<PAGE> 1
Filed pursuant to Rule 424(b)(5)
Registration Number 333-6031
PROSPECTUS SUPPLEMENT
dated March 7, 1997
to Prospectus dated February 20, 1997
$192,500,000
[AMRESCO LOGO]
SENIOR SUBORDINATED NOTES, SERIES 1997-A DUE 2004
The Senior Subordinated Notes, Series 1997-A due 2004 (the "Notes") being
offered hereby (the "Offering") are unsecured senior subordinated obligations of
AMRESCO, INC. (the "Company"). Interest on the Notes is payable semi-annually on
March 15 and September 15 of each year or, if any such day is not a business
day, the next succeeding business day (each, an "Interest Payment Date"), at the
rate of 10% per annum beginning September 15, 1997. The Notes mature on March
15, 2004 and are not redeemable prior to maturity. The Notes will be
subordinated to the prior payment of all existing and future "Senior Debt," as
defined, of the Company. The Notes will also be structurally subordinated to
indebtedness, preferred stock (if any) and other liabilities of the Company's
subsidiaries. At December 31, 1996, there was outstanding approximately $670.1
million of Senior Debt of the Company and its subsidiaries (including $381.2
million of which indebtedness was nonrecourse to the Company and its
subsidiaries). Under the most restrictive leverage covenant applicable to the
Company from previously contracted indebtedness (which occurs under the
Revolving Loan Agreement, as defined), at December 31, 1996, the Company could
have incurred up to approximately $25.0 million of additional Senior Debt. The
Notes will be pari passu with other senior subordinated indebtedness issued by
the Company (including $57.5 million principal amount of the Company's 10%
Senior Subordinated Notes due 2003) and with the Company's general unsecured
trade indebtedness. At December 31, 1996, the Company could issue an additional
$230.0 million of "Subordinated Debt," as defined, which could include
indebtedness pari passu with the Notes. There is no limit on the amount of trade
indebtedness the Company may incur. The Company is principally a holding company
whose primary assets consist of shares of common stock issued to the Company by
its subsidiaries. The Notes will not be guaranteed by the Company's
subsidiaries. Accordingly, any right of the Company to receive assets of its
subsidiaries upon their liquidation or reorganization (and the consequent right
of the holders of the Notes to participate in those assets) will be effectively
subordinated to the claims of creditors and preferred stockholders (if any) of
such subsidiaries as proceeds from any such liquidation or reorganization will
first be applied to satisfy obligations of such subsidiaries owing to creditors
and preferred stockholders (if any) before such proceeds may be available for
distribution to the Company. At December 31, 1996, other liabilities (primarily
unsecured trade indebtedness) of the Company's subsidiaries totaled
approximately $46.2 million and there were no shares of preferred stock of the
Company's subsidiaries outstanding. The Notes have been approved for listing on
the New York Stock Exchange, subject to notice of issuance. See "Description of
the Notes."
This Prospectus Supplement is qualified in its entirety by reference to the more
detailed information and the consolidated financial statements of the Company,
including the notes thereto, appearing or incorporated by reference herein or in
the accompanying Prospectus and to the Subordinated Indenture dated as of March
1, 1997, between the Company and Bank One, Columbus, N.A., as trustee (the
"Trustee"), with respect to the "Subordinated Debt Securities," as defined,
including the Officers' Certificate and Company Order to be dated as of March
12, 1997, establishing the terms of the Notes (collectively, the "Note
Indenture"). All capitalized terms used in this Prospectus Supplement are
defined as set forth elsewhere herein, in the accompanying Prospectus or in the
Note Indenture. All references in this Prospectus Supplement to the "Prospectus"
are to the Company's Prospectus dated February 20, 1997, accompanying this
Prospectus Supplement.
SEE "RISK FACTORS" BEGINNING ON PAGE S-11 OF THIS PROSPECTUS SUPPLEMENT AND ON
PAGE 7 OF THE PROSPECTUS FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=====================================================================================================================
Price to Underwriting Proceeds to
Public Discount Company(1)
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<S> <C> <C> <C>
Per Note..................................... 99.701% 2.75% 96.951%
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Total........................................ $191,924,425 $5,293,750 $186,630,675
=====================================================================================================================
</TABLE>
(1) Before deducting offering expenses payable by the Company estimated at
$300,000.
The Notes are offered by the several Underwriters subject to prior sale when, as
and if delivered to and accepted by the Underwriters and subject to their right
to reject orders in whole or in part. It is expected that delivery of the Notes
will be made on or about March 12, 1997 in book entry form through the
facilities of The Depository Trust Company or its nominees ("DTC"). The Notes
will not generally be issuable in definitive certificated form to any person
other than DTC.
PIPER JAFFRAY INC.
KEEFE, BRUYETTE & WOODS, INC.
LEGG MASON WOOD WALKER
Incorporated
MCDONALD & COMPANY
Securities, Inc.
MORGAN KEEGAN & COMPANY, INC.
<PAGE> 2
[Map of the United States indicating: (i) the location of the corporate
headquarters, (ii) international offices in Toronto and London, and (iii)
office locations by business lines.]
Information contained or incorporated by reference in this Prospectus
Supplement or in the accompanying Prospectus may contain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which can be identified by the use of forward-looking terminology such
as "may," "will," "expect," "intend," "anticipate," "estimate" or "continue" or
the negative thereof or other variations thereon or comparable terminology. The
matters described in "Risk Factors" and certain other factors noted throughout
this Prospectus Supplement and the Prospectus, and in any exhibits to the
Registration Statement of which this Prospectus Supplement and the Prospectus
are a part, constitute cautionary statements identifying important factors with
respect to any such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
in such forward-looking statements.
The Company intends to furnish holders of the Notes with (i) annual reports
containing audited financial statements and (ii) quarterly reports for each of
the first three quarters of each fiscal year, which will contain unaudited
summary financial information.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WITH A VIEW TO STABILIZING OR MAINTAINING THE MARKET PRICE OF THE
NOTES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere or incorporated by reference in this
Prospectus Supplement and in the accompanying Prospectus dated February 20, 1997
(the "Prospectus"). Certain terms used in this Prospectus Supplement are defined
in the "Glossary" included in the Prospectus. Certain terms used in connection
with the Notes are defined herein under "Description of the Notes -- Certain
Definitions" and in the Prospectus under the caption "Description of
Securities -- Debt Securities -- Certain Definitions."
THE COMPANY
General. 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 B&C loans. 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 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.
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 B&C 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.
RESIDENTIAL MORTGAGE BANKING
General. The Company originates, acquires, warehouses and securitizes B&C
loans. Borrowers under such loans may not satisfy the more rigid underwriting
standards of the traditional residential mortgage lending market for a number of
reasons, such as blemished credit histories (from past loan delinquencies or
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bankruptcy), inability to provide income verification data or lack of
established credit history. The Company believes that this market is large and
is underserved by traditional lenders. Therefore, there is less competition in
this market and interest rates are higher than on mortgage loans for more
creditworthy borrowers. The Company believes that the higher interest rates
offered by the B&C loan market are attractive even after taking into account the
potentially greater credit risk associated with such borrowers.
Loan Sources. The Company both originates loans and acquires loan
portfolios from third-party originators. The Company recently entered the B&C
loan origination business through its acquisition of Quality Mortgage USA, Inc.,
which originated over $5.0 billion of residential loans from the commencement of
that business in 1992 to September 30, 1996. See "Recent Developments -- Quality
Acquisition." The Company originates B&C loans through a nationwide network of
approximately 50 offices in 31 states. These offices enable the Company to
maintain local relationships with over 4,500 Company-approved mortgage brokers.
The Company also acquires portfolios of and individual B&C loans from
third-party loan originators. The loans originated and purchased by the Company
are then warehoused by the Company for securitization.
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 B&C, jumbo and non-standard
residential mortgage securitizations organized by third parties. The Company
does not currently service any residential loans it originates or acquires. The
mortgage-backed securities publicly sold to date by the Company have been rated
"AAA" by Standard & Poor's and "Aaa" by Moody's Investors Service, Inc. To
achieve these ratings the Company has used a combination of over-
collateralization techniques and financial guaranty insurance.
COMMERCIAL MORTGAGE BANKING
General. The Company performs a wide range of commercial mortgage banking
services, including originating, underwriting, placing, selling and servicing
commercial real estate loans through Holliday Fenoglio, ACC and AMRESCO
Services.
Commercial Mortgage Banking Business. Holliday Fenoglio primarily serves
commercial real estate developers and owners by originating commercial real
estate loans and acting as a broker on commercial real estate sales 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. Holliday Fenoglio originated
approximately $2.0 billion of commercial real estate mortgages during 1995 and
approximately $1.6 billion during the nine months ended September 30, 1996. The
loans originated by Holliday Fenoglio generally are funded by institutional
lenders, principally 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 $194 million during
1995 and approximately $218 million during the nine months ended September 30,
1996. The Company believes that Holliday Fenoglio's relationship and credibility
with its institutional lender network provide the Company with a competitive
advantage in the commercial mortgage banking industry.
ACC, which originated and underwrote approximately $447.1 million of
commercial real estate mortgages during 1995 and approximately $300.8 million
during the nine months ended September 30, 1996, is a mortgage banker that
originates and underwrites commercial real estate loans that are funded
primarily by
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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 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. 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 partnership through
which ACC shares in the accumulation and securitization profits and risks. ACC
is approved by Fannie Mae to participate in its DUS program, which ACC believes
makes it a more competitive loan originator and underwriter of multifamily
mortgages. ACC is also an approved lender in the Freddie Mac multifamily
sales/servicer program in the states of Florida, North Carolina and South
Carolina. Through September 30, 1996, approximately 30% of the loans
underwritten by ACC were originated by Holliday Fenoglio, with Holliday Fenoglio
and ACC each receiving fees for their respective services.
Commercial Loan Servicing Business. The Company serves as a Primary
Servicer for whole loans and as a Master/Full Servicer for securitized pools of
commercial mortgages through AMRESCO Services. At September 30, 1996, the
Company acted as servicer with respect to approximately $11.2 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. 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.
ASSET MANAGEMENT
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. Since 1987, the Company and its predecessors have managed over
$35.0 billion (Face Value) of Asset Portfolios. 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. While the majority of the Asset
Portfolios managed or owned by the Company are located in the United States, the
Company has opened offices in Toronto and London through which it pursues Asset
Portfolio acquisition opportunities and manages its investments in Canada and
Western Europe. The Company may open other offices and seek strategic alliances
in other international markets.
Asset Portfolio Investment. The Company invests in Asset Portfolios by
purchasing them alone or with co-investors. The Face Values of Asset Portfolios
acquired solely by the Company have ranged between approximately $0.5 million
and approximately $96.8 million, whereas Asset Portfolios owned by it with co-
investors have ranged up to approximately $426.8 million, with investments by
the Company ranging from approximately $0.1 million to $17.6 million. The
Company generally funds its share of any investment with a combination of
borrowings under its existing credit lines and internal cash flow. At September
30, 1996, the Face Value of the Company's total investment in wholly-owned Asset
Portfolios aggregated approximately $455.3 million, which was composed of
approximately $323.1 million (71.0%) of collateralized business loans,
approximately $102.6 million (22.5%) of asset-backed securities, approximately
$19.8 million (4.3%) of real estate owned and approximately $9.8 million (2.2%)
of real estate loans.
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
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resolution strategies and resolving loans, overseeing and managing collateral
condition and performance, and providing routine accounting services. Servicing
contracts provide incentives for the Company to resolve Asset Portfolios in
order to maximize returns to third party owners.
INSTITUTIONAL REAL ESTATE INVESTMENT ADVISORY
The Company provides real estate investment advice to various institutional
investors (primarily pension funds) seeking to invest a portion of their funds
in real estate and related investments. Although the Company is paid acquisition
and disposition fees by some of its clients, its principal form of revenue from
this activity is asset management fees, which are based on the cash flow of the
investments under management or are negotiated at the time of the client's
investment in a property.
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 believes that because of its experience in evaluating and
underwriting higher risk loans, it can take advantage of investment
opportunities that are presented by such Subordinated Certificates. The Company
expects that a majority of its investments in 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.
COMMERCIAL FINANCE
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.
The Company's commercial finance business currently involves: (i) providing high
yield debt financing for businesses and projects which are unable to access
traditional lending sources and (ii) providing construction financing for
builders of single family residences.
---------------------
The Company is a Delaware corporation. The Company's principal executive
offices are located at 700 North Pearl Street, Suite 2400, Dallas, Texas
75201-7424 and its telephone number at that address is (214) 953-7700.
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THE OFFERING
Issuer..................... AMRESCO, INC.
Securities offered......... $192,500,000 aggregate principal amount of Senior
Subordinated Notes, Series 1997-A due 2004.
Denomination............... $1,000 and any integral multiple thereof.
Book-entry form............ The Notes will be issued in book-entry form. The
Notes will not generally be issuable in definitive
certificated form to any person other than DTC.
Maturity................... March 15, 2004.
Sinking fund............... None.
Interest rate.............. Interest will accrue at the rate of 10% per annum
commencing on the date of original issuance.
Interest payment dates..... Interest is payable semi-annually on March 15 and
September 15 of each year or, if such day is not a
business day, the next succeeding business day,
beginning September 15, 1997. The first interest
payment will represent interest from the date of
original issuance of the Notes through September
14, 1997.
Redemption................. The Notes are not redeemable prior to maturity.
Subordination.............. The Notes will be subordinated to the prior payment
of all existing and future Senior Debt. The Notes
will also be structurally subordinated to
indebtedness, preferred stock (if any) and other
liabilities of the Company's subsidiaries. At
December 31, 1996, there was outstanding
approximately $670.1 million of Senior Debt of the
Company and its subsidiaries (including $381.2
million of which indebtedness was nonrecourse to
the Company and its subsidiaries). Under the most
restrictive leverage covenant applicable to the
Company from previously contracted indebtedness
(which occurs under the Revolving Loan Agreement),
at December 31, 1996, the Company could have
incurred up to approximately $25.0 million of
additional Senior Debt. The Notes will be pari
passu with other senior subordinated indebtedness
issued by the Company (including $57.5 million
principal amount of the Company's 10% Senior
Subordinated Notes due 2003) and with the Company's
general unsecured trade indebtedness. At December
31, 1996, the Company could issue an additional
$230.0 million of Subordinated Debt, which could
include indebtedness pari passu with the Notes.
There is no limit on the amount of trade
indebtedness the Company may incur. The Company is
principally a holding company whose primary assets
consist of shares of common stock issued to the
Company by its subsidiaries. The Notes will not be
guaranteed by the Company's subsidiaries.
Accordingly, any right of the Company to receive
assets of its subsidiaries upon their liquidation
or reorganization (and the consequent right of the
holders of the Notes to participate in those
assets) will be effectively subordinated to the
claims of creditors and preferred stockholders (if
any) of such subsidiaries as proceeds from any such
liquidation or reorganization will first be applied
to satisfy obligations of such subsidiaries owing
to creditors and preferred stockholders (if any)
before such proceeds may be available for
distribution to the Company. At December 31, 1996,
other liabilities (primarily unsecured trade
indebtedness) of the Company's subsidiaries totaled
approximately $46.2 million and there were no
shares of preferred stock of the Company's
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subsidiaries outstanding. See "Risk
Factors -- Subordination of the Notes" and
"Description of the
Notes -- Covenants -- Restrictions on Additional
Funded Debt and Interest Coverage Ratio" in this
Prospectus Supplement and "Description of
Securities -- Debt Securities -- Subordination of
Subordinated Debt Securities" in the Prospectus.
Limited rights of
acceleration............... Payment of principal on the Notes may be
accelerated upon the occurrence of Events of
Default (as defined) only upon the action of the
Trustee or the holders of at least 25% in aggregate
principal amount of outstanding Notes, and such
acceleration may be rescinded by the holders of a
majority of the aggregate principal amount of the
outstanding Notes if all Events of Default are
remedied and all payments due are made before a
judgment or decree for payment of money due is
obtained. See "Description of Securities -- Debt
Securities -- Events of Default" in the Prospectus.
Change of Control.......... If a Change of Control (as defined) occurs, each
holder of the Notes will have the right to require
the Company to repurchase such holder's Notes at a
price equal to 101% of the principal amount thereof
plus accrued interest to (but not including) the
date fixed for repurchase. See "Description of the
Notes -- Conditional Repayment Options."
Limited covenants.......... The Notes do not have the benefit of extensive
financial covenants. The Note Indenture contains
certain covenants that, among other things, will
limit (i) the Company's ability to incur Funded
Debt (as defined), (ii) the payment of dividends or
distributions to holders of the Company's equity
securities and (iii) consolidations, mergers and
transfers of all or substantially all of the
Company's assets. All of these covenants, however,
are subject to a number of important
qualifications. See "Risk Factors -- Limited
Covenants" and "Description of the
Notes -- Covenants" in this Prospectus Supplement
and "Description of Securities -- Debt
Securities -- Covenants" in the Prospectus.
Absence of security........ The Notes are unsecured obligations of the Company,
without collateral security of any kind.
Listing.................... The Notes have been approved for listing on the New
York Stock Exchange, subject to notice of issuance.
Trustee.................... Bank One, Columbus, N.A.
Use of proceeds............ The net proceeds from the sale of the Notes offered
hereby will be used to repay all of the Company's
outstanding borrowings under the Prudential Excess
Financing Agreement (as defined) and the Bridge
Loan Facility (as defined), if any, and then to
reduce its outstanding borrowings under the
Revolving Loan Agreement. After application of the
net proceeds, approximately $167.5 million would
have been available as of March 5, 1997 for
borrowing under the Revolving Loan Agreement to be
used for general corporate purposes, which may
include funding investments in Asset Portfolios,
Subordinated Certificates and other financial
instruments, acquiring new businesses or making
strategic investments in companies that complement
the Company's business lines and strategies. The
Prudential Excess Financing Agreement will mature
upon completion of this Offering and will terminate
once the Company repays the indebtedness
outstanding under such facility with the proceeds
of this Offering. Following completion of this
Offering, the Company does not intend to borrow
under the Bridge Loan Facility. See "Recent
Developments -- Finance Company Acquisition" and
"Use of Proceeds."
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SUMMARY FINANCIAL AND OTHER DATA
The summary data presented below under the captions "Summary Income
Statement" and "Summary Balance Sheet Data" for and as of the end of each of the
fiscal years in the three-year period ended December 31, 1995 are derived from
the consolidated financial statements of the Company audited by Deloitte &
Touche LLP, which are included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 (the "1995 Form 10-K") and incorporated by
reference in the Prospectus. In the opinion of management of the Company, the
data presented for the nine months ended September 30, 1996 and 1995, which are
derived from the Company's unaudited consolidated financial statements, reflect
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the financial position and results of operations for such
periods. Results for the nine months ended September 30, 1996 are not
necessarily indicative of results for the entire fiscal year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1996 1995 1995(1) 1994(1) 1993
-------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT:
Revenues:
Asset management and resolution
fees............................... $ 27,214 $27,279 $ 41,295 $ 93,764 $118,552
Interest and other investment
income............................. 65,728 24,446 40,105 14,215 3,440
Mortgage banking fees................. 25,032 14,077 24,382 6,176
Gain on sale of loans and investments,
net................................ 8,966 973 1,382 839
Other revenues........................ 2,255 5,302 3,322 14,797 409
-------- ------- -------- -------- --------
Total revenues................ 129,195 72,077 110,486 129,791 122,401
Operating expenses, excluding interest
expense............................... 74,050 49,334 73,307 92,337 77,970
Interest expense........................ 21,478 2,771 6,921 1,768 754
-------- ------- -------- -------- --------
Income from continuing operations before
income taxes.......................... 33,667 19,972 30,258 35,686 43,677
Income tax expense...................... 12,968 7,542 11,593 14,753 17,371
-------- ------- -------- -------- --------
Income from continuing operations....... 20,699 12,430 18,665 20,933 26,306
Gain (loss) from discontinued
operations............................ 2,425 2,425 (2,185) (2,088)
-------- ------- -------- -------- --------
Net income.................... $ 20,699 $14,855 $ 21,090 $ 18,748 $ 24,218
======== ======= ======== ======== ========
Earnings per share from continuing
operations:
Primary............................... $ 0.75 $ 0.51 $ 0.76 $ 0.88 $ 2.33
Fully diluted......................... 0.71 0.51 0.75 0.88 2.33
Earnings per share:
Primary............................... $ 0.75 $ 0.61 $ 0.86 $ 0.79 $ 2.15
Fully-diluted......................... 0.71 0.61 0.85 0.79 2.15
Weighted average number of common shares
outstanding and common share
equivalents........................... 27,647,629 24,429,822 24,654,321 23,679,239 11,288,688
</TABLE>
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<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA:
Cash and cash equivalents............... $ 14,157 $ 12,720 $ 16,139 $ 20,446 $ 43,442
Mortgage loans held for sale............ 402,738 6,042 160,843
Investments:
Loans................................. 175,784 114,767 138,180 32,631 33,795
Partnerships and joint ventures....... 31,102 30,052 34,694 22,491 2,503
Asset-backed securities and other
securities......................... 89,891 19,982 46,187 3,481
Real estate........................... 16,961 11,046 5,686 14,054 2,504
Total assets............................ 867,698 291,082 521,713 172,340 163,653
Notes payable........................... 99,864 104,222 89,442 15,500 22,113
Warehouse loans payable................. 381,560 5,693 153,158
Nonrecourse debt........................ 17,057 30,605 38,354 959 6,000
Senior notes............................ 57,500
Senior subordinated debt................ 57,500
Convertible subordinated debt........... 45,000 45,000
Total indebtedness...................... 658,481 140,520 325,954 16,459 28,113
Shareholders' equity.................... 185,093 129,024 160,794 113,586 91,699
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------ ------------------------------------
1996 1995 1995(1) 1994(1) 1993
----------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Ratio of earnings to fixed charges(2)... 2.6x 8.2x 5.4x 21.2x 58.9x
EBITDA(3)............................... $ 61,044 $ 25,437 $ 41,513 $ 43,177 $ 45,668
Interest coverage ratio(4).............. 2.8x 9.2x 6.0x 24.4x 60.6x
Face Value of assets under management
(at period end)....................... $ 2,936,929 $3,040,700 $3,693,900 $3,031,800 $5,754,400
Commercial mortgage loans originated:
Face Value............................ $ 1,993,000 $1,440,000 $2,385,000 $ 558,000
Number of loans....................... 327 245 429 100
Commercial mortgage loans serviced (at
period end):
Face Value............................ $11,209,201 $2,970,000 $9,919,596 $2,555,000
Number of loans....................... 6,531 749 7,226 592
</TABLE>
- ---------------
(1) Summary Income Statement and Other Data for the fiscal years ended December
31, 1995 and 1994 reflect data for Holliday Fenoglio beginning August 1,
1994 and EQ Services effective October 27, 1995, the effective dates of the
acquisitions by the Company.
(2) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of operating income before income taxes and fixed charges. Fixed
charges consist of interest expense.
(3) EBITDA is calculated as operating income (excluding gain (loss) from
discontinued operations) before interest, income taxes, depreciation and
amortization. The Company has included information concerning EBITDA because
EBITDA is one measure of an issuer's historical ability to service its
indebtedness. EBITDA should not be considered as an alternative to, or more
meaningful than, net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity.
(4) Interest coverage ratio means the ratio of EBITDA to cash interest expense.
- --------------------------------------------------------------------------------
S-10
<PAGE> 11
RISK FACTORS
Investors should carefully consider the following matters and the matters
set forth under "Risk Factors" in the Prospectus in connection with an
investment in the Notes in addition to the other information contained or
incorporated by reference in this Prospectus Supplement or in the accompanying
Prospectus. Information contained or incorporated by reference in this
Prospectus Supplement or in the accompanying Prospectus may contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. The following matters and certain
other factors noted throughout this Prospectus Supplement and the Prospectus,
and any exhibits to the Registration Statement of which this Prospectus
Supplement and the Prospectus are a part, constitute cautionary statements
identifying important factors with respect to any such forward-looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from those in such forward-looking statements.
SUBORDINATION OF THE NOTES
Payment of the principal of and interest on the Notes will be subordinated
in right of payment in full to all existing and future Senior Debt of the
Company, which includes all indebtedness under the Revolving Loan Agreement. The
Notes will also be structurally subordinated to indebtedness, preferred stock
(if any) and other liabilities of the Company's subsidiaries. At December 31,
1996, there was outstanding approximately $670.1 million of Senior Debt of the
Company and its subsidiaries (including $381.2 million of which indebtedness was
nonrecourse to the Company and its subsidiaries). Under the most restrictive
leverage covenant applicable to the Company from previously contracted
indebtedness (which occurs under the Revolving Loan Agreement), at December 31,
1996, the Company could have incurred up to approximately $25.0 million of
additional Senior Debt. As of March 5, 1997, after giving effect to the Offering
and the application of the net proceeds therefrom, the Company and its
subsidiaries would have had Senior Debt aggregating approximately $1.0 billion
and would have had up to $167.5 million available for borrowing under the
Revolving Loan Agreement which, if borrowed, would be included as Senior Debt.
The proceeds of the Offering will be used to repay all indebtedness outstanding
under the Prudential Excess Financing Agreement and the Bridge Loan Facility, if
any. The Prudential Excess Financing Agreement will be terminated upon
repayment. Following completion of this Offering, the Company does not intend to
borrow under the Bridge Loan Facility. The Company intends to incur additional
indebtedness in the future as it executes its business strategy. In the event of
the liquidation, dissolution, reorganization or any similar proceeding regarding
the Company, the assets of the Company will be available to pay obligations on
the Notes only after Senior Debt of the Company has been paid in full.
Accordingly, there may not be sufficient assets remaining to pay amounts due on
all or any of the Notes. See "Description of Securities -- Debt
Securities -- Subordination of Subordinated Debt Securities" in the Prospectus.
The Company is principally a holding company whose primary assets consist
of shares of common stock issued to the Company by its subsidiaries.
Accordingly, the Company will be dependent upon the cash flow of, and receipt of
dividends or advances from, its subsidiaries in order to meet its debt
obligations, including the Company's obligations under the Notes. The Notes will
not be guaranteed by the Company's subsidiaries, and consequently, the Company's
subsidiaries are not obligated or required to pay any amounts pursuant to the
Notes or to make funds available therefor in the form of dividends or advances
to the Company. Accordingly, any right of the Company to receive assets of its
subsidiaries upon their liquidation or reorganization (and the consequent right
of the holders of the Notes to participate in those assets) will be effectively
subordinated to the claims of creditors and preferred stockholders (if any) of
such subsidiaries as proceeds from any such liquidation or reorganization will
first be applied to satisfy obligations of such subsidiaries owing to creditors
and preferred stockholders (if any) before such proceeds may be available for
distribution to the Company. At December 31, 1996, other liabilities (primarily
unsecured trade indebtedness) of the Company's subsidiaries totaled
approximately $46.2 million and there were no shares of preferred stock of the
Company's subsidiaries outstanding.
S-11
<PAGE> 12
In addition to being subordinated to all existing and future Senior Debt of
the Company, the Notes will not be secured by any of the Company's assets. The
Revolving Loan Agreement is secured by substantially all of the assets of the
Company not pledged under other credit facilities, including stock of a majority
of the Company's subsidiaries. If the Company becomes insolvent or is
liquidated, or if payment under the Revolving Loan Agreement is accelerated, the
lenders under the Revolving Loan Agreement would be entitled to exercise the
remedies available to a secured lender under applicable law and pursuant to the
Revolving Loan Agreement. Accordingly, such lenders will have a prior claim with
respect to such assets and subsidiary capital stock.
FINANCIAL LEVERAGE
As of December 31, 1996, the Company and its subsidiaries had outstanding
approximately $729.7 million aggregate amount of Funded Debt (of which
approximately $381.2 million was nonrecourse to the Company and its
subsidiaries), representing approximately 70% of total consolidated
capitalization. The Company's nonrecourse debt, composed primarily of warehouse
credit lines, periodically increases and decreases as loans are funded or
acquired by the Company through the warehouse facilities and sold to
securitization trusts or other buyers. Accordingly the Company's total
indebtedness may change significantly from one period to the next. See "Use of
Proceeds" and "Capitalization."
Increasing the degree to which the Company is leveraged could have
important consequences to purchasers of the Notes, including: (i) limiting the
Company's ability to obtain necessary additional financing to fund future
working capital requirements, Asset Portfolio investments, investments in
Subordinated Certificates and other financial instruments, capital expenditures,
acquisitions or other general corporate requirements; (ii) requiring a
significant portion of the Company's cash flow from operations to be dedicated
to debt service requirements, thereby reducing the funds available for
operations and future business opportunities; (iii) requiring all of the
indebtedness incurred under the Revolving Loan Agreement to be repaid prior to
the time any principal payments are required on the Notes, thereby potentially
impairing the Company's ability to make payments on the Notes; and (iv)
increasing the Company's vulnerability to adverse economic and industry
conditions. The Company may incur additional indebtedness in the future,
although its ability to do so will be restricted by the Note Indenture, the
Senior Note Indenture, the Senior Subordinated Note Indenture and the Credit
Agreements. The ability of the Company to make scheduled payments under its
present and future indebtedness, or to refinance such indebtedness, will depend
on, among other things, the future operating performance of the Company, changes
in interest rates, general economic conditions and the perception in the capital
markets of the Company's business, results of operations, leverage, financial
condition and business prospects. Each of these factors is to a large extent
subject to economic, financial, competitive and other factors beyond the
Company's control.
The Credit Agreements contain numerous financial and operating covenants
that limit the discretion of the Company's management with respect to certain
business matters. These covenants place significant restrictions on, among other
things, the ability of the Company to make certain payments and investments and
to sell or otherwise dispose of assets and merge or consolidate with other
entities. The Credit Agreements also require the Company to meet certain
financial ratios and tests. A failure to comply with the obligations contained
in the Credit Agreements could result in an event of default under any of the
Credit Agreements, the Senior Note Indenture, the Senior Subordinated Note
Indenture or the Note Indenture, which could permit acceleration of the related
indebtedness and acceleration of indebtedness under other instruments that may
contain cross-acceleration or cross-default provisions. See "Description of
Other Indebtedness."
The Notes will not have the benefit of sinking fund payments by the
Company. Therefore, the Company anticipates that it will be necessary to
refinance all or a portion of the principal amount of the Notes at maturity.
However, there can be no assurance that the Company will be able to refinance
the Notes at that time.
S-12
<PAGE> 13
LIMITED COVENANTS
The holders of the Notes do not have the benefit of extensive covenants.
The covenants in the Note Indenture are not designed to protect holders of the
Notes in the event of a material adverse change in the Company's financial
condition or results of operations. These covenants impose only limited
restrictions on the ability of the Company to, among other things, create or
incur Funded Debt, pay dividends or make certain other restricted payments. The
Note Indenture does not contain covenants specifically designed to protect
holders of the Notes in the event of a highly leveraged transaction involving
the Company. The provisions of the Note Indenture should not be relied upon in
evaluating whether the Company will be able to comply with its obligations under
the Notes. See "Description of the Notes -- Covenants" in this Prospectus
Supplement and "Description of Securities -- Debt Securities -- Covenants" in
the Prospectus.
REPURCHASE OF THE NOTES
Upon a Change of Control, the Company will be required to offer to purchase
all outstanding Notes. In addition, such offer to repurchase would also require
the Company to offer to repurchase the Senior Notes and the Senior Subordinated
Notes pursuant to their respective indentures. Any Senior Notes tendered for
repurchase would be repaid prior to any repayment of the Notes. The source of
funds for any such purchase will be the Company's available cash or cash
generated from operations or other sources, including borrowings, sales of
assets, sales of equity or funds provided by a new controlling person. However,
there can be no assurance that sufficient funds will be available at the time of
any such event to make any required repurchase of Notes tendered or that, if
applicable, restrictions in the Revolving Loan Agreement will allow the Company
to make such required repurchases. The effect of such requirements may also make
it more difficult or delay attempts by others to obtain control of the Company.
See "Description of the Notes -- Conditional Repayment Options."
LIMITED MARKET FOR THE NOTES
The Notes have been approved for listing on the New York Stock Exchange,
subject to notice of issuance. However, no assurance can be given that an active
trading market for the Notes will develop. If a trading market for the Notes
does develop, the Notes may trade at a discount from their initial offering
price, depending on prevailing interest rates, the Company's operating results,
the market for similar securities and other factors.
S-13
<PAGE> 14
RECENT DEVELOPMENTS
FOURTH QUARTER 1996 RESULTS
On February 3, 1997, the Company announced its fourth quarter and full year
earnings results. A summary of the information released appears in the table
below. The information set forth below should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto incorporated
by reference in this Prospectus Supplement and the accompanying Prospectus. The
summary data presented below for the fiscal year ended December 31, 1995 is
derived from the consolidated financial statements of the Company audited by
Deloitte & Touche LLP, which are included in the 1995 Form 10-K. The data
presented for the three months ended December 31, 1996 and 1995 and for the
fiscal year ended December 31, 1996 are unaudited, but in the opinion of
management of the Company reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the results of
operations for such periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------
1996 1995 1996 1995
-------- -------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT:
Revenues:
Asset management and resolution fees............ $ 7,086 $14,544 $ 34,300 $ 41,295
Interest and other investment income............ 37,913 15,506 103,639 40,105
Mortgage banking fees........................... 15,665 10,305 40,697 24,382
Gain on sale of loans and investments, net...... 9,428 409 18,394 1,382
Other revenues.................................. 782 647 3,037 3,322
------- ------- -------- --------
Total revenues.......................... 70,874 41,411 200,067 110,486
Operating expenses, excluding interest expense.... 38,788 26,974 112,838 73,307
Interest expense.................................. 15,287 4,150 36,763 6,921
------- ------- -------- --------
Income from continuing operations before income
taxes........................................... 16,799 10,287 50,466 30,258
Income tax expense................................ 6,166 4,052 19,134 11,593
------- ------- -------- --------
Income from continuing operations................. 10,633 6,235 31,332 18,665
Gain from discontinued operations, net............ 2,425
------- ------- -------- --------
Net income........................................ $10,633 $ 6,235 $ 31,332 $ 21,090
======= ======= ======== ========
Earnings per share from continuing operations:
Primary......................................... $ 0.36 $ 0.25 $ 1.12 $ 0.76
Fully-diluted................................... 0.34 0.24 1.05 0.75
Earnings per share:
Primary......................................... $ 0.36 $ 0.25 $ 1.12 $ 0.86
Fully-diluted................................... 0.34 0.24 1.05 0.85
Weighted average number of common shares
outstanding and common share equivalents........ 29,454,758 25,327,818 28,099,411 24,654,321
</TABLE>
The Company earned net income of $10.6 million during the quarter ended
December 31, 1996, a 71% increase from the same period in 1995 and a 24%
increase relative to the third quarter ended September 30, 1996. Revenues for
the fourth quarter were $70.9 million, compared to $41.4 million for the same
period in 1995, a 71% increase. The fourth quarter performance brought income
from continuing operations for the year ended December 31, 1996 to $31.3
million, or 68% higher than the $18.7 million during the same period of 1995.
Primary earnings per share for the fourth quarter were $0.36, compared to
$0.25 for the same period in 1995, a 44% increase, and $0.31 for the third
quarter, a 16% increase. Fully-diluted earnings per share were $0.34, compared
to $0.24 for the same period in 1995, a 42% increase, and $0.29 for the third
quarter, a 17% increase.
S-14
<PAGE> 15
In December 1996, the Company completed a securitization of B&C loans
totaling approximately $700.0 million (including pre-funded loans of $142.0
million). Securitization volume for 1996 aggregated approximately $1.8 billion.
The commercial mortgage banking business originated $1.4 billion in new mortgage
loans in the fourth quarter, compared to $1.0 billion during the same period in
1995 and $0.8 billion during the third quarter.
The Company's asset management business invested $94.4 million and $198.4
million in Asset Portfolios during the quarter and year ended December 31, 1996,
respectively.
FINANCE COMPANY ACQUISITION
The Company currently is engaged in negotiations to acquire a
privately-held business finance company (the "Finance Company"). This
acquisition would enhance and complement the Company's commercial finance group.
The purchase price terms consist of: (i) an estimated $14.0 million in cash at
closing, (ii) shares of the Company's common stock, par value $0.05 per share
(the "Common Stock"), valued at an estimated $26.0 million at closing, (iii) the
assumption of certain liabilities estimated at $14.0 million at closing and (iv)
additional shares of Common Stock issuable based upon the operating performance
of the Finance Company during the next three fiscal years.
The negotiations are in the preliminary stage and a definitive agreement
has not yet been executed. The transaction is subject to the negotiation,
approval and execution of a definitive stock purchase agreement containing
customary terms, representations and warranties, covenants and conditions to
closing for a transaction of this type. The transaction will be subject to the
approval of the Company's board of directors as well as requisite regulatory and
other approvals. There can be no assurance that this acquisition will be
completed.
QUALITY ACQUISITION
On October 25, 1996, the Company purchased substantially all of the
operating assets and assumed certain contracts and obligations of Quality, an
originator of B&C loans. The purchase price was $65.0 million in cash plus the
assumption of liabilities aggregating $109.3 million, consisting of warehouse
indebtedness, accounts payable and other liabilities. See "Unaudited Pro Forma
Condensed Consolidated Financial Statements for the Quality Acquisition" and the
Company's Current Report on Form 8-K dated November 6, 1996, as amended by Form
8-K/A No. 1, incorporated by reference in the accompanying Prospectus.
COMMON STOCK OFFERING
In November 1996, the Company completed a registered public offering (the
"Common Stock Offering") of 1,828,148 shares of Common Stock. In December 1996,
the Company sold an additional 1,164,000 shares of Common Stock upon exercise of
the underwriters' over-allotment option. The net proceeds from such offering,
including the over-allotment shares, aggregated approximately $60.4 million 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 were $20.35 per
share (after deducting an underwriting discount of $0.90 per share). 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. See the Company's Current Report on Form
8-K dated November 19, 1996, incorporated by reference in the accompanying
Prospectus.
CONVERSION OF CONVERTIBLE SUBORDINATED DEBENTURES
In November 1996, the Company called for redemption all $45.0 million
aggregate principal amount of its Convertible Subordinated Debentures. In
December 1996, all the holders of outstanding Convertible Subordinated
Debentures converted such debentures into an aggregate of 3,600,000 shares of
the Company's Common Stock at a conversion price of $12.50 per share of Common
Stock (or 80 shares of Common Stock for each $1,000 principal amount).
S-15
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered hereby
(after deducting the underwriting discount and estimated expenses of the
Offering) will be approximately $186.3 million.
The Company intends to use the net proceeds first to repay all of the
Company's outstanding borrowings under a $31.0 million Excess Servicing
Receivable and Residual Financing Agreement dated February 27, 1997, between
ARCMI and Prudential Securities Credit Corporation (the "Prudential Excess
Financing Agreement") (which had an outstanding balance of $31.0 million bearing
interest at an interest rate of 7.56% on March 5, 1997). The net proceeds of
this Offering will then be used to repay all of the Company's outstanding
borrowings, if any, under a $25.0 million Bridge Loan Facility dated February 7,
1997, between the Company and NationsBank of Texas (the "Bridge Loan Facility")
(which had no indebtedness outstanding as of March 5, 1997). The remaining net
proceeds will then be used to reduce the Company's outstanding borrowings under
the Revolving Loan Agreement (which had an outstanding balance of approximately
$199.3 million bearing interest at a weighted average interest rate of 7.03% as
of March 5, 1997). For the year ended December 31, 1996, the weighted average
interest rate on indebtedness incurred under the Company's bank credit
agreements in place during 1996 was 7.40% per annum. The indebtedness under the
Prudential Excess Financing Agreement was incurred primarily to finance the
purchase of Subordinated Certificates. The indebtedness under the Revolving Loan
Agreement was incurred, and any borrowings under the Bridge Loan Facility will
be used, primarily in connection with investments in Asset Portfolios, certain
corporate acquisitions and other general corporate purposes. After application
of the net proceeds to the Company of the Offering, $167.5 million would have
been available as of March 5, 1997 for reborrowing under the Revolving Loan
Agreement to be used for general corporate purposes, which may include funding
investments in Asset Portfolios, Subordinated Certificates and other financial
instruments, acquiring new businesses or making strategic investments in
entities that complement the Company's business lines and strategies. The
Prudential Excess Financing Agreement will mature upon completion of this
Offering and will terminate once the Company repays the indebtedness outstanding
under such facility with the proceeds of this Offering. The Company expects to
draw on the Bridge Loan Facility prior to the closing of this Offering and
intends to repay any such indebtedness in full from the net proceeds of this
Offering. Following completion of this Offering, the Company does not intend to
borrow under the Bridge Loan Facility. Other than the acquisition discussed in
"Recent Developments -- Finance Company Acquisition," the Company has no
understandings or agreements in respect of any material acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Parent Capital Arrangements" and "Description of Other
Indebtedness -- Revolving Loan Agreement", "-- Bridge Loan Facility" and
"-- AMRESCO Residential Facilities -- Prudential Excess Financing Agreement."
S-16
<PAGE> 17
CAPITALIZATION
The following table presents the capitalization of the Company at September
30, 1996, (i) on a historical basis, (ii) on a pro forma basis to reflect (x)
the Quality Acquisition as if it occurred on September 30, 1996, (y) the Common
Stock Offering as described under "Recent Developments -- Common Stock Offering"
and (z) the conversion of all of the Company's outstanding Convertible
Subordinated Debentures into shares of Common Stock as described under "Recent
Developments -- Conversion of Convertible Subordinated Debentures," and (iii) on
a pro forma basis, as adjusted, to reflect the application of the estimated net
proceeds from the sale of the Notes offered hereby as described under "Use of
Proceeds." This table should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto included in the 1995
Form 10-K and the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, both of which are incorporated by reference in the
Prospectus, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Unaudited Pro
Forma Condensed Consolidated Financial Statements for the Quality Acquisition"
included elsewhere in this Prospectus Supplement.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
-------------------------------------
PRO FORMA
AS
HISTORICAL PRO FORMA ADJUSTED
---------- --------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Debt(1):
Notes payable............................................ $ 99,864 $104,424
Warehouse loans payable.................................. 381,560 474,256 $ 474,256
Nonrecourse debt......................................... 17,057 17,057 17,057
Senior Notes, Series 1996-A due 1999..................... 57,500 57,500 57,500
10% Senior Subordinated Notes due 2003................... 57,500 57,500 57,500
Senior Subordinated Notes, Series 1997-A due 2004........ 192,500
8% Convertible Subordinated Debentures due 2005.......... 45,000
-------- -------- ----------
Total debt....................................... 658,481 710,737 798,813
-------- -------- ----------
Shareholders' equity:
Common Stock, par value $0.05 per share; 50,000,000
shares authorized, 27,189,497 shares issued (actual)
and 33,781,645 shares issued (pro forma)(2)........... 1,359 1,689 1,689
Capital in excess of par................................. 110,121 213,306 213,306
Reductions for employee stock............................ (1,409) (1,409) (1,409)
Treasury stock, 24,339 shares............................ (160) (160) (160)
Net unrealized losses.................................... (1,207) (1,207) (1,207)
Retained earnings........................................ 76,389 76,389 76,389
-------- -------- ----------
Total shareholders' equity....................... 185,093 288,608 288,608
-------- -------- ----------
Total capitalization............................. $843,574 $999,345 $1,087,421
======== ======== ==========
</TABLE>
- ---------------
(1) Since September 30, 1996 through March 5, 1997, the Company has (i) incurred
$318.0 million (including $31.0 million outstanding under the Prudential
Excess Financing Agreement) of net additional indebtedness under Warehouse
Agreements, (ii) incurred $138.0 million (including $65.0 million to fund
the Quality Acquisition less $60.4 million of net proceeds from the Common
Stock Offering) of net additional indebtedness under the Revolving Loan
Agreement, (iii) entered into the Bridge Loan Facility, although no
indebtedness was outstanding under this facility and (iv) repaid $43.1
million of borrowings under other agreements, which have been terminated,
included above under notes payable. See "Description of Other Indebtedness,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 7 of Notes to
Consolidated Financial Statements included in the 1995 Form 10-K.
(2) Does not include an aggregate of 3,568,460 shares of Common Stock reserved
for issuance upon the exercise of outstanding stock options and 1,693,266
shares available for future grants of options and shares of restricted stock
under the Company's Stock Option and Award Plan at September 30, 1996. Since
September 30, 1996 through December 31, 1996, options for an aggregate of
14,500 shares have been exercised and no shares of restricted stock have
been issued under the Company's Stock Option and Award Plan. See Note 11 of
Notes to Consolidated Financial Statements included in the 1995 Form 10-K.
S-17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading speciality financial services company engaged in
residential mortgage banking, commercial mortgage banking, asset management,
institutional real estate investment advisory services and commercial finance.
Through the nine months ended September 30, 1996, the operations of the
commercial finance segment were included within the asset management segment.
The Company's business may be affected by many factors, including fluctuations
in real estate and other asset values, the availability and price of commercial
and residential mortgages and Asset Portfolios to be purchased, and the level of
and fluctuations in interest rates, changes in the securitization market and
competition. In addition, the Company's operations require continued access to
short and long term sources of financing.
On December 31, 1993, AMRESCO, INC., formerly BEI, merged with Holdings.
The merger was accounted for as a "reverse acquisition" whereby Holdings was
deemed to have acquired BEI for financial reporting purposes. However, BEI,
renamed AMRESCO, INC., remains the continuing legal entity and registrant for
Commission filing purposes. Consistent with the reverse acquisition accounting
treatment, the historical financial statements of AMRESCO, INC. presented for
the year ended December 31, 1993 are the consolidated financial statements of
Holdings and differ from the consolidated financial statements of BEI as
previously reported. The results of operations of BEI have been included in the
Company's financial statements from the date of acquisition.
In 1994, the Company concluded all of its significant asset management
relationships with government agencies and financial institutions and began to
shift its focus toward investment activities and the development of new lines of
financial service businesses. Since the BEI Merger, the Company has extended its
business lines to offer a full range of residential and commercial mortgage
banking services, including the development of capital markets activities,
increased substantially the amount it invests in Asset Portfolios, developed its
institutional 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 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 22% of
revenues and 30% of operating profit (before corporate, other and intercompany
eliminations) of the Company for the first nine months of 1996. The Company
believes that there are significant opportunities in the B&C loan market, and
consequently expects residential mortgage banking activities to represent an
increasing proportion of revenues and operating income of the entire Company for
the foreseeable future.
The following discussion and analysis presents the significant changes in
financial condition and results of continuing operations of the Company by
primary business lines for the nine months ended September 30, 1996 and 1995 and
for the years ended December 31, 1995, 1994 and 1993. The results of operations
of acquired businesses are included in the Company's Consolidated Financial
Statements from the date of acquisition. This discussion should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto included in the 1995 Form 10-K.
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<PAGE> 19
The following is a summary of the Company's results of operations by
primary business line for the nine months ended September 30, 1996 and 1995 and
for the years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues:
Residential mortgage banking................ $ 28,339 $ 88 $ 2,307
Commercial mortgage banking................. 33,974 14,720 26,573 $ 6,460
Asset management............................ 65,569 53,727 81,144 110,637 $122,944
Institutional real estate investment
advisory................................. 3,217 452
Corporate, other and intercompany
eliminations............................. (1,904) 3,542 10 12,694 (543)
-------- -------- -------- -------- --------
Total revenues...................... 129,195 72,077 110,486 129,791 122,401
-------- -------- -------- -------- --------
Operating expenses:
Residential mortgage banking................ 11,488 209 1,694
Commercial mortgage banking................. 26,566 12,426 20,550 6,237
Asset management............................ 33,489 24,906 37,691 52,741 51,678
Institutional real estate investment
advisory................................. 2,906 444
Corporate, other and intercompany
eliminations............................. 21,079 14,564 19,849 35,127 27,046
-------- -------- -------- -------- --------
Total operating expenses............ 95,528 52,105 80,228 94,105 78,724
-------- -------- -------- -------- --------
Operating profit:
Residential mortgage banking................ 16,851 (121) 613
Commercial mortgage banking................. 7,408 2,294 6,023 223
Asset management............................ 32,080 28,821 43,453 57,896 71,266
Institutional real estate investment
advisory................................. 311 8
Corporate, other and intercompany
eliminations............................. (22,983) (11,022) (19,839) (22,433) (27,589)
-------- -------- -------- -------- --------
Total operating profit.............. 33,667 19,972 30,258 35,686 43,677
Income tax expense............................ 12,968 7,542 11,593 14,753 17,371
-------- -------- -------- -------- --------
Income from continuing operations............. 20,699 12,430 18,665 20,933 26,306
Gain (loss) from discontinued operations...... 2,425 2,425 (2,185) (2,088)
-------- -------- -------- -------- --------
Net income.......................... $ 20,699 $ 14,855 $ 21,090 $ 18,748 $ 24,218
======== ======== ======== ======== ========
</TABLE>
RESULTS OF OPERATIONS
Revenues from the Company's residential mortgage banking activities consist
of interest earned on residential mortgage loans purchased, gains on the
securitization and sale of such loans and other related securities and accrued
earnings on Subordinated Certificates purchased from securitization trusts. The
gains on securitization and sale of mortgage loans and other related securities
represent the amount by which the proceeds received (including the estimated
value of any Subordinated Certificates retained) exceed the basis of the assets
sold and the cost of securitization. When loans are securitized and sold, the
Subordinated Certificates are valued at the discounted present value of the cash
flow expected to be realized over the anticipated average life of the assets
sold less future estimated credit losses, estimated prepayments and normal
servicing and other fees relating to the assets sold. The discounted present
value of such Subordinated Certificates is computed using management's
assumptions of market discount rates (currently approximately 20%), prepayment
rates, default rates and other costs.
Revenues from the Company's 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.
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<PAGE> 20
Revenues from the Company's asset management activities primarily consist
of fees charged for the management of Asset Portfolios comprised of performing,
nonperforming or underperforming real estate, commercial, industrial and
agricultural loans and for the successful resolution of the assets within such
Asset Portfolios. The asset base of each Asset Portfolio declines over the life
of the Asset Portfolio, thus reducing asset management fees as assets within the
Asset Portfolio are resolved. These fees are subject to fluctuation based on the
consideration received, timing of the sale or collection of the managed assets
and the attainment of specified earnings levels on behalf of investors or
investment partners. Certain direct costs incurred, primarily through 1994, in
the management of assets for the FDIC were paid by the Company and billed to the
FDIC.
The original cost of an investment in an Asset Portfolio is allocated to
individual assets within that Asset Portfolio based on their relative fair value
to the total purchase price. The difference between gross estimated cash flows
from loans and asset-backed and other securities and its present value is
accrued using the level yield method. The level yield method recognizes income
as the product of the recorded investment and the expected rate of return. The
expected rate of return is based upon estimated cash flows of the investments.
The recorded investment is reduced based on cash collections allocated to
principal. The Company periodically evaluates the recoverability of the recorded
investments by reviewing the estimated remaining amount and timing of cash flows
and adjusts, if necessary, investments or expected rates of return. The Company
accounts for its investments in partnerships and joint ventures using the equity
method which generally results in the pass-through of its pro rata share of
earnings as if it had a direct investment in the underlying loans. Loans,
partnerships and joint ventures, and real estate are carried at the lower of
cost or estimated fair value. The Company's investments in asset-backed and
other securities are classified as available for sale and are carried at
estimated fair value determined by discounting estimated cash flows at current
market rates. Any unrealized gains (losses) on asset-backed and other securities
are excluded from earnings and reported as a separate component of shareholders'
equity, net of tax effects.
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.
Other revenues consist of consulting revenues earned on due diligence,
gains on sales of other assets and other miscellaneous income. Additionally,
1994 included a $10.0 million conclusion fee on a management contract with a
financial institution.
In December 1994, the Company elected to dispose of the operations of its
data processing and home banking subsidiary. The loss from such discontinued
operations totaled approximately $2.2 million and $2.1 million for the years
ended December 31, 1994 and 1993, respectively. The subsidiary was sold on June
16, 1995 for a net gain of $2.4 million, or $0.10 per share.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
The Company reported a 79% increase in revenues and a 69% increase in
operating profit for the nine months ended September 30, 1996 compared to the
comparable 1995 period. The operating profit increase over the same period in
1995 was primarily due to the inclusion of residential mortgage banking
operations which were initiated in September 1995. Additionally, commercial
mortgage banking posted a 223% increase in operating profit and asset management
operating profit rose 11%. Weighted average shares outstanding and equivalents
for the nine months ended September 30, 1996 increased 13% over the first nine
months of 1995 primarily due to the issuance of 2,300,000 shares of common stock
in December 1995. Fully-diluted earnings per share from continuing operations
for the nine months ended September 30, 1996 were $0.71 compared to $0.51 for
the same period in 1995, a 39% increase.
Residential Mortgage Banking. The Company initiated the operation of the
residential mortgage banking business in September 1995. Revenues for the nine
months ended September 30, 1996 consisted of $20.2 million in interest and other
investment income and $8.2 million in gains on the securitization and sale of
$1.1 billion of residential mortgage loans in four separate transactions.
Interest and other investment income primarily consisted of interest earned on
mortgage loans held for sale which averaged approximately
S-20
<PAGE> 21
$186.7 million during the nine months ended September 30, 1996, compared to no
such loans held during the same period of 1995.
Expenses for the nine months ended September 30, 1996 were comprised of
$9.3 million in interest expense, $1.2 million in personnel expenses and $1.0
million in other general and administrative expenses. The $9.3 million in
interest expense relates primarily to borrowing under warehouse loans payable
which funded the acquisition of mortgage loans held for sale.
Commercial Mortgage Banking. Revenues for the nine months ended September
30, 1996 consisted primarily of $24.9 million in origination, underwriting and
servicing revenues and $9.0 million in interest and other investment income.
Origination, underwriting and servicing revenues increased $10.9 million and
interest and other investment income increased $8.4 million due to the inclusion
of the operations of the commercial loan servicing business acquired in October
1995 and increases in the loan originations and servicing volumes of the
Company's previously existing mortgage banking operations.
Expenses for the nine months ended September 30, 1996 were primarily
comprised of $19.4 million in personnel expenses, $5.4 million in other general
and administrative expenses and $1.2 million in interest expense. The $14.1
million increase in expenses over the $12.4 million of expenses for the same
period in 1995 was primarily due to a $9.7 million increase in personnel
expenses, a $3.0 million increase in other general and administrative expenses
and a $1.1 million increase in interest expense. Expenses increased primarily
due to the inclusion of operations of the commercial loan servicing business
which was acquired during October 1995 and the growth in commercial mortgage
banking operations which were initiated late in 1994.
Asset Management. Revenues for the first nine months of 1996 were comprised
of $39.1 million in interest and other investment income, $24.1 million in asset
management and resolution fees and $2.4 million in other revenues. The $11.8
million, or 22%, increase in revenues from the same period of 1995 was primarily
comprised of a $14.5 million increase in interest and other investment income
due to an increase in aggregate investments of $78.8 million from September 30,
1995. This increase was offset in part by a $1.9 million decrease in asset
management and resolution fees due to a shift from primarily managing and
investing in partnerships and joint ventures to investing in wholly-owned
portfolios.
Expenses for the nine months ended September 30, 1996 were primarily
comprised of $14.7 million in personnel expenses, $11.8 million in interest
expense and $6.4 million in other general and administrative expenses. The $8.6
million, or 34%, increase in expenses over the same period in 1995 was primarily
due to a $5.9 million increase in interest expense and a $3.5 million increase
in other general and administrative expenses. The increase in interest expense
was due to the financing incurred for a $78.8 million increase in aggregate
investments from September 30, 1995.
Institutional Real Estate Investment Advisory. The Company acquired
substantially all of the assets of Acacia Realty Advisors, Inc. in November
1995. Revenues for the first nine months of 1996 totaled $3.2 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 $2.9 million were incurred,
including $2.0 million in personnel expenses and $0.8 million in other general
and administrative expenses.
Corporate, Other and Intercompany Eliminations. Operating losses for the
nine months ended September 30, 1996 increased $12.0 million, or 109%, over the
comparable 1995 period. The increase is primarily due to increases in personnel
expenses and other overhead related to expanded operations.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company reported 1995 revenues of $110.5 million, a 15% decrease from
1994. Operating profit also decreased 15% over the same period. Revenues and
operating profit in 1994 included $10.0 million and $6.0 million, respectively,
related to the conclusion of an asset management contract. After adjustment for
this onetime conclusion fee, 1995 revenues decreased 8% while operating profits
increased 2%. Commercial mortgage banking posted a significant increase in
operating profit, while asset management operating profit fell
S-21
<PAGE> 22
25%. Fully-diluted earnings per share from continuing operations for 1995 was
$0.75 compared to $0.73 for 1994 after elimination of the onetime contract
conclusion fee in 1994, a 3% increase.
Residential Mortgage Banking. The Company initiated the operations 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. Interest and other investment income primarily consists of
interest earned on mortgage loans held for sale which totaled $142.7 million at
December 31, 1995.
Expenses for the year ended December 31, 1995 were comprised of $1.1
million in interest expense, $0.4 million in personnel expenses and $0.2 million
in other general and administrative expenses. The $1.1 million interest expense
relates to borrowings under warehouse loans payable which funded the acquisition
of mortgage loans held for sale.
Commercial Mortgage Banking. Revenues for the year ended December 31, 1995
consisted of $24.4 million in origination, underwriting and servicing revenues,
$2.1 million in interest and other investment income and $0.1 million in other
income. Interest and other investment income increased $1.9 million and mortgage
banking revenues increased $18.2 million primarily due to the inclusion for an
entire year of the operations of Holliday Fenoglio, which was purchased in
August 1994, commencement of ACC's underwriting activities in the fourth quarter
of 1994 and the inclusion of securitized commercial loan servicing contracts
acquired from EQS in the fourth quarter of 1995.
Expenses for the year ended December 31, 1995 were comprised of $16.1
million in personnel expenses, $4.1 million in other general and administrative
expenses, and $0.3 million in interest expense. The $14.3 million increase is
primarily due to a $11.2 million increase in personnel expenses, a $2.8 million
increase in other general and administrative expenses and a $0.3 million
increase in interest expense. Expenses increased due to the inclusion of
operations of Holliday Fenoglio, ACC and the contracts acquired from EQS.
Asset Management. Revenues for 1995 were comprised of $20.6 million in
asset management fees, $19.5 million in resolution fees, $36.9 million in
interest and other investment income and $4.1 million in other revenues,
primarily consulting revenues and gains on sales of investments. The $29.5
million, or 27%, decrease in revenues from 1994 was comprised of a $21.2 million
decrease in management fees and a $32.4 million decrease in resolution fees due
to the conclusion of significant institutional and government contracts during
1994 and early 1995. These declines were partially offset by a $23.0 million
increase in interest and other investment income due to an increase in aggregate
investments of $138.6 million from December 31, 1994 and a $1.1 million increase
in other revenues.
Expenses for the year ended December 31, 1995 were comprised of $21.1
million in personnel expenses, $5.0 million in other general and administrative
expenses, $9.5 million in interest and $2.1 million in profit participation
expenses. The $15.1 million, or 29%, decrease in expenses was primarily due to
an $18.5 million decrease in personnel expenses and a $5.8 million decrease in
other general and administrative expenses, which decreases were partially offset
by a $7.2 million increase in interest expense and a $2.0 million increase in
profit participation expenses. Personnel and other general and administrative
expenses decreased as significant institutional and government contracts
concluded during 1994, including a related $3.7 million reduction in estimate of
accounts receivable bad debt reserve and other accrued expenses related to
certain concluding asset management contracts. The increase in interest expense
was due to the financing incurred for a $138.6 million increase in aggregate
investments at December 31, 1995 compared to December 31, 1994. The increase in
profit participation expenses is primarily due to the $4.0 million received
related to certain expired RTC contracts, approximately 40% of which was owed to
a joint venture partner.
Institutional Real Estate Investment Advisory. After the acquisition of
substantially all 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, including acquisition,
portfolio/asset management and disposition services. Expenses of $0.4 million
were incurred, including $0.2 million in personnel expenses and $0.2 million in
other general and administrative expenses.
Corporate and Other. Revenues for the year ended December 31, 1995 were
nominal, compared to $12.7 million in 1994. The $12.7 million decrease in
revenues was primarily due to the $10.0 million
S-22
<PAGE> 23
conclusion fee on a significant institutional asset management contract
terminated in 1994 and $3.8 million relating to the inclusion in 1994 of
operations and sale of a subsidiary acquired with BEI for the period prior to
its sale in the first quarter of 1994.
Expenses for the year ended December 31, 1995 were $19.8 million, compared
to $35.1 million during 1994, a 44% decrease. The $15.3 million decrease was
primarily due to the inclusion of $6.0 million of expenses in 1994 related to
the conclusion of a significant institutional asset management contract as well
as reduced incentive compensation and severance costs.
Income Taxes. The Company must have future taxable income to realize
recorded deferred tax assets, including net operating loss carry forward tax
benefits obtained in the BEI Merger. Certain of these benefits expire beginning
in 1998 and are subject to annual utilization limitations. Management believes
that recorded deferred tax assets will be realized in the normal course of
business. The decrease in the effective income tax rate for the year ended
December 31, 1995 was primarily due to permanent tax differences related to
mortgages sold by a partnership in which the Company owns an interest for which
the acquired tax basis exceeded the book basis.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
The Company reported 1994 revenues of $129.8 million, a 6% increase from
1993, while operating profit decreased 18% over the same period. Revenues and
operating profit in 1994 included $10.0 million and $6.0 million, respectively,
related to the early conclusion of an asset management contract. The operations
of BEI are included from the date of acquisition, December 31, 1993. The
Company's commercial mortgage banking operations were initiated during 1994 with
the acquisition of Holliday Fenoglio in August 1994 and the commencement of
business by ACC during the fourth quarter of 1994. Additionally, during 1994,
the focus of the asset management business began changing from managing assets
for institutional and governmental entities to the direct ownership of Asset
Portfolios acquired from nongovernmental sellers and the management of Asset
Portfolios for private third parties.
Commercial Mortgage Banking. Revenues of $6.4 million and expenses of $6.2
million were due to the acquisition of Holliday Fenoglio and the commencement of
business by ACC during 1994. Revenues in 1994 consisted of $0.2 million in
interest income and $6.2 million in commercial mortgage banking revenues,
primarily origination, underwriting and servicing revenues. Expenses in 1994
consisted of $4.9 million in personnel expenses and $1.3 million in other
general and administrative expenses.
Asset Management. Revenues for the year ended December 31, 1994 included
$41.8 million in management fees, $52.0 million in resolution fees, $13.9
million in interest and other investment income and $2.9 million in other
revenues. Management fees decreased $8.9 million and resolution fees declined
$15.9 million during 1994 principally due to only eight months of operations
under a significant institutional asset management contract, as well as reduced
revenues from the government sector contracts as the contracts continued to
conclude. These declines were offset by a $9.7 million increase in interest and
investment income and gains on sales of assets and other revenues of $2.8
million.
Expenses of $52.7 million for the year ended December 31, 1994 included
$39.6 million in personnel expenses, $10.7 million in other general and
administrative expenses, $2.3 million in interest expense and $0.1 million in
profit participations. The $1.1 million increase over the same period of 1993
was primarily due to a $6.6 million increase in other general and administrative
expenses and a $1.2 million increase in interest expense, which increases were
partially offset by a $3.8 million decline in personnel expenses and a $2.9
million decrease in profit participations. The increase in other general and
administrative expenses was primarily due to the inclusion of BEI operations in
1994. The increase in interest expense was due to the incurrence of debt to
facilitate increased investments. The decrease in personnel expenses was
primarily related to a reduction in the number of personnel due to the
conclusion of personnel-intensive institutional and government asset management
contracts. The decrease in profit participations of $2.9 million was primarily
due to the modification of an asset management contract effective April 1, 1993
that effected an exchange of profit participation in the Company's income before
taxes for a rebate of fees.
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<PAGE> 24
Corporate and Other. Other revenues for the year ended December 31, 1994
were $12.7 million, compared to a loss of $0.5 million in 1993. The $13.2
million increase in revenues was primarily due to the $10.0 million conclusion
fee on an institutional asset management contract and the $3.8 million in
revenue relating to the inclusion in 1994 of operations and sale of a subsidiary
acquired with BEI for the period prior to its sale in the first quarter of 1994.
Expenses for the year ended December 31, 1994 increased $8.1 million over 1993
to $35.1 million primarily due to the inclusion of $6.0 million of expenses
related to the conclusion of an institutional asset management contract in 1994.
Pro Forma Income Summary. Pro forma combined revenues for 1994 totaled
$139.3 million compared to $168.4 million for 1993, assuming the BEI Merger and
the Holliday Fenoglio acquisition had been consummated as of January 1, 1993.
The $29.1 million, or 17%, decrease was primarily due to a decrease in BEI
revenues of $15.3 million and a decrease in Holdings revenues of $13.8 million.
The decline in revenues was primarily related to the conclusion of certain asset
management contracts during 1994 and the sale of certain Company subsidiaries in
the first quarter of 1994. Pro forma income from continuing operations for 1994
totaled $21.8 million compared to $28.0 million for 1993, after removing the
impact of merger expenses, net gain on sales of subsidiaries and discontinued
operations, for a decrease of $6.2 million, or 22%. Earnings per share from
continuing operations were $0.91 for 1994, compared to $1.23 for the previous
year, a decrease of $0.32, or 26%.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $14.2 million and $16.1 million at
September 30, 1996 and December 31, 1995, respectively. Cash flows from
operating activities plus principal cash collections on investments and proceeds
from sale of Subordinated Certificates totaled $36.8 million for the first nine
months of 1996, compared to $35.1 million for the same period of 1995. The
increase in cash flows from these activities resulted primarily from increased
investments. Cash for investing, originating and underwriting loans, acquiring
loans for securitization, general operating expenses and business acquisitions
is primarily obtained through cash flow and borrowings under credit facilities,
including advances on the corporate and portfolio credit lines, mortgage
warehouse lines, nonrecourse debt, subordinated indebtedness, retained earnings
and cash flow from owned investments. Cash may also be generated by the
Company's sale of additional Subordinated Certificates retained in the
securitization and sale of residential mortgage loans.
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
--------------- --------------
1996 1995 1995 1994
------ ------ ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Cash provided by operations and principal
collections on investments and sale of
subordinated interests in securitizations, net.... $ 36.8 $ 35.1 $ 77.9 $69.8
Cash used for purchase of investments............... (122.2) (139.1) (221.8) (62.6)
Cash used for purchase of mortgage loans, net....... (160.8)
Cash used for purchase of subsidiaries.............. (22.3) (17.8)
Interest coverage ratio(1).......................... 2.8x 9.2x 6.0x 24.4x
</TABLE>
- ---------------
(1) Interest coverage ratio means the ratio of earnings before interest, income
taxes, depreciation and amortization to cash interest expense.
S-24
<PAGE> 25
The following table shows the components of the Company's capital structure
as of September 30, 1996 and as of December 31, 1995:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 % OF TOTAL 1995 % OF TOTAL
------------- ---------- ------------ ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Notes payable (excluding investment
line(1))............................. $ 80.5 10.0% $105.9 22.8%
Mortgage warehouse debt................ 381.6 47.3 153.2 33.0
Senior Notes, Series 1996-A due 1999... 57.5 7.1
10% Senior Subordinated Notes due
2003................................. 57.5 7.1
8% Subordinated Convertible Debentures
due 2005(2).......................... 45.0 5.6 45.0 9.6
Shareholders' equity................... 185.1 22.9 160.8 34.6
</TABLE>
- ---------------
(1) The investment line under which $36.4 million and $21.9 million was
outstanding as of September 30, 1996 and December 31, 1995, respectively, is
used solely to acquire short term investments of high grade government
securities that secure the loan.
(2) In December 1996, all the holders of Subordinated Convertible Debentures
converted their debentures into shares of Common Stock of the Company.
The following discussion summarizes the key components of the Company's
ongoing capital resources:
Parent Capital Arrangements. On February 7, 1997, the Company and certain
of its subsidiaries entered into an amended Revolving Loan Agreement with
NationsBank of Texas and other lenders. 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. 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
balance of $31.5 million at 8.3%, $21.0 million at 7.7%, $47.0 million at 7.2%,
$60.0 million at 7.1% and $19.5 million at 7.0%, for a total of $179.0 million
outstanding. The total balance outstanding at March 5, 1997 was $199.3 million.
The Revolving Loan Agreement is secured by substantially all of the assets of
the Company not pledged under other credit facilities, including stock of a
majority of the Company's subsidiaries. The Revolving Loan Agreement requires
the Company to meet certain financial tests, including minimum consolidated
tangible net worth, maximum consolidated funded debt to consolidated
capitalization ratio, minimum fixed charge coverage ratio, minimum interest
coverage ratio, and maximum senior consolidated funded debt to consolidated
earnings before interest, income taxes, depreciation and amortization ("EBITDA")
ratio. The Revolving Loan Agreement contains covenants that, among other things,
will limit the incurrence of additional indebtedness, investments, asset sales,
loans to shareholders, dividends, transactions with affiliates, acquisitions,
mergers and consolidations, liens and encumbrances and other matters customarily
restricted in such agreements. The 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.
Since November 1995, the Company has completed three offerings of debt
instruments: (i) $45.0 million principal amount of Convertible Subordinated
Debentures, bearing interest at 8% per annum and due 2005, (ii) $57.5 million
principal amount of Senior Subordinated Notes, bearing interest at 10% per annum
and due 2003 and (iii) $57.5 million principal amount of Senior Notes bearing
interest at 8.75% per annum and due 1999. The net proceeds of this indebtedness
were used to repay indebtedness incurred under the Revolving Loan Agreement (or
its predecessor). In addition, the Company sold shares of its Common Stock in
two public offerings of (i) 2,300,000 shares in December 1995 and an aggregate
of 2,992,148 shares in November and December 1996. The net proceeds
(approximately $25.1 million and $60.4 million, respectively) were also used to
repay indebtedness under the Revolving Loan Agreement (or its predecessor). All
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<PAGE> 26
the holders of the $45.0 million aggregate principal amount of Convertible
Subordinated Debentures converted their debentures into an aggregate of
3,600,000 shares of Common Stock in December 1996. See "Recent
Developments -- Conversion of Convertible Subordinated Debentures."
On February 7, 1997, the Company and certain of its subsidiaries entered
into a Bridge Loan Facility with NationsBank of Texas, which provides the
Company a $25.0 million line of credit. As of March 5, 1997, no indebtedness was
outstanding under this facility. Indebtedness under the Bridge Loan Facility is
secured with the same collateral securing the Revolving Loan, and generally
bears interest at a rate based upon either the Adjusted LIBOR Rate (as defined
in the note evidencing the Bridge Loan Facility) or NationsBank of Texas' 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 proceeds of the Offering will be used to repay all indebtedness outstanding
under the Bridge Loan Facility, if any. Following completion of this Offering,
the Company does not intend to borrow under the Bridge Loan Facility. The
covenants and events of defaults are the same under the Bridge Loan Facility as
those under the Revolving Loan Agreement.
AMRESCO Residential. AMRESCO Residential has arranged various warehouse
facilities to support its acquisition of loan portfolios and the origination of
B&C loans. Currently AMRESCO Residential utilizes the facilities described
below.
ARCMI has arranged 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.
ARCMI also entered into a warehouse credit facility with Morgan Stanley
Mortgage Capital Inc., which was amended and restated as of October 25, 1996 (as
amended, 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. ARMC is also a pledgor on this
facility.
CS First Boston Mortgage Capital Corp. has agreed to provide ARCMI 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 is secured by the mortgages
acquired using funds obtained under the facility.
On June 28, 1996, ARCMI received approximately $39.8 million of proceeds
from the sale of certain Subordinated Certificates retained by the Company in
connection with the securitization and sale of residential mortgage loans. The
proceeds from this sale were used to reduce outstanding borrowings under the
Revolving Loan Agreement. Although ARCMI intends, from time to time, to continue
to pursue opportunities to sell other Subordinated Certificates to generate
additional borrowing capacity under its Revolving Loan Agreement and reduce the
Company's capital exposure with respect to Subordinated Certificates, no
assurance can be given that such opportunities will be available in the future.
On October 17, 1996, ARMC entered into a master repurchase agreement (the
"DLJ Master Repurchase Agreement") with DLJ Mortgage Capital, Inc. to support
the purchase of Subordinated Certificates and warehouse loans acquired in the
Quality Acquisition. As of December 31, 1996, $20.3 million was outstanding
under the DLJ Master Repurchase Agreement bearing interest at 6.34% to 6.80% per
annum. No additional indebtedness will be incurred under this facility.
On February 27, 1997, ARCMI entered into the Prudential Excess Financing
Agreement to finance the purchase of certain Subordinated Certificates. As of
March 5, 1997, $31.0 million was outstanding under the Prudential Excess
Financing Agreement bearing interest at 7.56% per annum. Indebtedness under the
Prudential Excess Financing Agreement is principally secured by a pledge of the
Subordinated Certificates
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purchased through the Prudential Excess Financing Agreement. The Prudential
Excess Financing Agreement will mature upon the completion of this Offering and
will be repaid in full with proceeds from this Offering.
ACC. On April 28, 1995, ACC entered into a $25.0 million warehouse line of
credit agreement with NationsBank of Texas (as subsequently amended, the
"NationsBank Warehouse Facility") to support its commercial mortgage origination
and underwriting activities. This facility currently consists of a $10.0 million
line of credit; however, NationsBank of Texas has agreed to a one-time loan of
approximately $8.5 million in excess of the $10.0 million line of credit. This
facility is secured by loans originated through borrowings under this facility
and bears interest at either the prime rate announced from time to time by
NationsBank of Texas or an Adjusted LIBOR Rate (as defined in the facility) plus
1.65% or 2.0% based upon certain enumerated factors. The Company is a guarantor
of certain of ACC's obligations under this facility. A total of $18.5 million,
consisting of $15.9 million bearing interest at 7.63% per annum and $2.6 million
at 7.29% was outstanding at December 31, 1996. The NationsBank Warehouse
Facility matures on January 25, 1998.
On August 15, 1995, ACC entered into a warehouse line of credit agreement
with Residential Funding Corporation (as subsequently amended, the "RFC
Warehouse Facility") to facilitate multifamily mortgage loan underwriting and
origination. This facility is secured by the loans originated through borrowings
under this facility and the stated interest rate for this line is an adjusted
30-day LIBOR rate plus 3.0% or less as determined solely by the lender (6.6% at
December 31, 1996). At December 31, 1996, $47.0 million was outstanding under
this facility. Each borrowing under the RFC Warehouse Facility is generally due
60 to 80 days after funding.
AMRESCO MBS I, Inc. On December 19, 1995, AMRESCO MBS I, Inc. entered into
a nonrecourse Global Master Repurchase Agreement (the "AMBS Global Agreement")
to support the purchase of certain commercial mortgage pass-through
certificates. The AMBS Global Agreement contemplates that repurchase
transactions may be entered into from time to time. At January 31, 1997, three
such transactions were existing. The outstanding amounts were, $17.3 million,
$3.0 million, and $5.9 million, for a total of $26.2 million. The repurchase
transactions mature on June 18, 1997, December 19, 1997, and January 23, 1998,
respectively. All three repurchase transactions bear interest rates of 30-day
LIBOR plus 1.4% (6.85% at January 31, 1997). The facility is secured by the
Company's investments in certain asset-backed securities.
During the next twelve months, the Company intends to pursue (i) expansion
of current businesses, including AMRESCO Residential, (ii) additional
investments in Asset Portfolios, both for its own account and as an investor
with various capital partners who acquire such investments, and (iii)
acquisitions of new businesses. The funds for such expansion, investments and
acquisitions are anticipated to be provided by cash flows and borrowings under
the Revolving Loan Agreement. As a result, interest expense for 1997 is expected
to be higher than interest expense for 1996.
The Company believes its funds on hand, cash flow from operations, its
unused borrowing capacity under its credit lines (after giving effect to the
application of the net proceeds of this Offering, $167.5 million under the
Revolving Loan Agreement and $585.9 million under warehouse lines at March 5,
1997, excluding availability under a lender-discretionary mortgage warehouse
line which has no stated limit) and its continuing ability to obtain financing
should be sufficient to meet its anticipated operating needs and capital
expenditures, as well as planned new acquisitions and investments, for at least
the next twelve months. The magnitude of the Company's acquisition and
investment program will be governed by the availability of capital.
IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," issued by the Financial Accounting Standards
Board, which is effective for fiscal years beginning after December 15, 1995,
requires that an employer's financial statements include certain disclosures
about stock-based employee compensation arrangements regardless of the method
used to account for them. The Company continues to measure compensation costs
using APB Opinion No. 25, "Accounting for Stock Issued to Employees," and will
therefore include pro forma disclosures in the notes to the financial statements
for all awards granted after December 31, 1994. The Company will disclose the
pro forma net
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income and pro forma earnings per share as if the fair value based accounting
methods in SFAS No. 123 had been used to account for stock-based compensation
cost in future financial statement presentations.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities," issued by the Financial Accounting Standards
Board, is effective for transfers of financial assets and extinguishment of
liabilities occurring after December 31, 1996 and is to be applied
prospectively. The Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of liabilities.
The Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
Management does not believe the impact of the adoption of this Statement will
have a material impact on its financial position or results of operations.
INFLATION
The Company has generally been able to offset cost increases with increases
in revenues. Accordingly, management does not believe that inflation has had a
material effect on its results of operations to date. However, there can be no
assurance that the Company's business will not be adversely affected by
inflation in the future.
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<PAGE> 29
BUSINESS
GENERAL
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 B&C loans. 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 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.
BACKGROUND
History. The Company is the product of the December 1993 merger of two
Asset Portfolio management and resolution service companies: BEI and the former
Asset Portfolio management and resolution unit of NationsBank of Texas. BEI was
a publicly held company that was engaged in the real estate and asset management
services businesses. The BEI Merger created one of the largest Asset Portfolio
management and resolution service companies in the United States. Since 1987,
the Company and its predecessors have managed over $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 B&C 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.
RESIDENTIAL MORTGAGE BANKING BUSINESS
General. Through AMRESCO Residential, the Company originates, acquires,
warehouses and securitizes B&C loans. Borrowers under such loans may not satisfy
the more rigid underwriting standards of the
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traditional residential mortgage lending market for a number of reasons, such as
blemished credit histories (from past loan delinquencies or bankruptcy),
inability to provide income verification data or lack of established credit
history. The Company believes that this market is large and is underserved by
traditional lenders. Therefore, there is less competition in this market and
interest rates are higher than on mortgage loans for more creditworthy
borrowers. The Company believes that the higher interest rates offered by the
B&C loan market are attractive even after taking into account the potentially
greater credit risk associated with such borrowers. For the nine months ended
September 30, 1996 and the year ended December 31, 1995, $16.9 million (29.7%)
and $0.6 million (1.2%), respectively, of the Company's operating profits were
attributable to the Company's residential mortgage banking business.
B&C Loan Origination. The Company recently entered the B&C loan origination
business through its acquisition of Quality, which originated over $5.0 billion
of residential loans from the commencement of that business in 1992 to September
30, 1996. See "Recent Developments -- Quality Acquisition." The Company
originates B&C loans through a nationwide network of approximately 50 branch
offices in 31 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 B&C loan portfolios from third-party originators in large
wholesale transactions. While the Company currently expects to continue to
obtain a majority of its B&C loans in this manner, the Company has expanded and
diversified its sources of B&C loans. In addition to its recent entry into the
B&C 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. At September 30, 1996, the Company had
approximately 100 approved partner institutions and had purchased loans from
approximately 23 of them.
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 B&C, 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 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
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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 $1.3 billion under three warehouse facilities of
which $987.8 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 "Asset-Backed and Other Securities" in the
Company's Consolidated Financial Statements included in the 1995 Form 10-K).
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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations" and "Risk Factors -- Change in Business Mix
and Management of Growth" in the accompanying Prospectus.
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 June 1996,
the Company successfully completed the private sale of certain Subordinated
Certificates for approximately $39.8 million. Although the Company intends, from
time to time, to continue to pursue opportunities to sell other Subordinated
Certificates to generate additional borrowing capacity under the Revolving Loan
Agreement and reduce the
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Company's capital exposure with respect to such retained certificates, no
assurance can be given that such opportunities will be available in the future.
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 B&C
loans. The Company closely monitors the performance of its loan servicers.
Servicers are required to advance to the securitization trust each month
scheduled principal and interest due on delinquent loans. The Company limits 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 nine months ended September
30, 1996 and the year ended December 31, 1995, $7.4 million (13.1%) and $6.0
million (12.0%), respectively, of the Company's operating profits 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
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originating commercial real estate loans and acting as a broker on commercial
real estate sales. Holliday Fenoglio originated approximately $2.0 billion of
commercial real estate loans during 1995 and approximately $1.6 billion during
the nine months ended September 30, 1996. Holliday Fenoglio principally targets
developers and owners of higher-quality commercial and multifamily real estate
properties. Holliday Fenoglio services prospective borrowers through its own
commission-based mortgage bankers in its offices located in Atlanta, Boca Raton,
Buffalo, Dallas, Houston, New York City, 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 $194 million during 1995 and approximately $218 million during
the nine months ended September 30, 1996. The Company believes that Holliday
Fenoglio's relationship and credibility with its institutional lender network
provide the Company a competitive advantage in the commercial mortgage banking
industry.
ACC, which originated and underwrote approximately $447.1 million of
commercial real estate mortgages during 1995 and approximately $300.8 million
during the nine months ended September 30, 1996, 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
will account 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 September 30, 1996, approximately 30% 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
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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 table that follows reflects the loan origination activity, loan
origination and underwriting fee revenue and number of loan origination offices
for the nine months ended September 30, 1996 and the year ended December 31,
1995:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ ------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Originations:
Dollar volume...................................... $1,930.5 $2,379.2
Number of loans.................................... 321 427
Origination and underwriting fees earned............. $ 15.2 $ 19.2
Number of offices.................................... 12 11
</TABLE>
The Company has established relationships with over 200 institutional
lenders that include insurance companies, pension plans and Conduit Purchasers.
In 1995, the Company placed 427 loans with approximately 80 different lenders.
For the nine months ended September 30, 1996, the Company placed 321 loans with
approximately 81 different lenders. Forty-four institutional lenders have
retained the Company as their respective exclusive or semi-exclusive loan
originator in selected cities and regions.
Commercial Loan Servicing Business. The Company serves as a Primary
Servicer for whole loans and as a Master/Full Servicer for securitized pools of
commercial mortgages through AMRESCO Services. In October 1996 the Company
received the first public "above average" commercial Master Servicer rating ever
awarded by Standard & Poors. At September 30, 1996, the Company acted as
servicer with respect to approximately $11.2 billion of loans. See "-- Asset
Management Business -- Third Party Asset Management and Resolution Services."
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 September 30, 1996, the Face
Value of the Company's Primary Servicing portfolio totaled approximately $3.1
billion.
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<PAGE> 35
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 September
30, 1996, the Face Value of the Company's Master/Full Servicing portfolio
totaled approximately $8.1 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 nine months ended September 30, 1996 and the year ended
December 31, 1995, $31.6 million (55.7%) and $43.4 million (86.7%),
respectively, of the Company's operating profits 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 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
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<PAGE> 36
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 September 30, 1996, in order to take advantage of both
investment and servicing opportunities in Canada, the United Kingdom and certain
other Western European nations. The Company believes that the international
markets are less competitive and, as a result, provide more attractive
investments and greater profit margins. The Company may open other offices and
seek strategic alliances in other international markets. The Company had $269.1
million (Face Value) in Canadian Asset Portfolios and $274.9 million (Face
Value) in United Kingdom Asset Portfolios under management as of September 30,
1996.
Because of the significant decline in Asset Portfolio management and
resolution services required by governmental agencies and the trend toward
outright sales of Asset Portfolios, the Company shifted its 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.
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<PAGE> 37
The following table reflects the ownership composition of the Asset
Portfolios (based on their Face Value) under management by the Company as of the
dates indicated and further reflects the decline in the management of Asset
Portfolios for governmental agencies and the increase in the Company's
investment in Asset Portfolios since December 31, 1993. Certain
reclassifications of prior period amounts have been conformed to the current
year presentation.
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
SEPTEMBER 30, ------------------------------------------------------
1996 1995 1994 1993
---------------- ---------------- ---------------- ----------------
% OF % OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wholly-owned by the Company(1)....... $ 455.3 15.5% $ 354.3 9.6% $ 140.4 4.6% $ 90.4 1.6%
Owned by the Company with co-
investors(2)....................... 1,135.0 38.6 1,558.1 42.2 1,675.9 55.3 392.4 6.8
Owned by third parties:
Securitized mortgage pools......... 635.0 21.6 738.3 20.0 315.0 10.4 268.8 4.7
Government and other owners........ 711.6 24.3 1,043.2 28.2 900.5 29.7 5,002.8 86.9
-------- ----- -------- ----- -------- ----- -------- -----
Total under management...... $2,936.9 100.0% $3,693.9 100.0% $3,031.8 100.0% $5,754.4 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
- ---------------
(1) Includes $102.6 million, $66.8 million, $13.9 million and $0.0 million of
asset-backed securities, and $19.8 million, $1.7 million, $0.6 million and
$0.0 million of real estate as of September 30, 1996 and as of December 31,
1995, 1994 and 1993, respectively.
(2) Includes the securitized Asset Portfolios managed by the Company in which
the Company has invested, which aggregated $589.9 million, $775.3 million,
$973.8 million and $354.3 million as of September 30, 1996 and as of
December 31, 1995, 1994 and 1993, respectively.
The following table reflects, by ownership category, the number of Asset
Portfolios managed by the Company and the number of assets included in such
portfolios as of September 30, 1996:
<TABLE>
<CAPTION>
NUMBER OF ASSET NUMBER OF
PORTFOLIOS ASSETS
--------------- ---------
<S> <C> <C>
Wholly-owned by the Company................................ 46 1,149
Owned by the Company with co-investors..................... 27 1,027
Owned by third parties:
Securitized mortgage pools............................... 13 742
Government and other owners.............................. 8 229
-- -----
Total under management........................... 94 3,147
== =====
</TABLE>
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<PAGE> 38
The following table reflects the Company's investment (at carrying value)
in Asset Portfolios as of the dates indicated below:
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
SEPTEMBER 30, ----------------------
1996 1995 1994 1993
------------- ------ ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Wholly-owned by the Company(1).................. $202.5 $170.5 $34.4 $33.8
Owned by the Company with co-investors(2)....... 30.7 34.3 33.7 2.5
------ ------ ----- -----
Total................................. $233.2 $204.8 $68.1 $36.3
====== ====== ===== =====
</TABLE>
- ---------------
(1) Includes $40.5 million, $33.9 million, $3.5 million and $0.0 million of
asset-backed securities, and $13.5 million, $0.5 million, $0.0 million and
$0.0 million of real estate as of September 30, 1996 and as of December 31,
1995, 1994 and 1993, respectively.
(2) Includes the securitized Asset Portfolios managed by the Company in which
the Company has invested, which aggregated $8.2 million, $8.9 million, $7.9
million and $1.7 million as of September 30, 1996 and as of December 31,
1995, 1994 and 1993, respectively.
Asset Portfolio Investment. The Company invests in Asset Portfolios by
purchasing them alone or with co-investors. As of September 30, 1996, the
Company's weighted average investment in all Asset Portfolios in which it was a
co-investor was 5.9% of the aggregate purchase price of such Asset Portfolios.
The Company generally funds its share of any investment with a combination of
borrowings under its then existing credit line and internal cash flow. Future
Asset Portfolio purchases will depend on the availability of Asset Portfolios
offered for sale, the availability of capital and the Company's ability to
submit successful offers to purchase Asset Portfolios. As a result, Asset
Portfolio purchases may vary significantly from quarter to quarter. The
following table reflects the Company's total purchases (at cost) of Asset
Portfolios by fiscal quarter over the past nine quarters:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
------------------------------------------------------------------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1996 1996 1996 1995 1995 1995 1995
------------- -------- --------- ------------ ------------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Wholly-owned by the
Company(1)............... $27,525 $48,066 $24,548 $76,749 $45,987 $62,499 $15,539
Owned by the Company with
co-investors(2).......... 581 5,452 325 8,480 6,294
------- ------- ------- ------- ------- ------- -------
Total.............. $27,525 $48,066 $25,129 $82,201 $46,312 $70,979 $21,833
======= ======= ======= ======= ======= ======= =======
<CAPTION>
FOR THE QUARTER ENDED
----------------------------
DECEMBER 31, SEPTEMBER 30,
1994 1994
------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Wholly-owned by the
Company(1)............... $21,014
Owned by the Company with
co-investors(2).......... 7,900 $11,306
------- -------
Total.............. $28,914 $11,306
======= =======
</TABLE>
- ---------------
(1) Includes $5,159, $2,822, $27,520, $13,248 and $2,875 in the quarters ended
September 30, 1996, June 30, 1996, December 31, 1995, September 30, 1995 and
June 30, 1995, respectively, for purchases of asset-backed securities, but
does not include any real estate assets.
(2) Includes $4,000 of investments in securitized mortgage pools purchased in
the quarter ended December 31, 1994.
Prior to making an offer to purchase an Asset Portfolio, the Company
conducts an extensive investigation and evaluation of the individual loans
generally comprising 100% of the aggregate Face Value of all the loans therein,
except in rare instances where an unusually large number of smaller assets are
being purchased. This examination typically consists of analyzing the
information made available by the Asset Portfolio seller (generally, the
respective credit and collateral files for the loans), reviewing other relevant
material that may be available (including tax and judgment records), and
analyzing the underlying collateral (including conducting site inspections,
obtaining value opinions from third parties and consulting with any of the
Company's asset managers who have experience with the local market for such
assets). The Company also reviews information on the local economy and real
estate markets in the area in which the loan collateral is
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<PAGE> 39
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 September
30, 1996, the Company had paid an average purchase price of 54.0% of the
aggregate Face Value on all of its Asset Portfolios.
When an Asset Portfolio is acquired (whether for the Company's own account
or with co-investors), the Company assumes the management of the loans in 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.
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<PAGE> 40
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 September 30, 1996, the geographic
dispersion of each primary asset securing the loans in the Asset Portfolios in
which the Company had invested (whether for its own account or with
co-investors) was as follows:
<TABLE>
<CAPTION>
NUMBER OF
FACE VALUE % OF TOTAL ASSETS % OF TOTAL
---------- ---------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Northeast............................... $ 405.9 25.5% 954 43.8%
West.................................... 600.5 37.8 425 19.5
Southwest............................... 149.0 9.4 223 10.2
Midwest................................. 71.5 4.5 71 3.3
Southeast............................... 267.9 16.8 382 17.6
-------- ----- ----- -----
United States Subtotal........ 1,494.8 94.0 2,055 94.4
Canada.................................. 21.0 1.3 73 3.4
UK...................................... 74.5 4.7 48 2.2
-------- ----- ----- -----
Total......................... $1,590.3 100.0% 2,176 100.0%
======== ===== ===== =====
</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 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
September 30, 1996, the Face Value of the Company's total investment in
wholly-owned Asset Portfolios aggregated approximately $455.3 million, which was
composed of approximately $323.1 million (71.0%) of collateralized business
loans, approximately $102.6 million (22.5%) of asset-backed securities,
approximately $19.8 million (4.3%) of real estate owned and approximately $9.8
million (2.2%) of real estate loans.
In addition, as of September 30, 1996, the Asset Portfolios in which the
Company had invested (whether for its own account or with co-investors) included
approximately 2,176 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 September 30, 1996, covered Asset Portfolios with an
aggregate Face Value of approximately $1.3 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
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<PAGE> 41
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
September 30, 1996, the Company was the designated Special Servicer for
securitized pools holding approximately $8.6 billion (Face Value) of loans,
$635.0 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 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 nine months ended September 30, 1996, $0.3
million (0.5%) of the Company's operating profits 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.
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<PAGE> 42
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. See "Recent Developments -- Finance Company Acquisition." For the
nine months ended September 30, 1996, $0.5 million (0.9%) 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 B&C loans as more originators and Conduit Purchasers enter this market. This
could impact origination and acquisition volume and profit margins. Certain of
the Company's larger, national competitors have access to greater financial
resources and lower costs of capital. In addition, the Company believes that its
ability to acquire Asset Portfolios for its own account will be important to its
future growth. Recently, the Company has 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 are critical to the
Company's ability to compete. The Company must compete with numerous
competitors, many of which have superior access to capital sources and can
arrange or obtain lower cost capital for customers.
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<PAGE> 43
LEGAL PROCEEDINGS
The Company is involved from time to time in various legal proceedings
arising in the ordinary course of business. In connection with the Company's
loan servicing, asset management and resolution activities, the Company is
indemnified to varying degrees by the party on whose behalf the Company is
acting. The Company also maintains insurance that management believes is
adequate for the Company's operations. None of the legal proceedings in which
the Company is currently involved, either individually or in the aggregate (and
after consideration of available indemnities and insurance), is expected to have
a material adverse effect on the Company's business or financial condition.
EMPLOYEES
At 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.
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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and a brief account of the business
experience of each person who is a director or executive officer of the Company.
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY AND PRINCIPAL
NAME (AGE) OCCUPATION DURING THE PAST FIVE YEARS
---------- ---------------------------------------
<S> <C>
Robert L.Adair III Mr. Adair serves as director, President and Chief Operating
(53) Officer of the Company (since December 1993). Mr. Adair
previously served as Executive Vice President and director
of BEI (1989 to December 1993). His term as a director
expires in 1997.
L. Keith Blackwell Mr. Blackwell serves as Vice President (since February
(55) 1996), General Counsel and Secretary of Holdings (December
1993). Mr. Blackwell previously was an investor and
consultant (May 1992 to December 1993) and served as
Executive Vice President, General Counsel and Secretary of
First Gibraltar Bank, FSB, a Federal savings bank (December
1988 to May 1992).
James P. Cotton, Jr. Mr. Cotton serves as a director of the Company. His term
(57) expires in 1998. Mr. Cotton previously served as Chairman of
the Board of BEI (1986 to December 1993). Mr. Cotton also
serves as Chairman of the Board and Chief Executive Officer
of USBA Holdings, Ltd., a provider of products and services
to financial institutions (since 1990).
Richard L. Cravey Mr. Cravey serves as a director of the Company. His term
(52) expires in 1999. Mr. Cravey previously served in the
following positions: Chairman of the Board and Chief
Executive Officer of the Company (December 1993 to May 1994)
and Chairman of the Board of Holdings (1992 to December
1993). Mr. Cravey also holds the following positions:
Founder and Managing Director of Cravey, Green & Wahlen
Incorporated, a private risk capital investment firm (since
1985), its investment management affiliate, CGW Southeast
Management Company (since 1991) and its affiliates, CGW
Southeast I, Inc. (the general partner of CGW Southeast
Partners I, L.P.) and CGW Southeast II, Inc. (the general
partner of CGW Southeast Partners II, L.P.) (since 1991);
and Director of Cameron Ashley Building Products, Inc., a
national distributor of home building products (since 1994).
Barry L. Edwards Mr. Edwards serves as Executive Vice President and Chief
(49) Financial Officer of the Company (since November 1994). Mr.
Edwards previously served as Vice President and Treasurer of
Liberty Corporation, an insurance holding company (1979 to
November 1994).
Gerald E. Eickhoff Mr. Eickhoff serves as a director of the Company. His term
(50) expires in 1999. Mr. Eickhoff also is a private investor
(since December 1993). He previously served as President,
Chief Executive Officer and director of BEI (1986 to
December 1993).
Harold E. Holliday, Jr. Mr. Holliday serves as President -- Commercial Mortgage
(49) Banking of the Company (since February 1996). He previously
served as Chairman of the Board and Chief Executive Officer
of Holliday Fenoglio (August 1994 to February 1996). Mr.
Holliday previously served as President of Holliday,
Fenoglio, Dockerty & Gibson, Inc., a mortgage banking
company (for more than five years prior to August 1994).
Amy J. Jorgensen Ms. Jorgensen serves as a director of the Company. Her term
(43) expires in 1998. Ms. Jorgensen also serves as Managing
Director of Greenbrier Associates LLC, which provides advice
and executes transactions relating to real estate assets
</TABLE>
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<PAGE> 45
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY AND PRINCIPAL
NAME (AGE) OCCUPATION DURING THE PAST FIVE YEARS
---------- ---------------------------------------
<S> <C>
and companies (since 1995). Ms. Jorgensen previously served
as President of The Jorgensen Company, a consultant for real
estate strategy and finance (April 1992 to September 1995)
and as Managing Director in the Real Estate Department of
Morgan Stanley & Co. Incorporated (1986 to February 1992).
Robert H. Lutz, Jr. Mr. Lutz serves as Chairman of the Board and Chief Executive
(47) Officer of the Company (since May 1994). His term as a
director expires in 1999. Mr. Lutz previously served as
President of Allegiance Realty, a real estate management
company (November 1991 to May 1994). Mr. Lutz is also a
director of Bristol Hotel Company (since 1995).
Michael N. Maberry Mr. Maberry serves as President of ACC (since April 1994).
(53) Mr. Maberry previously was a shareholder in the law firm of
Winstead, Sechrest & Minick (April 1989 to April 1994).
John J. McDonough Mr. McDonough also serves or has served in the following
(60) positions: President and Chief Executive Officer of
McDonough Capital Company LLC, a company through which Mr.
McDonough conducts personal and family investments (since
February 1995); Chairman of the Board of SoftNet Systems,
Inc., a company that develops, markets, installs and
services information and document management systems (since
June 1995); Vice Chairman and Chief Executive Officer (1993
to February 1995) of DENTSPLY International, Inc., a
manufacturer of dental supplies, dental equipment and
medical x-ray products; Chairman of the Board (1992 to
1993), Director (1983 to 1992), Chief Executive Officer
(1983 to 1993), and President (1983 to 1991) of GENDEX
Corporation, a manufacturer of dental equipment and medical
x-ray products, which merged with DENTSPLY in June 1993;
Director (since 1992) of Newell Co., a New York Stock
Exchange-listed manufacturer of products for the
do-it-yourself hardware and housewares market; and Director
of AmNet Systems, Inc., a company that develops, markets and
installs electronic information and document management for
the health care industry (since 1995).
Scott J. Reading Mr. Reading serves as President of AMRESCO Residential
(52) Credit Corporation (since August 1995). Mr. Reading
previously served as Managing Director of Household
Financial Services, Inc., a division of Household
International, Inc., a diversified financial services
company (June 1991 to August 1995).
Bruce W. Schnitzer Mr. Schnitzer previously served as Vice Chairman of the
(52) Board of BEI (1986 to December 1993). Mr. Schnitzer also
serves as Chairman of Wand Partners Inc., an investment
advisory company (since 1987); Director of Penncorp
Financial Group, Inc. (since 1990); Director of Chartwell Re
Corporation (since 1992); Director of Nestor, Inc. (since
1994); and Chairman of New London Capital PLC (since 1993).
Edwin A. Wahlen, Jr. Mr. Wahlen serves as a director of the Company. His term as
(49) director expires in 1998. Mr. Wahlen also holds the
following positions: Founder and Managing Director of
Cravey, Green & Wahlen Incorporated, a private risk capital
investment firm (since 1985), its investment management
affiliate, CGW Southeast Management Company (since 1991) and
its affiliates, CGW Southeast I, Inc. (the general partner
of CGW Southeast Partners I, L.P.) and CGW Southeast II,
Inc. (the general partner of CGW Southeast Partners II,
L.P.) (since 1991); and Director of Cameron Ashley Building
Products, Inc., a national distributor of home building
products (since 1996).
</TABLE>
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<PAGE> 46
DESCRIPTION OF THE NOTES
The Notes are to be issued under an Indenture (the "Subordinated
Indenture"), dated as of March 1, 1997 between the Company and Bank One,
Columbus, N.A., as trustee (the "Trustee"), and pursuant to an Officers'
Certificate and Company Order to be dated as of March 12, 1997, establishing the
terms of the Notes (the "Company Order") (the Subordinated Indenture, as
supplemented by the Company Order, is sometimes referred to herein as the "Note
Indenture"), the form of which Subordinated Indenture is filed as an exhibit to
the Registration Statement of which this Prospectus Supplement and the
Prospectus are a part. The following description of the particular terms of the
Notes offered hereby supplements, and to the extent inconsistent therewith or
contradictory thereto, modifies the description of the general terms and
provisions of the Subordinated Debt Securities set forth in the accompanying
Prospectus under the caption "Description of Securities -- Debt Securities," to
which description reference is hereby made.
GENERAL
The Notes offered by this Prospectus Supplement will be limited to $192.5
million aggregate principal amount. The Notes will be issued in fully registered
form only, without coupons, in denominations of $1,000 and any integral multiple
thereof. Interest on the Notes will accrue from the date of original issuance
and will be payable semi-annually on March 15 and September 15 of each year or,
if any such day is not a business day, on the next succeeding business day (each
an "Interest Payment Date"), beginning on September 15, 1997. The Notes will
bear interest at the rate per annum set forth on the cover page of this
Prospectus Supplement and will be payable to the person in whose name the Note
is registered at the close of business on the 1st day of the month (whether or
not a business day) in which an interest payment is to be made. The Notes will
mature on March 15, 2004, and may not be redeemed at the option of the Company
prior to that time. Except as set forth below under "-- Conditional Repayment
Options," the Company is not required to make mandatory redemption or sinking
fund payments with respect to the Notes.
Principal and interest will be payable at an office or agency to be
maintained by the Company in New York, New York (through The Depository Trust
Company ("DTC")) and Columbus, Ohio, in same day funds, except that, at the
option of the Company, interest may be paid by check mailed to the person
entitled thereto. So long as DTC or its nominee is the sole registered owner and
the sole holder of the Notes, such payments will be made by the Trustee directly
to DTC or its nominee. The Notes may be presented for registration of transfer
or exchange at an office or agency to be maintained by the Company in New York,
New York (through DTC) and Columbus, Ohio. The Notes will not be secured by the
assets of the Company or any of its subsidiaries or Affiliates or otherwise. In
addition, the rights of the Company to participate in any distribution of assets
of any subsidiary, including Holliday Fenoglio, ACC, AMRESCO Advisors, Inc. and
AMRESCO Residential, upon its liquidation or reorganization or otherwise (and
thus the ability of the holders of the Notes to benefit indirectly from such
distribution) are subject to the prior claims of creditors of the subsidiary.
So long as the Company is a reporting company under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), the Company will furnish to
holders of the Notes annual reports of the Company containing audited
consolidated financial statements and interim reports with unaudited
consolidated summary financial data on a quarterly basis. If the Company ceases
to be a reporting company under the Exchange Act, the Company will furnish to
holders of the Notes annual audited consolidated financial statements and
quarterly unaudited consolidated summary financial statements.
CONDITIONAL REPAYMENT OPTIONS
The Note Indenture provides that each holder shall have the right to
require the Company to repurchase the Notes at a purchase price equal to 100% of
the principal amount, plus accrued and unpaid interest, upon the occurrence of
any event requiring that the Company repurchase, or make an offer to repurchase,
any Subordinated Debt other than the Notes. In the event such a requirement is
effected with respect to Junior Debt, the holders of the Notes requiring the
Company to repurchase Notes must be paid in full prior to any payment to the
holders of Junior Debt. In the event such a requirement is effected with respect
to Subordinated Debt that is pari passu with the Notes, the holders of the Notes
requiring the Company to
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<PAGE> 47
repurchase Notes must be paid concurrently with the holders of the pari passu
Subordinated Debt. Currently there is no such outstanding repayment obligation
on the part of the Company.
The Note Indenture also provides that each holder shall have the right to
require the Company to repurchase the Notes at a purchase price equal to 101% of
the principal amount, plus accrued and unpaid interest, upon the occurrence of a
"Change of Control." For purposes of this provision, a "Change of Control" is
generally defined as the occurrence of one or more of the following events: (i)
a person or entity or group of persons or entities acting in concert becomes the
beneficial owner of capital stock representing 50% or more of the combined
voting power of the outstanding capital stock of the Company; (ii) the
consummation in certain circumstances of a consolidation or merger of the
Company or sale, lease, exchange or other transfer of all or substantially all
the assets of the Company; (iii) approval by the shareholders of the Company of
a plan or proposal for the liquidation or dissolution of the Company in certain
circumstances; or (iv) the Company's current directors cease to constitute a
majority of the Company's Board of Directors, unless the nomination for election
by the Company's shareholders of each new director was approved by a majority of
the directors at the time of such nomination or election.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Note Indenture are applicable. Except as
described above with respect to a Change of Control, the Note Indenture does not
contain provisions that permit the holders of the Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The definition of Change of Control includes a phrase relating to the sale,
lease, exchange or other transfer of "all or substantially all" of the assets of
the Company and its subsidiaries taken as a whole. Although there is a
developing body of case law interpreting the phrase "substantially all," there
is no precise established definition of the phrase under applicable law.
Accordingly, the ability of a holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, exchange or other transfer
of less than all of the assets of the Company and its subsidiaries taken as a
whole to another person or group may be uncertain.
COVENANTS
The Note Indenture will contain a number of covenants relating to the
Company and its operations, including the following:
Restrictions on Additional Funded Debt and Interest Coverage Ratio. The
Note Indenture limits the amount of Funded Debt of the Company on a consolidated
basis and contains a minimum Interest Coverage Ratio. The Company may not
create, incur, assume, guarantee or otherwise be liable for any Funded Debt if,
immediately after giving effect thereto: (i) the aggregate amount of Senior
Recourse Debt outstanding would exceed 450% of the Company's Consolidated
Capitalization; (ii) the aggregate amount of Total Funded Recourse Debt
outstanding would exceed 600% of the Company's Consolidated Net Worth; or (iii)
the aggregate amount of Subordinated Debt outstanding would exceed 100% of the
Company's Consolidated Net Worth. In addition, the Company may not permit the
Interest Coverage Ratio to be less than 1.25 to 1. See "-- Certain Definitions."
As of December 31, 1996, the Company's Consolidated Capitalization was
approximately $361.1 million, including Consolidated Net Worth of $301.5 million
and $59.6 million of Subordinated Debt on a consolidated basis. As of December
31, 1996, and after giving effect to the sale of the Notes offered hereby, the
Company could have incurred approximately $217.5 million of additional Senior
Recourse Debt, approximately $231.0 million of Total Funded Recourse Debt and
approximately $13.5 million of additional Subordinated Debt (assuming incurrence
of the full amount of permitted Senior Recourse Debt) under this covenant.
Restrictions on Dividends, Redemptions and Other Payments. The Note
Indenture provides that the Company cannot (i) declare or pay any dividend,
either in cash or property, on any shares of its capital stock (except dividends
or other distributions payable solely in shares of capital stock of the
Company), (ii) purchase, redeem or retire any shares of its capital stock or any
warrants, rights or options to purchase or acquire any shares of its capital
stock or (iii) make any other payment or distribution, either directly or
indirectly through any subsidiary, in respect of its capital stock (such
dividends, purchases, redemptions,
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<PAGE> 48
retirements, payments and distributions being herein collectively called
"Restricted Payments") if, after giving effect thereto,
(1) an Event of Default (as defined in the Note Indenture) would have
occurred; or
(2) (A) the sum of (i) such Restricted Payments plus (ii) the
aggregate amount of all Restricted Payments made during the period after
December 31, 1996 would exceed (B) the sum of (i) $50 million plus (ii) 50%
of the Company's Consolidated Net Income for each fiscal year commencing
subsequent to December 31, 1996 (with 100% reduction for a loss in any
fiscal year), plus (iii) the cumulative net proceeds received by the
Company from the issuance or sale after December 31, 1996 of capital stock
of the Company (including in such proceeds, the face amount of
indebtedness, including the Convertible Subordinated Debentures, that has
been converted to Common Stock after December 31, 1996).
Notwithstanding the foregoing, the Company may make a previously-declared
Restricted Payment if the declaration of such Restricted Payment was permitted
when made. The amount of any Restricted Payment payable in property shall be
deemed to be the fair market value of such property as determined by the Board
of Directors of the Company.
Limitation on Ranking of Future Indebtedness. The Note Indenture provides
that the Company will not, directly or indirectly, incur, create, assume or
guarantee any Funded Debt which is expressly subordinate in right of payment to
any Senior Debt, other than Junior Debt or Subordinated Debt that is pari passu
with the Notes in right of payment. The incurrence of Senior Debt which is
unsecured shall not, because of its unsecured status, be deemed to be
subordinate in right of payment to Senior Debt which is secured.
Limitations on Restricting Subsidiary Dividends. The Note Indenture
provides that neither the Company nor its subsidiaries may create or otherwise
cause to become effective any consensual encumbrance or restriction of any kind
on the ability of any subsidiary of the Company to (i) pay dividends or make any
other distribution on its capital stock, (ii) pay any indebtedness owed to the
Company or any other subsidiary of the Company or (iii) make loans, advances or
capital contributions to the Company or any other subsidiary of the Company
except in certain specified circumstances.
Limitation on Transactions with Affiliates. Neither the Company nor any of
its Material Subsidiaries may enter into any transactions with any Affiliate on
terms and conditions less favorable to the Company or such Material Subsidiary,
as the case may be, than would be available at such time in a comparable
transaction in arm's length dealings with an unrelated Person as determined by
the Company's Board of Directors. These provisions do not apply to Restricted
Payments otherwise permitted under the Note Indenture, fees and compensation
paid to, and indemnity provided on behalf of, officers, directors, employees or
consultants of the Company or any subsidiary, as determined by the Company's
Board of Directors or its senior management in the exercise of their reasonable
business judgment or payments for goods and services purchased in the ordinary
course of business on an arm's length basis.
CERTAIN DEFINITIONS
In addition to those terms already defined in the Subordinated Indenture,
the following additional terms shall have the meanings given below when used in
connection with the Notes.
"Consolidated Capitalization" is defined as Subordinated Debt plus
Consolidated Net Worth.
"Consolidated EBITDA" is defined as the sum of Consolidated Net Income
before taxes and non-recurring gains or losses, plus depreciation, plus
amortization, plus interest expense, each as deducted in determining such
Consolidated Net Income before taxes.
"Consolidated Interest Expense" is defined as the interest expense required
to be shown as such on the financial statements of the Company and its
subsidiaries, on a consolidated basis.
"Consolidated Net Income" is defined as the amount of consolidated net
income (loss) of the Company; provided, however, that there shall not be
included in Consolidated Net Income (i) any net income (loss) of a Subsidiary
for any period during which it was not a Consolidated Subsidiary or (ii) any net
income (loss) of
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<PAGE> 49
businesses, properties, or assets acquired or disposed of (by way of merger,
consolidation, purchase, sale or otherwise) by the Company or any Subsidiary for
any period prior to the acquisition thereof or subsequent to the disposition
thereof.
"Consolidated Net Worth" is defined as the excess, as determined in
accordance with generally accepted accounting principles, after appropriate
deduction for minority interests in the net worth of consolidated subsidiaries,
of the Company's assets over its liabilities.
"Consolidated Subsidiary" is defined as a Subsidiary of the Company, the
financial statements of which are consolidated with the financial statements of
the Company.
"Interest Coverage Ratio" is defined as the ratio of (i) Consolidated
EBITDA for the immediately preceding 12 calendar months to (ii) Consolidated
Interest Expense for the immediately preceding 12 calendar months.
"Junior Debt" is defined as the principal amount of, and interest on, any
Funded Debt, whether outstanding on the date of execution of the Note Indenture
or thereafter created, incurred, assumed or guaranteed, provided that in the
instrument creating or evidencing such Funded Debt or pursuant to which such
Funded Debt is outstanding it is provided that (i) such indebtedness is junior
in right of payment to the Notes; (ii) no payments with respect to such
indebtedness may be made at any time that an Event of Default shall have
occurred and be continuing and (iii) no payments other than the payment of
interest may be made with respect to such indebtedness at any time the Notes are
outstanding.
"Senior Recourse Debt" is defined as Senior Debt minus any Funded Debt of
the Company or any of its subsidiaries that is (A)(i) specifically advanced to
finance the acquisition of assets classified on the Company's balance sheet as
"assets held for sale" and (ii) either (a) secured only by the assets to which
such indebtedness relates without recourse to the Company or any of its
subsidiaries or (b) issued under a loan agreement that requires each advance to
be repaid upon sale of the assets to which such advance relates within no more
than one year from the date of such advance or (B) advanced to a subsidiary or
group of subsidiaries formed for the sole purpose of acquiring or holding a
portfolio of assets (i) against which a loan is obtained that is made without
recourse to, and with no cross-collateralization against the assets of, the
Company or any other subsidiary of the Company and (ii) upon complete or partial
liquidation of which the loan must be correspondingly completely or partially
repaid, as the case may be.
"Total Funded Recourse Debt" means Senior Recourse Debt plus Subordinated
Debt.
BOOK-ENTRY
The Notes will be issued initially as book-entry notes in the form of one
fully registered global security which will be deposited with, or on behalf of,
DTC, and registered in the name of DTC's nominee. Beneficial interests in the
Notes will be shown on, and transfers thereof will be effected only through,
records maintained by DTC and its participants. Except as described in the
accompanying Prospectus, Notes in definitive certificated form will not be
issued.
CONCERNING THE TRUSTEE
Bank One, Columbus, N.A. is Trustee under the Note Indenture and is also
the Note Registrar. The Trustee may be removed at any time upon 30 days written
notice by the Company. Bank One, Columbus, N.A. is also Trustee and Registrar
with respect to the Company's 10% Senior Subordinated Notes due 2003. Bank One,
Texas, N.A., an affiliate of Bank One, Columbus, N.A., is a lender under the
Revolving Loan Agreement.
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DESCRIPTION OF OTHER INDEBTEDNESS
The following summaries of the principal terms of certain credit
facilities, the Senior Note Indenture and the Senior Subordinated Note Indenture
do not purport to be complete and are subject to the detailed provisions of, and
qualified in their entirety by reference to, such agreements. The Company will
provide without charge to each person to whom a copy of this Prospectus
Supplement is delivered, upon the written or oral request of such person, a copy
of any agreement described in this section. See "Incorporation of Certain
Documents by Reference" in the accompanying Prospectus.
REVOLVING LOAN AGREEMENT
General. Effective February 7, 1997, the Company and certain of its
subsidiaries entered into the Revolving Loan Agreement with NationsBank of
Texas, as agent (the "Agent"), and NationsBank of Texas and other lending
institutions party thereto, as lenders (collectively, the "Banks"), which
replaced the Company's previous revolving line of credit with NationsBank of
Texas as agent bank. A total of $199.3 million was outstanding under this
facility at March 5, 1997. At March 5, 1997, the Company had outstanding $3.5
million in face amount of letters of credit pursuant to such facility.
The Revolving Loan Agreement provides for a $350.0 million credit facility
of which up to $275.0 million of indebtedness may be incurred pursuant to a
revolving credit facility and $75.0 million may be incurred pursuant to a term
facility. The borrowing base is determined from time to time based upon a
formula, the application of which may take into account loan commitments of and
outstanding amounts from the Banks to the Company and certain of its
subsidiaries, cash flows from certain investments, performing loans, non-
performing loans and other investments and assets of the Company. Availability
under the Revolving Loan Agreement as of March 5, 1997 was $215.0 million.
Advances under the Revolving Loan Agreement may be used for (i) general
corporate purposes, (ii) acquisitions of corporate entities, (iii) acquisitions
of Asset Portfolios, (iv) refinancing debt incurred in connection with the
purchase of existing Asset Portfolios and (v) obtaining letters of credit
related to the foregoing. There are also sublimits of $20.0 million for letters
of credit exposure and an aggregate of $50.0 million for all commercial paper
reserves within a commercial paper program. The facility permits the Company to
make draws denominated in certain foreign currencies subject to restrictions,
terms and reserves approved by the Agent and Banks.
Ranking. Indebtedness under the Revolving Loan Agreement constitutes Senior
Debt.
Security. Indebtedness under the Revolving Loan Agreement is secured by
substantially all the assets of the Company not pledged under other facilities,
including stock of a majority of the Company's subsidiaries.
Interest. Indebtedness under the Revolving Loan Agreement generally bears
interest at a rate based (at the Company's option) upon (i) the Variable Rate
(defined as the greater of the Agent's prime rate, as announced from time to
time, and the Federal Funds Rate (as defined in the Revolving Loan Agreement)
plus .50%) or (ii) the Adjusted LIBOR Rate (as defined in the Revolving Loan
Agreement). All advances funded in foreign currencies bear interest at the
Alternate Currency Rate (as defined in the Revolving Loan Agreement).
Maturity. The revolving credit facility portion of the Revolving Loan
Agreement will mature on May 31, 1998 and the term facility portion of the
Revolving Loan Agreement will mature on May 31, 2000.
Fees. The Company will be required to pay to the Banks a commitment fee of
20 to 37.5 basis points per annum, payable in arrears on a quarterly basis, on
the committed undrawn amount of the Revolving Loan Agreement. In addition, the
Company will be required to pay to the Agent (for the account of each Bank)
certain fees, generally payable in arrears on a quarterly basis, in respect of
letters of credit issued under the Revolving Loan Agreement. The Company also
will pay to the Agent, or an affiliate thereof, certain other fees for the
Agent's role in administering the Revolving Loan Agreement.
Conditions to Funding Extensions of Credit. The obligation of the Banks to
make loans or extend letters of credit will be subject to the satisfaction of
certain customary conditions, including, without limitation, proper requests for
credit, the absence of any credit default and any default which would occur as a
result of
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the extension of credit under the Revolving Loan Agreement and all
representations and warranties under the Revolving Loan Agreement being true and
correct in all material respects.
Covenants. The Revolving Loan Agreement requires the Company to meet
certain financial tests, including minimum consolidated tangible net worth,
maximum consolidated funded debt to consolidated capitalization ratio, minimum
fixed charge coverage ratio, minimum interest coverage ratio and maximum senior
consolidated funded debt to consolidated EBITDA ratio. The Revolving Loan
Agreement contains covenants that will limit the incurrence of additional
indebtedness, investments, asset sales, loans to shareholders, dividends,
transactions with affiliates, acquisitions, mergers and consolidations, liens
and encumbrances and other matters customarily restricted in such agreements.
The Revolving Loan Agreement also contains additional covenants that require,
among other things, the Company to maintain adequate insurance, to remain in its
primary business and related businesses which the Company was engaged in as of
the execution of the Revolving Loan Agreement, to provide certain information to
the Agent, including financial statements, notices, officer's certificates
containing statements of compliance with the requirements of the Revolving Loan
Agreement and reports, to permit inspections of the books and records of the
Company and its subsidiaries by the Agent, to comply with applicable laws,
including environmental laws and ERISA, and to pay taxes.
Events of Default. The Revolving Loan Agreement contains customary events
of default, including, among other things, principal, interest, fee and other
payment defaults, covenant defaults (subject to certain cure periods), breaches
of representations and warranties, cross-defaults to certain other indebtedness,
certain events of bankruptcy and insolvency, certain liquidation or dissolution
defaults, judgment defaults for one or more judgments or orders for the payment
of money aggregating in excess of $500,000 (subject to certain cure periods),
failure of any guaranty or security agreement supporting the Revolving Loan
Agreement to be in full force and effect and change of control of the Company.
Indemnification. Under the Revolving Loan Agreement, the Company has agreed
to indemnify the Agent and the Banks from and against any and all claims,
demands, causes of actions, liabilities, losses, damages, costs and expenses of
any kind (including, without limitation, reasonable fees, disbursements and
costs of counsel for Agent and the Banks) that may be incurred by Agent or any
Bank relating to or arising out of the Revolving Loan Agreement, provided that
the Company is not liable for any such claims, demands, causes of action,
liabilities, losses, damages, costs or expenses resulting from such indemnified
party's own gross negligence or willful misconduct.
BRIDGE LOAN FACILITY
General. On February 7, 1997, the Company and certain of its subsidiaries
entered into the Bridge Loan Facility with NationsBank of Texas. The Bridge Loan
Facility provides the Company a $25.0 million line of credit to be used for
general corporate working capital purposes. No indebtedness was outstanding
under the Bridge Loan Facility at March 5, 1997. The Company expects to draw on
the Bridge Loan Facility prior to the closing of this Offering and intends to
repay any such indebtedness in full from the net proceeds of this Offering.
Following completion of this Offering, the Company does not intend to borrow
under the Bridge Loan Facility.
Ranking. Indebtedness under the Bridge Loan constitutes Senior Debt.
Security. The Bridge Loan Facility is secured with the same collateral
securing the Revolving Loan Agreement.
Interest. Indebtedness under the Bridge Loan Facility generally bears
interest at a rate based upon, at the Company's option, the Adjusted LIBOR Rate
(as defined in the note evidencing the Bridge Loan Facility) or NationsBank of
Texas' prime rate. In certain cases outlined in the note evidencing the Bridge
Loan Facility where the Adjusted LIBOR Rate is unavailable to the Company,
interest on such indebtedness will generally be borne at NationsBank of Texas'
prime rate or the Federal Funds Rate (as defined in the note evidencing the
Bridge Loan Facility) plus 0.50%.
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Maturity. The Bridge Loan Facility will mature on April 30, 1997, subject
to the Company's one-time right to renew the facility for a one-year period,
which extension shall be subject to conditions stated in the note evidencing the
Bridge Loan Facility.
Fees. The Company shall pay, under the Bridge Loan Facility, a facility fee
equal to 0.05% times $25 million on each of April 1, 1997 and April 30, 1997.
Conditions to Extension of Credit. If the Company desires to extend the
facility, the Company in addition to certain other requirements shall be
required to pledge cash, cash equivalents or letters of credit in the amount
outstanding under the Bridge Loan Facility as of the April 30, 1997 original
maturity date.
Covenants. Under the Bridge Loan Facility, the Company makes the same
covenants it makes under the Revolving Loan Agreement.
Events of Default. Events of default under the Bridge Loan Facility shall
be any default or event of default as such terms are defined in the Revolving
Loan Agreement.
Indemnification. The note evidencing the Bridge Loan Facility contains a
provision whereby the Company is required to indemnify NationsBank of Texas for
certain costs associated with effecting, funding or maintaining the LIBOR rate.
AMRESCO RESIDENTIAL FACILITIES
Prudential Warehouse Facility
General. On October 25, 1996, ARCMI entered into the Prudential Warehouse
Facility. The Prudential Warehouse Facility is currently a $500.0 million credit
facility that ARCMI uses to finance the acquisition and warehousing of certain
residential mortgage loans and certain properties. See "Business -- Residential
Mortgage Banking Business." A total of $171.2 million was outstanding under the
Prudential Warehouse Facility at December 31, 1996. The Prudential Warehouse
Facility is non-recourse to the Company and its subsidiaries, other than ARCMI.
Ranking. Indebtedness under the ARCMI Warehouse Facility constitutes Senior
Debt.
Security. ARCMI's indebtedness under the Prudential Warehouse Facility is
secured by all residential mortgage loans acquired by ARCMI using funds obtained
under the Prudential Warehouse Facility.
Interest. Indebtedness under the Prudential Warehouse Facility generally
bears interest at a rate based upon LIBOR plus an Applicable Margin (as defined
in the Prudential Warehouse Facility) which ranges from .70% to 2.00%.
Maturity. 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; provided that
if the Second Securitization (as defined in the Prudential Warehouse Facility)
includes a pre-funding account, a portion of the Prudential Warehouse Facility
equal to the pre-funding account balance shall remain outstanding during the
related funding period.
Conditions to Extensions of Credit. The obligation of Prudential Securities
Credit Corporation to make loans to ARCMI under the Prudential Warehouse
Facility is subject to certain customary conditions, including, without
limitation, the delivery of certain documents, instruments and applications by
ARCMI, approval by Prudential Securities Credit Corporation of the mortgage loan
pool to be acquired by ARCMI, the absence of any default under the Prudential
Warehouse Facility, the making of various representations and warranties, and
all representations and warranties under the Prudential Warehouse Facility being
true and correct. The Prudential Warehouse Facility also requires that ARCMI
pledge certain documents related to the mortgage loans under the facility.
Covenants. The Prudential Warehouse Facility requires ARCMI to meet certain
financial tests, including, among other things, minimum tangible equity capital
and a maximum leverage ratio. The Prudential Warehouse Facility also contains
covenants that, among other things, require ARCMI to provide
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certain information to Prudential Securities Credit Corporation, including
financial statements and other reports regarding the mortgage loans, to maintain
adequate insurance, and to comply with applicable laws.
Events of Default. The Prudential Warehouse Facility contains customary
events of default, including, without limitation, principal, interest or other
payment defaults, defaults by ARCMI under certain other credit agreements,
breaches of covenants or representations and warranties, certain events of
bankruptcy and insolvency (including of the Company) and material adverse
changes in the financial condition of ARCMI or the Company.
Indemnification. Under the Prudential Warehouse Facility, ARCMI has agreed
to indemnify Prudential Securities Credit Corporation against all liabilities,
losses, damages, judgments, costs and expenses of any kind which relate to or
arise out of the Prudential Warehouse Facility and all related documents and
items thereunder, provided that ARCMI is not liable for such matters resulting
from the negligence or willful misconduct of Prudential.
Morgan Stanley Warehouse Facility
General. ARCMI also entered into a warehouse credit facility with Morgan
Stanley Mortgage Capital Inc., which was amended and restated as of October 25,
1996. The Morgan Stanley Warehouse Facility provides for a maximum borrowing
capacity of $200.0 million to directly or indirectly 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. The
Morgan Stanley Warehouse Facility is non-recourse to the Company and its
subsidiaries, other than ARCMI and ARMC.
Ranking. Indebtedness under the Morgan Stanley Warehouse Facility
constitutes Senior Debt.
Security. This facility is secured by the mortgages originated or acquired
using funds obtained under the facility. ARMC is a pledgor on this facility.
Interest. Indebtedness under the Morgan Stanley Warehouse Facility
generally bears interest at a rate based upon the Eurodollar Rate (as determined
by a formula defined in the Morgan Stanley Warehouse Agreement) plus 0.70% to
1.00%.
Maturity. The stated maturity date for the Morgan Stanley Warehouse
Facility is October 24, 1997. Maturity may occur earlier subject to various
provisions of the facility and by operation of law.
Conditions to Extensions of Credit. The obligation of Morgan Stanley
Mortgage Capital Inc. to make the initial and subsequent loans to ARCMI under
the Morgan Stanley Warehouse Facility is subject to certain customary
conditions, including, without limitation, the delivery of certain documents,
instruments and applications by ARCMI, approval by Morgan Stanley Mortgage
Capital Inc. of the mortgage loan pool to be acquired by ARCMI, the absence of
any default under the Morgan Stanley Warehouse Facility, the outstanding
principal not to exceed an amount determined under the facility and all
representations and warranties under the Morgan Stanley Warehouse Facility being
true and correct. In addition, the Morgan Stanley Warehouse Facility requires
various conditions, such as, without limitation, that no "catastrophic" events
occur such that there is an absence of a "lending market" for financing debt
obligations secured by mortgage loans and that there be no material adverse
change in the financial condition of Morgan Stanley Mortgage Capital, Inc.
Covenants. The Morgan Stanley Warehouse Facility requires ARCMI to meet
certain financial tests, including, without limitation, minimum net worth
capital and a maximum leverage ratio. The Morgan Stanley Warehouse Facility also
contains covenants that, among other things, require ARCMI to provide certain
information to Morgan Stanley Mortgage Capital Inc., including financial
statements and other reports regarding the mortgage loans and the legal and
financial status of ARCMI, to maintain adequate insurance, to comply with the
applicable laws and to maintain proper legal existence. The Morgan Stanley
Warehouse facility also contains prohibitions on ARCMI's incurrence of
additional debt, sale of assets, making of distributions and various other acts.
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Events of Default. The Morgan Stanley Warehouse Facility contains customary
events of default, including, without limitation, various payment defaults,
breaches of covenants or representations and warranties, certain events of
bankruptcy and insolvency (including any of ARMCI's subsidiaries) the taking of
a judgment or judgments in excess of $5.0 million and material adverse changes
in the financial condition of ARCMI or any of its subsidiaries.
Indemnification. Under the Morgan Stanley Warehouse Facility, ARCMI has
agreed to indemnify Morgan Stanley Mortgage Capital Inc. against all
liabilities, losses, damages, judgments, costs and expenses of any kind which
relate to or arise out of the Morgan Stanley Warehouse Facility, provided that
ARCMI is not liable for such matters resulting from the gross negligence or
willful misconduct of Morgan Stanley Mortgage Capital Inc.
CSFB Warehouse Facility
General. ARCMI entered into the CSFB Warehouse Facility with CS First
Boston Mortgage Capital Corp. ("CSFB") on December 23, 1996 to finance the
acquisition and warehousing of residential mortgage loans. The CSFB Warehouse
Facility provides that CSFB will make advances to ARCMI in an amount not to
exceed $500.0 million. As of December 31, 1996, no indebtedness was outstanding
under the CSFB Warehouse Facility.
Ranking. Indebtedness under the CSFB Warehouse Facility constitutes Senior
Debt.
Security. Indebtedness under the CSFB Warehouse Facility is secured by a
first priority security interest in the mortgage loans acquired with funds
advanced under the CSFB Warehouse Facility.
Interest. Indebtedness under the CSFB Warehouse Facility 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.
Maturity. The maturity date will be provided in the notice of borrowing
related to each advance under the CSFB Warehouse Facility.
Conditions of Extensions of Credit. The obligation of CSFB to make loans to
ARCMI under the CSFB Warehouse Facility is subject to certain customary
conditions, including, without limitation, the delivery of certain documents and
information by ARCMI to CSFB and approval by CSFB of the mortgage loan pool to
be acquired by ARCMI.
Covenants. Pursuant to the CSFB Warehouse Facility, ARCMI makes various
covenants, including, without limitation, that ARCMI is a valid corporation in
good standing, that there are no materially adverse suits pending against ARCMI,
that ARCMI will provide collateral and mortgage loans that meet the requirements
of the related documents and agreements, and that ARCMI will provide certain
opinions of counsel to CSFB. ARCMI also covenants that it will apply monthly
collections of interest to the payment of interest due CSFB and monthly
collections of principal to the reduction of the principal amount of each
advance due CSFB on the related maturity date, that the collateral value of the
collateral related to each advance shall meet minimum requirements and that it
will transfer additional collateral to CSFB if the aggregate amount of the
outstanding advances is greater that the weighted average Par Factor (as defined
in the CSFB Warehouse Facility).
Events of Default. The events of default under the CSFB Warehouse Facility
include, among others, principal, interest or other payment defaults, ARCMI's
failure to pay amounts due under the promissory note, failure to observe or
perform any of the covenants or agreements under the Program Documents (as
defined in the CSFB Warehouse Facility), any material adverse change in the
condition of ARCMI or its subsidiaries, certain judgments against ARCMI,
insolvency, and breaches of representations and warranties.
DLJ Master Repurchase Agreement
General. On October 17, 1996, ARMC entered into the DLJ Master Repurchase
Agreement with DLJ Mortgage Capital, Inc. to support the purchase of
Subordinated Certificates and warehouse loans acquired in
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the Quality Acquisition. As of December 31, 1996, $20.3 million was outstanding
under the DLJ Master Repurchase Agreement.
Ranking. Indebtedness under the DLJ Master Repurchase Agreement constitutes
Senior Debt.
Security. Indebtedness under the DLJ Master Repurchase Agreement is secured
by a security interest in all securities transferred pursuant to each repurchase
transaction under the DLJ Master Repurchase Agreement.
Interest. Interest rates will vary for each repurchase transaction
undertaken pursuant to the DLJ Master Repurchase Agreement. Currently,
indebtedness under each repurchase transaction bears interest at rates of 6.34%
to 6.80% per annum.
Repurchase Date. The repurchase date for the repurchase transactions
undertaken pursuant to the DLJ Master Repurchase Agreement is February 27, 1997,
subject to automatic 30-day renewal periods.
Events of Default. The DLJ Master Repurchase Agreement contains certain
events of default, including, the failure to transfer securities upon the
applicable purchase date, the failure to transfer or repurchase securities upon
the applicable repurchase date, payment defaults, the failure to comply with
margin maintenance requirements, insolvency, breach of representations or
warranties, and admission of a party's inability or intention not to perform any
of its obligations under the agreement.
Prudential Excess Financing Agreement
General. ARCMI entered into the Prudential Excess Financing Agreement with
Prudential Securities Credit Corporation ("PSCC") on February 27, 1997 to
finance the purchase of certain Subordinated Certificates. The funds to be lent
under the Prudential Excess Financing Agreement are to be made in a one-time
advance to ARCMI not to exceed $31.0 million. As of March 5, 1997, $31.0 million
was outstanding under the Prudential Excess Financing Agreement. The Company
intends to repay all indebtedness outstanding under the Prudential Excess
Finance Agreement with proceeds from this Offering.
Ranking. Indebtedness under the Prudential Excess Financing Agreement
constitutes Senior Debt.
Security. Indebtedness under the Prudential Excess Financing Agreement is
secured by a pledge of (i) the Subordinated Certificates financed through the
Prudential Excess Financing Agreement and all payments thereunder, (ii) a
pooling and servicing agreement related to the AMRESCO Residential Securities
Corporation Mortgage Loan Trust 1996-5 (the "Trust"), (iii) servicing agreements
between ARCMI and various entities acceptable to PSCC relating to mortgage loans
held by the Trust, and (iv) any collateral created by other agreements between
ARCMI and PSCC.
Interest. Indebtedness under the Prudential Excess Financing Agreement
generally bears interest at LIBOR (as defined in the Prudential Excess Financing
Agreement) plus 2.00%. In the event the indebtedness under the Prudential Excess
Financing Agreement is not repaid in full by June 30, 1997, the Prudential
Excess Financing Agreement provides for further interest adjustments until such
indebtedness is repaid in full.
Maturity. The Prudential Excess Financing Agreement shall mature on the
earlier of (i) the completion of this Offering or (ii) the completion of a
securitization of the Subordinated Certificates financed through the proceeds of
the Prudential Excess Financing Agreement. The maturity date may be extended
pursuant to certain terms within the Prudential Excess Financing Agreement.
Covenants. The Prudential Excess Financing Agreement requires ARCMI to,
among other things, maintain certain insurance coverages and to refrain
throughout the term of the loan from seeking any waivers from the trustee or the
credit enhancer with respect to provisions of certain servicing agreements
without the prior approval of PSCC.
Events of Default. The Prudential Excess Financing Agreement contains
customary events of default including, among other things, principal, interest,
fee and other payment defaults, cross-defaults to certain other indebtedness by
ARCMI or the Company, improper assignment of the Prudential Excess Financing
Agreement and any instruments thereunder, certain events of bankruptcy and
insolvency of ARCMI or the
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Company (subject to certain cure periods), certain liquidation or dissolution
defaults of ARCMI or the Company, materially adverse changes in the financial
condition of ARCMI or the Company (subject to certain cure periods) and breaches
of representations, warranties or covenants. The Company also would be in
default under the Prudential Excess Financing Agreement for a failure to service
mortgage loans in substantial compliance with servicing requirements.
Indemnification. Under the Prudential Excess Financing Agreement, ARCMI has
agreed to indemnify PSCC from and against all liabilities, losses, damages,
judgments, costs and expenses of any kind (including, without limitation,
reasonable fees and disbursements of counsel for PSCC) that may be incurred by
PSCC relating to or arising out of the Prudential Excess Financing Agreement and
certain related instruments, provided that ARCMI is not liable for any such
liabilities, losses, damages, judgments, costs and expenses resulting from such
indemnified party's own gross negligence or willful misconduct.
ACC WAREHOUSE FACILITIES
NationsBank Warehouse Facility
General. On April 28, 1995, ACC entered into the NationsBank Warehouse
Facility, which ACC uses to finance the origination and warehousing of certain
mortgage loans. See "Business -- Commercial Mortgage Banking Business." Pursuant
to this facility, NationsBank of Texas extended a $25.0 million line of credit
to ACC, which was subsequently reduced to $10.0 million effective October 26,
1996; however, on December 18, 1996, NationsBank of Texas allowed ACC to borrow
approximately $8.5 million in excess of the $10.0 million line of credit on a
one-time basis. The Company has guaranteed certain of ACC's obligations under
the NationsBank Warehouse Facility. A total of $9.0 million and $18.5 million
was outstanding under the NationsBank Warehouse Facility at December 31, 1995
and 1996, respectively.
Ranking. Indebtedness under the NationsBank Warehouse Facility constitutes
Senior Debt.
Security. ACC's indebtedness under the NationsBank Warehouse Facility is
secured by all mortgage loans originated by ACC using funds obtained under the
NationsBank Warehouse Facility and related collection and other accounts.
Interest. Indebtedness under the NationsBank Warehouse Facility generally
bears interest at a rate based (at ACC's option) upon either (i) the prime rate
established by NationsBank of Texas, as announced from time to time or (ii) the
Adjusted LIBOR Rate (as defined in the NationsBank Warehouse Facility) plus
either 1.65% or 2.0% depending upon certain enumerated factors.
Maturity. The original maturity date of the NationsBank Warehouse Facility
is January 25, 1998, subject to certain limitations and short extensions.
Conditions to Extensions of Credit. The obligation of NationsBank of Texas
to make loans to ACC under the NationsBank Warehouse Facility is subject to
certain customary conditions including, without limitation, the delivery of
certain documents, certificates, resolutions, opinions, financial statements,
instruments and applications by ACC, approval by NationsBank of Texas of the
mortgage loan to be originated by ACC, the delivery to NationsBank of Texas of
proof that certain required insurances are in effect, the payment of certain
required fees, the absence of any default under the NationsBank Warehouse
Facility, no material adverse change in ACC or the Company's financial condition
from the Closing Date, and all representations and warranties under the
NationsBank Warehouse Facility being true and correct.
Covenants. The NationsBank Warehouse Facility requires ACC to meet certain
financial tests, including minimum liquidity and minimum tangible net worth. The
NationsBank Warehouse Facility also contains covenants that, among other things,
limit the incurrence of additional indebtedness, investments, asset sales,
distributions, transactions with affiliates, mergers and consolidations, liens
and encumbrances and other matters customarily restricted in such agreements.
The NationsBank Warehouse Facility also contains additional covenants that
require, among other things, ACC to provide certain information to NationsBank
of Texas, including financial statements, notices, certificates, securities
filings, and reports, to permit inspections of the books and records of the
Company and its subsidiaries by NationsBank of Texas and to comply with
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applicable laws and to pay taxes. The NationsBank Warehouse Facility also
contains requirements with respect to the maintenance of employee benefit plans
regulated under ERISA.
Events of Default. The NationsBank Warehouse Facility contains customary
events of default, including without limitation, principal, interest and fee
payment defaults, covenant defaults, breaches of representations and warranties,
cross-defaults to certain other indebtedness, certain events of bankruptcy,
insolvency, dissolution or liquidation, judgment defaults in aggregate excess of
$500,000, failure of any guarantee or security agreement supporting the
NationsBank Warehouse Facility to be in full force and effect, a change in
control of ACC, changes in the basic business of ACC and changes in the
individuals holding certain offices with ACC.
Indemnification. Under the NationsBank Warehouse Facility, ACC has agreed
to indemnify NationsBank of Texas and certain related parties from and against
any and all losses, liabilities, claims, damages, deficiencies, interest,
judgments, costs and expenses (including, without limitation, reasonable fees
and disbursements of counsel for NationsBank of Texas) that arise out of certain
matters described in the NationsBank Warehouse Facility, provided that ACC may
not be held liable for such matters resulting from the gross negligence or
willful misconduct of an indemnitee thereunder. The NationsBank Warehouse
Facility also requires ACC to reimburse NationsBank of Texas and certain related
parties for taxes and fees paid in connection with the facility.
RFC Warehouse Facility
General. On August 15, 1995, ACC entered into the RFC Warehouse Facility,
which ACC uses to facilitate the underwriting and origination of multi-family
mortgage loans to be purchased by Freddie Mac or Fannie Mae. The RFC Warehouse
Facility was amended on May 1, 1996 and was supplemented by letter dated May 2,
1996. A total of $8.6 million and $47.0 million was outstanding under the RFC
Warehouse Facility at December 31, 1995 and 1996, respectively. The RFC
Warehouse Facility is non-recourse to the Company.
Ranking. Indebtedness under the RFC Warehouse Facility constitutes Senior
Debt.
Security. ACC's indebtedness under the RFC Warehouse Facility is secured by
all mortgage loans originated by ACC using funds obtained under the RFC
Warehouse Facility.
Interest. Indebtedness under the RFC Warehouse Facility generally bears
interest at a rate based upon LIBOR (as defined in the RFC Warehouse Facility)
plus 3.0%. However, pursuant to the supplemental letter, the Lender in its sole
discretion may lower the per annum rate of interest. The RFC Warehouse Facility
currently bears interest at a rate of LIBOR plus 1.25%. ACC may also be required
to pay certain other fees in addition to or in lieu of interest.
Maturity. The stated maturity date will be provided in a note related to
each borrowing under the RFC Warehouse Facility and is expected to be
approximately 60 to 80 days from the date of each such borrowing, though under
certain circumstances the maturity period on borrowing may be shorter.
Conditions to Extensions of Credit. The obligation of Residential Funding
Corporation to make initial and/or subsequent loans to ACC under the RFC
Warehouse Facility is subject to certain customary conditions including, without
limitation, the delivery of certain documents, certificates, resolutions,
opinions, financial statements, instruments and applications by ACC, approval by
Residential Funding Corporation of the mortgage loans to be originated by ACC,
the absence of any default under the RFC Warehouse Facility, the absence of
material liabilities not noted on Financial Statements required to have been
delivered and all representations and warranties under the RFC Warehouse
Facility being true and correct.
Covenants. The RFC Warehouse Facility requires ACC to meet certain
financial tests, including a maximum ratio of debt to tangible net worth,
minimum tangible net worth and minimum Servicing Portfolio (as defined in the
RFC Warehouse Facility). The RFC Warehouse Facility also contains covenants
that, among other things, limit ACC's ability to liquidate, dissolve,
consolidate or merge or sell any substantial part of its assets, or acquire any
substantial part of the assets of another business. The RFC Warehouse Facility
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also contains covenants that require ACC to provide certain information to
Residential Funding Corporation, including financial statements, notices and
reports, permit inspections of the books and records of ACC by Residential
Funding Corporation, to maintain certain insurance coverages, to maintain valid
corporate existence and good standing, to comply with applicable laws and to pay
taxes. The RFC Warehouse Facility contains additional covenants concerning
collateral securing credit extensions thereto.
Events of Default. The RFC Warehouse Facility contains customary events of
default, including without limitation, principal, interest and other payment
defaults (subject to certain cure periods), breaches of covenants or
representations and warranties, cross-defaults to certain other indebtedness,
certain events of bankruptcy and insolvency (including of the Company) and any
judgment default in excess of $100,000.
Indemnification. Under the RFC Warehouse Facility, ACC has agreed to
indemnify Residential Funding Corporation and certain related parties from and
against any and all losses, liabilities, claims, damages, deficiencies,
interest, judgments, costs and expenses (including, without limitation,
reasonable fees and disbursements of counsel for Residential Funding
Corporation) that arise out of certain matters described in the RFC Warehouse
Facility, provided that ACC is not liable for such matters resulting from the
gross negligence or willful misconduct of an indemnitee thereunder. ACC has also
agreed to indemnify Residential Funding Corporation and certain related parties
from and against certain tax liabilities related to the RFC Warehouse Facility.
AMBS GLOBAL AGREEMENT
General. On December 19, 1995, AMRESCO MBS I, INC., a wholly-owned
subsidiary of the Company ("AMBS"), entered into the AMBS Global Agreement with
Nomura Grand Cayman, Ltd. ("Nomura") to support the purchase on margin of
certain commercial mortgage pass-through certificates (the "AMBS Purchased
Securities"). The AMBS Global Agreement contemplates that repurchase
transactions may be entered into from time to time. At January 31, 1997, three
such transactions were existing. The outstanding amounts were, $17.3 million,
$3.0 million, and $5.9 million, for a total of $26.2 million.
Ranking. Indebtedness under the AMBS Global Agreement constitutes Senior
Debt.
Security. Indebtedness under each repurchase transaction is secured by a
first priority security interest in the AMBS Purchased Securities.
Interest. Indebtedness under the repurchase transactions bears interest at
a rate of 30 day LIBOR plus 1.40%.
Repurchase Date. The repurchase transactions mature on June 18, 1997,
December 19, 1997, and January 23, 1998, respectively.
Events of Acceleration. Upon the occurrence of (i) a material adverse
impact on (A) the creditworthiness of AMBS, (B) the ability of AMBS to perform
its obligations under the AMBS Global Agreement, (C) the marketability or value
of the AMBS Purchased Securities or (D) the economic, political or financial
stability of the issuing or domicile country or (ii) governmental changes in
taxation or exchange controls which affect the AMBS Purchased Securities or
relevant financial markets, Nomura may immediately accelerate the repurchase
date.
Events of Default. The repurchase transactions contain certain events of
default, including, among others, payment defaults, failure to maintain a
minimum margin, insolvency, breaches of representations and warranties,
suspension from a securities exchange or association, failure to maintain a
first priority security interest in the AMBS Purchased Securities, judgment
defaults in excess of $1.0 million and cross-defaults in excess of certain
amounts.
SENIOR NOTES
General. On July 1, 1996, the Company entered into the Senior Note
Indenture with Comerica Bank, as trustee. Pursuant to the terms of the Senior
Note Indenture, an aggregate of $57.5 million of Senior Notes
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were issued. The Company used the net proceeds from the sale of the Senior Notes
to pay down indebtedness under a predecessor to the Revolving Loan Agreement.
Ranking. Indebtedness under the Senior Note Indenture constitutes Senior
Debt.
Security. Indebtedness under the Senior Note Indenture is unsecured.
Interest. The Senior Notes bear interest at a rate of 8.75% per annum.
Maturity. The Senior Notes will mature on July 1, 1999.
Certain Rights to Require Repurchase of Senior Notes. The Senior Note
Indenture provides that each holder shall have the right to require the Company
to repurchase the Senior Notes at a purchase price equal to 100% of the
principal amount plus accrued and unpaid interest, upon the occurrence of any
event requiring the Company to repurchase, or make an offer to repurchase, any
Funded Debt other than the Senior Notes, including any Change of Control (as
defined in the Note Indenture). In the event such a requirement is effected with
respect to Subordinated Debt, the holders of Senior Notes who are requiring the
Company to repurchase their Senior Notes must be paid in full prior to any
payment to the holders of Subordinated Debt, including the holders of the Notes.
Limited Rights of Acceleration or Repurchase. Payment of principal on the
Notes may be accelerated upon the occurrence of events of default only upon the
action of the Trustee or the holders of at least 25% in aggregate principal
amount of outstanding Notes, and such acceleration may be rescinded by the
holders of a majority of the aggregate principal amount of the outstanding Notes
if all events of default are remedied and all payments due are made before a
judgment or decree for payment of money due is obtained.
Covenants. The Senior Note Indenture contains, among others, certain
covenants, limiting the incurrence of indebtedness, limiting dividends and
redemptions, requiring maintenance of proper legal existence, limiting
restrictions on subsidiary dividends, requiring punctual payment of principal,
premium and interest, and requiring that the Company maintain its properties and
assets, maintain insurances and pay applicable taxes.
Events of Default. The Senior Note Indenture contains certain customary
events of default, including, without limitation, various payment defaults,
covenant defaults (subject to certain cure periods), defaults of certain other
indebtedness, certain events of bankruptcy and insolvency and judgment defaults
in excess of $5.0 million.
SENIOR SUBORDINATED NOTES
General. On February 2, 1996, the Company entered into the Senior
Subordinated Note Indenture with Bank One, Columbus, N.A., as trustee. Pursuant
to the terms of the Senior Subordinated Note Indenture, an aggregate of $57.5
million of Senior Subordinated Notes were issued. The Company used the net
proceeds from the sale of the Senior Subordinated Notes to pay down indebtedness
under a predecessor to the Revolving Loan Agreement.
Ranking. Indebtedness under the Senior Subordinated Note Indenture does not
constitute Senior Debt and will be pari passu with the Notes.
Security. Indebtedness under the Senior Subordinated Note Indenture is
unsecured.
Interest. The Senior Subordinated Notes bear interest at a rate of 10% per
annum.
Maturity. The Senior Subordinated Notes will mature on January 15, 2003.
Certain Rights to Require Repurchase of Senior Subordinated Notes. The
Senior Subordinated Note Indenture provides that each holder shall have the
right to require the Company to repurchase the Senior Subordinated Notes at a
purchase price equal to 100% of the principal amount plus accrued and unpaid
interest, upon the occurrence of any event requiring the Company to repurchase,
or make an offer to repurchase, any Subordinated Debt other than the Senior
Subordinated Notes, including any Change of Control (as defined in the Note
Indenture). In addition, upon the death of any holder of Notes, the Company
S-59
<PAGE> 60
will redeem, at par plus accrued interest, such holder's Notes upon request up
to $30,000 in principal amount per holder per year subject to an aggregate limit
for all holders of $300,000 in principal amount in any twelve month period.
Optional Redemption. The Senior Subordinated Notes are not redeemable prior
to January 15, 2001. Thereafter, the Senior Subordinated Notes will be
redeemable, at the Company's option, in whole or in part, at 100% of the
principal amount thereof plus accrued interest.
Covenants. The Senior Subordinated Note Indenture contains covenants
limiting the incurrence of indebtedness, limiting dividends and redemptions,
limiting restrictions on subsidiary dividends and requiring that certain
conditions be met prior to any consolidation, merger or sale of the assets of
the Company.
Events of Default. The Senior Subordinated Note Indenture contains certain
customary events of default, including payment defaults, covenant defaults
(subject to certain cure periods), defaults of certain other indebtedness,
certain events of bankruptcy and insolvency and judgment defaults in excess of
$5.0 million.
UNDERWRITING
Subject to the terms and conditions of the Purchase Agreement (the
"Purchase Agreement") among the Company and Piper Jaffray Inc., Keefe, Bruyette
& Woods, Inc., Morgan Keegan & Company, Inc., Legg Mason Wood Walker,
Incorporated and McDonald & Company Securities, Inc. (collectively, the
"Underwriters") and to the receipt of certain legal opinions and other closing
conditions contemplated thereby, the Underwriters have severally agreed to
purchase from the Company the respective principal amount of the Notes set forth
opposite their names below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITERS OF NOTES
------------ ----------------
<S> <C>
Piper Jaffray Inc........................................... $ 91,000,000
Keefe, Bruyette & Woods, Inc. .............................. 38,500,000
Morgan Keegan & Company, Inc. .............................. 30,000,000
Legg Mason Wood Walker, Incorporated........................ 16,500,000
McDonald & Company Securities, Inc. ........................ 16,500,000
------------
Total............................................. $192,500,000
============
</TABLE>
The nature of the obligations of the Underwriters is such that if any of
the Notes are purchased, all of them must be purchased.
The Underwriters have advised the Company that they propose to offer the
Notes to the public at the Price to Public and to selected dealers at such price
less a concession of not more than 1.75% of the principal amount of the Notes.
The Underwriters may allow, and such dealers may re-allow, concessions not in
excess of 0.25% of the principal amount of the Notes to certain other brokers
and dealers. After the initial public offering of the Notes, the Price to Public
and other selling terms may be changed by the Underwriters.
The Purchase Agreement provides that the obligations of the Underwriters to
purchase the Notes are subject to certain conditions precedent. The Purchase
Agreement also provides that the Company will indemnify the Underwriters and
their controlling persons against certain liabilities and expenses, including
liabilities under the Securities Act, or contribute to payments the Underwriters
may be required to make in respect thereof.
The Notes have been approved for listing on the New York Stock Exchange
under the symbol "AMMB 04." However, there can be no assurance that an active
trading market in the Notes will develop or that the Notes will not trade at a
discount to their principal amount.
S-60
<PAGE> 61
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by L. Keith Blackwell, General Counsel of the Company. Mr. Blackwell
currently owns beneficially 2,777 shares of Common Stock (excluding 7,108
unvested shares allocated under the Company's restricted stock plan) and holds
options to purchase 37,510 shares of Common Stock. Certain other legal matters
will be passed upon for the Company by Haynes and Boone, LLP, Dallas, Texas.
Certain legal matters relating to the Notes offered hereby will be passed upon
for the Underwriters by Lindquist & Vennum, P.L.L.P., Minneapolis, Minnesota.
S-61
<PAGE> 62
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS FOR THE QUALITY ACQUISITION
The historical condensed consolidated financial statements consist of the
operations and financial position of the Company and Quality as of and for the
nine months ended September 30, 1996 and the operations of the Company for the
year ended December 31, 1995 combined with the operations of Quality for its
fiscal year ended September 30, 1995.
The unaudited pro forma condensed consolidated balance sheet is presented
as if the Company had acquired substantially all of the assets of Quality as of
September 30, 1996 and the unaudited pro forma condensed consolidated statements
of income are presented as if the assets had been acquired on the first day of
the period presented. These presentations are made as if the Company had (i)
acquired substantially all of the assets and assumed the operating liabilities
of Quality, (ii) financed the Quality Acquisition with indebtedness incurred
under the Revolving Loan Agreement and (iii) issued as of September 30, 1996 the
additional 2,992,148 shares of Common Stock that were sold in November and
December 1996, the proceeds of which were used to retire a portion of the
indebtedness incurred to fund the Quality Acquisition. The Company acquired all
residential loans owned by Quality on the closing date (totaling $84.6 million)
and assumed the related warehouse indebtedness (totaling $84.4 million).
Quality's mortgage loans were generally funded by such indebtedness. These
unaudited pro forma condensed consolidated financial statements should be read
in conjunction with the historical consolidated financial statements and notes
thereto of the Company and Quality incorporated by reference herein. In
management's opinion, all adjustments necessary to reflect the effects of the
acquisition of the assets and assumption of liabilities of Quality and the
capitalization of the acquisition have been made.
The unaudited pro forma condensed consolidated financial statements are not
necessarily indicative of what the actual results of operations and financial
position of the Company would have been assuming the transaction had been
completed as set forth above, nor do they purport to represent the Company's
results of operations for future periods.
S-62
<PAGE> 63
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
(A) (B)
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
COMPANY QUALITY ADJUSTMENTS COMPANY
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents.................... $ 14,157 $ 8,246 $ 22,403
Temporary investments........................ 36,392 36,392
Accounts receivable and interest............. 16,445 331 16,776
Mortgage loans held for sale................. 402,738 62,598 465,336
Advances and wet fundings.................... 10,752 10,752
Investments:
Loans..................................... 175,784 175,784
Partnerships and joint ventures........... 31,102 31,102
Asset-backed and other securities......... 89,891 29,531 119,422
Real estate............................... 16,961 1,123 18,084
Deferred income taxes........................ 12,529 4,576 $ (4,576)(C) 12,529
Premises and equipment, net.................. 6,233 5,716 11,949
Intangible assets............................ 46,417 44,348(D) 90,765
Other assets................................. 19,049 2,827 21,876
-------- -------- -------- ----------
Total Assets......................... $867,698 $125,700 $ 39,772 $1,033,170
======== ======== ======== ==========
Liabilities:
Accounts payable............................. $ 6,805 $ 3,776 $ 4,000(E) $ 14,581
Accrued employee compensation and benefits... 9,978 9,978
Notes payable................................ 116,921 65,000(F) 121,031
(60,890)(G)
Warehouse loans payable...................... 381,560 92,696 474,256
Senior Notes, Series 1997-A due 2004......... 57,500 57,500
10% Senior Subordinated Notes due 2003....... 57,500 57,500
8% Convertible Subordinated Debentures due
2005...................................... 45,000 45,000
Income taxes payable and deferred tax
liability................................. 2,744 3,248 (3,248)(C) 2,744
Other liabilities............................ 4,597 4,597
-------- -------- -------- ----------
Total liabilities.................... 682,605 99,720 4,862 787,187
-------- -------- -------- ----------
Shareholder's equity:
Preferred stock
Common stock................................. 1,359 138 150(G) 1,509
(138)(C)
Capital in excess of par..................... 110,121 2,000 60,740(G) 170,861
(2,000)(C)
Reductions for employee stock................ (1,409) (1,409)
Treasury stock............................... (160) (160)
Net unrealized gains (losses)................ (1,207) (1,207)
Retained earnings............................ 76,389 23,842 (23,842)(C) 76,389
-------- -------- -------- ----------
Total shareholder's equity........... 185,093 25,980 34,910 245,983
-------- -------- -------- ----------
Total liabilities and shareholders'
equity......................................... $867,698 $125,700 $ 39,772 $1,033,170
======== ======== ======== ==========
</TABLE>
S-63
<PAGE> 64
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(A) Represents the historical unaudited condensed consolidated balance sheet of
the Company as of September 30, 1996.
(B) Represents the historical unaudited condensed consolidated balance sheet of
Quality as of September 30, 1996.
(C) Reflects the adjustment to record assets purchased and liabilities assumed
at their estimated fair values.
(D) Represents the excess of purchase price over net assets acquired. For
purposes of these unaudited pro forma condensed consolidated financial
statements an estimated useful life of 15 years is utilized in calculating
amortization expense.
(E) Represents the approximated costs of the acquisition including professional
services and severance payments.
(F) Represents the indebtedness incurred to fund the acquisition of Quality by
the Company.
(G) Reflects the issuance of an additional 2,992,148 shares of Common Stock sold
by the Company at a net price of $20.35 per share in November and December
1996. The net proceeds were utilized to retire a portion of the additional
indebtedness incurred to fund the Quality Acquisition.
S-64
<PAGE> 65
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
(A) (B) PRO
HISTORICAL HISTORICAL PRO FORMA FORMA
COMPANY QUALITY ADJUSTMENTS COMPANY
---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Asset management and resolution fees........ $ 41,295 $ 41,295
Loan origination fees, net.................. $12,642 12,642
Interest and other investment income........ 40,105 34,721 74,826
Mortgage banking fees....................... 24,382 24,382
Gain on sale of loans and investments,
net...................................... 1,382 40,677 42,059
Prepayment and late fees.................... 14,281 $(14,281)(C)
Loss on sale of real estate held for sale... (6,269) (6,269)
Other revenues.............................. 3,322 1,989 5,311
---------- ------- -------- ----------
Total revenues...................... 110,486 98,041 (14,281) 194,246
---------- ------- -------- ----------
Expenses:
Personnel................................... 52,852 33,423 (3,151)(D) 83,124
General and administrative.................. 14,047 13,277 27,324
Interest.................................... 6,921 23,114 298(E) 30,333
Depreciation and amortization............... 4,334 1,436 2,721(F) 8,491
Provision for loss on investments........... 3,914 3,914
Profit participation........................ 2,074 2,074
---------- ------- -------- ----------
Total expenses...................... 80,228 75,164 (132) 155,260
---------- ------- -------- ----------
Income from continuing operations before
income tax expense.......................... 30,258 22,877 (14,149) 38,986
Income tax expense............................ 11,593 9,757 (6,406) 14,944
---------- ------- -------- ----------
Income from continuing operations............. 18,665 13,120 (7,743) 24,042
Gain from discontinued operations, net of
taxes....................................... 2,425 2,425
---------- ------- -------- ----------
Net income.................................... $ 21,090 $13,120 $ (7,743) $ 26,467
========== ======= ======== ==========
Earnings per share from continuing operations:
Primary..................................... $ 0.76 $ 0.87(I)
Fully-diluted............................... 0.75 0.86(I)
Earnings per share:
Primary..................................... $ 0.86 $ 0.96(I)
Fully-diluted............................... 0.85 0.94(I)
Weighted average number of common shares
outstanding and common share equivalents.... 24,654,321 27,646,469
</TABLE>
S-65
<PAGE> 66
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
(A) (B)
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
COMPANY QUALITY ADJUSTMENTS COMPANY
----------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Asset management and resolution fees.... $ 27,214 $ 27,214
Interest and other investment income.... 65,728 $17,154 82,882
Mortgage banking fees................... 25,032 25,032
Gain on sale of loans and investments,
net.................................. 8,966 23,640 32,606
Prepayment and late fees................ 15,597 $(15,597)(C)
Loss on sale of real estate............. (1,144) (1,144)
Other revenues.......................... 2,255 1,451 3,706
----------- ------- -------- -----------
Total revenues.................. 129,195 56,698 (15,597) 170,296
----------- ------- -------- -----------
Expenses:
Personnel............................... 52,662 21,372 (1,439)(D) 72,595
General and administrative.............. 15,489 14,754 30,243
Interest................................ 21,478 10,354 224(E) 32,056
Depreciation and amortization........... 5,899 1,497 1,722(F) 9,118
Provision for losses on investments..... 7,513 7,513(H)
----------- ------- -------- -----------
Total expenses.................. 95,528 55,490 507 151,525
----------- ------- -------- -----------
Net income before income tax expense...... 33,667 1,208 (16,104) 18,771
Income tax expense........................ 12,968 615 (5,574)(G) 8,009
----------- ------- -------- -----------
Net income................................ $ 20,699 $ 593 $(10,530) $ 10,762
=========== ======= ======== ===========
Earnings per share:
Primary................................. $ 0.75 $ 0.35(I)
Fully-diluted (assuming conversion of
3,600,000 shares).................... 0.71 0.36(I)
Weighted average number of common shares
outstanding and common share
equivalents............................. 27,647,629 30,639,777
</TABLE>
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<PAGE> 67
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
(A) Represents the historical condensed consolidated statement of income of the
Company for the period indicated.
(B) Represents the historical condensed statement of income of Quality for its
fiscal year ended September 30, 1995 and the nine months ended September 30,
1996, respectively.
(C) Reflects the removal of revenues related to accumulated rights to receive
prepayment fees and late fees which were not acquired. The Company did not
acquire the rights to receive late fees in loans originated through the
acquisition date. However, the Company will receive prepayment fees and late
fees on new loans originated.
(D) Represents the removal of contract services fees paid to the selling
shareholder as this agreement was terminated as a condition to the purchase.
(E) Represents interest expense on the additional indebtedness, net of the
proceeds of the Common Stock Offering incurred to fund the acquisition.
(F) Represents an adjustment to depreciation expense resulting from changes to
property and equipment valuations and an adjustment to record amortization
expense of $2,957 and $2,217 for the year ended December 31, 1995 and for
the nine months ended September 30, 1996, respectively, as a result of
recording the acquired intangible assets of $44,348 and utilizing an
amortization period of 15 years.
(G) Reflects an adjustment to income tax expense to reflect the Company's
effective tax rate for the period.
(H) For the nine months ended September 30, 1996, Quality recorded a charge to
operations, totaling $7,513, to recognize an impairment loss on certain of
its investments. As the assets associated with this adjustment were
acquired, no adjustment has been made to remove the effects of the recording
of this impairment loss.
(I) Reflects the issuance of an additional 2,992,148 shares of Common Stock sold
by the Company at a net price of $20.35 per share in November and December
1996. The net proceeds were utilized to retire a portion of the additional
indebtedness incurred to fund the Quality Acquisition.
S-67
<PAGE> 68
$250,000,000
[AMRESCO LOGO]
COMMON STOCK, PREFERRED STOCK, DEBT SECURITIES,
SECURITIES WARRANTS AND UNITS
------------------------
AMRESCO, INC. (the "Company") may offer from time to time, together or
separately, (i) shares of its common stock, par value $0.05 per share (the
"Common Stock"), (ii) shares of its preferred stock, par value $1.00 per share
(the "Preferred Stock"), (iii) its unsecured debt securities, which may be
either senior (the "Senior Debt Securities") or subordinated (the "Subordinated
Debt Securities" and, together with the Senior Debt Securities, the "Debt
Securities") and (iv) warrants (collectively, the "Securities Warrants") to
purchase Debt Securities (the "Debt Securities Warrants"), Preferred Stock (the
"Preferred Stock Warrants") or Common Stock (the "Common Stock Warrants"), in
amounts, at prices and on terms to be determined at the time of the offering
thereof. The Common Stock, Preferred Stock, Debt Securities and Securities
Warrants (collectively, the "Securities") may be offered independently or
together in any combination ("Units") for sale directly to purchasers or through
dealers, underwriters or agents to be designated. The Subordinated Debt
Securities and Preferred Stock may be convertible or exchangeable into other
series of Debt Securities, Preferred Stock or Common Stock. The Securities
offered pursuant to this Prospectus may be issued in one or more series or
issuances the aggregate offering price of which will not exceed $250.0 million
(or the equivalent thereof if the Debt Securities are denominated in one or more
foreign currencies of foreign currency units).
The specific terms of the Securities in respect of which this Prospectus is
being delivered (the "Offered Securities") will be set forth in an accompanying
supplement to this Prospectus (each, a "Prospectus Supplement"), including,
where applicable, (i) in the case of Common Stock, the aggregate number of
shares offered and by whom offered, (ii) in the case of the Preferred Stock, the
specific designation, the aggregate number of shares offered, the dividend rate
(or method of calculation thereof), the dividend period and dividend payment
dates, whether such dividends will be cumulative or noncumulative, the
liquidation preference, voting rights, if any, any terms for optional or
mandatory redemption, any terms for conversion or exchange into other series of
Debt Securities or Common Stock and any other special terms, (iii) in the case
of Debt Securities, the specific designation, aggregate principal amount,
ranking as Senior Debt Securities or Subordinated Debt Securities, authorized
denominations, maturity, any premium, rate or method of calculation of interest,
if any, and dates for payment thereof, any terms for optional or mandatory
redemption, any sinking fund provisions, any terms for conversion or exchange
into other series of Debt Securities, Preferred Stock or Common Stock and any
other special terms, (iv) the terms of any Securities Warrants offered,
including where applicable, the exercise price, detachability, duration and
other specific terms not described in this Prospectus and (v) the initial public
offering price and the net proceeds to the Company from and other specific terms
relating to the Offered Securities.
The Senior Debt Securities will rank pari passu in right of payment with all
unsubordinated indebtedness of the Company, but, except to the extent such
Senior Debt Securities are secured by collateral, will be effectively
subordinated to the rights of holders of secured unsubordinated indebtedness of
the Company to the extent of the value of the collateral securing such
indebtedness. The Senior Debt Securities will rank senior to all unsecured
subordinated indebtedness of the Company. The Subordinated Debt Securities will
be subordinate in right of payment to all existing and future Senior Debt (as
defined herein) of the Company, including any Senior Debt Securities.
This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement.
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SECURITIES OFFERED HEREBY, SEE "RISK FACTORS" BEGINNING ON
PAGE 7 HEREIN AND "RISK FACTORS" IN THE PROSPECTUS SUPPLEMENT ACCOMPANYING THIS
PROSPECTUS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The Company may sell the Securities (i) through underwriting syndicates
represented by managing underwriters or by underwriters without a syndicate,
with such underwriters to be designated at the time of sale, (ii) through agents
designated from time to time or (iii) directly. The names of any underwriters or
agents of the Company involved in the sale of the Securities, the public
offering price or purchase price thereof, any applicable commissions or
discounts, any other terms of the offering of such Securities and the net
proceeds to the Company from such sale will be set forth in the applicable
Prospectus Supplement. See "Plan of Distribution" for possible indemnification
arrangements for agents, dealers and underwriters.
------------------------
The date of this Prospectus is February 20, 1997
<PAGE> 69
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In accordance with the
Exchange Act, the Company files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). The reports,
proxy statements and other information can be inspected and copied at the public
reference facilities that the Commission maintains at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at 7 World Trade Center, 13th Floor, New York, New York 10048, and Suite
1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of these
materials can be obtained at prescribed rates from the Public Reference Section
of the Commission at the principal offices of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. Such documents may also be obtained at the Web
site maintained by the Commission (http://www.sec.gov). The Company's Common
Stock is quoted on the Nasdaq National Market and such reports, proxy statements
and other information may be inspected at the National Association of Securities
Dealers, Inc., 1735 K. Street N.W., Washington, D.C. 20006. The Company's 8.75%
Senior Notes, Series 1996-A due 1999 and its 10% Senior Subordinated Notes due
2003 are listed on the New York Stock Exchange. Reports and other information
concerning the Company can be inspected at the offices of such Exchange, 20
Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Securities. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement, certain items of which are
contained in schedules and exhibits to the Registration Statement as permitted
by the rules and regulations of the Commission. Statements made in the
Prospectus concerning the contents of any documents referred to herein are not
necessarily complete. With respect to each such document filed with the
Commission as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description, and each such statement shall be deemed
qualified in its entirety by such reference.
Unless otherwise indicated, currency amounts in this Prospectus are stated
in United States dollars ("$" or "dollars").
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act, are hereby incorporated by reference in
this Prospectus: (i) Annual Report on Form 10-K for the year ended December 31,
1995, (ii) Current Report on Form 8-K dated February 2, 1996, (iii) Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996, (iv) Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996, (v) Current Report on Form 8-K
dated July 19, 1996, (vi) Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, (vii) Current Report on Form 8-K dated November 6, 1996, as
amended by Form 8-K/A No. 1 dated October 25, 1996, (viii) Current Report on
Form 8-K dated November 19, 1996 and (ix) Current Report on Form 8-K dated
February 20, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus shall be
deemed to be incorporated by reference herein. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed superseded or modified for purposes of this Prospectus to the extent that
a statement contained herein (or in any other subsequently filed document which
also is incorporated by reference herein) modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, on the written or oral
request of any such person, a copy of any and all of the documents incorporated
by reference herein (other than exhibits to such documents which are not
specifically incorporated by reference in such documents). Written requests for
such copies should be directed to the Company, 700 North Pearl Street, Suite
2400, LB 342, Dallas, Texas 75201-7424, Attention: L. Keith Blackwell, Vice
President, General Counsel and Secretary. Telephone requests may be directed to
L. Keith Blackwell, Vice President, General Counsel and Secretary of the
Company, at (214) 953-7700.
2
<PAGE> 70
THE COMPANY
Certain terms used in this Prospectus are defined in the "Glossary"
included herein. Certain terms used in connection with the Debt Securities are
defined under the caption "Description of Securities -- Debt
Securities -- Certain Definitions."
The Company is a leading specialty financial services company engaged in
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 B&C loans. 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 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.
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 B&C 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
crossmarketing of products and services among its business lines.
RESIDENTIAL MORTGAGE BANKING
General. The Company originates, acquires, warehouses and securitizes B&C
loans. Borrowers under such loans may not satisfy the more rigid underwriting
standards of the traditional residential mortgage lending market for a number of
reasons, such as blemished credit histories (from past loan delinquencies or
bankruptcy), inability to provide income verification data or lack of
established credit history. The Company believes that this market is large and
is underserved by traditional lenders. Therefore, there is less competition in
this market and interest rates are higher than on mortgage loans for more
creditworthy borrowers. The Company believes that the higher interest rates
offered by the B&C loan market are attractive even after taking into account the
potentially greater credit risk associated with such borrowers.
3
<PAGE> 71
Loan Sources. The Company both originates loans and acquires loan
portfolios from third-party originators. The Company originates B&C loans
through a nationwide network of approximately 50 offices in 31 states. These
offices enable the Company to maintain local relationships with over 4,500
Company-approved mortgage brokers. The Company also acquires portfolios of and
individual B&C loans from third-party loan originators. The loans originated and
purchased by the Company are then warehoused by the Company for securitization.
Securitization. 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 B&C, jumbo and non-standard residential mortgage securitizations organized
by third parties. The Company does not currently service any residential loans
it originates or acquires. The mortgage-backed securities publicly sold to date
by the Company have been rated "AAA" by Standard & Poor's and "Aaa" by Moody's
Investors Service, Inc. To achieve these ratings the Company has used a
combination of over-collateralization techniques and financial guaranty
insurance.
COMMERCIAL MORTGAGE BANKING
General. The Company performs a wide range of commercial mortgage banking
services, including originating, underwriting, placing, selling and servicing
commercial real estate loans through Holliday Fenoglio, ACC and AMRESCO
Services.
Commercial Mortgage Banking Business. Holliday Fenoglio primarily serves
commercial real estate developers and owners by originating commercial real
estate loans and acting as a broker on commercial real estate sales 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, principally insurance
companies, and by Conduit Purchasers. The Company believes that Holliday
Fenoglio's relationship and credibility with its institutional lender network
provide the Company with a competitive advantage in the commercial mortgage
banking industry.
ACC is a mortgage banker that originates 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
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. ACC has established a financing and advisory relationship with a major
Wall Street investment bank whereby ACC originates commercial mortgages, which
are funded and securitized by a partnership through which ACC shares in the
accumulation and securitization profits and risks. ACC is approved by Fannie Mae
to participate in its DUS program, which ACC believes makes it a more
competitive loan originator and underwriter of multifamily mortgages. ACC is
also an approved lender in the Freddie Mac multifamily sales/servicer program in
the states of Florida, North Carolina and South Carolina.
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. 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. 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.
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ASSET MANAGEMENT
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. 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. While the majority of the Asset Portfolios managed or owned
by the Company are located in the United States, the Company has opened offices
in Toronto and London through which it pursues Asset Portfolio acquisition
opportunities and manages its investments in Canada and Western Europe. The
Company may open other offices and seek strategic alliances in other
international markets.
Asset Portfolio Investment. The Company invests in Asset Portfolios by
purchasing them alone or with co-investors. The Face Values of Asset Portfolios
acquired solely by the Company have ranged between approximately $0.5 million
and approximately $96.8 million, whereas Asset Portfolios owned by it with co-
investors have ranged up to approximately $426.8 million, with investments by
the Company ranging from approximately $0.1 million to $17.6 million. The
Company generally funds its share of any investment with a combination of
borrowings under its existing credit lines and internal cash flow.
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.
Servicing contracts provide incentives for the Company to resolve Asset
Portfolios in order to maximize returns to third party owners.
INSTITUTIONAL REAL ESTATE INVESTMENT ADVISORY
The Company provides real estate investment advice to various institutional
investors (primarily pension funds) seeking to invest a portion of their funds
in real estate and related investments. Although the Company is paid acquisition
and disposition fees by some of its clients, its principal form of revenue from
this activity is asset management fees, which are based on the cash flow of the
investments under management or are negotiated at the time of the client's
investment in a property.
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 believes that because of its experience in evaluating and
underwriting higher risk loans, it can take advantage of investment
opportunities that are presented by such Subordinated Certificates. The Company
expects that a majority of its investments in 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.
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COMMERCIAL FINANCE
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.
The Company's commercial finance business currently involves: (i) providing high
yield debt financing for businesses and projects which are unable to access
traditional lending sources and (ii) providing construction financing for
builders of single family residences.
---------------------
The Company is a Delaware corporation. The Company's principal executive
offices are located at 700 North Pearl Street, Suite 2400, Dallas, Texas
75201-7424 and its telephone number at that address is (214) 953-7700.
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RISK FACTORS
Investors should carefully consider the following matters and the matters
set forth under "Risk Factors" in the Prospectus Supplement accompanying this
Prospectus in connection with an investment in the Securities, in addition to
the other information contained or incorporated by reference in this Prospectus
or in the accompanying Prospectus Supplement. Information contained or
incorporated by reference in this Prospectus or in the accompanying Prospectus
Supplement may contain "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, which can be identified by the
use of forward-looking terminology such as "may," "will," "expect,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. The following matters and certain
other factors noted throughout this Prospectus and any Prospectus Supplement
accompanying this Prospectus, as well as any exhibits to this Prospectus and
such Prospectus Supplement, constitute cautionary statements identifying
important factors with respect to any such forward-looking statements, including
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in such forward-looking statements.
CHANGE IN BUSINESS MIX AND MANAGEMENT OF GROWTH
In early 1994, the Company made the strategic decision to diversify its
business lines. The Company has entered the residential mortgage banking,
commercial mortgage banking, institutional real estate investment advisory and
commercial finance businesses through a combination of acquisitions and the
internal startup of new business lines, as well as increased its investments in
Asset Portfolios. These businesses contributed a substantial portion of the
Company's revenue and operating income in 1995, and the Company expects they
will continue to contribute a substantial portion of its revenue and operating
income for the foreseeable future. The rapid entry of the Company into these
business lines has resulted in increased demands on the Company's personnel and
systems. As part of its business strategy, the Company intends to acquire
additional businesses which complement the Company's core capabilities in
specialty financial services. The Company must successfully continue its
assimilation of multiple acquired businesses with differing markets, customer
bases, financial products, systems and managements. The Company's ability to
support, manage and control continued growth is dependent upon, among other
things, its ability to hire, train, supervise and manage its workforce and to
continue to develop the skills necessary for the Company to compete successfully
in its new business lines. There can be no assurance that the Company will
successfully meet all of these challenges.
On October 25, 1996, the Company consummated the Quality Purchase Agreement
pursuant to which the Company acquired substantially all the operating assets of
Quality and thereby entered the B&C loan origination business. In addition to
the risks associated with diversifying into new business lines described above,
the Quality Acquisition presents several other specific risks. Quality has
experienced declining loan volumes, a high rate of employee turnover, including
high level management, and increased competition. The Company must stabilize
Quality's work force, strengthen Quality's senior and middle management, upgrade
Quality's information and data processing systems and successfully integrate a
nationwide B&C loan origination business with its existing business lines. There
can be no assurance that the Company will be successful in all of these efforts.
NEED FOR ADDITIONAL FINANCING
General. The Company's ability to execute its business strategy depends to
a significant degree on its ability to obtain additional indebtedness and equity
capital. Other than as described in this Prospectus, the Company has no
commitments for additional borrowings or sales of equity capital and there can
be no assurance that the Company will be successful in consummating any such
future financing transactions on terms satisfactory to the Company, if at all.
Factors which could affect the Company's access to the capital markets, or the
costs of such capital, include changes in interest rates, general economic
conditions and the perception in the capital markets of the Company's business,
results of operations, leverage, financial condition and business prospects.
Each of these factors is to a large extent subject to economic, financial,
competitive and other factors beyond the Company's control. In addition,
covenants under the Company's current and future debt securities and credit
facilities may significantly restrict the Company's ability to incur additional
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indebtedness and to issue Preferred Stock. The Company's ability to repay its
outstanding indebtedness at maturity may depend on its ability to refinance such
indebtedness, which could be adversely affected if the Company does not have
access to the capital markets for the sale of additional debt or equity
securities through public offerings or private placements on terms reasonably
satisfactory to the Company.
Dependence on Warehouse Financing. The Company's commercial and residential
mortgage securitization businesses depend upon warehouse facilities with
financial institutions or institutional lenders to finance the Company's
purchase of loans on a short-term basis pending sale or securitization.
Implementation of the Company's growth strategy requires continued availability
of warehouse facilities and may require increases in the capacity of warehouse
facilities. There can be no assurance that such financing will be available on
terms reasonably satisfactory to the Company. The inability of the Company to
arrange additional warehouse facilities or to extend or replace existing
facilities when they expire would have a material adverse effect on the
Company's business, financial condition and results of operations and on the
Company's outstanding securities.
RISKS OF SECURITIZATION
Significance of Securitization. The Company currently believes that it will
become increasingly dependent upon its ability to securitize mortgage loans by
pooling and subsequently selling them in the secondary market in order to
generate revenues, earnings and cash flows. Accordingly, adverse changes in the
secondary mortgage market could impair the Company's ability to originate,
purchase and sell mortgage loans on a favorable or timely basis. Any such
impairment could have a material adverse effect upon the Company's business and
results of operations. The Company endeavors to effect public securitizations of
its loans on at least a quarterly basis. However, market and other
considerations, including the conformity of loans to insurance company and
rating agency requirements, could affect the timing of such transactions. Any
delay in the sale of loans beyond a quarter end would delay any expected gain on
sale beyond the given quarter and adversely affect the Company's reported
earnings for such quarter.
Impact of Gains on Sale. The Company entered the residential mortgage
banking business in 1995, and since that time an increasing portion of its
revenues have been attributable to non-cash gains on sale. If the Company
continues to increase its reliance on securitizations, non-cash gains on sale
may continue to increase as a percentage of total revenues.
Importance of Credit Enhancement. In order to optimize access to the
secondary market for residential mortgage-backed securities, the Company may
rely on monoline insurance companies to provide, in exchange for premiums, a
guarantee on outstanding senior interests in the related securitization trusts
to enable it to obtain a "AAA/Aaa" rating for such interests. Any unwillingness
of monoline insurance companies to guarantee the senior interests in the
Company's loan pools could have a material adverse effect on the Company's
financial position, expected gain on sale and results of operations.
Retained Risks of Securitized Loans. The Company makes various
representations with respect to the loans that it pools and securitizes. The
Company's representations rely in part on similar representations made by the
originators of such loans when they were purchased by the Company. Accordingly,
the Company has a claim against the originator in the event of a breach of any
of these representations made by the originators. However, the Company's ability
to recover on any such claim is dependent on the financial condition of the
originator. There can be no assurance that the Company will not experience a
material loss in respect of any of these contingencies.
Investment in Subordinated Certificates. The Company derives a significant
portion of its reported income from its investment in Subordinated Certificates
created in securitizations completed by the Company. The earnings on such
Subordinated Certificates represent the excess of the interest and principal
paid by a borrower on a loan over the interest and principal passed through to
the investor acquiring an interest in such loan, less the normal servicing and
other fees and credit losses realized. When such loans are pooled, the Company
recognizes as a gain the estimated fair value of the Subordinated Certificates,
net of the Company's upfront costs of purchasing and securitizing the underlying
loans. The estimated fair value of the Subordinated Certificates is computed
using prepayment, default and interest rate assumptions that the Company
believes
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market participants would use for similar instruments at the time of sale.
Accordingly, no assurance can be given that these securities could in fact be
sold or recovered at their stated values on the balance sheet, if at all.
Contingent Risks. Although the Company sells substantially all the mortgage
loans which it originates or purchases, the Company retains some degree of
credit risk on substantially all loans sold. During the period of time that
loans are held pending sale, the Company is subject to the various business
risks associated with the lending business including the risk of borrower
default, the risk of foreclosure and the risk that a rapid increase in interest
rates would result in a decline in the value of loans to potential purchasers.
The documents governing the Company's securitization program require the Company
to establish deposit accounts or build over-collateralization levels through
retention of distributions otherwise payable to the holders of the Subordinated
Certificates. Such amounts serve as credit enhancement for the related trust and
are therefore available to fund losses realized on loans held by such trust. In
addition, documents governing the Company's securitization program require the
Company to commit to repurchase or replace loans which do not conform to the
representations and warranties made by the Company at the time of sale.
RISKS RELATED TO B&C LOANS
The B&C loan market is comprised of credit-impaired borrowers who generally
have significant equity in their homes and whose borrowing needs are not
currently met by traditional financial institutions. Loans made to such
borrowers may entail a higher risk of delinquency and higher losses than loans
made to more creditworthy borrowers. While the Company believes that the
underwriting criteria and collection methods it employs enable it to reduce the
higher risks inherent in loans made to credit-impaired borrowers, no assurance
can be given that such criteria or methods will afford adequate protection
against higher delinquencies, foreclosures or losses than anticipated and, as a
result, the Company's financial condition or results of operation could be
adversely affected.
CYCLICALITY OF AND COMPETITION IN THE ASSET MANAGEMENT BUSINESS
The asset management business is affected by long-term cycles in the
general economy. In addition, the volume of domestic Asset Portfolios available
for purchase by investors or management by third party servicers such as the
Company has generally declined since 1993. The Company cannot predict what will
be a normal annual volume of Asset Portfolios to be sold or outsourced for
management and resolution. Moreover, future Asset Portfolio purchases will
depend on the availability of Asset Portfolios offered for sale, the
availability of capital and the Company's ability to submit successful bids to
purchase Asset Portfolios. The acquisition of Asset Portfolios has become highly
competitive in the United States. This may require the Company to acquire Asset
Portfolios at higher prices thereby lowering profit margins on the resolutions
of such Asset Portfolios. Under certain circumstances the Company may choose not
to bid for Asset Portfolios which it believes cannot be acquired at attractive
prices. As a result of all the above factors, Asset Portfolio purchases may vary
significantly from quarter to quarter.
GENERAL ECONOMIC CONDITIONS
Periods of economic slowdown or recession, rising interest rates or
declining demand for real estate may adversely affect certain segments of the
Company's business. Although such economic conditions may increase the number of
nonperforming loans available for sale to or for management by the Company, such
conditions could adversely affect the resolution of Asset Portfolios held by the
Company for its own account or managed for others, lead to a decline in prices
or demand for collateral underlying Asset Portfolios or, in the case of Asset
Portfolios held for the Company's own account, increase the cost of capital
invested by the Company and the length of time that capital is invested in a
particular Asset Portfolio, thereby negatively impacting the rate of return
realized from such Asset Portfolio. Economic downturns and rising interest rates
also may reduce the number of loan originations by the Company's commercial
mortgage banking business and negatively impact its commercial and residential
mortgage securitization activity.
In addition, periods of economic slowdown or recession, whether general,
regional or industry-related, may increase the risk of default on residential
mortgage loans and may have an adverse effect on the
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Company's business, financial condition and results of operations. Such periods
also may be accompanied by decreased consumer demand for residential mortgages,
resulting in declining values of homes securing outstanding loans, thereby
weakening collateral coverage and increasing the possibility of losses in the
event of default. Significant increases in homes for sale during recessionary
economic periods may depress the prices at which foreclosed homes may be sold or
delay the timing of such sales. There can be no assurance that the housing
markets will be adequate for the sale of foreclosed homes and any material
deterioration of such markets could reduce recoveries from the sale of
repossession inventory.
CERTAIN COMMERCIAL LOAN ORIGINATION AND SERVICING RISKS
When borrowers are delinquent in making monthly payments on commercial
mortgage loans serviced by the Company, the Company is required to advance
interest payments with respect to such delinquent loans to the extent that the
Company deems such advances ultimately recoverable. These advances require
funding from the Company's capital resources but have priority of repayment from
collections or recoveries on the loans in the related pool in the succeeding
month. In the ordinary course of its business, the Company is subject to claims
made against it by borrowers and private investors arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentations, errors and omissions of
employees and officers of the Company (including its appraisers), incomplete
documentation and failures by the Company to comply with various laws and
regulations applicable to its business. The Company believes that liability with
respect to any currently asserted claims or legal actions is not likely to be
material to the Company's consolidated financial position or results of
operations; however, any claims asserted in the future may result in legal
expenses or liabilities which could have a material adverse effect on the
Company's financial position and results of operations.
As a participant in the Fannie Mae DUS program, the Company must accept a
first loss risk on loans originated by the Company. In addition, the Company
must also make certain representations and warranties concerning loans
originated by the Company and sold to Conduit Purchasers or Fannie Mae. These
representations cover such matters as title to the property, lien priority,
environmental reviews and certain other matters.
ASSET PERFORMANCE ASSUMPTIONS
The Company's business, financial condition, results of operations and
liquidity depend, to a material extent, on the performance of loans owned
directly or backing securities purchased and sold by the Company. The carrying
value of the Company's Asset Portfolios and certain other assets has been
determined in part using estimates of future cash flows based on assumptions
concerning future default and prepayment rates that are consistent with the
Company's historical experience and market conditions and present value discount
rates that the Company believes would be requested by an unrelated purchaser of
an identical stream of estimated cash flows. Management believes that the
Company's estimates of cash flows were reasonable at the time such estimates
were made. However, the actual rates of default and/or prepayment on such assets
may exceed those estimated and consequently may adversely affect anticipated
future cash flows, results of operations and reported earnings. The Company
periodically reviews its loss and prepayment assumptions in relation to current
performance of the loans and market conditions and, if necessary, provides for
the impairment of the respective asset. The Company's business, financial
condition and results of operations could be materially adversely affected by
such adjustments in the future. No assurance can be given that loan losses and
prepayments will not exceed the Company's estimates or that such assets could be
sold at their stated value on the balance sheet, if at all.
INTEREST RATES
Since certain of the Company's borrowings, including borrowings under the
Revolving Loan Agreement, are at variable rates of interest, the Company may be
impacted by increases in interest rates. In addition, the value of its
interest-earning assets and liabilities may be directly affected by the level of
and fluctuations in interest rates. The Company monitors the interest rate
environment and employs prefunding or other hedging strategies designed to
mitigate the impact of changes in interest rates. However, there can be no
assurance that
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the profitability of the Company would not be adversely affected during any
period of changes in interest rates. A significant decline in interest rates
could result in increased prepayment of outstanding loans.
A substantial and sustained increase in interest rates could adversely
affect the ability of the Company to originate loans and could reduce the gains
recognized by the Company upon their securitization and sale. A significant
decline in interest rates could decrease the size of the Company's residential
Subordinated Certificates by increasing the level of loan prepayments.
Fluctuating interest rates also may affect the net interest income earned by the
Company resulting from the difference between the yield to the Company on
mortgage loans held pending sale and the interest paid by the Company for funds
borrowed under the Company's warehouse credit facilities or otherwise. In
addition, inverse or flattened interest yield curves could have an adverse
impact on the earnings of the Company because the loans pooled and sold by the
Company have long-term rates while the senior interests in the related trusts
are priced on the basis of intermediate rates.
GOVERNMENT REGULATION
The operations of the Company are subject to regulation by federal, state
and local government authorities, as well as to various laws and judicial and
administrative decisions, that impose requirements and restrictions affecting,
among other things, the Company's loan originations, credit activities, maximum
interest rates, finance and other charges, disclosures to customers, the terms
of secured transactions, collection, repossession and claims handling
procedures, multiple qualification and licensing requirements for doing business
in various jurisdictions, and other trade practices. Although the Company
believes that it is in compliance in all material respects with applicable
local, state and federal laws, rules and regulations, there can be no assurance
that more restrictive laws, rules or regulations will not be adopted in the
future that could make compliance more difficult or expensive, restrict the
Company's ability to originate, purchase or sell loans, further limit or
restrict the amount of interest and other charges earned on loans originated or
purchased by the Company, further limit or restrict the terms of loan
agreements, or otherwise adversely affect the business or prospects of the
Company. There are also, among other risks, uncertainties concerning the
business practice of paying back points to residential mortgage brokers.
RISKS OF HEDGING TRANSACTIONS
The Company has in the past and may in the future enter into interest rate
or foreign currency financial instruments used for hedging purposes. While
intended to reduce the effects of volatility in interest rate or foreign
currency price movements, such transactions could cause the Company to recognize
losses depending on the terms of the instrument and the interest rate or foreign
currency price movement. See Note 14 of Notes to the Company's Consolidated
Financial Statements included herein.
FOREIGN OPERATIONS
The Company's asset management business has entered into, and intends to
continue to enter into, contracts to purchase and to manage and resolve Asset
Portfolios located in Canada and Western Europe and may in the future expand
into other foreign countries. Foreign operations are subject to various special
risks, including currency translation risks and currency exchange rate
fluctuations (which the Company intends to mitigate with currency hedging
arrangements as available and economical) and exchange controls. Changes in
foreign exchange rates may have an adverse effect on the Company's financial
condition and results of operations. In addition, earnings of foreign operations
are subject to foreign income taxes that reduce cash flow available to meet debt
service requirements and other obligations of the Company, which may be payable
even if the Company has no earnings on a consolidated basis.
COMPETITION
All of the business lines in which the Company operates are highly
competitive. Some of the Company's principal competitors in certain business
lines are substantially larger and better capitalized than the Company. Because
of these resources, these companies may be better able than the Company to
obtain new
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customers, to acquire Asset Portfolios, to pursue new business opportunities or
to survive periods of industry consolidation. Moreover, there cannot be any
assurance that Asset Portfolio purchasers/owners for whom the Company provides
Asset Portfolio management services will not build their own management and
resolution staffs and reduce or eliminate their outsourcing of these services.
The Company is experiencing greater competition in its residential mortgage
banking business. The Company has experienced increasing competition from other
Conduit Purchasers in the acquisition of B&C loan portfolios. In addition, the
Company expects to encounter significant competition in the B&C loan origination
market.
Acquisitions of Asset Portfolios are often based on competitive bidding,
where there are dangers of bidding too low (which generates no business), as
well as of bidding too high (which could win the Asset Portfolio at an
economically unattractive price). In addition, the increasing competition in
this business line has caused the Company to experience decreasing profit
margins in its Asset Portfolio business in order to remain a competitive bidder
for Asset Portfolios and has caused the Company to redeploy its capital in other
more profitable product lines.
The Company also encounters significant competition in its other business
lines. The commercial mortgage banking business is highly fragmented with
certain large national competitors and significant localized competition. In
addition, within the commercial loan origination and residential mortgage
securitization business, access to and the cost of capital are critical to the
Company's ability to compete. The Company must compete with numerous
competitors, many of whom have superior access to capital sources and can
arrange or obtain lower cost capital for customers.
USE OF PROCEEDS
The net proceeds from the sale of the Offered Securities, together with
internally generated funds, will be used (i) to repay, redeem or repurchase
outstanding indebtedness of the Company, (ii) for general operations of the
Company, including acquisitions, investments, capital expenditures and working
capital requirements and (iii) for such other purposes as may be specified in
the related Prospectus Supplement.
RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following table sets forth the Company's and its predecessors'
consolidated ratios of earnings to fixed charges and earnings to combined fixed
charges and Preferred Stock dividends for each of the nine months ended
September 30, 1996 and 1995 and the years ended December 31, 1995, 1994, 1993,
1992 and 1991 on an historical basis.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------- ----------------------------------------
1996 1995 1995 1994 1993 1992(2) 1991(2)
----- ----- ---- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges(1)..... 2.6x 8.2x 5.4x 21.2x 58.9x n/a n/a
Ratio of earnings to combined fixed
charges and Preferred Stock
dividends(3)............................ 2.6x 8.2x 5.4x 21.2x 58.9x n/a n/a
</TABLE>
- ---------------
(1) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of operating income before income taxes and fixed charges. Fixed
charges consist of interest expense and amortization of debt issuance costs.
(2) The Company or its predecessors had no or nominal interest expense in 1991
and 1992 and it was not meaningful, therefore, to calculate these ratios for
the years ended December 31, 1992 and 1991.
(3) The Company did not have any Preferred Stock outstanding during any of these
periods.
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DESCRIPTION OF SECURITIES
The following description of the terms of the Securities sets forth certain
general terms and provisions of the Securities to which any Prospectus
Supplement may relate. The particular terms of the Securities offered by any
Prospectus Supplement and the extent, if any, to which such general provisions
may apply to the Securities so offered will be described in the Prospectus
Supplement relating to such Securities.
The Company is authorized to issue 50,000,000 shares of Common Stock, par
value $0.05 per share, and 5,000,000 shares of Preferred Stock, par value $1.00
per share. As of December 31, 1996, the Company had issued and outstanding
33,771,806 shares of Common Stock and no shares of Preferred Stock. As of such
date, there were approximately 2,900 holders of record of the outstanding shares
of Common Stock.
The following summary of the Company's Common Stock and Preferred Stock is
qualified in its entirety by reference to the Company's Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation"), its Amended
and Restated Bylaws (the "Bylaws"), and the Delaware General Corporation Law, as
amended (the "DGCL").
COMMON STOCK
General. Subject to such preferential rights as may be granted by the Board
of Directors in connection with any issuances of Preferred Stock, holders of
shares of Common Stock are entitled to receive such dividends as may be declared
by the Board of Directors in its discretion from funds legally available
therefor. From October 1993 through October 1995, the Company paid a quarterly
dividend of $0.05 per share on shares of Common Stock. In October 1995, the
Company announced that it would discontinue its policy of paying cash dividends.
The Board of Directors determined to retain all earnings to support anticipated
growth in the current operations of the Company and to finance future expansion.
The Company's Revolving Loan Agreement, the Senior Note Indenture and the Senior
Subordinated Notes Indenture restrict the payment of cash dividends unless
certain earnings tests are satisfied. Additional restrictions on the payment of
cash dividends may be imposed in connection with future issuances of Preferred
Stock and indebtedness by the Company, including issuances of Debt Securities
and Preferred Stock contemplated by this Prospectus. Further declarations and
payments of cash dividends, if any, will also be determined in light of
then-current conditions, including the Company's earnings, operations, capital
requirements, liquidity, financial condition, restrictions in financing
agreements and other factors deemed relevant by the Board of Directors. Upon the
liquidation, dissolution or winding up of the Company, after payment of
creditors, the remaining net assets of the Company will be distributed pro rata
to the holders of Common Stock, subject to any liquidation preference of the
holders of Preferred Stock. There are no preemptive rights, conversion rights,
or redemption or sinking fund provisions with respect to the shares of Common
Stock. All of the outstanding shares of Common Stock are duly and validly
authorized and issued, fully paid and nonassessable.
Voting Rights. Holders of Common Stock are entitled to one vote per share
of Common Stock held of record on all such matters submitted to a vote of the
stockholders. With respect to any act or action required of or by the holders of
the Common Stock, the affirmative vote of a majority of the shares of Common
Stock present in person or represented by proxy at a meeting and entitled to
vote thereon is sufficient to authorize, affirm, ratify or consent to such act
or actions, except as otherwise provided by law or in the Certificate of
Incorporation. The DGCL requires the approval of the holders of a majority of
the outstanding stock entitled to vote for certain extraordinary corporate
transactions, such as a merger, sale of substantially all assets, dissolution or
amendment of the Certificate of Incorporation. Holders of the shares of Common
Stock do not have cumulative voting rights. As a result, the holders of a
majority of the outstanding shares of Common Stock voting for the election of
directors can elect all the directors, and, in such event, the holders of the
remaining shares of Common Stock will not be able to elect any persons to the
Board of Directors.
Delaware Law and Certain Corporate Provisions. The Company is subject to
the provisions of Section 203 of the DGCL. In general, this statute prohibits a
publicly-held Delaware corporation from engaging, under certain circumstances,
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless either (i) prior to the date at which the
stockholder became an interested stockholder the Board of
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Directors approved either the business combination or the transaction in which
the person became an interested stockholder, (ii) the stockholder acquires more
than 85% of the outstanding voting stock of the corporation (excluding shares
held by directors who are officers or held in certain employee stock plans) upon
consummation of the transaction in which the stockholder became an interested
stockholder or (iii) the business combination is approved by the Board of
Directors and by two-thirds of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder) at a meeting of the
stockholders (and not by written consent) held on or subsequent to the date on
which the person became an "interested stockholder" of the business combination.
An "interested stockholder" is a person who owns (or is an affiliate or
associate of the corporation and at any time within the prior three years did
own) 15% or more of the corporation's voting stock, and the affiliates and
associates of such person. Section 203 defines a "business combination" to
include, without limitation, mergers, consolidations, stock sales and asset
based transactions and other transactions resulting in a financial benefit to
the interested stockholder.
The Company's Certificate of Incorporation and Bylaws contain a number of
provisions relating to corporate governance and to the rights of stockholders.
Certain of these provisions may be deemed to have a potential "anti-takeover"
effect in that such provisions may delay, defer or prevent a change of control
of the Company. These provisions include (i) the classification of the Board of
Directors into three classes, each class serving for staggered three-year terms;
(ii) the authority of the Board of Directors to determine the size of the Board
of Directors, subject to certain minimums and maximums; (iii) the authority of
certain members of the Board of Directors to fill vacancies on the Board of
Directors; (iv) a requirement that special meetings of stockholders may be
called only by the Board of Directors, the Chairman of the Board or holders of
at least one-tenth of all the shares entitled to vote at the meeting; (v) the
elimination of stockholder action by written consent; (vi) the authority of the
Board of Directors to issue series of Preferred Stock with such voting rights
and other powers as the Board of Directors may determine; (vii) the requirement
that the Article in the Certificate of Incorporation creating the staggered
board may only be amended by the vote of at least 66 2/3% of the voting
securities of the Company; and (viii) a requirement that certain business
combinations between the Company and a record or beneficial owner of more than
five percent of any class of an equity security of the Company must be approved
by the holders of a majority of the Company's securities, excluding those
securities held by such record or beneficial owner, voted at a meeting called
for the purpose of approving such business combination.
Indemnification and Limited Liability. The Company's Certificate of
Incorporation and Bylaws require the Company to indemnify the directors and
officers of the Company to the fullest extent permitted by law. In addition, as
permitted by the DGCL, the Company's Certificate of Incorporation and Bylaws
provide that no director of the Company will be personally liable to the Company
or its stockholders for monetary damages for such director's breach of duty as a
director. This limitation of liability does not relieve directors from liability
for (i) any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) any liability under
Section 174 of the DGCL for unlawful distributions or (iv) any transaction from
which the director derived an improper personal benefit. This provision of the
Certificate of Incorporation will limit the remedies available to a stockholder
who is dissatisfied with a decision of the Board of Directors protected by this
provision, and such stockholder's only remedy in that circumstance may be to
bring a suit to prevent the action of the Board of Directors. In many
situations, this remedy may not be effective, including instances when
stockholders are not aware of a transaction or an event prior to action of the
Board of Directors in respect of such transaction or event.
Subject to certain limitations, the Company's officers and directors are
insured against losses arising from claims made against them for wrongful acts
which they may become obligated to pay or for which the Company may be required
to indemnify them.
Registration Rights. The Company has entered into an agreement granting
registration rights (the "Registration Rights Agreement") to certain holders of
Common Stock. Pursuant to the Registration Rights Agreement, these holders may
exercise "piggyback" registration rights until December 31, 1998 with respect to
shares of Common Stock held by them. These registration rights are subject to
certain conditions and limitations, including the right of underwriters to
restrict the number of shares offered in a registration.
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Other Matters. The Common Stock is listed on Nasdaq National Market under
the symbol "AMMB." The Bank of New York is the transfer agent and registrar for
the Common Stock.
PREFERRED STOCK
The description of certain provisions of the Preferred Stock set forth
below and in any Prospectus Supplement does not purport to be complete and is
subject to and qualified in its entirety by reference to the Company's
Certificate of Incorporation, and the Certificate of Designation relating to
each series of Preferred Stock, which will be filed with the Secretary of State
of Delaware and the Commission in connection with the offering of such series of
Preferred Stock.
General. The Board of Directors may, without approval of the Company's
stockholders, establish series of Preferred Stock having such voting powers, and
such designations, preferences and relative, participating, optional and other
special rights, and qualifications, limitations or restrictions thereof, as the
Board of Directors may determine.
The Preferred Stock will have the dividend, liquidation and voting rights
set forth below unless otherwise provided in the Prospectus Supplement relating
to a particular series of Preferred Stock. Reference is made to the Prospectus
Supplement relating to the particular series of Preferred Stock offered thereby
for specific terms, including: (i) the designation and stated value per share of
such Preferred Stock and the number of shares offered; (ii) the amount of
liquidation preference per share; (iii) the price at which such Preferred Stock
will be issued; (iv) the dividend rate (or method of calculation), the dates on
which dividends will be payable, whether such dividends will be cumulative or
noncumulative and, if cumulative, the dates from which dividends will accrue;
(v) any redemption or sinking fund provisions; (vi) any terms by which such
series of Preferred Stock may be convertible into or exchanged for Common Stock
or Debt Securities; and (vii) any additional or other rights, preferences,
privileges, limitations and restrictions relating to such series of Preferred
Stock.
The Preferred Stock will be issued in one or more series. The holders of
Preferred Stock will have no preemptive rights. Preferred Stock will be fully
paid and nonassessable upon issuance against full payment of the purchase price
therefor. Unless otherwise specified in the Prospectus Supplement relating to a
particular series of Preferred Stock, each series of Preferred Stock will, with
respect to dividend rights and rights on liquidation, dissolution and winding up
of the Company, rank prior to the Common Stock (the "Junior Stock") and on a
parity with each other series of Preferred Stock (the "Parity Stock").
Dividend Rights. Holders of the Preferred Stock of each series will be
entitled to receive when, as and if declared by the Board of Directors of the
Company, out of funds legally available therefor, cash dividends at such rates
and on such dates as are set forth in the Prospectus Supplement relating to such
series of Preferred Stock. Such rate may be fixed or variable or both. Each such
dividend will be payable to the holders of record as they appear on the stock
books of the Company on such record dates as will be fixed by the Board of
Directors of the Company. Dividends on any series of the Preferred Stock may be
cumulative or noncumulative, as provided in the Prospectus Supplement relating
thereto. If the Board of Directors of the Company fails to declare a dividend
payable on a dividend payment date on any series of Preferred Stock for which
dividends are noncumulative, then the right to receive a dividend in respect of
the dividend period ending on such dividend payment date will be lost, and the
Company will have no obligation to pay the dividend accrued for that period,
whether or not dividends are declared for any future period. Dividends on shares
of each series of Preferred Stock for which dividends are cumulative will accrue
from the date set forth in the applicable Prospectus Supplement.
The Preferred Stock of each series will include customary provisions (i)
restricting the payment of dividends or the making of other distributions on, or
the redemption, purchase or other acquisition of, Junior Stock unless full
dividends, including in the case of cumulative Preferred Stock, accruals, if
any, in respect of prior dividend periods, on the shares of such series of
Preferred Stock have been paid and (ii) providing for the pro rata payment of
dividends on such series and other Parity Stock when dividends have not been
paid in full upon such series and other Parity Stock.
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Rights Upon Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of each
series of Preferred Stock will be entitled to receive out of assets of the
Company available for distribution to stockholders, before any distribution of
assets is made to holders of Junior Stock, liquidating distributions in the
amount set forth in the Prospectus Supplement relating to such series of
Preferred Stock plus an amount equal to accrued and unpaid dividends. If, upon
any voluntary or involuntary liquidation, dissolution or winding up of the
Company, the amounts payable with respect to the Preferred Stock of any series
and any Parity Stock are not paid in full, the holders of the Preferred Stock of
such series and of such Parity Stock will share ratably in any such distribution
of assets of the Company in proration to the full respective preferential
amounts (which may include accumulated dividends) to which they are entitled.
After payment of the full amount of the liquidating distribution to which they
are entitled, the holders of such series of Preferred Stock will have no right
or claim to any of the remaining assets of the Company. Neither the sale of all
or a portion of the Company's assets nor the merger or consolidation of the
Company into or with any other corporation shall be deemed to be a dissolution,
liquidation or winding up, voluntarily or involuntarily, of the Company.
Voting Rights. Except as indicated below or in the Prospectus Supplement
relating to a particular series of the Preferred Stock, or except as expressly
required by the DGCL, the holders of the Preferred Stock will not be entitled to
vote. In the event the Company issues shares of a series of the Preferred Stock,
unless otherwise indicated in the Prospectus Supplement relating to such series,
each share will be entitled to one vote on matters on which holders of such
series are entitled to vote. In the case of any series of Preferred Stock having
one vote per share on matters on which holders of such series are entitled to
vote, the voting power of such series, on matters on which holders of such
series and holders of any other series of Preferred Stock are entitled to vote
as a single class, will depend on the number of shares in such series, not the
aggregate stated value, liquidation preference or initial offering price of the
shares of such series of the Preferred Stock.
DEBT SECURITIES
The following description of the terms of the Debt Securities sets forth
certain general terms and provisions of the Debt Securities to which any
Prospectus Supplement may relate. Particular terms of the Debt Securities
offered by any Prospectus Supplement and the extent, if any, to which such
general and specific provisions may apply to the Debt Securities so offered will
be described in the Prospectus Supplement relating to such Debt Securities. The
Debt Securities may be issued either separately, or together with, or upon
conversion of or in exchange for, other Securities.
The Senior Debt Securities and the Subordinated Debt Securities will be
issued under the indentures (the "Senior Indenture" and the "Subordinated
Indenture," respectively) between the Company and the Trustee named in the
applicable Prospectus Supplement. The forms of Senior Indenture and Subordinated
Indenture (collectively, the "Indentures") have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. The following brief
summary of certain provisions of the Indentures does not purport to be complete
and is subject to, and is qualified in its entirety by reference to all of the
provisions of, the Indentures, and is further qualified by any description
contained in the applicable Prospectus Supplement or Prospectus Supplements.
Certain terms capitalized and not otherwise defined herein are defined in the
Indentures. Wherever particular sections or defined terms of the Indentures are
referred to, such sections or defined terms are incorporated herein by
reference.
General. The Debt Securities may be issued from time to time in one or more
series. The terms of each series of Debt Securities, including without
limitation any restrictive covenants with respect thereto, will be established
by or pursuant to a resolution of the Board of Directors of the Company and set
forth or determined in the manner provided in an Officers' Certificate or by a
supplemental indenture. The particular terms of the Debt Securities offered
pursuant to any Prospectus Supplement or Prospectus Supplements will be
described in such Prospectus Supplement or Prospectus Supplements.
The amount of Debt Securities offered by this Prospectus will be limited to
the amount of Securities set forth on the cover of this Prospectus that have not
been otherwise issued or reserved for issuance. The Indentures will not limit
the aggregate principal amount of Debt Securities that may be issued thereunder.
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The Senior Debt Securities will rank pari passu in right of payment with
all unsubordinated indebtedness of the Company, but, except to the extent such
Senior Debt Securities are secured by collateral, will be effectively
subordinated to the rights of holders of secured unsubordinated indebtedness of
the Company to the extent of the value of the collateral securing such
indebtedness. The Senior Debt Securities will rank senior to all unsecured
subordinated indebtedness of the Company. The Subordinated Debt Securities will
be unsecured and will be subordinated in right of payment to all existing and
future Senior Debt of the Company, including the Senior Debt Securities, as
described under "Subordination of Subordinated Debt Securities."
The applicable Prospectus Supplement will indicate the form, registered or
bearer, and denominations in which Debt Securities of any series may be issued.
Debt Securities may be issuable in the form of one or more Global Securities, as
described below under "Global Securities." The Debt Securities (other than those
issued in the form of a Global Security) are exchangeable or transferable
without charge therefor, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith
and require the holders to furnish appropriate endorsements and transfer
documents. (Indenture Section 305)
Debt Securities may be issued as original issue discount securities to be
sold at a substantial discount below their principal amount. Special federal
income tax and other considerations applicable thereto and special federal tax
and other considerations applicable to any Debt Securities which are denominated
in a currency other than U.S. dollars will be described in the Prospectus
Supplement or Prospectus Supplements relating thereto.
Principal of and any premium and interest on the Debt Securities will be
payable, and the transfer of the Debt Securities will be registrable at the
office or agency maintained for such purpose. Interest on any Debt Security that
is payable will be paid to the Person in whose name that Debt Security is
registered in the Security Register. In addition, payment of interest may be
made at the option of the Company by check mailed to the address of the Person
entitled thereto as it appears on the Security Register or by wire transfer to
an account maintained by the Person entitled to such interest. (Indenture
Sections 301 and 307)
The applicable Prospectus Supplement or Prospectus Supplements will
describe the terms of the Debt Securities offered thereby, including the
following: (i) the title of the offered Debt Securities and whether the offered
Debt Securities are Senior Debt Securities or Subordinated Debt Securities; (ii)
any limit on the aggregate principal amount of the offered Debt Securities;
(iii) the Person to whom any interest on the offered Debt Securities will be
payable, if other than the Person in whose name they are registered on the
regular record date for such interest; (iv) the date or dates, or the method by
which such date or dates are determined or extended, on which the principal or
installments of principal and premium, if any, of the offered Debt Securities is
or are payable; (v) the rate or rates (which may be fixed or variable) at which
the offered Debt Securities will bear interest, if any, or the method by which
such rate or rates shall be determined, the date from which any such interest
will accrue, the dates on which such interest on the offered Debt Securities
will be payable and the regular record dates therefor, the circumstances, if
any, in which the Company may defer interest payments and the basis for
calculating interest if other than a 360-day year of twelve 30-day months; (vi)
the place or places where the principal of and premium, if any, and interest on
the offered Debt Securities will be payable and the offered Debt Securities may
be surrendered for registration of transfer or exchange if other than those
provided for in the Senior Indenture or the Subordinated Indenture; (vii) if
applicable, the period or periods within which, the price or prices at which and
the terms and conditions upon which the offered Debt Securities may be redeemed,
in whole or in part, at the option of the Company; (viii) the obligation, if
any, of the Company to redeem or purchase Debt Securities of the series pursuant
to any sinking fund or analogous provisions or at the option of a holder thereof
and the period or periods within which, the price or prices at which and the
terms and conditions upon which Debt Securities of the series shall be redeemed
or purchased in whole or in part pursuant to such obligation; (ix) whether the
Debt Securities of the series will be convertible into shares of Common Stock
and/or exchangeable for other securities, and if so, the terms and conditions
upon which such Debt Securities will be so convertible or exchangeable and any
deletions from or modifications or additions to the applicable Indenture to
permit or to facilitate the issuance of such convertible or exchangeable Debt
Securities or the administration thereof; (x) the identity of each Security
Registrar and Paying Agent if other than or in addition to the Trustee; (xi) if
the amount of principal
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of or any premium or interest on the offered Debt Securities may be determined
by reference to an index or pursuant to a formula, the manner in which such
amounts shall be determined; (xii) the applicability of, and any addition to or
change in the covenants and definitions set forth in the applicable Indenture;
(xiii) the denominations in which any offered Debt Securities will be issuable,
if other than denominations of $1,000 or any amount in excess thereof which is
an integral multiple of $1,000; (xiv) if other than U.S. dollars the currency or
currencies for the payment of principal of and any premium and interest on the
offered Debt Securities and the manner of determining the U.S. dollar equivalent
of the principal amount thereof for purposes of the definition of "outstanding"
and, if the principal of or any premium or interest on the offered Debt
Securities is to be payable, at the election of the Company or the holder
thereof, in one or more currencies other than that or those in which the offered
Debt Securities are stated to be payable, the currency, currencies or currency
units in which payment of the principal of and any premium and interest on such
offered Debt Securities of such series as to which such election is made shall
be payable, and the periods within which and the terms and conditions upon which
such election is to be made; (xv) any other event or events of default
applicable with respect to the offered Debt Securities in addition to or in lieu
of those described below under "Events of Default" and any change in the right
of the Trustee or the holders to declare the principal of or any premium or
interest on the offered Debt Securities due and payable; (xvi) if less than the
principal amount thereof, the portion of the principal payable upon acceleration
of such Debt Securities following an Event of Default; (xvii) whether such Debt
Securities are to be issued in whole or in part in the form of one or more
Global Securities and, if so, the identity of the depositary for such Global
Security or Securities, and any circumstances under which any such Global
Security may be exchanged for Debt Securities registered in the name of, and any
transfer of such Global Security may be registered to, a Person other than such
depositary or its nominee, if other than those described in the applicable
Indenture (see "-- Global Securities"); (xviii) if applicable, that the offered
Debt Securities, in whole or in any specified part, are not defeasible; (xix)
the extent of any subordination to other indebtedness of the Company; and (xx)
any other terms of the offered Debt Securities not inconsistent with the
provisions of the applicable Indenture. (Indenture Section 301)
If the purchase price of any Debt Securities is payable in a currency other
than U.S. dollars or if principal of or premium, if any, or interest, if any, on
any of the Debt Securities is payable in any currency other than U.S. dollars,
the specific terms and other information with respect to such Debt Securities
and such foreign currency, including any material foreign currency risks, will
be specified in the Prospectus Supplement or Prospectus Supplements relating
thereto.
Under the Indentures, the terms of the Debt Securities of any series may
differ, and the Company, without the consent of the holders of the Debt
Securities of any series, may reopen a previous series of Debt Securities and
issue additional Debt Securities of such series or establish additional terms of
such series.
Redemption. Except as set forth in the Prospectus Supplement with respect
to any offered Debt Securities or series thereof, the Company is not required to
make mandatory redemption or sinking fund payments with respect to the Debt
Securities. The Prospectus Supplement relating to any offered Debt Securities or
series thereof will specify the provisions, if any, regarding sinking fund
provisions related to such Debt Securities or series thereof. The Indentures
provide that the Company may deliver outstanding Debt Securities of like tenor
of a series (other than any previously called for redemption) and may apply as a
credit Debt Securities of like tenor of a series which have been redeemed either
at the election of the Company pursuant to the terms of such Debt Securities or
through the application of permitted optional sinking fund payments pursuant to
the terms of such Debt Securities, in each case in satisfaction of all or any
part of any sinking fund payment with respect to the Debt Securities of like
tenor of such series required to be made pursuant to the terms of such
Securities as provided for by the terms of such series. (Indenture Sections 1202
and 1203)
The Indentures provide that, if less than all of the Debt Securities of any
series are to be redeemed at any time, selection of Debt Securities for
redemption will be made by the Trustee by such method as the Trustee shall deem
fair and appropriate, and portions of the Debt Securities selected for
redemption shall be in amounts equal to the minimum authorized denomination for
Debt Securities of like tenor of that series or any integral multiple thereof of
principal amount of Debt Securities of such series of a denomination larger than
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the minimum authorized denomination for Debt Securities of that series. Notices
of redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each Holder of Debt Securities to be
redeemed at its registered address. If any Debt Security is to be redeemed in
part only, the notice of redemption that relates to such Debt Security shall
state the portion of the principal amount thereof to be redeemed. A new Debt
Security in principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original Debt
Security. On and after the redemption date, interest ceases to accrue on Debt
Securities or portions of them called for redemption. (Indenture Sections 1103,
1104, 1106 and 1107)
Repurchase at the Option of Holders. Except as set forth in the Prospectus
Supplement with respect to any offered Debt Securities or any series thereof,
the Indentures do not contain provisions that permit the Holders of the Debt
Securities to require that the Company repurchase or redeem the Debt Securities
in the event of a sale of assets or a takeover, recapitalization or similar
restructuring, nor does the Indenture contain covenants specifically designed to
protect holders in the event of a highly leveraged transaction involving the
Company.
Covenants. The Indentures contain certain covenants relating to the Company
and its operations, including covenants requiring the Company to (i) punctually
pay interest and principal of Debt Securities, (ii) maintain of an office or
agency in each place of payment in respect of the Debt Securities, (iii) hold in
trust money for payment of interest or principal on Debt Securities, (iv)
preserve the corporate existence, rights and franchises of the Company and its
Material Subsidiaries (as defined in the Indentures), (v) generally maintain its
properties and trademarks and to comply with applicable statutes, laws,
ordinances and regulations, (vi) maintain adequate insurance, (vii) timely pay
or discharge material tax obligations and claims for labor, material and
supplies, which, if unpaid, might become a lien upon the property of the Company
or any Subsidiary, (viii) keep proper books of record and account and (ix)
provide to the Trustee quarterly statements of compliance with the Indentures
and notice of any event which after notice or lapse of time or both would become
an Event of Default or the occurrence of any Repurchase Event. Certain of these
covenants are subject to various exceptions and qualifications as set forth in
the Indentures.
Certain additional covenants in respect of the Company may be set forth in
the Prospectus Supplement accompanying this Prospectus.
Consolidation, Merger or Transfer. The Indentures provide that the Company
may not consolidate with, merge with, or transfer all or substantially all of
its assets to another entity where the Company is not the surviving corporation
unless (i) such other entity assumes the Company's obligations under the
applicable Indenture and (ii), after giving effect thereto, no event shall have
occurred and be continuing which, after notice or lapse of time, would become an
Event of Default. (Indenture Section 801)
Events of Default. The Indentures provide that each of the following
constitutes an Event of Default with respect to the Debt Securities of any
series issued pursuant to the Indentures: (i) failure to pay the principal on
the Debt Securities of that series when due; (ii) failure for 30 consecutive
days (for Debt Securities that pay interest less frequently than monthly) or 10
consecutive days (for Debt Securities that pay interest monthly) to pay when due
any interest on the Debt Securities of that series; (iii) failure to deposit any
sinking fund payment, when and as due, in respect of the Debt Securities of that
series; (iv) failure to perform, or a breach of, any covenant or warranty set
forth in the Indenture for 30 consecutive days after receipt of written notice
from the Trustee or Holders of at least 25% in principal amount of the
outstanding Debt Securities specifying the default and requiring the Company to
remedy such default; (v) an event of default as defined in any indenture or
instrument under which the Company or any Material Subsidiary shall have
Outstanding at least $1.0 million aggregate principal amount of indebtedness
shall have happened and resulted in acceleration of such indebtedness and such
default shall not have been cured or waived and such acceleration shall not have
been rescinded or annulled for a period of 30 consecutive days, (vi) certain
events of insolvency, receivership or reorganization of the Company or any
Material Subsidiary and (vii) entry of a final judgment, decree or order against
the Company or any Material Subsidiary for the payment of money in excess of
$5.0 million and such judgment, decree or order continues unsatisfied for 30
consecutive days without a stay of execution. (Indenture Section 501)
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If any Event of Default occurs and is continuing with respect to any series
of Debt Securities, the Trustee or the Holders of at least 25% in aggregate
principal amount of the then outstanding Debt Securities of such series may
declare the unpaid principal amount (or, if any of the Debt Securities of that
series are Original Issue Discount Debt Securities, such lesser portion of the
principal amount of such Debt Securities as may be specified in the terms
thereof), premium, if any, and any accrued and unpaid interest on all the Debt
Securities of such series to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company or any Material Subsidiary
of the Company, all principal, premium, if any and interest on outstanding Debt
Securities will become due and payable without further action or notice. Holders
of the Debt Securities may not enforce the respective Indentures or the Debt
Securities except as provided in the Indentures. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Debt
Securities of any series may direct the Trustee in its exercise of any trust or
power with respect to such series of Debt Securities. The Trustee may withhold
from Holders of the Debt Securities of any series notice of any continuing
Default or Event of Default (except a Default or Event of Default in payment on
any Debt Security of any series or in the payment of any sinking fund
installment with respect to such series) if it in good faith determines that
withholding notice is in their interest. (Indenture Sections 502, 507, 512 and
602)
The Holders of a majority in aggregate principal amount of the Debt
Securities of any series then outstanding by notice to the Trustee may on behalf
of the Holders of all of the Debt Securities of such series waive any existing
Default or Event of Default with respect to such series of Debt Securities and
its consequences under the applicable Indenture except a continuing Default or
Event of Default with respect to such series in the payment of interest on, or
the principal of, or premium, if any, on the Debt Securities of such series.
(Indenture Section 513)
The Holders of a majority in principal amount of the outstanding Debt
Securities of any series will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. (Indenture Section 512) The Indentures
provide that in case an Event of Default shall occur and be continuing, the
Trustee will be required, in the exercise of its power, to use the degree of
care of a prudent person in the conduct of such person's own affairs. Subject to
such provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture unless the Trustee receives reasonable
security or indemnity against any loss, liability or expense. (Indenture
Sections 601 and 603)
The Company is required to deliver to the Trustee quarterly a statement
regarding compliance with the Indentures, and the Company is required upon
becoming aware of any Default or Event of Default with respect to a series of
Debt Securities due to any event of default under any other indenture or
instrument to deliver to the Trustee a statement specifying such Default or
Event of Default and what action the Company is taking or proposes to take with
respect thereto. (Indenture Section 703)
Defeasance Provisions. The Company will be discharged from any and all
obligations in respect of the Debt Securities of any series (except for certain
obligations to register the transfer or exchange of Debt Securities, to replace
destroyed, stolen, lost or mutilated Debt Securities, to maintain paying
agencies and to hold moneys for payment in trust) on the 91st day after the date
of deposit with the Trustee, in trust, of money, U.S. Government Obligations
which through the payment of interest and principal thereof in accordance with
their terms will provide money, or a combination thereof, in an amount
sufficient to pay any installment of principal of (and premium, if any) and
interest on and any mandatory sinking fund payments in respect of the Debt
Securities of such series on the dates on which such payments are due and
payable in accordance with the terms of the applicable Indenture and such Debt
Securities. Any such discharge is also subject to certain other conditions,
including the limitation that such discharge may only occur if there has been a
change in applicable federal law, or the Company has delivered to the Trustee an
Opinion of Counsel to the effect that such a discharge will not cause the
holders of such series of Debt Securities to recognize income, gain or loss for
federal income tax purposes and that such holders will be subject to federal
income tax on the same amount and in the same manner and at the same times as
would have been the case had such deposit, defeasance and discharge not
occurred, and that such discharge will not cause any outstanding Debt Securities
then listed on any securities exchange to be de-listed as a result thereof.
(Indenture Section 403)
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The Company may omit to comply with certain restrictive covenants with
respect to the Debt Securities of any series. If the Company elects not to
comply with any term, provision or condition in any such covenant, the Company
must deposit with the Trustee money, U.S. Government Obligations which through
the payment of interest and principal thereof in accordance with their terms
will provide money, or a combination thereof, in an amount sufficient to pay any
installment of principal of (and premium, if any) and interest on and any
mandatory sinking fund payments in respect of the Debt Securities of such series
on the dates on which such payments are due and payable in accordance with the
terms of the applicable Indenture and such Debt Securities. Any such covenant
defeasance is also subject to certain other conditions, including the delivery
to the Trustee of an opinion of counsel to the effect that the deposit and
related covenant defeasance will not cause the holders of the Debt Securities to
recognize income, gain or loss for federal income tax purposes and that such
holders will be subject to federal income tax on the same amount and in the same
manner and at the same times as would have been the case had such deposit and
defeasance not occurred. (Indenture Section 1009)
In the event the Company omits compliance with certain covenants of the
Indenture and the Debt Securities issued pursuant thereto are declared due and
payable because of the occurrence of any event of default, although the amount
of money and U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Debt Securities at the time of their stated
maturity, it may not be sufficient to pay amounts due on the Debt Securities at
the time of the acceleration resulting from such event of default. In such
event, the Company shall remain liable for all such payments.
Subordination of Subordinated Debt Securities. The Subordinated Debt
Securities will be subordinate and subject in right of payment, to the extent
and in the manner set forth in the Subordinated Indenture, to the prior payment
in full of all Senior Debt. Upon any distribution to creditors in a liquidation,
dissolution, winding up, reorganization, assignment for the benefit of
creditors, marshaling of assets and liabilities or any bankruptcy, insolvency or
similar proceeding involving the Company, the holders of Senior Debt will be
entitled to receive payment in full in cash of all Obligations (as defined in
the Subordinated Indenture) due on or to become due on or in respect of all
Senior Debt, before the holders of Subordinated Debt Securities are entitled to
receive any payment or distribution of any kind, whether in cash, property or
securities, by set off or otherwise on account of the principal of (and premium,
if any) or interest on the Subordinated Debt Securities or on account of any
purchase, redemption or other acquisition of Subordinated Debt Securities by the
Company, any Subsidiary of the Company, the Trustee or any Paying Agent or on
account of any other obligation of the Company in respect of any Subordinated
Debt Securities (excluding (i) shares of stock or securities of the Company or
another corporation provided for by a plan of reorganization or readjustment
that are subordinated in right of payment to all then outstanding Senior Debt to
substantially the same extent as, or to a greater extent than, the Subordinated
Debt Securities are so subordinated and (ii) payments of assets from any
defeasance trust which have been on deposit for 90 consecutive days without the
occurrence of blockage of payment on any such series of Subordinated Debt
Securities as described below) ("Securities Payments"). Until the Senior Debt is
paid in full, any Securities Payment to which the holders of Subordinated Debt
Securities or the Trustee for their benefit would be entitled, will be paid or
delivered by the Company or any receiver, trustee in bankruptcy, liquidating
trustee, agent or other person making such payment or distribution, directly to
the holders of Senior Debt or their representative or representatives or the
trustee or trustees under any indenture pursuant to which any instruments
evidencing, any Senior Debt may have been issued. (Subordinated Indenture
Sections 1301 and 1302)
The Subordinated Indenture contains certain standstill provisions, which
provide that no payments of principal of, or interest on, the Subordinated Debt
Securities may be made and no Subordinated Debt Securities may be accelerated if
at the time thereof the Trustee has received a written notice (a "Default
Notice") from the holder or holders of not less than 51% in principal amount of
the outstanding Senior Debt or any agent therefor (a "Senior Agent") specifying
that an event of default (a "Senior Event of Default") under any Senior Debt has
occurred. Such standstill will remain in effect until the first to occur of the
following: (i) the Senior Event of Default is cured, (ii) the Senior Event of
Default is waived by the holders of such Senior Debt or the Senior Agent or
(iii) the expiration of 180 days after the date the Default Notice is received
by the Trustee if the maturity of such Senior Debt has not been accelerated at
such time. Any such
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standstill will not prevent the occurrence of an "Event of Default" under the
Subordinated Indenture or the automatic acceleration of any Subordinated Debt
Securities upon the occurrence of certain events of bankruptcy or insolvency
with respect to the Company or any Material Subsidiary.
In the event that the Trustee receives any Securities Payment prohibited by
the subordination provisions of the Subordinated Indenture, such payment will be
held by the Trustee in trust for the benefit of, and will immediately be paid
over upon written request to, the holders of Senior Debt or their representative
or representatives, or the trustee or trustees under any applicable indenture
for application to the payment of Senior Debt. (Subordinated Indenture Section
1304) Such subordination will not prevent the occurrence of any event of default
in respect of the Subordinated Debt Securities.
By reason of such subordination, in the event of the insolvency of the
Company, holders of Senior Debt may receive more, ratably, and holders of the
Subordinated Debt Securities having a claim pursuant to such securities may
receive less, ratably, than the other creditors of the Company. There may also
be interruption of scheduled interest and principal payments resulting from
events of default on Senior Debt.
Modification and Waiver. Modifications and amendments of the respective
Indentures may be made by the Company and the Trustee with the consent of the
holders of not less than a majority in aggregate principal amount of the
outstanding Debt Securities of all series affected by such modification or
amendment (voting as one class); provided, however, that no such modification or
amendment may, without the consent of the holder of each outstanding Debt
Security affected thereby, (i) change the stated maturity of the principal of,
or any installment of principal of or interest on, any Debt Security, reduce the
principal amount of, or premium or interest on, any Debt Security, reduce the
amount of principal of an Original Issue Discount Debt Security due and payable
upon acceleration of the maturity thereof, change the place of payment where or
coin or currency in which the principal of, or any premium or interest on, any
Debt Security is payable, or impair the right to institute suit for the
enforcement of any payment on or after the stated maturity of any Debt Security,
(ii) reduce the percentage in principal amount of outstanding Debt Securities of
any series, the consent of the holders of which is required for modification or
amendment of the Senior Indenture or for waiver of compliance with certain
provisions of the Senior Indenture or for waiver of certain defaults or (iii)
modify any of the various sections relating to above-described provisions.
(Indenture Section 902)
The holders of not less than a majority in aggregate principal amount of
the outstanding Debt Securities of each series may, on behalf of the holders of
all Debt Securities of that series, waive, insofar as that series is concerned,
compliance by the Company with certain restrictive provisions of the Indenture.
(Indenture Section 1011) The holders of not less than a majority in aggregate
principal amount of the Outstanding Debt Securities of each series may, on
behalf of the holders of all Debt Securities of that series, waive any past
default under the Indenture with respect to Debt Securities of that series,
except a default (i) in the payment of principal of, or any premium or interest
on, any Debt Security of such series when due (other than amounts due and
payable solely upon acceleration), or (ii) in respect of a covenant or provision
of the Indenture which cannot be modified or amended without the consent of the
holder of each outstanding Debt Security of such series affected. (Indenture
Section 513) The definition of "Senior Debt" in the Subordinated Indenture may
not be amended or modified in a manner adverse to the holders of then
outstanding Senior Debt without the consent of the holders of all Senior Debt
affected thereby. (Subordinated Indenture Section 908)
The Indentures provide that, in determining whether the holders of the
requisite principal amount of the outstanding Debt Securities have given any
request, demand, authorization, direction, notice, consent or waiver thereunder
or whether a quorum is present at a meeting of holders of Debt Securities, (i)
the principal amount of an Original Issue Discount Debt Security that will be
deemed to be outstanding will be the amount of the principal thereof that would
be due and payable as of the date of such determination upon acceleration of the
maturity thereof to such date and (ii) the principal amount of a Debt Security
denominated in a foreign currency or currency unit that will be deemed to be
outstanding will be the United States dollar equivalent, determined as of the
date of original issuance of such Debt Security, of the principal amount of such
Debt Security (or, in the case of an Original Issue Discount Debt Security, the
United States dollar equivalent, determined as of the date of original issuance
of such Debt Security, of the amount determined as provided in (i) above).
(Indenture Section 101)
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Global Securities. The following description will apply to any series of
Debt Securities issued, in whole or in part, in the form of a Global Security or
Global Securities deposited with, or on behalf of, The Depository Trust Company
("DTC") (each such Debt Security represented by a Global Security, being herein
referred to as a "Book-Entry Security").
Upon initial issuance, all Book-Entry Securities of the same series and
bearing interest, if any, at the same rate or pursuant to the same formula and
having the same date of issuance, redemption provisions, if any, repayment
provisions, if any, stated maturity and other terms will be represented by a
single Global Security. Each Global Security representing Book-Entry Securities
will be deposited with, or on behalf of, DTC and will be registered in the name
of DTC or a nominee of DTC. Unless otherwise specified in the applicable
Prospectus Supplement, all Book-Entry Securities will be denominated in U.S.
dollars.
Upon the issuance of a Global Security, DTC will credit accounts held with
it with the respective principal or face amounts of the Book-Entry Securities
represented by such Global Security. The accounts to be credited shall be
designated initially by the Agent through which the Debt Security was sold or,
to the extent that such Debt Securities are offered and sold directly, by the
Company. Ownership of beneficial interests in a Global Security will be limited
to institutions that have accounts with DTC ("participants") and to persons that
may hold interests through such participants. Ownership of beneficial interests
by participants in a Global Security will be shown on, and the transfer of that
ownership interest will be effected only through, records maintained by DTC for
such Global Security. Ownership of beneficial interests in such Global Security
by persons that hold through participants will be shown on, and the transfer of
that ownership interest within such participant will be effected only through,
records maintained by such participant.
Payment of principal of, premium, if any, and interest, if any, on
Book-Entry Securities represented by any such Global Security will be made to
DTC or its nominee, as the case may be, as the sole registered holder of the
Book-Entry Securities represented thereby for all purposes under the Indentures.
None of the Company, the Trustee, the Paying Agent or any agent of the Company
or the Trustee will have a responsibility or liability for any aspect of DTC's
records relating to or payments made on account of beneficial ownership
interests in a Global Security representing any Book-Entry Securities or any
other aspect of the relationship between DTC and its participants or the
relationship between such participants and the owners of beneficial interests in
a Global Security owning through such participants or for maintaining,
supervising or reviewing any of DTC's records relating to such beneficial
ownership interests.
The Company has been advised by DTC that upon receipt of any payment of
principal of, premium, if any, or interest, if any, on any such Global Security,
DTC will immediately credit, on its book-entry registration and transfer system,
the accounts of participants with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Security
as shown on the records of DTC. Payments by participants to owners of beneficial
interests in a Global Security held through such participants will be governed
by standing instructions and customary practices, as is now the case with
securities held by such participants for customer accounts registered in "street
name," and will be the sole responsibility of such participants.
No Global Security may be transferred except as a whole by a nominee of DTC
to DTC or to another nominee of DTC, or by DTC or any such nominee to a
successor of DTC or a nominee of such successor.
A Global Security representing Book-Entry Securities is exchangeable for
certificated Debt Securities of the same series and bearing interest, if any, at
the same rate or pursuant to the same formula, having the same date of issuance,
redemption provisions, if any, repayment provisions, if any, stated maturity and
other terms and of differing authorized denominations aggregating a like amount,
if any, if (i) DTC notifies the Company that it is unwilling or unable to
continue as depositary for such Global Security or if at any time DTC ceases to
be a clearing agent registered under the Exchange Act, (ii) the Company, in its
sole discretion, determines that such Global Security shall be exchangeable for
certificated Debt Securities or (iii) there shall have occurred and be
continuing an Event of Default with respect to the Book-Entry Securities. Such
certificated Debt Securities shall be registered in the names of the owners of
the beneficial interests in such Global Security as provided by DTC's relevant
participants (as identified by DTC).
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Owners of beneficial interests in a Global Security will not be considered
the registered holders thereof for any purpose under the applicable Indenture
and no Global Security representing Book-Entry Securities shall be exchangeable
or transferrable. Accordingly, each person owning a beneficial interest in such
a Global Security must rely on the procedures of DTC and, if such person is not
a participant, on the procedures of the participant through which such person
owns its interest, to exercise any rights of a registered holder under the
applicable Indenture. The laws of some jurisdictions require that certain
purchasers of securities take physical delivery of such securities in
certificated form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Security.
DTC, as the registered holder of each Global Security, may appoint agents
and otherwise authorize participants to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action which a
registered holder is entitled to give or take under the applicable Indenture.
The Company understands that under existing industry practices, in the event
that the Company requests any action of registered holders or that an owner of a
beneficial interest in such a Global Security desires to give or take any action
which a registered holder is entitled to give or take under such Indenture. DTC
would authorize the participants holding the relevant beneficial interests to
give or take such action, and such participants would authorize beneficial
owners owning through such participants to give or take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code and a "clearing agency" registered under the Exchange
Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers, banks (which may include the Trustee), trust companies, clearing
corporations, and certain other organizations some of whom (and/or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly.
Certain Definitions. Set forth below are certain defined terms used in the
Indentures. Reference is made to the Indentures for a full disclosure of all
such terms, as well as any other capitalized terms used herein for which no
definition is provided. (Indenture Section 101)
"Funded Debt" means any of the following obligations of the Company or any
Subsidiary which by its terms matures at or is extendable or renewable at the
sole option of the obligor without requiring the consent of the obligee to a
date more than 360 days after the date of the creation or incurrence of such
obligation: (i) any obligations, contingent or otherwise, for borrowed money or
for the deferred purchase price of property, assets, securities or services
(including, without limitation, any interest accruing subsequent to an event of
default), (ii) all obligations (including the Debt Securities) evidenced by
bonds, notes, debentures or other similar instruments, (iii) all indebtedness
created or arising under any conditional sale or other title retention agreement
with respect to property acquired (even though the rights and remedies of the
seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), except any such obligation that
constitutes a trade payable and an accrued liability arising in the ordinary
course of business, if and to the extent any of the foregoing indebtedness would
appear as a liability upon a balance sheet prepared in accordance with generally
accepted accounting principles, (iv) all Capital Lease Obligations, (v)
liabilities of the Company actually due and payable under banker's acceptances
or letters of credit, (vi) all indebtedness of the type referred to in clause
(i), (ii), (iii), (iv) or (v) above secured by (or for which the holder of such
indebtedness has an existing right, content or otherwise, to be secured by) any
lien upon or security interest in property of the Company or any Subsidiary
(including, without limitation, accounts and contract rights), even though the
Company or any Subsidiary has not assumed or become liable for the payment of
such indebtedness and (vii) any guarantee or endorsement (other than for
collection or deposit in the ordinary course of business) or discount with
recourse of, or other agreement, contingent or otherwise, to purchase,
repurchase, or otherwise acquire, to supply, or advance funds or become liable
with
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respect to, any indebtedness or any obligation of the type referred to in any of
the foregoing clauses (i) through (vi), regardless of whether such obligation
would appear on a balance sheet.
"Material Subsidiary" means Holliday Fenoglio, Inc., AMRESCO Management,
Inc., AMRESCO Residential Mortgage Corporation, AMRESCO Advisors, Inc., AMRESCO
Residential Credit Corporation, AMRESCO Capital Corporation, AMRESCO New
England, Inc., Oak Cliff Financial, Inc. and any other Subsidiary whose assets
or revenues comprise at least five percent (5%) of the assets or revenues of the
Company and the Subsidiaries on a consolidated basis as of the end of, or for
the, Company's most recently completed fiscal quarter, as determined from time
to time.
"Original Issue Discount Security" means any Debt Security which provides
for an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration of the maturity thereof pursuant to the terms of
the applicable Indenture.
"Senior Debt" means any Funded Debt whether outstanding on the date of
execution of the Indenture or thereafter created or incurred, unless it is
provided in the appropriate instrument that such Funded Debt is subordinated to
any other Funded Debt.
"Subordinated Debt" means all Funded Debt except Senior Debt.
"Subsidiary," means, with respect to any Person, (i) any Corporation of
which at the time of determination more than 50% of the shares of Voting Stock
is at the time owned or controlled, directly or indirectly, by such Person or
one or more of the other Subsidiaries of that Person (or a combination thereof)
and (ii) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or (b) the only
general partners of which are such Person or one or more Subsidiaries of such
Person (or any combination thereof).
"U.S. Government Obligations" means direct obligations of the United States
of America, or any Person controlled or supervised by and acting as an agency or
instrumentality of such government, in each case where the payment or payments
thereunder are unconditionally guaranteed as a full faith and credit obligation
by such government and which are not callable or redeemable at the option of the
issuer or issuers thereof, and shall also include a depository receipt issued by
a bank or trust company as custodian with respect to any such U.S. Government
Obligation or a specific payment of interest on or principal of or other amount
with respect to any such U.S. Government Obligation held by such custodian for
the account of the holder of a depository receipt, provided that (except as
required by law) such custodian is not authorized to make any deduction from the
amount payable to the holder of such depository receipt from any amount received
by the custodian in respect of the U.S. Government Obligation or the specific
payment of interest on or principal of or other amount with respect to the U.S.
Government Obligation evidenced by such depository receipt.
SECURITIES WARRANTS
The Company may issue Securities Warrants for the purchase of Debt
Securities, Preferred Stock or Common Stock. Securities Warrants may be issued
independently or together with other Securities offered by any Prospectus
Supplement and may be attached to or separate from such other Securities. Each
series of Securities Warrants will be issued under a separate warrant agreement
(a "Securities Warrant Agreement") to be entered into between the Company and a
bank or trust company as Securities Warrant Agent, all as set forth in the
Prospectus Supplement relating to the particular issue of offered Securities
Warrants. The Securities Warrant Agent will act solely as an agent of the
Company in connection with the Securities Warrant Certificates and will not
assume any obligation or relationship of agency or trust for or with any holders
of Securities Warrant Certificates or beneficial owners of Securities Warrants.
Copies of the forms of Securities Warrant Agreements, including the forms of
Securities Warrant Certificates representing the Securities Warrants, will be
filed or incorporated by reference as exhibits to the Registration Statement to
which this Prospectus pertains. The following summaries of certain provisions of
the forms of Securities Warrant Agreements and Securities Warrant Certificates
do not purport to be complete and are subject to and are qualified in their
entirety by reference to all the provisions of the Securities Warrant Agreements
and the Securities Warrant Certificates.
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General. If Securities Warrants are offered, the applicable Prospectus
Supplement will describe the terms of such Securities Warrants, including, in
the case of Securities Warrants for the purchase of Debt Securities, the
following where applicable: (i) the offering price; (ii) the currencies in which
such Securities Warrants are being offered; (iii) the designation, aggregate
principal amount, currencies, denominations and terms of the series of Debt
Securities purchasable upon exercise of such Securities Warrants: (iv) the
designation and terms of any series of Securities with which such Securities
Warrants are being offered and the number of such Securities Warrants being
offered with each such Security; (v) the date on and after which such Securities
Warrants and the related series of Securities will be transferable separately;
(vi) the principal amount of the series of Debt Securities purchasable upon
exercise of each such Securities Warrant and the price at which and currencies
in which such principal amount of Debt Securities of such series may be
purchased upon such exercise; (vii) the date on which the right to exercise such
Securities Warrants shall commence and the date (the "Expiration Date") on which
such right shall expire; (viii) whether the Securities Warrants will be issued
in registered or bearer form; (ix) a discussion of any material United States
federal income tax consequences; and (x) any other terms of such Securities
Warrants.
In the case of Securities Warrants for the purchase of Preferred Stock or
Common Stock, the applicable Prospectus Supplement will describe the terms of
such Securities Warrants, including the following where applicable: (i) the
offering price; (ii) the aggregate number of shares purchasable upon exercise of
such Securities Warrants and, in the case of Securities Warrants for Preferred
Stock, the designation, aggregate number and terms of the series of Preferred
Stock purchasable upon exercise of such Securities Warrants; (iii) the
designation and terms of the series of Securities with which such Securities
Warrants are being offered and the number of such Securities Warrants being
offered with each such Security; (iv) the date on and after which such
Securities Warrants and the related series of Securities will be transferable
separately; (v) the shares of Preferred Stock or Common Stock purchasable upon
exercise of each such Securities Warrant and the price at which such shares of
Preferred Stock or Common Stock may be purchased upon each exercise; (vi) the
date on which the right to exercise such Securities Warrants shall commence and
the expiration date thereof; (vii) a discussion of any material United States
federal income tax consequences; and (viii) any other terms of such Securities
Warrants. Securities Warrants for the purchase of Preferred Stock or Common
Stock will be offered and exercisable for U.S. dollars only and will be in
registered form only.
Securities Warrant Certificates may be exchanged for new Securities Warrant
Certificates of different denominations, may (if in registered form) be
presented for registration of transfer and may be exercised at the corporate
trust office of the Securities Warrant Agent or any other office indicated in
the applicable Prospectus Supplement. Prior to the exercise of any Securities
Warrant to purchase Debt Securities, holders of such Securities Warrants will
not have any of the rights of holders of the Debt Securities purchasable upon
such exercise, including the right to receive payments of principal of, premium,
if any, or interest, if any, on the Debt Securities purchasable upon such
exercise or to enforce covenants in the applicable Indenture. Prior to the
exercise of any Securities Warrants to purchase Preferred Stock or Common Stock,
holders of such Securities Warrants will not have any rights of holders of the
Preferred Stock or Common Stock purchasable upon such exercise, including the
right to receive payment of dividends, if any, on the Preferred Stock or Common
Stock purchasable upon such exercise or to exercise any applicable right to
vote.
Exercise of Securities Warrants. Each Securities Warrant will entitle the
holder thereof to purchase such principal amount of Debt Securities or shares of
Preferred Stock or Common Stock, as the case may be, at such exercise price as
shall in each case be set forth in, or calculable from, the Prospectus
Supplement relating to the offered Securities Warrants. After the close of
business on the Expiration Date (or such later date to which such Expiration
Date may be extended by the Company), unexercised Securities Warrants will
become void.
Securities Warrants may be exercised by delivering to the Securities
Warrant Agent payment as provided in the applicable Prospectus Supplement of the
amount required to purchase the Debt Securities, Preferred Stock or Common
Stock, as the case may be, purchasable upon such exercise together with certain
information set forth on the reverse side of the Securities Warrant Certificate.
Securities Warrants will be deemed to have been exercised upon receipt of
payment of the exercise price, subject to the receipt of the Securities Warrant
Certificate evidencing such Securities Warrants. Upon receipt of such payment
and the
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Securities Warrant Certificate properly completed and duly executed at the
corporate trust office of the Securities Warrant Agent or any other office
indicated in the applicable Prospectus Supplement, the Company will, as soon as
practicable, issue and deliver the Debt Securities, Preferred Stock or Common
Stock, as the case may be, purchasable upon exercise. If fewer than all of the
Securities Warrants represented by such Securities Warrant Certificate are
exercised. a new Securities Warrant Certificate will be issued for the remaining
amount of Securities Warrants.
Amendments and Supplements to Securities Warrant Agreement. The Securities
Warrant Agreements may be amended or supplemented without the consent of the
holders of the Securities Warrants issued thereunder to effect changes that are
not inconsistent with the provisions of the Securities Warrants and that do not
adversely affect the interests of the holders of the Securities Warrants.
Common Stock Warrant Adjustments. The exercise price of, and the number of
shares of Common Stock covered by, a Common Stock Warrant are subject to
adjustment in certain events, including (i) the issuance of capital stock as a
dividend or distribution on the Common Stock; (ii) subdivisions and combinations
of the Common Stock; (iii) the issuance to all holders of Common Stock of
certain rights or warrants entitling them to subscribe for or purchase Common
Stock within 45 days after the date fixed for the determination of the
stockholders entitled to receive such rights or warrants, at less than the
current market price (as defined in the Warrant Agreement for such series of
Common Stock Warrants) and (iv) the distribution to all holders of Common Stock
of evidences of indebtedness or assets of the Company (excluding certain cash
dividends and distributions described below) or rights or warrants (excluding
those referred to above). In the event that the Company shall distribute any
rights or warrants to acquire capital stock pursuant to clause (iv) above (the
"Capital Stock Rights") pursuant to which separate certificates representing
such Capital Stock Rights will be distributed subsequent to the initial
distribution of such Capital Stock Rights (whether or not such distribution
shall have occurred prior to the date of the issuance of a series of Common
Stock Warrants), such subsequent distribution shall be deemed to be the
distribution of such Capital Stock Rights; provided that the Company may, in
lieu of making any adjustment in the exercise price of and the number of shares
of Common Stock covered by a Common Stock Warrant upon a distribution of
separate certificates representing such Capital Stock Rights. make proper
provision so that each holder of such a Common Stock Warrant who exercises such
Common Stock Warrant (or any portion thereof) (a) before the record date for
such distribution of separate certificates shall be entitled to receive upon
such exercise shares of Common Stock issued with Capital Stock Rights and (b)
after such record date and prior to the expiration, redemption or termination of
such Capital Stock Rights shall be entitled to receive upon such exercise, in
addition to the shares of Common Stock issuable upon such exercise, the same
number of such Capital Stock Rights as would a holder of the number of shares of
Common Stock that such Common Stock Warrant so exercised would have entitled the
holder thereof to acquire in accordance with the terms and provisions applicable
to the Capital Stock Rights if such Common Stock Warrant was exercised
immediately prior to the record date for such distribution. Common Stock owned
by or held for the account of the Company or any majority owned Subsidiary shall
not be deemed outstanding for the purpose of any adjustment.
No adjustment in the exercise price of and the number of shares of Common
Stock covered by a Common Stock Warrant will be made for regular quarterly or
other periodic or recurring cash dividends or distributions or for cash
dividends or distributions to the extent paid from retained earnings. No
adjustment will be required unless such adjustment would require a change of at
least 1% in the exercise price then in effect; provided that any such adjustment
not so made will be carried forward and taken into account in any subsequent
adjustment; and provided further that any such adjustment not so made shall be
made no later than three years after the occurrence of the event requiring such
adjustment to be made or carried forward. Except as stated above, the exercise
price of and the number of shares of Common Stock covered by a Common Stock
Warrant will not be adjusted for the issuance of Common Stock or any securities
convertible into or exchangeable for Common Stock, or securities carrying the
right to purchase any of the foregoing.
In the case of (i) a reclassification of or change to the Common Stock,
other than changes in par value, (ii) a consolidation or merger involving the
Company, other than where the Company is the continuing corporation and
reclassification or change, as described in (i) above, is involved or (iii) a
sale or conveyance to another corporation of the property and assets of the
Company as an entirety or substantially as an entirety,
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<PAGE> 95
the holders of the Common Stock Warrants then outstanding will be entitled
thereafter to convert such Common Stock Warrants into the kind and amount of
shares of stock and other securities or property which they would have received
upon such reclassification, change, consolidation, merger, sale or conveyance
had such Common Stock Warrants been exercised immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance.
PLAN OF DISTRIBUTION
The Company may offer and sell the Offered Securities in one or more of the
following ways: (i) through underwriters or dealers, (ii) through agents or
(iii) directly to one or more purchasers. The Prospectus Supplement with respect
to a particular offering of a series of Offered Securities will set forth the
terms of the offering of such Offered Securities, including the name or names of
any underwriters or agents with whom the Company has entered into arrangements
with respect to the sale of such Offered Securities, the public offering or
purchase price of such Offered Securities and the proceeds to the Company from
such sales and any underwriting discounts, agency fees or commissions and other
items constituting underwriters' compensation, the initial public offering
price, any discounts or concessions to be allowed or re-allowed or paid to
dealers and any securities exchange, if any, on which such Offered Securities
may be listed. Dealer trading may take place in certain of the Offered
Securities, including Offered Securities not listed on any securities exchange.
If underwriters are involved in the offer and sale of Offered Securities,
the Offered Securities will be acquired by the underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. The Offered Securities may be
offered to the public either through underwriting syndicates represented by
managing underwriters, or by underwriters without a syndicate, all of which
underwriters in either case will be designated in the applicable Prospectus
Supplement. Unless otherwise set forth in the applicable Prospectus Supplement,
under the terms of the underwriting agreement, the obligations of the
underwriters to purchase Offered Securities will be subject to certain
conditions precedent and the underwriters will be obligated to purchase all of
the Offered Securities if any are purchased. Any initial public offering price
and any discounts or concessions or re-allowed or paid to dealers may be changed
from time to time.
Offered Securities may be offered and sold directly by the Company or
through agents designated by the Company from time to time. Any agent involved
in the offer or sale of the Offered Securities with respect to which this
Prospectus is delivered will be named in, and any commissions payable by the
Company to such agent will be set forth in or calculable from, the applicable
Prospectus Supplement. Unless otherwise indicated in the Prospectus Supplement,
any such agent will be acting on a best efforts basis for the period of its
appointment.
If so indicated in the applicable Prospectus Supplement, the Company may
authorize underwriters, dealers or agents to solicit offers by certain
institutions to purchase the Offered Securities from the Company at the public
offering price set forth in such Prospectus Supplement pursuant to delayed
delivery contracts ("Delayed Delivery Contracts") providing for payment and
delivery on the date or dates stated in the Prospectus Supplement. Each Delayed
Delivery Contract will be for an amount of the Offered Securities not less than
and, unless the Company otherwise agrees, the aggregate amount of the Offered
Securities sold pursuant to Delayed Delivery Contracts shall be not more than
the respective minimum and maximum amounts stated in the Prospectus Supplement.
Institutions with which Delayed Delivery Contracts, when authorized, may be made
include commercial and savings banks, insurance companies, pension funds,
investment companies and educational and charitable institutions, but shall in
all cases be subject to the approval of the Company in its sole discretion. The
obligations of the purchaser under any Delayed Delivery Contract to pay for and
take delivery of the Offered Securities will not be subject to any conditions
except that (i) the purchase of the Offered Securities by such institution shall
not at the time of delivery be prohibited under the laws of the jurisdiction to
which such institution is subject and (ii) any related sale of the Offered
Securities to underwriters shall have occurred. A commission set forth in the
Prospectus Supplement will be paid to underwriters soliciting purchases of the
Offered Securities pursuant to Delayed Delivery Contracts
28
<PAGE> 96
accepted by the Company. The underwriters will not have any responsibility in
respect of the validity or performance of Delayed Delivery Contracts.
The Debt Securities, the Preferred Stock and the Securities Warrants will
be new issues of securities with no established trading market. Any underwriters
to whom Offered Securities are sold by the Company for public offering and sale
may make a market in such Offered Securities, but such underwriters will not be
obligated to do so and may discontinue any market making at any time without
notice. No assurance can be given as to the liquidity of the trading market for
any Offered Securities.
Any underwriter, dealer or agent participating in the distribution of the
Offered Securities may be deemed to be an underwriter, as that term is defined
in the Securities Act, of the Offered Securities so offered and sold and any
discounts or commissions received by it from the Company and any profit realized
by it on the sale or resale of the Offered Securities may be deemed to be
underwriting discounts and commissions under the Securities Act.
Under agreements entered into with the Company, underwriters, dealers and
agents may be entitled to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments which the underwriters or agents may be required to
make in respect thereof.
Underwriters, dealers and agents also may be customers of, engage in
transactions with, or perform other services for the Company in the ordinary
course of business.
LEGAL MATTERS
The validity of the shares of Common Stock, the Preferred Stock, the Debt
Securities and Securities Warrants offered hereby will be passed upon for the
Company by L. Keith Blackwell, General Counsel of the Company. Mr. Blackwell
currently owns beneficially 2,777 shares of Common Stock (excluding 7,108
unvested shares allocated under the Company's restricted stock plan) and holds
options to purchase 37,510 shares of Common Stock. Certain legal matters will be
passed upon for the Company by Haynes and Boone, LLP, Dallas, Texas.
EXPERTS
The consolidated financial statements incorporated in this prospectus by
reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report which is incorporated herein by reference
and has been so incorporated in reliance upon their authority as experts in
accounting and auditing.
The consolidated balance sheets of Quality as of September 30, 1994 and
1995, and the consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1995,
incorporated by reference in this Prospectus, have been incorporated by
reference herein in reliance of the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
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<PAGE> 97
GLOSSARY
The following are certain defined terms which may be used in this
Prospectus and any accompanying Prospectus Supplement:
"ACACIA" means Acacia Realty Advisors, Inc.
"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, nonperforming or
underperforming commercial, industrial, agricultural and/or real estate loans.
"B&C LOAN" means a residential mortgage loan to borrowers who do not
qualify for conventional loans or whose borrowing needs are not met by
traditional residential mortgage lenders. Such borrowers may not satisfy the
more rigid underwriting standards of the traditional residential mortgage
lending market for a number of reasons, such as blemished credit histories (from
past loan delinquencies or bankruptcy), inability to provide income verification
data or lack of established credit history.
"BEI" means BEI Holdings, Ltd.
"BEI MERGER" means the merger of Holdings with and into a subsidiary of BEI
on December 31, 1993.
"COMPANY" means, unless otherwise stated in this Prospectus or unless the
context otherwise requires, the Company and each of its subsidiaries.
"CONDUIT PURCHASERS" means investment bankers and other financial
intermediaries who purchase or otherwise accumulate pools or portfolios of loans
having common features (e.g., real estate mortgages, etc.), with the intent of
securitizing such loan assets and selling them to a trust that obtains its funds
by selling undivided interests in the revenue streams generated by the loans to
public or private investors.
"CONVERTIBLE SUBORDINATED DEBENTURES" means the Company's 8% Convertible
Subordinated Debentures due 2005.
"CONVERTIBLE SUBORDINATED DEBENTURE INDENTURE" means that certain Indenture
dated November 27, 1995, as amended, governing the Convertible Subordinated
Debentures.
"CREDIT AGREEMENTS" means the Revolving Loan Agreement and the Warehouse
Agreements.
"CREDIT ENHANCEMENT" means the method by which a seller of asset-backed
securities achieves a higher credit rating with respect to such securities than
the credit rating of the assets collateralizing such securities. Credit
enhancement is often achieved through the use of financial guaranty insurance
policies.
"DUS" means the Delegated Underwriting and Servicing program established by
Fannie Mae that permits a DUS approved lender to commit and close loans for
multifamily mortgages for resale to Fannie Mae without Fannie Mae's prior
approval of such loans.
"EQS" means, collectively, EQ Services, Inc. and Equitable Real Estate
Investment Management, Inc.
"FACE VALUE" means, with respect to any loan or Asset Portfolio, the
aggregate unpaid principal balance of a loan or loans.
"FANNIE MAE" means the Federal National Mortgage Association.
"FDIC" means the Federal Deposit Insurance Corporation.
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<PAGE> 98
"FREDDIE MAC" means the Federal Home Loan Mortgage Corporation.
"FULL SERVICER" means an entity which serves as Primary Servicer, Master
Servicer and Special Servicer on an Asset Portfolio.
"HOLDINGS" means AMRESCO Holdings, Inc.
"HOLLIDAY FENOGLIO" means Holliday Fenoglio, Inc., a subsidiary of the
Company.
"MASTER SERVICER" means an entity which provides administrative services
with respect to securitized pools of mortgage-backed securities.
"NATIONSBANK CONTRACT" means the asset management contract, as amended,
originally dated July 1, 1992, among the Company, NationsBank Corporation and
certain of its bank subsidiaries.
"NATIONSBANK OF TEXAS" means NationsBank of Texas, N.A.
"PRIMARY SERVICER" means an entity which provides various administrative
services with respect to loans such as collecting monthly mortgage payments,
maintaining escrow accounts for the payment of ad valorem taxes and insurance
premiums on behalf of borrowers, remitting payments of principal and interest
promptly to investors in mortgages or the Master Servicer of a pool and
reporting to those investors or the Master Servicer on financial transactions
related to such mortgages.
"QUALITY" means Quality Mortgage USA, Inc., a California corporation.
"QUALITY ACQUISITION" means the Company's purchase of substantially all the
operating assets, and the assumption of certain liabilities, of Quality Mortgage
USA, Inc.
"QUALITY PURCHASE AGREEMENT" means that certain agreement dated October 9,
1996 by and among ARMC and Quality, Calmac Funding, Russell and Rebecca Jedinak,
DLJ Mortgage Capital, Inc., and DLJ Quality Partners, L.P.
"REVOLVING LOAN AGREEMENT" means the Second Amended and Restated 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.
"SENIOR NOTES" means the Company's Senior Notes, Series 1996-A due 1999.
"SENIOR NOTE INDENTURE" means the Indenture dated as of July 1, 1996 and
the Officers' Certificate and Company Order dated as of July 19, 1996, governing
the Senior Notes.
"SENIOR SUBORDINATED NOTES" means the Company's 10% Senior Subordinated
Notes due 2003.
"SENIOR SUBORDINATED NOTE INDENTURE" means the Indenture dated February 2,
1996, governing the Senior Subordinated Notes.
"SPECIAL SERVICER" means an entity which provides asset management and
resolution services with respect to nonperforming or underperforming loans
within a pool of performing loans and/or mortgages.
"SUBORDINATED CERTIFICATES" means the unrated and uninsured tranches of
collateralized residential or commercial mortgage-backed securities.
"WAREHOUSE" means a type of lending arrangement whereby loans funded or
purchased and held for sale are financed by financial institutions or
institutional lenders on a short-term basis and secured by the underlying loans.
"WAREHOUSE AGREEMENTS" mean all warehouse loan facilities entered into by
the Company from time to time.
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<PAGE> 99
No dealer, salesperson or other person has been authorized by the Company to
give any information or to make any representations other than those contained
or incorporated by reference in this Prospectus Supplement or the Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company or the Underwriters. Neither this
Prospectus Supplement nor the Prospectus constitutes an offer to sell or a
solicitation of an offer to buy any securities other than the securities
described in this Prospectus Supplement or an offer to sell or the solicitation
of an offer to buy the securities described in this Prospectus Supplement in any
circumstances in which such offer or solicitation is unlawful. Neither the
delivery of this Prospectus Supplement or the Prospectus nor any sale made
hereunder or thereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the date
hereof or thereof or that the information contained herein or therein is correct
as of any time subsequent to the date of such information.
------------------------
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<S> <C>
Summary............................... S-3
Risk Factors.......................... S-11
Recent Developments................... S-14
Use of Proceeds....................... S-16
Capitalization........................ S-17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... S-18
Business.............................. S-29
Management............................ S-44
Description of the Notes.............. S-46
Description of Other Indebtedness..... S-50
Underwriting.......................... S-60
Legal Matters......................... S-61
Unaudited Pro Forma Condensed
Consolidated Financial Statements
for the Quality Acquisition......... S-62
Prospectus
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
The Company........................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 12
Ratios of Earnings to Fixed Charges
and Earnings to Combined Fixed
Charges and Preferred Stock
Dividends........................... 12
Description of Securities............. 13
Plan of Distribution.................. 28
Legal Matters......................... 29
Experts............................... 29
Glossary.............................. 30
</TABLE>
$192,500,000
[AMRESCO LOGO]
SENIOR SUBORDINATED NOTES,
SERIES 1997-A DUE 2004
------------------------------------------------------
PROSPECTUS SUPPLEMENT
to Prospectus dated February 20, 1997
------------------------------------------------------
PIPER JAFFRAY INC.
KEEFE, BRUYETTE & WOODS, INC.
LEGG MASON WOOD WALKER
Incorporated
MCDONALD & COMPANY
Securities, Inc.
MORGAN KEEGAN & COMPANY, INC.
March 7, 1997
