Stock (a "Right") for each outstanding share of Common Stock to the
holders of record on June 9, 1997 and authorized and directed the issuance of
one Right with respect to each share of Common Stock that shall become
outstanding prior to the occurrence of certain terminating events. The Rights
were issued with a purchase price of $125 per one one-thousandth of a share of
Series A Preferred Stock (the "Purchase Price"). Currently, the Rights trade
with the shares of Common Stock. The description and terms of the Rights are
set forth in a Rights Agreement (the "Rights Agreement") between the Company
and The Bank of New York, as Rights Agent (the "Rights Agent").
The Purchase Price, the number and kind of shares covered by each
Right and the number of Rights outstanding are subject to adjustment from time
to time to prevent dilution upon the occurrence of certain events described in
the Rights Agreement. The Rights will separate from the Common Stock upon the
earlier of (i) ten (10) business days following a public announcement that a
person or group of affiliated or associated persons (an "Acquiring Person") has
acquired, or obtained the right to acquire, beneficial ownership of fifteen
percent (15%) or more of the outstanding shares of Common Stock (the "Stock
Acquisition Date"), or (ii) ten (10) business days (or such later date as the
Board of Directors shall determine) following the commencement of a tender or
exchange offer that would result in a person or group beneficially owning
fifteen percent (15%) or more of such outstanding shares of Common Stock. The
date the Rights separate is referred to as the "Distribution Date." The Rights
are not exercisable until the Distribution Date and will expire at the close of
business on June 9, 2007, unless earlier redeemed by the Company as described
below. As soon as practicable after the Distribution Date, Rights
Certificates will be mailed to holders of record of the Common Stock as of the
close of business on the Distribution Date and, thereafter, the separate Rights
Certificates will represent the Rights.
In the event that (i) the Company is the surviving corporation in a
merger or other business combination with an Acquiring Person (or any associate
or affiliate thereof) and its Common Stock remains outstanding and unchanged,
(ii) any person shall acquire beneficial ownership of more than fifteen percent
(15%) of the outstanding shares of Common Stock (except pursuant to (A) certain
consolidations or mergers involving the Company or sales or transfers of the
combined assets, cash flow or earning power of the Company and its subsidiaries
or (B) an offer for all outstanding shares of Common Stock at a price and upon
terms and conditions which a majority of the Disinterested Directors (as
defined below) determines to be in the best interests of the Company and its
stockholders), or (iii) there occurs a reclassification of securities, a
recapitalization of the Company or any of certain business combinations or
other transactions (other than certain consolidations and mergers involving the
Company and sales or transfers of the combined assets, cash flow or earning
power of the Company and its subsidiaries) involving the Company or any of its
subsidiaries which has the effect of increasing by more than 1% the
proportionate share of any class of the outstanding equity securities of the
Company or any of its subsidiaries beneficially owned by an Acquiring Person
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<PAGE> 19
(or any associate or affiliate thereof), each holder of a Right (other than the
Acquiring Person and certain related parties) will thereafter have the right to
receive, upon exercise, Common Stock (or, in certain circumstances, cash,
property or other securities of the Company) having a value equal to two times
the Purchase Price of the Right. However, Rights are not exercisable following
the occurrence of any of the events described above until such time as the
Rights are no longer redeemable by the Company as described below.
Notwithstanding any of the foregoing, following the occurrence of any of the
events described in this paragraph, all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by
any Acquiring Person will be null and void.
In the event that, at any time following the Stock Acquisition Date,
(i) the Company enters into a merger or other business combination transaction
in which the Company is not the surviving corporation, (ii) the Company is the
surviving corporation in a consolidation, merger or similar transaction
pursuant to which all or part of the outstanding shares of Common Stock are
changed into or exchanged for stock or other securities of any other person or
cash or any other property or (iii) more than 50% of the combined assets, cash
flow or earning power of the Company and its subsidiaries is sold or
transferred (in each case other than certain consolidations with, mergers with
and into, or sales of assets, cash flow or earning power by or to subsidiaries
of the Company as specified in the Rights Agreement), each holder of a Right
(except Rights which previously have been voided as set forth above) shall
thereafter have the right to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the Purchase Price of the
Right. The events described in this paragraph and in the preceding paragraph
are referred to as "Triggering Events."
At any time after any person or group becomes an Acquiring Person and
prior to the acquisition by such person or group of 50% or more of the
outstanding shares of Common Stock, the Board of Directors of the Company may,
without payment of the Purchase Price by the holder, exchange the Rights (other
than Rights owned by such person or group, which will become void), in whole or
in part, for shares of Common Stock at an exchange ratio of one-half the number
of shares of Common Stock (or in certain circumstances Preferred Stock) for
which a Right is exercisable immediately prior to the time of the Company's
decision to exchange the Rights (subject to adjustment).
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
in a manner which causes the Rights to become exercisable. The Company
believes, however, that the Rights should neither affect any prospective
offeror that is willing to negotiate with the Board of Directors of the Company
nor interfere with any merger or other business combination approved by the
Board of Directors of the Company. At any time until 10 business days following
the Stock Acquisition Date, the Company may redeem the Rights in whole, but not
in part, at a price of $0.001 per Right (payable in cash, shares of Common
Stock or other consideration deemed appropriate by the Board of Directors).
Other than those provisions relating to the principal economic terms
of the Rights, any of the provisions of the Rights Agreement may be amended by
the Board of Directors of the Company prior to the Distribution Date; provided,
that any amendments after the Stock Acquisition Date must be approved by a
majority of the Disinterested Directors. The term "Disinterested Director"
means any member of the Board of Directors of the Company who was a member of
the Board prior to the date of the Rights Agreement, and any person who is
subsequently elected to the Board if such person is recommended or approved by
a majority of the Disinterested Directors, but shall not include an Acquiring
Person, or an affiliate or associate of an Acquiring Person, or any
representative of the foregoing entities. After the Distribution Date, the
provisions of the Rights Agreement may be amended by the Board in order to cure
any ambiguity, inconsistency or defect, to make changes which do not adversely
affect the interest of holders of Rights (excluding the interest of any
Acquiring Person) or to shorten or lengthen any time period under the Rights
Agreement; provided, however, that no amendment to adjust the time period
governing redemption shall be made at such time as the
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Rights are not redeemable; and, provided, that any amendments after the Stock
Acquisition Date must be approved by a majority of the Disinterested Directors.
Copies of the Rights Agreement are also available free of charge from
the Rights Agent. The foregoing description of the Rights does not purport to
be complete and is qualified in its entirety by reference to the Rights
Agreement.
DELAWARE LAW AND CERTAIN CORPORATE PROVISIONS
The Company is subject to the provisions of Section 203 of the DGCL.
In general, this statute prohibits a publicly-held Delaware corporation from
engaging, under certain circumstances, in a "business combination" with an
"interested shareholder" for a period of three years after the date of the
transaction in which the person becomes an interested shareholder, unless
either (i) prior to the date at which the shareholder became an interested
shareholder the Board of Directors approved either the business combination or
the transaction in which the person became an interested shareholder, (ii) the
shareholder 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
shareholder became an interested shareholder 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
shareholder) at a meeting of the shareholders (and not by written consent) held
on or subsequent to the date on which the person became an "interested
shareholder" of the business combination. An "interested shareholder" 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 and the affiliates and associates of such person.
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 shareholder.
The Company's Certificate of Incorporation and Bylaws contain a number
of provisions relating to corporate governance and to the rights of
shareholders. 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 shareholders 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 shareholder 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; and
(viii) a requirement that any business combinations between the Company and a
beneficial owner of more than five percent of any class of an equity security
of the Company must be approved by the holders of a majority of the Company's
securities, excluding those securities held by such beneficial owner, voted at
a meeting called for the purpose of approving such business combination.
INDEMNIFICATION AND LIMITED LIABILITY
The Company's Certificate of Incorporation and Bylaws require the
Company to indemnify the directors and officers of the Company to the fullest
extent permitted by law. In addition, as permitted by the DGCL, the Company's
Certificate of Incorporation and Bylaws provide that no director of the Company
will be personally liable to the Company or its shareholders for monetary
damages for such
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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 shareholders, (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 shareholder who is dissatisfied with a decision of the
Board of Directors protected by this provision, and such shareholder's only
remedy in that circumstance may be to bring a suit to prevent the action of the
Board of Directors. In many situations, this remedy may not be effective,
including instances when shareholders 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 executive 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
In connection with the CLC Acquisition, the Company entered into an
agreement granting registration rights (the "CLC Registration Rights
Agreement") to (i) the former owners of CLC, including the Selling
Shareholders, and (ii) CLC IO. Pursuant to the CLC Registration Rights
Agreement, these holders may exercise demand or "piggyback" registration rights
with respect to shares of Common Stock paid to them at the closing of the CLC
Acquisition or subsequently paid to them pursuant to the CLC Earnout. The
Company is obligated to register Common Stock up to three times pursuant to the
demand registration rights provisions of the CLC Registration Rights Agreement.
The registration rights cease to apply to shares of Common Stock when such
shares (i) have been effectively registered under the Securities Act and sold
or distributed pursuant to an effective registration statement or (ii) have
become eligible to be sold or distributed pursuant to Rule 144 (within the
then-applicable volume limitation pursuant to Rule 144(e)) or Rule 144(k).
These registration rights are subject to certain conditions and limitations,
including the right of underwriters to restrict the number of shares offered in
a "piggyback" registration.
In addition, the Company has entered into an agreement granting
registration rights (the "Prior Registration Rights Agreement") with certain
holders of Common Stock including Mr. James P. Cotton, Jr. and Mr. Gerald E.
Eickhoff (both of whom are directors of the Company). Pursuant to the Prior
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 Prior Registration Rights Agreement has a term
of three years for demand registration rights and five years 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 quoted as a national market security by the NASDAQ
Stock Market, Inc. The Common Stock is identified as such market by the symbol
"AMMB." The Bank of New York, New York, New York, is the transfer agent and
registrar for the Common Stock.
PLAN OF DISTRIBUTION
The shares of Common Stock covered hereby may be offered and sold from
time to time by the Selling Shareholders. The Selling Shareholders will act
independently of the Company in making decisions with respect to the timing,
manner and size of each sale. Such sales may be made in the
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over-the-counter market or otherwise, at market prices prevailing at the time
of the sale, at prices related to the then prevailing market price or in
negotiated transactions, including pursuant to an underwritten offering or
pursuant to one or more of the following methods: (i) purchases by a
broker-dealer as principal and resale by such broker or dealer for its account
pursuant to this Prospectus; (ii) ordinary brokerage transactions and
transactions in which a broker solicits purchasers; and (iii) block trades in
which a broker-dealer so engaged will attempt to sell the shares as agent but
may take a position and resell a portion of the block as principal to
facilitate the transaction. In effecting sales, broker-dealers engaged by the
Selling Shareholders may arrange for other broker-dealers to participate.
Broker- dealers may receive commissions or discounts from the Selling
Shareholders in amounts to be negotiated immediately prior to the sale.
In connection with the sale of shares of Common Stock covered hereby,
underwriters or agents may receive compensation from the Selling Shareholders
or from purchasers of the shares of Common Stock covered hereby for whom they
may act as agents, in the form of discounts, concessions or commissions.
Underwriters may sell shares of Common Stock to or through dealers and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they act as agents. Underwriters, dealers and agents that participate in
the distribution of shares of Common Stock covered hereby may be deemed to be
underwriters, and any discounts or commissions received by them from the
selling Shareholders and any profit on the resale of shares of Common Stock by
them may be deemed to be underwriting discounts and commissions under the
Securities Act.
The CLC Registration Rights Agreement provides that the Company will
indemnify the Selling Shareholders against certain liabilities, including
liabilities under the Securities Act.
This Offering will terminate on the earlier of (i) the date on which
all shares offered hereby have been sold by the Selling Shareholders or (ii)
the 120th day after the date hereof.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be
passed upon for the Company by L. Keith Blackwell, General Counsel of the
Company. Mr. Blackwell currently owns beneficially 8,904 shares of Common
Stock (excluding 10,501 unvested shares allocated under the Company's
restricted stock plan) and holds options to purchase 46,165 shares of Common
Stock.
EXPERTS
The consolidated financial statements incorporated in this prospectus
by reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report which is incorporated herein by reference
and has been so incorporated in reliance upon 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, 1995
and 1996, and the consolidated statements of income, stockholders' equity and
cash flows for each of the two years in the period ended September 30, 1996,
incorporated by reference in this Prospectus, have been incorporated by
reference 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.
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