<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration No. 333-27853
PROSPECTUS SUPPLEMENT DATED FEBRUARY 23, 1998
TO PROSPECTUS DATED AUGUST 20, 1997
4,500,000 Shares
[AMRESCO LOGO]
Common Stock
($.05 par value)
------------------
All of the 4,500,000 shares of common stock, par value $0.05 per share ("Common
Stock"), offered hereby (the "Common Stock Offering"), are being offered by
AMRESCO, INC. ("AMRESCO" or the "Company"). The Common Stock is traded on the
Nasdaq National Market under the symbol "AMMB." On February 23, 1998, the last
reported sale price of the Common Stock on the Nasdaq National Market was
$30.1875 per share. See "Price Range of Common Stock and Dividend Policy."
In addition, the Company is concurrently offering $290.0 million principal
amount of Senior Subordinated Notes due 2005 (the "1998 Senior Subordinated
Notes") of the Company (the "Notes Offering"). See "Description of Notes
Offering." The shares of Common Stock offered hereby and the 1998 Senior
Subordinated Notes offered by the Company are being offered separately and not
as units. The Common Stock Offering is not conditioned on the consummation of
the Notes Offering.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THE
ACCOMPANYING 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 SUPPLEMENT OR
THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per Share............................................ $30.00 $1.44 $28.56
Total(2)............................................. $135,000,000 $6,480,000 $128,520,000
</TABLE>
(1) Before deduction of expenses payable by the Company estimated at $200,000.
(2) The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus Supplement, to purchase a maximum of
675,000 additional shares to cover over-allotments, if any. If the option is
exercised in full, the total Price to Public will be $155,250,000,
Underwriting Discounts and Commissions will be $7,452,000 and Proceeds to
Company will be $147,798,000.
The Common Stock is offered by the several Underwriters when, as and if
issued by the Company, delivered to and accepted by the Underwriters and subject
to their right to reject orders in whole or in part. It is expected that the
Common Stock will be ready for delivery on or about February 27, 1998 against
payment in immediately available funds.
CREDIT SUISSE FIRST BOSTON
MORGAN STANLEY DEAN WITTER
PIPER JAFFRAY INC.
PRUDENTIAL SECURITIES INCORPORATED
THE ROBINSON-HUMPHREY COMPANY
Prospectus Supplement dated February 23, 1998.
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS, PENALTY BIDS AND PASSIVE MARKET MAKING. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
FORWARD-LOOKING STATEMENTS
This Prospectus Supplement and the accompanying Prospectus contain or
incorporate by reference certain forward-looking statements. The factors
identified under "Risk Factors" in the Prospectus are important factors (but not
necessarily all important factors) that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, the Company (or its subsidiaries).
Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, the Company
cautions that, while such assumptions or bases are believed to be reasonable and
are made in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. Where, in any forward-looking
statement, the Company (or its subsidiaries), or its management, express an
expectation or belief as to future results, such expectation or belief is
expressed in good faith and is believed to have a reasonable basis, but there
can be no assurance that such future results will be achieved or accomplished.
The words "believe," "expect," "estimate," "project," "anticipate" and similar
words and expressions identify forward-looking statements.
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PROSPECTUS SUPPLEMENT SUMMARY
Certain terms used in this Prospectus Supplement are defined in the
"Glossaries" included herein and in the accompanying Prospectus. 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. Unless otherwise indicated, the information
contained in this Prospectus Supplement assumes that the Underwriters'
over-allotment option is not exercised. See "Underwriting."
THE COMPANY
The Company is a leading diversified financial services company
specializing in real estate lending, commercial finance and the acquisition,
resolution and servicing of nonperforming and underperforming commercial loans.
The Company began operations in 1987 providing asset management and resolution
services to governmental agencies, financial institutions and others relating to
nonperforming and underperforming loans. In early 1994, the Company made the
decision to diversify its business lines and build "franchise" business units
that could use the Company's core real estate management and lending expertise
to pursue growth in markets that were being underserved by traditional lenders.
Since that time, the Company has entered the commercial mortgage banking,
residential mortgage banking, commercial finance and loan servicing businesses
and oriented its asset management activities towards direct investments in asset
portfolios and the special servicing of large portfolios of asset-backed
securities. As a result of the Company's diversification efforts, the Company
currently operates in the following four different business lines: asset
management, commercial mortgage banking, residential mortgage banking and
commercial finance.
The Company has experienced significant growth since making the strategic
decision to diversify its business lines. The Company's total assets have
increased from $172.3 million at December 31, 1994 to $1.6 billion at September
30, 1997. The Company's revenues have increased from $129.8 million for the year
ended December 31, 1994 to $200.1 million and $291.5 million for the year ended
December 31, 1996 and the nine months ended September 30, 1997, respectively.
For the same periods, the Company reported income from continuing operations of
$20.9 million, $31.3 million and $36.4 million, respectively.
The Company's revenues principally consist of interest and other investment
income (including interest on loans held for sale and from retained interests in
securitizations), fees from asset management activities and from the
origination, underwriting and servicing of loans and revenues derived from the
gain on sale of loans and investments. The Company's combined commercial
mortgage banking, residential mortgage banking and commercial finance activities
resulted in loan fundings and acquisitions of $5.3 billion and $6.7 billion for
the year ended December 31, 1996 and for the nine months ended September 30,
1997, respectively. The Company funds these operations with its credit lines
(including warehouse lines of credit) and with the proceeds received from
securitizations. For the year ended December 31, 1996 and the nine months ended
September 30, 1997, the Company securitized and sold $1.8 billion and $2.4
billion of loans, respectively. At September 30, 1997, the Company's loan
servicing portfolio was $21.0 billion as compared to $13.5 billion at December
31, 1995. The Company's investments in purchased loan and other asset portfolios
has increased from $69.2 million at December 31, 1994 to $329.6 million at
September 30, 1997, while total assets being managed and resolved for third
parties have decreased reflecting a changing market for asset portfolio
management and the Company's strategic shift towards direct investments in asset
portfolios.
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BUSINESS STRATEGY
The Company's business strategy focuses on continuing its diversification
efforts while building on its core strengths in order to support continued
growth in earnings and assets. The following principles are significant to the
execution of the Company's business strategy in the future:
- Maintain a leadership position in, and enhance profitability of, its
business units.
- Continue to diversify its sources of earnings through the balanced
development of its existing business lines and the development of
additional business lines that leverage existing capabilities and
complement the Company's core franchises.
- Allocate capital to, and pursue growth in, markets that are fragmented,
underserved or otherwise have prospects for sustainable growth and
favorable risk-adjusted returns.
- Enhance liquidity by maintaining access to multiple funding sources and
seeking lower cost of funds through improved debt ratings.
- Focus on improvements in operating margins by managing the growth of
operating expenses relative to revenue growth.
- Maintain an emphasis on growth in cash flows and earnings per share.
BUSINESS ACTIVITIES
The Company's primary businesses are organized along the following lines:
asset management, commercial mortgage banking, residential mortgage banking and
commercial finance.
Asset Management
The Company acquires, manages and resolves portfolios of real estate loans
and other assets acquired at a discount and provides special servicing for
nonperforming and underperforming loans in commercial mortgage-backed bond
trusts and similar securitized commercial asset-backed loan portfolios.
The Company is the product of the December 1993 merger of two asset
management and resolution companies, BEI Holdings, Inc. and the former asset
management and resolution unit of NationsBank of Texas, N.A. The 1993 merger
created one of the leading asset management and resolution service companies in
the United States. The Company and its predecessors have managed over $35.0
billion (Face Value) of asset portfolios since 1987. At September 30, 1997, the
Face Value of the Company's total investment in wholly-owned asset portfolios
aggregated approximately $575.7 million, which was composed of approximately
$395.4 million (68.7%) of collateralized business loans, approximately $97.7
million (17.0%) of asset-backed securities and approximately $82.6 million
(14.3%) of real estate. A majority of these assets were located in the United
States, with the remainder located primarily in Canada and Western Europe. The
Company has recently begun to open additional offices outside the United States
and seek opportunities for asset management and investments in other
international markets.
As a special servicer, the Company receives an annual fee (typically,
approximately 50 basis points of the Face Value of the delinquent or
nonperforming loan being serviced), plus a 50 to 200 basis points fee based on
the total cash flow from resolution of each loan as it is received. The Company
has received a "strong" rating from Standard & Poor's, the highest rating
currently given by that rating agency for special servicers such as the Company.
The Company is also rated "superior" by Fitch as a special servicer. At
September 30, 1997, the Company was the designated special servicer for
securitized pools holding approximately $12.7 billion (Face Value) of loans, of
which $458.5 million (Face Value) had been assigned to the Company for
resolution.
Commercial Mortgage Banking
General. The Company performs a wide range of commercial mortgage banking
services, including originating, underwriting, placing, selling, securitizing
and servicing commercial real estate loans, through its subsidiaries Holliday
Fenoglio Fowler, AMRESCO Capital and AMRESCO Services.
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Real Estate Capital Markets. Holliday Fenoglio Fowler, a commercial
mortgage banker, primarily serves commercial real estate developers and owners
by arranging commercial real estate loans and acting as a broker on commercial
real estate sales through its own commission-based mortgage bankers. The loans
arranged by Holliday Fenoglio Fowler generally are funded by institutional
lenders, principally insurance companies, and by AMRESCO Capital and other
Conduit Purchasers. At December 31, 1997, Holliday Fenoglio Fowler operated out
of twelve offices in major metropolitan centers throughout the United States and
employed eighty commission-based mortgage bankers. Holliday Fenoglio Fowler
arranged $2.8 billion of commercial real estate mortgages and earned $29.3
million in fee income for brokerage services during the nine months ended
September 30, 1997. In addition, Holliday Fenoglio Fowler was the commercial
mortgage banker on approximately $716.8 million of other real estate
transactions, including joint venture sales and participating mortgages.
Holliday Fenoglio Fowler has significantly expanded its East Coast business
with the recent acquisition of the business and operations of Fowler, Goedecke,
Ellis & O'Connor Incorporated, a commercial mortgage banker headquartered in
Boston, Massachusetts. See "Recent Developments -- Acquisition of Fowler,
Goedecke, Ellis & O'Connor Incorporated."
Commercial Real Estate Lending. AMRESCO Capital originates, underwrites,
warehouses and securitizes commercial real estate loans. AMRESCO Capital serves
its market directly through branch offices, as well as through a network of
independent mortgage brokers and commercial mortgage bankers, including Holliday
Fenoglio Fowler. AMRESCO Capital is approved by Fannie Mae to participate in its
Delegated Underwriting and Servicing ("DUS") program, which AMRESCO Capital
believes makes it a more competitive loan originator and underwriter of
multifamily mortgages. AMRESCO Capital is also an approved lender in the Freddie
Mac Program Plus(R) multifamily seller/servicer program in the states of
Florida, New York, North Carolina and South Carolina. During 1997, AMRESCO
Capital originated commercial real estate loans primarily through AMRESCO
Commercial Mortgage Funding, L.P., a limited partnership in which AMRESCO
Capital and an affiliate of Goldman, Sachs & Co. have shared equally in the
accumulation and securitization profits and risks. Effective December 19, 1997,
the partnership between AMRESCO Capital and the Goldman, Sachs & Co. affiliate
was revised, with the result that commercial real estate loans for which loan
applications were received after November 13, 1997 (and certain specified loans
aggregating approximately $120.3 million for which loan applications were
received prior to November 13, 1997) will be for the sole account of AMRESCO
Capital, including all the associated profits and risks. See "Recent
Developments -- Arrangement with Goldman, Sachs & Co."
Commercial Loan Servicing. AMRESCO Services is a servicer for securitized
pools of commercial mortgages and whole loans. The dominant users of commercial
loan servicers are commercial mortgage-backed bond trusts and other owners of
commercial real estate loans, including lenders accumulating loans for
securitization or sale that contract for servicing on an interim basis.
Historically, the revenue stream from servicing contracts on commercial
mortgages has been relatively predictable due in part to prepayment penalties in
commercial mortgages that tend to discourage early loan payoffs. At September
30, 1997, AMRESCO Services acted as servicer with respect to approximately $15.4
billion of commercial real estate loans. AMRESCO Services is currently rated
"above average" as a master servicer and "strong" as a primary servicer by
Standard & Poor's Ratings Service, a division of McGraw-Hill Companies
("Standard & Poor's"), which are the highest ratings given by that rating agency
to master servicers and primary servicers as of the date of this Prospectus
Supplement. AMRESCO Services is also rated "acceptable" by Fitch Investors
Services, L.P. ("Fitch") as a master and primary servicer.
Residential Mortgage Banking
Through AMRESCO Residential, the Company originates, acquires, warehouses,
services and securitizes conventional, nonconforming residential mortgage loans.
AMRESCO Residential's loan production has increased from $1.9 billion for the
year ended December 31, 1996 (its first full year of operations) to $2.6 billion
for the nine months ended September 30, 1997.
The Company targets borrowers having credit profiles that preclude their
loans from being sold in the secondary markets to government agencies. Such
credit profiles may include consumer or mortgage loan
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<PAGE> 6
delinquencies, high debt-to-income ratios, previous bankruptcy or inability to
provide income documentation. Borrowers in the Company's targeted market
typically have significant equity in their homes and may be charged higher
interest rates for loans than more creditworthy borrowers. The Company believes
that the higher interest rates and the more favorable loan-to-value
characteristics of this market mitigate the greater credit risk associated with
such borrowers and make this an attractive market for the Company.
The residential mortgage loans originated and acquired by the Company
consist of fixed and adjustable rate conventional mortgage loans with remaining
terms to maturity of not more than 360 months. The Company classifies loans
based on the borrower's credit history, repayment ability, equity in the home
and debt service-to-income ratios. Approximately 83% of fixed rate loans and 82%
of adjustable rate loans originated or acquired by the Company during the nine
months ended September 30, 1997 were with borrowers classified by the Company as
"A-," "B" or "C" credits. Persons classified as "A-," "B" or "C" borrowers
generally have a recent history of mortgage loan and/or other credit
delinquencies or other negative credit items. The maximum loan-to-value ratios
for the "A-" through "C" credits typically range from 75% ("C" credits) to 85%
("A-" credits). In addition, during the nine months ended September 30, 1997,
the Company originated or acquired loans for borrowers classified as "A" credits
(prime) (6% of fixed rate loans and 3% of adjustable rate loans) and "D" credits
(most derogatory credit items) (11% of fixed rate loans and 15% of adjustable
rate loans).
The Company obtains residential mortgage loans through portfolio
acquisitions, correspondent lending, wholesale broker operations and various
retail channels, including telemarketing, direct mail and retail branches. The
Company has adopted a diversification strategy to reduce its reliance on
portfolio acquisitions through the development of multiple product channels. The
acquisition of the assets and business of Quality Mortgage USA in October 1996
has provided the Company with a nationwide network of 53 branch offices that
originate loans through over 2,000 mortgage brokers. In addition, the Company
recently added to its retail origination capability with the acquisition of the
assets and business of City Federal Funding & Mortgage Corp., a residential
mortgage banking company with six East Coast-based retail origination branches.
See "Recent Developments -- Acquisition of City Federal Funding & Mortgage
Corp." Portfolio acquisitions and the wholesale, correspondent and retail
channels of distribution contributed $1.8 billion (69.7%), $639.5 million
(24.7%), $108.5 million (4.2%) and $36.4 million (1.4%), respectively, of total
loan production for the nine months ended September 30, 1997.
Since the acquisition of the assets and business of Quality Mortgage USA in
October 1996, the Company has performed delinquency management and related
servicing functions for the asset portfolios acquired from Quality Mortgage USA
and for loans originated by the Company after October 1, 1997 or acquired by it
on a servicing released basis. In addition, the Company is in the process of
developing the appropriate infrastructure and systems to support a broader array
of customer intensive servicing functions, including general customer relations,
which the Company believes will provide the opportunity to manage and improve
the performance of its residential mortgage loan portfolios by mitigating credit
losses and prepayment risk through direct involvement with borrowers. The
Company will continue to utilize recognized third party providers for
standardized, systems intensive servicing functions, such as payment processing
and tax, insurance and investor reporting.
Commercial Finance
In 1996, the Company organized the Commercial Finance Group to provide
financing to commercial borrowers in various targeted lending markets. The
Commercial Finance Group focuses on (i) loans to franchisees of nationally
recognized restaurant, hospitality and service organizations, (ii) special
situation mid-to-high yield lending, with an emphasis on the real estate and
communications industries, and (iii) single family residential construction
lending. Loans originated by the franchise lending operation are sold to third
parties, principally through securitization, while the real estate,
communications and single family residential construction loans are generally
retained for the Company's own portfolio. Other ancillary products, services and
investments provided by the Commercial Finance Group include equipment leasing,
small business lending and loan servicing.
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During the nine months ended September 30, 1997, the Commercial Finance
Group originated an aggregate of $319.1 million of loans, consisting of $144.1
million of franchise loans, $103.1 million of special situation loans and $71.9
million of residential construction loans. At September 30, 1997, the Company
had a portfolio of special situation loans of approximately $120.2 million and a
portfolio of single family residential construction loans of approximately $50.0
million.
THE COMMON STOCK OFFERING
Common Stock offered
hereby..................... 4,500,000 shares(1)
Common Stock outstanding
after the offering......... 41,411,127 shares(2)
Nasdaq National Market
Symbol................... AMMB
Use of Proceeds............ The net proceeds from the sale of the Common Stock
offered hereby, as well as the net proceeds from
the Notes Offering (if such offering is
consummated), will be used to reduce the Company's
outstanding borrowings under the Revolving Loan
Agreement, the Builders Warehouse Facility and
certain other credit lines. After application of
such net proceeds, approximately $378.3 million
will be available for borrowing under the Revolving
Loan Agreement and $55.0 million will be available
for borrowing under the Builders Warehouse
Facility, in each case as of February 19, 1998 (or
$187.1 million and $0.8 million, respectively, if
the Notes Offering is not consummated). Borrowings
under the Revolving Loan Agreement may be used for
general corporate purposes, including funding
investments in asset portfolios, mortgage-backed
securities and other financial instruments,
acquiring new businesses or making strategic
investments in companies that complement the
Company's business lines and strategies, including
the real estate investment trust proposed to be
sponsored by the Company. Borrowings under the
Builders Warehouse Facility may be used to fund
AMRESCO Builders Group's single family residential
construction lending business. See "Use of
Proceeds" and "Recent Developments -- Sponsorship
of Real Estate Investment Trust."
- ---------------
(1) Assumes the Underwriters' over-allotment option is not exercised. If such
over-allotment option is exercised in full, up to an additional 675,000
shares of Common Stock will be issued and sold by the Company. See
"Underwriting."
(2) Based on the number of shares of Common Stock outstanding on February 19,
1998. Does not include 1,464,591 shares of Common Stock issuable upon
exercise of outstanding stock options at January 26, 1998.
RISK FACTORS
Investors should carefully consider the risk factors involved in connection
with an investment in the Common Stock and the impact to investors from various
events that could adversely affect the Company's business. See "Risk Factors" in
the accompanying Prospectus.
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THE NOTES OFFERING
Concurrently with the Common Stock Offering, the Company is separately
offering $290.0 million principal amount of the 1998 Senior Subordinated Notes.
The 1998 Senior Subordinated Notes will mature on March 15, 2005, will be
unsecured obligations of the Company and will be subordinate in right of payment
to all existing and future Senior Debt (as defined) of the Company and its
subsidiaries. Interest will accrue on the 1998 Senior Subordinated Notes at a
rate of 9.875% per annum and will be payable in cash semi-annually on March 15
and September 15 of each year, commencing September 15, 1998. The Common Stock
Offering is not conditioned upon the consummation of the Notes Offering,
although the Notes Offering is conditioned on the consummation of the Common
Stock Offering. For information regarding the anticipated use of proceeds from
the Notes Offering by the Company and the terms of the 1998 Senior Subordinated
Notes generally, see "Use of Proceeds" and "Description of Notes Offering,"
respectively.
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SUMMARY HISTORICAL FINANCIAL AND OTHER DATA
The summary data presented below under the captions "Summary Income
Statement" and "Summary Balance Sheet Data" for and as of the end of each of the
fiscal years in the three-year period ended December 31, 1996 are derived from
the consolidated financial statements of the Company audited by Deloitte &
Touche LLP, which are incorporated by reference herein. In the opinion of
management of the Company, the data presented for the nine months ended
September 30, 1997 and 1996, 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, 1997 are not necessarily indicative of results for the
entire fiscal year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT(1) (IN THOUSANDS,
EXCEPT PER SHARE DATA):
Interest and other investment income........ $140,311 $ 65,728 $103,639 $ 40,105 $ 14,215
Gain on sale of loans and investments,
net(2).................................... 67,701 8,966 18,394 1,382 839
Mortgage banking and servicing fees......... 48,384 25,032 40,697 24,382 6,176
Asset management and resolution fees........ 18,632 27,214 34,300 41,295 93,764
Income from equity affiliate(3)............. 14,193 -- -- -- --
Other revenues.............................. 2,286 2,255 3,037 3,322 14,797
-------- -------- -------- -------- --------
Total revenues.................... 291,507 129,195 200,067 110,486 129,791
Operating expenses, excluding interest
expense................................... 160,444 74,050 112,838 73,307 92,337
Interest expense............................ 71,219 21,478 36,763 6,921 1,768
-------- -------- -------- -------- --------
Income from continuing operations before
income taxes.............................. 59,844 33,667 50,466 30,258 35,686
Income tax expense.......................... 23,461 12,968 19,134 11,593 14,753
-------- -------- -------- -------- --------
Income from continuing operations........... 36,383 20,699 31,332 18,665 20,933
Gain (loss) from discontinued
operations(4)............................. -- -- -- 2,425 (2,185)
-------- -------- -------- -------- --------
Net income.................................. $ 36,383 $ 20,699 $ 31,332 $ 21,090 $ 18,748
======== ======== ======== ======== ========
Earnings per share from continuing
operations:
Primary................................... $ 1.00 $ 0.75 $ 1.12 $ 0.76 $ 0.88
Fully-diluted............................. 1.00 0.71 1.05 0.75 0.88
Earnings per share:
Primary................................... $ 1.00 $ 0.75 $ 1.12 $ 0.86 $ 0.79
Fully-diluted............................. 1.00 0.71 1.05 0.85 0.79
Weighted average number of common shares
outstanding and common share
equivalents............................... 36,301 27,648 28,099 24,654 23,679
</TABLE>
(footnotes appear below)
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<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
--------------------- --------------------------------
1997 1996 1996 1995 1994
---------- -------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA(1) (DOLLARS IN
THOUSANDS):
Cash and cash equivalents................ $ 31,346 $ 14,157 $ 29,046 $ 16,139 $ 20,446
Loans held for sale, net................. 586,816 402,738 374,536 160,843 --
Investments in purchased loan and other
asset portfolios:
Loans.................................. 201,160 175,784 199,475 136,373 32,631
Real estate............................ 97,038 16,961 23,862 5,686 14,054
Partnerships and joint ventures........ 31,355 31,102 27,723 34,694 22,491
Asset-backed and other securities........ 87,737 89,891 55,678 34,038 3,481
Total assets............................. 1,647,501 867,698 1,075,941 521,713 172,340
Notes payable............................ 244,368 99,864 213,269 89,442 15,500
Warehouse loans payable.................. 562,284 381,560 354,562 153,158 --
Nonrecourse debt......................... 79,124 17,057 46,823 38,354 959
Senior notes............................. 57,500 57,500 57,500 -- --
Senior subordinated notes................ 250,000 57,500 57,500 -- --
Convertible subordinated debt............ -- 45,000 -- 45,000 --
Total indebtedness....................... 1,193,276 658,481 729,654 325,954 16,459
Stockholders' equity..................... 379,689 185,093 301,515 160,794 113,586
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATIONS BY BUSINESS LINE(1) (DOLLARS
IN THOUSANDS):
Revenues:
Asset management...................... $ 72,367 $ 67,154 $ 88,755 $ 81,596 $110,637
Commercial mortgage banking........... 69,772 33,974 54,625 26,573 6,460
Residential mortgage banking.......... 122,050 28,339 56,864 2,307 --
Commercial finance.................... 27,856 1,632 2,947 -- --
Corporate and other................... (538) (1,904) (3,124) 10 12,694
-------- -------- -------- -------- --------
Total revenues................ 291,507 129,195 200,067 110,486 129,791
-------- -------- -------- -------- --------
Operating expenses:
Asset management...................... 44,161 35,296 45,756 38,135 52,741
Commercial mortgage banking........... 45,865 26,566 40,131 20,550 6,237
Residential mortgage banking.......... 85,378 11,488 29,052 1,694 --
Commercial finance.................... 17,785 1,099 2,252 -- --
Corporate and other................... 38,474 21,079 32,410 19,849 35,127
-------- -------- -------- -------- --------
Total operating expenses ..... 231,663 95,528 149,601 80,228 94,105
-------- -------- -------- -------- --------
Operating profit (loss):
Asset management...................... 28,206 31,858 42,999 43,461 57,896
Commercial mortgage banking........... 23,907 7,408 14,494 6,023 223
Residential mortgage banking.......... 36,672 16,851 27,812 613 --
Commercial finance.................... 10,071 533 695 -- --
Corporate and other................... (39,012) (22,983) (35,534) (19,839) (22,433)
-------- -------- -------- -------- --------
Total operating profit........ $ 59,844 $ 33,667 $ 50,466 $ 30,258 $ 35,686
======== ======== ======== ======== ========
(footnotes appear below)
</TABLE>
S-10
<PAGE> 11
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- --------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
LOAN ORIGINATION DATA(1)
(DOLLARS IN THOUSANDS):
Commercial mortgage loans
originated/acquired(5):
Amount.................. $ 3,776,929 $ 1,993,000 $ 3,171,848 $ 2,385,000 $ 558,000
Number of loans......... 553 327 526 429 100
Securitization volume... $ 480,085 -- -- -- --
Residential mortgage loans
originated/acquired:
Amount.................. $ 2,586,500 $ 1,315,000 $ 1,944,000 -- --
Number of loans......... 27,491 13,581 21,124 -- --
Securitization volume... $ 2,295,000 $ 1,110,542 $ 1,810,542 -- --
Commercial finance loans
originated/acquired:
Amount.................. $ 319,058 $ 22,150 $ 36,415 $ 1,720 --
Number of loans......... 243 6 12 2 --
Securitization volume... $ 132,500 -- -- -- --
SERVICING DATA(1)(6):
Commercial mortgage
loans................... $20,288,479 $13,927,358 $16,625,307 $13,541,025 $5,572,900
Residential mortgage
loans(7).................. -- -- -- -- --
Commercial finance loans... $ 718,561 $ 62,175 $ 87,305 $ 5,720 --
</TABLE>
- ---------------
(1) Summary Income Statement, Balance Sheet, Operations by Business Line and
Loan Origination and Servicing Data for the fiscal years ended December 31,
1996, 1995 and 1994 and the nine months ended September 30, 1997 and 1996
reflect data for Holliday Fenoglio Fowler beginning August 1, 1994, EQS
beginning October 27, 1995, Quality Mortgage USA beginning October 25, 1996,
and ACLC beginning March 31, 1997, the effective date of their acquisitions
by the Company. Does not include information for Fowler, Goedecke, Ellis &
O'Connor Incorporated or City Federal Funding & Mortgage Corp. which were
acquired in January of 1998. See "Recent Developments."
(2) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Securitization Practices" for a discussion of accounting
for the sales of loans in the Company's securitizations.
(3) Reflects AMRESCO Capital's 50% interest in earnings of a partnership which
accumulates and securitizes commercial real estate loans. The arrangement
pursuant to which such activity was effected was revised effective December
19, 1997. See "Recent Developments -- Arrangement with Goldman, Sachs & Co."
(4) Reflects discontinuance of data processing operations for the banking and
asset management industry.
(5) Reflects loans arranged by Holliday Fenoglio Fowler but funded by third
parties, as well as loans originated, acquired and funded by AMRESCO
Capital.
(6) Represents data as of the end of each respective period.
(7) The Servicing Data for residential mortgage loans does not reflect
residential mortgage loans originated or acquired by AMRESCO Residential
which are included in securitized portfolios and serviced by third party
servicers.
RECENT DEVELOPMENTS
Preliminary Results of Operations for the Year Ended December 31, 1997. The
following table presents certain unaudited preliminary results of operations
data for the year ended December 31, 1997 and for the three months ended
December 31, 1997 and 1996. The Company's consolidated financial statements for
the year ended December 31, 1997 have not yet been audited and are not currently
available. The results of operations data set
S-11
<PAGE> 12
forth below with respect to the year ended December 31, 1996 are derived from,
and are qualified by reference to, the audited consolidated financial statements
and notes thereto contained in the 1996 Form 10-K, which is incorporated by
reference into the accompanying Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------- -----------------------
1997 1996 1997 1996
-------- -------- ----------- --------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Interest and other investment
income........................... $ 63,336 $ 37,911 $203,647 $103,639
Gain on sale of loans and
investments...................... 35,684 9,428 103,385 18,394
Mortgage banking and servicing
fees............................. 26,866 15,665 75,250 40,697
Asset management and resolution
fees............................. 6,316 7,086 24,948 34,300
Income (loss) from equity
affiliate........................ (263) -- 13,930 --
Other revenues...................... 309 782 2,595 3,037
-------- -------- -------- --------
Total revenues.............. 132,248 70,872 423,755 200,067
Operating expenses, excluding interest
expense............................. 69,151 38,788 229,595 112,838
Interest expense...................... 30,844 15,285 102,063 36,763
-------- -------- -------- --------
Income before income taxes............ 32,253 16,799 92,097 50,466
Income tax expense.................... 12,412 6,166 35,873 19,134
-------- -------- -------- --------
Net income............................ $ 19,841 $ 10,633 $ 56,224 $ 31,332
======== ======== ======== ========
Earnings per share(1):
Basic............................... $ 0.55 $ 0.37 $ 1.58 $ 1.15
Diluted............................. 0.53 0.34 1.53 1.06
Weighted average number of common
shares outstanding.................. 36,403 28,425 35,610 27,232
</TABLE>
- ---------------
(1) Earnings per share data for 1996 has been restated for the adoption of SFAS
No. 128, "Earnings per Share."
The Company earned net income of $19.8 million during the quarter ended
December 31, 1997, an 87% increase from the same period in 1996. Diluted
earnings were $0.53 per share during the quarter ended December 31, 1997,
compared to the prior year's fourth quarter of $0.34 per share, a 56% increase.
Revenues in the fourth quarter of 1997 were $132.2 million as compared to $70.9
million for the same period in 1996, an 87% increase. Total assets were $2.6
billion at December 31, 1997, up from $1.1 billion at prior year-end.
The fourth quarter earnings brought net income for the year ended December
31, 1997 to $56.2 million, or 79% higher than the prior year. Diluted earnings
per share rose to $1.53 for the year ended December 31, 1997 from $1.06 for the
prior year, a 44% increase. Total revenues for 1997 were $423.8 million compared
to the prior year's $200.1 million, a 112% increase. For the year ended December
31, 1997, operating profit contributions from the four business lines were as
follows: asset management 32%; commercial mortgage banking 21%; residential
mortgage banking 33%; and commercial finance 14%.
AMRESCO's asset management unit invested $140.8 million in asset portfolios
and asset-backed securities during the quarter ended December 31, 1997 bringing
total investments for the year to $355.2 million compared to $198.4 million in
1996. During the fourth quarter of 1997, the Company announced its intention to
form and sponsor a real estate investment trust (the "REIT"). The REIT is
expected to be managed by a subsidiary of AMRESCO. This subsidiary's activities
will be conducted through AMRESCO's asset management line of business and are
expected to commence in the second quarter of 1998. See "-- Sponsorship of Real
Estate Investment Trust," below.
Transaction volume for the Company's commercial mortgage banking units
totaled $3.3 billion in the fourth quarter of 1997 bringing volume for the year
to $7.8 billion, a 108% increase over the prior year. During the fourth quarter
of 1997, AMRESCO revised its commercial mortgage conduit relationship with an
affiliate of Goldman, Sachs & Co. Under the revised arrangement, AMRESCO will
retain the profits and risks associated
S-12
<PAGE> 13
with all commercial real estate loans originated after November 13, 1997, as
well as the profits and risks associated with $120.3 million of loans originated
before November 13, 1997. Goldman, Sachs & Co. will provide certain financial
advisory and distribution services under the revised arrangement.
AMRESCO Residential's origination and acquisition volume for the quarter
ended December 31, 1997 totaled $1.1 billion, bringing full year volume to $3.6
billion, an 87% increase from 1996. AMRESCO Residential completed a $526.0
million private loan sale of residential mortgages in December of 1997, bringing
full year securitization/sale volume to $2.8 billion, or a 56% increase over the
prior year. There was no net write down associated with the Company's retained
interests in residential securitizations during the fourth quarter of 1997.
The Commercial Finance Group's loan originations during the quarter ended
December 31, 1997 totaled $210.7 million, bringing full year originations to
$525.2 million compared to $36.4 million in 1996. The Commercial Finance Group
completed a securitization in December of 1997 of approximately $166.0 million
of franchise loans bringing full year securitization volume to $298.4 million.
As of December 31, 1997, there were no delinquencies in the Company's commercial
finance portfolio carried on balance sheet nor were there any charge-offs from
this portfolio during the year. As of December 31, 1997, reserves for this
portfolio were 2.6%. Also, there were no losses in the securitized commercial
finance portfolio during 1997.
Financing Transactions. The Company has significant ongoing financing needs
and has taken a number of steps to secure the funding necessary for the
continued development and growth of its core business lines. Effective as of
September 30, 1997, the Company amended the Revolving Loan Agreement to, among
other things, increase the borrowing limits provided for therein from $350.0
million to $550.0 million, of which up to $490.0 million was available pursuant
to lending commitments at January 31, 1998. The Company is seeking to obtain
lender commitments for the remaining $60.0 million of the total facility amount,
although no assurance can be given that such commitments will be obtained.
Assuming commitments were received for the full $550.0 million, the Revolving
Loan Agreement would permit up to $490.0 million of indebtedness to be incurred
pursuant to a revolving credit facility and $100.0 million to be incurred
pursuant to a term facility, subject to a combined borrowing limit of $550.0
million. At December 31, 1997, the outstanding balance of the Revolving Loan
Agreement was approximately $388.3 million, resulting in a borrowing capacity at
that time of approximately $66.7 million. In addition, concurrently with the
Common Stock Offering, the Company is offering $290.0 million principal amount
of the 1998 Senior Subordinated Notes. The aggregate net proceeds from the
Common Stock Offering and from the Notes Offering are expected to be used to
reduce outstanding borrowings under the Revolving Loan Agreement, the Builders
Warehouse Facility and certain other credit lines. After application of the net
proceeds of the Common Stock Offering and the Notes Offering, approximately
$378.3 million would have been available for reborrowing under the Revolving
Loan Agreement and $55.0 million would have been available under the Builders
Warehouse Facility, in each case at February 19, 1998. Following the
consummation of the Common Stock Offering and the Notes Offering, the Company's
management anticipates that the Company's borrowing capacity under the Revolving
Loan Agreement, the Builders Warehouse Facility, other credit lines and funds
from operations will be sufficient to fund the Company's operations through
mid-1999. In the event the Notes Offering is not consummated, the Company's
management anticipates undertaking an additional equity or debt financing in the
second half of 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Funding."
Arrangement with Goldman, Sachs & Co. During 1997, AMRESCO Capital
originated commercial real estate loans primarily through AMRESCO Commercial
Mortgage Funding, L.P., a limited partnership in which AMRESCO Capital and an
affiliate of Goldman, Sachs & Co. shared equally in the accumulation and
securitization profits and risks. Effective December 19, 1997, the partnership
between AMRESCO Capital and the Goldman, Sachs & Co. affiliate was revised. Any
accumulation and securitization profit or loss from commercial real estate loans
for which loan applications were received on or before November 13, 1997 (except
for specified loans aggregating approximately $120.3 million) will be shared
equally by AMRESCO Capital and the Goldman, Sachs & Co. affiliate. All of the
profits and risks associated with commercial real estate loans for which loan
applications were received after November 13, 1997, as well as the profits and
risks relating to specified loans aggregating approximately $120.3 million for
which there were loan applications outstanding prior to November 13, 1997, will
be for the sole account of AMRESCO Capital. AMRESCO Capital will
S-13
<PAGE> 14
continue to receive warehouse financing and financial advisory services from
Goldman, Sachs & Co. or its affiliates pursuant to a separate agreement.
Acquisition of Fowler, Goedecke, Ellis & O'Connor Incorporated. Effective
as of January 1, 1998, the Company acquired the commercial mortgage banking
business of Fowler, Goedecke, Ellis & O'Connor Incorporated for $16.0 million in
cash and stock, plus up to an additional $8.0 million in cash and stock over
three years in the event certain performance goals are met or exceeded during
the fiscal years 1998, 1999 and 2000. Fowler, Goedecke, Ellis & O'Connor
Incorporated has offices in Massachusetts, Connecticut, New York and New Jersey
and employed 17 mortgage bankers at December 31, 1997.
Acquisition of City Federal Funding & Mortgage Corp. On January 28, 1998,
the Company consummated the acquisition of the business and operations of City
Federal Funding & Mortgage Corp. ("City Federal") and its affiliate, Finance
America Corporation, for $10.0 million in cash and stock, plus up to an
additional $8.5 million in cash and stock over three years in the event certain
performance goals are met or exceeded during fiscal years 1998, 1999 and 2000.
City Federal is a residential mortgage banker focusing on originations through
its six East Coast-based retail branch offices.
Sponsorship of Real Estate Investment Trust. On December 5, 1997, the
Company announced its intention to sponsor and manage the REIT. It is
anticipated that the REIT will fund its operations with the proceeds of its
public offering (estimated to be approximately $300.0 million) and with credit
lines (including a warehouse credit facility and a bank line of credit). The
Company's management anticipates that the REIT will invest in a diversified
portfolio of commercial mortgage loans, commercial real estate, mortgage-backed
securities and other real estate related assets. The REIT will be managed by a
subsidiary of the Company and such subsidiary will be compensated on a fee basis
for its management services. It is anticipated that the Company will purchase a
ten percent (10%) ownership position in the REIT and will receive an option to
purchase at a price no lower than the public offering price additional shares of
the common stock of the REIT equal to ten percent (10%) of the outstanding
shares of common stock of the REIT at the date of the public offering. The
Company's management anticipates that the REIT will commence business in the
second quarter of 1998.
S-14
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby (after deducting underwriting discounts and commissions and estimated
expenses of the Common Stock Offering) are estimated to be approximately $128.3
million (approximately $147.6 million if the Underwriters' over-allotment option
is exercised in full).
In addition, concurrently with the Common Stock Offering, the Company is
offering $290.0 million principal amount of 1998 Senior Subordinated Notes in
the Notes Offering. The net proceeds from the Notes Offering (after deducting
underwriting discounts and commissions and estimated expenses of the Notes
Offering) are estimated to be approximately $281.6 million.
The Company intends to use the net proceeds it receives from the Common
Stock Offering, as well as the net proceeds it receives from the Notes Offering
(if such offering is consummated), to reduce the Company's outstanding
borrowings under the Revolving Loan Agreement, the Builders Warehouse Facility
and certain other credit lines.
The Revolving Loan Agreement had an outstanding balance of approximately
$388.3 million at December 31, 1997. For the year ended December 31, 1997, the
weighted average interest rate on indebtedness under the Revolving Loan
Agreement was 7.7% per annum. The indebtedness under the Revolving Loan
Agreement was incurred for general corporate purposes, including investments in
asset portfolios, mortgage-backed securities and other financial instruments.
After application of the aggregate net proceeds of the Common Stock Offering and
the Notes Offering, approximately $378.3 million would be available for
reborrowing under the Revolving Loan Agreement as of February 19, 1998 (or
$187.1 million if the Notes Offering is not consummated), which could be used
for general corporate purposes, including funding investments in asset
portfolios, mortgage-backed securities and other financial instruments,
acquiring new businesses or making strategic investments in companies that
complement the Company's business lines and strategies, including a potential
investment of $30.0 million in the REIT.
The Builders Warehouse Facility had an outstanding balance of approximately
$51.9 million at December 31, 1997. For the year ended December 31, 1997, the
weighted average interest rate on indebtedness under the Builders Warehouse
Facility was 7.6% per annum. The indebtedness under the Builders Warehouse
Facility was incurred to fund AMRESCO Builders Group's single family residential
construction lending business. After application of the aggregate net proceeds
of the Common Stock Offering and the Notes Offering, approximately $55.0 million
would be available for reborrowing under the Builders Warehouse Facility as of
February 19, 1998 (or $0.8 million if the Notes Offering is not consummated),
which could be used to fund AMRESCO Builders Group's single family residential
construction lending business.
The Company currently has no understandings or agreements in respect of any
material acquisition. See "Prospectus Supplement Summary -- Recent
Developments."
S-15
<PAGE> 16
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is quoted on the Nasdaq National Market under the symbol
"AMMB." The following table shows, for the calendar periods indicated, the range
of high and low last sale price per share for the Common Stock as quoted on the
Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1996
First Quarter............................................. $14.625 $11.875
Second Quarter............................................ 19.313 15.000
Third Quarter............................................. 24.375 17.250
Fourth Quarter............................................ 27.250 20.625
1997
First Quarter............................................. $25.500 $15.125
Second Quarter............................................ 21.500 13.875
Third Quarter............................................. 37.125 21.750
Fourth Quarter............................................ 37.125 24.000
1998
First Quarter (through February 23, 1998)................. $32.000 $23.250
</TABLE>
The last reported sale price of the Common Stock on February 23, 1998, was
$30.1875 per share.
Effective October 1995, the Company discontinued paying cash dividends. The
Board of Directors of the Company determined to retain all earnings to support
anticipated growth in the current operations of the Company and to finance
future expansion, and does not anticipate paying or declaring cash dividends on
the Common Stock in the foreseeable future. The agreements governing certain of
the Company's outstanding indebtedness restrict the payment of cash dividends
unless certain earnings tests are satisfied. Future declarations and payments of
dividends, if any, will be determined in light of then-current conditions,
including the Company's earnings, operations, capital requirements, liquidity,
financial condition, restrictions in financing agreements and other factors
deemed relevant by the Board of Directors.
S-16
<PAGE> 17
CAPITALIZATION
The following table presents the capitalization of the Company at September
30, 1997, on a historical basis, and as adjusted to give effect to the Common
Stock Offering and the application of the estimated net proceeds therefrom (see
note 1) and as further adjusted to give effect to the issuance of $290.0 million
principal amount of 1998 Senior Subordinated Notes in the Notes Offering and the
application of the estimated net proceeds therefrom (see note 2). This table
should be read in conjunction with "Use of Proceeds," the Company's Consolidated
Financial Statements and the notes thereto contained in the 1996 Form 10-K,
incorporated by reference in the accompanying Prospectus, and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Funding" included elsewhere in this Prospectus
Supplement.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-------------------------------------------------------------
AS FURTHER ADJUSTED
AS ADJUSTED FOR FOR COMMON STOCK
ACTUAL COMMON STOCK OFFERING(1) AND NOTE OFFERINGS(2)
---------- ------------------------ ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Debt(3)
Notes Payable........................... $ 244,368 $ 118,568 $ 118,568
Warehouse loans payable................. 562,284 559,564 288,628
Nonrecourse debt........................ 79,124 79,124 68,398
Senior notes............................ 57,500 57,500 57,500
Senior subordinated notes............... 250,000 250,000 540,000
---------- ---------- ----------
Total debt................................ 1,193,276 1,064,756 1,073,094
---------- ---------- ----------
Stockholders' equity:
Common Stock, par value $0.05 per share;
150,000,000 authorized shares and
36,504,450 issued shares(4).......... 1,825 2,050 2,050
Capital in excess of par................ 257,251 385,546 385,546
Reductions for employee stock........... (3,113) (3,113) (3,113)
Treasury stock, 24,399 shares........... (160) (160) (160)
Net unrealized gains (losses)........... 481 481 481
Retained earnings....................... 123,405 123,405 123,405
---------- ---------- ----------
Total stockholders' equity................ 379,689 508,209 508,209
---------- ---------- ----------
Total capitalization...................... $1,572,965 $1,572,965 $1,581,303
========== ========== ==========
</TABLE>
- ---------------
(1) As adjusted to reflect the sale by the Company of 4,500,000 shares of Common
Stock in the Common Stock Offering at a public offering price of $30.00 per
share and the application of the estimated net proceeds thereof to reduce
indebtedness under the Revolving Loan Agreement, the Builders Warehouse
Facility and certain other credit lines.
(2) As adjusted to reflect the sale by the Company of 4,500,000 shares of Common
Stock in the Common Stock Offering at a public offering price of $30.00 per
share and as further adjusted for the receipt and application of the
estimated net proceeds of approximately $281.7 million from the issuance of
$290.0 million principal amount of 1998 Senior Subordinated Notes in the
Notes Offering.
(3) As of January 26, 1998, the Company had a total of approximately $1.3
billion of outstanding indebtedness under warehouse credit facilities and
had a total of $431.8 million of outstanding indebtedness under the
Revolving Loan Agreement. Effective as of September 30, 1997, the Company
amended the Revolving Loan Agreement to increase the borrowing limits set
forth therein. See "Recent Developments -- Financing Transactions," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Funding" and Note 7 of Notes to the
Company's Consolidated Financial Statements contained in the 1996 Form 10-K
incorporated by reference in the accompanying Prospectus.
(4) Does not include an aggregate of approximately 3.9 million shares of Common
Stock reserved for issuance upon the exercise of outstanding stock options.
Since September 30, 1997 through January 26, 1998, options for an aggregate
of 48,760 shares had been exercised and 2,500 shares of restricted stock
issued under the Company's Stock Option and Award Plan had vested.
S-17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto contained in the 1996
Form 10-K. Certain information contained herein are forward-looking statements.
Prospective investors should carefully consider the factors set forth under the
caption "Risk Factors" in the accompanying Prospectus for a discussion of
important factors that could cause actual results to differ materially from the
forward-looking statements contained in this Prospectus Supplement.
OVERVIEW
The Company is a leading diversified financial services company
specializing in real estate lending, commercial finance, loan acquisition and
resolution and loan servicing. The Company has four principal lines of business:
asset management, commercial mortgage banking, residential mortgage banking and
commercial finance. The asset management business involves acquiring asset
portfolios at a substantial discount to Face Value and managing and resolving
such asset portfolios to maximize cash recoveries. In addition, in its asset
management business, the Company provides special servicing for nonperforming
and underperforming loans in commercial mortgage-backed bond trusts and similar
securitized commercial asset-backed loan portfolios. The commercial mortgage
banking business involves the full range of real estate capital markets
functions, including the origination, underwriting, placement, securitization
and servicing of commercial real estate mortgages and commercial real estate
brokerage. The residential mortgage banking business involves originating,
acquiring, warehousing, securitizing and servicing nonconforming (sub-prime)
loans. In its commercial finance business, the Company focuses on (i) loans to
franchisees of nationally recognized restaurant, hospitality and service
organizations, (ii) special situation mid-to-high yield lending and (iii) single
family residential construction lending. The Company's businesses may be
affected by many factors, including fluctuations in real estate and other asset
values, the availability and price of assets and residential mortgages to be
purchased, the level of and fluctuations in interest rates, the level of and
fluctuations in prepayment, default and loss rates with respect to loans owned
or serviced by the Company, changes in the securitization market and
competition. In addition, the Company's operations require continued access to
short and long term sources of financing.
Throughout 1996 and continuing into 1997, the Company extended and
developed its business lines by increasing its investment in asset portfolios
and by expanding its operations through both acquisitions and internal growth of
new 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.
S-18
<PAGE> 19
RESULTS OF OPERATIONS
The following discussion and analysis presents the results of operations of
the Company for the nine and three months ended September 30, 1997 and 1996 by
primary business lines. The results of operations of acquired businesses are
included in the consolidated financial statements from the date of acquisition.
This discussion should be read in conjunction with the consolidated financial
statements and notes thereto incorporated by reference in the Prospectus
(unaudited, in thousands, other than per share data).
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1997 1996 1997 1996
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Asset management.......................... $ 72,367 $ 67,154 $ 24,199 $21,231
Commercial mortgage banking............... 69,772 33,974 25,461 13,579
Residential mortgage banking.............. 122,050 28,339 50,835 11,475
Commercial finance........................ 27,856 1,632 12,021 816
Corporate, other and intercompany
eliminations........................... (538) (1,904) 270 (1,615)
-------- -------- -------- -------
Total revenues.................... 291,507 129,195 112,786 45,486
-------- -------- -------- -------
Operating expenses:
Asset management.......................... 44,161 35,296 14,636 10,594
Commercial mortgage banking............... 45,865 26,566 16,727 9,364
Residential mortgage banking.............. 85,378 11,488 33,569 4,866
Commercial finance........................ 17,785 1,099 8,763 527
Corporate, other and intercompany
eliminations........................... 38,474 21,079 13,539 6,414
-------- -------- -------- -------
Total operating expenses.......... 231,663 95,528 87,234 31,765
-------- -------- -------- -------
Operating profit (loss):
Asset management.......................... 28,206 31,858 9,563 10,637
Commercial mortgage banking............... 23,907 7,408 8,734 4,215
Residential mortgage banking.............. 36,672 16,851 17,266 6,609
Commercial finance........................ 10,071 533 3,258 289
Corporate, other and intercompany
eliminations........................... (39,012) (22,983) (13,269) (8,029)
-------- -------- -------- -------
Total operating profit............ 59,844 33,667 25,552 13,721
Income tax expense.......................... 23,461 12,968 10,216 5,165
-------- -------- -------- -------
Net income.................................. $ 36,383 $ 20,699 $ 15,336 $ 8,556
======== ======== ======== =======
Earnings per share:
Primary................................... $ 1.00 $ 0.75 $ 0.41 $ 0.31
Fully-diluted............................. 1.00 0.71 0.41 0.29
Weighted average shares outstanding and
equivalents............................... 36,301 27,648 37,487 28,005
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
The Company reported a 126% increase in revenues from $129.2 million to
$291.5 million, a 78% increase in operating profit from $33.7 million to $59.8
million and a 76% increase in net income from $20.7 million to $36.4 million
compared to the prior year period. The increases were due primarily to
additional contributions by the commercial mortgage banking, residential
mortgage banking and commercial finance businesses. Weighted average shares
outstanding and equivalents increased 31% due primarily to the late 1996
conversion of the Company's convertible subordinated debentures, the late 1996
public offering of the Company's common stock and the March 1997 purchase of
ACLC with the Company's common stock. Fully-diluted earnings per share increased
41% from $0.71 to $1.00.
Asset Management. Revenues for the nine months ended September 30, 1997
primarily consisted of $46.5 million in interest and other investment income,
$18.6 million in asset management and resolution fees and
S-19
<PAGE> 20
a $5.9 million gain on sale of loans and investments. The $5.2 million increase
in revenues from $67.2 million for the prior year period to $72.4 million for
the nine months ended September 30, 1997 was primarily comprised of a $9.0
million increase in interest and other investment income and a $5.2 million
increase in gain on sale of loans and investments, primarily resulting from the
sale of an asset backed security, offset, in part, by a $8.6 million decrease in
management and resolution fees. Interest and other investment income increased
due to a significant increase in aggregate investments for the Company's own
account since early 1996. Asset management and resolution fees decreased as a
result of a shift in business away from primarily managing and investing in
partnerships and joint ventures to investing in wholly-owned portfolios.
Operating expenses for the nine months ended September 30, 1997 primarily
consisted of $16.0 million in interest expense, $13.2 million in personnel cost,
$11.7 million in other general and administrative expenses and a $2.7 million
provision for investment and loan losses. The $8.9 million increase in expenses
from $35.3 million for the prior year period to $44.2 million for the nine
months ended September 30, 1997 was due primarily to a $5.1 million increase in
interest expense related to the financing for increased levels of investments
from early 1996, a $4.5 million increase in other general and administrative
expenses and a $2.7 million provision on owned portfolios and special servicing
receivables, offset, in part, by a $3.4 million decrease in personnel expenses
resulting from a lower level of assets being managed.
Commercial Mortgage Banking. Revenues for the nine months ended September
30, 1997 consisted of $42.1 million in origination, underwriting and servicing
revenues, $14.2 million in income from equity affiliate and $13.5 million in
interest and other investment income. The $35.8 million increase in revenues
from $34.0 million for the prior year period to $69.8 million for the nine
months ended September 30, 1997 relates primarily to an increase of $17.2
million in origination, underwriting and servicing revenues resulting from
originations of $3.8 billion during the nine months ended September 30, 1997
compared to $1.9 billion for the same period of 1996. Income from equity
affiliate of $14.2 million for the first nine months of 1997 was due primarily
to income from the AMRESCO Capital joint venture which included AMRESCO
Capital's 50% share of approximately $28.5 million of earnings. Interest and
other investment income increased $4.5 million due primarily to interest earned
on loans held for sale and escrow deposits, both of which have increased
significantly since early 1996.
Operating expenses for the nine months ended September 30, 1997 primarily
consisted of $32.4 million in personnel expense, $9.0 million in other general
and administrative expense, $2.7 million in interest expense and a $1.0 million
provision for investment and loan losses. The $19.3 million increase in expenses
from $26.6 million for the prior year period to $45.9 million for the nine
months ended September 30, 1997 was due primarily to an increase of $13.0
million in personnel expenses primarily related to commissions on increased
originations, an increase of $3.5 million in other general and administrative
expense due to expanded operations, an increase of $1.5 million in interest
expense related to warehousing a higher volume of loans and a $1.0 million
provision for investment and loan losses.
Residential Mortgage Banking. Revenues for the first nine months of 1997
primarily consisted of $63.4 million in interest and other investment income and
$53.5 million of gain on the securitization and sale of residential mortgage
loans. The $93.7 million increase in revenues from $28.3 million for the prior
year period to $122.0 million for the nine months ended September 30, 1997
related to increased levels of loan originations, acquisitions and
securitizations and the acquisition of the assets and business of Quality
Mortgage USA. The increase in revenues was primarily comprised of a $45.3
million increase in gain on the securitization and sale of residential mortgage
loans and a $43.2 million increase in interest and other investment income.
The increased gain on the securitization and sale of residential mortgage
loans was due primarily to the securitization and sale of approximately $2.4
billion of residential mortgage loans during the nine months ended September 30,
1997, including approximately $142.0 million of residential mortgage loans
securitized on a pre-fund basis in December 1996, as compared to gains on
approximately $1.1 billion of loans securitized in the first nine months of
1996. In addition to greater loan volumes, the increase in gain on
securitization and sale was attributable in part to the inclusion of loans in
the 1997 securitizations originated by ARMC, which had a lower basis than loans
purchased from third parties and thus resulted in larger gains. Gains for 1997
were reduced by losses from futures contracts used for hedging activities.
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<PAGE> 21
Interest and other investment income primarily consisted of interest earned
on loans held for sale ($45.8 million), which have increased significantly since
early 1996, and retained interests in securitizations ($15.1 million, including
related hedging and mark-to-market activities). During the first nine months of
1997, the Company recognized a loss of $4.9 million from futures contracts used
for hedging activities associated with its retained interests in securitizations
offset, in part, by mark-to-market gains of $2.5 million on its retained
interests in securitizations.
Operating expenses increased by $73.9 million from $11.5 million for the
prior year period to $85.4 million for the nine months ended September 30, 1997.
This increase primarily consisted of $39.6 million in interest expense, $28.0
million in personnel expense, $12.4 million in other general and administrative
expenses and a $4.3 million provision for investment and loan losses. Interest
expense primarily related to borrowings under warehouse loans payable which
funded the origination, acquisition and warehousing of mortgage loans held for
sale and acquisition of retained interests in securitizations. Personnel and
other general and administrative costs increased significantly from the prior
year period due primarily to the increased operations of the residential
business through ARMC.
Commercial Finance. Revenues for the first nine months of 1997 primarily
consisted of $17.6 million of interest and other investment income and $8.4
million of gain on sale of loans and investments. Interest and other investment
income primarily consisted of interest earned on loans and unrated securities
retained in securitizations. The $8.4 million gain primarily relates to a gain
on securitization of approximately $132.5 million of franchise loans in the
second quarter of 1997 by ACLC.
Operating expenses of $17.8 million primarily consisted of $7.0 million in
interest expense related to the financing of franchise and commercial loans,
$4.8 million in personnel expenses, $3.6 million in provision for loan losses
and $2.3 million in other general and administrative expenses.
Corporate, Other and Intercompany Eliminations. Operating losses for the
nine months ended September 30, 1997 increased $16.0 million due primarily to
increases in personnel costs and other overhead related to expanded operations.
The rapid growth of the commercial mortgage banking, residential mortgage
banking and commercial finance businesses have necessitated the hiring of
additional personnel and the related development of corporate infrastructure.
The Company anticipates that the costs associated with the corporate function
will decrease as a percentage of revenues over time as the corporate support
systems and infrastructure mature and are able to support a greater base of
revenue generating operations.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
The Company reported a 148% increase in revenues from $45.5 million to
$112.8 million, an 86% increase in operating profit from $13.7 million to $25.6
million and a 79% increase in net income from $8.6 million to $15.3 million, in
each case as compared to the prior year period. The increases were due primarily
to additional contributions by the commercial and residential mortgage banking
businesses and the commercial finance business. Weighted average shares
outstanding and equivalents increased 34% due primarily to the late 1996
conversion of the Company's convertible subordinated debentures, the late 1996
public offering of the Company's Common Stock and the March 1997 purchase of
ACLC with the Company's Common Stock. Fully-diluted earnings per share increased
41% from $0.29 to $0.41.
Asset Management. Revenues for the third quarter of 1997 primarily
consisted of $16.3 million in interest and other investment income and $6.7
million in asset management and resolution fees. The $3.0 million increase in
revenues from $21.2 million for the prior year period to $24.2 million for the
three months ended September 30, 1997 primarily consisted of a $5.4 million
increase in interest and other investment income related to a significant
increase in aggregate investments for the Company's own account since early
1996, which revenue increase was offset, in part, by a $2.4 million decrease in
management and resolution fees as a result of a shift in business away from
primarily managing and investing in partnerships and joint ventures to investing
in wholly-owned portfolios.
Operating expenses for the quarter ended September 30, 1997 primarily
consisted of $6.3 million in interest expense, $4.2 million in personnel cost
and $3.8 million in other general and administrative expenses. The
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<PAGE> 22
$4.0 million increase in operating expenses from $10.6 million for the prior
year period to $14.6 million for the three months ended September 30, 1997 was
due primarily to a $3.0 million increase in interest expense related to the
financing for increased levels of investments from early 1996 and a $1.4 million
increase in other general and administrative expenses offset, in part, by a $0.5
million decrease in personnel expenses resulting from a lower level of assets
being managed.
Commercial Mortgage Banking. Revenues for the three months ended September
30, 1997 consisted of $16.7 million in origination, underwriting and servicing
revenues, $5.1 million in interest and other investment income and $3.7 million
in income from equity affiliate. The $11.9 million increase in revenues from
$13.6 million for the prior year period to $25.5 million for the three months
ended September 30, 1997 relates primarily to an increase of $6.6 million in
origination, underwriting and servicing revenues resulting from originations of
$1.4 billion during the three months ended September 30, 1997 compared to $0.8
billion for the same period of 1996 and to an increase of $1.6 million in
interest and other investment income relating to interest earned on loans held
for sale and escrow deposits. Income from equity affiliate was $3.7 million for
the third quarter of 1997 due primarily to AMRESCO Capital realizing its 50%
share of the gain from its joint venture's $480.1 million securitization of
commercial loans ($16.0 million of income related to the loans securitized was
recorded in the joint venture's second quarter 1997 mark-to-market adjustment).
Operating expenses for the three months ended September 30, 1997 primarily
consisted of $12.6 million in personnel expense and $3.3 million in other
general and administrative expense. The $7.4 million increase in expenses from
$9.4 million for the prior year period to $16.7 million for the three months
ended September 30, 1997 was due primarily to an increase of $5.7 million in
personnel expenses primarily related to commissions on increased originations
and an increase of $1.3 million in other general and administrative expense due
to expanded operations.
Residential Mortgage Banking. Revenues for the three months ended September
30, 1997 primarily consisted of $28.5 million in interest and other investment
income and $20.4 million of gain on the securitization and sale of residential
mortgage loans. The $39.4 million increase in revenues from $11.5 million for
the prior year period to $50.9 million for the three months ended September 30,
1997 primarily consisted of a $17.8 million increase in gain on the
securitization and sale of residential mortgage loans and a $19.5 million
increase in interest and other investment income.
Interest and other investment income primarily consisted of interest earned
on loans held for sale ($19.5 million), which have increased significantly since
1996, and accrued earnings on retained interests in securitizations ($8.5
million). The increased gain on the securitization and sale of residential
mortgage loans was due primarily to the securitization and sale of approximately
$991.3 million of residential mortgage loans in the third quarter of 1997,
including approximately $64.4 million of residential mortgage loans securitized
on a pre-fund basis in the second quarter of 1997, as compared to gains on
approximately $311.0 million of loans securitized in the third quarter of 1996.
In addition to greater loan volumes, the increase in gain on securitization and
sale was attributable in part to the inclusion in the securitization in the
third quarter of 1997 of loans originated by ARMC (the subsidiary which acquired
substantially all of the assets of Quality Mortgage USA), which had a lower
basis than loans purchased from third parties and thus resulted in larger gains.
Operating expenses increased by $28.7 million from $4.9 million for the
prior year period to $33.6 million for the three months ended September 30,
1997. This increase primarily consisted of $17.0 million in interest expense,
$9.5 million in personnel expense, $4.3 million in other general and
administrative expense and a $2.3 million provision for loan losses. The $17.0
million increase in interest expense primarily related to borrowings under
warehouse loans payable which funded the origination, acquisition and
warehousing of mortgage loans held for sale and the financing associated with
the addition of retained interests in securitizations. Personnel and other
general and administrative costs increased significantly due primarily to the
increased operations of the residential business through ARMC. The provision for
loan losses related primarily to delinquent loans the Company elected to
repurchase from the securitization trustee in certain of the Company's
securitizations.
Commercial Finance. The Company acquired ACLC on March 31, 1997 and hired
an experienced team formerly with a financial institution to form its home
construction finance unit in the first quarter of 1997.
S-22
<PAGE> 23
Revenues for the third quarter of 1997 consisted primarily of $9.0 million of
interest and other investment income and $2.0 million of gain on sale of loans
and investments. Interest and other investment income primarily consisted of
interest earned on loans and retained interests in securitizations. The $2.0
million gain relates primarily to the transfer to the securitization trustee of
approximately $24.0 million of franchise loans securitized on a pre-fund basis
in the second quarter of 1997 by ACLC.
Operating expenses of $8.8 million primarily consisted of $3.3 million in
interest expense related to the financing of franchise and commercial loans,
$2.3 million in personnel expenses, $1.8 million in provision for loan losses
and $1.2 million in other general and administrative expenses.
Corporate, Other and Intercompany Eliminations. Operating losses in this
area for the three months ended September 30, 1997 increased $5.2 million
primarily due to increases in personnel costs and other overhead related to
expanded operations from the third quarter of 1996.
LIQUIDITY AND FUNDING
Liquidity is a measure of a Company's ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund investment
and lending activities and for general business purposes. Cash for investing,
originating and underwriting loans, acquiring loans for securitization, general
operating expenses and business acquisitions is primarily obtained through cash
flow from operations and credit facilities, including advances on the corporate
and portfolio credit lines, mortgage warehouse lines, nonrecourse debt and other
financings.
The Company has significant ongoing liquidity needs to support its existing
business and continued growth. The Company's liquidity is actively managed on a
daily basis and the Company's financial status, including its liquidity, is
reviewed periodically by the Board of Directors. This process is intended to
ensure the maintenance of sufficient funds to meet the needs of the Company.
Cash and cash equivalents totaled $31.3 million and $14.2 million at
September 30, 1997 and September 30, 1996, respectively. Cash flows from
operating activities, plus principal cash collections on investments in asset
portfolios and proceeds from the sale of and collections on available for sale
investments, totaled $100.2 million for the first nine months of 1997, compared
to $40.1 million for the same period of 1996. The increase in cash flows from
these activities resulted primarily from collections on asset-backed securities
and joint ventures.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1997 1996
--------- --------
(UNAUDITED,
DOLLARS IN MILLIONS)
<S> <C> <C>
Net income.................................................. $ 36.4 $ 20.7
Gain on sale of loans and investments....................... (67.7) (9.0)
Accretion of interest income................................ (27.4) (7.6)
Collections on retained interests in securitizations(1)..... 106.4 34.9
Other operating income and expenses......................... 7.5 6.9
------- ------
Subtotal.......................................... 55.2 45.9
Cash flow provided from (used by) receivables, other assets
and other payables........................................ 21.5 (7.4)
Cash flow used for loans held for sale, net of related
warehouse debt............................................ (103.0) (74.2)
------- ------
Net cash used in operating activities....................... $ (26.3) $(35.6)
======= ======
Cash flows from operations, collections on investments, and
proceeds from and collections on available for sale
investments............................................... $ 100.2 $ 40.1
Cash provided by new capital and borrowings, net (excluding
warehouse loans payable).................................. 234.4 99.6
Cash used for purchase of investments and originations of
commercial loans.......................................... (368.5) (126.0)
Ratio of total debt to equity(2)............................ 3.1:1 3.4:1
Ratio of core debt to equity(3)............................. 1.7:1 1.3:1
EBITDA(4)................................................... 141,839 61,044
Interest coverage ratio(5).................................. 2.0x 2.8x
</TABLE>
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<PAGE> 24
- ---------------
(1) Includes proceeds from sales of retained interests in securitizations.
(2) Excludes an investment line of credit for 1996.
(3) Excludes indebtedness under warehouse lines of credit and the investment
line of credit for 1996.
(4) 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.
(5) Interest coverage ratio means the ratio of earnings before interest, taxes,
depreciation and amortization to cash interest expense.
The following table shows the components of the Company's capital
structure, including certain short-term debt, as of September 30, 1997 and
December 31, 1996 (dollars in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 % OF TOTAL 1996 % OF TOTAL
------------- ---------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Shareholders' equity..................... $ 379.7 24% $301.5 30%
Senior notes............................. 57.5 4 57.5 6
Senior subordinated notes................ 250.0 16 57.5 6
Mortgage warehouse loans................. 562.3 36 354.6 36
Notes payable (excluding investment line
for 1996).............................. 323.5 20 225.9 22
-------- --- ------ ---
Total.......................... $1,573.0 100% $997.0 100%
======== === ====== ===
</TABLE>
Total assets increased $571.6 million to $1,647.5 million at September 30,
1997 from $1,075.9 million at December 31, 1996. This increase was due primarily
to (i) an increase in mortgage loans held for sale resulting from the
origination and acquisition of residential loans for securitization and sale and
the related increase in retained interests in securitizations due to the
securitization of approximately $2.4 billion of residential mortgage loans and
approximately $132.5 million of franchise loans, (ii) an increase in commercial
loans, and (iii) an increase in purchased loan and other asset portfolios.
On March 12, 1997, the Company issued $192.5 million aggregate principal
amount of senior subordinated notes. The notes bear interest at 10% per annum
and mature on March 15, 2004. The notes are unsecured obligations of the Company
and are subordinated to prior payment of all existing and future senior debt and
to indebtedness and other liabilities of the Company's subsidiaries. The notes
are not redeemable prior to maturity.
On May 30, 1997, the Revolving Loan Agreement was amended to provide a
$350.0 million commitment under the revolving credit facility with a maturity
date of May 31, 1999 and a $60.0 million commitment under the term facility
which matures May 31, 2001. As of September 30, 1997, $225.2 million was
outstanding under such credit facility. As discussed below, effective as of
September 30, 1997, the Company amended the Revolving Loan Agreement to, among
other things, increase the borrowing limits provided for therein.
The Company has significant ongoing financing needs and has taken a number
of steps to secure the funding necessary for the continued development and
growth of its core business lines. Effective as of September 30, 1997, the
Company amended the Revolving Loan Agreement to, among other things, increase
the borrowing limits provided for therein from $350.0 million to $550.0 million,
of which up to $490.0 million was available pursuant to lender commitments at
January 31, 1998. The Company is seeking to obtain lender commitments for the
remaining $60.0 million of the total facility amount, although no assurance can
be given that such commitments will be obtained. Assuming commitments were
received for the full $550.0 million, the Revolving Loan Agreement would permit
up to $490.0 million to be incurred pursuant to a revolving credit facility and
$100.0 million to be incurred pursuant to a term facility, subject to a combined
borrowing limit of $550.0 million. At December 31, 1997, the outstanding balance
of the Revolving Loan Agreement was approximately $388.3 million, resulting in a
borrowing capacity at that time of approximately $66.7 million. In addition,
concurrently with the Common Stock Offering, the Company is offering $290.0
million principal amount of the
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<PAGE> 25
1998 Senior Subordinated Notes. The aggregate net proceeds from the Common Stock
Offering and from the Notes Offering are expected to be used to reduce
outstanding borrowings under the Revolving Loan Agreement, the Builders
Warehouse Facility and certain other credit lines. After application of the net
proceeds of the Common Stock Offering and the Notes Offering, approximately
$378.3 million would have been available for reborrowing under the Revolving
Loan Agreement and $55.0 million would have been available under the Builders
Warehouse Facility, in each case at February 19, 1998. Following the
consummation of the Common Stock Offering and the Notes Offering, the Company's
management anticipates that the Company's borrowing capacity under the Revolving
Loan Agreement, the Builders Warehouse Facility, other credit lines and funds
from operations will be sufficient to fund the Company's operations through mid
1999. In the event the Notes Offering is not consummated, the Company's
management anticipates undertaking an additional equity or debt financing in the
second half of 1998.
SECURITIZATION PRACTICES
The Company has utilized warehouse lines of credit and securitizations to
fund the growth of its commercial real estate lending, residential mortgage
banking and franchise finance businesses. The Company believes that the ability
to accumulate loans under warehouse lines of credit and to repay the loans with
the proceeds of a subsequent securitization of the loans has permitted the
Company to deploy its capital resources across a broader revenue generating base
than would have been possible using traditional corporate financing techniques.
In addition, the gain recognized on the securitization of loans and the interest
income derived from securities retained by the Company from securitizations
provide an important source of revenue. In determining the amount of gain on
sale on securitizations and the value of retained securities, the Company
employs discount rates and assumes prepayment rates and a loss experience that
it believes are reasonable and prudent. The Company periodically evaluates the
assumptions used and makes any adjustments to assumed prepayment rates, default
rates and discount rates that may be necessary or appropriate given the market
conditions at that time or other appropriate factors.
The Company views prepayment rates in the residential market as less
predictable than in other markets, such as the commercial real estate lending
and franchise finance markets where prepayment penalties tend to discourage
prepayments. In particular, the Company believes that prepayment rates in the
residential market are susceptible to a falling interest rate environment as
borrowers refinance loans. The Company also recognizes that loss experience in
the nonconforming (subprime) residential market is likely to be higher than the
conforming (prime) residential market. Accordingly, it has been the Company's
practice to employ conservative assumptions with respect to prepayment and loss
rates for its residential mortgage loan securitizations. For its residential
mortgage loan securitizations for the year ended December 31, 1996 and the nine
months ended September 30, 1997, the Company has initially valued its retained
interest using a discount rate of 20% and has assumed prepayment methodologies
which contemplated over the life constant prepayment rates ranging from 19% to
30%, with variations within the range primarily depending upon mix of loan
types, and blended annualized loss rates ranging from 0.50% to 0.625%.
The Company has also employed a 20% discount rate in its franchise loan
securitizations in 1997. However, the Company has assumed no prepayments or
losses with respect to loans in the securitized portfolios. The "no losses"
assumption is based on the fact that ACLC and its predecessors have experienced
no losses on franchise loans since the inception of business in 1993. ACLC
structures its franchise loans with limited cross guarantees between borrowers
such that the borrowers absorb the first 5% of net losses. At the present time,
the Company considers it unlikely that net losses on franchise loan portfolios
will exceed 5%. Accordingly, losses are assumed to be zero. The "no prepayments"
assumption is based on the significant prepayment penalties applicable to the
franchise loans and ACLC's historical prepayment experience.
The Company computes a gain or loss on the sale and securitization of loans
based on the fair value of proceeds received over the allocated basis of the
assets sold. Retained interests in assets sold are initially recorded at their
allocated basis. However, retained interests from mortgage loans held for sale
are classified as trading securities and are carried at fair market value. The
retained interests in securitizations are valued at the discounted present value
of the cash flows expected to be realized over the anticipated average life of
the assets sold after the estimated future credit losses, estimated prepayments
and normal servicing and other fees related to assets sold.
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<PAGE> 26
The discounted present value of such retained interests is computed using
management's assumptions of market discount rates, prepayment rates, default
rates, credit losses and other costs. The Company typically retains an interest
in its securitizations of residential mortgage loans and franchise finance
receivables in the form of interest only and residual securities. The Company
did not retain an interest in the securitization of commercial mortgage loans in
the third quarter of 1997.
OTHER MATTERS
On March 31, 1997, the Company purchased the stock of Commercial Lending
Corporation and the operations and specific assets of certain affiliates and
renamed the business AMRESCO Commercial Lending Corporation (ACLC). ACLC's
primary line of business is originating, securitizing, selling and servicing
franchise loans. The purchase price consisted of (i) approximately 2.1 million
shares of the Company's Common Stock valued at $34.3 million (including 0.2
million additional shares issued in July 1997 valued at $3.3 million pursuant to
the original acquisition term), (ii) the assumption of certain liabilities
estimated at $14.0 million and (iii) contingent earnout payments of additional
shares of the Company's Common Stock based upon the operating performance of the
acquired entities through March 31, 2000. The acquisition of ACLC was recorded
as a purchase acquisition.
On January 1, 1997, the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
which requires an entity to recognize the financial and servicing assets it
controls and the liabilities it has incurred and to derecognize financial assets
when control has been surrendered. Retained interests in assets sold are
measured by allocating the previous carrying amount between the assets sold and
retained interests based on their relative fair values at the date of transfer.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," which establishes new standards for computing and
presenting earnings per share ("EPS") and is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods;
earlier application is not permitted, however, upon adoption prior periods are
restated. Under the requirements of SFAS No. 128, basic and diluted EPS for the
nine months ended September 30, 1997 and 1996 would have been as follows (shares
in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
------- -------
(UNAUDITED)
<S> <C> <C>
Earnings per share:
Basic..................................................... $1.03 $0.77
Diluted................................................... 1.00 0.71
Weighted average shares outstanding:
Basic..................................................... 35,346 26,834
Diluted................................................... 36,318 31,412
</TABLE>
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<PAGE> 27
BUSINESS
GENERAL
The Company is a leading diversified financial services company
specializing in real estate lending, commercial finance and the acquisition,
resolution and servicing of nonperforming and underperforming commercial loans.
The Company began operations in 1987 providing asset management and resolution
services to governmental agencies, financial institutions and others relating to
nonperforming and underperforming loans. In early 1994, the Company made the
decision to diversify its business lines and build "franchise" business units
that could use the Company's core real estate management and lending expertise
to pursue growth in markets that were being underserved by traditional lenders.
Since that time, the Company has entered the commercial mortgage banking,
residential mortgage banking, commercial finance and loan servicing businesses
and oriented its asset management activities towards direct investments in asset
portfolios and the special servicing of large portfolios of asset-backed
securities. As a result of the Company's diversification efforts, the Company
currently operates in the following four different business lines: asset
management, commercial mortgage banking, residential mortgage banking, and
commercial finance.
The Company has experienced significant growth since making the strategic
decision to diversify its business lines. The Company's total assets have
increased from $172.3 million at December 31, 1994 to $1.6 billion at September
30, 1997. The Company's revenues have increased from $129.8 million for the year
ended December 31, 1994 to $200.1 million and $291.5 million for the year ended
December 31, 1996 and the nine months ended September 30, 1997, respectively.
For the same periods, the Company reported income from continuing operations of
$20.9 million, $31.3 million and $36.4 million, respectively.
The Company's revenues principally consist of interest and other investment
income (including interest on loans held for sale and from retained interests in
securitizations), fees from asset management activities and from the
origination, underwriting and servicing of loans and revenues derived from the
gain on sale of loans and investments. The Company's combined commercial
mortgage banking, residential mortgage banking and commercial finance activities
resulted in loan fundings and acquisitions of $5.3 billion and $6.7 billion for
the year ended December 31, 1996 and the nine months ended September 30, 1997,
respectively. The Company funds these operations with its credit lines
(including warehouse lines of credit) and with the proceeds received from
securitizations. For the year ended December 31, 1996 and the nine months ended
September 30, 1997, the Company securitized and sold $1.8 billion and $2.4
billion of loans, respectively. At September 30, 1997, the Company's loan
servicing portfolio was $21.0 billion as compared to $13.5 billion at December
31, 1995. The Company's investments in purchased loan and other asset portfolios
has increased from $69.2 million at December 31, 1994 to $329.6 million at
September 30, 1997, while total assets being managed and resolved for third
parties have decreased reflecting a changing market for asset portfolio
management and the Company's strategic shift towards direct investments in asset
portfolios.
BUSINESS STRATEGY
The Company's business strategy focuses on continuing its diversification
efforts while building on its core strengths in order to support continued
growth in earnings and assets. The following principles are significant to the
execution of the Company's business strategy in the future:
- Maintain a leadership position in, and enhance profitability of, its
business units.
- Continue to diversify its sources of earnings through the balanced
development of its existing business lines and the development of
additional business lines that leverage existing capabilities and
complement the Company's core franchises.
- Allocate capital to, and pursue growth in, markets that are fragmented,
underserved or otherwise have prospects for sustainable growth and
favorable risk-adjusted returns.
- Enhance liquidity by maintaining access to multiple funding sources and
seeking lower cost of funds through improved debt ratings.
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- Focus on improvements in operating margins by managing the growth of
operating expenses relative to revenue growth.
- Maintain an emphasis on growth in cash flows and earnings per share.
BUSINESS ACTIVITIES
The Company's primary businesses are organized along the following lines:
asset management, commercial mortgage banking, residential mortgage banking and
commercial finance.
ASSET MANAGEMENT BUSINESS
General. The Company manages and resolves portfolios of performing,
underperforming and nonperforming loans and provides special servicing for
nonperforming or underperforming loans in commercial mortgage-backed bond trusts
and similar securitized commercial asset-backed loan portfolios. The Company is
the product of the December 1993 merger of two asset management and resolution
companies, BEI Holdings, Inc. and the former asset management and resolution
unit of NationsBank of Texas, N.A. The 1993 merger created one of the leading
asset management and resolution companies in the United States. The Company and
its predecessors have managed over $35.0 billion (Face Value) of asset
portfolios since 1987.
Asset Portfolio Management. The Company manages and resolves asset
portfolios acquired at a discount to Face Value by the Company alone and by the
Company with co-investors. The Company also manages and resolves asset
portfolios owned by third parties.
Management of asset portfolios includes managing and resolving loans and
providing routine accounting servicing functions. Asset portfolios generally
include secured loans of varying qualities and collateral types. The majority of
the loans in which the Company invests are in payment default at the time of
acquisition. Asset portfolios purchased by the Company are comprised of secured
loans and real estate 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 loans with known environmental liabilities, unless
the environmental risks can be quantified and discounted appropriately.
The Company obtains information on available asset portfolios from many
sources, including banks, insurance companies and other lenders. Repeat business
and referrals from asset portfolio sellers with whom the Company previously has
transacted business are an important and frequent source of business. The
Company has developed relationships in which it is a preferred purchaser of
asset portfolios 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. The Company is also an active participant in competitive bidding for
asset portfolios.
The Company believes that an active market for asset portfolio acquisition,
management and resolution services exists within the private sector. Many
financial institutions now use outside contractors to manage and resolve asset
portfolios for a variety of reasons, including a desire to reduce overhead
costs, inadequate staffing to handle large volumes of nonperforming and
underperforming loans or a need to avoid management and personnel distractions
with the intensive and time-consuming job of resolving loans. These financial
institutions include banks 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.
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
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States. Accordingly, the Company has opened offices in Toronto (August 1994),
employing 16 persons, and London (October 1995), employing nine persons, each at
September 30, 1997, in order to take advantage of both investment and servicing
opportunities in Canada, the United Kingdom and certain other Western European
nations. The Company and a major Wall Street bank recently acquired an asset
portfolio in Mexico. The Company intends to seek further opportunities in
Mexico. 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 $189.8 million (Face Value) in
Canadian asset portfolios, $304.8 million (Face Value) in United Kingdom asset
portfolios and $8.6 million (Face Value) in Mexican asset portfolios under
management as of September 30, 1997.
The Company believes that direct investment permits the Company to take
advantage of the profit opportunities of asset portfolio investing. The Company
believes that it can gain market share in the asset portfolio acquisition,
management and resolution business due to its financial strength, experience in
managing and resolving asset portfolios, national reputation and strategic
relationships with sellers and purchasers of asset portfolios, including
financial institutions, large corporate buyers, investment banking firms and
sophisticated private investors.
Asset Portfolio Investment. 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 seller (generally, the
respective credit and collateral files for the loans), reviewing other relevant
material that may be available (including tax and judgment records), and
analyzing the underlying collateral (including conducting site inspections,
obtaining value opinions from third parties and consulting with any of the
Company's asset managers who have experience with the local market for such
assets). The Company also reviews information on the local economy and real
estate markets in the area in which the loan collateral is located. Because of
its broad, nationwide experience in managing assets, the Company often is able
to draw on its asset management experience in the specific market in which an
asset is located. Unlike the original lender, the Company values 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.
Loan resolutions are typically accomplished through (i) negotiating a
discounted payoff with debtors, 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 loan resolution process is to maximize in
a timely manner the cash recovery on each loan in an asset portfolio.
At September 30, 1997, the Face Value of the Company's wholly-owned asset
portfolios aggregated approximately $575.7 million, which was composed of
approximately $395.4 million (68.7%) of collateralized business loans,
approximately $97.7 million (17.0%) of asset-backed securities and approximately
$82.6 million (14.3%) of real estate.
For the nine months ended September 30, 1997 and the year ended December
31, 1996, $18.6 million (6.4%) and $29.8 million (14.9%), respectively, of the
Company's revenues were attributable to its asset portfolio management business.
The following table reflects the ownership composition of the asset portfolios
(based on
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<PAGE> 30
their Face Value) under management by the Company as of the dates indicated.
Certain reclassifications of prior period amounts have been conformed to the
current year presentation.
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
SEPTEMBER 30, -----------------------------------------------------------
1997 1996 1995 1994
----------------- ----------------- ----------------- -----------------
% 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)....... $ 575.7 28.9% $ 572.2 20.7% $ 354.3 9.6% $ 140.4 4.6%
Owned by the Company with
co-investors(2)..................... 430.8 21.6 836.0 30.1 1,558.1 42.2 1,675.9 55.3
Owned by third parties:
Securitized mortgage pools.......... 458.5 23.0 618.0 22.3 738.3 20.0 315.0 10.4
Government and other owners ........ 528.1 26.5 744.4 26.9 1,043.2 28.2 900.5 29.7
-------- ----- -------- ----- -------- ----- -------- -----
Total under management........ $1,993.1 100.0% $2,770.6 100.0% $3,693.9 100.0% $3,031.8 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
- ---------------
(1) Includes $97.7 million, $122.8 million, $66.8 million and $13.9 million of
asset-backed securities, and $82.6 million, $18.3 million, $1.7 million and
$0.6 million of real estate as of September 30, 1997 and as of December 31,
1996, 1995 and 1994, respectively.
(2) Includes the securitized asset portfolios managed by the Company in which
the Company has invested, which aggregated $201.5 million, $472.2 million,
$775.3 million and $973.8 million as of September 30, 1997 and as of
December 31, 1996, 1995 and 1994, respectively.
The following table reflects the Company's investment in asset portfolios
as of the dates indicated below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
AS OF SEPTEMBER 30, ------------------------
1997 1996 1995 1994
------------------- ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Wholly-owned by the Company(1)............. $382.5 $274.9 $172.6 $ 34.4
Owned by the Company with
co-investors(2).......................... 31.4 27.7 34.3 33.7
------ ------ ------ ------
Total............................ $413.9 $302.6 $206.7 $ 68.1
====== ====== ====== ======
</TABLE>
- ---------------
(1) Includes $87.6 million, $55.6 million, $33.9 million and $3.5 million of
asset-backed securities, and $93.8 million, $20.4 million, $5.7 million and
$14.1 million of real estate as of September 30, 1997 and as of December 31,
1996, 1995 and 1994, respectively.
(2) Includes the securitized asset portfolios managed by the Company in which
the Company has invested, which aggregated $4.9 million, $7.6 million, $8.9
million and $7.9 million as of September 30, 1997 and as of December 31,
1996, 1995 and 1994, respectively.
Special Servicing. 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 50 to 200 basis points
resolution fee based on the total cash flow from resolution of each such loan as
it is received. As of September 30, 1997, the Company was the designated special
servicer for securitized pools holding approximately $12.7 billion (Face Value)
of loans, $458.5 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.
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<PAGE> 31
COMMERCIAL MORTGAGE BANKING BUSINESS
General. The Company performs a wide range of commercial mortgage banking
services, including originating, underwriting, placing, selling, securitizing
and servicing commercial real estate loans through Holliday Fenoglio Fowler,
AMRESCO Capital and AMRESCO Services.
Industry Trends. 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 Company anticipates that expensive
technological demands, increasingly standardized underwriting requirements, more
demanding borrowers and lenders and the growth 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.
Real Estate Capital Markets. The Company provides a wide range of real
estate capital markets services to lenders on, and owners and developers 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 specialized
nature of commercial mortgage lending, borrowers rely on commercial mortgage
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 commercial mortgage bankers to source
potential borrowers. Lenders generally include banks, pension funds and
insurance companies. In arranging loans, the Company works 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 Fowler was one of the largest commercial mortgage bankers
in the United States in 1996 (based on origination volume) and primarily serves
commercial real estate developers and owners by arranging commercial real estate
loans and providing brokerage and other real estate capital markets services for
commercial real estate transactions. Holliday Fenoglio Fowler arranged
approximately $2.5 billion and $2.8 billion of commercial real estate loans
during 1996 and the first nine months of 1997, respectively. Holliday Fenoglio
Fowler principally targets developers and owners of commercial and multifamily
real estate properties. Holliday Fenoglio Fowler services prospective borrowers
through its own commission-based mortgage bankers in its offices located in
Atlanta, Boca Raton, Boston, Buffalo, Dallas, Houston, Miami, New York City,
Orange County (California), Orlando, Portland (Oregon) and San Diego. The loans
arranged by Holliday Fenoglio Fowler generally are funded by institutional
lenders, primarily insurance companies, and by Conduit Purchasers. The Company
estimates that Holliday Fenoglio Fowler has retained the servicing rights on
approximately 41% of such loans over the last three years. The Company believes
that Holliday Fenoglio Fowler's relationship and credibility with its
institutional lender network provide the Company a competitive advantage in the
commercial mortgage banking industry.
The Company provided brokerage and other real estate capital markets
services on commercial real estate sales and other real estate transactions,
including joint ventures and participating mortgages of approximately $3.1
billion and $3.5 billion during 1996 and the first nine months of 1997,
respectively. For the year ended December 31, 1996 and the nine months ended
September 30, 1997, Holliday Fenoglio Fowler earned $26.6 million and $29.3
million, respectively, for brokerage services.
Holliday Fenoglio Fowler 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, Holliday Fenoglio
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Fowler 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.
Holliday Fenoglio Fowler has established relationships with over 200
institutional lenders that include insurance companies, pension plans and
Conduit Purchasers. In 1996 and the first nine months of 1997, Holliday Fenoglio
Fowler placed 410 and 411 loans with approximately 107 and 106 different
lenders, respectively. Forty-four institutional lenders have retained Holliday
Fenoglio Fowler as their respective exclusive or semi-exclusive loan originator
in selected cities and regions.
Holliday Fenoglio Fowler has significantly expanded its East Coast business
with the recent acquisition of the business and operations of Fowler, Goedecke,
Ellis & O'Connor Incorporated. See "Recent Developments -- Acquisition of
Fowler, Goedecke, Ellis & O'Connor Incorporated."
Commercial Real Estate Lending. AMRESCO Capital, which originated and
underwrote approximately $632.7 million and $989.2 million of commercial real
estate mortgages during 1996 and the first nine months of 1997, respectively, is
a commercial mortgage banker that originates, underwrites, accumulates and
securitizes commercial real estate loans. During the nine months ended September
30, 1997, the Company, through a joint venture, completed a securitization of
$480.1 million of commercial real estate loans (the "1997 securitization"). As a
securitized lender, AMRESCO Capital 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.
AMRESCO Capital targets mortgage loans for commercial real estate properties
suitable for securitization transactions. AMRESCO Capital serves its market
directly through AMRESCO Capital's offices located in Atlanta, Buffalo, Chicago,
Dallas, Denver, Irvine, Louisville, Miami, Phoenix, Seattle, Washington D.C. and
Winston-Salem, as well as through a network of approximately 40 independent
mortgage brokers located throughout the United States. These independent
mortgage brokers serve AMRESCO Capital on a nonexclusive basis and receive fees
and a commission based on loan size and other pertinent factors in respect of
each loan closed. For the nine months ended September 30, 1997, approximately
52% of the loans underwritten by AMRESCO Capital were originated by Holliday
Fenoglio Fowler.
At September 30, 1997, the commercial real estate loans originated by the
Company have consisted of fixed rate mortgage loans secured by first liens on
fee simple or leasehold interests in multifamily, retail, office, hotel,
industrial, health care-related and self-storage properties. The commercial
mortgage loans originated during the nine months ended September 30, 1997, had
mortgage loan balances ranging from $0.9 million to $19.5 million (average of
$4.8 million for the loans included in the 1997 securitization), coupon rates
ranging from 7.6% to 9.8% (weighted average of 8.74% for the loans included in
the 1997 securitization), original terms to maturity ranging from 78 months to
240 months (weighted average of 112 months for the loans included in the 1997
securitization) and loan-to-value ratios ranging from 50% to 81% (a weighted
average of 70% for the 1997 securitization). At September 30, 1997, a
substantial portion of the mortgage loans originated by the Company have been
"balloon" mortgage loans that have an amortization schedule longer, and in some
cases significantly longer, than the remaining term of the loan, thereby leaving
a substantial outstanding principal amount due and payable on its maturity date
unless earlier prepaid. For loans in the 1997 securitization approximately 91%
of the commercial real estate loans were "balloon" mortgage loans and 4% were
loans amortizing over the full term of the loan. Substantially all of the
commercial mortgage loans originated by the Company have substantial prepayment
penalties if the borrower prepays the loan within a specified time period from
the date of origination.
The Company is broadening its commercial real estate lending program to
include variable rate loans, as well as loans with balances exceeding $50.0
million. The Company anticipates that variable rate loans and large balance
loans will constitute an increasing proportion of total originations in the
future.
The commercial real estate loans originated or acquired by AMRESCO Capital
are underwritten in general accordance with guidelines designed to evaluate the
borrowers ability to satisfy the repayment conditions of the loan. These
underwriting procedures require a property analysis (including site inspection),
an analysis of the borrowers cash flows and debt service coverage, a property
appraisal and analysis of loan-to-value, an environmental site assessment, a
physical assessment report and an in-depth review of the borrower and its
principals with respect to credit history and prior experience as an owner and
operator of commercial real estate properties. In addition, each borrower is
required to have obtained a title insurance policy and property insurance
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with specified coverages. AMRESCO Capital also reviews industry data regarding
the local real estate market in which the mortgaged property is located.
AMRESCO Capital 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
minimum 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. AMRESCO Capital, as a DUS lender,
has experienced no losses on its portfolio of DUS loans as of September 30,
1997.
AMRESCO Capital is one of only 28 currently approved DUS lenders. While all
DUS lenders operate on a national basis, the Company believes that 10 such
lenders account for the majority of DUS volume. The Company believes that
AMRESCO Capital, as one of the few DUS lenders, has certain competitive
advantages in the multifamily mortgage origination business. These advantages
include the competitive pricing afforded by Fannie Mae's position as the largest
purchaser of housing related mortgages in the nation and the ability to commit
and close mortgages without the delay and the accompanying market risks of such
delay for an approval process by the mortgage purchaser. For these reasons, the
Company expects Fannie Mae loan originations to become a significant part of its
commercial mortgage banking activities. Holliday Fenoglio Fowler has been and is
expected to be a significant source of such loan originations.
AMRESCO Capital is also a member of the Freddie Mac Program Plus(R)
multifamily seller/servicer program in Florida, New York, 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.
In 1997, AMRESCO Capital originated commercial real estate loans primarily
through AMRESCO Commercial Mortgage Funding, L.P., a limited partnership in
which AMRESCO Capital and an affiliate of Goldman, Sachs & Co. have shared
equally in the accumulation and securitization profits and risks. Effective
December 19, 1997, the partnership between AMRESCO Capital and the Goldman,
Sachs & Co. affiliate was revised. Any accumulation and securitization profit or
loss from commercial real estate loans for which loan applications were received
on or before November 13, 1997 (except for specified loans aggregating
approximately $120.3 million) will be shared equally by AMRESCO Capital and the
Goldman, Sachs & Co. affiliate. All profits and risks associated with commercial
real estate loans originated after November 13, 1997, as well as the profits and
risks relating to specified loans aggregating approximately $120.3 million for
which loan applications were received prior to November 13, 1997, will be for
the sole account of AMRESCO Capital. Goldman, Sachs & Co. or its affiliates will
continue to provide funding, distribution and related services to AMRESCO
Capital pursuant to a separate agreement.
Commercial Loan Servicing. AMRESCO Services is a servicer for securitized
pools of commercial mortgages and whole loans. The average life of these
securitized pools is expected to be approximately eight years. At September 30,
1997, AMRESCO Services acted as servicer with respect to approximately $15.4
billion of loans. The dominant users of commercial loan servicers are commercial
mortgage-backed bond trusts and other owners of commercial real estate loans,
including lenders accumulating loans for securitization or sale that contract
for servicing on an interim basis. Historically, the revenue stream from
servicing contracts on commercial mortgages has been relatively predictable as
prepayment penalties in commercial mortgages tend to discourage early loan
payoffs.
Primary servicing of whole loans 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 servicer of whole loans also must cause properties
to be inspected periodically, determine the adequacy of insurance coverage on
each property and monitor delinquent accounts for payment. Servicer rates are
determined by a bidding and negotiating process. AMRESCO Services is rated
"strong" as a primary servicer by Standard & Poor's, which is
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the highest rating given by that rating agency to primary servicers as of the
date of this Prospectus Supplement. AMRESCO Services has also received an
"acceptable" rating from Fitch.
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 securitization trustee in respect of the related securities. The Company
frequently is designated as the full servicer for a pool of mortgages, in which
case the Company acts as master, primary, and, in some cases, 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. In October 1996, the Company received the first public
"above average" commercial master servicer rating ever awarded by Standard &
Poor's. The "above average" rating is the highest rating given by Standard &
Poor's to master servicers as of the date of this Prospectus Supplement. The
Company is also rated "acceptable" by Fitch as a master servicer.
RESIDENTIAL MORTGAGE BANKING BUSINESS
General. Through AMRESCO Residential, the Company originates, acquires,
warehouses and securitizes residential mortgage loans. AMRESCO Residential's
loan production has increased from $1.9 billion for the year ended December 31,
1996 (its first full year of operations) to $2.6 billion for the nine months
ended September 30, 1997.
Industry Trends. Although studies and reports on the size of the market for
conventional, nonconforming (sub-prime) residential mortgage loans vary
significantly, these studies and reports do generally confirm that the market
has experienced, and continues to experience, significant growth. One industry
publication, Inside Mortgage Finance, reported in January of 1998 originations
of "B" credit and "C" credit loans of $124.5 billion during 1997, which
represented an increase of $28.0 billion or 29% from 1996. The Company believes
that the growth in the market has been attributable to, among other factors: (i)
a large number of borrowers seeking to consolidate their revolving credit debt
and auto loans for a lower rate and payment; (ii) slow growth in real estate
appreciation causing an increase in the number of borrowers seeking to make home
improvements; (iii) increased entry into the home equity loan market by
commercial banks as well as the growth in the number and size of mortgage
brokers making home equity financing more readily available; and (iv) growth in
overall consumer awareness of the availability of home equity financing. In
addition, the asset-backed securitization market has provided an important
source of financing for originators of home equity loans.
Borrower Profile and Underwriting. The Company targets borrowers that have
credit profiles that preclude their loans from being sold in the government
agency secondary markets. Such credit profiles may include consumer or mortgage
loan delinquencies, high debt-to-income ratios, previous bankruptcy or inability
to provide income documentation. Borrowers in the Company's targeted market
typically have significant equity in their homes and may be charged higher
interest rates for loans than more creditworthy borrowers. The Company believes
that the higher interest rates and the more favorable loan-to-value
characteristics of this market mitigate the greater credit risk associated with
such borrowers and make this an attractive market for the Company.
The residential mortgage loans originated or acquired by the Company are
underwritten in accordance with the Company's guidelines or the guidelines of
the third party originator which have been submitted to and approved by the
Company. The Company performs due diligence on all residential mortgage loans
which it acquires to assure compliance with underwriting standards. Under the
guidelines used or approved by the Company, various risks are used to grade the
likelihood that the mortgagor will satisfy the repayment conditions of the
mortgage loan. These risk categories establish the maximum permitted
loan-to-value ratio and loan amount, given the occupancy status of the mortgaged
property and the mortgagor's credit history and debt ratio. In general, higher
credit risk mortgage loans are graded in categories which contemplate higher
debt ratios and more (or more recent) major derogatory credit items such as
outstanding judgments or prior bankruptcies. The
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<PAGE> 35
underwriting guidelines generally establish lower loan-to-value ratios and loan
amounts for higher credit risk mortgage loans.
Loan Products. The residential mortgage loans originated and acquired by
the Company consist of fixed and adjustable rate conventional, nonconforming
mortgage loans with remaining terms to maturity of not more than 360 months and
secured by first and second lien deeds of trust, security deeds or mortgages.
The properties securing the residential mortgage loans consist primarily of
single family residences (which may be attached, detached, part of a
two-to-four-family dwelling, a condominium unit or a unit in a planned unit
development). The properties securing the residential mortgage loans may be
owner occupied or non-owner occupied investment properties. The Company's
residential mortgage loan products include fixed rate loans that bear a fixed
rate of interest for the life of the loan, adjustable rate loans that bear
interest at rates that adjust, along with related monthly payments, periodically
(generally semiannually) based on a specified financial index or quoted rate and
loans that bear a fixed rate of interest for a specified period following
origination (generally 2, 3 or 5 years) with periodic rate adjustments
thereafter based on a specified financial index or quoted rate. In a majority of
cases, the residential mortgage loans can be prepaid by the mortgagor in whole
or in part at any time, although the mortgagor may be required to pay a fee in
connection with certain prepayments. For residential mortgage loans included in
securitizations consummated between January 1, 1996 and September 30, 1997, the
pools of residential mortgage loans have exhibited the following
characteristics: weighted average loan-to-value ratios, based upon the lower of
the sales prices and the appraised values of the related properties at the time
of origination, ranging from 66% to 75%, weighted average remaining terms to
maturity ranging from 318 months to 357 months, average loan balances ranging
from $66,000 to $106,000 and weighted average coupon rates ranging from 9.8% to
11.3%.
Loan Sources. The Company obtains residential mortgage loans through
portfolio acquisitions, correspondent lending, wholesale broker operations and
various retail channels, including telemarketing, direct mail and retail
branches. Portfolio acquisitions involve the purchase of pools of closed
mortgage loans with aggregate principal balances in excess of $2.0 million from
mortgage banks and other financial institutions throughout the United States.
Correspondent lending involves the acquisition of closed loans one at a time
(i.e., on a "flow" basis) through a network of correspondent financial
institutions. Wholesale operations involve the origination of loans through the
Company's network of branch offices and through its centralized wholesale
operations. The acquisition of the assets and operations of Quality Mortgage USA
in October 1996 provided the Company with a nationwide network of 53 branch
offices that originate loans through relationships with over 2,000 mortgage
brokers. In its centralized wholesale operations, the Company serves mortgage
brokers who do not come within the area of service of one of the Company's
branch offices. Retail operations involve consumer direct mail and
telemarketing, as well as retail branch operations. In its retail operations the
Company works directly with consumers to originate, underwrite and close
mortgage loans. Although retail originations currently represent only a small
percentage of total loan volumes, the Company anticipates that an increasing
proportion of its residential mortgage loans will be sourced through the retail
channel. On January 28, 1998, the Company consummated the acquisition of the
business and operations of City Federal, a residential mortgage banker with six
East Coast-based retail offices. See "Recent Developments -- Acquisition of City
Federal Funding & Mortgage Corp."
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<PAGE> 36
The diversification of the Company's sources of loan production has
resulted in the correspondent, wholesale and retail channels of distribution
becoming increasingly important contributors to total residential mortgage loan
production. The following table sets forth aggregate dollar amounts (in
millions) and percentage of all loans originated or acquired by the Company by
each product channel for the periods shown:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE YEAR
------------------------------------------------ ENDED
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1997 1997 1997 1996
-------------- -------------- -------------- ----------------
$ % $ % $ % $ %
------ ----- ------ ----- ------ ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio acquisitions......... $425.4 60.0% $686.9 70.2% $689.7 76.7% $1,817.5 93.5%
Correspondent lending.......... 32.7 4.6 39.0 4.0 36.8 4.1 9.3 0.5
Wholesale...................... 243.2 34.3 237.0 24.2 159.3 17.7 106.6 5.5
Retail......................... 7.3 1.1 15.5 1.6 13.6 1.5 10.6 0.5
------ ----- ------ ----- ------ ----- -------- -----
Total................ $708.6 100.0% $978.4 100.0% $899.4 100.0% $1,944.0 100.0%
====== ===== ====== ===== ====== ===== ======== =====
</TABLE>
Securitization and Sale. The Company pools the residential mortgage loans
it originates and purchases to create asset-backed securities which it typically
sells on a quarterly basis. During the nine months ended September 30, 1997, the
Company securitized approximately $2.3 billion in residential mortgages in three
public offerings of asset-backed securities. Once the Company accumulates loans
of an aggregate principal amount sufficient to permit efficient securitization
of the loan pool (generally in excess of $500.0 million), the loans are conveyed
to a special purpose trust that sells into the secondary market various tranches
of rated collateralized asset-backed securities representing undivided interests
in the revenue streams generated by the loans. 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 unrated securities. The holders of unrated securities
absorb losses and the negative impact of prepayments, delinquencies and losses
before holders of other asset-backed securities issued in the securitization.
The unrated securities issued by the trust are purchased by the Company and are
included in "Retained Interests in Securitizations -- Trading" in the Company's
Consolidated Balance Sheet. From time to time, the Company acquires rated and
unrated securities from sub-prime, jumbo and non-standard residential mortgage
securitizations organized by third parties if considered by management to be
suitable investments.
The asset-backed securities publicly sold to date by the Company have
received investment grade ratings from a recognized statistical rating
organization, such as Standard & Poor's or Moody's Investors Service, Inc. To
achieve these ratings, the Company has used various credit enhancement
techniques, including subordination among classes of securities,
over-collateralization techniques, financial guaranty insurance or a combination
of the foregoing.
The Company utilizes the net proceeds from securitizations to pay down
outstanding warehouse facilities and to originate and purchase additional
residential mortgages and commercial real estate loans. The Company has also
pooled and re-securitized securities retained from its securitizations, with the
resulting certificates ("Net Interest Margin Certificates") being sold in
private sales to institutional investors. In September 1997, the Company
completed the private sale of Net Interest Margin Certificates for net proceeds
of approximately $102.9 million. The Company intends, from time to time, to
re-securitize securities retained from its securitizations and sell the
resulting Net Interest Margin Certificates to reduce the Company's capital
exposure with respect to retained interests in securitizations and to generate
additional borrowing capacity under the Revolving Loan Agreement. However, no
assurance can be given that such opportunities will be available in the future.
The Company, through AMRESCO Residential, uses warehouse facilities with
financial institutions to finance its origination and purchase of loans on a
short-term basis pending securitization. At September 30, 1997, AMRESCO
Residential had an aggregate borrowing capacity of $1.3 billion under three
warehouse facilities of which $850.4 million was available.
Residential Loan Servicing. Since the acquisition of the assets and
business of Quality Mortgage USA in October 1996, the Company has performed
delinquency management and related servicing functions for the asset
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<PAGE> 37
portfolios acquired from Quality Mortgage USA and for loans originated by the
Company after October 1, 1997 or acquired by it on a servicing released basis.
In addition, the Company is in the process of developing the appropriate
infrastructure and systems to support a broader array of customer-intensive
servicing functions, including general customer relations. The Company believes
that customer intensive servicing functions, such as collections, delinquency
management and general customer relations provide the opportunity to manage and
improve the performance of its residential mortgage loan portfolios by
mitigating credit losses and prepayment risk through direct involvement with
borrowers. The Company will continue to utilize recognized third party providers
for portfolios of residential mortgage loans currently being serviced by such
providers, as well as for standardized, systems intensive servicing functions,
such as payment processing and tax, insurance and investor reporting.
Portfolio Performance. The following table provides information with
respect to prepayments, delinquencies and net losses for each of the Company's
securitizations as of November 30, 1997, prior to any potential recoveries:
<TABLE>
<CAPTION>
DELINQUENCIES(2)
SECURITIZATION ORIGINAL CURRENT CPR % -------------------
SECURITY DATE BALANCE BALANCE ACTUAL(1) 30+ 60+ 90+ % NET LOSSES(3)
- -------- -------------- ---------- --------- --------- ---- ---- ----- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-1 01/25/96 $275 $145 29.49% 1.40% 0.71% 10.13% 0.58%
1996-2 04/25/96 257 111 41.21 2.17 1.83 9.60 0.18
1996-3 06/20/96 267 197 19.51 1.13 0.88 6.35 0.08
1996-4 08/28/96 311 182 34.97 2.06 1.22 10.76 0.04
1996-5 12/18/96 700 531 25.96 2.94 1.75 8.79 0.02
1997-1 03/26/97 605 536 16.50 2.72 1.57 5.62 0.00
1997-2 06/12/97 740 695 13.99 2.38 1.17 4.06 0.00
1997-3 09/16/97 950 935 9.50 2.24 1.20 1.09 0.00
Weighted)average(4
18.09% 2.34% 1.32% 5.17% 0.06%
</TABLE>
- ---------------
(1) The Constant Prepayment Rate ("CPR") represents the rate of prepayment
experienced by the referenced securitized pool of mortgage loans, expressed
as an annual rate, relative to the outstanding principal balance over the
life of mortgage loans.
(2) The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the 90+ days data
includes loans in foreclosure.
(3) Net Losses represents the aggregate amount, expressed as a percentage, which
has been determined to be uncollectible relating to mortgage loans, less
recoveries from liquidation proceeds and deficiency judgments.
(4) Based on the current balance at November 30, 1997.
COMMERCIAL FINANCE BUSINESS
General. In 1996, the Company organized the Commercial Finance Group to
provide financing to commercial borrowers in various targeted lending markets.
The Company focuses on (i) loans to franchisees of nationally recognized
restaurant, hospitality and automotive organizations, (ii) special situation
mid- to high-yield lending, with an emphasis on the real estate and
communications industries, and (iii) single family residential construction
lending. Loans originated by the franchise lending operation are sold to third
parties, principally through securitization, while the real estate,
communications and single family residential construction loans are retained for
the Company's own portfolio. Other ancillary products, services and investments
provided by the Commercial Finance Group include equipment leasing, small
business lending and loan servicing.
Franchise Lending. ACLC's primary line of business is the origination,
securitization and servicing of loans made to franchisees of nationally
recognized fast food chains, family dining establishments, hotels and motels,
automotive aftermarket servicers and truck stops. These borrower profiles
emphasize, among other things, the borrower's experience with the particular
operating concept (i.e., fast food, quick oil change, etc.) and the cash flow of
the respective operating units. Management believes that this product can be
expanded to include other small business loans made to operators with similar
borrowing profiles. According to the International Franchise Association,
franchises comprise one out of every 12 businesses in the United States. The
Franchise Trade
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<PAGE> 38
Association has estimated that by the year 2000 over 50% of retail sales, or
approximately $1 trillion, will be generated by franchises.
The table set forth below provides information regarding the distribution
of loans serviced by franchise category as of September 30, 1997 (dollars in
thousands):
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL TOTAL
OUTSTANDING OUTSTANDING
FRANCHISE GROUP NUMBER OF LOANS LOAN AMOUNT LOAN AMOUNT
--------------- --------------- ----------- -------------
<S> <C> <C> <C>
Quick service restaurants................... 723 $333,001 72.6%
Casual dining............................... 59 47,357 10.3
Automotive after market services............ 126 42,450 9.3
Hospitality services........................ 5 20,353 4.4
Truck stop.................................. 6 9,345 2.0
Other....................................... 4 6,416 1.4
--- -------- -----
Total............................. 923 $458,922 100.0%
=== ======== =====
</TABLE>
ACLC provides loans primarily for the refinancing, remodeling or purchase
of existing facilities. ACLC also offers construction lending to franchisee
borrowers to finance the construction of new facilities. The loans are funded
primarily by a dedicated warehouse facility until they are securitized and sold.
During the six months since the acquisition of ACLC (ending September 30, 1997),
the franchise loans originated by ACLC had loan balances ranging from $0.04
million to $2.8 million, a coupon rate ranging from 8.3% to 10.7%, an original
term to maturity ranging from 60 months to 180 months and a remaining term to
maturity ranging from 57 months to 180 months.
The franchise loans are generally originated in accordance with ACLC's
underwriting guidelines, which focus on, among other things, the borrowers
ability to repay the loan, the adequacy of the cash flow at the franchise
unit(s), the real and tangible personal property that may serve as collateral
for the loan, the experience of the borrower, the sales and demographic trends
at the franchise units being financed and the credit history of the borrower and
its principal shareholders. The underwriting process involves background checks
of, and personal interviews with, prospective borrowers designed to further
ACLC's understanding of the borrowers' business, the character and managerial
qualities of the borrowers' management and the future direction, growth and
financing needs of the borrowers' business. At September 30, 1997, ACLC had
experienced no losses on loans in its servicing portfolio.
ACLC generates loan volume using a combination of marketing efforts that
include direct solicitation, direct mail, convention attendance and referrals
from previous borrowers. During the six months since the acquisition of ACLC
(ending September 30, 1997), ACLC had originated loans to borrowers in 33
states, with the greatest concentration of borrowers (by original principal
amount of loans) being in Oregon ($18.3 million), Texas ($14.4 million) and
Missouri ($11.9 million).
In the second quarter of 1997, ACLC completed a securitization of
approximately $132.5 million of loans. The investment grade securities in such
securitization were sold in a private placement to investors and the residual
interest securities were retained by ACLC. The investment grade certificates
were rated "Aaa" by Moody's Investors Service, Inc., "AAA" by Standard & Poor's
and "AAA" by Duff & Phelps Credit Rating Co. The ratings on the securities
offered to investors were achieved by (i) limited cross-guarantee loan
provisions for the various borrowers within the securitization and (ii)
financial guarantee insurance provided by Capital Markets Assurance Corporation.
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<PAGE> 39
ACLC retains the servicing rights to loans following securitization. ACLC
has developed a proprietary servicing system due to the accounting requirements
for the credit enhancement and the other features of ACLC's franchise lending
program. At September 30, 1997, ACLC was servicing 923 franchise related loans
with aggregate balances of $458.9 million. The table set forth below provides
information regarding ACLC's delinquency experience for all franchise related
loans originated by ACLC as of the periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Total loan balances at end of period(1)..................... $341,395 $458,922
======== ========
Delinquencies(2):
31-60 Days................................................ $ 0 $ 0
61-90 Days................................................ 961 0
91+ Days.................................................. 5,911 2,124
-------- --------
Total delinquencies......................................... $ 6,872 $ 2,124
======== ========
Total delinquencies as a percentage of total loan
balances(3)............................................... 2.01% 0.46%
</TABLE>
- ---------------
(1) The Company acquired the business and assets of ACLC effective March 31,
1997.
(2) The period of delinquency is based on the number of days payments are
contractually past due.
(3) Reflects contractual delinquencies. At September 30, 1997, all delinquencies
in respect of franchise loans were paid by borrower cross guarantees. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Securitization Practices."
ACLC also originates, underwrites and closes loans that are funded by a
third party conduit lender but only for credits that do not fit the profile for
ACLC's securitizable loan products. The conduit lender then includes these loans
in their securitization and ACLC records a gain from the sale to the conduit
lender. ACLC also provides lease financing for business equipment, primarily
restaurant equipment based on referrals from franchise borrowers.
Special Situation Lending. In 1995, the Company began making commercial
loans through AMRESCO Funding. AMRESCO Funding provides mid- to high-yield
financing to borrowers in special situations that have been unable to obtain
financing from traditional funding sources. In these transactions, the Company
funds senior and subordinated indebtedness generally ranging from $2.0 million
to $10.0 million for terms of one to four years to borrowers with an established
management record. Borrowers targeted by AMRESCO Funding usually have
reputations for enhancing value, but may lack the financial capacity to qualify
for bank financing beyond a certain level. Loan structures vary as they are
usually customized to fit the characteristics and purpose of the loans. Income
is generally derived by a combination of interest, fees and (in some cases) a
net profit interest.
AMRESCO Funding lending activity for the years ended December 31, 1995 and
1996 and the nine months ended September 30, 1997 is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ----------------
1997 1996 1995
------------- ------- ------
<S> <C> <C> <C>
Beginning Principal Balance........................... $ 33,597 $ 1,712 $ 0
Principal Advances.................................. 103,043 36,415 1,720
Principal Payments.................................. (13,097) (4,530) (8)
-------- ------- ------
Ending Principal Balance.............................. $123,543 $33,597 $1,712
======== ======= ======
</TABLE>
AMRESCO Funding lends primarily to the commercial real estate and
communications industries (radio and television) from loan production offices in
Texas, California, Oregon, Massachusetts, Virginia and Canada. Commercial real
estate loans and loans to borrowers in the communications industries accounted
for $84.1 mil-
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<PAGE> 40
lion (68%) and $39.4 million (32%), respectively, of the total AMRESCO Funding
principal balance at September 30, 1997.
AMRESCO Funding tailors its underwriting processes to suit the industries,
borrower types and various loan structures encountered in its business. The
underwriting process for loans takes into account special risks associated with
mid-to-high yield lending, including an in-depth assessment of the character,
experience (including operating history) and financial capacity of the borrower
or the borrowers' principal(s), a detailed analysis of the business, property or
project being financed and an analysis of the market in which the borrower
operates, including competition and market share data, comparable properties or
businesses, as well as more general information such as population, job growth,
median income and demographic data.
The loans originated in AMRESCO Funding's business are serviced by AMRESCO
Services. As of September 30, 1997, AMRESCO Services was servicing 30 loans with
aggregate balances of $209.6 million for AMRESCO Funding. As of September 30,
1997, AMRESCO Funding had experienced no delinquencies or losses on its
portfolio of outstanding loans and had established loan loss reserves of $4.2
million or 3.4% of aggregate loan balances.
Single Family Residential Construction Lending. In January 1997, the
Company established AMRESCO Builders Group to provide construction financing to
builders of homes for first time and first move-up buyers. To facilitate this
effort, the Company hired an experienced lending and servicing team formerly
associated with a Texas financial institution. AMRESCO Builders Group targets
experienced homebuilders that are starting from 100 to 1,500 units per year.
These homes generally are in the $90,000 to $200,000 price range. Prospective
borrowers must also have a minimum of three years proven experience in building
and selling homes, satisfactory financial condition and acceptable credit
history. AMRESCO Builders Group also provides a limited amount of acquisition
and development lending for residential lots which will serve as feeder stock
for the construction loan program. AMRESCO Builders Group funds loans through a
dedicated warehouse debt facility.
As of September 30, 1997, the residential construction loans originated by
AMRESCO Builders Group have consisted of adjustable rate loans secured by first
liens on homes under construction or lots. As of September 30, 1997, the loans
have evidenced the following characteristics: maturities from six months
(construction loans) to eighteen months (acquisition and development loans), and
interest rates ranging from 9.5% to 10.5% for single family construction and
acquisition and development loans.
AMRESCO Builders Group currently has loan production offices in California,
Arizona, Nevada, Georgia and Florida. AMRESCO Builders Group producers targets
markets that its management believes have large or growing populations with
qualifying incomes of home buying age. As of September 30, 1997, AMRESCO
Builders Group loan balances outstanding were $50.0 million on commitments of
$71.8 million. As of September 30, 1997, AMRESCO Builders Group had experienced
no delinquencies or losses on its portfolio of outstanding loans and had
established loan loss reserves of $0.4 million or 0.8% of aggregate loan
balances.
All loan processing, administration and servicing is performed in Houston,
Texas. This process maximizes the benefits of current technology by
electronically storing and tracking loan documents and information and allows
AMRESCO Builders Group to provide a high level of service to borrower customers.
For example, builder home completion records in the servicing system can be
electronically updated by a computer download from inspectors in the field
thereby speeding payment of draw requests. AMRESCO Builders Group believes that
this level of service provides added value to the borrower while minimizing
administrative cost.
COMPETITION
General. The Company's competition varies by business line and geographic
market. Generally, competition within each of the business lines in 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.
Asset Management. The Asset Management business is a nationwide (and
increasingly international) business with numerous financially strong and
experienced competitors. 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
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<PAGE> 41
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's
competitors in the Asset Management business include Lennar Corp., Archon (an
affiliate of Goldman, Sachs & Co.), J.E. Roberts Companies, GMAC and First City
Financial Corp.
Commercial Mortgage Banking. The Company's commercial mortgage banking
business consists of real estate capital markets, commercial real estate lending
and commercial loan servicing business lines. In each of these business lines,
the Company competes on a nationwide basis. The real estate capital markets and
commercial real estate lending businesses are fragmented, composed primarily of
small local or regional firms. The Company believes that the commercial mortgage
banking industry is moving toward greater consolidation and that well
capitalized, full service, nationwide mortgage banking firms 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's competitors in the commercial mortgage banking business
include Nomura Asset Capital Corporation, GMAC (commercial real estate finance),
L.J. Melody & Co. and Washington Mortgage Corporation.
The commercial loan servicing business is highly competitive. Distinct
markets have developed for the servicing of performing loan pools,
under-performing loan pools and non-performing loan pools. The Company has
focused its commercial loan servicing business on the market for performing loan
pools, the servicing market that management believes has the greatest potential
for growth. The Company's competitors in the commercial loan servicing business
include GMAC Commercial Mortgage Corporation, Midland Loan Services, L.P., G.E.
Capital Asset Management and First Union Bank.
Residential Mortgage Banking. The Company recently has encountered
increased competition in the market for conventional, nonconforming residential
mortgage 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. The Company's competitors in the
residential mortgage banking business include the Associates, United Companies
Financial, Money Store and Conti Mortgage Corp.
Commercial Finance. The markets in which the Commercial Finance Group
operates are highly competitive and are characterized by competitive factors
that vary based upon product and geographic region. The Commercial Finance
Group's competitors include captive and independent diversified finance
companies, specialty finance companies (including specialty franchise finance
companies), commercial banks, thrift institutions, asset-based lenders, real
estate investment trusts and leasing companies. Many of the competitors of the
Commercial Finance Group are large companies that have substantial capital,
technological and marketing resources, and some of these companies may have
lower costs of capital than is available to the Commercial Finance Group.
EMPLOYEES
At September 30, 1997, the Company and its subsidiaries employed 1,590
persons. Of that total, 227 persons were employed in the asset management group,
473 in the commercial mortgage banking group, 605 in the residential mortgage
banking group, 97 in the commercial finance business and 188 in general
corporate administration. The Company believes that its employee relations are
generally good.
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<PAGE> 42
DESCRIPTION OF NOTES OFFERING
The following summary of the principal terms of the 1998 Senior
Subordinated Notes does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the Subordinated Indenture, a
copy of which has been filed as an exhibit to the Registration Statement of
which this Prospectus Supplement is a part. Capitalized terms not otherwise
defined herein have the meanings specified in the Subordinated Indenture.
The 1998 Senior Subordinated Notes will initially be limited in aggregate
principal amount to $290.0 million and will mature on March 15, 2005. The 1998
Senior Subordinated Notes will be unsecured obligations of the Company and will
rank pari passu in right of payment with other senior subordinated indebtedness
issued by the Company and subordinate to all existing and future general
unsecured indebtedness of the Company and its subsidiaries (subject to certain
exceptions). Interest on the 1998 Senior Subordinated Notes will accrue at a
rate of 9.875% per annum and will be payable in cash semi-annually on March 15
and September 15 of each year, commencing September 15, 1998.
The 1998 Senior Subordinated Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after March 15, 2002 at
specified redemption prices together with accrued and unpaid interest, if any,
to the date of redemption. In addition, upon the occurrence of a Change of
Control (as defined), each holder of 1998 Senior Subordinated Notes will be able
to require the Company to repurchase all or a portion of such holder's 1998
Senior Subordinated Notes at 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the date of repurchase.
The Subordinated Indenture and the Company Order governing the 1998 Senior
Subordinated Notes will contain certain covenants, including limitations on the
incurrence of indebtedness, the making of restricted payments (including
restrictions on the payment of dividends on, or the repurchase of, the Common
Stock), the imposition of certain payment restrictions on subsidiaries,
transactions with affiliates, the existence of liens, the making of guaranties
by subsidiaries, mergers and sales of assets and the conduct of business.
The Common Stock Offering is not conditioned upon the consummation of the
Notes Offering.
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<PAGE> 43
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated February 23, 1998 (the "Underwriting Agreement"), the
underwriters named below (the "Underwriters"), for whom Credit Suisse First
Boston Corporation, Morgan Stanley & Co. Incorporated, Piper Jaffray Inc.,
Prudential Securities Incorporated and The Robinson-Humphrey Company, LLC are
acting as representatives (the "Representatives"), have severally but not
jointly agreed to purchase from the Company the following respective numbers of
shares of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Credit Suisse First Boston Corporation...................... 720,000
Morgan Stanley & Co. Incorporated........................... 720,000
Piper Jaffray Inc........................................... 720,000
Prudential Securities Incorporated.......................... 720,000
The Robinson-Humphrey Company, LLC.......................... 720,000
ABN AMRO Incorporated....................................... 150,000
J.C. Bradford & Co. ........................................ 150,000
NationsBanc Montgomery Securities LLC....................... 150,000
Raymond James & Associates, Inc. ........................... 150,000
Charles Schwab & Co., Inc. ................................. 150,000
Southwest Securities, Inc. ................................. 150,000
---------
Total............................................. 4,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Common Stock
offered hereby (other than those shares covered by the over-allotment option
described below) if any are purchased. The Underwriting Agreement provides that,
in the event of a default by an Underwriter, in certain circumstances the
purchase commitments of non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Company has granted to the Underwriters an option, expiring at the
close of business on the 30th day after the date of this Prospectus Supplement,
to purchase up to 675,000 additional shares at the public offering price less
the underwriting discounts and commissions, all as set forth on the cover page
of this Prospectus Supplement. Such option may be exercised only to cover
over-allotments in the sale of shares of Common Stock. To the extent such option
is exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of Common Stock as it was obligated to purchase pursuant to the
Underwriting Agreement.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public initially at the
public offering price set forth on the cover page of this Prospectus Supplement
and, through the Representatives, to certain dealers at such price less a
concession of $0.86 per share, and the Underwriters and such dealers may allow a
discount of $0.29 per share on sales of shares to certain other dealers. After
the initial public offering, the public offering price and concession and
discount to dealers may be changed by the Representatives.
The Company has agreed that it will not offer, sell, contract to sell,
announce its intention to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933 (the "Securities Act") relating to,
any additional shares of its Common Stock or securities convertible into or
exchangeable or exercisable for any shares of its Common Stock without the prior
written consent of the Credit Suisse First Boston Corporation on behalf of the
Underwriters for a period of 90 days after the date of this Prospectus
Supplement, except issuances pursuant to the exercise of employee stock options
outstanding on the date hereof.
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<PAGE> 44
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or contribute
to payments which the Underwriters may be required to make in respect thereof.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions,
penalty bids and "passive" market making in accordance with Regulation M under
the Securities Exchange Act of 1934 (the "Exchange Act"). Over-allotment
involves syndicate sales in excess of the offering size, which creates a
syndicate short position. Stabilizing transactions permit bids to purchase the
underlying securities so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the securities in
the open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the Representatives to reclaim a
selling concession from a syndicate member when the shares of Common Stock
originally sold by such syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. In "passive" market making,
market makers in the Common Stock who are Underwriters or prospective
underwriters may, subject to certain limitations, make bids for or purchases of
shares of Common Stock until the time, if any, at which a stabilizing bid is
made. Such stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the Common Stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
In the ordinary course of their respective businesses, certain of the
Underwriters and their affiliates have in the past and may in the future provide
investment and commercial banking, advisory and other financial services to the
Company and certain of its affiliates, for which they have or will receive
customary compensation. Affiliates of Credit Suisse First Boston Corporation,
Morgan Stanley & Co. Incorporated and Prudential Securities Incorporated
currently provide warehouse loan facilities to various subsidiaries of the
Company.
It is anticipated that more than 10% of the proceeds from the sale of the
Common Stock, not including underwriting compensation, will be received by
NationsBank of Texas, N.A., as Agent and a lender under the Company's Revolving
Loan Agreement. NationsBanc Montgomery Securities LLC, an affiliate of
NationsBank of Texas, N.A., is a member of the National Association of
Securities Dealers, Inc. ("NASD") and is acting as an underwriter of the Common
Stock Offering. Therefore, the Common Stock Offering is being made pursuant to
the provisions of Section 2710(c)(8) of the Conduct Rules of the NASD.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of Common Stock are effected. Accordingly, any resale of the Common
Stock in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction, and which may require resales
to be made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the dealer from whom
such purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such Common Stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions".
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RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE OF BRITISH COLUMBIA RESIDENTS
A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Common Stock acquired on the same date
and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Common Stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
The validity of the Common Stock offered hereby and certain other legal
matters will be passed upon for the Company by L. Keith Blackwell, General
Counsel of the Company. Mr. Blackwell currently owns beneficially 19,505 shares
of Common Stock (excluding 9,951 unvested shares allocated under the Company's
restricted stock plan) and holds options to purchase 88,275 shares of Common
Stock. Certain legal matters relating to the Common Stock offered hereby will be
passed upon for the Underwriters by Simpson Thacher & Bartlett (a partnership
which includes professional corporations), New York, New York.
EXPERTS
The consolidated financial statements of the Company incorporated in this
Prospectus Supplement by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 and the consolidated financial statements
from which the Selected Financial Data included in this Prospectus Supplement
have been derived, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is incorporated herein by reference,
and has been so incorporated in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The consolidated balance sheets of Quality Mortgage USA 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, are included in the 1996 Form 10-K and are incorporated herein by
reference. Such financial statements have been incorporated by reference herein
in reliance on 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> 46
SUPPLEMENTAL GLOSSARY
The following are certain defined terms which may be used in this
Prospectus Supplement and in the accompanying Prospectus:
"1996 FORM 10-K" means the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
"1998 SENIOR SUBORDINATED NOTES" means the Company's Senior Subordinated
Notes due 2005.
"ACLC" means AMRESCO Commercial Lending Corporation.
"AMMB" is the symbol used to trade the Company's common stock on the Nasdaq
National Market.
"AMRESCO" means AMRESCO, INC.
"AMRESCO BUILDERS GROUP" means AMRESCO Builders Group, Inc., a subsidiary
of the Company
"AMRESCO CAPITAL" means AMRESCO Capital L.P., a limited partnership.
"BUILDERS WAREHOUSE FACILITY" means that certain Loan and Security
Agreement between AMRESCO Builders Group and Bank United dated September 16,
1997.
"COMMON STOCK" means shares of common stock, par value $0.05 per share,
offered in the Common Stock Offering.
"COMMON STOCK OFFERING" means all of the shares of common stock, par value
$0.05 per share, being offered hereby.
"EPS" means earnings per share.
"HOLLIDAY FENOGLIO FOWLER" means Holliday Fenoglio Fowler, L.P., a
subsidiary of the Company.
"NET INTEREST MARGIN CERTIFICATES" means the securities based upon the
unrated securities retained by the Company from securitizations.
"NOTES OFFERING" means the offering of 1998 Senior Subordinated Notes being
offered concurrently herewith.
"QUALITY MORTGAGE USA" means Quality Mortgage USA, Inc., a California
corporation.
"REIT" means the real estate investment trust to be sponsored by the
Company.
"SFAS" means Statement of Financial Accounting Standards.
S-46
<PAGE> 47
$500,000,000
[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 $500.0 million
(or the equivalent thereof if the Debt Securities are denominated in one or more
foreign currencies or 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 Prospectus Supplement will also contain
information, where applicable, about certain material United States Federal
income tax considerations relating to the particular Securities offered hereby.
The Prospectus Supplement will also contain information, where applicable, as to
any listing on a national securities exchange of the Securities covered by such
Prospectus Supplement.
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 4 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 August 20, 1997
<PAGE> 48
THE COMPANY
Certain terms used in this Prospectus are defined in the "Glossary"
beginning on page 28 herein. Certain terms used in connection with the Debt
Securities are defined under the caption "Description of Securities -- Debt
Securities -- Certain Definitions."
General. The Company is a leading specialty financial services company
engaged in residential mortgage banking, commercial mortgage banking, asset
management, commercial finance and institutional real estate investment advisory
services.
RESIDENTIAL MORTGAGE BANKING
The Company originates, acquires, warehouses and securitizes sub-prime
loans. Borrowers under such loans may not satisfy the more rigid underwriting
standards of the traditional residential mortgage lending market for a number of
reasons, such as blemished credit histories (from past loan delinquencies or
bankruptcy), inability to provide income verification data or lack of
established credit history. The Company believes that this market is large and
is underserved by traditional lenders. Therefore, there is less competition in
this market and interest rates are higher than on mortgage loans for more
creditworthy borrowers. The Company believes that the higher interest rates
offered by the sub-prime loan market are attractive even after taking into
account the potentially greater credit risk associated with such borrowers.
COMMERCIAL MORTGAGE BANKING
The Company performs a wide range of commercial mortgage banking services,
including originating, underwriting, placing, selling, securitizing and
servicing commercial real estate loans through Holliday Fenoglio, ACC and
AMRESCO Services.
Holliday Fenoglio primarily serves commercial real estate developers and
owners by originating commercial real estate loans and acting as a broker on
commercial real estate sales through its own commission-based mortgage bankers.
The loans originated by Holliday Fenoglio generally are funded by institutional
lenders, principally insurance companies, and by ACC and other Conduit
Purchasers. Holliday Fenoglio generally retains Primary Servicer rights on a
portion of the loans originated by it. The Company believes that Holliday
Fenoglio's relationship and credibility with its institutional lender network
provide the Company with a competitive advantage in the commercial mortgage
banking industry.
ACC is a mortgage banker that originates, underwrites and securitizes
commercial real estate loans that are funded primarily by Conduit Purchasers and
Fannie Mae. ACC has established a partnership with a major Wall Street
investment bank which funds a significant portion of ACC's commercial real
estate loan originations and through which ACC and the investment bank share in
the accumulation and securitization profits and risks. ACC serves its market
directly through branch offices, as well as through a network of independent
mortgage brokers, including Holliday Fenoglio. ACC is approved by Fannie Mae to
participate in its DUS program, which ACC believes makes it a more competitive
loan originator and underwriter of multifamily mortgages. ACC is also an
approved lender in the Freddie Mac multifamily seller/servicer program in the
states of Florida, North Carolina and South Carolina.
AMRESCO Services serves as a Primary Servicer for whole loans and as a
Master/Full Servicer for securitized pools of commercial mortgages. The dominant
users of commercial loan servicers are commercial mortgage-backed bond trusts
and similar securitized commercial asset-backed loan portfolios held by numerous
passive investors. Historically, the revenue stream from servicing contracts on
commercial mortgages has been relatively predictable due in part to prepayment
penalties in commercial mortgages that tend to discourage early loan payoffs.
ASSET MANAGEMENT
The Company manages and resolves Asset Portfolios acquired at a discount to
Face Value by the Company alone and by the Company with co-investors. The
Company also manages and resolves Asset Portfolios owned by third parties. Asset
Portfolios generally include fee owned real estate and secured loans of varying
qualities and
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<PAGE> 49
collateral types. The majority of the loans in the Asset Portfolios in which the
Company invests are in default at the time of acquisition. Asset Portfolios
purchased by the Company are currently comprised of real estate secured loans
and collateralized business loans, the resolution of which may be based either
on cash flow of a business or on real estate and other collateral securing the
loan. While the majority of the Asset Portfolios managed or owned by the Company
are located in the United States, the Company has opened offices in Toronto and
London through which it pursues Asset Portfolio acquisition opportunities and
manages its investments in Canada and Western Europe. The Company and a major
Wall Street bank were recently awarded a contract to buy an Asset Portfolio in
Mexico. The Company may seek further opportunities in Mexico. The Company may
open offices and seek strategic alliances in other international markets.
COMMERCIAL FINANCE
The Company's commercial finance business was formally commenced in 1996.
The Company intends to expand its commercial finance business through
acquisitions of targeted niche finance companies and internal start-ups. The
Company's commercial finance business currently involves: (i) providing high
yield debt financing for the real estate and communications industries and for
businesses and projects which are unable to access traditional lending sources,
(ii) providing construction financing for builders of single family residences,
(iii) originating, acquiring, warehousing, securitizing and servicing loans to
franchises with single franchise and multiple franchise operations, and (iv)
equipment leasing and related financing activities.
INSTITUTIONAL REAL ESTATE INVESTMENT ADVISORY
The Company provides real estate investment advice to various institutional
investors (primarily pension funds) seeking to invest in real estate and related
investments. Although the Company is paid acquisition, disposition and
performance-based incentive fees by some of its clients, its principal form of
revenue from this activity is asset management fees, which are based on the cash
flow or value of the investments under management.
The Company is marketing to institutional investors the opportunity to
invest in Subordinated Certificates issued in commercial and residential
mortgage securitizations through investment funds or other entities 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 own investments in Subordinated
Certificates in the future will be through these funds or entities. As a policy,
the Company will not sell to these funds Subordinated Certificates created in
securitizations organized by the Company.
---------------------
The Company is a Delaware corporation. The Company's principal executive
offices are located at 700 North Pearl Street, Suite 2400, Dallas, Texas 75201
and its telephone number at that address is (214) 953-7700.
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<PAGE> 50
RISK FACTORS
Investors should carefully consider the following matters in connection
with an investment in any particular Securities in addition to the other
information contained or incorporated by reference in this Prospectus or any
accompanying Prospectus Supplement.
RISKS ASSOCIATED WITH RAPID GROWTH AND ENTRY IN NEW BUSINESSES
In early 1994, the Company made the strategic decision to diversify its
business lines. The Company has entered the residential mortgage banking,
commercial mortgage banking, commercial finance and institutional real estate
investment advisory businesses through a combination of acquisitions and the
internal start-up of new business lines. These businesses contributed in the
aggregate approximately 50% and 68% of the Company's operating profit for the
year ended December 31, 1996 and for the six months ended June 30, 1997,
respectively, and the Company expects they will continue to contribute a
substantial portion of its revenue and operating income for the foreseeable
future. The Company has also increased its investments in Asset Portfolios. The
rapid entry of the Company into these business lines has resulted in increased
demands on the Company's personnel and systems. As part of its business
strategy, the Company intends to acquire additional businesses which complement
the Company's core capabilities in specialty financial services. The Company
must successfully continue its assimilation of multiple acquired businesses with
differing markets, customer bases, financial products, systems and managements.
An inability to assimilate acquired businesses could have an adverse effect on
the Company's financial condition and results of operations. The Company's
ability to support, manage and control continued growth is dependent upon, among
other things, its ability to hire, train, supervise and manage its workforce and
to continue to develop the skills necessary for the Company to compete
successfully in its new business lines. There can be no assurance that the
Company will successfully meet all of these challenges.
NEED FOR ADDITIONAL FINANCING
General. The Company's ability to execute its business strategy depends to
a significant degree on its ability to obtain additional indebtedness and equity
capital. The Company has no commitments for additional borrowings or sales of
equity capital and there can be no assurance that the Company will be successful
in consummating any such future financing transactions on terms satisfactory to
the Company, if at all. Factors which could affect the Company's access to the
capital markets, or the costs of such capital, include changes in interest
rates, general economic conditions and the perception in the capital markets of
the Company's business, results of operations, leverage, financial condition and
business prospects. Each of these factors is to a large extent subject to
economic, financial and competitive factors beyond the Company's control. In
addition, covenants under the Company's current and future debt securities and
credit facilities may significantly restrict the Company's ability to incur
additional indebtedness and to issue Preferred Stock. The Company's ability to
repay its outstanding indebtedness, including the Debt Securities, at maturity
may depend on its ability to refinance such indebtedness, which could be
adversely affected if the Company does not have access to the capital markets
for the sale of additional debt or equity securities through public offerings or
private placements on terms reasonably satisfactory to the Company.
Dependence on Warehouse Financing. The Company's residential mortgage
banking, commercial mortgage banking and commercial finance securitization
businesses depend upon warehouse facilities with financial institutions or
institutional lenders to finance the Company's origination and purchase of loans
on a short-term basis pending sale or securitization. Implementation of the
Company's growth strategy requires continued availability of warehouse
facilities and may require increases in the capacity of warehouse facilities.
There can be no assurance that such financing will be available on terms
reasonably satisfactory to the Company. The inability of the Company to arrange
additional warehouse facilities or to extend or replace existing facilities when
they expire would have a material adverse effect on the Company's business,
financial condition and results of operations and on the Company's outstanding
securities.
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<PAGE> 51
RISKS OF SECURITIZATION
Significance of Securitization. The Company currently believes that it will
become increasingly dependent upon its ability to securitize mortgage loans and
other loans by pooling and subsequently selling them in the secondary market in
order to generate revenues, earnings and cash flows. Accordingly, adverse
changes in the secondary market for such loans could impair the Company's
ability to originate, purchase and sell mortgage loans and other loans on a
favorable or timely basis. Any such impairment could have a material adverse
effect upon the Company's business and results of operations. The Company
endeavors to effect a securitization of its residential mortgage loans on at
least a quarterly basis and its commercial mortgage and commercial finance loans
on at least a semi-annual basis. However, market and other considerations,
including the conformity of loans to insurance company and rating agency
requirements, could affect the timing of such transactions. Any delay in the
sale of loans beyond the reporting period in which such sale is anticipated to
occur would delay any expected gain on sale and adversely affect the Company's
reported earnings for such reporting period.
Investment in Subordinated Certificates. The Company invests in
Subordinated Certificates created in securitizations completed by the Company or
purchased from third parties. At December 31, 1996, the Company's aggregate
investment in Subordinated Certificates was approximately $130 million based on
the estimated fair value of the Subordinated Certificates at that time. The
Subordinated Certificates entitle the holder to the excess of the interest and
principal paid by borrowers on the loans pooled in the securitization over the
interest and principal passed through to other investors in the securities
created in the securitization transaction, less the normal servicing and other
fees and credit losses realized. The estimated fair value of the Subordinated
Certificates is computed using prepayment, default and interest rate assumptions
that the Company believes market participants would use for similar instruments
at the time of sale. These assumptions may not reflect actual experience.
Accordingly, no assurance can be given that these securities could in fact be
sold or recovered at their stated values on the balance sheet, if at all.
Contingent Risks. Although the Company sells substantially all the mortgage
loans and other loans which it originates or purchases, the Company retains some
degree of credit risk on substantially all loans sold. During the period of time
that loans are held pending sale, the Company is subject to the various business
risks associated with the lending business, including the risk of borrower
default, the risk of foreclosure and the risk that a rapid increase in interest
rates would result in a decline in the value of loans to potential purchasers.
The documents governing the Company's securitization program require the Company
to establish deposit accounts or build over-collateralization levels through
retention of distributions otherwise payable to the holders of the Subordinated
Certificates. Such amounts serve as credit enhancement for the related trust and
are therefore available to fund losses realized on loans held by such trust. In
addition, documents governing the Company's securitization program require the
Company to commit to repurchase or replace loans which do not conform to the
representations and warranties made by the Company at the time of sale.
Retained Risks of Securitized Loans. The Company makes various
representations with respect to the loans that it pools and securitizes. The
Company's representations rely in part on similar representations made by the
originators of such loans when they were purchased by the Company. In the event
of a breach of its representations, the Company may be required to repurchase or
replace the related loan using its own funds. While the Company may have a claim
against the originator in the event of a breach of any of these representations
made by the originators, the Company's ability to recover on any such claim will
be dependent on the financial condition of the originator. There can be no
assurance that the Company will not experience a material loss in respect of any
of these contingencies.
Importance of Credit Enhancement. To market residential mortgage-backed,
commercial mortgage-backed and commercial loan-backed securities, the Company
has in the past used various means of credit enhancement to obtain a "AAA/Aaa"
rating for such securities. In its residential mortgage-backed and commercial
loan-backed securitizations, the Company has relied to a significant extent on
monoline insurance companies to provide such credit enhancement. Any
unwillingness of monoline insurance companies to guarantee the senior interests
in the Company's loan pools could have a material adverse effect on the
Company's financial position and results of operations.
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<PAGE> 52
RISKS RELATED TO SUB-PRIME LOANS
The sub-prime loan market is comprised of credit-impaired borrowers who
generally have significant equity in their homes and whose borrowing needs are
not currently met by traditional financial institutions. Loans made to such
borrowers may entail a higher risk of delinquency and higher losses than loans
made to more creditworthy borrowers. While the Company believes that the
underwriting criteria and collection methods it employs enable it to reduce the
higher risks inherent in loans made to credit-impaired borrowers, no assurance
can be given that such criteria or methods will afford adequate protection
against higher delinquencies, foreclosures or losses than anticipated and, as a
result, the Company's financial condition or results of operation could be
adversely affected.
SERVICING RISKS; BORROWER DELINQUENCIES AND CLAIMS
When borrowers are delinquent in making monthly payments on commercial
mortgage loans serviced by the Company, the Company is required to advance
interest payments with respect to such delinquent loans to the extent that the
Company deems such advances ultimately recoverable. These advances require
funding from the Company's capital resources but have priority of repayment from
collections or recoveries on the loans in the related pool in the succeeding
month. In the ordinary course of its business, the Company is subject to claims
made against it by borrowers and private investors arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentations, errors and omissions of
employees and officers of the Company (including its appraisers), incomplete
documentation and failures by the Company to comply with various laws and
regulations applicable to its business. The Company believes that liability with
respect to any currently asserted claims or legal actions is not likely to be
material to the Company's consolidated financial position or results of
operations; however, any claims asserted in the future may result in legal
expenses or liabilities which could have a material adverse effect on the
Company's financial position and results of operations.
As a participant in the Fannie Mae DUS program, the Company must accept a
first loss risk on loans originated by the Company. In addition, the Company
must also make certain representations and warranties concerning loans
originated by the Company and sold to Conduit Purchasers or Fannie Mae. These
representations cover such matters as title to the property, lien priority,
environmental reviews and certain other matters.
ASSET PERFORMANCE ASSUMPTIONS
The Company's business, financial condition, results of operations and
liquidity depend, to a material extent, on the performance of loans owned
directly or backing securities purchased and sold by the Company. The carrying
value of the Company's Asset Portfolios, Subordinated Certificates and certain
other assets have been determined in part using estimates of future cash flows
based on assumptions concerning future default and prepayment rates that are
consistent with the Company's historical experience and market conditions and
present value discount rates that the Company believes would be requested by an
unrelated purchaser of an identical stream of estimated cash flows. Management
believes that the Company's estimates of cash flows were reasonable at the time
such estimates were made. However, the actual rates of default and/or prepayment
on such assets may exceed those estimated and consequently may adversely affect
the carrying values of such assets, anticipated future cash flows, results of
operations and reported earnings. The Company periodically reviews its loss and
prepayment assumptions in relation to current performance of the loans and
market conditions and, if necessary, provides for the impairment of the
respective asset. The Company's business, financial condition and results of
operations could be materially adversely affected by such adjustments in the
future. No assurance can be given that loan losses and prepayments will 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
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designed to mitigate the impact of changes in interest rates. However, there can
be no assurance that the profitability of the Company would not be adversely
affected during any period of changes in interest rates. A significant decline
in interest rates could result in increased prepayment of outstanding loans.
A substantial and sustained increase in interest rates could adversely
affect the ability of the Company to originate loans and could reduce the gains
recognized by the Company upon their securitization and sale. A significant
decline in interest rates could decrease the size of the Company's residential
Subordinated Certificates by increasing the level of loan prepayments.
Fluctuating interest rates also may affect the net interest income earned by the
Company resulting from the difference between the yield to the Company on
mortgage loans held pending sale and the interest paid by the Company for funds
borrowed under the Company's warehouse credit facilities or otherwise. In
addition, inverse or flattened interest yield curves could have an adverse
impact on the earnings of the Company because the loans pooled and sold by the
Company have long-term rates while the senior interest in the related trusts are
priced on the basis of intermediate rates.
RISKS OF HEDGING TRANSACTIONS
The Company has in the past and may in the future enter into interest rate
or foreign currency financial instruments used for hedging purposes. While
intended to reduce the effects of volatility in interest rate or foreign
currency price movements, such transactions could cause the Company to recognize
losses depending on the terms of the instrument and the interest rate or foreign
currency price movements.
FOREIGN OPERATIONS; CURRENCY RISKS
The Company's asset management and resolution business has entered into,
and intends to continue to enter into, contracts to purchase and to manage and
resolve Asset Portfolios located in Canada, Mexico and Western Europe and may in
the future expand into other foreign countries. Foreign operations are subject
to various special risks, including currency translation risks and currency
exchange rate fluctuations (which the Company intends to mitigate with currency
hedging arrangements as available and economical) and exchange controls. Changes
in foreign exchange rates may have an adverse effect on the Company's financial
condition and results of operations. In addition, earnings of foreign operations
are subject to foreign income taxes that reduce cash flow available to meet debt
service requirements and other obligations of the Company, which may be payable
even if the Company has no earnings on a consolidated basis.
CYCLICALITY OF AND COMPETITION IN THE ASSET MANAGEMENT BUSINESS
The asset management business is affected by long-term cycles in the
general economy. In addition, the volume of domestic Asset Portfolios available
for purchase by investors or management by third party servicers such as the
Company has generally declined since 1993 as large pools of distressed assets
acquired by governmental agencies in the 1980's and early 1990's have been
resolved or sold. The Company cannot predict what will be a normal annual volume
of Asset Portfolios to be sold or outsourced for management and resolution.
Moreover, future Asset Portfolio purchases will 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
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Portfolios held for the Company's own account, increase the cost of capital
invested by the Company and the length of time that capital is invested in a
particular Asset Portfolio, thereby negatively impacting the rate of return
realized from such Asset Portfolio. Economic downturns and rising interest rates
also may reduce the number of loan originations by the Company's residential
mortgage banking, commercial mortgage banking and commercial finance businesses
and negatively impact its securitization activity.
In addition, periods of economic slowdown or recession, whether general,
regional or industry-related, may increase the risk of default on mortgage loans
and other loans and may have an adverse effect on the Company's business,
financial condition and results of operations. Such periods also may be
accompanied by decreased consumer demand for residential mortgages, resulting in
declining values of homes securing outstanding loans, thereby weakening
collateral coverage and increasing the possibility of losses in the event of
default. Significant increases in homes for sale during recessionary economic
periods may depress the prices at which foreclosed homes may be sold or delay
the timing of such sales. There can be no assurance that the housing markets
will be adequate for the sale of foreclosed homes and any material deterioration
of such markets could reduce recoveries from the sale of collateral.
GOVERNMENT REGULATION
The operations of the Company are subject to regulation by federal, state
and local government authorities, as well as to various laws and judicial and
administrative decisions, that impose requirements and restrictions affecting,
among other things, the Company's loan originations, credit activities, maximum
interest rates, finance and other charges, disclosures to customers, the terms
of secured transactions, collection, repossession and claims handling
procedures, multiple qualification and licensing requirements for doing business
in various jurisdictions, and other trade practices. Although the Company
believes that it is in compliance in all material respects with applicable
local, state and federal laws, rules and regulations, there can be no assurance
that more restrictive laws, rules or regulations will not be adopted in the
future that could make compliance more difficult or expensive, restrict the
Company's ability to originate, purchase or sell loans, further limit or
restrict the amount of interest and other charges earned on loans originated or
purchased by the Company, further limit or restrict the terms of loan
agreements, or otherwise adversely affect the business or prospects of the
Company. There are also, among other risks, uncertainties concerning the
business practice of paying back points to residential mortgage brokers.
COMPETITION
All of the business lines in which the Company operates are highly
competitive. Some of the Company's principal competitors in certain business
lines are substantially larger and better capitalized than the Company. Because
of these resources, these companies may be better able than the Company to
obtain new customers, to acquire Asset Portfolios, to pursue new business
opportunities or to survive periods of industry consolidation.
The Company is experiencing greater competition in its residential mortgage
banking business. The Company has experienced increasing competition from other
Conduit Purchasers in the acquisition of sub-prime loan portfolios. In addition,
the Company expects to encounter significant competition in the sub-prime loan
origination market.
The Company believes that its ability to acquire Asset Portfolios for its
own account will be important to its future growth. Acquisitions of Asset
Portfolios are often based on competitive bidding, where there are dangers of
bidding too low (which generates no business), as well as of bidding too high
(which could win the Asset Portfolio at an economically unattractive price). In
addition, the increasing competition in this business line has caused the
Company to experience decreasing profit margins in its Asset Portfolio business
in order to remain a competitive bidder for Asset Portfolios and has caused the
Company to redeploy its capital in other more profitable product lines.
The Company also encounters significant competition in its other business
lines. The commercial mortgage banking business is highly fragmented with
certain large national competitors and significant localized competition. In
addition, within the commercial loan origination and residential mortgage
securitization businesses, access to and the cost of capital are critical to the
Company's ability to compete. The Company must
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<PAGE> 55
compete with numerous competitors, many of whom have superior access to capital
sources and can arrange or obtain lower cost of capital for customers.
Other. The Company also encounters significant competition in its other
business lines. The Company must compete with numerous competitors, many of
which have superior access to capital sources and can arrange or obtain lower
cost capital for customers.
ANTI-TAKEOVER CONSIDERATIONS
The Company's Restated Certificate of Incorporation, as amended, and
Amended and Restated Bylaws include a number of provisions that may have the
effect of encouraging persons considering unsolicited tender offers or other
unilateral takeover proposals to negotiate with the Company's Board of Directors
rather than pursue non-negotiated takeover attempts. These provisions include a
staggered Board of Directors, authorized "blank check" preferred stock, super
majority voting requirements on certain matters and prohibitions against certain
business combinations. The Indentures governing the Senior Subordinated Notes
and Senior Notes require the Company to repurchase all outstanding Senior
Subordinated Notes and Senior Notes in the event of certain change of control
transactions. In addition, on May 28, 1997, the Company adopted a Stockholders
Rights Plan pursuant to which rights were distributed to stockholders of record
as of June 9, 1997. The Stockholders Rights Plan provides, among other things,
that if a person (or group of affiliated or associated persons) acquires (or ten
(10) days after the commencement of a tender offer to acquire) "beneficial
ownership" of 15% or more of the outstanding shares of Common Stock, the rights
previously distributed to stockholders, other than those owned by such acquiring
person or group, will become exercisable. Under the Stockholders Rights Plan,
the acquisition of 15% or more of the outstanding Common Stock or the completion
of the tender offer will entitle the holder to purchase shares of Common Stock
having a market value equal to twice the purchase price of the right. These
anti-takeover provisions could have the effect of discouraging or making more
difficult a merger, tender offer, other business combination or proxy contest,
even if such event would be favorable to the interests of the stockholders. See
"Description of Securities -- Delaware Law and Certain Corporate Provisions."
FORWARD-LOOKING STATEMENTS
This Prospectus and any Prospectus Supplement may contain or incorporate by
reference forward-looking statements. The factors identified under "Risk
Factors" are important factors (but not necessarily all important factors) that
could cause actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company (or its
subsidiaries).
Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, the Company
cautions that, while such assumptions or bases are believed to be reasonable and
are made in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. Where, in any forward-looking
statement, the Company (or its subsidiaries), or its management, express an
expectation or belief as to future results, such expectation or belief is
expressed in good faith and is believed to have a reasonable basis, but there
can be no assurance that the statement of expectation or belief will result or
be achieved or accomplished. The words "believe", "expect", "estimate",
"project" and "anticipate" and similar expressions identify forward-looking
statements.
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.
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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 three months ended March
31, 1997 and 1996 and the years ended December 31, 1996, 1995, 1994, 1993 and
1992 on an historical basis.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------- ----------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges(1)...... 1.8x 2.6x 2.4x 5.4x 21.2x 58.9x (2)
Ratio of earnings to combined fixed charges
and Preferred Stock dividends(3)......... 1.8x 2.6x 2.4x 5.4x 21.2x 58.9x (2)
</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 interest expense in 1992.
(3) The Company did not have any Preferred Stock outstanding during any of these
periods.
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 150,000,000 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 July 15, 1997, the Company had issued and outstanding
36,091,656 shares of Common Stock and no shares of Preferred Stock. As of such
date, there were approximately 2,817 holders of record of the outstanding shares
of Common Stock.
The following summary of the Company's Common Stock and Preferred Stock is
qualified in its entirety by reference to the Company's Restated Certificate of
Incorporation (the "Certificate of Incorporation"), its Amended and Restated
Bylaws (the "Bylaws"), and the Delaware General Corporation Law, as amended (the
"DGCL").
COMMON STOCK
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. Since October 1995, the Company has not paid cash dividends. The Board
of Directors currently intends to retain all earnings to support anticipated
growth in the current operations of the Company and to finance future expansion.
The Company's Revolving Loan Agreement, the Senior Subordinated Notes Indenture
and the Senior 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
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the Company will be distributed pro rata to the holders of Common Stock, subject
to any liquidation preference of the holders of Preferred Stock which may then
be outstanding. There are no preemptive rights, conversion rights, or redemption
or sinking fund provisions with respect to the shares of Common Stock. All of
the outstanding shares of Common Stock are duly and validly authorized and
issued, fully paid and non-assessable.
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. 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 becomes an
interested stockholder, unless either (i) prior to the date at which the
stockholder became an interested stockholder the Board of Directors approved
either the business combination or the transaction in which the person becomes
an interested stockholder, (ii) the stockholder acquires more than 85% of the
outstanding voting stock of the corporation (excluding shares held by directors
who are officers or held in certain employee stock plans) upon consummation of
the transaction in which the stockholder becomes an interested stockholder or
(iii) the business combination is approved by the Board of Directors and by
two-thirds of the outstanding voting stock of the corporation (excluding shares
held by the interested stockholder) at a meeting of the stockholders (and not by
written consent) held on or subsequent to the date on which the person became an
"interested stockholder". An "interested stockholder" is a person who, together
with affiliates and associates, owns (or is an affiliate or associate of the
corporation and, together with affiliates and associates, at any time within the
prior three years did own) 15% or more of the corporation's voting stock.
Section 203 defines a "business combination" to include, without limitation,
mergers, consolidations, stock sales and asset based transactions and other
transactions resulting in a financial benefit to the interested stockholder.
The Company's Certificate of Incorporation and Bylaws contain a number of
provisions relating to corporate governance and to the rights of stockholders.
Certain of these provisions may be deemed to have a potential "anti-takeover"
effect in that such provisions may delay, defer or prevent a change of control
of the Company. These provisions include (i) the classification of the Board of
Directors into three classes, each class serving for staggered three-year terms;
(ii) the authority of the Board of Directors to determine the size of the Board
of Directors, subject to certain minimums and maximums; (iii) the authority of
certain members of the Board of Directors to fill vacancies on the Board of
Directors; (iv) a requirement that special meetings of stockholders may be
called only by the Board of Directors, the Chairman of the Board or holders of
at least one-tenth of all the shares entitled to vote at the meeting; (v) the
elimination of stockholder action by written consent; (vi) the authority of the
Board of Directors to issue series of Preferred Stock with such voting rights
and other powers as the Board of Directors may determine; (vii) the requirement
that the Article in the Certificate of Incorporation creating the staggered
board may only be amended by the vote of at least 66 2/3% of the voting
securities of the Company; and (viii) a requirement that any business
combination between the Company and a beneficial owner of more than five percent
of any class of an equity security of the Company must be approved by the
holders of a majority of the Company's securities, excluding those securities
held by such beneficial owner, voted at a meeting called for the purpose of
approving such business combination.
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
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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.
Other Matters. The Common Stock is quoted as a national market security by
the NASDAQ Stock Market, Inc. The Common Stock is identified as such market by
the symbol "AMMB." The Bank of New York, New York, New York, is the transfer
agent and registrar for the Common Stock.
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.
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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.
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 proportion 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
Company's Registration Statement on Form S-3 (No. 333-6031) and the Company's
Form 8-K dated March 12, 1997, respectively. 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
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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. (Indenture Section 301)
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.
(Indenture Section 301)
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
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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 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; and
(xix) 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
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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 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. The Indentures do not quantify what constitutes "all or
substantially all" of the Company's assets. The Indentures provide that the
Notes and Indentures shall be governed by and construed in accordance with the
laws of the State of Texas. Assuming such law as currently in effect governs the
meaning of "all or substantially all," there currently is no established
quantitative definition of "all or substantially all" of the assets of a
corporation under applicable law. An analysis of all the then relevant facts and
circumstances and relevant legal authorities would be required at the time of
determination to establish whether or not a sale of "all or substantially all"
assets has occurred. (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
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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)
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,
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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)
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
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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 standstill will not prevent the occurrence of an "Event of
Default" under the Subordinated Indenture.
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
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original issuance of such Debt Security, of the amount determined as provided in
(i) above). (Indenture Section 101)
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
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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).
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, contingent 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,
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or other agreement, contingent or otherwise, to purchase, repurchase, or
otherwise acquire, to supply, or advance funds or become liable with 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.
"Junior Indebtedness" means all Funded Debt except Senior Debt.
"Material Subsidiary" means Holliday Fenoglio, Inc., AMRESCO Management,
Inc., AMRESCO Residential Mortgage Corporation, AMRESCO Advisors, Inc., AMRESCO
Residential Credit Corporation, AMRESCO Residential Capital Markets, Inc.,
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.
"pari passu" means, with respect to the ranking of any indebtedness of any
Person in relation to other indebtedness of such Person, that such indebtedness
(a) either (i) is not subordinate in right of payment to any other indebtedness
of such Person or (ii) is subordinate in right of payment to the same
indebtedness of such Person as is the other and is so subordinate to the same
extent and (b) is not subordinate in right of payment to the other or to any
indebtedness of such Person as to which the other is not so subordinate.
"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.
"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,
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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.
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.
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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 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.
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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, 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 to be allowed 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
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Offered Securities pursuant to Delayed Delivery Contracts 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 as General Counsel of the Company. Mr. Blackwell
currently owns beneficially 8,904 shares of Common Stock (excluding 10,501
unvested shares allocated under the Company's restricted stock plan) and holds
options to purchase 46,165 shares of Common Stock.
EXPERTS
The consolidated financial statements incorporated in this prospectus by
reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report which is incorporated herein by reference
and has been so incorporated in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing.
The consolidated balance sheets of Quality Mortgage USA, Inc. as of
September 30, 1995 and 1996, and the consolidated statements of income,
stockholder's equity and cash flows for each of the two years in the period
ended September 30, 1996, incorporated by reference in the 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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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 website
maintained by the Commission (http://www.sec.gov). The Company's Common Stock is
quoted on the Nasdaq National Market and such reports, proxy statements and
other information may be inspected at the National Association of Securities
Dealers, Inc., 1735 K. Street N.W., Washington, D.C. 20006. The Company's 10%
Senior Subordinated Notes due 2003, the 8.75% Senior Notes due 1999 and the 10%
Senior Subordinated Notes due 2004 are listed for trading 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 and any
Prospectus Supplement are stated in United States dollars ("$," "dollars," "U.S.
dollars," or "U.S.$").
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act, are hereby incorporated by reference in
this Prospectus: (i) Annual Report on Form 10-K for the year ended December 31,
1996 (filed March 31, 1997; File No. 1-11579), (ii) Current Report on Form 8-K
dated March 7, 1997 (filed March 7, 1997; File No. 001-11599), (iii) Current
Report on Form 8-K dated March 12, 1997 (filed March 27, 1997; File No.
001-1159), (iv) Quarterly Report on Form 10-Q for the quarter ended March 31,
1997 (filed May 15, 1997; File No. 001-11599), (iv) Current Report on Form 8-K
dated May 28, 1997; (filed May 30, 1997; File No. 001-1159) and (v) the
description of the Company's Common Stock contained in the Company's
Registration Statement on Form 8-A dated May 28, 1997 (filed May 30, 1997; File
No. 000-08630).
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus shall be
deemed to be incorporated by reference herein. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed superseded or modified for purposes of this Prospectus to the extent that
a statement contained herein (or in any other subsequently filed document which
also is incorporated by reference herein) modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, on the written or oral
request of any such person, a copy of any or all of the documents incorporated
by reference (other than exhibits to such documents which are not specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to the Company, 700 North Pearl Street, Suite 2400, LB 342,
Dallas, Texas 75201, Attention: L. Keith Blackwell, Vice President, General
Counsel and Secretary. Telephone requests may be directed to L. Keith Blackwell,
Vice President, General Counsel and Secretary of the Company, at (214) 953-7700.
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<PAGE> 74
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, 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, a subsidiary of the
Company.
"ASSET PORTFOLIO" means a pool or portfolio of performing, non-performing
or underperforming commercial, industrial, agricultural and/or real estate
loans.
"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 ownership interests in the trust to public or private investors.
"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.
"DTC" means The Depository Trust Company or its nominees.
"DUS" means the Delegated Underwriting and Servicing program established by
Fannie Mae that permits a DUS approved lender to commit and close loans for
multi-family mortgages for resale to Fannie Mae without Fannie Mae's prior
approval of such loans.
"EQS" means, collectively, EQ Services, Inc. and Equitable Real Estate
Investment Management, Inc.
"FACE VALUE" means, with respect to any loan or Asset Portfolio, the
aggregate unpaid principal balance of a loan or loans.
"FANNIE MAE" means the Federal National Mortgage Association.
"FDIC" means the Federal Deposit Insurance Corporation.
"FREDDIE MAC" means the Federal Home Loan Mortgage Corporation.
"FULL SERVICER" means an entity which serves as Primary Servicer, Master
Servicer and Special Servicer on an Asset Portfolio.
"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 OF TEXAS" means NationsBank of Texas, N.A.
28
<PAGE> 75
"PRIMARY SERVICER" means an entity which provides various administrative
services with respect to loans such as collecting monthly mortgage payments,
maintaining escrow accounts for the payment of taxes and insurance premiums on
behalf of borrowers, remitting payments of principal and interest promptly to
investors in mortgages or the Master Servicer of a pool and reporting to those
investors or the Master Servicer on financial transactions related to such
mortgages.
"QUALITY" means Quality Mortgage USA, Inc., a California corporation.
"REVOLVING LOAN AGREEMENT" means the First Amended and Restated Revolving
Loan Agreement dated as of April 25, 1996 and as subsequently amended, among the
Company, NationsBank of Texas, as Agent, and the Banks which are parties thereto
from time to time.
"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, mortgage-backed or commercial
loan-backed securities.
"SENIOR SUBORDINATED NOTES" means the Company's 10% Senior Subordinated
Notes due 2003 and the Company's 10% Senior Subordinated Notes due 2004,
collectively.
"SENIOR SUBORDINATED NOTES INDENTURE" means the Indenture dated January 15,
1996, governing the Senior Subordinated Notes.
"SPECIAL SERVICER" means an entity which provides asset management and
resolution services with respect to non-performing or under-performing loans
within a pool of performing loans and/or mortgages.
"SUBORDINATED CERTIFICATES" means the unrated and uninsured tranches of
collateralized residential or commercial mortgage-backed securities which are
included under the caption "Retained Interests in Securitizations trading" in
the Company's consolidated balance sheet.
"SUB-PRIME LOAN" means a residential mortgage loan to borrowers who do not
qualify for conventional loans or whose borrowing needs are not met by
traditional residential mortgage lenders. Such borrowers may not satisfy the
more rigid underwriting standards of the traditional residential mortgage
lending market for a number of reasons, such as blemished credit histories (from
past loan delinquencies or bankruptcy), inability to provide income verification
data or lack of established credit history.
"WAREHOUSE" means a type of lending arrangement whereby loans funded or
purchased and held for sale are financed by financial institutions or
institutional lenders on a short-term basis and secured by the underlying loans.
"WAREHOUSE AGREEMENTS" mean all warehouse loan facilities entered into by
the Company from time to time.
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<PAGE> 76
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NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary......... S-3
Use of Proceeds....................... S-15
Price Range of Common Stock and
Dividend Policy..................... S-16
Capitalization........................ S-17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... S-18
Business.............................. S-27
Description of Notes Offering......... S-42
Underwriting.......................... S-43
Notice to Canadian Residents.......... S-44
Legal Matters......................... S-45
Experts............................... S-45
Supplemental Glossary................. S-46
</TABLE>
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Company........................... 2
Risk Factors.......................... 4
Forward-Looking Statements............ 9
Use of Proceeds....................... 9
Ratios of Earnings to Fixed Charges
and Earnings to Combined Fixed
Charges and Preferred Stock
Dividends........................... 10
Description of Securities............. 10
Plan of Distribution.................. 25
Legal Matters......................... 26
Experts............................... 26
Available Information................. 27
Incorporation of Certain Documents by
Reference........................... 27
Glossary.............................. 28
</TABLE>
======================================================
[AMRESCO LOGO]
4,500,000 Shares
Common Stock
($.05 par value)
PROSPECTUS SUPPLEMENT
CREDIT SUISSE FIRST BOSTON
MORGAN STANLEY DEAN WITTER
PIPER JAFFRAY INC.
PRUDENTIAL SECURITIES INCORPORATED
THE ROBINSON-HUMPHREY COMPANY
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