UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-8630
AMRESCO, INC.
(Exact name of Registrant as specified in its charter)
Delaware 59-1781257
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 N. Pearl Street, Suite 2400, LB 342, Dallas, Texas 75201-7424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 953-7700
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
44,277,282 shares of common stock, $.05 par value per share, as of
August 10, 1998.
AMRESCO, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1998 and 3
December 31, 1997
Consolidated Statements of Income - Three and Six
Months Ended June 30, 1998 and 1997 4
Consolidated Statement of Shareholders' Equity -
Six Months Ended June 30, 1998 5
Consolidated Statements of Cash Flows - Six
Months Ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 18
Item 4. Submission of Maters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURE 19
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
AMRESCO, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share amounts)
June 30, December 31,
1998 1997
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 35,051 $ 25,866
Loans held for sale, net 1,894,241 1,330,337
Loans and asset portfolios, net 858,363 648,694
Retained interests in securitizations - trading
(at fair value) 392,753 294,062
Asset backed and other securities - available for
sale (at fair value) 192,551 107,677
Accounts receivable, net of reserves of $395 and
$455, respectively 16,168 19,183
Deferred income taxes 38,482 28,324
Premises and equipment, net of accumulated
depreciation of $13,251 and $10,641, respectively 14,351 10,147
Intangible assets, net of accumulated amortization
of $25,018 and $20,038, respectively 145,325 113,841
Other assets 91,276 55,717
TOTAL ASSETS $3,678,561 $2,633,848
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 37,422 $ 22,821
Accrued employee compensation and benefits 24,581 33,609
Notes payable 611,741 583,442
Warehouse loans payable 1,669,824 1,216,796
Senior notes 57,500 57,500
Senior subordinated notes 580,190 250,000
Income taxes payable 9,882 19,185
Other liabilities 76,020 41,995
Total liabilities 3,067,160 2,225,348
SHAREHOLDERS' EQUITY:
Common stock, $0.05 par value, authorized
150,000,000 shares; 42,918,044 and 36,543,210
shares issued, respectively 2,147 1,827
Capital in excess of par 436,431 257,941
Reductions for employee stock (6,095) (2,713)
Treasury stock, $0.05 par value, 24,339 shares in
1998 and 1997, respectively (160) (160)
Accumulated other comprehensive income 2,123 8,359
Retained earnings 176,955 143,246
Total shareholders' equity 611,401 408,500
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,678,561 $2,633,848
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
AMRESCO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Six Months
Ended Ended
June 30, June 30,
1998 1997 1998 1997
REVENUES:
<S> <C> <C> <C> <C>
Interest and other investment income $108,849 $ 45,319 $197,418 $81,334
Gain on sale of loans and investments, net 34,917 26,515 59,683 44,626
Mortgage banking and servicing fees 27,145 16,025 48,551 29,353
Asset management and resolution fees 4,175 6,164 6,832 11,891
Income from equity affiliate 1,589 9,401 6,354 10,457
Other revenues 1,227 457 2,127 1,060
Total revenues 177,902 103,881 320,965 178,721
EXPENSES:
Interest 62,150 25,253 111,993 41,412
Personnel 51,928 35,181 93,276 64,976
Other general and administrative 19,722 13,660 37,564 24,048
Provision for loan and asset portfolio losses 6,718 5,298 13,565 7,218
Depreciation and amortization 5,155 3,803 9,431 6,775
Total expenses 145,673 83,195 265,829 144,429
Income before income taxes 32,229 20,686 55,136 34,292
Income tax expense 12,569 8,200 21,427 13,245
NET INCOME $ 19,660 $12,486 $33,709 $21,047
Earnings per share:
Basic $ 0.46 $ 0.35 $ 0.83 $ 0.61
Diluted 0.45 0.34 0.80 0.59
Weighted average number of common shares
outstanding
Basic 42,457 35,709 40,742 34,720
Diluted 44,003 36,653 42,224 35,733
</TABLE>
See notes to consolidated financial statements.
AMRESCO, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Six Months Ended June 30, 1998
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Reductions Accumulated
$0.05 Par Value Capital in for Other Total
Number of Excess of Employee Treasury Comprehensive Retained Shareholders'
Shares Amount Par Stock Stock Income Earnings Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1998 36,543,210 $1,827 $257,941 $(2,713) $(160) $ 8,359 $143,246 $408,500
Common stock offering
net of offering costs 5,175,000 259 147,273 147,532
Issuance of common stock
for purchase of
subsidiaries 442,640 21 12,240 12,261
Issuance of common
stock for earnout 335,761 17 8,690 8,707
Exercise of stock
options (including
tax benefit) 263,877 15 5,445 5,460
Grant of restricted
stock 165,556 8 4,990 (4,998)
Cancellation of
restricted stock (8,000) (148) 148
Amortization of
unearned stock
compensation 1,468 1,468
Realized gain on
securities available (4,889) (4,889)
for sale
Unrealized loss on
securities available (819) (819)
for sale
Foreign currency
translation adjustments (528) (528)
Net income 33,709 33,709
June 30, 1998 42,918,044 $2,147 $436,431 $(6,095) $(160) $ 2,123 $176,955 $611,401
</TABLE>
See notes to consolidated financial statements.
AMRESCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months
Ended
June 30,
1998 1997
OPERATING ACTIVITIES:
Net income $ 33,709 $ 21,047
Adjustments to reconcile net income to net cash used
in operating activities:
Gain on sale of loans and investments (59,683) (44,626)
Undistributed earnings of equity affiliate (3,514) (10,457)
Depreciation and amortization 9,431 6,775
Accretion of interest income (10,915) (18,120)
Provision for loan and investment losses 13,565 7,218
Deferred tax benefit (6,525) (7,305)
Other 1,468 827
Increase (decrease) in cash for changes in (exclusive
of assets and liabilities acquired in business
combinations):
Accounts receivable 3,015 551
Loans held for sale, net (642,705) (431,684)
Retained interests in securitizations 29,795 (778)
Other assets (35,056) (5,656)
Accounts payable and accrued compensation and benefits 14,507 1,722
Warehouse loans payable 453,028 342,883
Income taxes payable (9,303) 4,887
Other liabilities 24,469 5,319
Net cash used in operating activities (184,714) (127,397)
INVESTING ACTIVITIES:
Sale of temporary investments, net 34,190
Origination of loans and purchase of asset
portfolios (498,667) (259,601)
Collections on loans and asset portfolios 288,173 74,431
Purchase of asset-backed securities - available for
sale (103,891) (49,975)
Proceeds from sale of and collections on asset-
backed securities - available for sale 18,653 26,688
Cash used for purchase of subsidiaries (22,990) (2,176)
Investment in and advances to joint venture (4,999) (9,530)
Distribution from joint venture 21,498
Purchase of premises and equipment (5,879) (2,219)
Net cash used in investing activities (308,102) (188,192)
FINANCING ACTIVITIES:
Net proceeds from notes payable and other debt 892,608 586,923
Repayment of notes payable and other debt (864,427) (464,882)
Proceeds from issuance of senior subordinated notes 320,828 186,631
Proceeds from common stock offering 147,532
Stock options exercised and tax benefit from
employee stock compensation 5,460 1,019
Net cash provided by financing activities 502,001 309,691
Net increase (decrease) in cash and cash equivalents 9,185 (5,898)
Cash and cash equivalents, beginning of period 25,866 29,046
Cash and cash equivalents, end of period $ 35,051 $ 23,148
SUPPLEMENTAL DISCLOSURE:
Exchange of loans held for sale for retained
interests in securitizations $ 74,051 $ 44,875
Interest paid 63,040 34,226
Income taxes paid 27,224 16,249
Common stock issued for the purchase of 20,968 31,740
subsidiaries and earnouts
Common stock issued for unearned stock
compensation, net 4,850 3,268
See notes to consolidated financial statements
AMRESCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
1. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements of
AMRESCO, INC. and subsidiaries (the "Company") have been prepared by
the Company in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods
ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the entire fiscal year or any other interim
period. It is recommended that these statements be read in
conjunction with the Company's consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997. Certain reclassifications of
prior period amounts have been made to conform to the current period
presentation.
Retained interests in securitizations are classified as trading
and are carried at estimated fair market value. Changes in market
value are included in earnings. Cash flows for retained interests in
securitizations are generally subordinated to other security holders
in a securitization trust. 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 estimated future credit losses, estimated prepayments and
normal servicing and other related fees. 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 carrying value of the
retained interests in securitizations is determined by the Company on
a disaggregated basis and considers historical prepayment and loss
experience, economic conditions and trends, collateral values and
other relevant factors. The discount rate used to value the retained
interests is influenced primarily by volatility and predictability of
the underlying cash flows which generally become more certain as the
securities season. The weighted average discount rate used to value
the Company's residual strips at June 30, 1998 was 17.8%. The
Company has utilized a 20% discount rate in its home equity and
franchise loan securitizations and a 15% discount rate in its small
business loan securitization (completed by commercial finance) in
1998 for initial valuation purposes. The lower discount rate on the
small business loan securitization was due to the reduced risk
related to a better borrower cross-collateralization feature in these
securitizations.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires an entity to
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in
the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a foreign-
currency-denominated forecasted transaction. This statement is
effective for all fiscal quarters for fiscal years beginning after
June 15, 1999. The Company has not yet determined the impact on the
Consolidated Financial Statements upon adoption of this standard.
2. Notes Payable and Other Debt
Revolving Loan Agreement - During 1998, the Company amended its
revolving loan agreement (the "Revolving Loan Agreement") with a
syndicate of lenders, led by NationsBank of Texas, N.A. The
Revolving Loan Agreement was amended to provide for a revolving
commitment of $490.0 million and a term commitment of $100.0 million,
subject to a combined borrowing limit of $550.0 million. As of June
30, 1998, $372.3 million was outstanding under the Revolving Loan
Agreement.
Warehouse Debt - On January 8, 1998, a wholly-owned subsidiary
of the Company entered into an amendment of a Whole Loan Financing
Facility which replaced an existing warehouse agreement, with Credit
Suisse First Boston Mortgage Capital LLC for an amount not to exceed
$700.0 million (the "Facility") to finance the acquisition and
warehousing of mortgage loans. Indebtedness under the Facility is
secured by the loans originated with funds advanced under the
Facility. As of June 30, 1998, $430.7 million was outstanding under
the Facility.
On February 26, 1998, a wholly-owned subsidiary of the Company
entered into an Interim Warehouse and Security Agreement with
Prudential Securities Credit Corporation ("Prudential") for an amount
not to exceed $250.0 million (the "Security Agreement"). The
Security Agreement provides a maximum loan balance of $100.0 million
for the origination of certain commercial loans and a maximum loan
balance of $150.0 million for the origination of certain franchise
and construction loans. Indebtedness under the Security Agreement is
secured by the loans originated with funds advanced under the
Security Agreement. At June 30, 1998, $63.4 million was outstanding
under the Security Agreement. On March 26, 1998, a wholly-owned
subsidiary of the Company entered into an Interim Warehouse and
Security Agreement with Prudential for an amount not to exceed $350.0
million (the "Residential Security Agreement") for the origination
and purchase of certain mortgage loans. Indebtedness under the
Residential Security Agreement is secured by the loans originated or
purchased with funds advanced under the Residential Security
Agreement. At June 30, 1998, $291.8 million was outstanding under
the Residential Security Agreement. The maximum aggregate loan
amount to the Company and its subsidiaries from Prudential from these
agreements and other outstanding agreements cannot exceed $1.0
billion.
On April 14, 1998, a wholly-owned subsidiary of the Company
entered into an amendment of a Loan and Security Agreement with Aspen
Funding Corp. for an amount not to exceed $470.0 million to finance
the acquisition and warehousing of mortgage loans and the acquisition
of certain eligible securities. Indebtedness under the Loan and
Security Agreement is secured by the loans originated with funds
advanced under the Loan and Security Agreement. As of June 30, 1998,
$82.6 million was outstanding under the Loan and Security Agreement.
Commercial Paper Conduit - On June 26, 1998, a wholly-owned
subsidiary of the Company entered into a Transfer and Administration
Agreement with Kitty Hawk Funding Corporation for an amount not to
exceed $75.0 million to provide transfer financing to residential
construction builders. Indebtedness under the Transfer and
Administration Agreement is secured by the loans originated with
funds advanced under the Transfer and Administration Agreement. As
of June 30, 1998, $74.4 million was outstanding under the Transfer
and Administration Agreement.
Subordinated Debt - On February 24, 1998 and March 10, 1998, the
Company issued $290.0 million and $40.2 million, respectively,
aggregate principal amount of senior subordinated notes. The notes
bear interest at 9.875% per annum and mature on March 15, 2005. The
net proceeds from the offerings aggregated approximately $320.7
million. 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.
3. Shareholders' Equity
On February 24, 1998, the Company issued options to purchase
approximately 331,000 shares of common stock and approximately
166,000 shares of restricted common stock to certain key employees
and directors.
On February 23, 1998, the Company completed a registered public
offering of 5.2 million shares of common stock including the
underwriters' over-allotment option. The net proceeds from such
offering, after underwriters discount and offering expenses,
aggregated approximately $147.2 million. The price to the public was
$30.00 per share and the proceeds to the Company were $28.56 per
share, after underwriting discounts.
4. Comprehensive Income
Effective January 1, 1998, the Company adopted statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." This Statement requires that all items recognized under
accounting standards as components of comprehensive earnings be
reported in an annual financial statement that is displayed with the
same prominence as other annual financial statements. This Statement
also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement. For
example, other comprehensive earnings includes foreign currency
translation adjustments and unrealized gains and losses on marketable
securities classified as available-for-sale. Annual financial
statements for prior periods will be reclassified, as required. The
Company's total comprehensive earnings were as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C> <C>
NET INCOME $19,660 $12,486 $33,709 $21,047
Other comprehensive loss,net
of tax:
Foreign currency translation
adjustments $ (632) $ 64 $ (528) $(82)
Unrealized gains on securities:
Unrealized holding gains
(losses) during period (706) 928 (819) 177
Less: Reclassification adjustment
for Gains included in net income (2,138) (4,889)
Other comprehensive income (loss),
net of tax (3,476) 992 (6,236) 95
COMPREHENSIVE INCOME $16,184 $13,478 $27,473 $21,142
</TABLE>
5. Subsequent Events
On July 16, 1998, the Company purchased the assets of
Independence Funding Co. L.L.P. ("IFC") and TeleCapital L.P.
("TeleCapital") for approximately 1.3 million shares of the Company's
common stock and cash of $44.0 million. IFC's primary line of
business is providing long term financing to small businesses and
TeleCapital's primary line of business is providing financing to the
pay phone industry.
On August 11, 1998, the Company acquired Mortgage Investors
Corporation ("MIC"), a privately held specialized producer of
veteran's administration streamlined re-financed loans, by merging a
wholly-owned subsidiary of the Company with MIC. The merger
agreement provided for an acquisition price of approximately 1.8
million shares of the Company's common stock and $2.6 million in
cash. Additionally, the Company will pay an annual earnout over a
three-year period, the total of which will not exceed $105.0 million,
comprised of approximately 82% in the Company's common stock and 18%
cash.
Effective July 28, 1998, the Company adopted the AMRESCO, INC.
1998 Stock Option and Award Plan (the "Plan"), which permits the
grant of Nonqualified Stock Options, Incentive Options, Performance
Shares and Restricted Stock (as defined), and granted options to
purchase approximately 1.4 million shares of common stock under the
Plan. Additionally, on July 28, 1998, the Company granted the option
to purchase approximately 1.2 million and 0.1 million shares of
common stock under the AMRESCO, INC. 1997 and 1995 Stock Option and
Award Plans, respectively.
In August 1998, the Company received $737.5 million in
commitments on a revolving loan agreement (the "Revolving Loan
Agreement") to replace its $550.0 million revolving loan agreement.
The Revolving Loan Agreement will be closed with a syndicate of
lenders led by NationsBank, N.A. (Administrative Agent) and Credit
Suisse First Boston (Syndication Agent) within the next two weeks.
The Revolving Loan Agreement provides for initial revolving
commitments of $168.8 million and $506.2 million, which mature 364
days and three years from the date of the Revolving Loan Agreement,
respectively, and a term commitment of $62.5 million, which matures
August 2003. The Company may increase the Revolving Loan Agreement
through the addition of commitments under either the revolving or the
term portion. Interest under the Revolving Loan Agreement is based
upon LIBOR or the prime interest rate plus a spread as determined by
the Company's leverage ratio. The Revolving Loan Agreement is
secured by substantially all of the assets of the Company not pledged
under other credit facilities, including stock of a majority of the
Company's subsidiaries.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
The Company is a leading diversified financial services company
with four principal lines of business: asset management, commercial
mortgage banking, home equity lending (previously residential
mortgage banking) and commercial finance. The asset management
business involves acquiring asset portfolios at a 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,
warehousing, underwriting, placement, securitization and servicing of
commercial real estate mortgages and commercial real estate
brokerage. The home equity lending business involves originating,
acquiring, warehousing, securitizing and servicing nonconforming
loans. In its commercial finance business, the Company focuses on
(i) loans to franchisees of nationally recognized restaurant,
hospitality and service organizations, (ii) loans to small business
owners, (iii) real estate structured finance, (iv) communications
finance and (v) single family residential construction lending.
Revenues from the Company's asset management activities
primarily consist of earnings on asset portfolios, fees charged for
the management of asset portfolios and for the successful resolution
of the assets within such asset portfolios and gains on sale of
investments. The Company's revenues from its commercial mortgage
banking activities are primarily earned from fees generated by the
(i) origination and underwriting of commercial real estate mortgage
loans, (ii) placement of such loans with permanent investors and
(iii) servicing of loans, interest earned on commercial loans held
for sale and deposits, and gains on the sale and securitization of
commercial mortgage loans held for sale earned either through a joint
venture, as was the case in 1997, or through the Company's own
expected securitization activity. Revenues from the Company's home
equity lending activities primarily consist of interest earned on
originated and purchased residential loans, accrued earnings on
retained interests in securitizations, gains on the securitization
and sale of residential loans and other related securities and fees
generated by the origination, underwriting and servicing of
residential loans. Revenues from the Company's commercial finance
business are primarily earned from (i) interest and fees on real
estate structured finance activities, loans to franchisees of
nationally recognized restaurant, hospitality, service organizations
and other small business owners and loans to single family
residential contractors, (ii) accrued earnings on retained interests
in securitizations and (iii) gains on the securitization and sale of
franchise loans and other related securities. Corporate and other
revenues primarily consist of interest earned on investments, other
miscellaneous income and intercompany eliminations. Corporate and
other expenses primarily include corporate personnel and overhead and
certain incentive compensation, unallocated interest expense and
amortization of intangibles.
Retained interests in securitizations are classified as trading
and are carried at estimated fair market value. Changes in market
value are included in earnings. Cash flows for retained interests in
securitizations are generally subordinated to other security holders
in a securitization trust. 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 estimated future credit losses, estimated prepayments and
normal servicing and other related fees. 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 carrying value of the
retained interests in securitizations is determined by the Company on
a disaggregated basis and considers historical prepayment and loss
experience, economic conditions and trends, collateral values and
other relevant factors. The actual weighted average annual
prepayment rate on the Company's home equity securitizations was
21.4% for the period from inception of each security through May 29,
1998 as compared to the originally modeled projection of 18.7%.
Prepayment rates on the Company's franchise and small business loan
securitizations are in line with expectations. Current valuations
take into account the change in prepayment assumptions as well as
other assumptions influenced by market conditions. The discount rate
used to value the retained interests is influenced primarily by
volatility and predictability of the underlying cash flows which
generally become more certain as the securities season. The weighted
average discount rate used to value the Company's residual strips at
June 30, 1998 was 17.8%. The Company has utilized a 20% discount
rate in its home equity and franchise loan securitizations and a 15%
discount rate in its small business loan securitization (completed by
commercial finance) in 1998 for initial valuation purposes. The
lower discount rate on the small business loan securitization was due
to the reduced risk related to a better borrower cross-
collateralization feature in these securitizations.
Results of Operations
The following discussion and analysis presents the significant
changes in results of operations of the Company for the three and six
months ended June 30, 1998 and 1997 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.
<TABLE>
<CAPTION>
Three Months Six Months
(in thousands, except per share data) Ended Ended
data) June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Asset management $ 33,619 $ 27,420 $ 64,635 $ 48,167
Commercial mortgage banking 47,012 27,640 88,432 44,312
Home equity lending 64,448 34,783 119,656 71,214
Commercial finance 32,329 13,883 47,753 15,836
Corporate, other and intercompany 494 155 489 (808)
eliminations
Total revenues 177,902 103,881 320,965 178,721
Operating expenses:
Asset management 21,088 18,503 38,883 29,524
Commercial mortgage banking 39,376 16,894 72,564 29,140
Home equity lending 53,633 27,181 98,366 51,811
Commercial finance 15,182 6,948 26,973 9,019
Corporate, other and 16,394 13,669 29,043 24,935
intercompany eliminations
Total operating expenses 145,673 83,195 265,829 144,429
Operating profit:
Asset management 12,531 8,917 25,752 18,643
Commercial mortgage banking 7,636 10,746 15,868 15,172
Home equity lending 10,815 7,602 21,290 19,403
Commercial finance 17,147 6,935 20,780 6,817
Corporate, other and (15,900) (13,514) (28,554) (25,743)
intercompany eliminations
Total operating profit 32,229 20,686 55,136 34,292
Income tax expense 12,569 8,200 21,427 13,245
Net income $ 19,660 $ 12,486 $ 33,709 $ 21,047
Earnings per share (1):
Basic $ 0.46 $ 0.35 $ 0.83 $ 0.61
Diluted 0.45 0.34 0.80 0.59
Weighted average shares
outstanding:
Basic 42,457 35,709 40,742 34,720
Diluted 44,003 36,653 42,224 35,733
</TABLE>
(1) Prior period restated for the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings Per Share."
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
The Company reported a 71% increase in revenues from $103.9
million to $177.9 million, a 56% increase in operating profit from
$20.7 million to $32.2 million and a 57% increase in net income from
$12.5 million to $19.7 million compared to the prior year period.
The increases were due primarily to additional contributions by
commercial finance, asset management and home equity lending.
Diluted weighted average common shares outstanding increased 20% due
primarily to the early 1998 public offering of the Company's common
stock. Diluted earnings per share increased 32% from $0.34 to $0.45.
Asset Management. Revenues for the three months ended June 30,
1998 primarily consisted of $24.8 million in interest income, $4.2
million in gain on sale of investments and $4.2 million in asset
management and resolution fees. The $6.2 million increase in
revenues from $27.4 million for the second quarter of 1997 to $33.6
million for the second quarter of 1998 was primarily comprised of a
$8.8 million increase in interest income offset, in part, by a $2.0
million decrease in management and resolution fees and a $0.7 million
reduction on gain on sale of investments. Interest income increased
due primarily to a significant increase in aggregate investments for
the Company's own account since early 1997. 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. The decrease in
gain on sale of investments was due primarily to a larger commercial
mortgage backed securities sale gain in 1997.
Operating expenses for the quarter ended June 30, 1998 primarily
consisted of $9.8 million in interest expense, $6.2 million in other
general and administrative expenses, $3.9 million in personnel cost
and a $1.1 million provision for loan and asset portfolio losses.
The $2.6 million increase in expenses from $18.5 million for the
prior year period to $21.1 million for the quarter ended June 30,
1998 was due primarily to a $3.4 million increase in interest expense
related to the financing of increased levels of investments from the
second quarter of 1997 and a $1.8 million increase in other general
and administrative expenses primarily related to increased real
estate balances offset, in part, by a $1.4 million decrease in
provision for loan and asset portfolio losses and a $1.0 million
decrease in personnel expenses.
Commercial Mortgage Banking. Revenues for the quarter ended
June 30, 1998 primarily consisted of $26.1 million in origination,
underwriting and servicing revenues and $20.4 million in interest
income. The $19.4 million increase in revenues from $27.6 million
for the prior year period to $47.0 million for the quarter ended June
30, 1998 primarily relates to an increase of $15.8 million in
interest income due primarily to increased balances of commercial
loans held for sale and interest on servicing related deposits, both
of which have increased significantly since early 1997, and an
increase of $12.4 million in mortgage banking and servicing revenues
due primarily to transaction volume of $3.4 billion during the second
quarter of 1998 compared to $1.7 billion for the second quarter of
1997 offset, in part by a $7.8 million decrease in income from equity
affiliate (income from equity affiliate was from the AMRESCO Capital
L.P. 50% share in a joint venture).
Operating expenses for the quarter ended June 30, 1998 primarily
consisted of $20.2 million in personnel expense, $11.5 million in
interest expense and $6.9 million in other general and administrative
expense. The $22.5 million increase in expenses from $16.9 million
for the prior year period to $39.4 million for the quarter ended June
30, 1998 was due primarily to an increase of $10.3 million in
interest expense related to financing an increased balance of
commercial loans held for sale, a $9.2 million increase in personnel
expenses primarily related to commissions on increased originations
and increased number of personnel due to expanded operations and an
increase of $3.5 million in other general and administrative expense
due to expanded operations.
Home Equity Lending. Revenues for the three months ended June
30, 1998 primarily consisted of $46.2 million in interest income and
$16.4 million of gains on securitization and sale of residential
loans. The $29.7 million increase in revenues from $34.8 million for
the prior year period to $64.4 million for the quarter ended June 30,
1998 primarily related to increased levels of loan originations,
acquisitions and securitizations. The increase in revenues was
primarily comprised of a $28.2 million increase in interest income
related to loans held for sale, which have increased significantly
since the second quarter of 1997, and retained interests in
securitizations (including related hedging and mark-to-market
activities).
Operating expenses for the quarter ended June 30, 1998 primarily
consisted of $29.5 million in interest expense, $14.0 million in
personnel expense, $5.6 million in other general and administrative
expense and $3.8 million in provision for loan losses. Operating
expenses increased by $26.4 million from $27.2 million for the prior
year period to $53.6 million for the quarter ended June 30, 1998.
This increase primarily consisted of $17.6 million in interest
expense, $3.9 million in personnel expense and $3.3 million in
provision for 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. Personnel costs increased significantly from the prior year
period due primarily to the increased operations of the
wholesale/retail business and the provision for loan losses increased
due to increased levels of under-performing loans.
Commercial Finance. Revenues for the three months ended June
30, 1998 primarily consisted of $17.2 million of interest income and
$15.4 million of gain on securitization and sale of loans. The $18.4
million increase in revenues from $13.9 million for the prior year
period to $32.3 million for the three months ended June 30, 1998
relates primarily to a $10.6 million increase in interest income and
a $9.0 million increase in gain on sale of loans and investments.
The increase in interest and other investment income was due
primarily to loan payoffs and interest earned on loans and securities
retained in securitizations, both of which have increased
significantly since the second quarter of 1997. The increase in gain
on sale of loans and investments was due primarily to the
securitization and sale of approximately $119.7 million of small
business loans.
Operating expenses for the quarter ended June 30, 1998 primarily
consisted of $8.6 million in interest expense, $3.6 million in
personnel cost, and a $1.8 million provision for loan losses. The
$8.3 million increase in expenses from $6.9 million for the prior
year to $15.2 million for the quarter ended June 30, 1998 was due
primarily to an increase of $5.4 million in interest expense related
to the financing for increased levels of loans held for sale and
investments from 1997 and $1.8 million in personnel expense related
to expanded operations.
Corporate, Other and Intercompany Eliminations. Operating
losses for the three months ended June 30, 1998 increased $2.4
million due primarily to increases in overhead related to expanded
operations and amortization of intangibles related to acquisitions.
The rapid growth of the commercial mortgage banking, home equity
lending and commercial finance operations 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 continue to decrease as a
percentage of revenues over time as the corporate support systems and
infrastructure are able to support a greater base of revenue
generating operations.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30,
1997
The Company reported an 80% increase in revenues from $178.7
million to $321.0 million, a 61% increase in operating profit from
$34.3 million to $55.1 million and a 60% increase in net income from
$21.0 million to $33.7 million compared to the prior year period.
The increases were due primarily to significant additional
contributions by commercial finance and asset management operations.
Diluted weighted average common shares outstanding increased 18% due
primarily to the early 1998 public offering of the Company's common
stock. Diluted earnings per share increased 36% from $0.59 to $0.80.
Asset Management. Revenues for the six months ended June 30,
1998 primarily consisted of $46.3 million in interest income, $10.8
million in gain on sale of investments and $6.8 million in asset
management and resolution fees. The $16.4 million increase in
revenues from $48.2 million for the first six months of 1997 to $64.6
million for the six months ended June 30, 1998 was primarily
comprised of a $16.1 million increase in interest and investment
income and a $5.6 million increase in gain on sale of investments
offset, in part, by a $5.1 million decrease in management and
resolution fees. Interest income increased due primarily to a
significant increase in aggregate investments for the Company's own
account from 1997. Gain on sale of loans and investments increased
due primarily to higher current year sales of commercial mortgage
backed securities and real estate. 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 six months ended June 30, 1998
primarily consisted of $17.5 million in interest expense, $12.1
million in other general and administrative expenses and $7.6 million
in personnel cost. The $9.4 million increase in expenses from $29.5
million for the prior year period to $38.9 million for the year-to-
date period ended June 30, 1998 was due primarily to a $7.8 million
increase in interest expense related to the financing of increased
levels of investments from early 1997 and a $4.2 million increase in
other general and administrative expenses primarily related to
increased real estate.
Commercial Mortgage Banking. Revenues for the six months ended
June 30, 1998 primarily consisted of $45.8 million in origination,
underwriting and servicing revenues, $36.6 million in interest income
and $6.4 million in income from equity affiliate. The $44.1 million
increase in revenues from $44.3 million for the prior year period to
$88.4 million for the six months ended June 30, 1998 primarily
relates to an increase of $28.2 million in interest income due
primarily to increased balances of commercial loans held for sale and
interest on servicing related deposits both of which have increased
significantly since 1997 and $20.4 million of increased mortgage
banking and servicing revenues due primarily to transaction volume of
$5.4 billion during the first six months of 1998 compared to $2.9
billion for the first six months of 1997 offset, in part, by a $4.1
million decrease in income from equity affiliate related to AMRESCO
Capital's 50% share in a joint venture.
Operating expenses for the year-to-date period ended June 30,
1998 primarily consisted of $37.6 million in personnel expense, $21.4
million in interest expense and $12.3 million in other general and
administrative expense. The $43.5 million increase in expenses from
$29.1 million for the prior year period to $72.6 million for the six
months ended June 30, 1998 was due primarily to an increase of $19.2
million in interest expense related to financing an increased balance
of commercial loans held for sale, a $17.8 million increase in
personnel expenses primarily related to commissions on increased
originations and number of personnel and an increase of $6.7 million
in other general and administrative expense due to expanded
operations.
Home Equity Lending. Revenues for the six months ended June 30,
1998 primarily consisted of $84.3 million in interest income and
$32.3 million of gains on securitization and sale of residential
loans. The $48.5 million increase in revenues from $71.2 million for
the prior year period to $119.7 million for the six months ended June
30, 1998 primarily related to a $49.3 million increase in interest
income related to originated and acquired loans held for sale, which
have increased significantly since the same period in 1997, and
retained interests in securitizations (including related hedging and
mark-to-market activities).
Operating expenses for the year-to-date period ended June 30,
1998 primarily consisted of $52.9 million in interest expense, $25.0
million in personnel expense, $10.6 million in other general and
administrative expense and an $8.6 million provision for loan losses.
Operating expenses increased by $46.6 million from $51.8 million for
the prior year period to $98.4 million for the quarter ended June 30,
1998. This increase primarily consisted of $30.3 million in interest
expense, $6.6 million in provision for loan losses, $6.5 million in
personnel expense and $2.6 million in other general and
administrative expenses. Interest expense was primarily related to
borrowings under warehouse loans payable which funded the
origination, acquisition and warehousing of mortgage loans held for
sale. Personnel and other general and administrative costs increased
significantly from the prior year period due primarily to the
expanded operations of the wholesale/retail business and the
provision for loan losses increased due to increased levels of under-
performing loans.
Commercial Finance. Revenues for the six months ended June 30,
1998 primarily consisted of $30.1 million of interest income and
$17.0 million of gain on securitization and sale of loans. The $32.0
million increase in revenues from $15.8 million for the prior year
period to $47.8 million for the six months ended June 30, 1998
relates primarily to the acquisition of the operations of the
business lending group (formerly known as Commercial Lending
Corporation) in March 1997 and increased lending activity. Interest
income increased $21.5 million due primarily to interest earned on
loans and securities retained in securitizations, both of which have
increased significantly since early 1997. Gain on sale of loans and
investments increased $10.7 million due primarily to a gain on the
securitization and sale of approximately $119.7 million of small
business loans.
Operating expenses for the six months ended June 30, 1998
primarily consisted of $14.4 million in interest expense, $6.3
million in personnel cost, a $3.3 million provision for loan losses
and $2.9 million in other general and administrative expenses. The
$18.0 million increase in expenses from $9.0 million for the prior
year to $27.0 million for the six months ended June 30, 1998 was due
primarily to an increase of $10.7 million in interest expense related
to the financing for increased levels of loans held for sale and
investments from 1997, $3.9 million in personnel expense related to
expanded operations due primarily to the acquisition of business
lending group, $1.8 million in other general and administrative
expenses primarily related to expanded operations and $1.6 million of
additional provision for loan losses.
Corporate, Other and Intercompany Eliminations. Operating
losses for the six months ended June 30, 1998 increased $2.8 million
from the prior year period due primarily to increases in interest
costs, overhead related to expanded operations and amortization of
intangibles related to acquisitions. The rapid growth of the
commercial mortgage banking, home equity lending and commercial
finance operations 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 continue to decrease as a percentage of revenues over
time as the corporate support systems and infrastructure are able to
support a greater base of revenue generating operations.
Liquidity and Capital Resources
Cash and cash equivalents totaled $35.1 million at June 30,
1998. Cash flows used in operating activities plus principal
collections on loans, asset portfolios and asset-backed securities
investments totaled an inflow of $122.1 million for the first six
months of 1998 compared to a use of $26.3 million for the same period
in 1997. The variance from the prior period was due primarily to
increased principal collections on loans and asset portfolios offset,
in part, by providing financing for the increased balance of loans
held for sale not covered by warehouse lines. The following table is
a summary of selected cash flow activity and debt ratios during the
first six months of 1998 and 1997 (dollars in thousands):
For the Six
Months
Ended June 30,
1998 1997
Net cash used in operating activities $(184,714) $(127,397)
Net cash used in investing activities (308,102) (188,192)
Net cash provided by financing activities 502,001 309,691
Other financial measures:
Cash flow from operations and collections on
loans, asset portfolios and asset-backed securities 122,112 (26,278)
Cash provided by new capital and borrowings, net
(excluding warehouse loans payable) 496,541 308,672
Cash used for purchase of asset portfolios,
asset-backed securities and originations of loans (602,558) (309,576)
EBITDA (1) 176,560 82,479
Interest coverage ratio (2) 1.6x 2.0x
The following table is a summary of selected debt ratios as of June
30, 1998 and December 31, 1997:
1998 1997
Ratio of total debt to equity 4.8:1 5.2:1
Ratio of core debt to equity (3) 2.0:1 2.2:1
(1) EBITDA is calculated as operating income 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.
(2) Interest coverage ratio means the ratio of earnings before
interest, taxes, depreciation and amortization to cash interest
expense.
(3) Excludes indebtedness under warehouse lines of credit.
The following table shows the components of the Company's
capital structure, including certain short-term debt, as of June 30,
1998 and December 31, 1997 (dollars in millions):
1998 1997
% of % of
Dollars Total Dollars Total
Shareholders' equity $ 611.4 17% $ 408.5 16%
Senior notes 57.5 2 57.5 2
Senior subordinated notes 580.2 17 250.0 10
Mortgage warehouse loans 1,669.8 47 1,216.8 49
Notes payable 611.7 17 583.4 23
Total $3,530.6 100% $2,516.2 100%
Total assets increased $1.1 billion to $3.7 billion at June 30,
1998 from $2.6 billion at December 31, 1997. This increase was due
primarily to an increase in loans held for sale, loans and
investments in real estate portfolios, retained interests in
securitizations and asset-backed securities.
In August 1998, the Company received $737.5 million in
commitments on a revolving loan agreement (the "Revolving Loan
Agreement") to replace its $550.0 million revolving loan agreement.
The Revolving Loan Agreement will be closed with a syndicate of
lenders led by NationsBank, N.A. (Administrative Agent) and Credit
Suisse First Boston (Syndication Agent) within the next two weeks.
The Revolving Loan Agreement provides for initial revolving
commitments of $168.8 million and $506.2 million, which mature 364
days and three years from the date of the Revolving Loan Agreement,
respectively, and a term commitment of $62.5 million, which matures
August 2003. The Company may increase the Revolving Loan Agreement
through the addition of commitments under either the revolving or the
term portion. Interest under the Revolving Loan Agreement is based
upon LIBOR or the prime interest rate plus a spread as determined by
the Company's leverage ratio. The Revolving Loan Agreement is
secured by substantially all of the assets of the Company not pledged
under other credit facilities, including stock of a majority of the
Company's subsidiaries.
During the next twelve months, the Company intends to pursue (i)
additional investment opportunities by acquiring assets both for its
own account and as an investor with various capital partners who
acquire such investments and (ii) additional investment opportunities
through additional acquisitions of businesses which meet our
guidelines of diversification and synergy. The funds for such growth
are anticipated to be provided by borrowings under the Company's
Revolving Loan Agreement or other debt facilities and cash flows. As
a result, interest expense for the remainder of 1998 is expected to
be higher than interest expense for the corresponding period in 1997.
The Company believes its funds on hand of $35.1 million at June
30, 1998, its cash flow from operations, and its unused borrowing
capacity under its credit lines should be sufficient to meet its
anticipated operating needs and capital expenditures, as well as
planned new investments, into 1999.
Other Matters
On July 16, 1998 the Company purchased the assets of
Independence Funding Co. L.L.P. ("IFC") and TeleCapital L.P.
("TeleCapital") for approximately 1.3 million shares of the Company's
common stock and cash of $44.0 million. IFC's primary line of
business is providing long term financing to small businesses and
TeleCapital's primary line of business is providing financing to the
pay phone industry.
On August 11, 1998, the Company acquired Mortgage Investors
Corporation ("MIC"), a privately held specialized producer of
veteran's administration streamlined re-financed loans, by merging a
wholly-owned subsidiary of the Company with MIC. The merger
agreement provided for an acquisition price of approximately 1.8
million shares of the Company's common stock and $2.6 million in
cash. Additionally, the Company will pay an annual earnout over a
three-year period, the total of which will not exceed $105.0 million,
comprised of approximately 82% in the Company's common stock and 18%
cash.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires an entity to
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in
the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a foreign-
currency-denominated forecasted transaction. This statement is
effective for all fiscal quarters for fiscal years beginning after
June 15, 1999. The Company has not yet determined the impact on the
Consolidated Financial Statements upon adoption of this standard.
Year 2000 Compliance
The inability of computers, software and other equipment
utilizing microprocessors to recognize and properly process date
fields containing a two-digit year is commonly referred to as the
Year 2000 Compliance issue. As the year 2000 approaches, such
systems may be unable to accurately process certain date-based
information.
The Company has reviewed its computer systems in order to
evaluate necessary modifications for Year 2000 Compliance. The
Company is in the process of making necessary modifications and does
not anticipate any material difficulties in achieving Year 2000
Compliance with respect to the Company's computer systems.
Furthermore, the Company does not anticipate that it will incur
material expenditures in connection with any modifications necessary
to achieve Year 2000 Compliance. In addition, the Company has
communicated with others with whom it does significant business to
determine their Year 2000 Compliance status and the extent to which
the Company could be affected by any third party Year 2000 Compliance
issues. Although the Company has not received responses from all
third parties with whom it does business, the Company does not
anticipate that it will be materially affected by any third party
Year 2000 Compliance issues. However, there can be no assurance that
the systems of other companies on which the Company's systems rely
will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
The anticipated costs and timeliness of completion of Year 2000
modifications are based on management's best estimates, which were
derived using numerous assumptions relating to future events,
including, without limitation, the continued availability of certain
resources and third party modification plans. However, there can be
no assurance that the estimates and assumptions will prove to be
accurate.
Private Litigation Securities Reform Act of 1995
This report contains forward-looking statements based on current
expectations that involve a number of risks and uncertainties. The
forward-looking statements are made pursuant to safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
The factors that could cause actual results to differ materially
include the following: industry conditions and competition, interest
rates, business mix, availability of additional financing, and the
risks described from time to time in the Company's reports to the
Securities and Exchange Commission.
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds.
For the quarterly period covered by this Report, the Company
issued the following equity securities that were not registered under
the Securities Act of 1933, as amended (the Securities Act):
1. On January 28, 1998, the Company issued 286,996 shares of
Common Stock to City Federal Funding & Mortgage Corp. (City Federal)
in connection with the acquisition of the residential mortgage
banking business and operations of City Federal and its affiliate,
Finance America Corporation. In addition to the Common Stock, the
Company paid $2,000,000 in cash in connection with such acquisition
and will pay up to an additional $8,500,000 in cash and stock over
the next three years in the event certain performance goals are met
or exceeded during the fiscal years 1998, 1999 and 2000. The Company
sold the Common Stock pursuant to a private offering exemption under
Section 4(2) of the Securities Act, as this was an isolated
transaction involving a small number of purchasers.
2. On February 23, 1998, the Company issued 124,713 shares of
Common Stock to the shareholders of Fowler, Goedecke, Ellis &
O'Connor Incorporated, Fowler Goedecke, Ellis & O'Connor Company and
Fowler, Goedecke, Ellis & O'Connor of New York, Inc. in connection
with the acquisition of the commercial mortgage banking business of
those companies effective as of January 1, 1998. In addition to the
Common Stock, the Company paid $12,800,000 in cash in connection with
such acquisition and will pay up to an additional $8,000,000 in cash
and stock over the next three years in the event certain performance
goals are met or exceeded during the fiscal years 1998, 1999 and
2000. The Company sold the Common Stock pursuant to a private
offering exemption under Section 4(2) of the Securities Act, as this
was an isolated transaction involving a small number of purchasers.
3. On April 30, 1998, the Company issued 30,930 shares of
Common Stock to the former members and partners of PNS Realty
Partners, L.P., PNS Realty Partners/Kentucky L.L.C., PNS Realty
Partners/Indiana L.P. and PNS Realty Partners Multifamily (the PNS
Entities) in connection with the acquisition by the Company of the
PNS Entities. In addition to the Common Stock, the Company paid
$7,273,883 in cash in connection with such acquisition and will pay
up to an additional $5,650,000 in cash and stock over a three-year
period in the event certain performance goals are met or exceeded
during the fiscal years 1998, 1999 and 2000. The Company sold the
Common Stock pursuant to a private offering exemption under Section
4(2) of the Securities Act, as this was an isolated transaction
involving a small number of purchasers.
ITEM 4. Submission of Matters to a vote of Security Holders.
On May 18, 1998, the Company held its 1998 Annual Meeting of
stockholders at which the following matters were considered and voted
upon:
(a) Election of Directors
Three persons were elected as Class II Directors for a
three year term ending at the Annual Meeting of
Stockholders after the close of the fiscal year ending in
1999 or until their successors have been duly elected.
SHARES SHARES
NOMINEE VOTED FOR WITHHELD
James P. Cotton 35,000,662 507,121
Edwin A. Wahlen, Jr. 35,142,746 365,037
Amy J. Jorgensen 35,159,164 348,619
(b) Appointment of Deloitte & Touche LLP
A proposal to appoint Deloitte & Touche LLP as the
Company's independent public accountants for 1998 was
approved. The number of shares voting for the proposal:
35,468,259; shares against the proposal: 17,687; shares
abstaining: 21,837.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits and Exhibit Index
Exhibit No.
10 AMRESCO, INC. 1998 Stock Option and Award Plan
11 Computation of Per Share Earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
AMRESCO, INC.
Registrant
Date: August 12, 1998 By: /s/Barry L. Edwards
Barry L. Edwards
Executive Vice President
and Chief Financial Officer
AMRESCO, INC,
1998 STOCK OPTION AND AWARD PLAN
ARTICLE 1. Establishment, Purpose and Duration
1.1 Establishment of the Plan. AMRESCO, INC., a Delaware
corporation (hereinafter referred to as "AMRESCO"), hereby
establishes a stock option and award plan to be known as the
"AMRESCO, INC. 1998 Stock Option and Award Plan" (the "Plan"), as
set forth in this document. The Plan permits the grant of
Nonqualified Stock Options, Incentive Stock Options, Performance
Shares and Restricted Stock.
The effective date of the Plan is July 28, 1998 (the
"Effective Date") and the Plan shall remain in effect as provided
in Section 1.3.
1.2 Purpose of the Plan. The purpose of the Plan is to
secure for AMRESCO and its stockholders the benefits of the
incentive inherent in stock ownership in AMRESCO by employees,
directors and other persons who are largely responsible for its
future growth and continued success. The Plan promotes the
success and enhances the value of AMRESCO by linking the personal
interests of Participants to those of AMRESCO's stockholders, and
by providing Participants with an incentive for outstanding
performance.
The Plan is further intended to provide flexibility to
AMRESCO in its ability to motivate, attract and retain the
services of Participants upon whose judgment, interest and
special effort the successful conduct of its operation largely
depends.
1.3 Duration of the Plan. The Plan shall commence on the
Effective Date and shall remain in effect, subject to the right
of the Board of Directors to amend or terminate the Plan at any
time pursuant to Article 13, until the day prior to the tenth
(10th) anniversary of the Effective Date.
ARTICLE 2. Definitions
Whenever used herein, the following terms shall have the
meanings set forth below and, when the meaning is intended, the
initial letter of the word is capitalized:
(a) "Award" means, individually or collectively, a grant
under the Plan of Nonqualified Stock Options, Incentive Stock
Options, Performance Shares or Restricted Stock.
(b) "Award Agreement" means an agreement entered into by
each Participant and AMRESCO, setting forth the terms and
provisions applicable to Awards granted to Participants
hereunder.
(c) "Beneficial Owner" or "Beneficial Ownership" shall have
the meaning ascribed to such term in Rule 13d-3 of the General
Rules and Regulations under the Exchange Act.
(d) "Board" or "Board of Directors" means the board of
directors of AMRESCO.
(e) "Cause" means: (i) willful misconduct on the part of a
Participant that is materially detrimental to AMRESCO; or (ii)
the indictment of a Participant for the commission of a felony.
The existence of "Cause" under either (i) or (ii) shall be
determined by the Committee. Notwithstanding the foregoing, if
the Participant has entered into an employment agreement that is
binding as of the date of employment termination, and if such
employment agreement defines "Cause" and/or provides a means of
determining whether "Cause" exists, the definition of "Cause" and
the means of determining whether "Cause" exists provided for in
the employment agreement shall apply to the Participant for
purposes hereof.
(f) "Change in Control" shall be deemed to have occurred
if:
(i) An acquisition by any Person of Beneficial
Ownership of the Shares then outstanding ("AMRESCO Common
Stock Outstanding") or the voting securities of AMRESCO then
outstanding entitled to vote generally in the election of
directors ("AMRESCO Voting Securities Outstanding");
provided such acquisition of Beneficial Ownership would
result in the Person's beneficially owning (within the
meaning of Rule 13d-3 under the Exchange Act) twenty-five
percent (25%) or more of AMRESCO Common Stock Outstanding or
twenty-five percent (25%) or more of the combined voting
power of AMRESCO Voting Securities Outstanding; and provided
further, that immediately prior to such acquisition such
Person was not a direct or indirect Beneficial Owner of
twenty-five percent (25%) or more of AMRESCO Common Stock
Outstanding or twenty-five percent (25%) or more of the
combined voting power of AMRESCO Voting Securities
Outstanding, as the case may be; or
(ii) The approval of the stockholders of AMRESCO of a
reorganization, merger, consolidation, complete liquidation
or dissolution of AMRESCO, the sale or disposition of all or
substantially all of the assets of AMRESCO or similar
corporate transaction (in each case referred to in this
Section 2(f) as a "Corporate Transaction") or, if
consummation of such Corporate Transaction is subject, at
the time of such approval by stockholders, to the consent of
any government or governmental agency, the obtaining of such
consent (either explicitly or implicitly); or
(iii) A change in the composition of the Board such
that the individuals who, as of the Effective Date,
constitute the Board (such Board shall be hereinafter
referred to as the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board; provided,
however, for purposes of this Section 2(f), that any
individual who becomes a member of the Board subsequent to
the Effective Date whose election, or nomination for
election by AMRESCO's stockholders, was approved by a vote
of at least a majority of those individuals who are members
of the Board and who were also members of the Incumbent
Board (or deemed to be such pursuant to this proviso) shall
be considered as though such individual were a member of the
Incumbent Board; but, provided, further, that any such
individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest
(as such terms are used in Rule 14a-11 of Regulation 14A
under the Exchange Act, including any successor to such
Rule) or other actual or threatened solicitation of proxies
or consents by or on behalf of a Person other than the Board
shall not be so considered as a member of the Incumbent
Board.
Notwithstanding the provisions set forth in subparagraphs (i) and
(ii) of this Section 2(f), the following shall not constitute a
Change in Control for purposes hereof: (1) any acquisition of
shares of common stock of AMRESCO by, or consummation of a
Corporate Transaction with, any Subsidiary or an employee benefit
plan (or related trust) sponsored or maintained by AMRESCO or an
affiliate; or (2) any acquisition of shares of common stock of
AMRESCO, or consummation of a Corporate Transaction, following
which more than fifty percent (50%) of the shares of common stock
then outstanding of the corporation resulting from such
acquisition or Corporate Transaction and more than fifty percent
(50%) of the combined voting power of the voting securities then
outstanding of such corporation entitled to vote generally in the
election of directors, is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and
entities who were Beneficial Owners of AMRESCO Common Stock
Outstanding and AMRESCO Voting Securities Outstanding,
respectively, immediately prior to such acquisition or Corporate
Transaction in substantially the same proportions as their
ownership, immediately prior to such acquisition or Corporate
Transaction, of AMRESCO Common Stock Outstanding and AMRESCO
Voting Securities Outstanding, as the case may be.
(g) "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
(h) "Committee" means the committee appointed by the Board
to administer the Plan with respect to grants of Awards, as
specified in Article 3.
(i) "Director" means any individual who is a member of the
Board of Directors.
(j) "Disability" shall have the meaning ascribed to such
term in the AMRESCO long-term disability plan covering the
Participant, or in the absence of such plan, a meaning consistent
with Section 22(e)(3) of the Code.
(k) "Employee" means any full-time, salaried employee of
AMRESCO or AMRESCO's Subsidiaries.
(l) "Exchange Act" means the Securities Exchange Act of
1934, as amended from time to time, or any successor act thereto.
(m) "Fair Market Value" shall be determined as follows:
(i) If, on the relevant date, the Shares, are traded
on a national or regional securities exchange or on The
Nasdaq Stock Market ("Nasdaq") and closing sale prices for
the Shares are customarily quoted, on the basis of the
closing sale price on the principal such securities exchange
on which the Shares may then be traded or, if there is no
such sale on the relevant date, then on the immediately
preceding day on which a sale was reported;
(ii) If, on the relevant date, the Shares are not
listed on any securities exchange or traded on Nasdaq, but
nevertheless are publicly traded and reported on Nasdaq
without closing sale prices for the Shares being customarily
quoted, on the basis of the mean between the closing bid and
asked quotations in such other over-the-counter market as
reported by Nasdaq; but, if there are no bid and asked
quotations in the over-the-counter market as reported by
Nasdaq on that date, then the mean between the closing bid
and asked quotations in the over-the-counter market as
reported by Nasdaq on the immediately preceding day such bid
and asked prices were quoted; and
(iii) If, on the relevant date, the Shares are not
publicly traded as described in (i) or (ii), on the basis of
the good faith determination of the Committee.
(n) "Final Award" means the actual award earned during a
performance period by a Participant, as determined by the
Committee at the end of the performance period pursuant to
Article 7.
(o) "Incentive Payment Date" means the seventy-fifth (75th)
day following the last day of the performance period during which
the Final Award under Article 7 was earned, or such earlier date
upon which Final Awards are paid to Participants.
(p) "Incentive Stock Option" or "ISO" means an option to
purchase Shares granted under Article 6 which is designated as an
Incentive Stock Option and is intended to meet the requirements
of Section 422 of the Code.
(q) "Insider" shall mean a Person who is, on the relevant
date, a director, officer or ten percent (10%) beneficial owner
of any class of AMRESCO's equity securities that is registered
pursuant to Section 12 of the Exchange Act, all as defined under
Section 16 of the Exchange Act.
(r) "Named Executive Officer" means a Participant who, as
of the date of vesting and/or payout of an Award is one of the
group of "covered employees," as defined in the regulations
promulgated under Code Section 162(m), or any successor statute.
(s) "Nonqualified Stock Option" or "NQSO" means an option
to purchase Shares granted under Article 6 which is not intended
to meet, or does not meet, the requirements of Code Section 422.
(t) "Option" means an Incentive Stock Option or a
Nonqualified Stock Option.
(u) "Option Price" means the price at which a Share may be
purchased by a Participant pursuant to an Option, as determined
by the Committee.
(v) "Participant" means an Employee, director or other
Person who has been granted an Award which is outstanding.
(w) "Performance Share" means an Award granted to an
Employee, as described in Article 7.
(x) "Person" shall have the meaning ascribed to such term
in Section 3(a)(9) of the Exchange Act and used in Section 13(d)
and 14(d) thereof, including a "group" as defined in Section
13(d) thereof.
(y) "Plan Year" shall mean, for purposes of Article 7,
AMRESCO's fiscal year which coincides with each calendar year
during the term hereof.
(z) "Retirement" shall have the meaning ascribed to such
term in the AMRESCO, INC. Retirement Savings and Profit Sharing
Plan and Trust.
(aa) "Restricted Stock" means an Award of restricted Shares
granted in accordance with the terms of Article 8 and the other
provisions hereof.
(ab) "Shares" means the shares of AMRESCO common stock, par
value $0.05 per share.
(ac) "Subsidiary" means any corporation, partnership, joint
venture or other entity in which AMRESCO has a fifty percent
(50%) or greater voting interest.
ARTICLE 3. Administration
3.1 The Committee. The Plan shall be administered by the
Stock Option and Bonus Committee of the Board, or by any other
Committee appointed by the Board consisting of not less than two
(2) Directors who are "non-employee directors" under Rule 16b-3
or any successor thereto under the Exchange Act. The members of
the Committee shall be appointed from time to time by, and shall
serve at the discretion of, the Board of Directors.
The Committee shall be comprised solely of non-employee
directors who are eligible to administer the Plan pursuant to
Rule 16b-3(b)(3) or any successor thereto under the Exchange Act.
However, if for any reason any member of the Committee does not
qualify to administer the Plan, as contemplated by Rule 16b-
3(b)(3) under the Exchange Act, the Board of Directors may
appoint a new Committee member who complies with Rule 16b-
3(b)(3).
3.2 Authority of the Committee. Subject to the provisions
hereof, the Committee shall have full power to select the
Employees and other Persons who are responsible for the future
growth and success of AMRESCO, who may include, without
limitation, consultants, independent contractors or other
providers of services to AMRESCO, who shall participate herein
(who may change from year to year); determine the size and types
of Awards; determine the terms and conditions of Awards in a
manner consistent herewith (including vesting provisions and the
duration of the Awards); construe and interpret the Plan and any
agreement or instrument entered into hereunder; establish, amend
or waive rules and regulations for the Plan's administration; and
(subject to the provisions of Article 13) amend the terms and
conditions of any outstanding Award to the extent such terms and
conditions are within the discretion of the Committee as provided
herein, including to establish different terms and conditions
relating to the effect of the termination of employment or other
service to AMRESCO. Further, the Committee shall make all other
determinations which may be necessary or advisable for the
administration hereof. As permitted by law, the Committee may
delegate its authority hereunder.
3.3 Decisions Binding. All determinations and decisions
made by the Committee pursuant to the provisions hereof and all
related orders and resolutions of the Board shall be final,
conclusive and binding on all Persons, including AMRESCO, the
stockholders, Employees, Participants and their estates and
beneficiaries.
ARTICLE 4. Shares Subject to the Plan
4.1 Number of Shares. Subject to adjustment as provided in
Section 4.3, the total number of Shares available for grant of
Awards shall be an aggregate of three million (3,000,000). These
Shares may, in the discretion of AMRESCO, be either authorized
but unissued Shares or shares held as treasury shares, including
Shares purchased by AMRESCO.
The following rules shall apply for purposes of the
determination of the number of Shares available for grant
hereunder;
(a) The grant of an Option or Restricted Stock shall
reduce the Shares available for grant hereunder by the
number of shares subject to such Award.
(b) The Committee shall in each case determine the
appropriate number of Shares to deduct from the authorized
pool in connection with the grant of Performance Shares.
(c) While an Option, Restricted Stock or Performance
Share is outstanding, it shall be counted against the
authorized pool of Shares, regardless of its vested status.
(d) In the event an Award is paid in the form of
Shares or derivatives of Shares, the authorized pool shall
be reduced by the number of Shares or Share derivatives paid
to the Participant, as determined by the Committee.
(e) To the extent that an Award is settled in cash
rather than in Shares, the authorized Share pool shall be
credited with the appropriate number of Shares represented
by the cash settlement of the Award, as determined at the
sole discretion of the Committee (subject to the limitation
set forth in Section 4.2).
4.2 Lapsed Awards. If any Award is canceled, terminates,
expires or lapses for any reason, any Shares subject to such
Award shall again be available for the grant of an Award.
However, in the event that prior to the Award's cancellation,
termination, expiration or lapse, the holder of the Award at any
time received one (1) or more "benefits of ownership" pursuant to
such Award (as defined by the Securities and Exchange Commission,
pursuant to any rule or interpretation promulgated under Section
16 of the Exchange Act), the Shares subject to such Award shall
not be made available for regrant hereunder.
4.3 Adjustments in Authorized Shares. In the event of any
change in corporate capitalization, such as a stock split, or a
corporate transaction, such as any merger, consolidation,
separation, including a spin-off, or other distribution of stock
or property of AMRESCO, any reorganization (whether or not such
reorganization comes within the definition of such term in Code
Section 368) or any partial or complete liquidation of AMRESCO,
such adjustment shall be made in the number and class of Shares
which may be delivered hereunder, and in the number and class of
and/or price of Shares subject to outstanding Awards, as may be
determined to be appropriate and equitable by the Committee, in
its sole discretion, to prevent dilution or enlargement of
rights; provided, however, that the number of Shares subject to
any Award shall always be a whole number and the Committee shall
make such adjustments as are necessary to insure Awards of whole
Shares.
ARTICLE 5. Eligibility and Participation
Any Employee or Director of AMRESCO, or of any Subsidiary,
including any such Employee who is also a director of AMRESCO, or
of any Subsidiary, or any other Person, including consultants,
independent contractors or other service providers, whose
judgment, initiative and efforts contribute or may be expected to
contribute materially to the successful performance of AMRESCO or
any Subsidiary shall be eligible to receive an Award. In
determining the Employees and other Persons to whom an Award
shall be granted and the number of Shares which may be granted
pursuant to that Award, the Committee shall take into account the
duties of the respective Person, their present and potential
contributions to the success of AMRESCO or any Subsidiary, and
such other factors as the Committee shall deem relevant in
connection with accomplishing the purpose hereof.
ARTICLE 6. Stock Options
6.1 Grant of Options.
(a) Eligible Persons other than Outside Directors. Subject
to the terms and provisions hereof, Options may be granted to
Employees or other Persons at any time and from time to time as
shall be determined by the Committee. The Committee shall have
discretion in determining the number of Shares subject to Options
granted to each Participant; provided, however, that in the case
of any ISO, only an Employee may receive such grant and the
aggregate Fair Market Value (determined at the time such Option
is granted) of the Shares to which ISOs are exercisable for the
first time by the Optionee during any calendar year (hereunder
and under all other Incentive Stock Option Plans of AMRESCO and
any Subsidiary) shall not exceed $100,000. The Committee may
grant a Participant ISOs, NQSOs or a combination thereof, and may
vary such Awards among Participants.
The maximum number of Options that a Named Executive Officer
can be granted hereunder during any twelve (12) month period is
500,000.
(b) Outside Directors. Subject to the terms and
provisions hereof, unless comparable options are granted to an
Outside Director pursuant to the AMRESCO INC. 1997 Stock Option
and Award Plan, Options shall be granted to Outside Directors as
follows:
(i) Each Outside Director elected or appointed to the
Board for the first time after the Effective Date shall be
granted an NQSO to purchase 15,000 Shares on the date of
such election or appointment; and
(ii) Each Outside Director upon his or her re-election
at the first meeting of the stockholders to elect Directors
following the expiration of the Triennial Period shall be
granted an NQSO to purchase 15,000 Shares.
Each such Option shall have an Option Price equal to one hundred
percent (100%) of the Fair Market Value of a Share on the date of
grant, shall have a term of ten (10) years and shall vest twenty
percent (20%) on the date of grant and (20%) on each anniversary
thereof. For purposes of this Section 6.1(b), the term "Outside
Director" shall mean any Director that is not an Employee.
Further, the term "Triennial Period" shall mean, in respect of
any Outside Director, the three (3) year period beginning on the
date of the last grant of Options to such Outside Director under
Section 6.1(b), and ending three (3) calendar years thereafter.
6.2 Award Agreement. Each Option grant shall be evidenced
by an Award Agreement that shall specify the Option Price, the
duration of the Option, the number of Shares to which the Option
pertains and such other provisions as the Committee shall
determine. The Award Agreement shall further specify whether the
Award is intended to be an ISO or an NQSO. Any portion of an
Option that is not designated as an ISO or otherwise fails or is
not qualified to be treated as an ISO (even if designated as an
ISO) shall be a NQSO.
6.3 Option Price. The Option Price for each grant of an
ISO shall be not less than one hundred percent (100%) of the Fair
Market Value of a Share on the date the ISO is granted. In no
event, however, shall any Participant, who at the time he would
otherwise be granted an Option owns (within the meaning of
Section 424(d) of the Code) stock of AMRESCO possessing more than
ten percent (10%) of the total combined voting power of all
classes of stock of AMRESCO be eligible to receive an ISO at an
Option Price less than one hundred ten percent (110%) of the Fair
Market Value of a Share on the date the ISO is granted. The
price at which each Share covered by each NQSO shall be purchased
by an Optionee shall be established by the Committee, in its sole
discretion.
6.4 Duration of Options. Each Option shall expire at such time
as the Committee shall determine at the time of grant; provided,
however, that no Option shall be exercisable later than the tenth
(10th) anniversary date of its grant; provided, further, however,
that any ISO granted to any Participant who at such time owns
(within the meaning of Section 424(d) of the Code) stock of
AMRESCO possessing more than ten percent (10%) of the total
combined voting power of all classes of stock in AMRESCO, shall
be exercisable not later than the fifth (5th) anniversary date of
its grant.
6.5
6.5 Exercise of Options. Options shall be exercisable at
such times and be subject to such restrictions and conditions as
the Committee shall in each instance approve, which need not be
the same for each grant or each Participant. Each Option shall
be exercisable for such number of Shares and at such time or
times, including periodic installments, as may be determined by
the Committee at the time of the grant. Except as otherwise
provided in the Award Agreement and Article 12, the right to
purchase Shares that are exercisable in periodic installments
shall be cumulative so that when the right to purchase any Shares
has accrued, such Shares or any part thereof may be purchased at
any time thereafter until the expiration or termination of the
Option.
6.6 Payment. Options shall be exercised by the delivery of
a written notice of exercise to AMRESCO, setting forth the number
of Shares with respect to which the Option is to be exercised,
accompanied by full payment for the Shares. The Option Price
upon exercise of any Option shall be payable to AMRESCO in full
either: (a) in cash or (b), if approved by the Committee, by
tendering previously acquired Shares having an aggregate Fair
Market Value at the time of exercise equal to the total Option
Price or (c) by a combination of (a) and (b). The Committee also
may allow cashless exercises as permitted under Federal Reserve
Board's Regulation T, subject to applicable securities law
restrictions, or by any other means which the Committee
determines to be consistent with the Plan's purpose and
applicable law.
As soon as practicable after receipt of a written
notification of exercise and full payment, AMRESCO shall deliver
to the Participant, in the Participant's name, Share certificates
in an appropriate amount based upon the number of Shares
purchased under the Option(s).
6.7 Termination of Employment Due to Death or Disability.
Unless otherwise provided by the Committee in an Award Agreement,
the following rules shall apply in the event of the Participant's
termination of employment due to death or Disability. With
respect to a Participant that is a non-Employee Director or is
otherwise not an Employee, the following references to employment
shall be deemed to be references to service as a Director or in
such other capacity as is determined by the Committee:
(a) Termination by Death. In the event the
Participant dies while actively employed, all outstanding
Options granted to that Participant shall immediately vest
and shall remain exercisable at any time prior to their
expiration date, or for two (2) years after the date of
death, whichever period is shorter, by (i) such Person(s) as
shall have been named as the Participant's beneficiary, (ii)
such Person(s) that have acquired the Participant's rights
under such Options by will or by the laws of descent and
distribution, (iii) the Participant's estate or
representative of the Participant's estate or (iv) by a
transferee of the Option who has acquired the Option in a
transaction that is permitted by Section 6.9.
(b) Termination by Disability. In the event the
employment of a Participant is terminated by reason of
Disability, all outstanding Options granted to that
Participant shall immediately vest as of the date the
Committee determines the definition of Disability to have
been satisfied and shall remain exercisable at any time
prior to their expiration date, or for one (1) year after
the date that the Committee determines the definition of
Disability to have been satisfied, whichever period is
shorter, by the Participant's duly appointed guardian or
other legal representative.
(c) Employment Termination Followed by Death. In the
event that a Participant's employment terminates by reason
of Disability, and within the exercise period following such
termination the Participant dies, then the remaining
exercise period for outstanding Options shall be one (1)
year following death. Such Options shall be exercisable by
the Persons specified in subsection (a) above.
6.8 Termination of Employment for Other Reasons. If the
employment of a Participant shall terminate for any reason other
than the reasons set forth in Section 6.7, all Options held by
the Participant which are not vested as of the effective date of
employment termination immediately shall be forfeited to AMRESCO
(and shall once again become available for grant hereunder).
However, the Committee, in its sole discretion, shall have the
right to immediately vest all or any portion of such Options,
subject to such terms as the Committee, in its sole discretion,
deems appropriate.
In the event an Employee's employment is terminated by
AMRESCO for Cause, or an Employee voluntarily terminates his
employment, the rights under any then vested outstanding Options
shall terminate immediately upon such termination of employment.
If the Employee's employment is terminated by AMRESCO without
Cause, any Options vested as of the date of termination shall
remain exercisable at any time prior to their expiration date or
for three (3) months after his date of termination of employment,
whichever period is shorter.
6.9 Limited Transferability. A Participant may transfer an
Option to members of his or her Immediate Family, to one or more
trusts for the benefit of such Immediate Family members, or to
one (1) or more partnerships where such Immediate Family members
are the only partners, if (i) the Award Agreement evidencing such
Option expressly provides that the Option may be transferred and
(ii) the Participant does not receive any consideration in any
form whatsoever for said transfer thereof. Any Option so
transferred shall continue to be subject to the same terms and
conditions in the hands of the transferee as were applicable to
said Option immediately prior to the transfer thereof. Any
reference in any such Award Agreement to the employment by or
performance of services for AMRESCO by the Participant shall
continue to refer to the employment of or performance by the
transferring Participant. For purpose hereof, "Immediate Family"
shall mean the Participant and the Participant's spouse, and
their respective ancestors and descendants. Any Option that is
granted pursuant to any Award Agreement that did not initially
expressly allow the transfer of said Option and that has not been
amended to expressly permit such transfer, shall not be
transferable by the Participant otherwise than by will or by the
laws of descent and distribution and such Option thus shall be
exercisable during the Participant's lifetime only by the
Participant.
ARTICLE 7. Performance Shares
7.1 Grant of Performance Shares. Subject to the terms
hereof, Performance Shares may be granted to eligible Employees
at any time and from time to time for no consideration, as shall
be determined by the Committee. The Committee shall have
complete discretion in determining the number of Performance
Shares granted to each Participant; provided, however, that
unless and until AMRESCO's stockholders vote to change the
maximum number of Performance Shares that may be earned by any
one Named Executive Officer (subject to the terms of Article 13),
none of the Named Executive Officers may earn more than 500,000
Performance Shares with respect to any performance period.
7.2 Value of Performance Shares. Each Performance Share
shall have a value equal to the Fair Market Value of a Share on
the date the Performance Share is earned. The Committee shall
set performance goals in its discretion which, depending on the
extent to which they are met, will determine the number of
Performance Shares that will be earned by the Participants. The
time period during which the performance goals must be met shall
be called a "performance period." Performance periods shall, in
all cases, equal or exceed two (2) years in length. The
performance goals shall be established at the beginning of the
performance period (or within such time period as is permitted by
Code Section 162(m)).
Unless and until AMRESCO's stockholders vote to change the
general performance measures (subject to the terms of Article
13), the attainment of which shall determine the number of
Performance Shares earned hereunder, the Committee will use one
(1) or more of the following performance measures for purposes of
grants to Named Executive Officers: total shareholder return,
return on assets, return on equity, earnings per share and ratio
of operating overhead to operating revenue. Each Plan Year, the
Committee, in its sole discretion, may select among the
performance measures specified in this Section 7.2 and set the
relative weights to be given to such performance measures.
However, in the case of Participants who are not Named Executive
Officers, the Committee may approve performance measures that are
not specified in this Section 7.2 without obtaining stockholder
approval of such measures.
In the event that applicable tax and/or securities laws
(including, but not limited to, Code Section 162(m) and Section
16 of the Exchange Act) change to permit Committee discretion to
alter the governing performance measures without obtaining
stockholder approval of such changes, the Committee shall have
sole discretion to make such changes without obtaining
stockholder approval.
7.3 Earning of Performance Shares. After the applicable
performance period has ended, the Committee shall certify the
extent to which the established performance goals have been
achieved. Subsequently, each holder of Performance Shares shall
be entitled to receive payout on the number of Performance Shares
earned by the Participant over the performance period, to be
determined as a function of the extent to which the corresponding
performance goals have been achieved. The Committee may, in its
sole discretion, decrease the amount of a Final Award otherwise
payable to a Participant under this Article 7. The Committee
shall have no discretion, however, to increase the amount of a
Final Award otherwise payable to a Named Executive Officer under
this Article 7.
7.4 Form and Timing of Payment of Performance Shares.
Payment of earned Performance Shares shall be made, in a single
lump sum, promptly but in no event later than the Incentive
Payment Date. The Committee, in its sole discretion, may pay
earned Performance Shares in the form of cash or in Shares (or in
a combination thereof) which have, as of the close of the
applicable performance period, an aggregate Fair Market Value
equal to the value of the earned Performance Shares.
7.5 Termination of Employment Due to Death, Disability or
at the Request of AMRESCO Without Cause. In the event the
employment of a Participant is terminated by reason of death,
Disability or by AMRESCO without Cause during a performance
period, the Participant shall receive a prorated payout with
respect to the Performance Shares. The prorated payout shall be
determined by the Committee, in its sole discretion, and shall be
based upon the length of time that the Participant held the
Performance Shares during the performance period, and shall
further be adjusted based on the achievement of the established
performance goals at the time of his termination.
Payment of earned Performance Shares shall be made at the
same time payments are made to Participants who did not terminate
employment during the applicable performance period.
7.6 Termination of Employment for Other Reasons. In the
event that a Participant's employment terminates for any reason
other than those reasons set forth in Section 7.5, all
Performance Shares shall be forfeited by the Participant to
AMRESCO.
7.7 Nontransferability. Unless the Committee provides
otherwise in the Award Agreement, Performance Shares may not be
sold, transferred, pledged, assigned or otherwise alienated or
hypothecated, other than by will or by the laws of descent and
distribution. Further, a Participant's Performance Shares rights
hereunder shall be exercisable during the Participant's lifetime
only by the Participant or the Participant's legal
representative.
ARTICLE 8. Restricted Stock
8.1 Grants. The Committee may from time to time in its
discretion grant Restricted Stock to Employees and may determine
the number of Shares of Restricted Stock to be granted and the
terms and conditions of, and the amount of payment, if any, to be
made by the Employee for, such Restricted Stock. A grant of
Restricted Stock may require the Employee to pay for such Shares
of Restricted Stock, but the Committee may establish a price
below Fair Market Value at which the Employee can purchase the
Shares of Restricted Stock. Each grant of Restricted Stock will
be evidenced by an Award Agreement containing terms and
conditions not inconsistent herewith as the Committee shall
determine to be appropriate in its sole discretion. Such
Restricted Stock shall be granted subject to the restrictions
prescribed pursuant hereto and the Award Agreement.
8.2 Restricted Period; Lapse of Restrictions. At the time
a grant of Restricted Stock is made, the Committee shall
establish a period or periods of time (the "Restricted Period")
applicable to such grant, unless the Committee otherwise
provides, shall not be less than one (1) year. Subject to the
other provisions of this Article 8, at the end of the Restricted
Period all restrictions shall lapse and the Restricted Stock
shall vest in the Participant. At the time a grant is made, the
Committee may, in its discretion, prescribe conditions for the
incremental lapse of restrictions during the Restricted Period
and for the lapse or termination of restrictions upon the
occurrence of other conditions in addition to or other than the
expiration of the Restricted Period with respect to all or any
portion of the Restricted Stock. Such conditions may, but need
not, include without limitation, (a) the death, Disability or
Retirement of the Employee to whom Restricted Stock is granted or
(b) the occurrence of a Change in Control. The Committee may
also, in its discretion, shorten or terminate the Restricted
Period, or waive any conditions for the lapse or termination of
restrictions with respect to all or any portion of the Restricted
Stock at any time after the date the grant is made.
8.3 Rights of Holder; Limitations Thereon. Upon a grant of
Restricted Stock, a stock certificate (or certificates)
representing the number of Shares of Restricted Stock granted to
the Employee shall be registered in the Employee's name and shall
be held in custody by AMRESCO or a bank selected by AMRESCO for
the Employee's account. Following such registration, the
Employee shall have the rights and privileges of a stockholder as
to such Restricted Stock, including the right to receive
dividends and to vote such Restricted Stock, except that, the
right to receive cash dividends shall be the right to receive
such dividends either in cash currently or by payment in
Restricted Stock, as the Committee shall determine, and except
further that, the following restrictions shall apply:
(a) The Employee shall not be entitled to delivery of
a certificate until the expiration or termination of the
Restricted Period for the Shares represented by such
certificate and the satisfaction of any and all other
conditions prescribed by the Committee;
(b) None of the Shares of Restricted Stock may be
sold, transferred, assigned, pledged, or otherwise
encumbered or disposed of during the Restricted Period and
until the satisfaction of any and all other conditions
prescribed by the Committee; and
(c) All of the Shares of Restricted Stock that have
not vested shall be forfeited and all right of the Employee
to such Restricted Stock shall terminate without further
obligation on the part of AMRESCO unless the Employee has
remained a full-time employee of AMRESCO or any of its
Subsidiaries until the expiration or termination of the
Restricted Period and the satisfaction of any and all other
conditions prescribed by the Committee applicable to such
Restricted Stock. Upon the forfeiture of any Shares of
Restricted Stock, such forfeited Shares shall be transferred
to AMRESCO without further action by the Employee, and
shall, in accordance with Section 4.2, again be available
for grant hereunder.
With respect to any Shares received as a result of
adjustments under Section 4.3 and any Shares received with
respect to cash dividends declared on Restricted Stock, the
Participant shall have the same rights and privileges, and be
subject to the same restrictions, as are set forth in this
Article 8.
8.4 Delivery of Unrestricted Shares. Upon the expiration
or termination of the Restricted Period for any Shares of
Restricted Stock and the satisfaction of any and all other
conditions prescribed by the Committee, the restrictions
applicable to such Restricted Stock shall lapse and a stock
certificate for the number of Shares of Restricted Stock with
respect to which the restrictions have lapsed shall be delivered,
free of all such restrictions except any that may be imposed by
law, to the holder of the Restricted Stock. AMRESCO shall not be
required to deliver any fractional Share but will pay, in lieu
thereof, the Fair Market Value (determined as of the date the
restrictions lapse) of such fractional share to the holder
thereof. Prior to or concurrently with the delivery of a
certificate for Restricted Stock, the holder shall be required to
pay an amount necessary to satisfy any applicable federal, state
and local tax requirements as set out in Article 14.
8.5 Nonassignability of Restricted Stock. Unless the
Committee provides otherwise in the Award Agreement, no grant of,
nor any right or interest of a Participant in or to any
Restricted Stock, or in any instrument evidencing any grant
hereunder, may be assigned, encumbered or transferred except, in
the event of the death of a Participant, by will or the laws of
descent and distribution.
ARTICLE 9. Beneficiary Designation
Each Participant hereunder may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or
successively) to whom any benefit hereunder is to be paid in case
of his or her death before he or she receives any or all of such
benefit. Each such designation shall revoke all prior
designations by the same Participant, shall be in a form
prescribed by AMRESCO and shall be effective only when filed by
the Participant, in writing, with AMRESCO during the
Participant's lifetime. In the absence of any such designation,
benefits remaining unpaid at the Participant's death shall be
paid to the Participant's estate.
The spouse of a married Participant domiciled in a community
property jurisdiction shall
join in any designation of beneficiary or beneficiaries other
than the spouse.
ARTICLE 10. Deferrals
The Committee may permit a Participant to defer to another
plan or program such Participant's receipt of the payment of cash
or the delivery of Shares that would otherwise be due to such
Participant by virtue of the exercise of an Option, the
satisfaction of any requirements or goals with respect to
Performance Shares or the vesting of Restricted Stock. If any
such deferral election is required or permitted, the Committee
shall, in its sole discretion, establish rules and procedures for
such payment deferrals.
ARTICLE 11. Rights of Employees
11.1 Employment. Nothing herein shall interfere with or
limit in any way the right of AMRESCO or a Subsidiary to
terminate any Participant's employment or engagement by AMRESCO
at any time, nor confer upon any Participant any right to
continue in the employ or service of AMRESCO or a Subsidiary.
For purpose hereof, transfer of employment of a Participant
between AMRESCO and any one of its Subsidiaries (or between
Subsidiaries) shall not be deemed a termination of employment.
11.2 Participation. No Employee shall have the right to
be selected to receive an
Award, or, having been so selected, to be selected to receive a
future Award.
ARTICLE 12. Change in Control
Upon the occurrence of a Change in Control, except as
provided in the Award Agreement
or unless otherwise specifically prohibited by the terms of
Article 17:
(a) Any and all Options granted hereunder shall
become fully vested and immediately exercisable;
(b) The target payout opportunity attainable under all
outstanding Performance Shares shall be deem to have been
fully earned for the entire performance period(s) as of the
effective date of the Change in Control, and all earned
Performance Shares shall be paid out in accordance with
Section 7.4 to Participants within thirty (30) days
following the effective date of the Change in Control;
(c) All restrictions on a grant of Restricted Stock
shall lapse and such Restricted Stock shall be delivered to
the Participant in accordance with Section 8.4; and
(d) Subject to Article 13, the Committee shall have
the authority to make any modifications to the Awards as
determined by the Committee to be appropriate before the
effective date of the Change in Control.
ARTICLE 13. Amendment, Modification and Termination
13.1 Amendment Modification and Termination. The Board may,
at any time and from time to time, alter, amend, suspend or
terminate the Plan in whole or in part.
13.2 Awards Previously Granted. No termination, amendment
or modification hereof shall adversely affect in any material way
any Award previously granted hereunder, without the written
consent of the Participant holding such Award. The Committee,
with the written consent of the Participant holding such Award,
shall have the authority to cancel Awards outstanding and grant
replacement Awards therefor.
13.3 Compliance With Code Section 162(m). At all times when
the Committee determines that compliance with Code Section 162(m)
is desired, all Awards shall comply with the requirements of Code
Section 162(m). In addition, in the event that changes are made
to Code Section 162(m) to permit greater flexibility with respect
to any Award or Awards, the Committee may, subject to this
Article 13, make any adjustments it deems appropriate.
ARTICLE 14. Withholding
14.1 Tax Withholding. AMRESCO shall have the power and the
right to deduct or withhold, or require a Participant to remit to
AMRESCO, an amount sufficient to satisfy federal, state and local
taxes (including the Participant's FICA obligation) required by
law to be withheld with respect to any taxable event arising in
connection with an Award.
14.2 Share Withholding. With respect to withholding
required upon the exercise of Options, or upon any other taxable
event as a result of Awards granted hereunder which are to be
paid in the form of Shares, a Participant may elect, subject to
the approval of the Committee, to satisfy the withholding
requirement, in whole or in part, by having AMRESCO withhold
Shares having a Fair Market Value on the date the tax is to be
determined equal to the minimum statutory total tax which could
be imposed on the transaction. All elections shall be
irrevocable, made in writing, signed by the Participant, and
elections by Insiders shall additionally comply with all legal
requirements applicable to Shares transactions by such
Participants.
ARTICLE 15. Indemnification
Each person who is or shall have been a member of the
Committee, or the Board, shall be indemnified and held harmless
by AMRESCO against and from any loss, cost, liability or expense
that may be imposed upon or reasonably incurred by him or her in
connection with or resulting from any claim, action, suit or
proceeding to which he or she may be party or in which he or she
may be involved by reason of any action taken or failure to act
hereunder and against and from any and all amounts paid by him or
her in settlement thereof, with AMRESCO's approval, or paid by
him in satisfaction of any judgment in any such action, suit or
proceeding against him, provided he shall give AMRESCO an
opportunity, at its own expense, to handle and defend the same
before he undertakes to handle and defend it on his own behalf.
The foregoing right of indemnification shall be in addition to
any other rights of indemnification to which such persons may be
entitled under AMRESCO's Certificate of Incorporation or Bylaws,
as a matter of law, or otherwise, or any power that AMRESCO may
have to indemnify them or hold them harmless.
ARTICLE 16. Successors
All obligations of AMRESCO hereunder, with respect to
Awards, shall be binding on any successor to AMRESCO, whether the
existence of such successor is the result of a direct or indirect
purchase, merger, consolidation or otherwise, of all or
substantially all of the business and/or assets of AMRESCO.
ARTICLE 17. Legal Construction
17.1 Gender and Number. Except where otherwise indicated by
the context, any masculine term used herein also shall include
the feminine; the plural shall include the singular and the
singular shall include the plural.
17.2 Severability. In the event any provision hereof shall
be held illegal or invalid for any reason, the illegality or
invalidity shall not affect the remaining parts hereof, and the
Plan shall be construed and enforced as if the illegal or invalid
provision had not been included.
17.3 Requirements of Law. The granting of Awards and the
issuance of Shares under the Plan shall be subject to all
applicable laws, rules and regulations, and to such approvals by
any governmental agencies or national securities exchanges as may
be required.
17.4 Regulatory Approvals and Listing. AMRESCO shall not be
required to issue any certificate or certificates for Shares
hereunder prior to (i) obtaining any approval from any
governmental agency which AMRESCO shall, in its discretion,
determine to be necessary or advisable, (ii) the admission of
such Shares to listing on any national securities exchange or
Nasdaq on which AMRESCO's Shares may be listed and (iii) the
completion of any registration or other qualification of such
Shares under any state or federal law or ruling or regulations of
any governmental body which AMRESCO shall, in its sole
discretion, determine to be necessary or advisable.
Notwithstanding any other provision set forth herein, if
required by the then-current Section 16 of the Exchange Act, any
"derivative security": or "equity security" offered pursuant
hereto to any Insider may not be sold or transferred for at least
six (6) months after the date of grant of such Award. The terms
"equity security" and "derivative security" shall have the
meanings ascribed to them in the then-current Rule 16(a) under
the Exchange Act.
17.5 Securities Law Compliance. With respect to Insiders,
transactions hereunder are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange
Act. To the extent any provisions hereof or action by the
Committee fails to so comply, it shall be deemed null and void,
to the extent permitted by law and deemed advisable by the
Committee.
17.6 Governing Law. To the extent not preempted by
federal law, the Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the
State of Delaware.
<TABLE>
<CAPTION>
AMRESCO, INC.
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Basic:
<S> <C> <C> <C> <C>
Net income $19,660,000 $12,486,000 $33,709,000 $21,047,000
Weighted average common shares outstanding 42,840,145 36,023,853 40,983,662 34,966,629
Contingently issuable shares 7,277 109,448 25,470
Restricted shares (383,005) (322,544) (350,919) (271,917)
Total 42,457,140 35,708,586 40,742,191 34,720,182
Earnings per share $0.46 $0.35 $0.83 $0.61
Diluted:
Net income $19,660,000 $12,486,000 $33,709,000 $21,047,000
Weighted average common shares outstanding 42,840,145 36,023,853 40,983,662 34,966,629
Contingently issuable shares 7,277 109,448 25,470
Net effect of dilutive stock
options based on the Treasury
stock method using the average market price 1,162,838 622,210 1,131,164 740,755
Total 44,002,983 36,653,340 42,224,274 35,732,854
Earnings per share $0.45 $0.34 $0.80 $0.59
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> $ 35,051
<SECURITIES> 0
<RECEIVABLES> 16,563
<ALLOWANCES> 395
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 27,602
<DEPRECIATION> 13,251
<TOTAL-ASSETS> 3,678,561
<CURRENT-LIABILITIES> 0
<BONDS> 1,249,431
0
0
<COMMON> 2,147
<OTHER-SE> 609,254
<TOTAL-LIABILITY-AND-EQUITY> 3,678,561
<SALES> 0
<TOTAL-REVENUES> 320,965
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 140,271
<LOSS-PROVISION> 13,565
<INTEREST-EXPENSE> 111,993
<INCOME-PRETAX> 55,136
<INCOME-TAX> 21,427
<INCOME-CONTINUING> 33,709
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,709
<EPS-PRIMARY> 0.83
<EPS-DILUTED> $ 0.80
</TABLE>
