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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-8630
AMRESCO, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 59-1781257
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
700 N. PEARL ST. STE 2400 LB 342 DALLAS, TX. 75201-7424
(Address of principal executive offices) (zip code)
</TABLE>
Registrant's telephone number, including area code: (214) 953-7700
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
10% Senior Subordinated Notes due 2003 New York Stock Exchange
8.75% Senior Notes due 1999 New York Stock Exchange
10% Senior Subordinated Notes due 2004 New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Shares of common Stock, par value $0.05 per share
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
As of March 21, 1997, 33,876,591 shares of the registrants common
stock were outstanding. The aggregate market value of the voting stock held by
non-affiliates of the registrant, computed by reference to the closing price of
such stock as of March 21, 1997, was approximately $502,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed for the
Annual Meeting of Shareholders to be held on May 28, 1997, are incorporated by
reference in Part III hereof.
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PART I
ITEM 1. BUSINESS
General
AMRESCO, INC. (the "Company") is a leading specialty financial
services company engaged in residential mortgage banking, commercial mortgage
banking, asset management, institutional real estate investment advisory
services and commercial finance. The residential mortgage banking business
involves originating, acquiring, warehousing and securitizing Sub-prime Loans
(see "Certain Definitions" for a listing of the defined terms used herein).
The commercial mortgage banking business involves the origination,
underwriting, placement, sale, securitization and servicing of commercial real
estate mortgages. The asset management 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 Company's institutional real estate investment
advisory subsidiary provides real estate investment advice to various
institutional investors (primarily pension funds). The commercial finance
business involves providing high yield debt financing for businesses and
projects which are unable to access traditional lending sources and providing
construction loans for builders of single family residences. Financial
information regarding the Company is presented in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Item 8. Financial Statements and Supplementary Data."
Background
History. The Company, a Delaware corporation organized in 1977, 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 $35.0 billion (Face Value) of Asset Portfolios.
Since the BEI Merger, the Company has expanded its operations into the
residential and commercial mortgage banking, institutional real estate
investment advisory and commercial finance 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 leverage upon 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:
# growing its participation in the origination, acquisition and
securitization of residential mortgage Sup-prime Loans;
# 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;
# investing 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;
# expanding its institutional real estate investment advisory business to
complement the Company's existing business lines; and
# developing and 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 leverage upon 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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Recent Developments
On March 21, 1997, the Company entered into a definitive stock and
asset purchase agreement among Commercial Lending Corporation and certain of
its affiliates ("CLC") pursuant to which the Company would acquire the
operations and certain assets of CLC. CLC's primary line of business is
originating, securitizing and servicing franchise loans. The acquisition
should enhance and complement the Company's commercial finance group. The
purchase price consists of (i) approximately 1.9 million shares of the
Company's common stock, (ii) the assumption of certain liabilities estimated at
$14,000,000 and (iii) contingent earnout payments of additional shares of the
Company's common stock based upon the operating performance of the acquired
entities through March 31, 2000. The consumation of the transaction is subject
to satisfaction of certain conditions. The transaction is expected to close in
late March 1997.
Residential Mortgage Banking Business
General. Through AMRESCO Residential, 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. For the year ended December 31,
1996 and 1995, $27.8 million (32.3%) and $0.6 million (1.2%), respectively, of
the Company's operating profits (before corporate and other's operating loss)
were attributable to the Company's residential mortgage banking business.
Sub-prime Loan Origination. The Company recently entered the
Sub-prime loan origination business through its acquisition of Quality, which
originated over $5.0 billion of residential loans since the commencement of
that business in 1992. The Company originates Sub-prime Loans through a
nationwide network of approximately 50 branch offices in 32 states, which
enables the Company to maintain local relationships with over 4,500
Company-approved mortgage brokers. This branch structure and large independent
broker network allow the Company to obtain economic efficiencies associated
with a wholesale mortgage origination business without paying premium prices
for closed loans. The Company augments its branch office structure with a
complementary telemarketing division, which works with mortgage brokers in
locations where the Company does not maintain a geographic presence through its
existing branch network and markets loan programs to homeowners through
direct-response marketing. This telemarketing approach permits the Company to
expand its geographic penetration without incurring the cost of establishing
new offices.
The Company underwrites and funds substantially all mortgage loans on
its own behalf. The Company employs appraisers who conduct a majority of all
appraisal reviews. Other appraisal reviews are performed by independent
appraisers approved by the Company, and are subsequently reviewed by the
Company. Substantially all of the loans that are originated by the Company are
secured by first mortgages on residential properties.
Wholesale Loan Acquisition. Before the Quality Acquisition, the
Company exclusively acquired Sub-prime Loan portfolios from third-party
originators in large wholesale transactions. While the Company currently
expects to continue to obtain a majority of its Sub-prime Loans in this manner,
the Company has expanded and diversified its sources of Sub-prime Loans. In
addition to its recent entry into the Sub-prime Loan origination business, the
Company has formed a wholesale conduit division through which it acquires
individual or small portfolios of closed loans directly from loan originators.
Securitization. The Company warehouses the loans it originates and
purchases for securitization. During 1996, the Company securitized
approximately $1.8 billion in residential mortgages (including pre-funded loans
of $142.0 million) in five public offerings of asset-backed securities. Loan
originations and acquisitions are funded through warehouse credit facilities
arranged by the Company until the Company accumulates loans of an aggregate
principal amount sufficient to permit efficient securitization of the loan pool
(generally, in excess of $250.0 million). 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 also acquires Subordinated Certificates from Sub-
prime, jumbo and non-standard residential mortgage securitizations organized by
third parties. The mortgage-backed securities publicly sold to date by the
Company have been rated "AAA" by Standard & Poor's and "Aaa" by Moody's
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Investors Service, Inc. To achieve these ratings the Company has used a
combination of over-collateralization techniques and financial guaranty
insurance.
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 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 December 31, 1996, AMRESCO Residential had an aggregate
borrowing capacity of $1.2 billion under three warehouse facilities of which
$912.8 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 "Retained Interests in
Securitizations-trading" in the Company's Consolidated Balance Sheet). 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 holders of the related Subordinated
Certificates. The remaining cash flows on Subordinated Certificates purchased
by the Company represent a substantial portion of the Company's revenues.
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.
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.
The Company initially retains the Subordinated Certificates. In 1996,
the Company completed the private sale of certain Subordinated Certificates for
net proceeds of approximately $44.0 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.
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Servicing. The Company does not currently service the loans
originated, acquired or securitized by it. When the originator does not retain
servicing rights, the Company selects third-party servicers experienced in
servicing Sub- prime 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 its 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.
Commercial Mortgage Banking Business
General. The Company performs a wide range of commercial mortgage
banking services, including originating, underwriting, placing, selling and
servicing commercial real estate loans through its Holliday Fenoglio, ACC and
AMRESCO Services commercial mortgage banking units. For the year ended
December 31, 1996 and 1995, $14.5 million (16.9%) and $6.0 million (12.0%),
respectively, of the Company's operating profits (before corporate and other's
operating loss) 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 and acting as a broker on commercial real estate sales. Holliday
Fenoglio originated approximately $2.7 billion and $2.0 billion of commercial
real estate loans during 1996 and 1995, respectively. 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, Orange
County (California), Orlando, Portland (Oregon) and San Diego. The loans
originated by Holliday Fenoglio generally are funded by institutional lenders,
primarily insurance companies, and by Conduit Purchasers. The Company
estimates that Holliday Fenoglio has retained the Primary Servicer rights on
approximately 36% of such loans over the last three years. The Company acted
as a broker on commercial real estate sales of approximately $393 million and
$194 million during 1996 and 1995, respectively. 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.
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ACC, which originated and underwrote approximately $632.0 million and
$447.1 million of commercial real estate mortgages during 1996 and 1995,
repectively is a mortgage banker that originates and underwrites commercial
real estate loans that are funded primarily by Conduit Purchasers and Fannie
Mae. Unlike Holliday Fenoglio, ACC makes certain representations and
warranties concerning the loans it originates. These representations cover
title to the property, lien priority, environmental reviews and certain other
matters. ACC targets mortgage loans for commercial real estate properties
suitable for sale to Conduit Purchasers that accumulate loans for
securitization programs. ACC has established a financing and advisory
relationship with a major Wall Street investment bank whereby ACC originates
commercial mortgages, that are funded and securitized by a limited partnership
in which ACC is a 50% owner. Through this relationship, ACC shares equally 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. The Company
accounts for the limited partnership on the equity basis of accounting. 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 40 independent mortgage brokers located throughout the United
States. Through December 31, 1996, approximately 55% 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 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 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 Company has established relationships with over 200 institutional
lenders that include insurance companies, pension plans and Conduit Purchasers.
In 1996 and 1995, the Company placed 561 and 427 loans with approximately 109
and 82 different lenders, respectively. 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. In October 1996, the
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Company received the first public "above average" commercial Master Servicer
rating ever awarded by Standard & Poors. At December 31, 1996, the Company
acted as servicer with respect to approximately $14.1 billion of loans. 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. 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 December 31, 1996, the
Face Value of the Company's Primary Servicing portfolio totaled approximately
$3.3 billion.
Master Servicing involves providing administrative and reporting
services to securitized pools of mortgage- backed securities. Typically,
mortgages underlying mortgage-backed securities are serviced by a number of
Primary Servicers. Under most master servicing arrangements, the Primary
Servicers retain principal responsibility for administering the mortgage loans
and the Master Servicer acts as an intermediary in overseeing the work of the
Primary Servicers, monitoring their compliance with the issuer's standards and
consolidating their respective periodic accounting reports for transmission to
the issuer of the related securities. The Company occasionally is designated
as the Full Servicer for a pool of mortgages, in which case the Company acts as
Master, Primary and Special Servicer for the pool. Master/Full Servicers are
typically paid fees based on the Face Value of loans under management, and the
compensation is determined by a bidding and negotiating process. At December
31, 1996, the Face Value of the Company's Master/Full Servicing portfolio
totaled approximately $10.8 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.
Asset Management Business
General. 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. For the year ended December 31, 1996 and 1995, $42.4 million
(49.3%) and $43.5 million (86.7%), respectively, of the Company's operating
profits (before corporate and other's operating loss) were attributable to the
Company's asset management business.
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. Asset Portfolios purchased by the Company are currently comprised
primarily 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. The Company does not invest in Asset Portfolios with known
environmental liabilities, unless an Asset Portfolio contains identifiable
environmental risks that can be quantified and discounted appropriately.
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
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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 an active 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 16 persons and London (October 1995)
employing 6 persons, each at December 31, 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 $256.4 million (Face Value) in Canadian Asset Portfolios and $350.6
million (Face Value) in United Kingdom Asset Portfolios under management as of
December 31, 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 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.
Asset Portfolio Investment. The Company invests in Asset Portfolios
by purchasing them alone or with co- investors. As of December 31, 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
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
7
<PAGE> 9
for such assets). The Company also reviews information on the local economy
and real estate markets in the area in which the loan collateral is located.
Because of its broad, nationwide experience in managing assets, the Company
often is able to draw on its asset management experience in the specific market
in which an asset is located. Unlike the original lender, the Company values
Asset Portfolio loans based on the present value of estimated total cash flow
from resolution, with the expectation that the loans will be resolved prior to
scheduled maturity. 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 December 31, 1996, the Company had paid an average purchase price of 54.2%
of the aggregate Face Value on all of its Asset Portfolios.
When an Asset Portfolio is acquired (whether for the Company's own
account or with co-investors), the Company assumes the management of the loans
in that portfolio. Management includes responsibility both for servicing and
for resolving such loans. The Company's asset managers are given the
supporting due diligence information and projections relating to each newly
acquired loan for which the manager assumes management responsibility. Because
asset managers are actively involved in the Asset Portfolio evaluation process,
it is not unusual for an asset manager to be given management responsibility
for the specific loans that the asset manager assisted in evaluating in the due
diligence or pricing processes. The Company believes that by combining the
resolution and evaluation activities 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 in 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 December 31, 1996, the geographic
dispersion of each primary asset securing the loans in the Asset Portfolios in
which the Company had invested (whether for its own account or with
co-investors) was as follows:
<TABLE>
<CAPTION>
Face Value
(in millions) % of Total Number of Assets % of Total
------------- ---------- ---------------- -----------
<S> <C> <C> <C> <C>
Northeast ...................................... $ 379.7 26.9% 926 43.1%
West ........................................... 469.9 33.4 422 19.0
Southwest ...................................... 165.2 11.7 386 17.4
Midwest ........................................ 60.2 4.3 44 2.0
Southeast ...................................... 227.7 16.2 309 14.0
------------- ---------- ---------------- -----------
United States Subtotal ...................... 1,302.7 92.5 2,087 95.5
Canada ......................................... 22.5 1.6 58 2.6
UK ............................................. 83.0 5.9 41 1.9
------------- ---------- ---------------- -----------
Total ....................................... $ 1,408.2 100.0% 2,186 100.0%
============ ========== =============== ===========
</TABLE>
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
8
<PAGE> 10
generally sought by the Company. Asset Portfolios composed primarily of real
estate loans typically are larger and the Company's investments in such
portfolios usually are made with co-investors. At December 31, 1996, the Face
Value of the Company's total investment in wholly-owned Asset Portfolios
aggregated approximately $572.2 million, which was composed of approximately
$423.0 million (73.9%) of collateralized business loans, approximately $122.8
million (21.5%) of asset-backed securities, approximately $8.1 million (1.4%)
of real estate owned and approximately $18.3 million (3.2%) of real estate
loans.
In addition, as of December 31, 1996, the Asset Portfolios in which
the Company had invested (whether for its own account or with co-investors)
included approximately 2,186 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.
Third Party Asset Management and Resolution Services. The Company
acts as a Special Servicer 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 December 31, 1996, covered Asset Portfolios with
an aggregate Face Value of approximately $1.4 billion. These contracts
generally provide for the payment of all or a combination 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 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
December 31, 1996, the Company was the designated Special Servicer for
securitized pools holding approximately $10.0 billion (Face Value) of loans,
$618.0 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.
Institutional Real Estate Investment Advisory Services Business
General. 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
9
<PAGE> 11
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. For the year ended December 31, 1996,
$0.6 million (0.7%) of the Company's operating profits (before corporate and
other's operating loss) were attributable to the Company's institutional real
estate investment advisory services business. As a result of the commencement
of this unit in late 1995, its operating profits in 1995 were insignificant.
Investment Funds. The Company is marketing to institutional investors
the opportunity to invest in Subordinated Certificates issued in commercial and
residential mortgage securitizations through investment funds being organized
by the Company. The Company anticipates that its equity investment would range
between 10.0% and 20.0% 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 management, commercial mortgage banking and
residential mortgage banking 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 Company expects that a majority of its investments in these Subordinated
Certificates in the future will be through these funds. As a policy, the
Company will not sell to these funds Subordinated Certificates created in
securitizations organized by the Company. The funds will be marketed through
the Company's institutional real estate investment advisory group.
Commercial Finance Business
General. The Company's commercial finance business was formally
commenced in 1996 and has not contributed materially to the Company's revenues
or net income to date. However, the Company intends to expand its commercial
finance business through acquisitions of targeted niche finance companies and
internal start-ups. For the year ended December 31, 1996, $0.7 million (0.8%)
of the Company's operating profits were attributable to the Company's
commercial finance business.
Special Situation Lending. The Company currently provides high yield
debt financing for businesses and projects which are unable to access
traditional lending sources. In such transactions, the Company funds senior
and subordinated indebtedness on a relatively short term basis for borrowers
with an established management record. The Company funds only those loans with
defined exit strategies, such as bridge loans, mezzanine debt financing or
construction loans. Loans are often extended for the purpose of turning around
or repositioning assets the value of which has not been maximized by the prior
owners. Borrowers targeted by the Company typically have a reputation for
enhancing value, but may lack the financial capacity to qualify for bank
financing beyond a certain level. High yield lenders such as the Company fill
this gap, earning equity-type returns through a combination of high interest
yields, fees and equity participations. The Company has teamed with a Wall
Street investment bank as one means of providing such high yield debt
financing.
Construction Finance. In the first quarter of 1997, the Company hired
an experienced team formerly with a Texas-based financial institution to form
its construction finance unit. Through this unit, the Company provides
construction financing for builders of single family residences. Before
providing such financing, the Company analyzes the builder, the specific
subdivision and the specific home to be built. In following this process, the
Company intends to target strong and growing markets and reputable builders of
basic single family residences who are successful and active in such markets.
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 Sub-prime 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
10
<PAGE> 12
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 encountered increased 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 is 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.
Employees
At December 31, 1996, the Company and its subsidiaries employed 1,275
persons. Of that total, 530 persons were employed in the Company's residential
mortgage banking group, 349 in the Company's commercial mortgage banking group,
210 in its asset management group, 32 in its institutional real estate
investment advisory business, 15 in its commercial finance business and 139 in
general administration. The Company believes that its employee relations are
generally good.
Certain Definitions
The following are certain defined terms used herein:
"ACACIA" means Acacia Realty Advisors, Inc.
"ACC" means AMRESCO Capital Corporation, a subsidiary of the Company.
"AMRESCO RESIDENTIAL" means, collectively, ARCMI, ARMC and AMRESCO
Residential Credit Corporation, subsidiaries of the Company.
"AMRESCO SERVICES" means a division of AMRESCO Management, Inc., a
subsidiary of the Company.
"ARCMI" means, AMRESCO Residential Capital Markets, Inc., a subsidiary
of the Company.
"ARMC" means, AMRESCO Residential Mortgage Corporation, an indirect
subsidiary of the Company through which the Company acquired substantially all
the operating assets of Quality.
"ASSET PORTFOLIO" means a pool or portfolio of performing,
non-performing or underperforming commercial, industrial, agricultural and/or
real estate loans.
"BEI" means BEI Holdings, Ltd.
"BEI MERGER" means the merger of Holdings with and into a subsidiary
of BEI on December 31, 1993.
"CGW" means, collectively, CGW Southwest Partners I, L.P. and CGW
Southeast Partners II, L.P.
"COMPANY" means, unless otherwise stated herein or unless the context
otherwise requires, the Company and each of its subsidiaries.
"CONDUIT PURCHASERS" means investment bankers and other financial
intermediaries who purchase or otherwise accumulate pools or portfolios of
loans having common features (e.g., real estate mortgages, etc.), with the
intent of securitizing such loan assets and selling them to a trust that
secures its funds by selling ownership interests in the trust to public or
private investors.
11
<PAGE> 13
"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.
"HOLDINGS" means AMRESCO Holdings, Inc.
"HOLLIDAY FENOGLIO" means Holliday Fenoglio, Inc., a subsidiary of the
Company.
"MASTER SERVICER" means an entity which provides administrative
services to securitized pools of mortgage-backed securities.
"NATIONSBANK OF TEXAS" means NationsBank of Texas, N.A.
"PRIMARY SERVICER" means an entity which provides various
administrative services for loans such as collecting monthly mortgage payments,
maintaining escrow accounts for the payment of ad valorem taxes and insurance
premiums on behalf of borrowers, remitting payments of principal and interest
promptly to investors in mortgages or the Master Servicer of a pool and
reporting to those investors or the Master Servicer on financial transactions
related to such mortgages.
"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.
"REVOLVING LOAN AGREEMENT" means the Second Amended and Restated
Revolving Loan Agreement dated as of February 7, 1997 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.
"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
"SPECIAL SERVICER" means an entity which provides asset management and
resolution services for non-performing or under-performing loans within a pool
of performing loans and/or mortgages.
12
<PAGE> 14
ITEM 2. PROPERTIES
The Company leases approximately 130,000 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.
The Company owns two buildings in Irvine, California aggregating
approximately 110,000 square feet of space which serve as the headquarters of
ARMC's operations. The Company also owns another building in Irvine containing
approximately 40,000 square feet of space which is primarily used for servicing
and administrative functions of ARMC. The Company is exploring its options
with respect to this building.
The Company believes that its facilities are adequate for its
immediate needs and that additional or substitute space is available, if
needed, to accommodate expansion.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in various legal proceedings
arising in the ordinary course of business. In connection with the Company's
loan servicing, asset management and resolution activities, the Company 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fiscal quarter ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock (Symbol: AMMB) is listed on the Nasdaq
Stock Market. At March 21, 1997, there were approximately 2,800 stockholders
of record of the Company's common stock. Presented below are the high and low
quarterly bid prices for 1996 and 1995, as reported by NASDAQ, together with
quarterly dividends declared. Quarterly dividends were discontinued beginning
with the fourth quarter of 1995 and the Company does not expect to declare
dividends on its common stock in the foreseeable future.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
1996 High $14.375 $18.875 $23.625 $26.750
1996 Low 11.750 14.500 17.000 20.750
1995 High $6.875 $8.750 $13.250 $13.125
1995 Low 5.875 6.750 8.750 9.750
1995 Dividends 0.050 0.050 0.050
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the five years ended
December 31, 1996 has been derived from the Company's audited consolidated
financial statements (in thousands of dollars, except per share amounts). This
information should be read in conjunction with "Item 1. Business" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as the audited consolidated financial statements and notes
thereto included in "Item 8. Financial Statements and Supplementary Data."
13
<PAGE> 15
<TABLE>
<CAPTION>
PREDECESSOR
AMRESCO, INC. (1) BUSINESSES (2)
-------------------------------------------------------------- -------------
TWO MONTHS TEN MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, OCTOBER 31,
1996 1995 1994 1993 1992 1992
------------ ------------ ------------ ------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Operating Results:
Revenues $ 200,067 $110,486 $129,791 $122,401 $22,809 $87,538
Income from continuing 31,332
operations 18,665 20,933 26,306 3,883 (2)
Net income 31,332 21,090 18,748 24,218 3,735 23,307
Earnings per share for income
from continuing operations:
Primary
1.12 0.76 0.88 2.33 0.34 (3)
Fully-diluted
1.05 0.75 0.88 2.33 0.34 (3)
Earnings per share:
Primary 1.12 0.86 0.79 2.15 0.33 (3)
Fully-diluted 1.05 0.85 0.79 2.15 0.33 (3)
Dividends per share (4) 0.15 0.20 0.35 (3)
Balance Sheet Data:
Total assets 1,075,941 521,713 172,340 163,653 44,238 59,049
Long-term obligations 293,956 112,500 6,000
Total liabilities 774,426 360,919 58,754 71,954 25,503 46,501
Total shareholders' equity 301,515 160,794 113,586 91,699 18,735 12,548
- ---------------------------
</TABLE>
(1) On December 31, 1993, AMRESCO, INC., formerly BEI, merged with
Holdings. The merger was accounted for as a "reverse acquisition" whereby
Holdings was deemed to have acquired BEI for financial reporting purposes.
However, BEI, renamed AMRESCO, INC., remains the continuing legal entity and
registrant for Securities and Exchange Commission filing purposes. Consistent
with the reverse acquisition accounting treatment, the historical financial
statements of AMRESCO, INC. presented for the year ended December 31, 1993 are
the consolidated financial statements of Holdings and differ from the
consolidated financial statements of BEI as previously reported. The results
of operations of BEI have been included in the Company's financial statements
from the date of acquisition.
(2) The information for predecessor businesses represents the combined
financial and operating information for the businesses acquired effective
October 31, 1992. Predecessor financial statements have not been restated for
the effect of discontinued operations.
(3) Per share data for predecessor businesses are not presented as such
data are not comparable, due to changes in ownership and capital structure of
Holdings as a result of its acquisition by CGW.
(4) In 1993 dividends of $0.35 were paid by Holdings to its shareholders
prior to the merger with BEI.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company is a leading specialty financial services company engaged
in residential mortgage banking, commercial mortgage banking, asset management,
institutional real estate investment advisory services and commercial finance.
The residential mortgage banking business involves originating, acquiring,
warehousing and securitizing non- conforming (sub-prime grade) loans. The
commercial mortgage banking business involves the origination, underwriting,
placement and servicing of commercial real estate mortgages. The asset
management business involves acquiring asset portfolios at a substantial
discount to face value and managing and resolving such asset portfolios to
maximize cash recoveries. The Company's institutional real estate investment
advisory subsidiary provides real estate investment advice to various
institutional investors (primarily pension funds). The commercial finance
business involves providing high yield debt financing for businesses and
projects which are unable to access traditional lending sources.
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<PAGE> 16
Results of Operations
The following discussion and analysis presents the significant changes
in financial condition and results of continuing operations of the Company by
primary business line for the years ended December 31, 1996, 1995 and 1994.
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 (in thousands, except per share data).
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Residential mortgage banking ............. $ 56,864 $ 2,307
Commercial mortgage banking .............. 54,625 26,573 $ 6,460
Asset management ......................... 84,062 81,144 110,637
Institutional real estate investment
advisory ............................. 4,693 452
Commercial finance ....................... 2,947
Corporate and other ...................... (3,124) 10 12,694
--------- --------- ---------
Total revenues ....................... 200,067 110,486 129,791
--------- --------- ---------
Operating expenses:
Residential mortgage banking ............. 29,052 1,694
Commercial mortgage banking .............. 40,131 20,550 6,237
Asset management ......................... 41,669 37,691 52,741
Institutional real estate investment
advisory .............................. 4,087 444
Commercial finance ....................... 2,252
Corporate and other ...................... 32,410 19,849 35,127
--------- --------- ---------
Total operating expenses .............. 149,601 80,228 94,105
--------- --------- ---------
Operating profit:
Residential mortgage banking ............. 27,812 613
Commercial mortgage banking .............. 14,494 6,023 223
Asset management ......................... 42,393 43,453 57,896
Institutional real estate investment
advisory .............................. 606 8
Commercial finance ....................... 695
Corporate and other ...................... (35,534) (19,839) (22,433)
--------- --------- ---------
Total operating profit ................ 50,466 30,258 35,686
Income tax expense ........................... 19,134 11,593 14,753
--------- --------- ---------
Income from continuing operations ............ 31,332 18,665 20,933
Gain (loss) from discontinued operations ..... 2,425 (2,185)
--------- --------- ---------
Net income ................................... $ 31,332 $ 21,090 $ 18,748
========= ========= =========
Earnings per share from continuing operations:
Primary ................................... $ 1.12 $ 0.76 $ 0.88
Fully-diluted ............................. 1.05 0.75 0.88
Earnings per share:
Primary ................................... $ 1.12 $ 0.86 $ 0.79
Fully-diluted ............................. 1.05 0.85 0.79
Weighted average number of common shares
outstanding and common share equivalents .... 28,099 24,654 23,679
</TABLE>
In 1994, the Company concluded substantially all of its asset
management relationships with government agencies and financial institutions
and also began to shift its focus toward direct investment in asset portfolios
and the development of new lines of financial service businesses. The Company
has extended its business lines to offer a full range of mortgage banking
services, increased the amount it invests in asset portfolios, developed its
institutional real estate investment advisory business, began its commercial
finance business and disposed of certain non-core business lines. These
significant changes in the composition of the Company's business are
15
<PAGE> 17
reflected in the Company's results of operations and may limit the
comparability of the Company's results from period to period.
Residential mortgage banking activities represented approximately 28%
of revenues and 32% of operating profit (before corporate and other) of the
Company for the year ended December 31, 1996. The Company believes that there
are significant opportunities in the non-conforming residential loan market and
consequently expects residential mortgage banking activities to represent an
increasing proportion of revenues and operating profits of the Company in the
future.
Revenues from the Company's residential mortgage banking activities
consist of fees from originating residential mortgage loans, interest earned on
residential mortgage loans originated and purchased, gains on the
securitization and sale of such loans and other related securities and accrued
earnings on retained interests in securitizations. 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 retained
interests) exceed the basis of the assets sold and the cost of securitization.
When loans are securitized and sold, the retained interests are valued at the
discounted present value of the cash flows expected to be realized over the
anticipated average life of the assets sold after future estimated credit
losses, estimated prepayments and normal servicing and other fees related to
assets sold. Cash flows from retained interests in securitizations are
generally subordinated to other security holders in a securitization trust.
The discounted present value of such retained interests is computed using
management's assumptions of market discount rates, prepayment rates, default
rates, credit losses and other costs.
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 asset management activities primarily
consist of earnings on wholly-owned portfolios and fees charged for the
management of asset portfolios comprised of performing, non-performing or
under- performing real estate, commercial, industrial and agricultural loans
and for the successful resolution of the assets within such asset portfolios.
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 shareholders' equity, net of tax effects. 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. In
addition, management and resolution fees are earned from partnership and joint
ventures. These fees are subject to fluctuation based on the consideration
received, timing of the sale or collection of the partnership and joint venture
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 Federal Deposit Insurance Corporation
("FDIC") were paid by the Company and billed to the FDIC. With the U.S.
economy entering its approximate seventh year of an economic recovery, the
Company expects the asset management business to represent a smaller percentage
of consolidated revenues and operating profits in the future.
Revenues from the Company's institutional real estate 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.
Revenues from the Company's commercial finance business are earned
from the origination and underwriting of commercial loans and interest earned
on such loans.
16
<PAGE> 18
Corporate and other revenues consist of consulting revenues earned on
due diligence, gains on sales of other assets, other miscellaneous income and
intercompany eliminations. Corporate and other expenses include unallocated
interest expense, amortization of intangibles, corporate personnel and overhead
and certain incentive compensation. 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 for the year ended
December 31, 1994. The subsidiary was sold on June 16, 1995 for a net gain of
$2.4 million, or $0.10 per share.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
The Company reported 1996 revenues of $200.1 million, an increase of
81% over 1995, and operating profit of $50.5 million, an increase of 67% over
1995. The increases in both revenues and operating profit were primarily
related to growth in the residential and commercial mortgage banking segments.
Fully diluted earnings per share from continuing operations increased 40% over
1995 primarily due a 68% increase in income from continuing operations offset
by an increase in weighted average shares outstanding and equivalents used to
compute fully diluted per share amounts. The increase in weighted average
shares outstanding and equivalents was primarily due to the issuance of 2.3
million shares of common stock in late 1995, the issuance of 3.0 million shares
of common stock in late 1996 and the impact of an increase in the Company's
common stock price on the computation of common stock equivalents.
Residential Mortgage Banking -- The Company initiated the operation of
the residential mortgage banking business in September 1995. Revenues for 1996
consisted of $39.8 million of interest and investment income, $16.9 million
from gain on sales of loans and investments and other revenues of $0.2 million.
Interest and investment income was earned primarily on residential mortgage
loans accumulated and held for securitization and sale, while $16.9 million in
gains were recorded from five securitizations of approximately $1.8 billion
(including $142.0 million in pre-funded loans) in residential mortgage loans.
Revenues for 1996 include $2.8 million in interest and other investment income,
$2.4 million in gain on sales of loans and investments and $0.5 million in
other revenues related to substantially all of the assets of Quality Mortgage
USA, Inc. ("Quality"), which were purchased by the Company effective October
25, 1996. The Company originates non-conforming (sub-prime grade) residential
mortgage loans through a network which consisted of 50 offices in 32 states at
December 31, 1996.
Operating expenses for the year ended 1996 consisted of $6.4 million
in personnel costs, $18.5 million in interest expense and $4.2 million in other
general and administrative expenses. The $18.5 million in interest expense
primarily relates to borrowings under warehouse loans payable which funded the
origination, acquisition and holding of mortgage loans held for sale. Expenses
for 1996 include $4.6 million in personnel costs, $1.1 million in interest
expense and $2.8 million in other general and administrative expenses related
to the operations acquired from Quality since October 25, 1996.
Commercial Mortgage Banking -- Revenues for 1996 consisted of $14.3
million in interest and investment income, $40.0 million in mortgage banking
and servicing fees and $0.3 million in other revenues. Interest and other
investment income increased $12.2 million and mortgage banking and servicing
fees increased $15.6 million due to the inclusion of the operations of the
commercial loan servicing business acquired in October 1995 and increases in
the loan origination and servicing volumes of the Company's previously existing
mortgage banking operations.
Operating expenses for the year ended December 31, 1996 consisted of
$29.3 million in personnel expenses, $2.3 million in interest expense and $8.5
million in other general and administrative expenses. The $19.7 million, or
97%, increase in expenses was primarily due to a $13.2 million increase in
personnel expenses, a $1.9 million increase in interest expense and a $4.6
million increase in other general and administrative expenses. The increase in
expenses was due to the inclusion of operations of the commercial loan
servicing business acquired in October 1995 and the growth in commercial
mortgage banking operations which were initiated in late 1994.
Asset Management -- Revenues for 1996 consisted of $29.8 million in
management and resolution fees, $50.8 million in interest and other investment
income and $3.5 million in other revenues. Management and
17
<PAGE> 19
resolution fees decreased $10.4 million, or 26%, and interest and other
investment income increased $13.9 million, or 38%, over 1995 primarily due to a
shift from primarily managing and investing in partnerships and joint ventures
to investing in wholly-owned portfolios. Aggregate investments of the asset
management business increased 49% from $203.0 million as of December 31, 1995
to $302.6 million at December 31, 1996.
Operating expenses for the year ended December 31, 1996 consisted of
$18.2 million in personnel expenses, $15.3 million in interest expense and $8.2
million in other general and administrative expenses. The $4.3 million, or
12%, increase in expenses over 1995 was primarily related to a $5.8 million, or
61%, increase in interest expense offset by a $1.7 million, or 9%, decrease in
personnel expenses. Interest expense increased due to financing incurred on
the $99.6 million increase in aggregate investments, while personnel expenses
decreased in relation to the decrease in management and resolution fees due to
the shift in the revenue mix.
Institutional Real Estate Investment Advisory -- The Company acquired
substantially all of the assets of Acacia Realty Advisors, Inc. ("Acacia") in
November 1995. Revenues for 1996 totaled $4.7 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 $4.1 million were incurred in
1996, including $2.7 million in personnel expense, $0.1 million in interest
expense and $1.3 million in other general and administrative expenses.
Commercial Finance -- The Company began operations of its commercial
finance business in 1996. Revenues for 1996 totaled $2.9 million and were
earned in conjunction with providing high yield debt financing for businesses
and projects which were unable to access traditional lending sources. Expenses
of $2.3 million were incurred in 1996, including $0.3 million in personnel
expenses, $1.0 million in interest expense and $1.0 million in other general
and administrative expenses. In 1997, the Company also began providing
construction financing for builders of single family residences.
Corporate and Other -- Corporate and other for 1996 increased $15.7
million, or 79%, over 1995. The increase is primarily due to increases in
personnel costs and other overhead and interest expense related to expanded
operations.
Income Taxes -- The Company must have future taxable income to realize
recorded deferred tax assets. Certain of these benefits expire beginning in
2001 and are subject to annual utilization limitations. Management believes
that recorded net deferred tax assets will be realized in the normal course of
business.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
The Company reported 1995 revenues of $110.5 million, a 15% decrease
from 1994. Operating profit also decreased 15% over the same period. Revenues
and operating profits for 1994 included $10.0 million and $6.0 million,
respectively, related to the conclusion of an asset management contract. After
adjustment for this one-time conclusion fee, 1995 revenues decreased 8% while
operating profits increased 2%. Commercial mortgage banking posted a
significant increase in operating profit, while asset management operating
profit fell 25%. Also, residential mortgage banking began its operations late
in 1995. Fully-diluted earnings per share from continuing operations for 1995
were $0.75 compared to $0.73 for 1994, after elimination of the one-time
contract conclusion fee in 1994, a 3% increase.
Residential Mortgage Banking -- The Company initiated the operation of
the residential mortgage banking business in September 1995. Revenues for the
year ended December 31, 1995 consisted of $2.3 million in interest and other
investment income earned on mortgage loans held for sale, which totaled $142.7
million at December 31, 1995.
Expenses for the year ended December 31, 1995 consisted of $0.4
million in personnel expense, $1.1 million in interest expense and $0.2 million
in other general and administrative expense. Interest expense primarily
relates to borrowings under warehouse loans payable which funded the
acquisition and holding of mortgage loans held for sale.
Commercial Mortgage Banking -- Revenues for the year ended December
31, 1995 consisted of $24.4 million in mortgage banking and servicing fees,
$2.1 million in interest and other investment income and $0.1 million in other
income. Mortgage banking revenues increased $18.2 million primarily due to the
inclusion for an entire year of the operations of Holliday Fenoglio, Inc.
("Holliday Fenoglio") which was purchased in
18
<PAGE> 20
August 1994, AMRESCO Capital Corporation's ("ACC") underwriting activities
commencing in the fourth quarter of 1994 and the securitized commercial loan
servicing contracts acquired in the fourth quarter of 1995.
Expenses for the year ended December 31, 1995 were comprised of $16.1
million in personnel expense, $4.0 million in other general and administrative
expense and $0.3 million in interest expense. The $14.2 million increase in
expenses from the prior year was primarily due to an $11.2 million increase in
personnel expenses, a $2.7 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 commercial
loan servicing business acquired.
Asset Management -- Revenues for 1995 were comprised of $40.1 million
in asset management and 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 $53.6 million decrease in
management and 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, which related 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, $7.1 million in other general and administrative
expenses and $9.5 million in interest expense. The $15.1 million, or 29%,
decrease in expenses was primarily due to an $18.5 million decrease in
personnel expenses and a $3.8 million decrease in other general and
administrative expenses, which decreases were partially offset by a $7.2
million increase in interest expense. Personnel and other general
administrative expenses decreased as significant institutional and government
contracts concluded during 1994, including a related $3.7 million reduction in
estimate of an accounts receivable bad debt reserve and other accrued expenses
related to certain concluded asset management contracts, partially offset by
$4.0 million received related to certain expired RTC contracts, approximately
40% of which was due to a joint venture partner. The increase in interest
expense was due to the financing incurred for a $138.6 million increase in
aggregate investments.
Institutional Real Estate Investment Advisory -- After the acquisition
of the assets of Acacia 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. Expenses of $0.4 million were incurred
in 1995, including $0.2 million in personnel expense and $0.2 million in other
general and administrative expenses.
Corporate and Other -- Revenues for the year ended December 31, 1995
were nominal, compared to $12.7 million in 1994. The $12.7 million decrease in
revenues was primarily due to a $10.0 million conclusion fee on a significant
institutional asset management contract and $3.8 million relating to the
inclusion in 1994 of operations and sale of a subsidiary for the period prior
to its sale in the first quarter of 1994.
Expenses for the year ended December 31, 1995 were $19.8 million,
compared to $35.1 million during 1994, a 44% decrease. The $15.3 million
decrease was primarily due to the inclusion of $6.0 million of expenses in 1994
related to the conclusion of a significant institutional asset management
contract as well as reduced incentive compensation costs and severance costs.
Income Taxes -- The 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.
Liquidity and Capital Resources
Cash and cash equivalents totaled $29.0 million at December 31, 1996,
compared to $16.1 million at December 31, 1995. Cash flows from operating
activities plus, principal cash collections on investments in asset portfolios
and proceeds from the sale of and collections on trading and available for sale
investments, totaled $56.6 million for 1996, compared to $77.9 million for
1995. The decrease in cash flows from these activities resulted primarily from
an increase in mortgage loans held for sale in 1996. Cash for investing,
originating and underwriting loans, acquiring loans for securitization, general
operating expenses and business acquisitions is primarily obtained through cash
flow from operations and credit facilities, including advances on the corporate
and portfolio credit lines, mortgage warehouse lines, nonrecourse debt,
subordinated debt, retained earnings and cash flow from owned investments.
19
<PAGE> 21
<TABLE>
<CAPTION>
1996 1995
------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Cash flows from operations, collections on investments, and proceeds from and
collections on trading and available for sale investments .................................................. $56.6 $ 77.9
Cash flows from operations ................................................................................... (98.6) 7.7
Cash provided by new capital and borrowings, net (excluding warehouse loans payable) ........................ 283.6 181.4
Cash used for purchase of investments ....................................................................... (240.8) (221.8)
Cash used for purchase of subsidiaries ....................................................................... (57.4) (22.3)
Ratio of total debt to equity (excluding investment line) ................................................... 2.3:1 1.9:1
Ratio of core debt to equity (excluding warehouse debt and investment line) .................................. 1.1:1 0.9:1
Interest coverage ratio * .................................................................................... 2.6x 6.0x
</TABLE>
* Interest coverage ratio means the ratio of earnings before interest,
taxes, depreciation and amortization to cash interest expense.
The following table shows the components of the Company's capital
structure, including certain short-term debt, at December 31, 1996 and 1995
(dollars in millions):
<TABLE>
<CAPTION>
1996 % OF TOTAL 1995 % OF TOTAL
------ --- ------ ---
<S> <C> <C> <C> <C>
Shareholders' equity . . . . . . . . . . . . . . . . . . $301.5 30% $160.8 35%
Senior notes . . . . . . . . . . . . . . . . . . . . . . 57.5 6
Senior subordinated notes . . . . . . . . . . . . . . . . 57.5 6
Convertible debt . . . . . . . . . . . . . . . . . . . . 45.0 10
Mortgage warehouse loans . . . . . . . . . . . . . . . . 354.6 36 153.2 33
Notes payable (excluding investment line) . . . . . . . . 225.9 22 105.9 22
------ --- ------ ---
$997.0 100% $464.9 100%
====== === ====== ===
</TABLE>
Total assets have more than doubled from $521.7 million at December
31, 1995 to $1,075.9 million at December 31, 1996. The increase is primarily
due to increases in mortgage loans held for sale, retained interests in
securitizations resulting from 1996 securitizations, an increase in investments
in asset portfolios and an increase in intangible assets, primarily related to
the acquisition of the assets of Quality. These increases were financed by
increased net borrowings and an increase in shareholders' equity primarily
related to a common stock offering of 3.0 million shares in late 1996 and the
earnings of the Company in 1996.
On February 7, 1997, the Company and certain of its subsidiaries
amended its revolving loan agreement with NationsBank of Texas and other
lenders ("Revolving Loan Agreement"). The Revolving Loan Agreement provides
for a $350.0 million credit facility consisting of a $275.0 million revolving
credit facility and a $75.0 million term facility. This replaced a revolving
loan agreement which previously provided a $200.0 million revolving credit
facility. The interest rate may be selected by the Company and tied to either
NationsBank of Texas' variable rate (8.3% at December 31, 1996) or, for
advances on a term basis up to approximately 180 days, a rate equal to an
adjusted LIBOR rate (7.0% at December 31, 1996 for a term of 30 days) or, on
borrowings funded in foreign currency, an adjusted currency rate (7.7% at
December 31, 1996). At December 31, 1996, there was a total of $179.0 million
outstanding under the Revolving Loan Agreement. The Revolving Loan Agreement
continues to be 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 credit facility portion of the Revolving
Loan Agreement matures on May 31, 1998 and the term facility portion of the
Revolving Loan Agreement matures on May 31, 2000.
20
<PAGE> 22
In 1996, the Company completed two offerings of debt instruments: (i)
$57.5 million principal amount of Senior Subordinated Notes, bearing interest
at 10% per annum and due 2003 and (ii) $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 sold an
aggregate of 3.0 million shares of its common stock in November and December
1996. The net proceeds (approximately $60.4 million) were used to repay
indebtedness under the Revolving Loan Agreement (or its predecessor). All the
holders of the $45.0 million aggregate principal amount of Convertible
Subordinated Debentures converted their debentures into an aggregate of 3.6
million shares of the Company's common stock in December 1996.
In June 1996, the Company filed a shelf registration statement (the
"Shelf Registration") to register up to an aggregate of $250.0 million in debt
or equity securities of the Company. An aggregate of $57.5 million in Senior
Notes were issued in 1996 and in March 1997 an aggregate of $192.5 million in
Senior Subordinated Notes were issued pursuant to the Shelf Registration. See
Note 14 to the Company's consolidated financial statements.
On February 7, 1997, the Company and certain of its subsidiaries
entered into a bridge loan facility with NationsBank of Texas ("Bridge Loan
Facility"), which provides the Company a $25.0 million line of credit.
Indebtedness under the Bridge Loan Facility is secured with the same collateral
securing the Revolving Loan Agreement and generally bears interest at a rate
based upon the adjusted LIBOR Rate (as defined in the note evidencing the
Bridge Loan Facility) plus 200 basis points. Under certain circumstances,
interest under the Bridge Loan Facility will accrue at NationsBank of Texas'
prime rate. The Bridge Loan Facility matures on April 30, 1997, subject to the
Company's one-time qualified right to renew the facility for a 1 year period.
A wholly-owned subsidiary of the Company has entered into a warehouse
facility (the "Prudential Warehouse Facility") with Prudential Securities
Credit Corporation. The Prudential Warehouse Facility is currently a $500.0
million credit facility used to finance the acquisition and warehousing of
certain residential mortgage loans. At December 31, 1996, a total of $171.2
million was outstanding under the Prudential Warehouse Facility bearing
interest at 6.8% per annum. The Prudential Warehouse Facility is secured by
all residential mortgage loans acquired using funds obtained under this
facility.
A wholly-owned subsidiary of the Company has entered into a warehouse
credit facility with Morgan Stanley Mortgage Capital Inc., (the "Morgan Stanley
Warehouse Facility"). The Morgan Stanley Warehouse Facility provides for a
maximum borrowing capacity of $200.0 million to finance the origination or
acquisition, and/or the funding of the origination or acquisition, of certain
mortgage loans. As of December 31, 1996, $116.0 million was outstanding under
the Morgan Stanley Warehouse Facility bearing interest at 6.2% per annum. This
facility is secured by the mortgages originated or acquired using funds
obtained under the facility.
CS First Boston Mortgage Capital Corp. has agreed to provide a
wholly-owned subsidiary of the Company with a warehouse facility in an amount
not to exceed $500.0 million (the "CSFB Warehouse Facility"), to finance the
acquisition and warehousing of certain residential mortgage loans. As of
December 31, 1996, no indebtedness was outstanding under this facility. This
facility will be secured by the mortgages acquired using funds obtained under
the facility.
In 1996, the Company received approximately $44.0 million of net
proceeds from the sale of certain retained interests in securitizations held by
the Company. The proceeds from this sale were used to reduce outstanding
borrowings under the predecessor to the Revolving Loan Agreement. Although the
Company intends, from time to time, to continue to pursue opportunities to sell
other retained interests in securitizations to generate additional borrowing
capacity under its Revolving Loan Agreement and reduce the Company's capital
exposure with respect to retained interests in securitizations, no assurance
can be given that such opportunities will be available in the future.
On October 17, 1996, a wholly-owned subsidiary of the Company entered
into a master repurchase agreement (the "DLJ Master Repurchase Agreement") with
DLJ Mortgage Capital, Inc. to support the purchase of retained interests in
securitizations and warehouse loans acquired from Quality. As of December 31,
1996, $20.3 million was outstanding under the DLJ Master Repurchase Agreement
bearing interest at 6.3% to 6.8% per annum.
21
<PAGE> 23
During the next twelve months, the Company intends to pursue (i)
expansion of current businesses, (ii) additional asset management investments,
both for its own account and as an investor with various capital partners who
acquire such investments, (iii) additional loans by the commercial finance
business and (iv) acquisitions of new businesses. The funds for such
expansion, investments and acquisitions are anticipated to be provided by cash
flows, borrowings under the Revolving Loan Agreement and debt and equity
offerings. 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 $29.0 million at December
31, 1996, cash flow from operations, its unused borrowing capacity under its
credit lines 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.
OTHER MATTERS
On March 21, 1997, the Company entered into a definitive stock and
asset purchase agreement among Commercial Lending Corporation and certain of
its affiliates ("CLC") pursuant to which the Company would acquire the
operations and certain assets of CLC. CLC's primary line of business is
originating, securitizing and servicing franchise loans. The acquisition
should enhance and complement the Company's commercial finance group. The
purchase price consists of (i) approximately 1.9 million shares of the
Company's common stock, (ii) the assumption of certain liabilities estimated at
$14,000,000 and (iii) contingent earnout payments of additional shares of the
Company's common stock based upon the operating performance of the acquired
entities through March 31, 2000. The consumation of the transaction is subject
to satisfaction of certain conditions. The transaction is expected to close in
late March 1997.
In 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long Lived Assets to be Disposed of," which did not have a
significant impact upon the Company's financial position or results of
operations. The Company also adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which requires financial statements to 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 therefore has included pro forma disclosures in the
notes to the financial statements for all awards granted after December 31,
1994. The Company has disclosed 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.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities," 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. SFAS No. 128, "Earnings Per Share," is effective for
earnings per share calculations and disclosures for periods ending after
December 15, 1997, including interim periods, and requires restatement of all
prior period earnings per share date that is presented. The statement
supersedes APB Opinion No. 15, "Earnings Per Share," and provides reporting
standards for calculating "Basic" and "Diluted" earnings per share. Management
does not believe the impact of the adoption of this statement will have a
material impact on its earnings per share computations.
PRIVATE LITIGATION SECURITIES REFORM ACT OF 1995
This report contains forward-looking statements based on current
expectations that involve a number of risks and uncertainties. The
forward-looking statements are made pursuant to safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The factors that could cause
actual results to differ materially include the following: industry conditions
and competition, interest rates, business mix, availability of additional
financing, and the risks described from time to time in the Company's reports
to the Securities and Exchange Commission.
22
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on Page F-1 of this Annual Report on
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is set forth under the caption
"Management" in the Company's definitive Proxy Statement (the "Proxy
Statement"), which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A under the Securities Exchange Act of 1934 and is
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the caption
"Executive Compensation" in the Proxy Statement, which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement, which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A under the Securities Exchange Act of 1934 and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth under the caption
"Certain Relationships and Related Transactions" in the Proxy Statement, which
will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934 and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(1) Financial Statements
See Index to Financial Statements on page F-1 of this Annual Report on
Form 10-K.
(2) Financial Statement Schedules
Financial statement schedules under the applicable rules and
regulations of the Securities and Exchange Commission have been omitted as the
schedules are not applicable or the information required thereby is included in
the Company's consolidated financial statements or notes thereto.
(3) Exhibits
The following instruments are included as exhibits to the report.
Exhibits incorporated by reference are so indicated.
23
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<S> <C>
2.(a) Agreement for Purchase and Sale of Assets, dated as of July 28, 1994, among Holliday Fenoglio
Dockerty & Gibson, Inc., Holliday Fenoglio Dockerty & Gibson of Dallas, Inc., Holliday
Fenoglio & Monte, Inc. and 3003, Inc. and Holliday Acquisition Corp., filed as Exhibit 2.1 to
Registrant's Current Report on Form 8-K dated August 15, 1994, which exhibit is incorporated
herein by reference.
3.(a) Restated Certificate of Incorporation, filed as Exhibit 3(i) to the Registrant's Form 10-Q for
the quarter ended September 30, 1995, which exhibit is incorporated herein by reference.
(b) Amended and Restated Bylaws effective as of February 25, 1997.(1)
4.(a) See Exhibits 3(a) and (b).
(b) Indenture, dated as of November 27, 1995, between the Registrant and First Interstate Bank of
Texas, National Association in respect of the Registrant's 8% Convertible Subordinated
Debentures due 2005, filed as Exhibit 4.5 to the Registrant's Registration Statement on Form S-3
(No. 33-63683), which exhibit is incorporated herein by reference.
(c) Indenture, dated as of January 15, 1996, between the Registrant and Bank One, Columbus, N.A., as
trustee, filed as Exhibit 4.1 to the Registrant's Form 8-K dated February 2, 1996, which exhibit
is incorporated herein by reference.
(d) Indenture, dated as of March 1, 1997, between the Company and Bank One, Columbus, N.A., as
trustee, filed as Exhibit 4.1 to the Registrant's Form 8-K dated March 12, 1997, which exhibit is
incorporated herein by reference.
(e) Officers' Certificate and Company Order dated as of March 12, 1997, establishing the terms of the
Company's Senior Subordinated Notes, Series 1997-A due 2004, filed as Exhibit 4.2 to the
Registrant's Form 8-K dated March 12, 1997, which exhibit is incorporated herein by reference.
(f) 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.
10.(a) Form of Indemnification Agreement together with a list of all officers and directors who have
signed such agreement, filed as Exhibit 10(g) to the Registrant's Annual Report on Form 10-K for
the year ended October 31, 1987, which exhibit is incorporated herein by reference.
(b) Form of Indemnification Agreement dated as of August 24, 1993, together with a list of all
officers and directors who have signed such agreement, filed as Exhibit 10(g) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September 31, 1993, which
exhibit is incorporated herein by reference.
(c) Fifth Amended and Restated Incentive Stock Option Plan dated as of November 20, 1990, filed as
Exhibit 10(h) to the Registrant's Annual Report on Form 10-K for the year ended December 31,
1991, which exhibit is incorporated herein by references.(2)
(d) Fourth Amended and Restated Stock Option Plan dated as of November 20, 1991, filed as
Exhibit 10(i) to the Registrants Annual Report on Form 10-K for the year ended December 31,
1991, which exhibit is incorporated herein by reference.(2)
(e) Stock Option Agreement, dated as of April 17, 1990, between the Registrant and Bruce W.
Schnitzer, and Termination of Warrant between Mr. Schnitzer and the Registrant, filed as
Exhibit 10(s) to the Registrant's Annual Report on Form 10-K for the year ended October 31,
1990, which exhibit is incorporated herein by reference.(2)
(f) Promissory Note dated October 31, 1990 issued by James P. Cotton, Jr. to the Registrant, filed
as Exhibit 10(s) to the Registrant's Annual Report on Form 10-K for the year ended October 31,
1990, which exhibit is incorporated herein by reference.
(g) Promissory Note dated October 31, 1990 issued by Gerald E. Eickhoff to the Registrant, filed as
Exhibit 10(w) to the Registrant's Annual Report Form 10-K for the year ended October 31, 1990,
which exhibit is incorporated herein by reference.
(h) Registrant's 1993 Key Individual Stock Option Plan filed as Exhibit 10(z) to the Registration
Statement of Registrant on Form S-4 under the Securities Act of 1993 (File No. 33-72732), which
exhibit is incorporated herein by reference.(2)
(i) Indemnification Agreement, dated March 30, 1993, between AMRESCO Holdings, Inc. and Richard L.
Cravey, filed as Exhibit 10(ab) to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993, which exhibit is incorporated herein by reference.
(j) Indemnification Agreement, dated March 30, 1993, between AMRESCO Holdings, and William S.
Green, filed as Exhibit 10(ac) to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993, which exhibit is incorporated herein by reference.
(k) The Registrant's Retirement Savings and Profit Sharing Plan and Trust filed as Exhibit 10(ag) to
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, which exhibit
is incorporated herein by reference.(2)
(l) The Registrant's Retention Bonus Plan, as amended, filed as Exhibit 10(ah) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993 and as Exhibit 10(y) to the
Registration Statement of the Registrant on Form S-4 under the Securities Act of 1993 (File No.
33-72321), which exhibits are incorporated herein by reference.(2)
</TABLE>
24
<PAGE> 26
<TABLE>
<S> <C> <C>
(m) The Registrant's Severance Pay Plan filed as Exhibit 10(ai) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993, which exhibit is incorporated herein by
reference.(2)
(n) The Registrant's Thrift Restoration Plan filed as Exhibit 10(ak) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993, which exhibit is incorporated herein
by reference.(2)
(o) Employment Agreement, dated as of May 31, 1994, between Registrant and Robert H. Lutz, Jr.,
filed as Exhibit 10(y) to the Registrant's Form 10-K for the fiscal year ended December 31,
1994, which exhibit is incorporated herein by reference.(2)
(p) Warehousing Credit and Security Agreement, dated as of August 15, 1995, between AMRESCO Capital
Corporation and Residential Funding Corporation, filed as Exhibit 10(a) to the Registrant's
Form 10-Q/A No. 1 dated October 25, 1995 for the quarter ended September 30, 1995, which
exhibit is incorporated herein by reference.
(q) Second Amendment to Agreement for Purchase and Sale of Assets, dated November 21, 1995, by and
among the Registrant, Holliday Fenoglio, Inc. and certain sellers and shareholders named
therein filed as Exhibit 10(am) to the Registrant's Form 10-K for the fiscal year ended
December 31, 1995, which exhibit is incorporated herein by reference.
(r) Amendment to Stock Option Agreement, dated as of April 1, 1995, between the Registrant and
Bruce W. Schnitzer filed as Exhibit 10(an) to the Registrant's Form 10-K for the fiscal year
ended December 31, 1995, which exhibit is incorporated herein by reference.(2)
(s) Lease Agreement, dated as of February 9, 1996, between K-P Plaza Limited Partnership and the
Registrant filed as Exhibit 10(ao) to the Registrant's Form 10-K for the fiscal year ended
December 31, 1995, which exhibit is incorporated herein by reference.
(t) Interim Warehouse and Security Agreement, dated as of February 23, 1996, among Prudential
Securities Realty Funding Corporation and AMRESCO Residential Mortgage Corporation filed as
Exhibit 10(ap) to the Registrant's Form 10-K for the fiscal year ended December 31, 1995, which
exhibit is incorporated herein by reference.
(u) Second Amended and Restated Loan Agreement dated as of February 7, 1997 by and among AMRESCO,
INC. and certain of its subsidiaries and NationsBank of Texas, N.A. and certain other lenders
designated therein filed as Exhibit 10.1 to the Registrant's Form 8-K dated February 20, 1997,
which exhibit is incorporated herein by reference.
(v) Letter Agreement related to the Bridge Loan, dated February 7, 1997 by and among AMRESCO, INC.
and certain of its subsidiaries and NationsBank of Texas, N.A. filed as Exhibit 10.2 to the
Registrant's Form 8-K dated February 20, 1997, which exhibit is incorporated herein by
reference.
(w) Promissory Note related to the Letter Agreement dated February 7, 1997 by and among AMRESCO,
INC. and certain of its subsidiaries and NationsBank of Texas, N.A. filed as Exhibit 10.3 to the
Registrant's Form 8-K dated February 20, 1997, which exhibit is incorporated herein by
reference.
(x) Form of Severance Agreement, dated as of May 29, 1996, with Robert H Lutz, Jr., Robert L. Adair,
Barry L. Edwards, L. Keith Blackwell, Ronald B. Kirkland and Ronald Castleman. (1) (2)
(y) Form of Letter Agreement, dated as of March 20, 1997, with Harold E. Holliday, Jr. and Scott J.
Reading. (1) (2)
(z) Incentive Compensation Program, dated August 15, 1996, for certain employees of AMRESCO
Residential Credit Corporation. (1) (2)
(aa) AMRESCO Deferred Compensation Program, Dated as of January 1, 1996. (1) (2)
(ab) Amendment No. 1 to AMRESCO Deferred Compensation Program, dated December 31, 1996. (1) (2)
(ac) AMRESCO, INC. 1997 Stock Option Plan. (1) (2)
(ad) AMRESCO, INC. 1995 Stock Option and Award Plan, as amended and restated. (1) (2)
11. Statement re: Computation of Per Share Earnings.(1)
21. Subsidiaries of the Registrant.(1)
23.(a) Consent of Independent Auditors-Deloitte and Touche L.L.P.(1)
(b) Consent of Independent Auditors-Coopers and Lybrand L.L.P.(1)
24. Power of Attorney of the Directors and certain officers of the Registrant.(1)
27. Financial Data Schedule.(1)
</TABLE>
25
<PAGE> 27
(1) Filed herewith.
(2) Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of this Report.
Reports on Form 8-K
During the fiscal quarter ended December 31, 1996, the Company filed
one Current Report on Form 8-K, which reported information under Item 2
(Acquisition of Assets) dated November 6, 1996 and subsequently amended on Form
8-K/A dated October 25, 1996.
26
<PAGE> 28
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
I. Financial Statements of AMRESCO, INC. and Subsidiaries
Consolidated Balance Sheets, December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 . . . . . . . F-3
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-22
II. Financial Statements of Quality Mortgage USA, Inc. and Subsidiaries
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-23
Consolidated Balance Sheets, September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . F-24
Consolidated Statements of Income for the Years Ended September 30, 1996 and 1995 . . . . . . . . . F-25
Consolidated Statement of Stockholders' Equity for the Years Ended September 30, 1996 and 1995 . . F-26
Consolidated Statements of Cash Flows for the Years Ended September 30, 1996 and 1995 . . . . . . . F-27
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-28
</TABLE>
F-1
<PAGE> 29
AMRESCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,046 $16,139
Temporary investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,190 21,942
Accounts receivable, net of reserves of $1,611 and $1,737, respectively . . . . . . . . . 12,243 18,576
Mortgage loans held for sale, net (Note 3) . . . . . . . . . . . . . . . . . . . . . . . 374,536 160,843
Loans, net (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,188 3,389
Investments in purchased loan and other asset portfolios (Note 3) . . . . . . . . . . . 251,060 176,753
Asset backed securities - available for sale (Note 4) . . . . . . . . . . . . . . . . . 55,678 34,038
Retained interests in securitizations - trading (Note 4) . . . . . . . . . . . . . . . . 130,328 12,149
Deferred income taxes (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,285 12,184
Premises and equipment, net of accumulated depreciation of $5,285 and $2,335,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,228 5,904
Intangible assets, net of accumulated amortization of $11,110 and $4,136, respectively 87,219 49,863
(Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,940 9,933
---------- --------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,075,941 $521,713
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,988 $ 14,124
Accrued employee compensation and benefits (Note 11) . . . . . . . . . . . . . . . . . 14,521 10,487
Notes payable (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,092 127,796
Warehouse loans payable (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . 354,562 153,158
Senior notes (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,500
Senior subordinated notes (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . 57,500
Convertible debt (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000
Income taxes payable (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,742 2,897
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,521 7,457
---------- --------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 774,426 360,919
---------- --------
COMMITMENTS AND CONTINGENCIES (Notes 12 and 13)
SHAREHOLDERS' EQUITY (Note 10):
Common stock, $0.05 par value, authorized 50,000,000 shares; 33,796,145 and 26,689,331
shares issued and outstanding, respectively . . . . . . . . . . . . . . . . . . . . 1,690 1,334
Capital in excess of par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213,843 106,054
Reductions for employee stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,129) (2,238)
Treasury stock, $0.05 par value, 24,339 shares in 1996 and 1995 . . . . . . . . . . . (160) (160)
Net unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249 114
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,022 55,690
---------- --------
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301,515 160,794
---------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . $ 1,075,941 $ 521,713
========== ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 30
AMRESCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Interest and other investment income . . . . . . . . . . . . . . . . . . . $ 103,639 $ 40,105 $ 14,215
Mortgage banking and servicing fees . . . . . . . . . . . . . . . . . . . 40,697 24,382 6,176
Asset management and resolution fees . . . . . . . . . . . . . . . . . . . 34,300 41,295 93,764
Gain on sale of loans and investments, net . . . . . . . . . . . . . . . . 18,394 1,382
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,037 3,322 15,636
---------- --------- ---------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,067 110,486 129,791
---------- --------- ---------
EXPENSES:
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,864 52,852 68,143
Interest . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,763 6,921 1,768
Other general and administrative . . . . . . . . . . . . . . . . . . . . . 25,098 16,121 21,166
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 8,876 4,334 3,028
---------- --------- ---------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 149,601 80,228 94,105
---------- --------- ---------
Income from continuing operations before income taxes . . . . . . . . . . . . 50,466 30,258 35,686
Income tax expense (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . 19,134 11,593 14,753
---------- --------- ---------
INCOME FROM CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . . . . . 31,332 18,665 20,933
Gain (loss) from discontinued operations, net of income taxes (Note 9) . . . 2,425 (2,185)
---------- --------- ---------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,332 $ 21,090 $ 18,748
========== ========= =========
Earnings per share from continuing operations:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.12 $ 0.76 $ 0.88
Fully-diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.05 0.75 0.88
Earnings per share: . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.12 $ 0.86 $ 0.79
Fully-diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.05 0.85 0.79
Weighted average number of common shares outstanding and common share
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,099 24,654 23,679
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 31
AMRESCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
$0.05 PAR VALUE
-------------------
REDUCTION NET
CAPITAL IN FOR UNREALIZED TOTAL
NUMBER OF EXCESS OF EMPLOYEE TREASURY GAINS RETAINED SHAREHOLDERS'
SHARES AMOUNT PAR STOCK STOCK (LOSSES) EARNINGS EQUITY
---------- ------ -------- ------- ----- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1994 22,309,817 $1,116 $67,112 $ (607) $24,078 $91,699
Exercise of stock options (Note 10) 711,590 35 1,560 1,595
Issuance of common stock for
acquisition (Note 2) 571,240 29 4,291 4,320
Tax benefits from employee stock
compensation 1,728 1,728
Repayments of notes receivable for
officer's shares (Note 10) 178 178
Dividends paid ($0.20 per share) (4,620) (4,620)
Foreign currency translation
adjustments $ (62) (62)
Net income 18,748 18,748
---------- ------ -------- ------- ----- ----- -------- --------
DECEMBER 31, 1994 23,592,647 1,180 74,691 (429) (62) 38,206 113,586
Common stock offering (Note 10) 2,300,000 115 24,995 25,110
Exercise of stock options (Note 10) 434,480 22 1,234 1,256
Issuance of common stock for earnout
(Note 2) 112,002 5 772 777
Issuance of common stock for unearned
stock compensation (Note 10) 250,202 12 2,385 (2,397)
Amortization of unearned stock
compensation (Note 10) 279 279
Tax benefits from employee stock
compensation 1,977 1,977
Repayment of notes receivable for
officers' shares (Note 10) 220 220
Settlement of notes receivable for
officers' shares with common stock
(14,339 shares) 89 $(89)
Acquisition of treasury stock
(10,000 shares) (71) (71)
Dividends paid ($0.15 per share) (3,606) (3,606)
Foreign currency translation
adjustments 111 111
Unrealized gain on investments
available for sale, net (Note 4) 65 65
Net income 21,090 21,090
---------- ------ -------- ------- ----- ----- ------- --------
DECEMBER 31, 1995 26,689,331 1,334 106,054 (2,238) (160) 114 55,690 160,794
Exercise of stock options (Note 10) 466,760 23 1,975 1,998
Issuance of common stock for earnout
(Note 2) 57,186 3 774 777
Common stock offering (Note 10) 2,992,148 150 60,740 60,890
Tax benefits from employee stock
compensation 1,500 1,500
Cancellation of restricted common stock (9,280) (79) 79
Debt conversion to common stock (Note 10) 3,600,000 180 42,879 43,059
Amortization of unearned stock
compensation (Note 10) 1,015 1,015
Repayment of notes receivable for
officers' shares (Note 10) 15 15
Foreign currency translation adjustments (344) (344)
Unrealized gain on investments available
for sale, net (Note 4) 479 479
Net income 31,332 31,332
---------- ------ -------- ------- ----- ----- ------- --------
DECEMBER 31, 1996 33,796,145 $1,690 $213,843 $(1,129) $(160) $ 249 $87,022 $301,515
========== ====== ======== ======= ===== ===== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 32
AMRESCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,332 $ 21,090 $ 18,748
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Gain on sale of mortgage loans and other securities . . . . . . . . . . (18,394)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 8,876 4,334 3,028
Accretion of interest income . . . . . . . . . . . . . . . . . . . . . (12,745)
Provision for loss (gain) on sale of discontinued operation . . . . . . (2,425) 1,645
Write-off of intangible related to contract conclusion . . . . . . . . 2,827
Deferred tax provision (benefit). . . . . . . . . . . . . . . . . . . . (1,101) 5,023 966
Loss from disposition of property and equipment . . . . . . . . . . . . 67 198
Employee stock compensation . . . . . . . . . . . . . . . . . . . . . . 1,015 279
Increase (decrease) in cash for changes in (exclusive of assets and
liabilities acquired in business combinations):
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . 6,369 4,757 17,855
Mortgage loans held for sale, net . . . . . . . . . . . . . . . . . (232,935) (160,843)
Warehouse loans payable . . . . . . . . . . . . . . . . . . . . . . 116,962 153,158
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,441) (3,990) 1,908
Accounts payable and accrued compensation and benefits. . . . . . . 1,393 (2,272) (4,768)
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . 845 61 678
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 6,222 (11,577) (4,137)
----------- ---------- ----------
Net cash provided by (used in) operating activities . . . . . . . . (98,602) 7,662 38,948
----------- ---------- ----------
INVESTING ACTIVITIES:
Purchase of temporary investments, net . . . . . . . . . . . . . . . . . . . (12,248) (21,942)
Purchase of purchased loan and other asset portfolios . . . . . . . . . . . (218,879) (166,180) (59,099)
Collections on purchased loan and other asset portfolios . . . . . . . . . . 108,272 57,208 30,815
Purchase of asset backed securities . . . . . . . . . . . . . . . . . . . . (21,877) (43,516) (3,481)
Proceeds from sale of and collections on asset backed securities . . . . . . 237 13,067
Purchase of retained interests in securitizations . . . . . . . . . . . . . (12,149)
Proceeds from sale of and collections on retained interests in
securitizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,739
Cash used for purchase of subsidiaries . . . . . . . . . . . . . . . . . . . (57,437) (22,323) (17,830)
Investment in joint venture . . . . . . . . . . . . . . . . . . . . . . . . (13,905)
Proceeds from sales of subsidiaries . . . . . . . . . . . . . . . . . . . . 6,250 1,385
Purchase of premises and equipment . . . . . . . . . . . . . . . . . . . . . (6,480) (2,384) (2,141)
----------- ---------- ----------
Net cash used in investing activities . . . . . . . . . . . . . . . (175,578) (191,969) (50,351)
----------- ---------- ----------
FINANCING ACTIVITIES:
Net proceeds from notes payable and other debt . . . . . . . . . . . . . . . 1,108,720 565,311 19,894
Repayment of notes payable and other debt . . . . . . . . . . . . . . . . . (886,036) (408,974) (31,547)
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,785) (3,441)
Proceeds from common stock offering . . . . . . . . . . . . . . . . . . . . 60,890 25,110
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . 1,998 1,256 1,595
Tax benefit of employee stock compensation . . . . . . . . . . . . . . . . . 1,500 1,977 1,728
Tax effect of unrealized gains and losses . . . . . . . . . . . . . . . . . (44)
Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . . . . (71)
Repayment of notes receivable for officers' shares . . . . . . . . . . . . . 15 220 178
----------- ---------- ----------
Net cash provided by (used in) financing activities . . . . . . . . 287,087 180,000 (11,593)
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . 12,907 (4,307) (22,996)
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . 16,139 20,446 43,442
----------- ---------- ----------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . $ 29,046 $ 16,139 $ 20,446
=========== ========== ==========
SUPPLEMENTAL DISCLOSURES:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,667 $5,494 $1,533
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,289 4,813 8,507
Common stock issued for purchase of mortgage banking subsidiary and related
earnout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 777 777 4,320
Accrued earnout payment for purchase of mortgage banking subsidiary . . . . 3,883 3,883 3,883
Common stock issued for unearned stock compensation . . . . . . . . . . . . 2,397
Notes receivable received in connection with sales of subsidiaries . . . . . 818
Exchange of loans held for sale for retained interests in securitizations . 105,612
Conversion of convertible debt to common stock . . . . . . . . . . . . . . . 45,000
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 33
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AMRESCO, INC. (the "Company") is engaged primarily in the business of
residential mortgage banking, commercial mortgage banking, asset management,
institutional real estate investment advisory services and commercial finance.
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 and its subsidiaries. Significant
intercompany accounts and transactions have been eliminated in consolidation.
Revenue and Expense Recognition -- Revenues from the Company's
residential mortgage banking activities consist of fees from originations of
loans, interest earned on residential mortgage loans originated and purchased,
gains on the securitization and sale of such loans and other related securities
and accrued earnings on certificates purchased or retained from securitization
trusts. 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 retained interest is valued at the discounted present
value of the cash flow expected to be realized over the anticipated average
life of the assets sold after future estimated credit losses and normal
servicing and other fees relating to the assets sold. The discounted present
value of such retained interest is computed using management's assumptions of
market discount rates, 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.
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.
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.
Revenues from the Company's institutional real estate investment
advisory 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 when purchased. 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 approximates fair value.
All temporary investments are pledged as collateral under an investment loan
agreement. See Note 7.
Receivables -- Receivables are recognized as earned according to the
respective management contracts. The Company's exposure to credit loss in the
event that payment is not received for revenue recognized equals the balance of
accounts receivable on the balance sheet.
Mortgage Loans Held for Sale, net -- Mortgage loans held for sale are
carried at the lower of cost or market, net of deferred loan origination fees
and associated direct costs. Loan origination fees and associated direct costs
are deferred and recognized upon sale. Market is determined on an individual
loan basis based upon the estimated fair value of similar loans for the month
of expected delivery.
F-6
<PAGE> 34
Loans, net -- Loans are stated at face value, net of deferred loan
origination fees and associated direct costs and net of an allowance for loan
losses. Loan origination fees and incremental direct costs are deferred and
recognized over the life of the loan as an adjustment to yield, using the
interest method. The Company provides for estimated loan losses by
establishing an allowance for loan losses through a charge to earnings.
Management's periodic evaluation of the allowance for estimated losses is based
upon an analysis of the portfolio, historical loss experience, economic
conditions and trends, collateral values and other relevant factors.
Investments in Purchased Loan and Other Asset Portfolios -- The
Company classifies its investments in purchased loan and other asset portfolios
as: loan portfolios, partnerships and joint ventures 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 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.
Loan portfolios, partnerships and joint ventures, and real estate are carried
at the lower of cost or estimated fair value.
Asset Backed Securities -- The Company's investments in asset-backed
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 securities are excluded
from earnings and reported as a separate component of shareholders' equity, net
of tax effects. Any impairment, other then temporary, in the value of a
security will be included in earnings.
Retained Interests in Securitizations -- Retained interests in
securitizations are classified as trading and are carried at market value. The
carrying value of the retained interests in securitizations is analyzed by the
Company on a disaggregated basis to determine whether historical loss
experience, economic conditions and trends, collateral values and other
relevant factors have had an impact on the carrying value. Changes in market
value are included in earnings. Cash flows for retained interests in
securitizations are generally subordinated to other security holders in a
securitization trust.
Premises and Equipment -- Premises and equipment, primarily building
and improvements, 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 one to thirty 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 of other businesses. These intangible assets, principally
goodwill, servicing rights and contracts acquired, are amortized using the
straight-line method over periods ranging from one to thirty 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.
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 -- Primary earnings per share is computed by
dividing net income by the weighted average number of common shares outstanding
adjusted for incremental shares attributed to the exercise of outstanding
options to purchase common stock using the treasury stock method.
Fully-diluted earnings per share is computed by dividing net income plus
interest on convertible debt (net of income taxes) by the weighted average
number of common shares outstanding adjusted for incremental shares attributed
to the exercise of outstanding options to purchase common stock using the
treasury stock method and additional shares issued assuming conversion of
convertible debt.
Foreign Currency Translation -- Assets and liabilities of the foreign
subsidiaries are translated into United States dollars at the prevailing
exchange rate on the balance sheet date. Revenue and expense accounts for
these subsidiaries are translated using the weighted average exchange rate
during the period. These translation methods give rise to cumulative foreign
currency translation adjustments which are reported as a component of equity.
F-7
<PAGE> 35
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.
The net interest received or paid on derivative financial investment activities
is reflected as interest income or expense of the related hedged position.
Gains and losses resulting from the termination of derivative financial
instruments are recognized over the shorter of the remaining contract lives of
the derivative financial instruments or the lives of the related hedged
positions or, if the hedged positions are sold, are recognized in the current
period as gain or loss on sale. Gains and losses on futures contracts are
deferred and amortized over the terms of the related assets or liabilities and
reflected as interest income or expense of the related hedged positions. If
the hedged positions are sold, any unamortized deferred gains or losses on
futures contracts are recognized in the current period as gain or loss on sale.
New Accounting Standards -- In 1996, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which did not have a significant impact on the Company's results of operations
or financial position. SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities," requires an entity to
recognize the financial and servicing assets it controls and the liabilities it
has incurred and to derecognize financial assets when control has been
surrendered. The Company will apply the new rules of SFAS 125 prospectively to
transactions beginning January 1, 1997. Based on current activities, the
Company believes the adoption of SFAS 125 will not have a material impact on
the Company's results of operations or financial position.
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 as of and for the years ended December 31,
1996, 1995 and 1994. Actual results may differ from such estimates.
Reclassifications -- Certain reclassifications of prior year amounts
have been made to conform to the current year presentation.
2. ACQUISITIONS
On October 25, 1996, the Company purchased substantially all of the
operating assets of Quality Mortgage USA, Inc. ("Quality") for $65,000,000 in
cash and the assumption of warehouse indebtedness and certain other
liabilities. Quality was an originator of non-conforming (sub-prime grade)
residential mortgages. The acquisition was accounted for under the purchase
method of accounting and the purchase price was allocated as follows (in
thousands):
<TABLE>
<S> <C>
Cash and cash equivalents . . . . . . . . . . . $ 10,667
Retained interests in securitizations . . . . . 29,628
Mortgage loans held for sale . . . . . . . . . 86,371
Intangible assets . . . . . . . . . . . . . . . 38,651
Premises and equipment . . . . . . . . . . . . 9,028
Accounts payable and accrued liabilities . . . (4,591)
Warehouse loans payable . . . . . . . . . . . . (84,442)
Notes payable . . . . . . . . . . . . . . . . . (20,312)
--------
Net assets acquired . . . . . . . . . . . $ 65,000
========
</TABLE>
The allocation of the purchase price was based upon preliminary
estimates and is subject to adjustment. The intangible assets are being
amortized using the straight line method over 15 years.
F-8
<PAGE> 36
The following pro forma financial information for the twelve months
ended December 31, 1996 and 1995 is presented as if the acquisition of the
assets of Quality occurred at the beginning of the periods presented and is not
necessarily indicative of the results of operations that would have occurred if
Quality would have been purchased on these dates or of results that may occur
in the future (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1995
----------- ----------
<S> <C> <C>
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 241,170 $ 194,246
Income from continuing operations . . . . . . . . . . . . . . . . . . . 21,395 24,042
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,395 26,467
Earnings per share:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.76 $ 0.96
Fully diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.67 0.94
</TABLE>
On October 27, 1995, the Company completed the acquisition of the
third-party securitized, commercial mortgage loan Master Servicer and Special
Servicer operating assets of EQ Services, Inc. and Equitable Real Estate
Investment Management, Inc. (collectively "EQS") for $16,864,000, primarily
consisting of servicing contracts and other intangibles. Effective November
20, 1995, the Company 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, primarily consisting of servicing
contracts and other intangibles. Effective June 30, 1995, the Company acquired
substantially all of the assets of CKSRS Housing Group, Ltd., ("CKSRS") a
Miami, Florida-based commercial mortgage banking company specializing in the
origination, sale and servicing of multifamily mortgages in Florida for
$1,278,000.
Effective August 1, 1994, the Company acquired substantially all of
the assets of Holliday Fenoglio Dockerty & Gibson, Inc. and certain of its
affiliates ("Holliday Fenoglio"), which were originators and servicers of
commercial mortgages, for 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, 1996, 1995 and 1994,
$3,883,000 was accrued for the respective year's earnout payment. The
transaction has been accounted for as an asset purchase. The purchase price,
determined based on the cash paid, the fair market value of the Company stock
issued and direct acquisition costs, was allocated to the Holliday Fenoglio
assets acquired based on the fair market value at the date of acquisition.
3. LOANS AND ASSET PORTFOLIOS
Investments in purchased loan and other asset portfolios at December
31, 1996 and 1995 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Loan portfolios . . . . . . . . . . . . . . . . . . $199,475 $136,373
Partnerships and joint ventures . . . . . . . . . . 27,723 34,694
Real estate . . . . . . . . . . . . . . . . . . . . 23,862 5,686
-------- --------
$251,060 $176,753
======== ========
</TABLE>
The Company's asset portfolio's consist primarily of loans purchased
at a substantial discount from their principal amount. Substantially all of
the Company's investments in asset portfolios are backed by commercial mortgage
real estate. All of the Company's investments in loan portfolios are
collateral under the Company's notes payable and other debt. The Company
investment in asset portfolios are disbursed throughout the United States, with
a heavier concentration in the Northeast and West, in addition to Canada and
the United Kingdom. The Company does not believe it has significant
concentration risk in any geographic area that could have a detrimental effect
upon the Company.
F-9
<PAGE> 37
Mortgage loans held for sale at December 31, 1996 and 1995 consisted
of the following (net of an allowance for loan losses on residential mortgage
loans of $1,390,000 at December 31, 1996) (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Residential mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $307,752 $160,843
Commercial mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,784
-------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $374,536 $160,843
======== ========
</TABLE>
At December 31, 1996, the Company was committed to sell, as part of a
December 1996 securitization, approximately $142,000,000 of residential
mortgage loans held for sale. Such loans were sold in early 1997.
Loans at December 31, 1996 of $42,188,000 (net of an allowance for
loan losses of $840,000) consisted primarily of high yield loans to businesses
and projects which were unable to access traditional lending sources. Included
in loans at December 31, 1996 were deferred loan origination fees and costs
which aggregated approximately $860,000.
4. INVESTMENTS
Securities available for sale, carried at estimated fair value, at
December 31, 1996 and 1995, were as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAIN LOSS FAIR VALUE
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
1996:
Asset-backed securities . . . . . . . . . . . $54,902 $1,580 $(804) $55,678
1995:
Asset-backed securities . . . . . . . . . . . $33,930 $325 $(217) $34,038
</TABLE>
Maturities of securities available for sale are not presented because
the loans underlying such securities are subject to prepayment. All of the
Company's asset-backed securities are collateral under the Company's notes
payable and other debt.
Net proceeds from sale of retained interests in securitizations in
1996 were $44,000,000 and no gain or loss was recognized on the transaction.
5. INVESTMENT IN COMMERCIAL MORTGAGE BANKING JOINT VENTURE
In November 1996, the Company entered into a joint venture agreement
with a large investment banking firm to fund and securitize commercial mortgage
loans. The Company owns a 50% interest in AMRESCO Commercial Mortgage Funding
L.P. ("ACC Joint Venture"), and accounts for its investment using the equity
method. The Company's investment at December 31, 1996 was $13,641,000 and was
included in other assets. The following is a summary of the financial position
and results of operations of the ACC Joint Venture at December 31, 1996 and
from inception through December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Mortgage loans held for sale . . . . . . . . . . . $ 257,369
Total assets . . . . . . . . . . . . . . . . . . . 265,146
Nonrecourse debt . . . . . . . . . . . . . . . . . 235,586
Partners equity . . . . . . . . . . . . . . . . . . 27,198
Revenues . . . . . . . . . . . . . . . . . . . . . $ 3,721
Operating expenses . . . . . . . . . . . . . . . . 2,929
-----------
Net income . . . . . . . . . . . . . . . . . . . . $ 792
===========
</TABLE>
F-10
<PAGE> 38
6. 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 was 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 Resolution Trust Corporation ("RTC") expired, and in
December 1995 the Company received a $4,000,000 final settlement from the RTC
for certain contracts.
7. NOTES PAYABLE AND OTHER DEBT:
The Company's notes payable and other debt at December 31, 1996 and
1995, consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Notes payable:
Revolving loan agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . $178,956 $67,500
Revolving investment loan agreement . . . . . . . . . . . . . . . . . . . . . . 34,190 21,942
Nonrecourse debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,823 38,354
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
-------- --------
Total notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $260,092 $127,796
======== ========
Warehouse loans payable:
Residential debt facilities . . . . . . . . . . . . . . . . . . . . . . . . . . $289,136 $135,601
Commercial debt facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,426 17,557
-------- --------
Total warehouse loans payable . . . . . . . . . . . . . . . . . . . . . . $354,562 $153,158
======== ========
8.75% senior notes due July 1, 1999 . . . . . . . . . . . . . . . . . . . . . . . . $57,500
=======
10.0% senior subordinate notes due January 15, 2003 . . . . . . . . . . . . . . . . $57,500
=======
8.0% convertible subordinated debentures due December 15, 2005 . . . . . . . . . . $45,000
=======
</TABLE>
Revolving Loan Agreements -- Effective June 13, 1996, the Company
amended its revolving loan agreement ("Revolving Loan Agreement") with a
syndicate of lenders, led by NationsBank of Texas, N.A. ("Bank"). This
$200,000,000 Revolving Loan Agreement matures May 31, 1998 and replaced the
Company's $150,000,000 revolving loan agreement. The borrowing terms,
including interest, may be selected by the Company and tied to either the
Bank's variable rate (8.25% at December 31, 1996) or, for advances on a term
basis up to approximately 180 days, a rate equal to an adjusted LIBOR rate
(7.0% at December 31, 1996). 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. The Company has
outstanding letters of credit totaling $3,271,000 at December 31, 1996, which
reduce the available revolving line. The available borrowing capacity under
this facility at December 31, 1996 was $17,773,000. At December 31, 1996,
$178,956,000 was outstanding under the Revolving Loan Agreement. On February
7, 1997, the Revolving Loan Agreement was amended to provide for a $350,000,000
credit facility consisting of a $275,000,000 revolving credit facility and a
$75,000,000 term facility. The revolving credit facility matures on May 31,
1998 and the term facility matures on May 31, 2000.
On February 7, 1997, the Company and certain of its subsidiaries
entered into a $25,000,000 bridge loan facility with the Bank secured with the
same collateral securing the Revolving Loan Agreement, and generally
F-11
<PAGE> 39
bears interest at a rate based upon the adjusted LIBOR Rate (as defined in the
note evidencing the bridge loan facility) plus 200 basis points. Under certain
circumstances interest under the bridge loan facility shall accrue at the
Bank's prime rate. The bridge loan facility will mature on April 30, 1997,
subject to the Company's one-time qualified right to renew the facility for a 1
year period. The obligation of the Bank to extend credit under the bridge loan
facility shall be waived in the case of any default or event of default. Under
the bridge loan facility, the covenants and events of defaults are the same as
those under the Revolving Loan Agreement.
Revolving Investment Loan Agreement -- On January 20, 1995, the
Company entered into a $35,000,000 revolving investment loan agreement with the
Bank, amended as of March 5, 1996 and 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. At December 31, 1996, $34,190,000 was outstanding under
this facility. In January 1997, the Company discontinued its revolving
investment loan agreement and related temporary investment activities.
Nonrecourse Debt -- On October 17, 1996, a wholly-owned subsidiary of
the Company entered into a Master Repurchase Agreement ("Repurchase Agreement")
with a financial services company to fund retained interests in securitizations
and warehouse loans acquired from Quality. Indebtedness under the Repurchase
Agreement is secured only by the specific assets sold (aggregating $29,210,000
at December 31, 1996) under an obligation to repurchase and mature at various
dates in 1997. Interest rates and repurchase dates vary for each repurchase
transaction undertaken pursuant to the Repurchase Agreement. At December 31,
1996, $20,296,000 was outstanding under this facility bearing interest at 6.3%
to 6.8%.
On December 19, 1995, a wholly-owned subsidiary of the Company entered
into a non-recourse Global Master Repurchase Agreement ("AMBS Global
Agreement") to support the purchase of certain commercial mortgage pass-through
certificates. At December 31, 1996, there was $26,527,000 outstanding at an
interest rate of 30-day LIBOR plus 1.4% (7.0% at December 31, 1996). The
repurchase transactions mature from June 18, 1997 through January 23, 1998.
The facility is secured only by the Company's investments in certain
asset-backed securities.
Residential Warehouse Debt Facilities -- On October 25, 1996, a
wholly-owned subsidiary of the Company entered into a $500,000,000 warehouse
line of credit with Prudential Securities Credit Corporation ("Prudential") to
finance the acquisition and warehousing of residential mortgage loans. The
facility is secured by the loans held for sale purchased through borrowings
under this facility and bears interest at LIBOR plus an applicable margin which
ranges from 0.70% to 2.00%. The stated maturity date for the Prudential
warehouse facility is the earlier of (i) March 31, 1997 or (ii) the date on
which the loans collateralizing the Prudential warehouse facility are
securitized. At December 31, 1996, $171,212,000 was outstanding under this
facility bearing interest at 6.8% per annum.
A wholly-owned subsidiary of the Company entered into a $200,000,000
warehouse credit facility with Morgan Stanley Mortgage Capital Inc., which was
amended and restated as of October 25, 1996, to finance the origination or
acquisition of certain residential mortgage loans. This facility is secured by
the mortgages originated or acquired under the facility. At December 31, 1996,
$115,982,000 was outstanding under this facility bearing interest at LIBOR plus
0.7% (6.2%) per annum.
On December 23, 1996, a wholly-owned subsidiary of the Company entered
into a $500,000,000 warehouse credit facility with CS First Boston Mortgage
Capital Corp. to finance the acquisition and warehousing of certain residential
mortgage loans. This facility is secured by the mortgages acquired under the
facility and bears interest at a rate of LIBOR plus 0.60% to 1.40% based upon
the amount of the advance and the collateral value and unpaid principal amount
of the mortgage loans related to each advance. At December 31, 1996, no
indebtedness was outstanding under this facility.
The Company anticipates that it will incur additional borrowings under
these facilities in connection with the origination and purchase of loans for
securitizations in the future. At December 31, 1996, $289,136,000 was
outstanding under residential warehouse debt facilities secured by assets
totaling $307,752,000.
Commercial Warehouse Debt Facilities -- On August 15, 1995, a
wholly-owned subsidiary of the Company entered into a mortgage warehouse
facility with a funding corporation to facilitate the underwriting and
origination of multi-family mortgage loans to be purchased by Freddie Mac or
Fannie Mae. Indebtedness under the facility generally bears interest at a rate
based upon LIBOR (as defined by the facility) plus 3.0%. The lender
F-12
<PAGE> 40
reduced the interest rate to LIBOR plus 1.25% on current borrowings (6.6% at
December 31, 1996). The subsidiary may also be required to pay certain other
fees in addition to or in lieu of interest. The maturity is expected to be
approximately 60 to 80 days from the date of each such borrowing. The loan is
secured by the mortgage loans originated by the Company and held for sale under
the facility. At December 31, 1996, the balance outstanding under this
facility was $46,960,000.
On April 28, 1995, a wholly-owned subsidiary of the Company entered
into a $25,000,000 revolving credit loan agreement with a bank to finance the
origination and warehousing of certain commercial mortgage loans which was
subsequently reduced to $10,000,000, however, on December 18, 1996, the bank
allowed the subsidiary to borrow approximately $8,500,000 in excess of the
$10,000,000 line of credit on a one-time basis. The Company has guaranteed
certain of the subsidiaries obligations under the facility. Indebtedness under
the facility generally bears interest at a rate based (at the subsidiary's
option) upon either (i) the prime rate established by the Bank, as announced
from time to time or (ii) the adjusted LIBOR Rate (as defined) plus either
1.65% or 2.0% depending upon certain enumerated factors. The subsidiary's
indebtedness under the facility is secured by all mortgage loans originated by
the subsidiary using funds obtained under the facility and related collection
and other accounts. The original maturity date of the facility is January 25,
1998. At December 31, 1996, $18,466,000 was outstanding bearing interest at
7.3% to 7.6%.
At December 31, 1996, $65,426,000 was outstanding under the commercial
warehouse debt facilities secured by assets totaling $66,784,000.
8.75% Senior Notes Due July 1, 1999 -- On July 16, 1996, the Company
issued $57,500,000 principal amount of Senior Notes. The net proceeds of
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 mature on July 1, 1999. There is no sinking fund or
amortization of principal prior to maturity. The debt offering costs have been
included in other assets and are amortized over the life of the debt using the
effective interest method. The Senior Notes are not redeemable prior to
maturity. The Senior Notes are 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.
10% Senior Subordinated Notes Due January 15, 2003 -- On January 30,
1996, the Company issued $57,500,000 principal amount of Senior Subordinated
Notes. The net proceeds of approximately $54,900,000 from such offering were
used to repay borrowings under the Revolving Loan Agreement. The Senior
Subordinated Notes bear interest at 10% per annum and mature on January 15,
2003. There is no sinking fund or amortization of principal prior to maturity.
The debt offering costs were included in other assets and are amortized over
the life of the debt using the effective interest method. 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.
8% Convertible Subordinated Debentures Due December 15, 2005 -- On
October 31, 1996, the Company called for redemption on December 27, 1996, its
outstanding 8%, Convertible Subordinated Debentures due 2005 (the "Convertible
Debentures") at 108% of the face amount (or $1,080 per $1,000 principal amount)
plus accrued and unpaid interest. The Convertible Debentures, with an
aggregate face amount of $45,000,000, were converted into 3,600,000 shares of
the Company's common stock at a conversion price of $12.50 per share
(equivalent to a conversion rate of 80 shares per $1,000 principal amount of
Convertible Subordinated Debentures). All unamortized debt offering costs
related to the Convertible Debentures and included in other assets were
recorded as a reduction to capital in excess of par.
Covenants -- Each of the Company's notes payable and other debt
agreements has certain covenants which include 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
agreements also contain covenants that, among other things, 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.
F-13
<PAGE> 41
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. The agreement matures on September
7, 1997.
Aggregate amounts of notes payable and other debt that mature during
the next five years were as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1998 1999 2000 2001 THEREAFTER
-------- -------- ------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Notes payable . . . . . . . . . . . . . . . $75,139 $184,953
Warehouse loans payable . . . . . . . . . . 336,096 18,466
8.75% senior notes due July 1, 1999 . . . . $57,500
10.0% senior subordinate notes due January
15, 2003 . . . . . . . . . . . . . . $57,500
-------- -------- ------- --------- ---------- -------
$411,235 $203,419 $57,500 $57,500
======== ======== ======= ========= ========== =======
</TABLE>
8. INCOME TAXES
Income tax expense (benefit) consisted of the following for the years
ended December 31, 1996, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,456 $6,040 $9,665
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,779 2,147 2,609
------- ------- -------
Total current tax expense . . . . . . . . . . . . . . . . . . . 20,235 8,187 12,274
Deferred tax expense (benefit) . . . . . . . . . . . . . . . . . . . . (1,101) 5,023 966
------- ------- -------
Total income tax expense . . . . . . . . . . . . . . . . . . . . $19,134 $13,210 $13,240
======= ======= =======
Income tax expense (benefit) attributable to:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . $19,134 $11,593 $14,753
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . 1,617 (1,513)
------- ------- -------
Total income tax expense . . . . . . . . . . . . . . . . . . . . $19,134 $13,210 $13,240
======= ======= =======
</TABLE>
A reconciliation of income taxes on reported pretax income at
statutory rates to actual income tax expense for the years ended December 31,
1996, 1995 and 1994, is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------------- ------------------ ------------------
DOLLARS RATE DOLLARS RATE DOLLARS RATE
------- -- ------- -- ------- --
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory rates .......................... $17,663 35% $12,005 35% $11,196 35%
State income taxes, net of Federal tax ................. 1,471 3 1,205 4 1,606 5
benefit .............................................
Other .................................................. 438 1
------- -- ------- -- ------- --
Total income tax expense ............................ $19,134 38% $13,210 39% $13,240 41%
======= == ======= == ======= ==
</TABLE>
F-14
<PAGE> 42
The net deferred tax assets at December 31, 1996 and 1995, consisted
of the tax effects of temporary differences related to the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995
--------- -----------
<S> <C> <C>
Allowance for uncollectible accounts receivable . . . . . . . . . . . . . . . . . . . . $ 275 $ 594
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,128 1,759
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477 477
Reserve for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 842
Accrued employee compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,414 2,085
Net operating loss carryforwards of acquired company . . . . . . . . . . . . . . . . . 3,848 5,334
AMT credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 602 602
Reserves on real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,075 2,075
Securitized loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,176
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,123 (67)
--------- -----------
Deferred tax asset before valuation allowance . . . . . . . . . . . . . . . . . . . 13,960 12,859
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (675) (675)
--------- -----------
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,285 $ 12,184
========= ===========
</TABLE>
As a result of an acquisition, the Company has available for its use
the acquired 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 were the expiration dates and the approximate net
operating loss carry forwards at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
EXPIRATION DATE AMOUNT
- --------------- -----------
<S> <C>
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,051
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,071
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,459
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,867
-----------
$ 9,820
===========
</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.
9. 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.
Gross revenues applicable to the discontinued operations were $4,542,000 for
the eleven months ended November 30, 1994. The loss from discontinued
operations for the eleven months ended November 30, 1994 was $1,287,000 net of
a $891,000 income tax benefit. The loss from the discontinued operations for
the period December 1, 1994 to December 31, 1994 was $95,000, net of a $63,000
income tax benefit. The loss on the disposal of discontinued operations for
the year ended December 31, 1994 of $898,000 was net of a Company estimated
income tax benefit of $622,000. On June 16, 1995, the Company sold
substantially all of the assets of its data processing operations for the
banking and asset management industry for $6,250,000 in cash and recorded 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.
F-15
<PAGE> 43
10. COMMON STOCK AND EMPLOYEE STOCK OPTION AND PURCHASE PLANS
The Company has a stock option and award plan for the benefit of key
individuals, including its directors, officers and key employees. The plan is
administered by a committee of the Board of Directors. Stock option activity
under the plan for the years ended December 31, 1996, 1995 and 1994 was as
follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF OPTION PRICE PER AVERAGE OPTION
SHARES SHARE PRICE PER SHARE
---------- --------------- --------------
<S> <C> <C> <C>
Options outstanding at January 1, 1994 . . . . . . . . 2,094,100 $0.60 to $4.50 $ 2.96
Granted . . . . . . . . . . . . . . . . . . . . . . 500,000 7.00 to 8.94 7.62
Exercised . . . . . . . . . . . . . . . . . . . . . (711,590) 0.60 to 3.50 2.24
Forfeited . . . . . . . . . . . . . . . . . . . . . (10,060) 3.50 3.50
----------
Options outstanding at December 31, 1994 . . . . . . . 1,872,450 0.60 to 4.50 4.41
Granted . . . . . . . . . . . . . . . . . . . . . . 872,160 6.88 to 11.38 9.78
Exercised . . . . . . . . . . . . . . . . . . . . . (434,480) 0.60 to 6.88 2.99
Forfeited . . . . . . . . . . . . . . . . . . . . . (8,337) 2.75 to 3.75 3.15
----------
Options outstanding at December 31, 1995 . . . . . . . 2,301,793 0.60 to 11.38 6.77
Granted . . . . . . . . . . . . . . . . . . . . . . 45,500 13.13 to 21.75 17.39
Exercised . . . . . . . . . . . . . . . . . . . . . (466,760) 3.50 to 11.38 4.28
Forfeited . . . . . . . . . . . . . . . . . . . . . (68,181) 4.50 to 11.38 6.98
----------
Options outstanding at December 31, 1996 . . . . . . . 1,812,352 0.60 to 21.75 7.67
==========
Options exercisable at December 31, 1996 . . . . . . . 1,168,289 $0.60 to $21.75 $ 6.47
Options available for grant at December 31, 1996 . . . 1,674,478
</TABLE>
At December 31, 1996, the Company has reserved a total of 1,812,352
shares of common stock for exercise of stock options.
The following table summarizes information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Weighted
Weighted Weighted Average Average
Average Exercise Price Exercise
Number Remaining of Outstanding Number Price of
Range of Exercise Outstanding at Contractual Options Exercisable at Exercisable
Prices 12/31/96 Life 12/31/96 Options
- --------------------- -------------- ----------- ---------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.60 - $ 2.75 165,165 5 $ 2.03 165,165 $ 2.03
3.50 - 3.75 301,220 6 3.56 301,220 3.56
6.88 - 7.00 493,167 9 6.93 276,352 6.95
7.50 - 9.38 286,000 8 8.22 209,732 8.20
11.38 - 11.38 521,300 6 11.38 206,720 11.38
13.13 - 21.75 45,500 7 17.39 9,100 17.39
</TABLE>
At December 31, 1996, the Company has reserved a total of 1,812,352
shares of common stock for exercise of stock options.
F-16
<PAGE> 44
The Company applies APB Opinion No. 25, "Accounting for Stock Issued
to Employees," in accounting for its stock option and award plans. Under the
terms of the plans, the exercise price of each option is equal to the market
price of the Company's stock on the date of grant. Accordingly, no
compensation expense has been recognized under these plans. Net income and
earnings per share on a proforma basis as if the Company had utilized the
accounting methodology prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation," would have been as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1996 1995
--------- ---------
<S> <C> <C>
Net income:
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31,332 $21,090
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,015 19,102
Primary earnings per share:
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.12 $ 0.86
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.07 0.77
Fully diluted earnings per share:
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.05 $ 0.85
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.01 0.77
</TABLE>
The estimated fair value of options granted during 1996 and 1995 was
$9.61 and $4.99 per share, respectively. For purposes of determining fair
value of each option, the Company used the Black-Scholes model with the
following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate 5.98% -7.21%
Expected life 7 - 8 years
Expected volatility 43% - 45%
</TABLE>
A stock subscription agreement and related shareholders' agreement
("Shareholder Agreements") were entered into by the Company with various
officers and other parties ("Subscribers") on December 9, 1992. The purchase
price was based on $.60 per share. Certain executive officers purchased common
stock with cash and promissory notes. The notes accrue interest at 6% per
annum and are due and payable in December 2002 or within one year of
termination of employment. The shares are subject to certain restrictions and
repurchase rights pursuant to the Shareholder Agreements. In the event of
termination of employment prior to December 2002, the Company could cancel
unvested shares by canceling related indebtedness based on the original issue
price. The notes are secured by the stock acquired and are nonrecourse to the
Subscribers. The notes are classified as a reduction of shareholders' equity
for financial reporting purposes. At December 31, 1996 and 1995, reductions
for employee stock included notes receivable for officers' shares of $105,000
and $120,000, respectively. During 1996, $15,000 in officers' notes receivable
were collected. During 1995, $309,000 in officers' notes receivable were
collected, including $220,000 in cash and $89,000 in common stock.
The Company did not issue any shares of restricted common stock during
1996 under the Company's stock option and award plan. 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 1996 and 1995, $1,015,000 and $279,000 in unearned stock compensation
was amortized as compensation expense, respectively. At December 31, 1996 and
1995, reductions for employee stock included unearned stock compensation of
$1,024,000 and $2,118,000, respectively.
In November and December 1996, the Company completed a registered
public offering of 2,992,148 shares of common stock including the underwriters'
over-allotment option. The net proceeds from such offering aggregated
approximately $60,400,000 and were used to repay borrowings under the Revolving
Loan Agreement. The price to the public was $21.25 per share and the proceeds
to the Company per share were $20.35, after underwriting discounts. In
addition to the offering of shares of common stock by the Company, certain
selling shareholders sold an aggregate of 5,931,852 shares of common stock for
which the Company did not receive any proceeds from the sale of these shares.
F-17
<PAGE> 45
On December 27, 1996, the Company issued 3,600,000 shares of common
stock upon redemption of all of the outstanding 8% Convertible Debentures. The
Convertible Debentures were convertible at a conversion rate of 80.0 shares of
common stock for each $1,000 principal amount of Convertible Debentures. See
Note 7.
In December 1995, the Company completed a registered public offering
of 2,300,000 shares of common stock including the underwriters' over-allotment
option. The net proceeds from such offering, aggregating approximately
$25,110,000, were used to repay borrowings. The price to the public was $11.75
per share and the proceeds to the Company were $11.10 per share, after
underwriting discounts. 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 for which the Company did not receive any proceeds from
the sale of these shares.
During 1996, the Company instituted a stock compensation plan that
covers certain senior managers of the Company. The awards are contingent on
certain earnings levels being reached by the Company in 1998 and will award
participants two times their 1996 annual salary in restricted common stock of
the Company of which 20% would vest immediately and the remainder would vest at
the rate of 20% per year. No compensation expense was recorded in 1996 related
to this plan.
11. EMPLOYEE COMPENSATION AND BENEFITS
Accrued employee compensation and benefits at December 31, 1996 and
1995, included amounts for incentive compensation, severance and benefits.
Certain employees are eligible to receive a bonus from a pool computed on
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, 1996 and 1995, a total of
$572,000 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 ("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 1996, the matching contribution was set at $.50 for each
$1.00 contributed by the employees. In addition to the matching savings
contribution, the Company provided an annual contribution to the profit sharing
retirement component of the Plan on behalf of all eligible employees. This
portion of the Plan has been amended to assure that the Company is not required
to make an employer profit sharing contribution to the Plan. However, it is
anticipated that some level of profit sharing contribution will continue in
future periods. For the years ended December 31, 1996, 1995 and 1994, the
Company accrued profit sharing contributions of $1,688,000, $1,218,000 and
$1,312,000, 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.
12. COMMITMENTS AND CONTINGENCIES
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, 1996, 1995 and 1994, was approximately
$5,334,000, $3,655,000, and $4,386,000, respectively. The future minimum
annual rental commitments under non-cancelable operating lease agreements
having a remaining term in excess of one year at December 31, 1996 were as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,171
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,667
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,256
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 746
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 718
</TABLE>
F-18
<PAGE> 46
Certain pending or threatened legal actions have alleged that the
Company may be liable with respect to certain actions which allege that Quality
violated certain provisions of the Real Estate Settlement Procedures Act
("RESPA") when it made certain payments to brokers in transactions that occured
prior to October 25, 1996. The Company did not assume any liabilities for
litigation arising out of the operations of Quality prior to October 25, 1996,
the date the Company purchased substantially all of the assets of Quality. In
addition to not assuming any liabilities relating to such litigation, the
Company obtained an indemnification aggregating $10,000,000 from Quality, its
shareholders and certain individuals which would be applicable to such
litigation. Therefore, the Company does not believe that it has any liability
with respect to such litigation against Quality. Even though the Company has
continued, in certain instances, to make these types of payments to brokers,
the Company does not believe that it has significant exposure to loss for any
alleged violation of RESPA since it believes the payments it has made are not a
violation of RESPA and such payments have been made on only a small portion of
the residential mortgage loans which it has originated.
The Company is a defendant in other 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.
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
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, interest rate swap agreements and forward and futures
contracts. 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 and futures contracts through
approvals, limits and monitoring procedures.
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 four forward contracts at December 31, 1996, to sell a
total of $19,000,000 three year and five year treasury securities at contracted
forward prices and the Company had entered into Euro-dollar and U.S. Treasury
futures contracts with a notional amount of $1,605,000,000. The Company
matches the duration of the items being hedged with offsetting futures
positions. At December 31, 1996, the outstanding futures contracts were
hedging assets with a carrying value of approximately $218,000,000. The
Company's forward contracts and futures contracts are hedges against a change
in a forward contract's value which would be offset with an equivalent but
opposite change in hedged residential mortgage loans and retained interests in
securitizations. The forward contracts matured on March 10, 1997 and the
futures contracts expire on various dates through 2000.
The Company has eight forward contracts to sell Fannie Mae mortgage
backed securities totaling $43,410,000. The contracts mature at varying dates
in 1997. These forward contracts are hedges against a change in a forward
contract's value which would be offset with an equivalent but opposite change
in the hedged commercial mortgage loans.
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 1996 and 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,
futures and interest rate swap contracts. The Company uses commercial rating
agencies to evaluate the credit quality of the counterparties, all of whom are
F-19
<PAGE> 47
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 requirements 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, 1996 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 . . . . . . . . . . $29,046 $ 29,046 $16,139 $16,139
Temporary investments . . . . . . . . . . . . 34,190 34,190 21,942 21,942
Accounts receivable, net . . . . . . . . . . . 12,243 12,243 18,576 18,576
Mortgage loans held for sale, net . . . . . . 374,536 374,236 160,843 161,841
Loans, net . . . . . . . . . . . . . . . . . . 42,188 42,188 3,389 3,389
Investments in purchased loan and other asset
portfolios . . . . . . . . . . . . . . . . 251,060 267,395 176,753 183,194
Asset backed securities - available for sale . 55,678 55,678 34,038 34,038
Retained interests in securitizations - trading 130,328 130,328 12,149 12,149
Liabilities:
Accounts payable . . . . . . . . . . . . . . . 15,988 15,988 14,124 14,124
Notes payable and warehouse loans payable . . 614,654 614,654 280,954 281,354
Senior notes . . . . . . . . . . . . . . . . . 57,500 58,988
Senior subordinated notes . . . . . . . . . . 57,500 58,844
Convertible debt . . . . . . . . . . . . . . . 45,000 45,000
Off-Balance Sheet:
Interest rate swap . . . . . . . . . . . . . . (41) (251)
Forward contracts . . . . . . . . . . . . . . 77 (998)
Futures contracts . . . . . . . . . . . . . . 256
Letters of credit ($3,272 and $239,
respectively) . . . . . . . . . . . . . . .
</TABLE>
The fair values of loans, investments in purchased loan and other
asset portfolios, asset backed securities, retained interests in
securitizations, notes payable and other debt, senior notes, senior
subordinated notes and convertible debt were estimated based on present values
of estimated cash flows using current entry-value interest rates applicable to
each category of such financial instruments (which notes reflect the credit
risk applicable to the instruments). Mortgage loans held for sale were valued
at their contracted sales prices. The carrying amount of cash and cash
equivalents, temporary investments, accounts receivable, net of reserves and
accounts payable approximated 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 were estimated using market quotes. The fair value estimates
presented herein were based on pertinent information available to management as
of December 31, 1996 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.
14. SUBSEQUENT EVENTS (UNAUDITED)
On February 25, 1997, the Company issued options to purchase
approximately 2,400,000 shares of common stock and approximately 150,000
restricted shares to certain key employees and directors. The Board of
Directors approved two plans which will allow the Company to issue up to
3,850,000 shares of the Company's common stock pursuant to the exercise of
stock options and the grant of restricted shares.
F-20
<PAGE> 48
On March 12, 1997, the Company issued $192,500,000 aggregate principal
amount of senior subordinated notes. The notes bear interest at 10% per annum
and mature on March 15, 2004. The notes are unsecured obligations of the
Company and are subordinated to prior payment of all existing and future senior
debt and to indebtedness and other liabilities of the Company's subsidiaries.
The notes are not redeemable prior to maturity.
On March 21, 1997, the Company entered into a definitive stock and
asset purchase agreement with Commercial Lending Corporation and certain of its
affiliates ("CLC") to acquire the operations and certain assets of CLC. CLC's
primary line of business is originating, securitizing and servicing franchise
loans. The purchase price consists of (i) approximately 1.9 million shares of
the Company's common stock, (ii) the assumption of certain liabilities
estimated at $14,000,000 and (iii) contingent earnout payments of additional
shares of the Company's common stock based upon the operating performance of
the acquired entities through March 31, 2000. The consumation of the
transaction is subject to satisfaction of certain conditions. The transaction
is expected to close in late March 1997.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of
operations for the years ended December 31, 1996 and 1995 (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $36,896 $46,813 $45,486 $70,872
Income before income taxes . . . . . . . . . . . . . . . . . 8,095 11,851 13,721 16,799
Net income . . . . . . . . . . . . . . . . . . . . . . . . . 4,795 7,348 8,556 10,633
Earnings per share: . . . . . . . . . . . . . . . . . . . . .
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . 0.18 0.27 0.31 0.36
Fully-diluted . . . . . . . . . . . . . . . . . . . . . . . 0.17 0.25 0.29 0.34
</TABLE>
<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 is $4,000,000 related to an expired RTC contract.
F-21
<PAGE> 49
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, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Dallas, Texas
February 7, 1997
F-22
<PAGE> 50
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, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. 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, 1996 and 1995, and the
consolidated results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
Coopers & Lybrand LLP
Newport Beach, California
December 19, 1996
F-23
<PAGE> 51
QUALITY MORTGAGE USA, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
------------ ------------
Assets:
<S> <C> <C>
Cash and cash equivalents $ 8,298,777 $ 19,912,703
Advances and wet fundings 10,751,838 25,814,662
Investments, net 29,479,131 4,194,470
Mortgage loans held for sale, net 61,489,358 197,216,733
Interest receivable 331,025 1,566,896
Real estate held for sale, net 1,122,793 3,555,041
Other assets 2,995,198 2,876,938
Property and equipment, net 5,715,617 8,284,924
Income tax refund receivable 940,266
Deferred tax asset 4,575,838 7,277,263
------------ ------------
Total assets $125,699,841 $270,699,630
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Related party notes payable $ 92,695,761 $230,947,747
Accounts payable and accrued expenses 3,775,692 7,335,756
Income tax payable 3,955,915
Deferred tax liability 1,279,979 621,373
------------ ------------
Total liabilities 97,751,432 242,860,791
------------ ------------
Commitments and contingencies
Stockholders' equity:
Series A common stock, no par value, 200 shares
authorized, issued and outstanding 198 198
Additional paid-in capital 2,137,398 2,137,398
Retained earnings 25,810,813 25,701,243
------------ ------------
Total stockholders' equity 27,948,409 27,838,839
------------ ------------
Total liabilities and stockholders' equity $125,699,841 $270,699,630
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-24
<PAGE> 52
QUALITY MORTGAGE USA, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Loan origination fees, net $ 9,787,677 $12,641,985
Interest 23,518,433 34,721,394
Gain on Sale of mortgage loans 23,645,096 40,676,945
Prepayment and late fees 20,775,169 14,280,731
Loss on sale of real estate held for sale (2,487,712) (6,268,944)
Other 2,195,537 1,989,274
----------- -----------
77,434,200 98,041,385
----------- -----------
Operating expenses:
Interest 15,302,254 23,113,640
Commissions 5,972,381 5,837,811
Salaries 22,035,006 27,585,478
Professional and consulting fees 5,612,792 3,906,046
Selling, general and administrative 12,929,060 7,645,938
Realized losses on investments 7,513,450 3,914,364
Rent and other occupancy costs 2,330,557 1,724,583
Depreciation and amortization 1,908,542 1,436,406
----------- -----------
73,604,042 75,164,266
----------- -----------
Income before provision for income taxes 3,830,158 22,877,119
----------- -----------
Provision for income taxes 1,728,465 9,756,946
----------- -----------
Net income $ 2,101,693 $13,120,173
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-25
<PAGE> 53
QUALITY MORTGAGE USA, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
__________
<TABLE>
<CAPTION>
Class A Class B Additional
Common Stock Common Stock Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
------- -------- ------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances, October 31, 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 -- -- (6.87) (137,498) 137,498 -- --
agreement
Net income -- -- -- -- -- 13,120,173 13,120,173
------- -------- ------- -------- ------------ ------------ ------------
Balances, September 30, 1995 200 198 -- -- 2,137,398 25,701,243 27,838,839
Dividends in-kind -- -- -- -- -- (1,992,123) (1,992,123)
Net income -- -- -- -- -- 2,101,693 2,101,693
------- -------- ------- -------- ------------ ------------ ------------
Balances, September 30, 1996 200 $ 198 -$ $ 2,137,398 $ 25,810,813 $ 27,948,409
======= ======== ======= ======== ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-26
<PAGE> 54
QUALITY MORTGAGE USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,101,693 $ 13,120,173
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 1,908,542 1,436,406
Realized loss on sale of real estate held for sale 2,487,712 6,268,944
Realized loss on investments 7,513,450 3,914,364
Change in provision for losses on investments, mortgage
loans and real estate held for sale (762,670)
(Increase) decrease in advances and wet fundings 15,062,824 (13,268,674)
(Increase) decrease in mortgage loans held for sale 136,137,038 (50,033,470)
(Increase) decrease in interest receivable 1,235,871 (919,386)
(Increase) decrease in other assets (527,921) (144,618)
Increase (decrease) in deferred taxes, net 3,360,031 (3,173,646)
Increase (decrease) in accounts payable and accrued
expenses (3,560,069) 283,341
Increase (decrease) in income taxes payable/receivable (4,896,181) 907,284
--------------- ------------
Net cash provided (used) by operating activities 160,060,320 (41,609,282)
--------------- ------------
Cash flows from investing activities:
Proceeds from investments sold 183,145 13,882,275
Purchases of investments (32,799,579) (7,708,605)
Capital expenditures (1,331,353) (3,239,854)
Purchase of real estate held for sale (8,175,998) (24,133,326)
Proceeds from sale of real estate 8,701,524 23,005,019
--------------- ------------
Net cash provided (used) by investing activities (33,422,261) 1,805,509
--------------- ------------
Cash flows from financing activities:
Net borrowings (payments) on related party notes payable (138,251,985) 62,842,195
Dividends paid (22,412,495)
Proceeds from sale of stock 137,498
--------------- ------------
Net cash provided (used) by financing activities (138,251,985) 40,567,198
--------------- ------------
Net increase (decrease) in cash equivalents (11,613,926) 763,425
Cash and cash equivalents, beginning of year 19,912,703 19,149,278
--------------- ------------
Cash and cash equivalents, end of year $ 8,298,777 $ 19,912,703
=============== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 15,570,221 $ 22,635,519
Income taxes 3,264,615 7,761,000
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
F-27
<PAGE> 55
QUALITY MORTGAGE USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
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,
1996 and 1995 was approximately $1.008 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:
o Quality Funding, Inc., a Hawaiian corporation, acts as a loan
originator exclusively for Quality Mortgage USA, Inc.
o 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.
o 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.
o Quality Trustee, Inc., a Missouri 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 equivalents consist primarily of money market accounts which are
convertible into a known amount of cash and carry insignificant risk of
loss. Cash equivalents are recorded at cost which approximates fair
value.
F-28
<PAGE> 56
QUALITY MORTGAGE USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
2. Significant Accounting Policies, Continued:
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
Investments consist primarily of, Class B, C and R mortgage pass-through
certificates and interest only strips, all with maturities exceeding
three months on the date of acquisition. Management has classified
investments at September 30, 1996 and 1995 as available-for-sale.
Investment fair market value is determined using various factors,
including related fair market values and estimated future cash flows. At
September 30, 1996 and 1995, investments are carried at amortized cost,
which approximates market.
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
effective 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.
ORIGINATED MORTGAGE SERVICING RIGHTS
On May 12, 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting
for Mortgage Servicing Rights, an amendment to SFAS No. 65. The Company
elected to adopt this standard for its financial statement reporting
beginning in fiscal 1996.
F-29
<PAGE> 57
QUALITY MORTGAGE USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
2. Significant Accounting Policies, Continued:
SFAS No. 122 requires that a portion of the cost of originating a
mortgage loan be allocated to the mortgage servicing right based on its
fair value relative to the loan as a whole. To determine the fair value
of the servicing rights created during the year, the Company used the
market prices under comparable servicing sale contracts, when available,
or alternatively used a valuation model that calculates the present value
of future cash flows to determine the fair value of the servicing rights.
In using this valuation method, the Company incorporated assumptions that
market participants would use in estimating future net servicing income
which included estimates of the cost of servicing per loan, the discount
rate, float value, an inflation rate, ancillary income per loan,
prepayment speeds and default rates.
In determining servicing value impairment at the end of the year, the
post-implementation originated servicing portfolio was disaggregated into
its predominant risk characteristics. The Company has determined those
risk characteristics to be prepayment and foreclosure risks. The Company
has disaggregated the portfolio by loan type and investor type to reflect
those risk characteristics. These segments of the portfolio were then
valued, using market prices under comparable servicing sale contracts
when available or, alternatively using the same model as was used to
originally determine the fair value at origination, using current
assumptions. The calculated value was then compared with the book value
of each segment to determine if a reserve for impairment was required.
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.
INCOME TAXES
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-30
<PAGE> 58
QUALITY MORTGAGE USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. Significant Accounting Policies, Continued:
ADVERTISING
Advertising costs are expensed as incurred. Advertising costs for the
year ended September 30, 1996 were approximately $955,000.
USE OF 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 revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
3. Cash And Cash Equivalents:
Cash and cash equivalents consist of the following at September 30:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Short-term investments $3,082,755 $ 9,855,902
Other cash deposits 5,216,022 10,056,801
---------- -----------
$8,298,777 $19,912,703
========== ===========
</TABLE>
Short-term investments consist primarily of money market accounts.
4. Mortgage Loans Held For Sale:
Mortgage loans held for sale, net consist of the following at September
30:
<TABLE>
<CAPTION>
1996 1995
-------------- ------------
<S> <C> <C>
Principal balance outstanding $ 62,471,329 $199,044,085
Premium paid on purchased loans 13,240 1,171,330
Deferred loan fees, net (67,124) (798,682)
Allowance for estimated losses (928,087) (2,200,000)
-------------- ------------
$ 61,489,358 $197,216,733
============== ============
Weighted average interest rate 10.84% 11.19%
</TABLE>
F-31
<PAGE> 59
QUALITY MORTGAGE USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
4. Mortgage Loans Held For Sale, Continued:
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.
5. 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.
At September 30, 1996 and 1995, the Company's real estate held for sale
consisted of twenty-five and thrity-two properties, respectively,
primarily located in Southern California. These properties are reflected
in the accompanying financial statements at appraised value less sales
commissions and other estimated costs of disposal.
At September 30, 1996 and 1995, these properties were carried at
$2,156,663, with estimated selling cost of $1,033,870 and $5,169,902,
with estimated selling costs of $1,614,861, respectively.
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, 1996 and 1995, the Company had loans outstanding of $0 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 totaling $92,425 and $1,719,679 as of
September 30, 1996 and 1995, respectively. Such amounts are included in
other assets on the accompanying balance sheets.
F-32
<PAGE> 60
QUALITY MORTGAGE USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
6. Originated Mortgage Servicing Rights:
Originated loan servicing, net of accumulated amortization and impairment
was as follows
<TABLE>
<CAPTION>
Originated
Servicing
Net
-----------
<S> <C>
Balance, September 30, 1995 $ -
Scheduled amortization (123,071)
Impairment -
Basis on servicing sales 1,460,736
-----------
Balance, September 30,1996 $ 1,337,665
===========
</TABLE>
7. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at September 30:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Office Buildings $ 3,823,854 $ 5,905,635
Computer hardware and software 3,618,864 2,782,184
Office machinery and equipment 1,831,984 1,538,326
Furniture and fixtures 694,649 637,178
Leasehold improvements 371,685 320,178
----------- -----------
10,341,036 11,183,501
Less accumulated depreciation (4,625,419) (2,898,577)
----------- -----------
$ 5,715,617 $ 8,284,924
=========== ===========
</TABLE>
During 1996, the Company recorded an in-kind dividend to both
shareholders. The dividend consisted of the transfer of real estate
with a carrying value of approximately $1,900,000. During October, 1996,
the related party transferred the same real estate back into the Company
as a capital contribution of approximately $1,900,000.
F-33
<PAGE> 61
QUALITY MORTGAGE USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
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,
1996 and 1995 was approximately $.827 billion and $1.421 billion, which
resulted in gains of $24.6 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.
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, 1996 and 1995
totaled $64,610,406 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, 1996 and 1995 were 6.875% and 7.75%,
respectively. Borrowings are collateralized by the underlying mortgage
loans.
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, 1996 and 1995, the
effective interest rates approximated the rates on the DLJ line of
credit. At September 30, 1996 and 1995, $7,773,011 and $25,814,662 were
outstanding under this Financing Program, respectively.
CONSULTING AGREEMENT
Under the terms of a five-year consulting agreement 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.
F-34
<PAGE> 62
QUALITY MORTGAGE USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
8. Related Party Transactions, Continued:
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, 1996 and 1995, the Company purchased a total of
$178,779,893 and $490,984,561, respectively, of mortgage loans from EFI.
Total premiums paid on mortgage loans purchased from EFI totaled
$1,922,296 and $6,206,855 for the years ended September 30, 1996 and
1995, respectively.
OTHER
During the year ended September 30, 1996, the Company paid $181,670 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 at September 30:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Current:
Federal $ (1,758,777) $ 9,340,301
State 127,212 3,590,292
----------- -----------
(1,631,565) 12,930,593
Deferred:
Federal 2,889,693 (2,205,756)
State 470,337 (967,891)
----------- -----------
3,360,030 (3,173,647)
----------- -----------
$ 1,728,465 $ 9,756,946
=========== ===========
</TABLE>
F-35
<PAGE> 63
QUALITY MORTGAGE USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
9. Income Taxes, Continued:
Significant components of the deferred income tax asset at September 30 are as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accrued salaries $ 267,257 $ 137,470
State taxes 743,585
REO reserve 478,682 750,426
Mortgage reserve 429,704 1,022,340
Litigation reserve 240,566 348,525
Investment income 2,797,461 3,964,534
Fair market value adjustment 273,420
Accumulated depreciation 151,326
Other 77,876 36,963
Net operating loss 132,966
---------- ----------
4,575,838 7,277,263
---------- ----------
Deferred tax liabilities:
Loan origination costs (277,404) (612,326)
State taxes (344,461)
Fair market value adjustment (658,114)
Other (9,047)
---------- ----------
(1,279,979) (621,373)
---------- ----------
Net deferred tax asset $3,295,859 $6,655,890
========== ==========
</TABLE>
Management has determined that a valuation allowance for the net deferred
tax asset is not necessary based on the Company's ability, in the event
of future losses, to carry back and recover the majority of its deferred
tax assets from refunds of taxes paid in prior years. Although
realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized.
10. Common Stock:
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-36
<PAGE> 64
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, 1996 and 1995
are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
------ ------ ------- -------
(In 000's)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 8,299 $ 8,299 $ 19,913 $ 19,913
Investments 29,479 29,479 8,109 8,109
Mortgage loans held for sale 61,489 63,266 197,217 203,330
Financial liabilities:
Related party notes payable 92,696 92,696 230,948 230,948
</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 various class-action litigation alleging
certain Truth-in-Lending Act and Real Estate Settlement and Procedures
Act violations. Based upon the opinions of in-house and external
counsel, the ultimate outcome and amount of any potential liability upon
disposition of these matters is not determinable.
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, 1996 under
these obligations are as follows:
<TABLE>
<CAPTION>
For the years ending September 20,
- ----------------------------------
<S> <C>
1997 $496,787
1998 72,895
--------
$569,682
========
</TABLE>
F-37
<PAGE> 65
QUALITY MORTGAGE USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
__________
12. Commitments And Contingencies, Continued:
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, 1996 and 1995, loans with principal balances totaling approximately
$-0- and $35,579,936, respectively, were being serviced by the Company.
The average annual servicing fee received by the Company was
approximately 50 basis points times the principal balance serviced.
Custodial funds amounted to $34,324 and $542,469 at September 30, 1996
and 1995, respectively. 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.
13. Credit Risk:
At September 30, 1996 and 1995, the Company had cash balances at certain
institutions that were in excess of the federally-insured limit of
$100,000. The Company has not experienced any losses due to funds on
deposit in excess of federally-insured amounts.
14. Subsequent Event:
In October 1996, substantially all of the net assets of the Company were
sold to Amresco Residential Mortgage Corporation for approximately
$65,000,000 under the terms of an asset purchase agreement.
F-38
<PAGE> 66
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<TABLE>
<S> <C>
2.(a) Agreement for Purchase and Sale of Assets, dated as of July 28, 1994, among Holliday Fenoglio
Dockerty & Gibson, Inc., Holliday Fenoglio Dockerty & Gibson of Dallas, Inc., Holliday
Fenoglio & Monte, Inc. and 3003, Inc. and Holliday Acquisition Corp., filed as Exhibit 2.1 to
Registrant's Current Report on Form 8-K dated August 15, 1994, which exhibit is incorporated
herein by reference.
3.(a) Restated Certificate of Incorporation, filed as Exhibit 3(i) to the Registrant's Form 10-Q for
the quarter ended September 30, 1995, which exhibit is incorporated herein by reference.
(b) Amended and Restated Bylaws effective as of February 25, 1997.(1)
4.(a) See Exhibits 3(a) and (b).
(b) Indenture, dated as of November 27, 1995, between the Registrant and First Interstate Bank of
Texas, National Association in respect of the Registrant's 8% Convertible Subordinated
Debentures due 2005, filed as Exhibit 4.5 to the Registrant's Registration Statement on Form S-3
(No. 33-63683), which exhibit is incorporated herein by reference.
(c) Indenture, dated as of January 15, 1996, between the Registrant and Bank One, Columbus, N.A., as
trustee, filed as Exhibit 4.1 to the Registrant's Form 8-K dated February 2, 1996, which exhibit
is incorporated herein by reference.
(d) Indenture, dated as of March 1, 1997, between the Company and Bank One, Columbus, N.A., as
trustee, filed as Exhibit 4.1 to the Registrant's Form 8-K dated March 12, 1997, which exhibit is
incorporated herein by reference.
(e) Officers' Certificate and Company Order dated as of March 12, 1997, establishing the terms of the
Company's Senior Subordinated Notes, Series 1997-A due 2004, filed as Exhibit 4.2 to the
Registrant's Form 8-K dated March 12, 1997, which exhibit is incorporated herein by reference.
(f) 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.
10.(a) Form of Indemnification Agreement together with a list of all officers and directors who have
signed such agreement, filed as Exhibit 10(g) to the Registrant's Annual Report on Form 10-K for
the year ended October 31, 1987, which exhibit is incorporated herein by reference.
(b) Form of Indemnification Agreement dated as of August 24, 1993, together with a list of all
officers and directors who have signed such agreement, filed as Exhibit 10(g) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September 31, 1993, which
exhibit is incorporated herein by reference.
(c) Fifth Amended and Restated Incentive Stock Option Plan dated as of November 20, 1990, filed as
Exhibit 10(h) to the Registrant's Annual Report on Form 10-K for the year ended December 31,
1991, which exhibit is incorporated herein by references.(2)
(d) Fourth Amended and Restated Stock Option Plan dated as of November 20, 1991, filed as
Exhibit 10(i) to the Registrants Annual Report on Form 10-K for the year ended December 31,
1991, which exhibit is incorporated herein by reference.(2)
(e) Stock Option Agreement, dated as of April 17, 1990, between the Registrant and Bruce W.
Schnitzer, and Termination of Warrant between Mr. Schnitzer and the Registrant, filed as
Exhibit 10(s) to the Registrant's Annual Report on Form 10-K for the year ended October 31,
1990, which exhibit is incorporated herein by reference.(2)
(f) Promissory Note dated October 31, 1990 issued by James P. Cotton, Jr. to the Registrant, filed
as Exhibit 10(s) to the Registrant's Annual Report on Form 10-K for the year ended October 31,
1990, which exhibit is incorporated herein by reference.
(g) Promissory Note dated October 31, 1990 issued by Gerald E. Eickhoff to the Registrant, filed as
Exhibit 10(w) to the Registrant's Annual Report Form 10-K for the year ended October 31, 1990,
which exhibit is incorporated herein by reference.
(h) Registrant's 1993 Key Individual Stock Option Plan filed as Exhibit 10(z) to the Registration
Statement of Registrant on Form S-4 under the Securities Act of 1993 (File No. 33-72732), which
exhibit is incorporated herein by reference.(2)
(i) Indemnification Agreement, dated March 30, 1993, between AMRESCO Holdings, Inc. and Richard L.
Cravey, filed as Exhibit 10(ab) to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993, which exhibit is incorporated herein by reference.
(j) Indemnification Agreement, dated March 30, 1993, between AMRESCO Holdings, and William S.
Green, filed as Exhibit 10(ac) to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993, which exhibit is incorporated herein by reference.
(k) The Registrant's Retirement Savings and Profit Sharing Plan and Trust filed as Exhibit 10(ag) to
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, which exhibit
is incorporated herein by reference.(2)
(l) The Registrant's Retention Bonus Plan, as amended, filed as Exhibit 10(ah) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993 and as Exhibit 10(y) to the
Registration Statement of the Registrant on Form S-4 under the Securities Act of 1993 (File No.
33-72321), which exhibits are incorporated herein by reference.(2)
</TABLE>
<PAGE> 67
<TABLE>
<S> <C>
(m) The Registrant's Severance Pay Plan filed as Exhibit 10(ai) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993, which exhibit is incorporated herein by
reference.(2)
(n) The Registrant's Thrift Restoration Plan filed as Exhibit 10(ak) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993, which exhibit is incorporated herein
by reference.(2)
(o) Employment Agreement, dated as of May 31, 1994, between Registrant and Robert H. Lutz, Jr.,
filed as Exhibit 10(y) to the Registrant's Form 10-K for the fiscal year ended December 31,
1994, which exhibit is incorporated herein by reference.(2)
(p) Warehousing Credit and Security Agreement, dated as of August 15, 1995, between AMRESCO Capital
Corporation and Residential Funding Corporation, filed as Exhibit 10(a) to the Registrant's
Form 10-Q/A No. 1 dated October 25, 1995 for the quarter ended September 30, 1995, which
exhibit is incorporated herein by reference.
(q) Second Amendment to Agreement for Purchase and Sale of Assets, dated November 21, 1995, by and
among the Registrant, Holliday Fenoglio, Inc. and certain sellers and shareholders named
therein filed as Exhibit 10(am) to the Registrant's Form 10-K for the fiscal year ended
December 31, 1995, which exhibit is incorporated herein by reference.
(r) Amendment to Stock Option Agreement, dated as of April 1, 1995, between the Registrant and
Bruce W. Schnitzer filed as Exhibit 10(an) to the Registrant's Form 10-K for the fiscal year
ended December 31, 1995, which exhibit is incorporated herein by reference.(2)
(s) Lease Agreement, dated as of February 9, 1996, between K-P Plaza Limited Partnership and the
Registrant filed as Exhibit 10(ao) to the Registrant's Form 10-K for the fiscal year ended
December 31, 1995, which exhibit is incorporated herein by reference.
(t) Interim Warehouse and Security Agreement, dated as of February 23, 1996, among Prudential
Securities Realty Funding Corporation and AMRESCO Residential Mortgage Corporation filed as
Exhibit 10(ap) to the Registrant's Form 10-K for the fiscal year ended December 31, 1995, which
exhibit is incorporated herein by reference.
(u) Second Amended and Restated Loan Agreement dated as of February 7, 1997 by and among AMRESCO,
INC. and certain of its subsidiaries and NationsBank of Texas, N.A. and certain other lenders
designated therein filed as Exhibit 10.1 to the Registrant's Form 8-K dated February 20, 1997,
which exhibit is incorporated herein by reference.
(v) Letter Agreement related to the Bridge Loan, dated February 7, 1997 by and among AMRESCO, INC.
and certain of its subsidiaries and NationsBank of Texas, N.A. filed as Exhibit 10.2 to the
Registrant's Form 8-K dated February 20, 1997, which exhibit is incorporated herein by
reference.
(w) Promissory Note related to the Letter Agreement dated February 7, 1997 by and among AMRESCO,
INC. and certain of its subsidiaries and NationsBank of Texas, N.A. filed as Exhibit 10.3 to the
Registrant's Form 8-K dated February 20, 1997, which exhibit is incorporated herein by
reference.
(x) Form of Severance Agreement, dated as of May 29, 1996, with Robert H Lutz, Jr., Robert L. Adair,
Barry L. Edwards, L. Keith Blackwell, Ronald B. Kirkland and Ronald Castleman. (1) (2)
(y) Form of Letter Agreement, dated as of March 20, 1997, with Harold E. Holliday, Jr. and Scott J.
Reading. (1) (2)
(z) Incentive Compensation Program, dated August 15, 1996, for certain employees of AMRESCO
Residential Credit Corporation. (1) (2)
(aa) AMRESCO Deferrred Compensation Program, Dated as of January 1, 1996. (1) (2)
(ab) Amendment No. 1 to AMRESCO Deferred Compensation Program, dated December 31, 1996. (1) (2)
(ac) AMRESCO, INC. 1997 Stock Option Plan. (1) (2)
(ad) AMRESCO, INC. 1995 Stock Option and Award Plan, as amended and restated. (1) (2)
11. Statement re: Computation of Per Share Earnings.(1)
21. Subsidiaries of the Registrant.(1)
23.(a) Consent of Independent Auditors-Deloitte and Touche L.L.P.(1)
(b) Consent of Independent Auditors-Coopers and Lybrand L.L.P.(1)
24. Power of Attorney of the Directors and certain officers of the Registrant.(1)
27. Financial Data Schedule.(1)
</TABLE>
___________
(1) Filed herewith.
(2) Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of this Report.
<PAGE> 1
EXHIBIT 3(b)
AMENDED AND RESTATED
CORPORATE BYLAWS
OF
AMRESCO, INC.
EFFECTIVE AS OF FEBRUARY 25, 1997
The following are Amended and Restated Bylaws of AMRESCO, INC., a
corporation for profit previously incorporated under the laws of Delaware under
the name Lifetime Communities, Inc. (the "Corporation"). These Amended and
Restated Bylaws were duly adopted by the Directors of said Corporation in
accordance with the provisions of the Amended and Restated Certificate of
Incorporation of the Corporation (the "Certificate of Incorporation") and with
the provisions of Section 109 of the General Corporation Law of the State of
Delaware.
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE: The principal place of business of the
Corporation shall be located at such place as shall be designated by the
Corporation's Board of Directors from time to time. The Corporation may also
have offices at such places, within or without the State of Delaware, as the
Board of Directors or Executive Committee may from time to time determine or as
the business of the Corporation may require.
Section 2. REGISTERED OFFICE AND AGENT: The registered office and
registered agent of the Corporation shall be designated in accordance with the
laws of its state of incorporation or any other state in which the Corporation
is authorized to do business.
ARTICLE II
DIRECTORS
Section 1. GENERAL POWERS: The Board of Directors shall have the
management and control of the business of the Corporation, and, in addition to
the power and authority by these Amended and Restated Bylaws expressly
conferred upon them, may exercise all such powers as are expressly or by
implication conferred on the Board of Directors by the Certificate of
Incorporation, these Amended and Restated Bylaws or the laws of Delaware.
Section 2. NUMBER, TENURE AND QUALIFICATION: The Board of Directors
shall be not less than seven (7) nor more than fifteen (15); all of whom shall
be of lawful age. The number of Directors comprising the Board of Directors
within the foregoing minimum and maximum limitations may be fixed and/or
changed from time to time by resolution of the Board of Directors. It shall
not be necessary for Directors to be stockholders.
Section 3. ELECTION: The Board of Directors shall be divided into
three classes as set forth in the Certificate of Incorporation.
<PAGE> 2
Section 4. VACANCIES: Newly created directorships resulting from any
increase in the authorized number of Directors and any vacancies occurring in
the Board of Directors caused by death, resignation, retirement,
disqualification, removal or other termination from office of any Directors may
be filled by the vote of a majority of the Directors then in office, though
less than a quorum, or by the affirmative vote, at a special meeting of the
stockholders called for the purpose of filling such directorship, of the
holders of a majority of the outstanding shares of capital stock then entitled
to vote in person or by proxy at such meeting. Each successor Director so
chosen shall hold office until the next election of the class for which such
Director shall have been chosen and until his respective successor shall have
been duly elected and qualified. Any newly created or eliminated directorships
resulting from an increase or decrease in the authorized number of Directors
shall be appointed or allocated by the Board of Directors among the three
classes of Directors so as to maintain such classes as nearly equal in number
as possible.
Section 5. REMOVAL: Any Director may be removed from office with
cause by a majority vote of the issued and outstanding capital stock of the
Corporation at any annual or special meeting of the stockholders.
Section 6. COMPENSATION: By resolution of the Board of Directors,
the Directors may be paid their expenses, if any, for attendance at each
meeting of the Board of Directors or any committee thereof, and may be paid
such compensation for the performance of their duties as the Board of Directors
shall determine either in the form of an annual salary or a fee for attendance
at each meeting or such other form of compensation as the Board of Directors
shall deem appropriate. No such payment shall preclude any Director from
serving the Corporation in any other capacity and receiving compensation
therefor.
ARTICLE III
COMMITTEES
Section 1. EXECUTIVE COMMITTEE:
(a) The Board of Directors may appoint an Executive Committee,
which shall consist of such number of Directors as the Board of Directors shall
determine.
(b) The Executive Committee shall meet at such times and places as
the majority thereof shall determine. The Executive Committee shall have and
exercise the full power of the Board of Directors in the management of the
business and affairs of the Corporation (excluding functions delegated by the
Board of Directors to other standing committees) during the interim between
meetings of the Board of Directors, except that the Executive Committee shall
not have any power or authority to take action with regard to any matter which
applicable law reserves exclusively to the full Board of Directors. The
Executive Committee shall have the power to authorize the issuance of stock of
the Corporation upon exercise of options (and compliance with the terms
thereof) granted by the Board of Directors, provided such shares have been
reserved for issuance. A majority of the Executive Committee shall be
necessary to and shall constitute a quorum for the transaction of all business.
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Section 2. AUDIT COMMITTEE: The Board of Directors may appoint an
Audit Committee which shall consist of such number of non-employee Directors as
the Board of Directors shall determine. The Audit Committee shall meet at such
times and places as the majority thereof shall determine. The Board of
Directors shall retain the power to fill vacancies on the Audit Committee. The
Audit Committee shall have the power to review all significant financial
information so as to assure the accuracy thereof, to ascertain the existence of
effectiveness of internal accounting controls, to oversee independent and
internal auditing functions and to provide communication between outside
auditors of the Corporation and the Board of Directors. A majority of the
Audit Committee shall be necessary and shall constitute a quorum for the
transaction of all business.
Section 3. COMPENSATION COMMITTEE: The Board of Directors may
appoint a Compensation Committee, which shall consist of such number of
Directors as the Board of Directors shall determine. The Compensation
Committee shall have the authority to make recommendations to the Board of
Directors regarding the compensation of any officer of the Corporation. A
majority of the Compensation Committee shall be necessary to and shall
constitute a quorum for the transaction of all business.
Section 4. OTHER COMMITTEES: The Board of Directors may, by
resolution adopted by a majority of the entire Board of Directors, designate
one or more committees in addition to those described above. Each committee
shall consist of one or more Directors appointed by resolution adopted by a
majority of the entire Board of Directors. Each committee, to the extent
expressly provided in the resolution establishing such committee, shall have
and may exercise all of the powers and authority of the Board of Directors in
the management of the business and affairs of the Corporation except to the
extent expressly restricted by the Certificate of Incorporation, these Amended
and Restated Bylaws or applicable law.
Section 5. COMMITTEE CHANGES: The Board of Directors shall have the
power at any time to fill vacancies in, to change the membership of, and to
discharge any committee. The number of committee members may be increased or
decreased from time to time by resolution adopted by a majority of the entire
Board of Directors. Each committee member shall serve as such until the
earliest of (i) the expiration of his term as Director, (ii) his resignation as
a committee member or as a Director, or (iii) his removal as a committee member
or as a Director.
Section 6. MEETINGS, NOTICE, QUORUM AND VOTING: Section 1 through 6
of Article VI shall also apply to committees and their members, unless
otherwise provided by the Certificate of Incorporation, these Amended and
Restated Bylaws or applicable law.
ARTICLE IV
OFFICERS
Section 1. GENERAL: The officers of the Corporation shall consist of
a Chairman of the Board, President, Executive Vice President, such additional
Vice Presidents, with such further designations, if any, as may be determined
by the Board of Directors, a Secretary, a Treasurer and such Assistant Vice
Presidents, Assistant Secretaries and Assistant Treasurers as the Board
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of Directors may appoint or elect. The Chairman of the Board and the President
shall be Directors of the Corporation. Any two offices may be held by one and
the same person, except that the office of President and Secretary or Assistant
Secretary shall not be so held.
Section 2. CHAIRMAN OF THE BOARD: The Chairman of the Board shall
preside at all meetings of the Board of Directors and stockholders, and shall
exercise and perform such other powers and duties as may from time to time be
assigned to him by the Board of Directors.
Section 3. CHIEF EXECUTIVE OFFICER AND PRESIDENT: The Chief
Executive Officer shall be the chief executive officer of the Corporation and,
in the absence of the Chairman of the Board, shall preside at all meetings of
the stockholders and the Board of Directors. The President shall be the chief
operating officer of the Corporation and, in the absence of the Chairman of the
Board and the Chief Executive Officer, shall preside at all meetings of the
stockholders and the Board of Directors. The Chief Executive Officer and the
President shall have responsibility for the general and active management of
the business of the Corporation and shall see that all orders and resolutions
of the Board of Directors are carried into effect.
Section 4. EXECUTIVE VICE PRESIDENT: The Vice Presidents shall
perform such duties as may be assigned to them from time to time by the Board
of Directors, the Executive Committee or the President.
Section 5. VICE PRESIDENTS: The Vice Presidents shall perform such
duties as may be assigned to them from time to time by the Board of Directors,
the Executive Committee or the President.
Section 6. SECRETARY: The Secretary shall be the custodian of the
corporate seal, and shall be ex-officio the clerk of the stockholders and of
the Board of Directors. He shall attend all meetings of the stockholders,
Board of Directors and the Executive Committee, and shall keep accurate minutes
of such meetings in a book to be kept for that purpose. He shall perform such
other duties as may be required of him by the Board of Directors, the Executive
Committee, or the laws of Delaware.
Section 7. TREASURER: The Treasurer shall keep full and accurate
accounts of receipts and disbursements in a book belonging to the Corporation,
and shall deposit all monies and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by the
Board of Directors. He shall disburse the funds of the Corporation under the
direction of the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the Chairman of the Board, the President and
the Directors, at annual meetings of stockholders or whenever directed by the
Chairman of the Board or the President, an account of all or any part of his
transactions as Treasurer, and of the financial condition of the Corporation,
and shall also perform all other duties imposed upon him by the Board of
Directors, the Executive Committee, or the laws of Delaware.
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<PAGE> 5
Section 8. ASSISTANT VICE PRESIDENT, ASSISTANT SECRETARIES AND
ASSISTANT TREASURERS: Assistant Vice Presidents, Assistant Secretaries and
Assistant Treasurers shall perform such duties as shall be assigned to them by
the Executive Vice President, Secretary or Treasurer respectively or by the
Board of Directors, the Executive Committee or the President.
Section 9. ELECTION OF OFFICERS: At the first meeting held after the
first or organizational meeting of stockholders, and at the first meeting held
after each annual meeting of stockholders, the Board of Directors shall elect
all officers of the Corporation who shall hold office for one (1) year or until
their successors are elected and qualified.
Section 10. VACANCIES: If any office shall become vacant by reason
of death, resignation, disqualification, removal or otherwise, the Board of
Directors, by a majority vote, may elect a successor or successors who shall
hold office for the unexpired term.
Section 11. REMOVAL: Any officer may be removed with or without
cause by a majority vote of the Board of Directors at any meeting of the Board
of Directors.
ARTICLE V
MEETING OF STOCKHOLDERS
Section 1. ANNUAL AND SPECIAL MEETINGS: The annual meeting of
stockholders of the Corporation shall be held at the office of the Corporation
(or at such other place as the Board of Directors may, from time to time,
designate) on or before six months after the end of each fiscal year (as
established by the Directors) for the election of Directors and for such other
business as may properly come before the meeting. Special meetings of
stockholders may be called at any time by the Board of Directors or the
Chairman of the Board; and shall be called by the Board of Directors or the
Chairman of the Board at the request of the holders of not less than one-tenth
of all the shares entitled to vote at the meeting.
Section 2. NOTICE: Notice of all stockholders, meetings, whether
annual or special, except the first meeting, shall always be mailed to each
stockholder of record entitled to vote at such meeting not less than ten (10)
nor more than sixty (60) days before such meeting. It shall be directed to a
stockholder at this address as it appears on the records of the Corporation.
In the case of special meetings, all notices shall state the purpose or
purposes of the meetings, and the business to be transacted or considered
thereat.
Section 3. RECORD DATE:
(a) In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a record
date, which shall not be more than 60 or less than 10 days before the date of
such meeting, nor more than 60 days prior to any other action.
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<PAGE> 6
(b) If no record date is fixed: (i) the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the date next preceding the
day on which notice is given, or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held; and (ii) the
record date for determining stockholders for any other purpose shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating thereto.
(c) A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of
the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
Section 4. QUORUM: A majority of the stock then issued and
outstanding shall constitute a quorum at all meetings of the stockholders. In
the absence of a quorum, those present at a stockholders' meeting may adjourn
the same to a future date, but until a quorum is present, no other business may
be transacted.
Section 5. VOTING PROXIES: In all elections of Directors, and in
deciding all questions at stockholders' meetings, each stockholder shall be
entitled to one vote for each share of stock held by him. Treasury stock shall
not be voted at any meeting and shall not be counted in determining the issued
and outstanding stock of the Corporation. Stockholders may vote by proxy duly
authorized in writing which shall be filed with the Secretary at or before the
meeting.
ARTICLE VI
MEETINGS OF BOARD OF DIRECTORS
Section 1. REGULAR MEETINGS: Regular meetings of the Board of
Directors shall be held quarterly at such times as shall be determined by the
Board of Directors, except that the annual meeting shall be held the same day
and immediately after the adjournment of the stockholders' annual meeting.
Section 2. SPECIAL MEETINGS: Special meetings of the Board of
Directors may be called by the Chairman of the Board upon request of any one
Director.
Section 3. NOTICE OF MEETINGS: Notice of any regular or special
meeting of the Board of Directors shall state the time and place thereof, shall
be given not less than three (3) days before the day of such meeting and shall
be given by oral, telephonic, telegraphic or written communication. In the
event that all members of the Board of Directors shall sign a written consent
and waiver of notice thereof on the record of any special or regular meeting,
however called or notified, the acts of such meeting shall be as valid as if
legally called and notified.
Section 4. QUORUM: The presence of a majority of the Directors shall
be necessary to and constitute a quorum for the transaction of business by the
Board of Directors and the acts of such majority at a meeting shall be the act
of the Board of Directors. In the absence of a quorum, those present at a
Directors' meeting may adjourn the same to a future date, but until a quorum is
present no other business may be transacted.
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<PAGE> 7
Section 5. PLACE AND CONDUCT OF MEETINGS: Regular or special
meetings of the Board of Directors may be held within or without the State of
Delaware or at such places within or without the United States as shall be
designated by the Board of Directors. The Board of Directors may adopt such
rules and regulations for the conduct of the business of its meetings and
management of the affairs of the Corporation as it may deem proper, not
inconsistent with the Certificate of Incorporation, these Amended and Restated
Bylaws or applicable law.
Section 6. VOTING:
The vote of the majority of the Directors present at a meeting at
which a quorum is present shall be required to effect any action of the Board
of Directors, except as otherwise provided herein.
ARTICLE VII
BANK ACCOUNTS AND CONTRACTS
Section 1. DEPOSITORIES: The money and funds of the Corporation, not
otherwise invested by the Board of Directors, shall be deposited by the
Treasurer in the name and to the credit of the Corporation in such bank or
banks as the Board of Directors shall select. All checks, drafts, notes and
acceptances shall be signed by such officer or officers, agent or agents of the
Corporation in such manner as the Board of Directors shall determine.
Section 2. CONTRACTS: Except as otherwise provided by the Board of
Directors, contracts may be executed on behalf of the Corporation by the
Chairman of the Board, the President, any Vice President, or the Treasurer, and
may be attested and the corporate seal affixed by the Secretary or an Assistant
Secretary. The Board of Directors may authorize the execution of contracts by
such officers, agents and employees as may be designated by them.
ARTICLE VIII
SEAL
Section 1. FORM AND USE: The corporate seal of the Corporation shall
bear the words and figures: AMRESCO, INC. - Delaware - 1977.
The corporate seal shall be used under the direction of the Board of Directors.
ARTICLE IX
STOCK AND STOCKHOLDERS
Section 1. CERTIFICATES OF STOCK: Every stockholder shall be
entitled to a certificate of stock signed by the Chairman of the Board, the
President or a Vice President and the Secretary or an Assistant Secretary,
under the seal of the Corporation, certifying the number and class of shares
represented by such certificate. When such certificate is signed by a transfer
agent and
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<PAGE> 8
by a registrar, the seal of the Corporation and the signature of any such
Chairman of the Board, President, Vice President, Secretary or Assistant
Secretary may be facsimile. If any officer, transfer agent, or registrar who
has signed, or whose facsimile signature has been placed upon, a certificate
has ceased to be such officer, transfer agent, or registrar before such
certificate is issued, such certificate may be issued by the Corporation with
the same effect as if he were such officer, transfer agent, or registrar at the
date of issue. All certificates for shares shall be consecutively numbered or
otherwise identified. The name of the person owning the shares represented
thereby, with the number of such shares and date of issue, shall be entered on
the Corporation's books.
If the Corporation shall be authorized to issue more than 1 class of
stock or more than 1 series of any class, the powers, designations, preferences
and relative, participating, optional, or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights shall be set forth in full or summarized on the
face or back of the certificate which the Corporation shall issue to represent
such class of series of stock, provided that, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate
which the Corporation shall issue to represent such class or series of stock, a
statement that the Corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
Section 2. TRANSFER OF SHARES: Transfer of shares shall be made only
upon the books of the Corporation and no new certificates shall be issued until
the former certificate for a like number of shares shall have been surrendered
and canceled. Transfers of shares shall be made by the holder of record
thereof or by his legal representative, who shall furnish proper evidence of
authority to transfer, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary.
Section 3. TRANSFER AGENT AND REGISTRAR: The Board of Directors may
appoint one or more transfer agents and one or more registrars of transfers and
may require all certificates of shares to bear the signature of a transfer
agent and registrar, or as the Board of Directors may otherwise direct.
Section 4. LOST CERTIFICATES: Any person claiming a certificate of
stock to be lost or destroyed shall make an affidavit or affirmation of that
fact to the Corporation and shall, if the Board of Directors so require, give
the Corporation a bond of indemnity, in form and amount satisfactory to the
Corporation.
Section 5. REGULATIONS: The Board of Directors shall have power and
authority to make all such rules and regulations as they may deem expedient
concerning the issue, transfer and registration of certificates for shares of
the capital stock of the Corporation.
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<PAGE> 9
Section 6. LEGENDS: The Board of Directors shall have the power and
authority to provide that certificates representing shares of stock bear such
legends as the Board of Directors deems appropriate to assure that the
Corporation does not become liable for violations of federal or state
securities laws or other applicable law.
ARTICLE X
ORDER OF BUSINESS
Insofar as practicable, the order of business of any annual or special
meeting of stockholders or Directors shall be as follows:
1. Roll Call
2. Reading of Minutes
3. Report of Officers
4. Reports of Committees
5. Unfinished Business
6. Miscellaneous Business
7. Election of Officers
8. New Business
9. Adjournment
ARTICLE XI
AMENDMENT OF THE BYLAWS
The Board of Directors is expressly authorized, without the assent of
the stockholders, to make, amend, alter and rescind the Bylaws of the
Corporation by the affirmative vote of a majority of the Board of Directors at
a regular or special meeting.
ARTICLE XII
INDEMNITY
No Director of the Corporation shall have, or incur, any personal
liability to the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a Director; provided, that this provision shall not
eliminate or limit the liability of a Director (i) for any breach of such
Director's duty of loyalty to the Corporation 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 Delaware General
Corporation Law, or (iv) for any transaction from which the Director derived an
improper personal benefit. If the Delaware General Corporation Law shall be
hereafter repealed or modified, the elimination of liability of a Director
herein provided shall be to the fullest extent permitted by the Delaware
General Corporation Law as amended. Any repeal or modification of this
provision shall not adversely affect any right or protection of a Director of
the Corporation existing immediately prior to such repeal or modification.
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<PAGE> 10
The Corporation shall indemnify, to the full extent that it shall have
the power under applicable law, any person who was or is a party or is
threatened to be made a party to any threatened, pending or contemplated
action, suit or proceeding, whether civil, criminal, administrative or
investigative, 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 or another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding. To the fullest extent allowed by applicable law,
such payment shall be paid by the Corporation in advance of the final
disposition of the action, suit or proceeding; provided, however, such
Director, officer, employee or agent must undertake to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the
Corporation. Furthermore, the Board of Directors is authorized to enter into a
contract with any Director, officer, employee or agent of the Corporation,
providing for indemnification to the fullest extent permitted by law. Any
repeal or modification of this provision shall not adversely affect any right
or protection of a Director, officer, employee or agent of the Corporation
existing immediately prior to such real or modification.
Adopted: February 25, 1997
L. Keith Blackwell, Secretary
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EXHIBIT 10(X)
SEVERANCE COMPENSATION AGREEMENT
THIS AGREEMENT made and entered into as of May 29, 1996, by and
between AMRESCO, INC., a Delaware corporation (together with its subsidiaries,
"AMRESCO"), and ______________________ ("Executive").
W I T N E S S E T H:
WHEREAS, AMRESCO recognizes that the current business environment
makes it difficult to attract and retain highly qualified executives unless a
certain degree of security can be offered to such individuals against
organizational and personnel changes which frequently follow Changes of Control
(as defined below) of a corporation; and
WHEREAS, even rumors of acquisitions or mergers may cause executives
to consider major career changes in an effort to assure financial security for
themselves and their families; and
WHEREAS, AMRESCO desires to assure fair treatment of its key
executives in the event of a Change of Control and to allow them to make
critical career decisions without undue time pressure and financial
uncertainty, thereby increasing their willingness to remain with AMRESCO
notwithstanding the outcome of a possible Change of Control transaction; and
WHEREAS, AMRESCO recognizes that its key executives will be involved
in evaluating or negotiating any offers, proposals or other transactions which
could result in Changes of Control of AMRESCO and believes that it is in the
best interest of AMRESCO and its stockholders for such key executives to be in
a position, free from personal financial and employment considerations, to be
able to assess objectively and pursue aggressively the interests of AMRESCO and
its stockholders in making these evaluations and carrying on such negotiations;
and
WHEREAS, the Board of Directors of AMRESCO (the "Board") believes it
is essential to provide the Executive with compensation arrangements upon a
Change of Control which provide the Executive with individual financial
security and which are competitive with those of other corporations, and in
order to accomplish these objectives, the Board has caused AMRESCO to enter
into this Agreement.
NOW, THEREFORE, in consideration of the mutual premises and conditions
contained herein, the parties hereto agree as follows:
1. TERM. This Agreement shall commence on the date hereof, and
shall continue until April 30, 2001; thereafter the term hereof shall be
extended automatically from year-to-year unless (i) there has been no Change of
Control and
<PAGE> 2
(ii) no fewer than thirty (30) days prior to April 30, 2001 or the appropriate
April 30 thereafter, AMRESCO shall have given notice that it does not wish to
extend this Agreement; and provided, further, that after a Change of Control of
AMRESCO during the term hereof, this Agreement shall remain in effect until all
of the obligations of the parties hereunder are satisfied.
2. CHANGE OF CONTROL. Except as provided herein, no benefits
shall be payable hereunder unless there shall have been a Change of Control of
AMRESCO, as defined below, and Executive's employment by AMRESCO shall
thereafter have been terminated within two (2) years of the date of such Change
of Control in accordance with Section 3. For purposes hereof, a "Change of
Control" or "Change of Control of AMRESCO" shall mean any one of the following:
(i) Continuing Directors (The term "Continuing Director" means any individual
who is a member of the Board on the date hereof or was nominated for election
as a director by, or whose nomination as a director was approved by, the Board
with the affirmative vote of a majority of the Continuing Directors.) no longer
constitute a majority of the Board; (ii) any person or group of persons (as
defined in Rule 13d-5 under the Securities Exchange Act of 1934, as amended
{"Rule 13d-5"}) (other than Richard L. Cravey, CGW Southeast Partners I, L.P.
or CGW Southeast Partners II, L.P. {collectively, the "Control Group"})
together with his or its affiliates, becomes the beneficial owner, directly or
indirectly, of 25% or more of the voting power of AMRESCO's then outstanding
securities entitled generally to vote for the election of AMRESCO's directors;
(iii) the merger or consolidation of AMRESCO with any other entity if AMRESCO
is not the surviving entity and any person or group of persons (as defined in
Rule 13d-5) (other than the Control Group), together with his or its
affiliates, is the beneficial owner, directly or indirectly, of 25% or more of
the surviving entity's then outstanding securities entitled generally to vote
for the election of the surviving entity's directors; or (iv) the sale of all
or substantially all of the assets of AMRESCO or the liquidation or dissolution
of AMRESCO. Notwithstanding the foregoing provisions of this Section 2, if the
Executive's employment with AMRESCO is terminated in accordance with the
provisions of Section 3 prior to the date on which a Change of Control occurs,
and it is reasonably demonstrated that such termination (i) was at the request
of a third party who has taken steps reasonably calculated to effect a Change
of Control or (ii) otherwise arose in connection with a Change of Control, then
for all purposes hereof, such termination shall be deemed to have occurred
immediately following a Change of Control.
3. TERMINATION OF EMPLOYMENT FOLLOWING CHANGE OF CONTROL. If any
of the events described in Section 2 constituting a Change of Control of
AMRESCO shall have occurred, Executive shall be entitled to the benefits
provided in Section 4 upon the subsequent termination of his employment,
provided that such termination occurs within two (2) years of a Change of
Control of AMRESCO and unless such termination is (a) because of his death or
his "Disability" or "Retirement" (as defined in Section 3.1), (b) by AMRESCO
for "Cause" (as defined
2
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in Section 3.1), (b) by AMRESCO for "Cause" (as defined in Section 3.2), or (c)
by Executive other than for "Good Reason" (as defined in Section 3.3).
3.1 Disability; Retirement.
(a) If, as a result of Executive's incapacity due
to physical or mental illness, Executive shall have been absent from
his duties with AMRESCO on a full time basis for one hundred twenty
(120) consecutive business days, and within thirty (30) days after
written Notice of Termination (as hereinafter defined) is given,
Executive shall not have returned to the full time performance of his
duties, AMRESCO may terminate Executive's employment for "Disability."
(b) Termination by AMRESCO or Executive of his
employment based on "Retirement" shall mean termination in accordance
with AMRESCO's retirement policy, including early retirement,
generally applicable to its salaried employees or in accordance with
any retirement arrangement established with Executive's consent with
respect to him.
3.2 Cause. For the purposes hereof, AMRESCO shall have
"Cause" to terminate Executive's employment hereunder upon (i) the willful and
continued failure by Executive to perform his duties with AMRESCO (other than
any such failure resulting from incapacity due to physical or mental illness),
after a demand for substantial performance is delivered to Executive by the
Board which specifically identifies the manner in which the Board believes that
he has not substantially performed his duties, or (ii) the willful engaging by
Executive in gross misconduct materially and demonstrably injurious to AMRESCO.
For purposes of this Section 3.2, no act, or failure to act, on Executive's
part shall be considered "willful" if, in the Executive's sole judgment, his
action or omission was done, or omitted to be done, in good faith and with a
reasonable belief that his action or omission was in the best interest of
AMRESCO. Notwithstanding the foregoing, Executive shall not be deemed to have
been terminated for Cause unless and until there shall have been delivered to
him a copy of a resolution duly adopted by the affirmative vote of not less
than two-thirds (2/3) of the entire authorized membership of the Board at a
meeting of the Board called and held for the purpose (after reasonable notice
and an opportunity for Executive, together with counsel, to be heard before the
Board), finding that in the good faith opinion of the Board he was guilty of
conduct set forth above in clauses (i) or (ii) of the first sentence of this
Section 3.2 and specifying the particulars thereof in detail.
3.3 Good Reason. Executive may terminate his employment
for Good Reason. For purposes of this Agreement, "Good Reason" shall mean:
3
<PAGE> 4
(a) Without his express written consent, the
assignment to Executive of any duties inconsistent with his positions,
duties, responsibilities and status with AMRESCO immediately prior to
a Change of Control, or a change in his reporting responsibilities,
titles or offices as in effect immediately prior to a Change of
Control, or any removal of Executive from or any failure to re-elect
Executive to any of such positions, except in connection with the
termination of his employment for Cause, death, Disability or
Retirement or by Executive other than for Good Reason;
(b) A reduction by AMRESCO in Executive's base
salary as in effect on the date of a Change of Control or as the same
may be increased from time to time thereafter;
(c) A reduction by AMRESCO in the bonus payable
to Executive in any year below a percentage of Executive's then base
salary equal to the average percentage of Executive's base salary
represented by the bonuses received by Executive for the three (3)
years (or, if shorter, the years of Executive's employment by AMRESCO)
immediately preceding the year in which a Change of Control occurs as
percentages of his base salaries in each of such three (3) years (or
shorter number of years). By way of example, but not in limitation of
the provisions of this paragraph (c), assume a Change of Control
occurs in 1998, and Executive received bonuses for each of 1995, 1996
and 1997 as follows: 30% of his base salary for 1995; 50% of his base
salary for 1996; and 50% of his base salary for 1997. If Executive
receives a bonus for 1998 which is less than 43.33% of his 1998 base
salary, Executive shall have "Good Reason" for terminating his
employment under this Section 3.3. If Executive was only employed
during 1996 and 1997, using the same facts as recited herein,
Executive would have "Good Reason" to terminate his employment if his
1998 bonus was less than 50% of his 1998 base salary;
(d) AMRESCO's requiring Executive to be based
anywhere other than either AMRESCO's offices at which he was based
immediately prior to a Change of Control or AMRESCO's offices which
are no more than 75 miles from the offices at which the Executive was
based immediately prior to a Change of Control, except for required
travel on AMRESCO's business to an extent substantially consistent
with his business travel obligations immediately prior to the Change
of Control (excluding, however, any travel obligations prior to the
Change of Control that are associated with or caused by the Change of
Control events or circumstances), or, in the event Executive consents
to any relocation beyond such 75-mile radius, the failure by AMRESCO
to pay
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<PAGE> 5
(or reimburse Executive) for all reasonable moving expenses incurred
by him relating to a change of his principal residence in connection
with such relocation and to indemnify Executive against any loss
(defined as the difference between the actual sale price of such
residence and the higher of (a) his aggregate investment in such
residence or (b) the fair market value of such residence as determined
by a real estate appraiser designated by Executive and reasonably
satisfactory to AMRESCO) realized on the sale of Executive's principal
residence in connection with any such change of residence;
(e) The failure by AMRESCO to continue in effect
any benefit or compensation plan (including but not limited to any
stock option plan, pension plan, life insurance plan, health and
accident plan or disability plan) in which Executive is participating
at the time of a Change of Control of AMRESCO (or plans providing
substantially similar benefits), the taking of any action by AMRESCO
which would adversely affect Executive's participation in or
materially reduce his benefits under any of such plans or deprive him
of any material fringe benefit enjoyed by him at the time of the
Change of Control, or the failure by AMRESCO to provide Executive with
the number of paid vacation days to which he is then entitled on the
basis of years of service with AMRESCO in accordance with AMRESCO's
normal vacation policy in effect immediately prior to the Change of
Control;
(f) Any failure of AMRESCO to obtain the
assumption of, or the agreement to perform, this Agreement by any
successor as contemplated in Section 5;
(g) Any purported termination of Executive's
employment which is not effected pursuant to a Notice of Termination
satisfying the requirements of Section 3.4 (and, if applicable,
Section 3.2); and for purposes hereof, no such purported termination
shall be effective; or
(h) Any termination of employment by Executive
for any reason (other than death, Disability or Retirement) during the
thirty (30)-day period beginning on the first anniversary of the date
on which a Change of Control occurs.
For purposes of this Section 3.3, any good faith determination of "Good Reason"
made by the Executive shall be conclusive and binding on the parties.
3.4 Notice of Termination. Any termination pursuant to
the foregoing provisions of this Section (including termination due to
Executive's death) shall be
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<PAGE> 6
communicated by written Notice of Termination to the other party hereto. For
purposes hereof, a "Notice of Termination" shall mean a notice which shall
indicate the specific termination provision herein relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of Executive's employment under the provision so
indicated. In the event that Executive seeks to terminate his employment with
AMRESCO pursuant to Section 3.3, he must communicate his written Notice of
Termination to AMRESCO within sixty (60) days of being notified of such action
or actions by AMRESCO which constitute Good Reasons for termination.
3.5 Date of Termination. "Date of Termination" shall
mean (i) if this Agreement is terminated for Disability, thirty (30) days after
Notice of Termination is given (provided that Executive shall not have returned
to the performance of his duties on a full-time basis during such thirty
(30)-day period); (ii) if Executive's employment is terminated pursuant to
Section 3.3, the date specified in the Notice of Termination; and (iii) if
Executive's employment is terminated for any other reason, the date on which a
Notice of Termination is given.
4. COMPENSATION UPON TERMINATION.
4.1 Termination Without Cause or for Good Reason. If
Executive's employment is terminated other than on account of Executive's death
or pursuant to Sections 3.1 or 3.2, or if Executive shall terminate his
employment for Good Reason, then, subject to Section 4.2, Executive shall be
entitled, if such termination occurred within two (2) years of a Change of
Control, to the following benefits:
(a) AMRESCO shall pay to Executive as severance
pay in a lump sum not later than the tenth (10th) day following the
Date of Termination, an amount equal to the greater of (i) or (ii) as
follows:
(i) The product of (A) Executive's Total
Compensation (as defined below) for the calendar year
immediately preceding the calendar year in which the Date of
Termination occurs, multiplied by (B) the number three (3).
(ii) The sum of Executive's Total
Compensation (as defined below) for the three (3) calendar
years immediately preceding the calendar year in which the
Date of Termination occurs.
For purposes of this Section 4.1(a), the Executive's Total
Compensation" for a given calendar year shall mean the total amount
reportable on Form W-2, or the successor Federal income tax wage
reporting form, for
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<PAGE> 7
such given calendar year except that the amount of any bonus
reportable on such W-2 Form shall not be counted as part of Total
Compensation for such given calendar year if such bonus was not
payable for services performed in such given calendar year, and the
amount of any bonus payable to Executive for services performed in
such given calendar year (which may be reportable on a later Form W-2)
shall be counted as part of Total Compensation for such given calendar
year.
(b) Notwithstanding any provision to the contrary
in any stock option agreement or restricted stock agreement that may
be outstanding between Executive and AMRESCO, all stock options then
held by Executive shall immediately become exercisable and Executive
shall become 100% vested in all shares of restricted stock held by or
for the benefit of Executive.
(c) Notwithstanding any provision to the contrary
in any stock option agreement that may be outstanding between
Executive and AMRESCO, Executive's right to exercise any previously
unexercised options under any such stock option agreement shall not
terminate until the latest date on which the option granted under such
agreement would expire under the terms of such agreement but for
Executive's termination of employment.
(d) AMRESCO shall continue to provide Executive
with medical/dental and related benefits and long-term disability
benefits equal to the benefits in effect for Executive at the time of
the Change of Control, and AMRESCO shall provide such benefits at the
same cost to Executive as the cost, if any, charged to Executive for
those benefits prior to termination of employment. AMRESCO shall
provide the foregoing benefits for the period from Executive's
termination of employment until the earlier of (i) three (3) years
from the date of Executive's termination of employment, or (ii) the
date Executive obtains employment which provides him with comparable
medical/dental and related benefits and/or long-term disability
benefits. For purposes of the preceding sentence, benefits will not
be comparable during any waiting period for eligibility for such
benefits or during any period during which there is a preexisting
condition limitation on such benefits.
4.2 Limitation on Payments.
(a) Anything in Section 4.1 to the contrary
notwithstanding, in the event it shall be determined that any payment
or distribution made, or benefit provided, by AMRESCO to or for the
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<PAGE> 8
benefit of Executive (whether paid or payable or distributed or
distributable or provided pursuant to the terms hereof or otherwise)
would constitute a "parachute payment" as defined in Section 280G of
the Internal Revenue Code of 1986, as amended (the "Code"), then the
lump sum severance payment payable pursuant to Section 4.1(a) shall be
reduced so that the aggregate present value of all payments in the
nature of compensation to (or for the benefit of) Executive which are
contingent on a change of control (as defined in Code Section
280G(b)(2)(A)) is One Dollar ($1.00) less than the amount which
Executive could receive without being considered to have received any
parachute payment (the amount of this reduction in the lump sum
severance payment is referred to herein as the "Excess Amount"). The
determination of the amount of any reduction required by this Section
4.2 shall be made by an independent accounting firm (other than
AMRESCO's independent accounting firm) selected by AMRESCO and
acceptable to Executive, and such determination shall be conclusive
and binding on the parties hereto.
(b) Notwithstanding the provisions of Section
4.2(a), if it is established pursuant to a final determination of a
court or an Internal Revenue Service proceeding which has been finally
and conclusively resolved, that an Excess Amount was received by
Executive from AMRESCO, then such Excess Amount shall be deemed for
all purposes to be a loan to Executive made on the date Executive
received the Excess Amount and Executive shall repay the Excess Amount
to AMRESCO on demand (but no less than ten (10) days after written
demand is received by Executive) together with interest on the Excess
Amount at the "applicable Federal rate" (as defined in Section 1274(d)
of the Code) from the date of Executive's receipt of such Excess
Amount until the date of such repayment.
4.3 Mitigation or Set-off of Amounts Payable Hereunder.
Executive shall not be required to mitigate the amount of any payment provided
for in this Section 4 by seeking other employment or otherwise, nor shall the
amount of any payment provided for in this Section 4 be reduced by any
compensation earned by Executive as the result of employment by another
employer after the Date of Termination, or otherwise. AMRESCO's obligations
hereunder also shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which AMRESCO may have against
Executive.
5. SUCCESSORS; BINDING AGREEMENT.
5.1 Successors of AMRESCO. AMRESCO will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or
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<PAGE> 9
substantially all of the business and/or assets of AMRESCO, by agreement in
form and substance satisfactory to Executive, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that AMRESCO
would be required to perform it if there had been a Change of Control but no
such succession had taken place. Failure of AMRESCO to obtain such agreement
prior to the effectiveness of any such succession shall be a breach hereof and
shall entitle Executive to compensation from AMRESCO in the same amount and on
the same terms as Executive would be entitled hereunder if Executive terminated
his employment for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used herein, "AMRESCO, INC." shall mean
AMRESCO as hereinbefore defined and any successor to its business and/or assets
as aforesaid which executes and delivers the agreement provided for in this
Section 5 or which otherwise becomes bound by all the terms and provisions
hereof by operation of law.
5.2 Executive's Heirs, etc. This Agreement shall inure
to the benefit of and be enforceable by Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If Executive should die while any amounts would still
be payable to him hereunder as if he had continued to live, all such amounts,
unless other provided herein, shall be paid in accordance with the terms hereof
to his designee or, if there be no such designee, to his estate.
6. NOTICE. For the purposes hereof, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when delivered or mailed by United States registered or
certified mail, return receipt requested, postage prepaid, addressed to AMRESCO
at its principal place of business and to Executive at his address as shown on
the records of AMRESCO, provided that all notices to AMRESCO shall be directed
to the attention of the Chief Executive Officer of AMRESCO with a copy to the
Secretary of AMRESCO, or to such other in writing in accordance herewith,
except that notices of change of address shall be effective only upon receipt.
7. MISCELLANEOUS. No provisions hereof may be amended, modified,
waived or discharged unless such amendment, waiver, modification or discharge
is agreed to in writing signed by Executive and such officer as may be
specifically designated by the Board (which shall in any event include
AMRESCO's Chief Executive Officer). No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision hereof to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not set forth expressly herein.
9
<PAGE> 10
8. VALIDITY. The invalidity or unenforceability of any
provisions hereof shall not affect the validity or enforceability of any other
provision hereof, which shall remain in full force and effect.
9. NON-EXCLUSIVITY OF RIGHTS. Nothing herein shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plans, practices, policies or programs provided by AMRESCO
and for which the Executive may qualify, nor shall anything herein limit or
otherwise affect such rights as the Executive may have under any stock option
or other agreements with AMRESCO. Amounts which are vested benefits or which
the Executive is otherwise entitled to receive under any plan, practice, policy
or program of AMRESCO at or subsequent to the Date of Termination shall be
payable in accordance with such plan, practice, policy or program.
10. LEGAL EXPENSES. AMRESCO agrees to pay, upon written demand
therefor by Executive, all legal fees and expenses which Executive may
reasonably incur as a result of any dispute or contest (regardless of the
outcome thereof) by or with AMRESCO or others regarding the validity or
enforceability of, or liability under, any provision hereof (including as a
result of any contest about the amount of any payment pursuant to Section 4.2),
plus in each case interest at the "applicable Federal rate" (as defined in
Section 1274(d) of the Code). In any such action brought by Executive for
damages or to enforce any provisions hereof, he shall be entitled to seek both
legal and equitable relief and remedies, including, without limitation,
specific performance of AMRESCO's obligations hereunder, in his sole
discretion.
11. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
12. GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of Texas.
13. CAPTIONS AND GENDER. The use of captions and Section headings
herein is for purposes of convenience only and shall not effect the
interpretation or substance of any provisions contained herein. Similarly, the
use of the masculine
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gender with respect to pronouns herein is for purposes of convenience and
includes either sex who may be a signatory.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as
of the day and year first above written.
AMRESCO, INC.
By:
-----------------------------------
Name: Robert H. Lutz, Jr.
Title: Chairman of the Board and
Chief Executive Officer
EXECUTIVE
--------------------------------------
11
<PAGE> 1
EXHIBIT 10(y)
[AMRESCO LETTERHEAD]
March 20, 1997
[Address]
Dear _____:
This will confirm our agreement that in the event it becomes eminent there will
be a "Change of Control" of AMRESCO, INC. ("AMRESCO") you will be granted a
three (3) year employment agreement with the following terms:
1. Base salary equal to your then base salary.
2. Employee benefits comparable to those then being provided to other
senior management.
3. Yearly bonus determined in accordance with the formula and guidelines
then applicable to you.
4. Participation in the then existing stock option and restricted stock
plan then being provided for other senior management.
5. In the event your employment is terminated after a Change of Control
of AMRESCO, INC., you will be entitled to receive a lump-sum payment
equal to the sum of the (i) base salary payable through the remaining
term of your agreement and (ii) aggregate amount of yearly cash
bonuses payable through the remaining term of your agreement assuming
the yearly cash bonus would be equal to most recent yearly cash bonus
paid to you.
As used in such employment agreement, the term "Change of Control" will mean
any one of the following: (a) Continuing Directors (the term "Continuing
Director" means any individual who is a member of the Company's Board of
Directors on the date hereof or was nominated for election as a director by, or
whose nomination as a director was approved by, AMRESCO's Board of Directors
with the affirmative vote of a majority of the Continuing Directors) no longer
constitute a majority of AMRESCO's Board of Directors; (b) any person or group
of persons (as defined in Rule 13d-5 under the Securities Exchange Act of 1934,
as amended {"Rule 13d-5"}) together with his or its affiliates, becomes the
beneficial owner, directly or indirectly, of 25% or more of the voting power of
AMRESCO's then outstanding securities entitled generally to vote for the
election of AMRESCO's directors; (c) the merger or consolidation of AMRESCO
with any other entity if AMRESCO is not the surviving entity and any person or
group of persons (as defined in Rule 13d-5),
<PAGE> 2
[AMRESCO LETTERHEAD]
together with his or its affiliates, is the beneficial owner, directly or
indirectly, of 25% or more of the surviving entity's then outstanding
securities entitled generally to vote for the election of the surviving
entity's directors; or (d) the sale of all or substantially all of the assets
of AMRESCO or the liquidation or dissolution of AMRESCO.
If you have any questions concerning the subject matter of this letter, please
call.
Sincerely,
/s/ ROBERT H. LUTZ, JR.
Robert H. Lutz, Jr.
Chairman and Chief Executive Officer
LKB:dac
<PAGE> 1
EXHIBIT (Z)
[AMRESCO LETTERHEAD]
CONFIDENTIAL
TO: Scott J. Reading
FROM: Robert H. Lutz, Jr.
SUBJECT: ARCC Incentive Compensation
DATE: August 15, 1996
The following are the principal terms of the Incentive Compensation Program
(the "Program") for AMRESCO Residential Credit Corporation ("ARCC") which has
been approved by the Compensation Committee and the Board of Directors of
AMRESCO, INC. ("AMRESCO").
1. ARCC Bonus Pool
An annual bonus pool will be created under the Program and it will be
in an amount equal to 20% of ARCC's Pre-Tax Profit after allocation
for corporate overhead and charge for capital (the "ARCC Bonus Pool").
2. Allocation of Corporate Overhead
Once all direct corporate overhead has been charged to the appropriate
line of business, ARCC will be charged 25% of the remainder.
3. Charge for Capital
ARCC will be charged for its cost of capital, currently 12%; however,
such rate will fluctuate based on AMRESCO's then cost of capital.
4. Incentive Plan for Lower Staff
Staff members ("Staff Member") below the executive team (the
"Executive Team") will be eligible for an annual discretionary cash
bonus. Depending on job grade, level of responsibility and
performance/contribution, cash bonuses for Staff Members will
generally range from 0% to 20% of such person's base salary. However,
exceptional performance could warrant a cash bonus well in excess of
20%.
<PAGE> 2
Page 2
Scott J. Reading
ARCC Executive Compensation
August 15, 1996
CONFIDENTIAL
Each staff Member will have a performance plan/objectives established
and measured as part of AMRESCO's Performance Management Process.
These performance plans/objectives will designed to contribute to the
Program.
5. Special Incentive Compensation Program - Executive Team
You, as a member of the Executive Team, will participate in a special
incentive compensation program. After deducting the total cost of
Staff Member cash bonuses from the ARCC Bonus Pool, you will be
eligible for allocation of up to 39% of the remainder.
Your performance, as assessed by your manager, will determine the
final percentage to be paid to you.
6. Bonus Caps for Annual Cash Bonus
Annual cash bonuses for you may not exceed 250% of your base salary.
7. Excess Over the Cash Bonus Cap
The excess in the ARCC Bonus Pool allocated to you over your annual
cash bonus will be paid 50% in Restricted Stock (RS) and 50% in
Non-Qualified Stock Options (NQSO). RS will be a ratio of 1:1 while
NQSO would be a ratio based on the lessor of (i) 50% of the then
market value of a share of AMRESCO common stock or (ii) $20 per share.
NQSO's will have a term of 10 years from the date of grant and will
have an exercise price equal to the market price of a share of AMRESCO
common stock on the date of the grant.
<PAGE> 3
Page 3
Scott J. Reading
ARCC Executive Compensation
August 15, 1996
CONFIDENTIAL
The following are examples of the number of RS and NQSO's which would
be granted assuming that $2,000,000 of the ARCC Bonus Pool is
available for such grants:
AMRESCO Common Stock at $20 Per Share
-------------------------------------
$1,000,000 / $20 = 50,000 Shares of RS
$1,000,000 / $10 (50% of market price) = 100,000 Options
AMRESCO Common Stock at $50 Per Share
-------------------------------------
$1,000,000 / $50 = 20,000 Shares of RS
$1,000,000 / $20 ($20 maximum) = 50,000 Options
8. Vesting
RS and NQSO will vest 20% immediately and 20% each year thereafter.
Vesting would be accelerated if your employment is terminated other
than for cause.(1)
9. In the Event of an IPO
If there is an IPO, it is essential that top management be linked
financially to the new corporation. Therefore, 5% of the value of the
new corporation would be allocated to the Executive Team; however, the
5% cannot exceed 20% of the value of proceeds to AMRESCO from the IPO.
Also, the allocation to the Executive Team would be paid in NQSO's.
Each NQSO will have an exercise price equal to the IPO offering price.
------------------------
(1) Cause shall mean the occurrence of any of the following events:
voluntary resignation or voluntary retirement prior to the age of 62;
conviction for any felony or a misdemeanor which involves moral
turpitude; inability to perform duties as a consequence of the filing
of a voluntary or involuntary petition in bankruptcy, the making of an
assignment for the benefit of creditors, or a like of insolvency by or
against the employee; any material breach of his/her obligations to
AMRESCO or its subsidiaries or of any published policy of AMRESCO;
making a material misrepresentation of fact or omission as to
educational attainments or employment history; making a material
misrepresentation of fact or omission to disclose material facts in
relation to transactions occurring in the business and financial
matters of AMRESCO; willful or negligent failure to perform his/her
duties.
<PAGE> 4
Page 4
Scott J. Reading
ARCC Executive Compensation
August 15, 1996
CONFIDENTIAL
10. Other RS and NQSO Programs
You will continue to be eligible for all other incentive compensation
and benefit programs in which you are currently participating or in
which you become eligible to participate as a result of your
employment status or position with AMRESCO or one of its affiliates,
and your compensation under the Program will not affect your
participation in these programs.
11. In the Event a Member of the Executive Team Leaves
If a member of the original Executive Team leaves the employment of
ARCC, the remaining members will not share in the departing member's
portion. Also, a person replacing one of the original Executive Team
members will not receive the departing member's portion or participate
in the special incentive program.
12. Duration of This Program
The Program will be subject to annual review by the Compensation and
Stock and Bonus Committees of the board of directors of AMRESCO.
ACCEPTED:
_______________________ Date:________________, 1996
Scott J. Reading
<PAGE> 1
EXHIBIT 10(a)(a)
AMRESCO
DEFERRED COMPENSATION PROGRAM
(Effective As of January 1, 1996)
<PAGE> 2
AMRESCO
DEFERRED COMPENSATION PROGRAM
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I - INTRODUCTION AND ESTABLISHMENT . . . . . . . I-1
ARTICLE II - DEFINITIONS . . . . . . . . . . . . . . . . II-1
2.1 Account . . . . . . . . . . . . . . . . . II-1
2.2 Accumulated Earnings . . . . . . . . . . . II-1
2.3 Anniversary Date . . . . . . . . . . . . . II-1
2.4 Beneficiary . . . . . . . . . . . . . . . II-1
2.5 Class Year Deferral Account . . . . . . . II-1
2.6 Class Year Investment Fund . . . . . . . . II-1
2.7 Code . . . . . . . . . . . . . . . . . . . II-2
2.8 Company . . . . . . . . . . . . . . . . . II-2
2.9 Compensation . . . . . . . . . . . . . . . II-2
2.10 Election Form . . . . . . . . . . . . . . II-2
2.11 Employee . . . . . . . . . . . . . . . . . II-2
2.12 Employer . . . . . . . . . . . . . . . . . II-2
2.13 ERISA . . . . . . . . . . . . . . . . . . II-2
2.14 Participant . . . . . . . . . . . . . . . II-2
2.15 Plan . . . . . . . . . . . . . . . . . . . II-2
2.16 Plan Administrator . . . . . . . . . . . . II-2
2.17 Plan Year . . . . . . . . . . . . . . . . II-2
2.18 Surviving Spouse . . . . . . . . . . . . . II-2
2.19 Valuation Date . . . . . . . . . . . . . . II-2
ARTICLE III - PARTICIPATION . . . . . . . . . . . . . . . III-1
3.1 Eligibility to Participate . . . . . . . . III-1
3.2 Deferral Election . . . . . . . . . . . . . III-1
3.3 Time and Manner of Election . . . . . . . . III-1
3.4 Change of Election . . . . . . . . . . . . III-2
ARTICLE IV - INTEREST OF PARTICIPANTS . . . . . . . . . . IV-1
4.1 Accounting for Participants' Interests . . IV-1
4.2 Vesting of a Participant's Account . . . . IV-1
4.3 Distribution of a Participant's Account . . IV-1
4.4 Hardship Withdrawals . . . . . . . . . . . IV-2
ARTICLE V - PLAN ADMINISTRATOR . . . . . . . . . . . . . V-1
5.1 Members . . . . . . . . . . . . . . . . . . V-1
5.2 Action . . . . . . . . . . . . . . . . . . V-1
5.3 Right and Duties . . . . . . . . . . . . . V-1
5.4 Compensation, Indemnity and Liability . . . V-2
5.5 Taxes . . . . . . . . . . . . . . . . . . . V-2
</TABLE>
1
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<TABLE>
<S> <C>
ARTICLE VI - CLAIMS PROCEDURE . . . . . . . . . . . . . . VI-1
6.1 Claims for Benefits . . . . . . . . . . . . VI-1
6.2 Appeals . . . . . . . . . . . . . . . . . . VI-1
ARTICLE VII - AMENDMENT AND TERMINATION . . . . . . . . . VII-1
7.1 Amendments . . . . . . . . . . . . . . . . VII-1
7.2 Termination of Plan . . . . . . . . . . . . VII-1
ARTICLE VIII - MISCELLANEOUS . . . . . . . . . . . . . .VIII-1
8.1 Limitation on Participant's Rights . . . .VIII-1
8.2 Benefits Unfunded . . . . . . . . . . . . .VIII-1
8.3 Other Plans . . . . . . . . . . . . . . . .VIII-1
8.4 Receipt or Release . . . . . . . . . . . .VIII-1
8.5 Governing Law . . . . . . . . . . . . . . .VIII-1
8.6 Gender, Tense, and Headings . . . . . . . .VIII-2
8.7 Successors and Assigns; Nonalienation of
Benefits. . . . . . . . . . . . . . . . . .VIII-2
</TABLE>
2
<PAGE> 4
ARTICLE I
INTRODUCTION AND ESTABLISHMENT
AMRESCO, INC.("Company") hereby establishes the AMRESCO
Deferred Compensation Program ("Plan") for the benefit of eligible management
and highly compensated employees of the Company and its affiliated or related
employers. The purpose of the Plan is to permit eligible employees to defer
receipt of a portion of their salary, bonus and/or commissions to a future year
and to have such deferrals earn a rate of return reflecting the Company's
return on certain investment portfolios. The terms of this Plan are applicable
only to eligible employees who are actively employed on or after January 1,
1996.
I-1
<PAGE> 5
ARTICLE II
DEFINITIONS
When used in this Plan, the following terms shall have the
meanings set forth below unless a different meaning is plainly required by the
context:
2.1 "Account" means the records maintained by the Plan
Administrator to determine each Participant's interest under this Plan. Such
Account may be reflected as an entry in the Company's records, or as a separate
account under a trust, or as a combination of both. Each Participant's Account
shall consist of one or more subaccounts designated as Class Year Deferral
Accounts to reflect the Plan Year during which such amounts are deferred. The
Plan Administrator may establish such additional subaccounts as it deems
necessary for the proper administration of the Plan.
2.2 "Accumulated Earnings" - The amount of accumulated
earnings of a Class Year Investment Fund through a Valuation Date as determined
by the Plan Administrator. The amount of accumulated earnings shall be based
upon the overall investment return of the Class Year Investment Fund in which
the Participant's deferrals are deemed to be invested and such other investment
return factors as the Plan Administrator deems appropriate in each case.
2.3 "Anniversary Date" means the last day of each Plan Year.
2.4 "Beneficiary" means the person or persons last designated
in writing by the Participant to receive the amount in his Account in the event
of such Participant's death; or if no designation shall be in effect at the
time of a Participant's death or if all designated Beneficiaries shall have
predeceased the Participant, then the Beneficiary shall be the following, in
the order listed:
(a) Such Participant's Surviving Spouse, if any;
(b) Otherwise, the Participant's estate.
2.5 "Class Year Deferral Account" - The subaccount which has
credited to it the Participant's deferrals for a Plan Year and which is deemed
to be invested in the Class Year Investment Fund (or Funds) designated as
applying to such Plan Year.
2.6 "Class Year Investment Fund" - The investment funds,
pools or other investment vehicles in which a Participant's deferrals for a
Plan Year are deemed to be invested
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<PAGE> 6
and whose Accumulated Earnings are used to determine the amount of
distributions pursuant to Section 4.3.
2.7 "Code" means the Internal Revenue Code of 1986, as
amended.
2.8 "Company" means AMRESCO, INC., a Delaware corporation, or
its successor or successors.
2.9 "Compensation" means the Employee's salary, commissions
and bonuses for the Plan Year and shall also include amounts deferred for the
year by the Employee under any other deferred compensation plan of the Company
(whether qualified or nonqualified) or contributed to a welfare plan of the
Company (except to the extent specified by the Company).
2.10 "Election Form" means the form prescribed by the Plan
Administrator on which a Participant may specify the amount of his Compensation
that is to be deferred pursuant to the provisions of Article III.
2.11 "Employee" means any management or highly compensated
employee of an Employer (as determined by the Company).
2.12 "Employer" means the Company and any affiliated or
related employer designated by the Company to participate in the Plan.
2.13 "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
2.14 "Participant" means any Employee who has satisfied the
requirements for participation in this Plan.
2.15 "Plan" means the AMRESCO Deferred Compensation Program,
as it may be amended from time to time.
2.16 "Plan Administrator" means the committee or individual
appointed pursuant to the provisions of this Plan to administer the Plan. In
the absence of such appointment, the Company shall be the Plan Administrator.
2.17 "Plan Year" means the 12-month period January 1 to
December 31.
2.18 "Surviving Spouse" means the spouse the Participant was
legally married to on the earlier of the Participant's benefit commencement
date or date of death.
2.19 "Valuation Date" means the Annual Valuation Date,
December 31, and any other date(s) selected by the Plan Administrator in its
sole discretion as of which the value or earnings of Participants' Accounts are
determined.
II-2
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ARTICLE III
PARTICIPATION
3.1 Eligibility to Participate. Each year the Company (or
its designee) shall specify the Employees who are eligible to participate in
the Plan for the following Plan Year. Such eligibility designation may be
made by establishing a minimum compensation level for participation or by the
use of such other criteria, including ownership of stock or rights to acquire
stock of the Company, as the Company (or its designee) deems appropriate from
time to time. An Employee designated as eligible to participate shall become a
Participant on the (a) the January 1 coincident with or next following his
designation as eligible to participate, or (b) such other eligibility date as
may be specified by the Company (or its designee) in its discretion, provided
in all instances that the Employee completes the Election Form provided for in
Section 3.3 below.
3.2 Deferral Election. Each Participant may elect to defer
any whole percentage or dollar amount of his Compensation in the manner
described in Section 3.3; provided, however, that the Company may establish a
maximum or minimum percentage (or dollar amount) of Compensation that may be
deferred in a year. For the Plan's first Plan Year, the minimum deferral shall
be $10,000 (except as the Company otherwise provides for a Participant).
3.3 Time and Manner of Election. When an Employee first
becomes eligible to participate, he may make an election to defer Compensation
prior to the January 1 on which he becomes a Participant. Such election must
be made prior to the period of service for which the Compensation subject to
the deferral election would otherwise be payable. Any subsequent deferral
election by the Participant must be made not later than December 31st of the
Plan Year preceding the Plan Year for which the Compensation subject to the
deferral election would otherwise be payable.
An election to defer Compensation must be made in writing on
an Election Form and must be filed with the Plan Administrator within the time
period prescribed by the Plan Administrator. The Election Form must specify
the percentage or dollar amount of Compensation to be deferred. If a
Participant fails to file a properly completed and duly executed Election Form
with the Plan Administrator by the prescribed time, he will be deemed to have
elected not to defer any Compensation under this Plan for the following Plan
Year, except to the extent the Plan Administrator in its sole discretion
permits an extension of the election period. Except as provided in Section
3.4, a Participant may not, after the applicable election date discontinue his
election to participate or change the percentage
III-1
<PAGE> 8
or dollar amount of Compensation he has elected to defer for a Plan Year.
The Participant shall designate on the Election Form (or on a
separate form provided by the Plan Administrator) a Beneficiary to receive
payment of amounts in his Account in the event of his death. If the
Participant is married and designates someone other than his spouse to receive
all or a portion of his Account upon his death, his spouse shall be required to
consent to such election in the manner established by the Plan Administrator.
In the absence of such spousal consent, the Surviving Spouse shall be the
Beneficiary of the Participant's Account.
3.4 Change of Election. Upon demonstration of severe
financial hardship to the Plan Administrator, a Participant may during the Plan
Year terminate his election to defer and discontinue future deferrals of
Compensation under this Plan. In the event of such discontinuance,
Compensation earned for services subsequent to such termination notice will be
paid directly to the Participant and will not be subject to his prior deferral
election. The Plan Administrator shall in its sole discretion determine
whether a Participant has demonstrated severe financial hardship under this
Section 3.4. A Participant who elects to discontinue participation in the Plan
for a Plan Year may not recommence participation in the Plan until the second
Plan Year following the Plan Year in which he discontinues deferrals (or such
later Plan Year in which he is again eligible to participate), provided the
Participant completes and executes the required Election Form.
III-2
<PAGE> 9
ARTICLE IV
INTEREST OF PARTICIPANTS
4.1 Accounting for Participants' Interests.
(a) Deferral Account. A Participant's Class Year Deferral
Account shall be credited with the amounts of Compensation deferred by the
Participant under this Plan for the Plan Year. The timing and manner in which
amounts are credited to Participants' Class Year Deferral Accounts and the
establishment of subaccounts for a Plan Year (if any) shall be determined by
the Company and the Plan Administrator in their discretion; provided, that it
is the Company's intention that deferral amounts shall be contributed to the
Plan as early as practical in the Plan Year, subject to tax and other
withholding obligations.
(b) Account Earnings. The Participant's Class Year Deferral
Account shall be credited with earnings as provided in this subsection (b).
The earnings rate credited to the Participant's Class Year Deferral Account
will be determined on a class year basis assuming the amounts credited to his
Class Year Deferral Account during a Plan Year were invested in the Class Year
Investment Fund (or Funds) that the Plan Administrator from time to time
designates as applying to such Plan Year. The Participant's Class Year
Deferral Account shall be deemed to be invested in the Class Year Investment
Fund (or Funds) and neither the Company nor any trust established in connection
with this Plan shall be required to invest in any such deemed investment funds
or in any other investments.
4.2 Vesting of a Participant's Account. A Participant's
interest in the value of his Account shall at all times be 100% vested and
nonforfeitable.
4.3 Distribution of a Participant's Account (a) Unless
distributed earlier as provided in subsection (b) below, the Participant's
Class Year Deferral Account shall be distributed in cash in a lump sum in the
Plan Year commencing ten (10) years after the Plan Year during which the
amounts were deferred to the Class Year Deferral Account. The distribution
method provided in subsection (b) below shall apply in the event of a
Participant's retirement, death, total and permanent disability or other
termination of employment, unless the Company establishes a different uniform
rule for specific events.
(b) The Participant's Class Year Deferral Account shall be
distributed commencing in the third Plan Year following the end of the Plan
Year in which amounts were deferred to the Class Year Deferral Account and
shall continue in each Plan Year thereafter. The distribution each Plan Year
shall be an amount equal to the Accumulated Earnings credited to the Class Year
Deferral Account as of the Annual Valuation Date of the Plan Year
IV-1
<PAGE> 10
immediately preceding the Plan Year of distribution (less any prior Plan
Years's distribution of such Accumulated Earnings), provided that the Plan
Administrator shall have the sole discretion to increase or decrease the amount
of distributions for a Plan Year from the amount of Accumulated Earnings, but
not by more than 20% from the amount otherwise provided in this subsection (b).
The amounts shall be distributed quarterly or at such other times as the Plan
Administrator determines.
(c) The Company may under this Plan provide the Participant
the right to elect to defer to a later date the distributions under subsection
(b) above. The Company (or its designee) shall establish the procedures and
requirements for any such further deferrals.
4.4 Hardship Withdrawals. A Participant who is suffering an
unforeseen and severe financial hardship as a result of an illness or accident
of the Participant or his immediate family, or loss of Participant's property
due to casualty, or for such other reasons as the Plan Administrator may
establish, may file a written request with the Plan Administrator for
distribution of all or a portion of the vested amount credited to his Account.
The Plan Administrator shall have the sole discretion to determine whether to
grant a Participant's hardship request and the amount to distribute to the
Participant, which may be limited solely to the amount deferred by the
Participant (without any earnings). The Plan Administrator shall not authorize
distribution of an amount in excess of that reasonably necessary to alleviate
the Participant's hardship. Any Participant who receives a hardship withdrawal
under this section shall not be eligible to make additional deferrals of
Compensation to the Plan for the remainder of the Plan Year of withdrawal and
the following Plan Year.
IV-2
<PAGE> 11
ARTICLE V
PLAN ADMINISTRATOR
5.1 Members. The Plan Administrator shall be a committee or
an individual appointed by the Company to serve at its pleasure, provided that
in the absence of such appointment the Company shall be the Plan Administrator
and shall have the duties of the Plan Administrator provided for herein.
Members of the committee shall not be required to be employees of the Company
or Participants. Any committee member may resign by giving notice, in writing,
filed with the Company.
5.2 Action. Action of the Plan Administrator may be taken
with or without a meeting of committee members; provided, however, that any
action shall be taken only upon the vote or other affirmative expression of a
majority of the committee members qualified to vote with respect to such
action. If a member of the committee or the appointed individual is a
Participant in the Plan, he shall not participate in any decision which solely
affects his own Account. The Plan Administrator shall for purposes of
administering the Plan choose a secretary who shall keep minutes of the Plan
Administrator's proceedings and all records and documents pertaining to the
administration of this Plan. The secretary may execute any certificate or any
other written direction on behalf of the Plan Administrator.
5.3 Right and Duties. The Plan Administrator shall
administer and manage the Plan and shall have all powers necessary to
accomplish that purpose, including (but not limited to) the following:
(a) To construe, interpret, and administer this Plan;
(b) To make allocations and determinations required by this
Plan, and to maintain records regarding Participants' Accounts;
(c) To compute and certify to the Company the amount and
kinds of benefits payable to Participants or their beneficiaries, and to
determine the time and manner in which such benefits are to be paid;
(d) To authorize all disbursements by the Company pursuant to
this Plan;
(e) To maintain (or cause to be maintained) all the necessary
records of the administration of this Plan;
(f) To make and publish such rules for the regulation of this
Plan as are not inconsistent with the terms hereof;
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<PAGE> 12
(g) To delegate to other individuals or entities from time to
time the performance of any of its duties or responsibilities hereunder;
(h) To designate the applicable Class Year Investment Funds
under Section 4.1(b) of the Plan; and
(i) To hire agents, accountants, actuaries, consultants and
legal counsel to assist in operating and administering the Plan.
The Plan Administrator shall have the exclusive discretionary
authority to construe and to interpret the Plan, to decide all questions of
eligibility for benefits and to determine the amount and manner of payment of
such benefits, and its decisions on such matters shall be final and conclusive
on all parties.
5.4 Compensation, Indemnity and Liability. The Plan
Administrator shall serve as such without bond and without compensation for
services hereunder. Except to the extent the Plan Administrator elects to
charge certain Plan expenses against Participant deferrals, all expenses of the
Plan and the Plan Administrator shall be paid by the Company. If the Plan
Administrator is a committee, no member of the committee shall be liable for
any act or omission of any other member of the committee, nor for any act or
omission on his own part, excepting his own willful misconduct. The Company
shall indemnify and hold harmless the Plan Administrator and each member of the
committee, if any, against any and all expenses and liabilities, including
reasonable legal fees and expenses, arising out of his membership on the
committee, excepting only expenses and liabilities arising out of his own
willful misconduct.
5.5 Taxes. If the whole or any part of any Participant's
Account shall become liable for the payment of any estate, inheritance, income,
or other tax which the Company shall be required to pay or withhold, the
Company shall have the full power and authority to withhold and pay such tax
out of any monies or other property in its hand for the account of the
Participant whose interests hereunder are so liable. The Company shall provide
the Participant notice of such withholding. Prior to making any payment, the
Company may require such releases or other documents from any lawful taxing
authority as it shall deem necessary.
V-2
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ARTICLE VI
CLAIMS PROCEDURE
6.1 Claims for Benefits. If a Participant or beneficiary
(hereafter, "Claimant") does not receive timely payment of any benefits which
he believes are due and payable under the Plan, he may make a claim for
benefits to the Plan Administrator. The claim for benefits must be in writing
and addressed to the Plan Administrator or to the Company. If the claim for
benefits is denied, the Plan Administrator shall notify the Claimant in writing
within 90 days after the Plan Administrator initially received the benefit
claim. However, if special circumstances require an extension of time for
processing the claim, the Plan Administrator shall furnish notice of the
extension to the Claimant prior to the termination of the initial 90-day period
and such extension shall not exceed one additional, consecutive 90-day period.
Any notice of a denial of benefits shall advise the Claimant of the basis for
the denial, any additional material or information necessary for the Claimant
to perfect his claim, and the steps which the Claimant must take to have his
claim for benefits reviewed.
6.2 Appeals. Each Claimant whose claim for benefits has been
denied may file a written request for a review of his claim by the Plan
Administrator. The review of the denied claim will be made by a committee
appointed by the Company. The request for review must be filed by the Claimant
within 60 days after he received the written notice denying his claim. The
decision on review will be made within 60 days after receipt of a request for
review and shall be communicated in writing to the Claimant. Such written
notice shall set forth the basis for the decision. If there are special
circumstances which require an extension of time for completing the review, the
decision shall be rendered not later than 120 days after receipt of a request
for review.
VI-1
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ARTICLE VII
AMENDMENT AND TERMINATION
7.1 Amendments. The Company (or its designee) shall have the
right in its sole discretion to amend this Plan in whole or in part at any
time; provided, however, that no such amendment shall reduce the amounts
credited at that time to any Participant's Account. Any amendment shall be in
writing and executed by a duly authorized officer of the Company. All
Participants shall be bound by such amendment.
7.2 Termination of Plan. The Company expects to continue
this Plan, but does not obligate itself to do so. The Company reserves the
right to discontinue and terminate the Plan at any time, in whole or in part,
for any reason (including a change, or an impending change, in the tax laws of
the United States or any State). If the Plan is terminated, the Plan
Administrator shall be notified of such action in a writing executed by a duly
authorized officer of the Company, and the Plan shall be terminated at the time
therein set forth. Termination of the Plan shall be binding on all
Participants, but in no event may such termination reduce the amounts credited
at that time to any Participant's Account. If this Plan is terminated, amounts
theretofore credited to Participants' Accounts shall either be paid in a lump
sum immediately, or distributed in some other manner consistent with this Plan,
as determined by the Plan Administrator in its sole discretion.
VII-1
<PAGE> 15
ARTICLE VIII
MISCELLANEOUS
8.1 Limitation on Participant's Rights. Participation in
this Plan shall not give any Participant the right to be retained in the
Company's employ or any right or interest in this Plan or any assets of the
Company other than as herein provided. The Company reserves the right to
terminate the employment of any Participant without any liability for any claim
against the Company under this Plan, except to the extent provided herein.
8.2 Benefits Unfunded. The benefits provided by this Plan
shall be unfunded. All amounts payable under this Plan to Participants shall
be paid from the general assets of the Company, and nothing contained in this
Plan shall require the Company to set aside or hold in trust any amounts or
assets for the purpose of paying benefits to Participants. This Plan shall
create only a contractual obligation on the part of the Company, and
Participants shall have the status of general unsecured creditors of the
Company under the Plan with respect to amounts of Compensation they defer
hereunder or any other obligation of the Company to pay benefits pursuant
hereto. Any funds of the Company available to pay benefits pursuant to the
Plan shall be subject to the claims of general creditors of the Company, and
may be used for any purpose by the Company.
Notwithstanding the preceding paragraph, the Company may at
any time transfer assets to the Trust for purposes of paying all or any part of
its obligations under this Plan. However, to the extent provided in the Trust
only, such transferred amounts shall remain subject to the claims of general
creditors of the Company. To the extent that assets are held in the Trust when
a Participant's benefits under the Plan become payable, the Plan Administrator
shall direct the trustee to pay such benefits to the Participant from the
assets of the Trust.
8.3 Other Plans. This Plan shall not affect the right of any
eligible Employee or Participant to participate in and receive benefits under
and in accordance with the provisions of any other employee benefit plans which
are now or hereafter maintained by the Company, unless the terms of such other
employee benefit plan or plans specifically provide otherwise.
8.4 Receipt or Release. Any payment to a Participant in
accordance with the provisions of this Plan shall, to the extent thereof, be in
full satisfaction of all claims against the Plan Administrator, the Company and
any Employer, and the Plan Administrator may require such Participant, as a
condition precedent to such payment, to execute a receipt and release to such
effect.
8.5 Governing Law. This Plan shall be construed,
administered, and governed in all respects in accordance with
VIII-1
<PAGE> 16
ERISA and, to the extent not preempted by ERISA, in accordance with the laws of
the State of Texas. If any provisions of this instrument shall be held by a
court of competent jurisdiction to be invalid or unenforceable, the remaining
provisions hereof shall continue to be fully effective.
8.6 Gender, Tense, and Headings. In this Plan, whenever the
context so indicates, the singular or plural number and the masculine,
feminine, or neuter gender shall be deemed to include the other. Headings and
subheadings in this Plan are inserted for convenience of reference only and are
not considered in the construction of the provisions hereof.
8.7 Successors and Assigns; Nonalienation of Benefits. This
Plan shall inure to the benefit of and be binding upon the parties hereto and
their successors and assigns; provided, however, that the amounts credited to
the Account of a Participant shall not (except as provided in Section 5.5) be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, charge, garnishment, execution or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any right to
any benefits payable hereunder, including, without limitation, any assignment
or alienation in connection with a separation, divorce, child support or
similar arrangement, shall be null and void and not binding on the Plan or the
Company.
IN WITNESS WHEREOF, the Company has caused this Plan to be
executed by its duly authorized officers to be effective January 1, 1996.
AMRESCO, INC.
By:________________________
VIII-2
<PAGE> 1
EXHIBIT 10(a)(b)
AMENDMENT NO. 1
TO
AMRESCO DEFERRED COMPENSATION PROGRAM
THIS AMENDMENT made this 31st day of December, 1996, by AMRESCO, INC., a
Delaware corporation (the "Company");
WITNESSETH
WHEREAS, the Company established the AMRESCO Deferred Compensation Program
("Plan"), effective January 1, 1996; and
WHEREAS, the Company now desires to amend the Plan in accordance with the
power of amendment contained therein;
NOW, THEREFORE, the Plan is hereby amended as follows:
1. Section 4.3 is hereby amended by deleting the present section in
its entirety and substituting the following in lieu thereof:
"4.3 Distribution of a Participant's Account
(a) Except as provided in subsection (c) below, the
Participants' Class Year Deferral Account shall be distributed
commencing in the third Plan Year following the end of the Plan
Year in which amounts were deferred to the Class Year Deferral
Account and shall continue in each Plan Year thereafter. The
distribution each Plan Year shall be an amount equal to the
Accumulated Earnings credited to the Class Year Deferral Account
as of the date of distribution, less any prior distributions of
such Accumulated Earnings. The amounts shall be distributed
quarterly or at such other times during the Plan Year as the Plan
Administrator determines. The distribution method provided in
this subsection (a) shall continue to apply in the event of a
Participant's retirement, death, total and permanent disability or
other termination of employment.
(b) The Company may under this Plan provide the
Participant the right to elect to defer to a later date the
distributions under subsection (a) above. The Company (or its
designee) shall establish the procedures and requirements for any
such further deferrals.
(c) Upon a Participant's termination of employment
during a Plan Year, the amount of Compensation deferred by the
Participant to his Class Year Deferral Subaccount for such Plan
Year (without any credit for earnings under Subsection 4.1(b))
shall be paid to the Participant as soon as practical after his
termination. The
<PAGE> 2
payment under this subsection (c) shall not affect the
distribution of the Participant's other Class Year Deferral
Accounts (if any) under subsection (a) above."
2. Article VII is hereby deleted in its entirety and the following
substituted in lieu thereof:
"ARTICLE VII
AMENDMENT AND TERMINATION
7.1 Amendments. The Company (or its designee) shall have
the right in its sole discretion to amend this Plan in whole or in
part at any time; provided, however, that no such amendment shall
(i) reduce the amounts credited at that time to any Participant's
Account, (ii) change the earnings rate credited to then existing
Class Year Deferral Accounts in accordance with subsection 4.1(b)
or (iii), without the Participant's consent, change the manner of
distribution of an existing Class Year Deferral Account under
subsection 4.3(a); provided, further, that with the written
approval of all Participants, the Plan may be amended in the
manner provided in (ii) or (iii) above.
7.2 Termination of Plan. The Company expects to continue
this Plan, but does not obligate itself to do so. The company
reserves the right to discontinue and terminate the Plan at any
time, in whole or in part, for any reason (including a change or
an impending change, in the tax laws of the United States or any
State); provided, however, if the Plan is terminated, the Plan
Administrator shall be notified of such action in a writing
executed by a duly authorized officer of the Company. In no event
shall such termination (i) reduce the amounts credited at that
time to any Participant's Account, (ii) change the earnings rate
credited to then existing Class Year Deferral Accounts in
accordance with subsection 4.1(b) or (iii), without the
Participant's consent, change the manner of distribution of an
existing Class Year Deferral Account under subsection 4.3(a);
provided, further, that with the written approval of all
Participants, the Plan may be amended in the manner provided in
(ii) or (iii) above."
3. Section 8.7 is hereby amended by adding the following sentence to
the end of the present section:
In addition to any obligations imposed by law upon any
successor to the Company, the Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or
otherwise) to substantially all of the business or assets of the
company to expressly agree to assume and perform the Company's
obligations under this Plan."
<PAGE> 3
4. Section 1 of this Amendment shall be effective as of January 1,
1996; Section 2 and 3 shall be effective as of date hereof. Except as
hereby modified, the Plan shall remain in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Amendment No. 1 to be
executed by its duly authorized officer the day and year first above
written.
AMRESCO, INC.
By:_______________________________
Name: L. Keith Blackwell
Title: Vice President, General
Counsel and Secretary
<PAGE> 1
EXHIBIT 10(a)(c)
AMRESCO, INC,
1997 STOCK OPTION AND AWARD PLAN
ARTICLE 1. ESTABLISHMENT, PURPOSE AND DURATION
1.1 Establishment of the Plan. AMRESCO, INC., a Delaware
corporation (hereinafter referred to as "AMRESCO"), hereby establishes a stock
option and award plan to be known as the "AMRESCO, INC. 1997 Stock Option and
Award Plan" (the "Plan"), as set forth in this document. The Plan permits the
grant of Nonqualified Stock Options, Incentive Stock Options, Performance
Shares and Restricted Stock.
The effective date of the Plan is _________, 1997 (the "Effective
Date") and the Plan shall remain in effect as provided in Section 1.3.
1.2 Purpose of the Plan. The purpose of the Plan is to secure for
AMRESCO and its stockholders the benefits of the incentive inherent in stock
ownership in AMRESCO by key employees, directors and other persons who are
largely responsible for its future growth and continued success. The Plan
promotes the success and enhances the value of AMRESCO by linking the personal
interests of Participants to those of AMRESCO's stockholders, and by providing
Participants with an incentive for outstanding performance.
The Plan is further intended to provide flexibility to AMRESCO in its
ability to motivate, attract and retain the services of Participants upon whose
judgment, interest and special effort the successful conduct of its operation
largely depends.
1.3 Duration of the Plan. The Plan shall commence on the
Effective Date and shall remain in effect, subject to the right of the Board of
Directors to amend or terminate the Plan at any time pursuant to Article 13,
until the day prior to the tenth (10th) anniversary of the Effective Date.
ARTICLE 2. DEFINITIONS
Whenever used herein, the following terms shall have the meanings set
forth below and, when the meaning is intended, the initial letter of the word
is capitalized:
(a) "AWARD" means, individually or collectively, a grant under
this Plan of Nonqualified Stock Options, Incentive Stock Options, Performance
Shares or Restricted Stock.
(b) "AWARD AGREEMENT" means an agreement entered into by each
Participant and AMRESCO, setting forth the terms and provisions applicable to
Awards granted to Participants hereunder.
(c) "BENEFICIAL OWNER" or "BENEFICIAL OWNERSHIP" shall have the
meaning ascribed to such term in Rule 13d-3 of the General Rules and
Regulations under the Exchange Act.
(d) "BOARD" or "BOARD OF DIRECTORS" means the board of directors
of AMRESCO.
<PAGE> 2
(e) "CAUSE" means: (i) willful misconduct on the part of a
Participant that is materially detrimental to AMRESCO; or (ii) the indictment
of a Participant for the commission of a felony. The existence of "Cause"
under either (i) or (ii) shall be determined by the Committee. Notwithstanding
the foregoing, if the Participant has entered into an employment agreement that
is binding as of the date of employment termination, and if such employment
agreement defines "Cause" and/or provides a means of determining whether
"Cause" exists, the definition of "Cause" and the means of determining whether
"Cause" exists provided for in the employment agreement shall apply to the
Participant for purposes hereof.
(f) "CHANGE IN CONTROL" shall be deemed to have occurred if:
(i) An acquisition by any Person of Beneficial Ownership
of the Shares then outstanding ("AMRESCO Common Stock Outstanding") or
the voting securities of AMRESCO then outstanding entitled to vote
generally in the election of directors ("AMRESCO Voting Securities
Outstanding"); provided such acquisition of Beneficial Ownership would
result in the Person's beneficially owning (within the meaning of Rule
13d-3 promulgated under the Exchange Act) twenty-five percent (25%) or
more of AMRESCO Common Stock Outstanding or twenty-five percent (25%)
or more of the combined voting power of AMRESCO Voting Securities
Outstanding; and provided further, that immediately prior to such
acquisition such Person was not a direct or indirect Beneficial Owner
of twenty-five percent (25%) or more of AMRESCO Common Stock
Outstanding or twenty-five percent (25%) or more of the combined
voting power of AMRESCO Voting Securities Outstanding, as the case may
be; or
(ii) The approval of the stockholders of AMRESCO of a
reorganization, merger, consolidation, complete liquidation or
dissolution of AMRESCO, the sale or disposition of all or
substantially all of the assets of AMRESCO or similar corporate
transaction (in each case referred to in this Section 2(f) as a
"Corporate Transaction") or, if consummation of such Corporate
Transaction is subject, at the time of such approval by stockholders,
to the consent of any government or governmental agency, the obtaining
of such consent (either explicitly or implicitly); or
(iii) A change in the composition of the Board such that
the individuals who, as of the Effective Date, constitute the Board
(such Board shall be hereinafter referred to as the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board;
provided, however, for purposes of this Section 2(f), that any
individual who becomes a member of the Board subsequent to the
Effective Date whose election, or nomination for election by AMRESCO's
stockholders, was approved by a vote of at least a majority of those
individuals who are members of the Board and who were also members of
the Incumbent Board (or deemed to be such pursuant to this proviso)
shall be considered as though such individual were a member of the
Incumbent Board; but, provided, further, that any such individual
whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act, including
any successor to such Rule) or other actual or threatened solicitation
of proxies or consents by or on behalf of a Person other than the
Board shall not be so considered as a member of the Incumbent Board.
Notwithstanding the provisions set forth in subparagraphs (i) and (ii) of this
Section 2(f), the following shall not constitute a Change in Control for
purposes hereof: (1) any acquisition of shares of common
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stock of AMRESCO by, or consummation of a Corporate Transaction with, any
Subsidiary or an employee benefit plan (or related trust) sponsored or
maintained by AMRESCO or an affiliate; or (2) any acquisition of shares of
common stock of AMRESCO, or consummation of a Corporate Transaction, following
which more than fifty percent (50%) of the shares of common stock then
outstanding of the corporation resulting from such acquisition or Corporate
Transaction and more than fifty percent (50%) of the combined voting power of
the voting securities then outstanding of such corporation entitled to vote
generally in the election of directors, is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who
were Beneficial Owners of AMRESCO Common Stock Outstanding and AMRESCO Voting
Securities Outstanding, respectively, immediately prior to such acquisition or
Corporate Transaction in substantially the same proportions as their ownership,
immediately prior to such acquisition or Corporate Transaction, of AMRESCO
Common Stock Outstanding and AMRESCO Voting Securities Outstanding, as the case
may be.
(g) "CODE" means the Internal Revenue Code of 1986, as amended from
time to time.
(h) "COMMITTEE" means the committee appointed by the Board to
administer the Plan with respect to grants of Awards, as specified in Article 3.
(i) "DIRECTOR" means any individual who is a member of the Board of
Directors.
(j) "DISABILITY" shall have the meaning ascribed to such term in
the AMRESCO long-term disability plan covering the Participant, or in the
absence of such plan, a meaning consistent with Section 22(e)(3) of the Code.
(k) "EMPLOYEE" means any full-time, salaried employee of AMRESCO,
or AMRESCO's Subsidiaries.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor act thereto.
(m) "FAIR MARKET VALUE" shall be determined as follows:
(i) If, on the relevant date, the Shares, are traded on a
national or regional securities exchange or on The Nasdaq Stock Market
("Nasdaq") and closing sale prices for the Shares are customarily
quoted, on the basis of the closing sale price on the principal such
securities exchange on which the Shares may then be traded or, if
there is no such sale on the relevant date, then on the immediately
preceding day on which a sale was reported;
(ii) If, on the relevant date, the Shares are not listed
on any securities exchange or traded on Nasdaq, but nevertheless are
publicly traded and reported on Nasdaq without closing sale prices for
the Shares being customarily quoted, on the basis of the mean between
the closing bid and asked quotations in such other over-the-counter
market as reported by Nasdaq; but, if there are no bid and asked
quotations in the over-the-counter market as reported by Nasdaq on
that date, then the mean between the closing bid and asked quotations
in the over-the-counter market as reported by Nasdaq on the
immediately preceding day such bid and asked prices were quoted; and
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(iii) If, on the relevant date, the Shares are not publicly traded
as described in (i) or (ii), on the basis of the good faith
determination of the Committee.
(n) "FINAL AWARD" means the actual award earned during a
performance period by a Participant, as determined by the Committee at the end
of the performance period pursuant to Article 7.
(o) "INCENTIVE PAYMENT DATE" means the seventy-fifth (75th) day
following the last day of the performance period during which the Final Award
under Article 7 was earned, or such earlier date upon which Final Awards are
paid to Participants.
(p) "INCENTIVE STOCK OPTION" or "ISO" means an option to purchase
Shares, granted under Article 6 which is designated as an Incentive Stock
Option and is intended to meet the requirements of Section 422 of the Code.
(q) "INSIDER" shall mean a Person who is, on the relevant date, a
director, officer or ten percent (10%) beneficial owner of any class of
AMRESCO's equity securities that is registered pursuant to Section 12 of the
Exchange Act, all as defined under Section 16 of the Exchange Act.
(r) "NAMED EXECUTIVE OFFICER" means a Participant who, as of the
date of vesting and/or payout of an Award is one of the group of "covered
employees," as defined in the regulations promulgated under Code Section
162(m), or any successor statute.
(s) "NONQUALIFIED STOCK OPTION" or "NQSO" means an option to
purchase Shares granted under Article 6 which is not intended to meet, or does
not meet, the requirements of Code Section 422.
(t) "OPTION" means an Incentive Stock Option or a Nonqualified
Stock Option.
(u) "OPTION PRICE" means the price at which a Share may be
purchased by a Participant pursuant to an Option, as determined by the
Committee.
(v) "PARTICIPANT" means an Employee, director or other Person who
has been granted an Award which is outstanding.
(w) "PERFORMANCE SHARE" means an Award granted to an Employee, as
described in Article 7.
(x) "PERSON" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act and used in Section 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d) thereof.
(y) "PLAN YEAR" shall mean, for purposes of Article 7, AMRESCO's
fiscal year which coincides with each calendar year during the term hereof.
(z) "RETIREMENT" shall have the meaning ascribed to such term in
the AMRESCO, INC. Retirement Savings and Profit Sharing Plan and Trust.
(aa) "RESTRICTED STOCK" means an Award of restricted Shares granted
in accordance with the terms of Article 8 and the other provisions hereof.
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(ab) "SHARES" means the shares of common stock of AMRESCO, par
value $0.05 per share.
(ac) "SUBSIDIARY" means any corporation, partnership, joint venture
or other entity in which AMRESCO has a fifty percent (50%) or greater voting
interest.
(ad) "WINDOW PERIOD" means the period beginning on the third (3rd)
business day following the date of public release of AMRESCO's quarterly sales
and earnings information, and ending on the twelfth (12th) business day
following such date.
ARTICLE 3. ADMINISTRATION
3.1 The Committee. The Plan shall be administered by the
Compensation Committee of the Board, or by any other Committee appointed by the
Board consisting of not less than two (2) Directors who meet the "disinterested
administration" requirements of Rule 16b-3 or any successor thereto under the
Exchange Act. The members of the Committee shall be appointed from time to
time by, and shall serve at the discretion of, the Board of Directors.
The Committee shall be comprised solely of Directors who are eligible
to administer the Plan pursuant to Rule 16b-3(c)(2) or any successor thereto
under the Exchange Act. However, if for any reason any member of the Committee
does not qualify to administer the Plan, as contemplated by Rule 16b-3(c)(2) of
the Exchange Act, the Board of Directors may appoint a new Committee member who
complies with Rule 16b-3(c)(2).
3.2 Authority of the Committee. Subject to the provisions hereof,
the Committee shall have full power to select the Employees and other Persons
who are responsible for the future growth and success of AMRESCO, who may
include, without limitation, consultants, independent contractors or other
providers of services to AMRESCO, who shall participate herein (who may change
from year to year); determine the size and types of Awards; determine the terms
and conditions of Awards in a manner consistent herewith (including vesting
provisions and the duration of the Awards); construe and interpret the Plan and
any agreement or instrument entered into hereunder; establish, amend or waive
rules and regulations for the Plan's administration; and (subject to the
provisions of Article 13) amend the terms and conditions of any outstanding
Award to the extent such terms and conditions are within the discretion of the
Committee as provided herein, including to establish different terms and
conditions relating to the effect of the termination of employment or other
service to AMRESCO. Further, the Committee shall make all other determinations
which may be necessary or advisable for the administration hereof. As
permitted by law, the Committee may delegate its authority hereunder.
3.3 Decisions Binding. All determinations and decisions made by
the Committee pursuant to the provisions hereof and all related orders and
resolutions of the Board shall be final, conclusive and binding on all Persons,
including AMRESCO, the stockholders, Employees, Participants and their estates
and beneficiaries.
ARTICLE 4. SHARES SUBJECT TO THE PLAN
4.1 Number of Shares. Subject to adjustment as provided in
Section 4.3, the total number of Shares available for grant of Awards shall be
an aggregate of three million (3,000,000). These
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Shares may, in the discretion of AMRESCO, be either authorized but unissued
Shares or shares held as treasury shares, including Shares purchased by
AMRESCO.
The following rules shall apply for purposes of the determination of
the number of Shares available for grant hereunder;
(a) The grant of an option or Restricted Stock shall
reduce the Shares available for grant hereunder by the number of
shares subject to such Award.
(b) The Committee shall in each case determine the
appropriate number of Shares to deduct from the authorized pool in
connection with the grant of Performance Shares.
(c) While an Option, Restricted Stock or Performance
Share is outstanding, it shall be counted against the authorized pool
of Shares, regardless of its vested status.
(d) In the event an Award is paid in the form of Shares
or derivatives of Shares, the authorized pool shall be reduced by the
number of Shares or Share derivatives paid to the Participant, as
determined by the Committee.
(e) To the extent that an Award is settled in cash rather
than in Shares, the authorized Share pool shall be credited with the
appropriate number of Shares represented by the cash settlement of the
Award, as determined at the sole discretion of the Committee (subject
to the limitation set forth in Section 4.2).
4.2 Lapsed Awards. If any Award is canceled, terminates, expires
or lapses for any reason, any Shares subject to such Award shall again be
available for the grant of an Award. However, in the event that prior to the
Award's cancellation, termination, expiration or lapse, the holder of the Award
at any time received one (1) or more "benefits of ownership" pursuant to such
Award (as defined by the Securities and Exchange Commission, pursuant to any
rule or interpretation promulgated under Section 16 of the Exchange Act), the
Shares subject to such Award shall not be made available for regrant hereunder.
4.3 Adjustments in Authorized Shares. In the event of any change
in corporate capitalization, such as a stock split, or a corporate transaction,
such as any merger, consolidation, separation, including a spin-off, or other
distribution of stock or property of AMRESCO, any reorganization (whether or
not such reorganization comes within the definition of such term in Code
Section 368) or any partial or complete liquidation of AMRESCO, such adjustment
shall be made in the number and class of Shares which may be delivered
hereunder, and in the number and class of and/or price of Shares subject to
outstanding Awards, as may be determined to be appropriate and equitable by the
Committee, in its sole discretion, to prevent dilution or enlargement of
rights; provided, however, that the number of Shares subject to any Award shall
always be a whole number and the Committee shall make such adjustments as are
necessary to insure Awards of whole Shares.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
Any key Employee of AMRESCO, or of any Subsidiary, including any such
Employee who is also a director of AMRESCO, or of any Subsidiary, or any other
Person, including consultants, independent contractors or other service
providers, whose judgment, initiative and efforts contribute or
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may be expected to contribute materially to the successful performance of
AMRESCO or any Subsidiary shall be eligible to receive an Award. In
determining the Employees and other Persons to whom an Award shall be granted
and the number of Shares which may be granted pursuant to that Award, the
Committee shall take into account the duties of the respective Person, their
present and potential contributions to the success of AMRESCO or any
Subsidiary, and such other factors as the Committee shall deem relevant in
connection with accomplishing the purpose hereof
ARTICLE 6. STOCK OPTIONS
6.1 Grant of Options.
(a) Eligible Persons other than Outside Directors. Subject to the
terms and provisions hereof, Options may be granted to Employees or other
Persons at any time and from time to time as shall be determined by the
Committee. The Committee shall have discretion in determining the number of
Shares subject to Options granted to each Participant; provided, however, that
in the case of any ISO, only an Employee may receive such grant and the
aggregate Fair Market Value (determined at the time such Option is granted) of
the Shares to which ISOs are exercisable for the first time by the Optionee
during any calendar year (hereunder and under all other Incentive Stock Option
Plans of AMRESCO and any Subsidiary) shall not exceed $100,000. The Committee
may grant a Participant ISOs, NQSOs or a combination thereof, and may vary such
Awards among Participants.
The maximum number of Options that a Named Executive Officer can be
granted hereunder during any twelve month period is 300,000.
(b) Outside Directors. Subject to the terms and provisions
hereof, Options shall be granted to Outside Directors as follows:
(i) Each Outside Director serving as such on February 25,
1997 shall be granted an NQSO to purchase 15,000 Shares;
(ii) Each Outside Director elected or appointed to the
Board for the first time after February 25, 1997 shall be granted an
NQSO to purchase 15,000 Shares on the date of such election or
appointment; and
(iii) Each Outside Director upon his or her re-election at
the first meeting of the stockholders to elect Directors following the
expiration of the Triennial Period shall be granted an NQSO to
purchase 15,000 Shares.
Each such Option shall have an Option Price equal to one hundred percent (100%)
of the Fair Market Value of a Share on the date of grant, shall have a term of
ten (10) years and shall vest twenty percent (20%) on the date of grant and
(20%) on each anniversary thereof. For purposes of this Section 6.1(b), the
term "Outside Director" shall have the meaning ascribed to such term in Rule
16b-3 under the Exchange Act. Further, the term "Triennial Period" shall mean,
in respect of any Outside Director, the three year period beginning on the date
of the last grant of Options to such Outside Director under Section 6.1(b), and
ending three calendar years thereafter.
6.2 Award Agreement. Each Option grant shall be evidenced by an
Award Agreement that shall specify the Option Price, the duration of the
Option, the number of Shares to which the Option
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pertains and such other provisions as the Committee shall determine. The Award
Agreement shall further specify whether the Award is intended to be an ISO or
an NQSO. Any portion of an Option that is not designated as an ISO or
otherwise fails or is not qualified to be treated as an ISO (even if designated
as an ISO) shall be a NQSO.
6.3 Option Price. The Option Price for each grant of an ISO shall
be not less than one hundred percent (100%) of the Fair Market Value of a Share
on the date the ISO is granted. In no event, however, shall any Participant,
who at the time he would otherwise be granted an Option owns (within the
meaning of Section 424(d) of the Code) stock of AMRESCO possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
AMRESCO be eligible to receive an ISO at an Option Price less than one hundred
ten percent (110%) of the Fair Market Value of a Share on the date the ISO is
granted. The price at which each Share covered by each NQSO shall be purchased
by an Optionee shall be established by the Committee, but in no event shall
such price be less than eighty-five percent (85%) of the Fair Market Value (or
such lower percentage of Fair Market Value as may be established by Internal
Revenue Service rules or regulations as the limit for granting discounted stock
options without causing immediate tax consequences to the Participant) of a
Share on the date the Option is granted.
6.4 Duration of Options. Each Option shall expire at such time as
the Committee shall determine at the time of grant; provided, however, that no
Option shall be exercisable later than the tenth (10th) anniversary date of its
grant; provided, further, however, that any ISO granted to any Participant who
at such time owns (within the meaning of Section 424(d) of the Code) stock of
AMRESCO possessing more than ten percent (10%) of the total combined voting
power of all classes of stock in AMRESCO, shall be exercisable not later than
the fifth (5th) anniversary date of its grant.
6.5 Exercise of Options. Options shall be exercisable at such
times and be subject to such restrictions and conditions the Committee shall in
each instance approve, which need not be the same for each grant or each
Participant. Each Option shall be exercisable for such number of Shares and at
such time or times, including periodic installments, as may be determined by
the Committee at the time of the grant. Except as otherwise provided in the
Award Agreement and Article 12, the right to purchase Shares that are
exercisable in periodic installments shall be cumulative so that when the right
to purchase any Shares has accrued, such Shares or any part thereof may be
purchased at any time thereafter until the expiration or termination of the
Option.
6.6 Payment. Options shall be exercised by the delivery of a
written notice of exercise to AMRESCO, setting forth the number of Shares with
respect to which the Option is to be exercised, accompanied by full payment for
the Shares. The Option Price upon exercise of any Option shall be payable to
AMRESCO in full either: (a) in cash, or (b) if approved by the Committee, by
tendering previously acquired Shares having an aggregate Fair Market Value at
the time of exercise equal to the total Option Price (provided that the Shares
which are tendered must have been held by the Participant for at least six (6)
months prior to their tender to satisfy the Option Price), or (c) by a
combination of (a) and (b). The Committee also may allow cashless exercises as
permitted under Federal Reserve Board's Regulation T, subject to applicable
securities law restrictions, or by any other means which the Committee
determines to be consistent with the Plan's purpose and applicable law.
As soon as practicable after receipt of a written notification of
exercise and full payment, AMRESCO shall deliver to the Participant, in the
Participant's name, Share certificates in an appropriate amount based upon the
number of Shares purchased under the Option(s).
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6.7 Termination of Employment Due to Death, Disability or
Retirement. Unless otherwise provided by the Committee in an Award Agreement,
the following rules shall apply in the event of the Participant's termination
of employment due to death, Disability, or Retirement. With respect to a
Participant that is a non-employee director of AMRESCO or is otherwise not an
Employee, the following references to employment shall be deemed to be
references to service as a director or in such other capacity as is determined
by the Committee:
(a) Termination by Death. In the event the Participant
dies while actively employed, all outstanding Options granted to that
Participant shall immediately vest and shall remain exercisable at any
time prior to their expiration date, or for two (2) years after the
date of death, whichever period is shorter, by (i) such Person(s) as
shall have been named as the Participant's beneficiary, (ii) such
Person(s) that have acquired the Participant's rights under such
Options by will or by the laws of descent and distribution, (iii) the
Participant's estate or representative of the Participant's estate or
(iv) by a transferee of the Option who has acquired the Option in a
transaction that is permitted by Section 6.9.
(b) Termination by Disability. In the event the
employment of a Participant is terminated by reason of Disability, all
outstanding Options granted to that Participant shall immediately vest
as of the date the Committee determines the definition of Disability
to have been satisfied and shall remain exercisable at any time prior
to their expiration date, or for one (1) year after the date that the
Committee determines the definition of Disability to have been
satisfied, whichever period is shorter, by the Participant's duly
appointed guardian or other legal representative.
(c) Termination by Retirement. In the event the
employment of a Participant is terminated by reason of Retirement, all
outstanding Options granted to that Participant shall immediately vest
and shall remain exercisable at any time prior to their expiration
date, or for three (3) months after the effective date of Retirement,
whichever period is shorter.
(d) Employment Termination Followed by Death. In the
event that a Participant's employment terminates by reason of
Disability or Retirement, and within the exercise period following
such termination the Participant dies, then the remaining exercise
period for outstanding Options shall be one (1) year following death.
Such Options shall be exercisable by the Persons specified in
subsection (a) above.
6.8 Termination of Employment for Other Reasons. If the
employment of a Participant shall terminate for any reason other than the
reasons set forth in Section 6.7, all Options held by the Participant which are
not vested as of the effective date of employment termination immediately shall
be forfeited to AMRESCO (and shall once again become available for grant
hereunder). However, the Committee, in its sole discretion, shall have the
right to immediately vest all or any portion of such Options, subject to such
terms as the Committee, in its sole discretion, deems appropriate.
In the event an Employee's employment is terminated by AMRESCO for
Cause, or an Employee voluntarily terminates his employment (other than upon
retirement), the rights under any then vested outstanding Options shall
terminate immediately upon such termination of employment. If the Employee's
employment is terminated by AMRESCO without Cause, any Options vested as of the
date of termination shall remain exercisable at any time prior to their
expiration date or for three (3) months after his date of termination of
employment, whichever period is shorter.
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6.9 Limited Transferability. A Participant may transfer an Option
to members of his or her Immediate Family, to one or more trusts for the
benefit of such Immediate Family members, or to one or more partnerships where
such Immediate Family members are the only partners, if (i) the Award Agreement
evidencing such Option expressly provides that the Option may be transferred
and (ii) the Participant does not receive any consideration in any form
whatsoever for said transfer thereof. Any Option so transferred shall continue
to be subject to the same terms and conditions in the hands of the transferee
as were applicable to said Option immediately prior to the transfer thereof.
Any reference in any such Award Agreement to the employment by or performance
of services for AMRESCO by the Participant shall continue to refer to the
employment of or performance by the transferring Participant. For purpose
hereof, "Immediate Family" shall mean the Participant and the Participant's
spouse, and their respective ancestors and descendants. Any Option that is
granted pursuant to any Award Agreement that did not initially expressly allow
the transfer of said Option and that has not been amended to expressly permit
such transfer, shall not be transferable by the Participant otherwise than by
will or by the laws of descent and distribution and such Option thus shall be
exercisable during the Participant's lifetime only by the Participant.
ARTICLE 7. PERFORMANCE SHARES
7.1 Grant of Performance Shares. Subject to the terms hereof,
Performance Shares may be granted to eligible Employees at any time and from
time to time for no consideration, as shall be determined by the Committee.
The Committee shall have complete discretion in determining the number of
Performance Shares granted to each Participant; provided, however, that unless
and until AMRESCO's stockholders vote to change the maximum number of
Performance Shares that may be earned by any one Named Executive Officer
(subject to the terms of Article 13), none of the Named Executive Officers may
earn more than three hundred thousand (300,000) Performance Shares with respect
to any performance period.
7.2 Value of Performance Shares. Each Performance Share shall
have a value equal to the Fair Market Value of a Share on the date the
Performance Share is earned. The Committee shall set performance goals in its
discretion which, depending on the extent to which they are met, will determine
the number of Performance Shares that will be earned by the Participants. The
time period during which the performance goals must be met shall be called a
"performance period." Performance periods shall, in all cases, equal or exceed
two (2) years in length. The performance goals shall be established at the
beginning of the performance period (or within such time period as is permitted
by Code Section 162(m)).
Unless and until AMRESCO's stockholders vote to change the general
performance measures (subject to the terms of Article 13), the attainment of
which shall determine the number of Performance Shares earned hereunder, the
Committee will use one or more of the following performance measures for
purposes of grants to Named Executive Officers: total shareholder return,
return on assets, return on equity, earnings per share and ratio of operating
overhead to operating revenue. Each Plan Year, the Committee, in its sole
discretion, may select among the performance measures specified in this Section
7.2 and set the relative weights to be given to such performance measures.
However, in the case of Participants who are not Named Executive Officers, the
Committee may approve performance measures that are not specified in this
Section 7.2 without obtaining stockholder approval of such measures.
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In the event that applicable tax and/or securities laws (including,
but not limited to, Code Section 162(m) and Section 16 of the Exchange Act)
change to permit Committee discretion to alter the governing performance
measures without obtaining stockholder approval of such changes, the Committee
shall have sole discretion to make such changes without obtaining stockholder
approval.
7.3 Earning of Performance Shares. After the applicable
performance period has ended, the Committee shall certify the extent to which
the established performance goals have been achieved. Subsequently, each
holder of Performance Shares shall be entitled to receive payout on the number
of Performance Shares earned by the Participant over the performance period, to
be determined as a function of the extent to which the corresponding
performance goals have been achieved. The Committee may, in its sole
discretion, decrease the amount of a Final Award otherwise payable to a
Participant under this Article 7. The Committee shall have no discretion,
however, to increase the amount of a Final Award otherwise payable to a Named
Executive Officer under this Article 7.
7.4 Form and Timing of Payment of Performance Shares. Payment of
earned Performance Shares shall be made, in a single lump sum, promptly but in
no event later than the Incentive Payment Date. The Committee, in its sole
discretion, may pay earned Performance Shares in the form of cash or in Shares
(or in a combination thereof) which have, as of the close of the applicable
performance period, an aggregate Fair Market Value equal to the value of the
earned Performance Shares.
7.5 Termination of Employment Due to Death, Disability or
Retirement or at the Request of AMRESCO Without Cause. In the event the
employment of a Participant is terminated by reason of death, Disability, or
Retirement or by AMRESCO without Cause during a performance period, the
Participant shall receive a prorated payout with respect to the Performance
Shares. The prorated payout shall be determined by the Committee, in its sole
discretion, and shall be based upon the length of time that the Participant
held the Performance Shares during the performance period, and shall further be
adjusted based on the achievement of the established performance goals at the
time of his termination.
Payment of earned Performance Shares shall be made at the same time
payments are made to Participants who did not terminate employment during the
applicable performance period.
7.6 Termination of Employment for Other Reasons. In the event
that a Participant's employment terminates for any reason other than those
reasons set forth in Section 7.5, all Performance Shares shall be forfeited by
the Participant to AMRESCO.
7.7 Nontransferability. Unless the Committee provides otherwise
in the Award Agreement, Performance Shares may not be sold, transferred,
pledged, assigned or otherwise alienated or hypothecated, other than by will or
by the laws of descent and distribution. Further, a Participant's Performance
Shares rights hereunder shall be exercisable during the Participant's lifetime
only by the Participant or the Participant's legal representative.
ARTICLE 8. RESTRICTED STOCK
8.1 Grants. The Committee may from time to time in its discretion
grant Restricted Stock to Employees and may determine the number of Shares of
Restricted Stock to be granted and the terms and conditions of, and the amount
of payment, if any, to be made by the Employee for, such Restricted Stock. A
grant of Restricted Stock may require the Employee to pay for such Shares of
Restricted
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Stock, but the Committee may establish a price below Fair Market Value at which
the Employee can purchase the Shares of Restricted Stock. Each grant of
Restricted Stock will be evidenced by an Award Agreement containing terms and
conditions not inconsistent herewith as the Committee shall determine to be
appropriate in its sole discretion. Such Restricted Stock shall be granted
subject to the restrictions prescribed pursuant hereto and the Award Agreement.
8.2 Restricted Period; Lapse of Restrictions. At the time a grant
of Restricted Stock is made, the Committee shall establish a period or periods
of time (the "Restricted Period") applicable to such grant which, unless the
Committee otherwise provides, shall not be less than one (1) year. Subject to
the other provisions of this Article 8, at the end of the Restricted Period all
restrictions shall lapse and the Restricted Stock shall vest in the
Participant. At the time a grant is made, the Committee may, in its
discretion, prescribe conditions for the incremental lapse of restrictions
during the Restricted Period and for the lapse or termination of restrictions
upon the occurrence of other conditions in addition to or other than the
expiration of the Restricted Period with respect to all or any portion of the
Restricted Stock. Such conditions may, but need not, include without
limitation, (a) the death, Disability or Retirement of the Employee to whom
Restricted Stock is granted or (b) the occurrence of a Change in Control. The
Committee may also, in its discretion, shorten or terminate the Restricted
Period, or waive any conditions for the lapse or termination of restrictions
with respect to all or any portion of the Restricted Stock at any time after
the date the grant is made.
8.3 Rights of Holder; Limitations Thereon. Upon a grant of
Restricted Stock, a stock certificate (or certificates) representing the number
of Shares of Restricted Stock granted to the Employee shall be registered in
the Employee's name and shall be held in custody by AMRESCO or a bank selected
by AMRESCO for the Employee's account. Following such registration, the
Employee shall have the rights and privileges of a stockholder as to such
Restricted Stock, including the right to receive dividends and to vote such
Restricted Stock, except that, the right to receive cash dividends shall be the
right to receive such dividends either in cash currently or by payment in
Restricted Stock, as the Committee shall determine, and except further that,
the following restrictions shall apply:
(a) The Employee shall not be entitled to delivery of a
certificate until the expiration or termination of the Restricted
Period for the Shares represented by such certificate and the
satisfaction of any and all other conditions prescribed by the
Committee;
(b) None of the Shares of Restricted Stock may be sold,
transferred, assigned, pledged, or otherwise encumbered or disposed of
during the Restricted Period and until the satisfaction of any and all
other conditions prescribed by the Committee; and
(c) All of the Shares of Restricted Stock that have not
vested shall be forfeited and all right of the Employee to such
Restricted Stock shall terminate without further obligation on the
part of AMRESCO unless the Employee has remained a full-time employee
of AMRESCO or any of its Subsidiaries until the expiration or
termination of the Restricted Period and the satisfaction of any and
all other conditions prescribed by the Committee applicable to such
Restricted Stock. Upon the forfeiture of any Shares of Restricted
Stock, such forfeited Shares shall be transferred to AMRESCO without
further action by the Employee, and shall, in accordance with Section
4.2, again be available for grant hereunder.
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With respect to any Shares received as a result of adjustments under
Section 4.3 and any Shares received with respect to cash dividends declared on
Restricted Stock, the Participant shall have the same rights and privileges,
and be subject to the same restrictions, as are set forth in this Article 8.
8.4 Delivery of Unrestricted Shares. Upon the expiration or
termination of the Restricted Period for any Shares of Restricted Stock and the
satisfaction of any and all other conditions prescribed by the Committee, the
restrictions applicable to such Restricted Stock shall lapse and a stock
certificate for the number of Shares of Restricted Stock with respect to which
the restrictions have lapsed shall be delivered, free of all such restrictions
except any that may be imposed by law, to the holder of the Restricted Stock.
AMRESCO shall not be required to deliver any fractional Share but will pay, in
lieu thereof, the Fair Market Value (determined as of the date the restrictions
lapse) of such fractional share to the holder thereof. Prior to or
concurrently with the delivery of a certificate for Restricted Stock, the
holder shall be required to pay an amount necessary to satisfy any applicable
federal, state and local tax requirements as set out in Article 14.
8.5 Nonassignability of Restricted Stock. Unless the Committee
provides otherwise in the Award Agreement, no grant of, nor any right or
interest of a Participant in or to any Restricted Stock, or in any instrument
evidencing any grant hereunder, may be assigned, encumbered or transferred
except, in the event of the death of a Participant, by will or the laws of
descent and distribution.
ARTICLE 9. BENEFICIARY DESIGNATION
Each Participant hereunder may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit hereunder is to be paid in case of his or her death before he
or she receives any or all of such benefit. Each such designation shall revoke
all prior designations by the same Participant, shall be in a form prescribed
by AMRESCO and shall be effective only when filed by the Participant, in
writing, with AMRESCO during the Participant's lifetime. In the absence of any
such designation, benefits remaining unpaid at the Participant's death shall be
paid to the Participant's estate.
The spouse of a married Participant domiciled in a community property
jurisdiction shall join in any designation of beneficiary or beneficiaries
other than the spouse.
ARTICLE 10. DEFERRALS
The Committee may permit a Participant to defer to another plan or
program such Participant's receipt of the payment of cash or the delivery of
Shares that would otherwise be due to such Participant by virtue of the
exercise of an Option, the satisfaction of any requirements or goals with
respect to Performance Shares or the vesting of Restricted Stock. If any such
deferral election is required or permitted, the Committee shall, in its sole
discretion, establish rules and procedures for such payment deferrals.
ARTICLE 11. RIGHTS OF EMPLOYEES
11.1 Employment. Nothing herein shall interfere with or limit in
any way the right of AMRESCO or a Subsidiary to terminate any Participant's
employment or engagement by AMRESCO at any time, nor confer upon any
Participant any right to continue in the employ or service of AMRESCO or a
Subsidiary. For purpose hereof, transfer of employment of a Participant
between
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AMRESCO and any one of its Subsidiaries (or between Subsidiaries) shall not be
deemed a termination of employment.
11.2 Participation. No Employee shall have the right to be selected
to receive an Award, or, having been so selected, to be selected to receive a
future Award.
ARTICLE 12. CHANGE IN CONTROL
Upon the occurrence of a Change in Control, except as provided in the
Award Agreement or unless otherwise specifically prohibited by the terms of
Article 17.
(a) Any and all Options granted hereunder shall become
fully vested and immediately exercisable;
(b) The target payout opportunity attainable under all
outstanding Performance Shares shall be deemed to have been fully
earned for the entire performance period(s) as of the effective date
of the Change in Control, and all earned Performance Shares shall be
paid out in accordance with Section 7.4 to Participants within thirty
(30) days following the effective date of the Change in Control;
provided, however, that there shall not be an accelerated earning
with respect to Performance Shares which were granted less than six
(6) months prior to the effective date of the Change in Control;
(c) All restrictions on a grant of Restricted Stock shall
lapse and such Restricted Stock shall be delivered to the Participant
in accordance with Section 8.4; provided, however, that there shall
not be an accelerated delivery with respect to Restricted Stock which
was granted less than six (6) months prior to the effective date of
the Change in Control; and
(d) Subject to Article 13, the Committee shall have the
authority to make any modifications to the Awards as determined by the
Committee to be appropriate before the effective date of the Change in
Control.
ARTICLE 13. AMENDMENT, MODIFICATION AND TERMINATION
13.1 Amendment Modification and Termination. The Board may, at any
time and from time to time, alter, amend, suspend or terminate the Plan in
whole or in part.
13.2 Awards Previously Granted. No termination, amendment or
modification hereof shall adversely affect in any material way any Award
previously granted hereunder, without the written consent of the Participant
holding such Award. The Committee, with the written consent of the Participant
holding such Award, shall have the authority to cancel Awards outstanding and
grant replacement Awards therefor.
13.3 Compliance With Code Section 162(m). At all times when the
Committee determines that compliance with Code Section 162(m) is desired, all
Awards shall comply with the requirements of Code Section 162(m). In addition,
in the event that changes are made to Code Section 162(m) to permit greater
flexibility with respect to any Award or Awards, the Committee may, subject to
this Article 13, make any adjustments it deems appropriate.
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ARTICLE 14. WITHHOLDING
14.1 Tax Withholding. AMRESCO shall have the power and the right
to deduct or withhold, or require a Participant to remit to AMRESCO, an amount
sufficient to satisfy federal, state and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to
any taxable event arising in connection with an Award.
14.2 Share Withholding. With respect to withholding required upon
the exercise of Options, or upon any other taxable event as a result of Awards
granted hereunder which are to be paid in the form of Shares, a Participant may
elect, subject to the approval of the Committee, to satisfy the withholding
requirement, in whole or in part, by having AMRESCO withhold Shares having a
Fair Market Value on the date the tax is to be determined equal to the minimum
statutory total tax which could be imposed on the transaction. All elections
shall be irrevocable, made in writing, signed by the Participant, and elections
by Insiders shall additionally comply with all legal requirements applicable to
Shares transactions by such Participants.
ARTICLE 15. INDEMNIFICATION
Each person who is or shall have been a member of the Committee, or
the Board, shall be indemnified and held harmless by AMRESCO against and from
any loss, cost, liability or expense that may be imposed upon or reasonably
incurred by him or her in connection with or resulting from any claim, action,
suit or proceeding to which he or she may be party or in which he or she may be
involved by reason of any action taken or failure to act hereunder and against
and from any and all amounts paid by him or her in settlement thereof, with
AMRESCO's approval, or paid by him in satisfaction of any judgment in any such
action, suit or proceeding against him, provided he shall give AMRESCO an
opportunity, at its own expense, to handle and defend the same before he
undertakes to handle and defend it on his own behalf. The foregoing right of
indemnification shall be in addition to any other rights of indemnification to
which such persons may be entitled under AMRESCO's Certificate of Incorporation
or Bylaws, as a matter of law, or otherwise, or any power that AMRESCO may have
to indemnify them or hold them harmless.
ARTICLE 16. SUCCESSORS
All obligations of AMRESCO hereunder, with respect to Awards, shall be
binding on any successor to AMRESCO, whether the existence of such successor is
the result of a direct or indirect purchase, merger, consolidation or
otherwise, of all or substantially all of the business and/or assets of
AMRESCO.
ARTICLE 17. LEGAL CONSTRUCTION
17.1 Gender and Number. Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular and the singular shall include the plural.
17.2 Severability. In the event any provision hereof shall be held
illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts hereof, and the Plan shall be construed and enforced
as if the illegal or invalid provision had not been included.
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17.3 Requirements of Law. The granting of Awards and the issuance
of Shares under the Plan shall be subject to all applicable laws, rules and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
17.4 Regulatory Approvals and Listing. AMRESCO shall not be
required to issue any certificate or certificates for Shares hereunder prior to
(i) obtaining any approval from any governmental agency which AMRESCO shall, in
its discretion, determine to be necessary or advisable, (ii) the admission of
such Shares to listing on any national securities exchange or Nasdaq on which
AMRESCO's Shares may be listed and (iii) the completion of any registration or
other qualification of such Shares under any state or federal law or ruling or
regulations of any governmental body which AMRESCO shall, in its sole
discretion, determine to be necessary or advisable.
Notwithstanding any other provision set forth herein, if required by
the then-current Section 16 of the Exchange Act, any "derivative security": or
"equity security" offered pursuant hereto to any Insider may not be sold or
transferred for at least six (6) months after the date of grant of such Award.
The terms "equity security" and "derivative security" shall have the meanings
ascribed to them in the then-current Rule 16(a) under the Exchange Act.
17.5 Securities Law Compliance. With respect to Insiders,
transactions hereunder are intended to comply with all applicable conditions of
Rule 16b-3 or its successors under the Exchange Act. To the extent any
provisions hereof or action by the Committee fails to so comply, it shall be
deemed null and void, to the extent permitted by law and deemed advisable by
the Committee.
17.6 Governing Law. To the extent not preempted by federal law,
the Plan, and all agreements hereunder, shall be construed in accordance with
and governed by the laws of the State of Delaware.
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EXHIBIT 10(a)(d)
AMRESCO, INC,
1995 STOCK OPTION AND AWARD PLAN
AS AMENDED AND RESTATED
ARTICLE 1. ESTABLISHMENT, PURPOSE AND DURATION
1.1 Establishment of the Plan. AMRESCO, INC., a Delaware
corporation (hereinafter referred to as "AMRESCO"), hereby establishes a stock
option and award plan to be known as the "AMRESCO, INC. 1995 Stock Option and
Award Plan" (the "Plan"), as set forth in this document. The Plan permits the
grant of Nonqualified Stock Options, Incentive Stock Options, Performance
Shares and Restricted Stock.
The effective date of the Plan is February 17, 1995 (the "Effective
Date") and the Plan shall remain in effect as provided in Section 1.3.
1.2 Purpose of the Plan. The purpose of the Plan is to secure for
AMRESCO and its stockholders the benefits of the incentive inherent in stock
ownership in AMRESCO by key employees, directors and other persons who are
largely responsible for its future growth and continued success. The Plan
promotes the success and enhances the value of AMRESCO by linking the personal
interests of Participants to those of AMRESCO's stockholders, and by providing
Participants with an incentive for outstanding performance.
The Plan is further intended to provide flexibility to AMRESCO in its
ability to motivate, attract and retain the services of Participants upon whose
judgment, interest and special effort the successful conduct of its operation
largely depends.
1.3 Duration of the Plan. The Plan shall commence on the
Effective Date and shall remain in effect, subject to the right of the Board of
Directors to amend or terminate the Plan at any time pursuant to Article 13,
until the day prior to the tenth (10th) anniversary of the Effective Date.
ARTICLE 2. DEFINITIONS
Whenever used herein, the following terms shall have the meanings set
forth below and, when the meaning is intended, the initial letter of the word
is capitalized:
(a) "AWARD" means, individually or collectively, a grant under
this Plan of Nonqualified Stock Options, Incentive Stock Options, Performance
Shares or Restricted Stock.
(b) "AWARD AGREEMENT" means an agreement entered into by each
Participant and AMRESCO, setting forth the terms and provisions applicable to
Awards granted to Participants hereunder.
(c) "BENEFICIAL OWNER" or "BENEFICIAL OWNERSHIP" shall have the
meaning ascribed to such term in Rule 13d-3 of the General Rules and
Regulations under the Exchange Act.
(d) "BOARD" or "BOARD OF DIRECTORS" means the board of directors of
AMRESCO.
<PAGE> 2
(e) "CAUSE" means: (i) willful misconduct on the part of a
Participant that is materially detrimental to AMRESCO; or (ii) the indictment
of a Participant for the commission of a felony. The existence of "Cause"
under either (i) or (ii) shall be determined by the Committee. Notwithstanding
the foregoing, if the Participant has entered into an employment agreement that
is binding as of the date of employment termination, and if such employment
agreement defines "Cause" and/or provides a means of determining whether
"Cause" exists, the definition of "Cause" and the means of determining whether
"Cause" exists provided for in the employment agreement shall apply to the
Participant for purposes hereof.
(f) "CHANGE IN CONTROL" shall be deemed to have occurred if:
(i) An acquisition by any Person of Beneficial Ownership
of the Shares then outstanding ("AMRESCO Common Stock Outstanding") or
the voting securities of AMRESCO then outstanding entitled to vote
generally in the election of directors ("AMRESCO Voting Securities
Outstanding"); provided such acquisition of Beneficial Ownership would
result in the Person's beneficially owning (within the meaning of Rule
13d-3 promulgated under the Exchange Act) twenty-five percent (25%) or
more of AMRESCO Common Stock Outstanding or twenty-five percent (25%)
or more of the combined voting power of AMRESCO Voting Securities
Outstanding; and provided further, that immediately prior to such
acquisition such Person was not a direct or indirect Beneficial Owner
of twenty-five percent (25%) or more of AMRESCO Common Stock
Outstanding or twenty-five percent (25%) or more of the combined
voting power of AMRESCO Voting Securities Outstanding, as the case may
be; or
(ii) The approval of the stockholders of AMRESCO of a
reorganization, merger, consolidation, complete liquidation or
dissolution of AMRESCO, the sale or disposition of all or
substantially all of the assets of AMRESCO or similar corporate
transaction (in each case referred to in this Section 2(f) as a
"Corporate Transaction") or, if consummation of such Corporate
Transaction is subject, at the time of such approval by stockholders,
to the consent of any government or governmental agency, the obtaining
of such consent (either explicitly or implicitly); or
(iii) A change in the composition of the Board such that
the individuals who, as of the Effective Date, constitute the Board
(such Board shall be hereinafter referred to as the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board;
provided, however, for purposes of this Section 2(f), that any
individual who becomes a member of the Board subsequent to the
Effective Date whose election, or nomination for election by AMRESCO's
stockholders, was approved by a vote of at least a majority of those
individuals who are members of the Board and who were also members of
the Incumbent Board (or deemed to be such pursuant to this proviso)
shall be considered as though such individual were a member of the
Incumbent Board; but, provided, further, that any such individual
whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act, including
any successor to such Rule) or other actual or threatened solicitation
of proxies or consents by or on behalf of a Person other than the
Board shall not be so considered as a member of the Incumbent Board.
Notwithstanding the provisions set forth in subparagraphs (i) and (ii) of this
Section 2(f), the following shall not constitute a Change in Control for
purposes hereof: (1) any acquisition of shares of common
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stock of AMRESCO by, or consummation of a Corporate Transaction with, any
Subsidiary or an employee benefit plan (or related trust) sponsored or
maintained by AMRESCO or an affiliate; or (2) any acquisition of shares of
common stock of AMRESCO, or consummation of a Corporate Transaction, following
which more than fifty percent (50%) of the shares of common stock then
outstanding of the corporation resulting from such acquisition or Corporate
Transaction and more than fifty percent (50%) of the combined voting power of
the voting securities then outstanding of such corporation entitled to vote
generally in the election of directors, is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who
were Beneficial Owners of AMRESCO Common Stock Outstanding and AMRESCO Voting
Securities Outstanding, respectively, immediately prior to such acquisition or
Corporate Transaction in substantially the same proportions as their ownership,
immediately prior to such acquisition or Corporate Transaction, of AMRESCO
Common Stock Outstanding and AMRESCO Voting Securities Outstanding, as the case
may be.
(g) "CODE" means the Internal Revenue Code of 1986, as amended
from time to time.
(h) "COMMITTEE" means the committee appointed by the Board to
administer the Plan with respect to grants of Awards, as specified in Article
3.
(i) "DIRECTOR" means any individual who is a member of the Board of
Directors.
(j) "DISABILITY" shall have the meaning ascribed to such term in
the AMRESCO long-term disability plan covering the Participant, or in the
absence of such plan, a meaning consistent with Section 22(e)(3) of the Code.
(k) "EMPLOYEE" means any full-time, salaried employee of AMRESCO,
or AMRESCO's Subsidiaries.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor act thereto.
(m) "FAIR MARKET VALUE" shall be determined as follows:
(i) If, on the relevant date, the Shares, are traded on a
national or regional securities exchange or on The Nasdaq Stock Market
("Nasdaq") and closing sale prices for the Shares are customarily
quoted, on the basis of the closing sale price on the principal such
securities exchange on which the Shares may then be traded or, if
there is no such sale on the relevant date, then on the immediately
preceding day on which a sale was reported;
(ii) If, on the relevant date, the Shares are not listed
on any securities exchange or traded on Nasdaq, but nevertheless are
publicly traded and reported on Nasdaq without closing sale prices for
the Shares being customarily quoted, on the basis of the mean between
the closing bid and asked quotations in such other over-the-counter
market as reported by Nasdaq; but, if there are no bid and asked
quotations in the over-the-counter market as reported by Nasdaq on
that date, then the mean between the closing bid and asked quotations
in the over-the-counter market as reported by Nasdaq on the
immediately preceding day such bid and asked prices were quoted; and
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(iii) If, on the relevant date, the Shares are not publicly
traded as described in (i) or (ii), on the basis of the good faith
determination of the Committee.
(n) "FINAL AWARD" means the actual award earned during a
performance period by a Participant, as determined by the Committee at the end
of the performance period pursuant to Article 7.
(o) "INCENTIVE PAYMENT DATE" means the seventy-fifth (75th) day
following the last day of the performance period during which the Final Award
under Article 7 was earned, or such earlier date upon which Final Awards are
paid to Participants.
(p) "INCENTIVE STOCK OPTION" or "ISO" means an option to purchase
Shares, granted under Article 6 which is designated as an Incentive Stock
Option and is intended to meet the requirements of Section 422 of the Code.
(q) "INSIDER" shall mean a Person who is, on the relevant date, a
director, officer or ten percent (10%) beneficial owner of any class of
AMRESCO's equity securities that is registered pursuant to Section 12 of the
Exchange Act, all as defined under Section 16 of the Exchange Act.
(r) "NAMED EXECUTIVE OFFICER" means a Participant who, as of the
date of vesting and/or payout of an Award is one of the group of "covered
employees," as defined in the regulations promulgated under Code Section
162(m), or any successor statute.
(s) "NONQUALIFIED STOCK OPTION" or "NQSO" means an option to
purchase Shares granted under Article 6 which is not intended to meet, or does
not meet, the requirements of Code Section 422.
(t) "OPTION" means an Incentive Stock Option or a Nonqualified
Stock Option.
(u) "OPTION PRICE" means the price at which a Share may be
purchased by a Participant pursuant to an Option, as determined by the
Committee.
(v) "PARTICIPANT" means an Employee, director or other Person who
has been granted an Award which is outstanding.
(w) "PERFORMANCE SHARE" means an Award granted to an Employee, as
described in Article 7.
(x) "PERSON" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act and used in Section 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d) thereof.
(y) "PLAN YEAR" shall mean, for purposes of Article 7, AMRESCO's
fiscal year which coincides with each calendar year during the term hereof.
(z) "RETIREMENT" shall have the meaning ascribed to such term in
the AMRESCO, INC. Retirement Savings and Profit Sharing Plan and Trust.
(aa) "RESTRICTED STOCK" means an Award of restricted Shares granted
in accordance with the terms of Article 8 and the other provisions hereof.
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(ab) "SHARES" means the shares of common stock of AMRESCO, par
value $0.05 per share.
(ac) "SUBSIDIARY" means any corporation, partnership, joint venture
or other entity in which AMRESCO has a fifty percent (50%) or greater voting
interest.
(ad) "WINDOW PERIOD" means the period beginning on the third (3rd)
business day following the date of public release of AMRESCO's quarterly sales
and earnings information, and ending on the twelfth (12th) business day
following such date.
ARTICLE 3. ADMINISTRATION
3.1 The Committee. The Plan shall be administered by the
Compensation Committee of the Board, or by any other Committee appointed by the
Board consisting of not less than two (2) Directors who meet the "disinterested
administration" requirements of Rule 16b-3 or any successor thereto under the
Exchange Act. The members of the Committee shall be appointed from time to
time by, and shall serve at the discretion of, the Board of Directors.
The Committee shall be comprised solely of Directors who are eligible
to administer the Plan pursuant to Rule 16b-3(c)(2) or any successor thereto
under the Exchange Act. However, if for any reason any member of the Committee
does not qualify to administer the Plan, as contemplated by Rule 16b-3(c)(2) of
the Exchange Act, the Board of Directors may appoint a new Committee member who
complies with Rule 16b-3(c)(2).
3.2 Authority of the Committee. Subject to the provisions hereof,
the Committee shall have full power to select the Employees and other Persons
who are responsible for the future growth and success of AMRESCO, who may
include, without limitation, consultants, independent contractors or other
providers of services to AMRESCO, who shall participate herein (who may change
from year to year); determine the size and types of Awards; determine the terms
and conditions of Awards in a manner consistent herewith (including vesting
provisions and the duration of the Awards); construe and interpret the Plan and
any agreement or instrument entered into hereunder; establish, amend or waive
rules and regulations for the Plan's administration; and (subject to the
provisions of Article 13) amend the terms and conditions of any outstanding
Award to the extent such terms and conditions are within the discretion of the
Committee as provided herein, including to establish different terms and
conditions relating to the effect of the termination of employment or other
service to AMRESCO. Further, the Committee shall make all other determinations
which may be necessary or advisable for the administration hereof. As
permitted by law, the Committee may delegate its authority hereunder.
3.3 Decisions Binding. All determinations and decisions made by
the Committee pursuant to the provisions hereof and all related orders and
resolutions of the Board shall be final, conclusive and binding on all Persons,
including AMRESCO, the stockholders, Employees, Participants and their estates
and beneficiaries.
ARTICLE 4. SHARES SUBJECT TO THE PLAN
4.1 Number of Shares. Subject to adjustment as provided in
Section 4.3, the total number of Shares available for grant of Awards shall be
an aggregate of two million five hundred thousand
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(2,500,000). These Shares may, in the discretion of AMRESCO, be either
authorized but unissued Shares or shares held as treasury shares, including
Shares purchased by AMRESCO.
The following rules shall apply for purposes of the determination of
the number of Shares available for grant hereunder;
(a) The grant of an option or Restricted Stock shall
reduce the Shares available for grant hereunder by the number of
shares subject to such Award.
(b) The Committee shall in each case determine the
appropriate number of Shares to deduct from the authorized pool in
connection with the grant of Performance Shares.
(c) While an Option, Restricted Stock or Performance
Share is outstanding, it shall be counted against the authorized pool
of Shares, regardless of its vested status.
(d) In the event an Award is paid in the form of Shares
or derivatives of Shares, the authorized pool shall be reduced by the
number of Shares or Share derivatives paid to the Participant, as
determined by the Committee.
(e) To the extent that an Award is settled in cash rather
than in Shares, the authorized Share pool shall be credited with the
appropriate number of Shares represented by the cash settlement of the
Award, as determined at the sole discretion of the Committee (subject
to the limitation set forth in Section 4.2).
4.2 Lapsed Awards. If any Award is canceled, terminates, expires
or lapses for any reason, any Shares subject to such Award shall again be
available for the grant of an Award. However, in the event that prior to the
Award's cancellation, termination, expiration or lapse, the holder of the Award
at any time received one (1) or more "benefits of ownership" pursuant to such
Award (as defined by the Securities and Exchange Commission, pursuant to any
rule or interpretation promulgated under Section 16 of the Exchange Act), the
Shares subject to such Award shall not be made available for regrant hereunder.
4.3 Adjustments in Authorized Shares. In the event of any change
in corporate capitalization, such as a stock split, or a corporate transaction,
such as any merger, consolidation, separation, including a spin-off, or other
distribution of stock or property of AMRESCO, any reorganization (whether or
not such reorganization comes within the definition of such term in Code
Section 368) or any partial or complete liquidation of AMRESCO, such adjustment
shall be made in the number and class of Shares which may be delivered
hereunder, and in the number and class of and/or price of Shares subject to
outstanding Awards, as may be determined to be appropriate and equitable by the
Committee, in its sole discretion, to prevent dilution or enlargement of
rights; provided, however, that the number of Shares subject to any Award shall
always be a whole number and the Committee shall make such adjustments as are
necessary to insure Awards of whole Shares.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
Any key Employee of AMRESCO, or of any Subsidiary, including any such
Employee who is also a director of AMRESCO, or of any Subsidiary, or any other
Person, including consultants, independent contractors or other service
providers, whose judgment, initiative and efforts contribute or
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may be expected to contribute materially to the successful performance of
AMRESCO or any Subsidiary shall be eligible to receive an Award. In
determining the Employees and other Persons to whom an Award shall be granted
and the number of Shares which may be granted pursuant to that Award, the
Committee shall take into account the duties of the respective Person, their
present and potential contributions to the success of AMRESCO or any
Subsidiary, and such other factors as the Committee shall deem relevant in
connection with accomplishing the purpose hereof
Except for Awards pursuant to Section 6.1(b) hereof, no Person who is
a member of the Committee shall be eligible to be granted any Award hereunder
while so serving.
ARTICLE 6. STOCK OPTIONS
6.1 Grant of Options.
(a) Eligible Persons other than Outside Directors. Subject to the
terms and provisions hereof, Options may be granted to Employees or other
Persons at any time and from time to time as shall be determined by the
Committee. The Committee shall have discretion in determining the number of
Shares subject to Options granted to each Participant; provided, however, that
in the case of any ISO, only an Employee may receive such grant and the
aggregate Fair Market Value (determined at the time such Option is granted) of
the Shares to which ISOs are exercisable for the first time by the Optionee
during any calendar year (hereunder and under all other Incentive Stock Option
Plans of AMRESCO and any Subsidiary) shall not exceed $100,000. The Committee
may grant a Participant ISOs, NQSOs or a combination thereof, and may vary such
Awards among Participants.
The maximum number of Options that a Named Executive Officer can be
granted hereunder during any twelve month period is 300,000.
(b) Outside Directors. Subject to the terms and provisions
hereof, Options shall be granted to Outside Directors as follows:
(i) Each Outside Director serving as such on February 25,
1997 shall be granted an NQSO to purchase 15,000 Shares;
(ii) Each Outside Director elected or appointed to the
Board for the first time after February 25, 1997 shall be granted an
NQSO to purchase 15,000 Shares on the date of such election or
appointment; and
(iii) Each Outside Director upon his or her re-election at
the first meeting of the stockholders to elect Directors following the
expiration of the Triennial Period shall be granted an NQSO to
purchase 15,000 Shares.
Each such Option shall have an Option Price equal to one hundred percent (100%)
of the Fair Market Value of a Share on the date of grant, shall have a term of
ten (10) years and shall vest twenty percent (20%) on the date of grant and
(20%) on each anniversary thereof. For purposes of this Section 6.1(b), the
term "Outside Director" shall have the meaning ascribed to such term in Rule
16b-3 under the Exchange Act. Further, the term "Triennial Period" shall mean,
in respect of any Outside Director, the three year period beginning on the date
of the last grant of Options to such Outside Director under Section 6.1(b), and
ending three calendar years thereafter.
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6.2 Award Agreement. Each Option grant shall be evidenced by an
Award Agreement that shall specify the Option Price, the duration of the
Option, the number of Shares to which the Option pertains and such other
provisions as the Committee shall determine. The Award Agreement shall further
specify whether the Award is intended to be an ISO or an NQSO. Any portion of
an Option that is not designated as an ISO or otherwise fails or is not
qualified to be treated as an ISO (even if designated as an ISO) shall be a
NQSO.
6.3 Option Price. The Option Price for each grant of an ISO shall
be not less than one hundred percent (100%) of the Fair Market Value of a Share
on the date the ISO is granted. In no event, however, shall any Participant,
who at the time he would otherwise be granted an Option owns (within the
meaning of Section 424(d) of the Code) stock of AMRESCO possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
AMRESCO be eligible to receive an ISO at an Option Price less than one hundred
ten percent (110%) of the Fair Market Value of a Share on the date the ISO is
granted. The price at which each Share covered by each NQSO shall be purchased
by an Optionee shall be established by the Committee, but in no event shall
such price be less than eighty-five percent (85%) of the Fair Market Value (or
such lower percentage of Fair Market Value as may be established by Internal
Revenue Service rules or regulations as the limit for granting discounted stock
options without causing immediate tax consequences to the Participant) of a
Share on the date the Option is granted.
6.4 Duration of Options. Each Option shall expire at such time as
the Committee shall determine at the time of grant; provided, however, that no
Option shall be exercisable later than the tenth (10th) anniversary date of its
grant; provided, further, however, that any ISO granted to any Participant who
at such time owns (within the meaning of Section 424(d) of the Code) stock of
AMRESCO possessing more than ten percent (10%) of the total combined voting
power of all classes of stock in AMRESCO, shall be exercisable not later than
the fifth (5th) anniversary date of its grant.
6.5 Exercise of Options. Options shall be exercisable at such
times and be subject to such restrictions and conditions the Committee shall in
each instance approve, which need not be the same for each grant or each
Participant. Each Option shall be exercisable for such number of Shares and at
such time or times, including periodic installments, as may be determined by
the Committee at the time of the grant. Except as otherwise provided in the
Award Agreement and Article 12, the right to purchase Shares that are
exercisable in periodic installments shall be cumulative so that when the right
to purchase any Shares has accrued, such Shares or any part thereof may be
purchased at any time thereafter until the expiration or termination of the
Option.
6.6 Payment. Options shall be exercised by the delivery of a
written notice of exercise to AMRESCO, setting forth the number of Shares with
respect to which the Option is to be exercised, accompanied by full payment for
the Shares. The Option Price upon exercise of any Option shall be payable to
AMRESCO in full either: (a) in cash, or (b) if approved by the Committee, by
tendering previously acquired Shares having an aggregate Fair Market Value at
the time of exercise equal to the total Option Price (provided that the Shares
which are tendered must have been held by the Participant for at least six (6)
months prior to their tender to satisfy the Option Price), or (c) by a
combination of (a) and (b). The Committee also may allow cashless exercises as
permitted under Federal Reserve Board's Regulation T, subject to applicable
securities law restrictions, or by any other means which the Committee
determines to be consistent with the Plan's purpose and applicable law.
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As soon as practicable after receipt of a written notification of
exercise and full payment, AMRESCO shall deliver to the Participant, the
Participant's name, Share certificates in an appropriate amount based upon the
number of Shares purchased under the Option(s).
6.7 Termination of Employment Due to Death, Disability or
Retirement. Unless otherwise provided by the Committee in an Award Agreement,
the following rules shall apply in the event of the Participant's termination
of employment due to death, Disability, or Retirement. With respect to a
Participant that is a non-employee director of AMRESCO or is otherwise not an
Employee, the following references to employment shall be deemed to be
references to service as a director or in such other capacity as is determined
by the Committee:
(a) Termination by Death. In the event the Participant
dies while actively employed, all outstanding Options granted to that
Participant shall immediately vest and shall remain exercisable at any
time prior to their expiration date, or for two (2) years after the
date of death, whichever period is shorter, by (i) such Person(s) as
shall have been named as the Participant's beneficiary, (ii) such
Person(s) that have acquired the Participant's rights under such
Options by will or by the laws of descent and distribution, (iii) the
Participant's estate or representative of the Participant's estate or
(iv) by a transferee of the Option who has acquired the Option in a
transaction that is permitted by Section 6.9.
(b) Termination by Disability. In the event the
employment of a Participant is terminated by reason of Disability, all
outstanding Options granted to that Participant shall immediately vest
as of the date the Committee determines the definition of Disability
to have been satisfied and shall remain exercisable at any time prior
to their expiration date, or for one (1) year after the date that the
Committee determines the definition of Disability to have been
satisfied, whichever period is shorter, by the Participant's duly
appointed guardian or other legal representative.
(c) Termination by Retirement. In the event the
employment of a Participant is terminated by reason of Retirement, all
outstanding Options granted to that Participant shall immediately vest
and shall remain exercisable at any time prior to their expiration
date, or for three (3) months after the effective date of Retirement,
whichever period is shorter.
(d) Employment Termination Followed by Death. In the
event that a Participant's employment terminates by reason of
Disability or Retirement, and within the exercise period following
such termination the Participant dies, then the remaining exercise
period for outstanding Options shall be one (1) year following death.
Such Options shall be exercisable by the Persons specified in
subsection (a) above.
6.8 Termination of Employment for Other Reasons. If the
employment of a Participant shall terminate for any reason other than the
reasons set forth in Section 6.7, all Options held by the Participant which are
not vested as of the effective date of employment termination immediately shall
be forfeited to AMRESCO (and shall once again become available for grant
hereunder). However, the Committee, in its sole discretion, shall have the
right to immediately vest all or any portion of such Options, subject to such
terms as the Committee, in its sole discretion, deems appropriate.
In the event an Employee's employment is terminated by AMRESCO for
Cause, or an Employee voluntarily terminates his employment (other than upon
retirement), the rights under any
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then vested outstanding Options shall terminate immediately upon such
termination of employment. If the Employee's employment is terminated by
AMRESCO without Cause, any Options vested as of the date of termination shall
remain exercisable at any time prior to their expiration date or for three (3)
months after his date of termination of employment, whichever period is
shorter.
6.9 Limited Transferability. A Participant may transfer an Option
to members of his or her Immediate Family, to one or more trusts for the
benefit of such Immediate Family members, or to one or more partnerships where
such Immediate Family members are the only partners, if (i) the Award Agreement
evidencing such Option expressly provides that the Option may be transferred
and (ii) the Participant does not receive any consideration in any form
whatsoever for said transfer thereof. Any Option so transferred shall continue
to be subject to the same terms and conditions in the hands of the transferee
as were applicable to said Option immediately prior to the transfer thereof.
Any reference in any such Award Agreement to the employment by or performance
of services for AMRESCO by the Participant shall continue to refer to the
employment of or performance by the transferring Participant. For purpose
hereof, "Immediate Family" shall mean the Participant and the Participant's
spouse, and their respective ancestors and descendants. Any Option that is
granted pursuant to any Award Agreement that did not initially expressly allow
the transfer of said Option and that has not been amended to expressly permit
such transfer, shall not be transferable by the Participant otherwise than by
will or by the laws of descent and distribution and such Option thus shall be
exercisable during the Participant's lifetime only by the Participant.
ARTICLE 7. PERFORMANCE SHARES
7.1 Grant of Performance Shares. Subject to the terms hereof,
Performance Shares may be granted to eligible Employees at any time and from
time to time for no consideration, as shall be determined by the Committee.
The Committee shall have complete discretion in determining the number of
Performance Shares granted to each Participant; provided, however, that unless
and until AMRESCO's stockholders vote to change the maximum number of
Performance Shares that may be earned by any one Named Executive Officer
(subject to the terms of Article 13), none of the Named Executive Officers may
earn more than three hundred thousand (300,000) Performance Shares with respect
to any performance period.
7.2 Value of Performance Shares. Each Performance Share shall
have a value equal to the Fair Market Value of a Share on the date the
Performance Share is earned. The Committee shall set performance goals in its
discretion which, depending on the extent to which they are met, will determine
the number of Performance Shares that will be earned by the Participants. The
time period during which the performance goals must be met shall be called a
"performance period." Performance periods shall, in all cases, equal or exceed
two (2) years in length. The performance goals shall be established at the
beginning of the performance period (or within such time period as is permitted
by Code Section 162(m)).
Unless and until AMRESCO's stockholders vote to change the general
performance measures (subject to the terms of Article 13), the attainment of
which shall determine the number of Performance Shares earned hereunder, the
Committee will use one or more of the following performance measures for
purposes of grants to Named Executive Officers: total shareholder return,
return on assets, return on equity, earnings per share and ratio of operating
overhead to operating revenue. Each Plan Year, the Committee, in its sole
discretion, may select among the performance measures specified in this Section
7.2 and set the relative weights to be given to such performance measures.
However, in the
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case of Participants who are not Named Executive Officers, the Committee may
approve performance measures that are not specified in this Section 7.2 without
obtaining stockholder approval of such measures.
In the event that applicable tax and/or securities laws (including,
but not limited to, Code Section 162(m) and Section 16 of the Exchange Act)
change to permit Committee discretion to alter the governing performance
measures without obtaining stockholder approval of such changes, the Committee
shall have sole discretion to make such changes without obtaining stockholder
approval.
7.3 Earning of Performance Shares. After the applicable
performance period has ended, the Committee shall certify the extent to which
the established performance goals have been achieved. Subsequently, each
holder of Performance Shares shall be entitled to receive payout on the number
of Performance Shares earned by the Participant over the performance period, to
be determined as a function of the extent to which the corresponding
performance goals have been achieved. The Committee may, in its sole
discretion, decrease the amount of a Final Award otherwise payable to a
Participant under this Article 7. The Committee shall have no discretion,
however, to increase the amount of a Final Award otherwise payable to a Named
Executive Officer under this Article 7.
7.4 Form and Timing of Payment of Performance Shares. Payment of
earned Performance Shares shall be made, in a single lump sum, promptly but in
no event later than the Incentive Payment Date. The Committee, in its sole
discretion, may pay earned Performance Shares in the form of cash or in Shares
(or in a combination thereof) which have, as of the close of the applicable
performance period, an aggregate Fair Market Value equal to the value of the
earned Performance Shares.
7.5 Termination of Employment Due to Death, Disability or
Retirement or at the Request of AMRESCO Without Cause. In the event the
employment of a Participant is terminated by reason of death, Disability, or
Retirement or by AMRESCO without Cause during a performance period, the
Participant shall receive a prorated payout with respect to the Performance
Shares. The prorated payout shall be determined by the Committee, in its sole
discretion, and shall be based upon the length of time that the Participant
held the Performance Shares during the performance period, and shall further be
adjusted based on the achievement of the established performance goals at the
time of his termination.
Payment of earned Performance Shares shall be made at the same time
payments are made to Participants who did not terminate employment during the
applicable performance period.
7.6 Termination of Employment for Other Reasons. In the event
that a Participant's employment terminates for any reason other than those
reasons set forth in Section 7.5, all Performance Shares shall be forfeited by
the Participant to AMRESCO.
7.7 Nontransferability. Unless the Committee provides otherwise
in the Award Agreement, Performance Shares may not be sold, transferred,
pledged, assigned or otherwise alienated or hypothecated, other than by will or
by the laws of descent and distribution. Further, a Participant's Performance
Shares rights hereunder shall be exercisable during the Participant's lifetime
only by the Participant or the Participant's legal representative.
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ARTICLE 8. RESTRICTED STOCK
8.1 Grants. The Committee may from time to time in its discretion
grant Restricted Stock to Employees and may determine the number of Shares of
Restricted Stock to be granted and the terms and conditions of, and the amount
of payment, if any, to be made by the Employee for, such Restricted Stock. A
grant of Restricted Stock may require the Employee to pay for such Shares of
Restricted Stock, but the Committee may establish a price below Fair Market
Value at which the Employee can purchase the Shares of Restricted Stock. Each
grant of Restricted Stock will be evidenced by an Award Agreement containing
terms and conditions not inconsistent herewith as the Committee shall determine
to be appropriate in its sole discretion. Such Restricted Stock shall be
granted subject to the restrictions prescribed pursuant hereto and the Award
Agreement.
8.2 Restricted Period; Lapse of Restrictions. At the time a grant
of Restricted Stock is made, the Committee shall establish a period or periods
of time (the "Restricted Period") applicable to such grant which, unless the
Committee otherwise provides, shall not be less than one (1) year. Subject to
the other provisions of this Article 8, at the end of the Restricted Period all
restrictions shall lapse and the Restricted Stock shall vest in the
Participant. At the time a grant is made, the Committee may, in its
discretion, prescribe conditions for the incremental lapse of restrictions
during the Restricted Period and for the lapse or termination of restrictions
upon the occurrence of other conditions in addition to or other than the
expiration of the Restricted Period with respect to all or any portion of the
Restricted Stock. Such conditions may, but need not, include without
limitation, (a) the death, Disability or Retirement of the Employee to whom
Restricted Stock is granted or (b) the occurrence of a Change in Control. The
Committee may also, in its discretion, shorten or terminate the Restricted
Period, or waive any conditions for the lapse or termination of restrictions
with respect to all or any portion of the Restricted Stock at any time after
the date the grant is made.
8.3 Rights of Holder; Limitations Thereon. Upon a grant of
Restricted Stock, a stock certificate (or certificates) representing the number
of Shares of Restricted Stock granted to the Employee shall be registered in
the Employee's name and shall be held in custody by AMRESCO or a bank selected
by AMRESCO for the Employee's account. Following such registration, the
Employee shall have the rights and privileges of a stockholder as to such
Restricted Stock, including the right to receive dividends and to vote such
Restricted Stock, except that, the right to receive cash dividends shall be the
right to receive such dividends either in cash currently or by payment in
Restricted Stock, as the Committee shall determine, and except further that,
the following restrictions shall apply:
(a) The Employee shall not be entitled to delivery of a
certificate until the expiration or termination of the Restricted
Period for the Shares represented by such certificate and the
satisfaction of any and all other conditions prescribed by the
Committee;
(b) None of the Shares of Restricted Stock may be sold,
transferred, assigned, pledged, or otherwise encumbered or disposed of
during the Restricted Period and until the satisfaction of any and all
other conditions prescribed by the Committee; and
(c) All of the Shares of Restricted Stock that have not
vested shall be forfeited and all right of the Employee to such
Restricted Stock shall terminate without further obligation on the
part of AMRESCO unless the Employee has remained a full-time employee
of AMRESCO or any of its Subsidiaries until the expiration or
termination of the Restricted Period and the satisfaction of any and
all other conditions prescribed by the Committee applicable to such
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Restricted Stock. Upon the forfeiture of any Shares of Restricted
Stock, such forfeited Shares shall be transferred to AMRESCO without
further action by the Employee, and shall, in accordance with Section
4.2, again be available for grant hereunder.
With respect to any Shares received as a result of adjustments under
Section 4.3 and any Shares received with respect to cash dividends declared on
Restricted Stock, the Participant shall have the same rights and privileges,
and be subject to the same restrictions, as are set forth in this Article 8.
8.4 Delivery of Unrestricted Shares. Upon the expiration or
termination of the Restricted Period for any Shares of Restricted Stock and the
satisfaction of any and all other conditions prescribed by the Committee, the
restrictions applicable to such Restricted Stock shall lapse and a stock
certificate for the number of Shares of Restricted Stock with respect to which
the restrictions have lapsed shall be delivered, free of all such restrictions
except any that may be imposed by law, to the holder of the Restricted Stock.
AMRESCO shall not be required to deliver any fractional Share but will pay, in
lieu thereof, the Fair Market Value (determined as of the date the restrictions
lapse) of such fractional share to the holder thereof. Prior to or
concurrently with the delivery of a certificate for Restricted Stock, the
holder shall be required to pay an amount necessary to satisfy any applicable
federal, state and local tax requirements as set out in Article 14.
8.5 Nonassignability of Restricted Stock. Unless the Committee
provides otherwise in the Award Agreement, no grant of, nor any right or
interest of a Participant in or to any Restricted Stock, or in any instrument
evidencing any grant hereunder, may be assigned, encumbered or transferred
except, in the event of the death of a Participant, by will or the laws of
descent and distribution.
ARTICLE 9. BENEFICIARY DESIGNATION
Each Participant hereunder may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit hereunder is to be paid in case of his or her death before he
or she receives any or all of such benefit. Each such designation shall revoke
all prior designations by the same Participant, shall be in a form prescribed
by AMRESCO and shall be effective only when filed by the Participant, in
writing, with AMRESCO during the Participant's lifetime. In the absence of any
such designation, benefits remaining unpaid at the Participant's death shall be
paid to the Participant's estate.
The spouse of a married Participant domiciled in a community property
jurisdiction shall join in any designation of beneficiary or beneficiaries
other than the spouse.
ARTICLE 10. DEFERRALS
The Committee may permit a Participant to defer to another plan or
program such Participant's receipt of the payment of cash or the delivery of
Shares that would otherwise be due to such Participant by virtue of the
exercise of an Option, the satisfaction of any requirements or goals with
respect to Performance Shares or the vesting of Restricted Stock. If any such
deferral election is required or permitted, the Committee shall, in its sole
discretion, establish rules and procedures for such payment deferrals.
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ARTICLE 11. RIGHTS OF EMPLOYEES
11.1 Employment. Nothing herein shall interfere with or limit in
any way the right of AMRESCO or a Subsidiary to terminate any Participant's
employment or engagement by AMRESCO at any time, nor confer upon any
Participant any right to continue in the employ or service of AMRESCO or a
Subsidiary. For purpose hereof, transfer of employment of a Participant
between AMRESCO and any one of its Subsidiaries (or between Subsidiaries) shall
not be deemed a termination of employment.
11.2 Participation. No Employee shall have the right to be selected
to receive an Award, or, having been so selected, to be selected to receive a
future Award.
ARTICLE 12. CHANGE IN CONTROL
Upon the occurrence of a Change in Control, except as provided in the
Award Agreement or unless otherwise specifically prohibited by the terms of
Article 17.
(a) Any and all Options granted hereunder shall become
fully vested and immediately exercisable;
(b) The target payout opportunity attainable under all
outstanding Performance Shares shall be deem to have been fully earned
for the entire performance period(s) as of the effective date of the
Change in Control, and all earned Performance Shares shall be paid out
in accordance with Section 7.4 to Participants within thirty (30) days
following the effective date of the Change in Control; provided,
however, that there shall not be an accelerated earning with respect
to Performance Shares which were granted less than six (6) months
prior to the effective date of the Change in Control;
(c) All restrictions on a grant of Restricted Stock shall
lapse and such Restricted Stock shall be delivered to the Participant
in accordance with Section 8.4; provided, however, that there shall
not be an accelerated delivery with respect to Restricted Stock which
was granted less than six (6) months prior to the effective date of
the Change in Control; and
(d) Subject to Article 13, the Committee shall have the
authority to make any modifications to the Awards as determined by the
Committee to be appropriate before the effective date of the Change in
Control.
ARTICLE 13. AMENDMENT, MODIFICATION AND TERMINATION
13.1 Amendment Modification and Termination. The Board may, at any
time and from time to time, alter, amend, suspend or terminate the Plan in
whole or in part; provided, that, unless approved by the holders of a majority
of the total number of Shares of AMRESCO represented and voted at a meeting at
which a quorum is present, no amendment shall be made hereto if such amendment
would (a) materially modify the eligibility requirements provided in Article 5;
(b) increase the total number of Shares (except as provided in Section 4.3)
which may be granted hereunder, as provided in Section 4. 1; (c) extend the
term hereof; or (d) amend the Plan in any manner which the Board, in its
discretion, determines should become effective only if approved by the
stockholders even though such stockholder approval is not expressly required
hereby or by law. No amendment which
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requires stockholder approval in order for the Plan to continue to comply with
Rule 16b-3 under the Exchange Act, including any successor to such Rule, shall
be effective unless such amendment shall be approved by the requisite vote of
stockholders.
13.2 Awards Previously Granted. No termination, amendment or
modification hereof shall adversely affect in any material way any Award
previously granted hereunder, without the written consent of the Participant
holding such Award. The Committee, with the written consent of the Participant
holding such Award, shall have the authority to cancel Awards outstanding and
grant replacement Awards therefor.
13.3 Compliance With Code Section 162(m). At all times when the
Committee determines that compliance with Code Section 162(m) is desired, all
Awards shall comply with the requirements of Code Section 162(m). In addition,
in the event that changes are made to Code Section 162(m) to permit greater
flexibility with respect to any Award or Awards, the Committee may, subject to
this Article 13, make any adjustments it deems appropriate.
ARTICLE 14. WITHHOLDING
14.1 Tax Withholding. AMRESCO shall have the power and the right
to deduct or withhold, or require a Participant to remit to AMRESCO, an amount
sufficient to satisfy federal, state and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to
any taxable event arising in connection with an Award.
14.2 Share Withholding. With respect to withholding required upon
the exercise of Options, or upon any other taxable event as a result of Awards
granted hereunder which are to be paid in the form of Shares, a Participant may
elect, subject to the approval of the Committee, to satisfy the withholding
requirement, in whole or in part, by having AMRESCO withhold Shares having a
Fair Market Value on the date the tax is to be determined equal to the minimum
statutory total tax which could be imposed on the transaction. All elections
shall be irrevocable, made in writing, signed by the Participant, and elections
by Insiders shall additionally comply with all legal requirements applicable to
Shares transactions by such Participants.
ARTICLE 15. INDEMNIFICATION
Each person who is or shall have been a member of the Committee, or
the Board, shall be indemnified and held harmless by AMRESCO against and from
any loss, cost, liability or expense that may be imposed upon or reasonably
incurred by him or her in connection with or resulting from any claim, action,
suit or proceeding to which he or she may be party or in which he or she may be
involved by reason of any action taken or failure to act hereunder and against
and from any and all amounts paid by him or her in settlement thereof, with
AMRESCO's approval, or paid by him in satisfaction of any judgment in any such
action, suit or proceeding against him, provided he shall give AMRESCO an
opportunity, at its own expense, to handle and defend the same before he
undertakes to handle and defend it on his own behalf. The foregoing right of
indemnification shall be in addition to any other rights of indemnification to
which such persons may be entitled under AMRESCO's Certificate of Incorporation
or Bylaws, as a matter of law, or otherwise, or any power that AMRESCO may have
to indemnify them or hold them harmless.
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ARTICLE 16. SUCCESSORS
All obligations of AMRESCO hereunder, with respect to Awards, shall be
binding on any successor to AMRESCO, whether the existence of such successor is
the result of a direct or indirect purchase, merger, consolidation or
otherwise, of all or substantially all of the business and/or assets of
AMRESCO.
ARTICLE 17. LEGAL CONSTRUCTION
17.1 Gender and Number. Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular and the singular shall include the plural.
17.2 Severability. In the event any provision hereof shall be held
illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts hereof, and the Plan shall be construed and enforced
as if the illegal or invalid provision had not been included.
17.3 Requirements of Law. The granting of Awards and the issuance
of Shares under the Plan shall be subject to all applicable laws, rules and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
17.4 Regulatory Approvals and Listing. AMRESCO shall not be
required to issue any certificate or certificates for Shares hereunder prior to
(i) obtaining any approval from any governmental agency which AMRESCO shall, in
its discretion, determine to be necessary or advisable, (ii) the admission of
such Shares to listing on any national securities exchange or Nasdaq on which
AMRESCO's Shares may be listed and (iii) the completion of any registration or
other qualification of such Shares under any state or federal law or ruling or
regulations of any governmental body which AMRESCO shall, in its sole
discretion, determine to be necessary or advisable.
Notwithstanding any other provision set forth herein, if required by
the then-current Section 16 of the Exchange Act, any "derivative security": or
"equity security" offered pursuant hereto to any Insider may not be sold or
transferred for at least six (6) months after the date of grant of such Award.
The terms "equity security" and "derivative security" shall have the meanings
ascribed to them in the then-current Rule 16(a) under the Exchange Act.
17.5 Securities Law Compliance. With respect to Insiders,
transactions hereunder are intended to comply with all applicable conditions of
Rule 16b-3 or its successors under the Exchange Act. To the extent any
provisions hereof or action by the Committee fails to so comply, it shall be
deemed null and void, to the extent permitted by law and deemed advisable by
the Committee.
17.6 Governing Law. To the extent not preempted by federal law,
the Plan, and all agreements hereunder, shall be construed in accordance with
and governed by the laws of the State of Delaware.
16
<PAGE> 1
EXHIBIT 11
AMRESCO, INC.
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Twelve Months Ended
December 31,
---------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Primary:
- --------
Net income $31,332,000 $21,090,000 $18,748,000
=========== =========== ===========
Weighted average common shares outstanding
27,256,346 24,137,358 22,958,502
Net effect of dilutive stock options based
on the Treasury stock method using average
market price 843,065 516,963 720,737
----------- ----------- -----------
Total 28,099,411 24,654,321 23,679,239
=========== =========== ===========
Earnings per share $ 1.12 $ 0.86 $ 0.79
=========== =========== ===========
Fully diluted:
- --------------
Net income $31,332,000 $21,090,000 $18,748,000
Interest expense related to convertible
debentures, net of income tax expense 2,101,000 192,000
----------- ----------- -----------
Adjusted net income $33,433,000 $21,282,000 $18,748,000
=========== =========== ===========
Weighted average common shares outstanding
assuming conversion of convertible
debentures to 3,600,000 shares of common
stock in November 1995 30,807,434 24,469,966 22,958,502
Net effect of dilutive stock options based
on the Treasury stock method using the
higher of average or ending market price 1,019,447 608,058 738,851
----------- ----------- -----------
Total 31,826,880 25,078,024 23,697,353
=========== =========== ===========
Earnings per share $ 1.05 $ 0.85 $ 0.79
=========== =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 21
AMRESCO, INC.
CORPORATE INFORMATION
SUBSIDIARIES AND AFFILIATES
TABLE OF CONTENTS
CORPORATIONS
AMRESCO, INC.
AFC EQUITIES, INC.
AMRESCO 1994-N2, INC.
AMRESCO ADVISORS, INC.
AMRESCO ATLANTA INDUSTRIAL, INC.
AMRESCO BUILDERS GROUP, INC.
AMRESCO CANADA INC.
AMRESCO CAPITAL CORPORATION
AMRESCO CAPITAL CONDUIT CORPORATION
AMRESCO CAPITAL LIMITED, INC.
AMRESCO COMMERCIAL MORTGAGE FUNDING CORPORATION
AMRESCO COMMERCIAL MORTGAGE FUNDING, L.P.
AMRESCO CONSOLIDATION CORP.
AMRESCO EQUITIES CANADA INC.
AMRESCO FINANCIAL I, INC.
AMRESCO FINANCIAL I, L.P.
AMRESCO FUNDING CORPORATION
AMRESCO-INSTITUTIONAL, INC.
AMRESCO INVESTMENTS, INC.
AMRESCO MANAGEMENT, INC.
AMRESCO-MBS I, INC.
AMRESCO-MBS II, INC.
AMRESCO NEW ENGLAND, INC.
AMRESCO NEW ENGLAND, L.P.
AMRESCO NEW ENGLAND II, INC.
AMRESCO NEW ENGLAND II, L.P.
AMRESCO NEW HAMPSHIRE, INC.
AMRESCO NEW HAMPSHIRE, L.P.
AMRESCO OVERSEAS, INC.
AMRESCO PORTFOLIO INVESTMENTS, INC.
AMRESCO PRINCIPAL MANAGERS I, INC.
AMRESCO PRINCIPAL MANAGERS II, INC.
AMRESCO RESIDENTIAL CAPITAL MARKETS, INC.
AMRESCO RESIDENTIAL CONDUIT, INC
AMRESCO RESIDENTIAL CREDIT CORPORATION
AMRESCO RESIDENTIAL MORTGAGE CORPORATION
<PAGE> 2
AMRESCO RESIDENTIAL SECURITIES CORPORATION
AMRESCO RHODE ISLAND, INC.
AMRESCO SERVICES CANADA INC.
AMRESCO TEXAS, INC.
AMRESCO RETAIL VENTURES I LIMITED
AMRESCO UK HOLDINGS LIMITED
AMRESCO UK LIMITED
AMRESCO UK VENTURES LIMITED
AMRESCO JERSEY VENTURES LIMITED
OLD MIDLAND HOUSE LIMITED
AMRESCO VENTURES, INC.
ASSET MANAGEMENT RESOLUTION COMPANY
BCS ASSET MANAGEMENT CORPORATION
BCS MANAGEMENT CORP. I
BEI 1992-N1, INC.
BEI 1993-N3, INC.
BEI 1994-N1, INC.
BEI MULTI-POOL, INC.
BEI PORTFOLIO INVESTMENTS, INC.
BEI PORTFOLIO MANAGERS, INC.
BEI REAL ESTATE SERVICES, INC.
BEI SANJAC, INC.
ENT MIDWEST, INC.
ENT NEW JERSEY, INC.
ENT SOUTHERN CALIFORNIA, INC.
GRANITE EQUITIES, INC.
HOLLIDAY FENOGLIO, INC.
LIFETIME HOMES OF NEW JERSEY, INC.
NORTHSTAR MANAGEMENT CORPORATION
OAK CLIFF FINANCIAL, INC.
PRESTON HOLLOW ASSET HOLDINGS, INC.
WHITEROCK INVESTMENTS, INC.
<PAGE> 1
EXHIBIT NO. 23(a)
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
AMRESCO, INC.
We consent to the incorporation by reference in Registration Statements No.
033-60015 and No. 033-58629 on Form S-8 and Registration Statement No.
333-13823 on Form S-3 of our report dated February 7, 1997, appearing in this
Annual Report on Form 10-K of AMRESCO, INC. for the year ended December 31,
1996.
DELOITTE & TOUCHE LLP
DALLAS, TEXAS
March 28, 1997
<PAGE> 1
EXHIBIT NO. 23(b)
INDEPENDENT ACCOUNTANTS CONSENT
The Board of Directors
AMRESCO, INC.
We consent to the incorporation by reference in Registration Statements No.
033-60015 and No. 033-58629 on Form S-8 and Registration Statement No.
333-13823 on Form S-3 of our report dated December 19, 1996 on our audit of the
consolidated financial statements of Quality Mortgage USA, Inc. for the years
ended September 30, 1996 and 1995, appearing in this Annual Report on Form 10-K
of AMRESCO, INC. for the year ended December 31, 1996.
Coopers & Lybrand L.L.P.
Newport Beach, California
March 25, 1997
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Robert H. Lutz, Jr., Robert L.
Adair III and L. Keith Blackwell, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, acting alone, to sign,
execute and file with the Securities and Exchange Commission an Annual Report
on Form 10-K for the year ended December 31, 1996 for AMRESCO, INC. under the
Securities Exchange Act of 1934, including any amendment or amendments relating
thereto, with all exhibits and any and all documents required to be filed with
respect thereto, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as he might or could
do if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT H. LUTZ, JR. Chairman of the Board and March 28, 1997
- ------------------------------- Chief Executive Officer
Robert H. Lutz, Jr.
/s/ ROBERT L. ADAIR III Director, President and March 28, 1997
- ------------------------------- Chief Operating Officer
Robert L. Adair III
/s/ BARRY L. EDWARDS Executive Vice President March 28, 1997
- ------------------------------- and Chief Financial Officer
Barry L. Edwards (Principal Financial Officer)
/s/ JAMES P. COTTON, JR. Director March 28, 1997
- -------------------------------
James P. Cotton, Jr.
/s/ RICHARD L. CRAVEY Director March 28, 1997
- -------------------------------
Richard L. Cravey
/s/ GERALD E. EICKHOFF Director March 28, 1997
- -------------------------------
Gerald E. Eickhoff
</TABLE>
-1-
<PAGE> 2
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ EDWIN A. WAHLEN, JR. Director March 28, 1997
- -------------------------------
Edwin A. Wahlen, Jr.
/s/ AMY J. JORGENSEN Director March 28, 1997
- -------------------------------
Amy J. Jorgensen
/s/ JOHN J. McDONOUGH Director March 28, 1997
- -------------------------------
John J. McDonough
/s/ BRUCE W. SCHNITZER Director March 28, 1997
- -------------------------------
Bruce W. Schnitzer
/s/ RONALD B. KIRKLAND Vice President and Chief March 28, 1997
- ------------------------------- Accounting Officer
Ronald B. Kirkland (Principal Accounting
Officer)
</TABLE>
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 29,046
<SECURITIES> 34,190
<RECEIVABLES> 13,854
<ALLOWANCES> 1,611
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 23,513
<DEPRECIATION> 5,285
<TOTAL-ASSETS> 1,075,941
<CURRENT-LIABILITIES> 0
<BONDS> 375,092
0
0
<COMMON> 1,690
<OTHER-SE> 299,825
<TOTAL-LIABILITY-AND-EQUITY> 1,075,941
<SALES> 0
<TOTAL-REVENUES> 200,067
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 112,838
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,763
<INCOME-PRETAX> 50,466
<INCOME-TAX> 19,134
<INCOME-CONTINUING> 31,332
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,332
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.05
</TABLE>
