UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-8630
AMRESCO, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-1781257
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
700 N. Pearl St. Ste 2400 LB 342 Dallas, Tx. 75201-7424
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (214) 953-7700
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
8.75% Senior Notes due 1999 New York Stock Exchange
10% Senior subordinated Notes due 2003 New York Stock Exchange
10% Senior Subordinated Notes due 2004 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Shares of common stock, par value $0.05 per share
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past
90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K [ ]
As of March 22, 1999, 48,069,335 shares of the registrant's
common stock were outstanding. The aggregate market value of the
voting stock held by non-affiliates of the registrant, computed by
reference to the closing price of such stock as of March 22, 1999, was
approximately $398,500,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed for the
Annual Meeting of Shareholders to be held on May 19, 1999, are
incorporated by reference in Part III hereof.
PART I
Item 1. Business
General
AMRESCO, INC. (the "Company") is a diversified financial services
company specializing in real estate lending, commercial finance and
the acquisition, resolution and servicing of performing,
underperforming and nonperforming commercial loans. The Company began
operations in 1987 providing asset management and resolution services
to governmental agencies, financial institutions and others relating
to nonperforming and underperforming commercial and real estate loans.
In early 1994, the Company made the decision to diversify its business
lines and build "franchise" business units that could use the
Company's core real estate management and lending expertise to pursue
growth in markets that were being underserved by traditional lenders.
Since that time, the Company has entered the commercial mortgage
banking, commercial finance, residential mortgage lending and loan
servicing businesses and oriented its asset management activities
towards direct investments in asset portfolios and the special
servicing of large portfolios of asset-backed securities.
Business Activities
The Company's primary businesses are organized along the
following lines: asset management, commercial mortgage banking, home
equity lending, commercial finance and residential mortgage banking.
Financial information regarding the Company's operating segments is
presented in Note 13 of the Notes to Consolidated Financial Statements
included in "Item 8. Financial Statements and Supplementary Data."
Additional financial information regarding the Company's operating
segments is presented in "Item 7. Management's Discussion and
Analysis of Financial Conditions and Results of Operations".
Asset Management Business
General. The Company manages and resolves portfolios of
performing, underperforming and nonperforming loans ("asset
portfolios") and provides special servicing for nonperforming or
underperforming loans in commercial mortgage-backed bond trusts and
similar securitized commercial asset-backed loan portfolios.
Asset Portfolio Management. The Company manages and resolves
asset portfolios acquired at a discount to Face Value by the Company
alone and by the Company with co-investors. The Company also manages
and resolves asset portfolios owned by third parties.
Management of asset portfolios includes managing and resolving
loans and providing routine accounting servicing functions. Asset
portfolios generally include secured loans of varying qualities and
collateral types. The majority of the loans in which the Company
invests are in payment default at the time of acquisition. Asset
portfolios purchased by the Company are comprised of secured loans and
real estate loans, the resolution of which may be based either on cash
flow of a business or on real estate and other collateral securing the
loan. The Company does not invest in loans with known environmental
liabilities, unless the environmental risks can be quantified and
discounted appropriately.
The Company obtains information on available asset portfolios
from many sources, including banks, insurance companies and other
lenders. Repeat business and referrals from asset portfolio sellers
with whom the Company previously has transacted business are an
important and frequent source of business. The Company has developed
relationships in which it is a preferred purchaser of asset portfolios
from certain sellers. The Company believes that it receives many
asset portfolio solicitations that result primarily from the Company's
reputation as an active portfolio purchaser. Other important sources
of business include referrals from co-investors who seek the Company's
participation in asset portfolio purchases, contacts initiated by
senior management, public advertising of asset portfolios for sale and
the Company's nationwide presence.
The Company believes that opportunities for the acquisition,
management and resolution of asset portfolios are becoming
increasingly evident in certain international markets and that lenders
in these markets are adopting many of the asset portfolio management
and resolution outsourcing techniques currently utilized in the United
States. Accordingly, the Company has opened offices in Toronto
(August 1994), employing 13 persons, and London (October 1995),
employing 11 persons, each at December 31, 1998, in order to take
advantage of both investment and servicing opportunities in Canada,
the United Kingdom and certain other Western European nations. During
1998, the Company began providing asset management services in Mexico
and Asia employing 49 persons in Mexico and 3 persons in Asia. The
Company believes that the international markets are less competitive
and, as a result, provide more attractive investments and greater
profit margins. The Company may open other offices and seek strategic
alliances in other international markets. The Company had
$102.8 million (Face Value) in Canadian asset portfolios,
$441.5 million (Face Value) in United Kingdom asset portfolios and
$241.8 million (Face Value) in Mexican asset portfolios under
management as of December 31, 1998.
The Company believes that it can gain market share in the asset
portfolio acquisition, management and resolution business due to its
experience in managing and resolving asset portfolios and its national
reputation and strategic relationships with sellers and purchasers of
asset portfolios, including financial institutions, large corporate
buyers, investment banking firms and sophisticated private investors.
Asset Portfolio Investment. Prior to making an offer to purchase
an asset portfolio, the Company conducts an extensive investigation
and evaluation of the individual loans generally comprising 100% of
the aggregate Face Value of all the loans therein, except in rare
instances where an unusually large number of smaller assets are being
purchased. This examination typically consists of analyzing the
information made available by the seller (generally, the respective
credit and collateral files for the loans), reviewing other relevant
material that may be available (including tax and judgment records),
and analyzing the underlying collateral (including conducting site
inspections, obtaining value opinions from third parties and
consulting with any of the Company's asset managers who have
experience with the local market for such assets). The Company also
reviews information on the local economy and real estate markets in
the area in which the loan collateral is located. Because of its
broad, nationwide experience in managing assets, the Company often is
able to draw on its asset management experience in the specific market
in which an asset is located. Unlike the original lender, the Company
values loans based on the present value of estimated total cash flow
from resolution, with the expectation that the loans will be resolved
prior to scheduled maturity. Generally, the Company does not
refinance or renew purchased loans or grant new credit.
Asset portfolio evaluations are conducted almost exclusively by
the Company's employees who specialize in analysis of nonperforming
and underperforming loans, often with further specialization based on
geographic or collateral-specific factors. Most of these employees
have previously served the Company (and some continue to serve) as
asset managers with responsibility for resolving such loans. Their
asset management experience aids these individuals, working together
in teams, in making informed judgments about the status of each loan
and the underlying collateral, the probable cash flows from the loan,
the likely resolution of the loan and the time and expense required
for resolution.
Loan resolutions are typically accomplished through (i)
negotiating a discounted payoff with debtors, which may be
accomplished through a refinancing by the obligor with a lender other
than the Company, or (ii) foreclosure and sale of the collateral. The
Company generally seeks consensual resolution of each loan, having
found that a negotiated resolution usually maximizes the Company's or
investor's rate of return. Historically, the Company has resolved the
majority of the assets in an asset portfolio within 18 months of
acquisition. The goal of the Company's loan resolution process is to
maximize the cash recovery in a timely manner on each loan in an asset
portfolio.
The Company's investment in asset portfolios is comprised of
collateralized business loans and in real estate collateralized loans.
At December 31, 1998, the Face Value of the Company's wholly-owned
asset portfolios aggregated approximately $1,048.0 million, which was
composed of approximately $685.9 million (65.4%) of collateralized
business loans, approximately $141.2 million (13.5%) of asset-backed
securities and approximately $220.9 million (21.1%) of real estate.
For the years ended December 31, 1998, 1997 and 1996, $112.7
million (21.4%), $103.6 million (24.8%), and $88.8 million (44.4%)
respectively, of the Company's revenues were attributable to its asset
management business. The following table reflects the ownership
composition of the asset portfolios (based on their Face Value) under
management by the Company as of December 31, 1998, 1997, 1996, 1995
and 1994. Certain reclassifications of prior period amounts have been
made to conform to the current year presentation.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Wholly-owned by the Company $1,048.0 33.6% $593.4 30.7% $ 572.2 20.7% $ 354.3 9.6% $ 140.4 4.6%
Owned by the Company with co-investors 182.5 5.9 422.9 21.8 836.0 30.1 1,558.1 42.2 1,675.9 55.3
Owned by third parties:
Securitized mortgage pools 574.0 18.4 459.2 23.7 618.0 22.3 738.3 20.0 315.0 10.4
Government and other owners 1,313.1 42.1 462.1 23.8 744.4 26.9 1,043.2 28.2 900.5 29.7
Total under management $3,117.6 100.0% $1,937.6 100.0% $2,770.6 100.0% $3,693.9 100.0% $3,031.8 100.0%
The following table reflects the Company's investment in asset
portfolios as of December 31, 1998, 1997, 1996, 1995 and 1994:
1998 1997 1996 1995 1994
(dollars in millions)
Wholly-owned by the Company $573.0 $494.9 $274.9 $172.6 $34.4
Owned by the Company with co-investors 17.1 22.8 27.7 34.3 33.7
Total $590.1 $517.7 $302.6 $206.9 $68.1
</TABLE>
Special Servicing. As part of its third-party asset management
and resolution business, the Company aggressively pursues contracts to
serve as the designated special servicer for pools of securitized
commercial mortgages. The competitive bidding process generally
requires that the Company agree to purchase an interest (a "servicing
strip") in the securitized portfolio in order to secure the servicing
contract. After a loan within a securitized pool of performing loans
becomes delinquent or nonperforming, the master servicer or primary
servicer of the pool will contractually transfer responsibility for
resolution of that loan to the pool's designated special servicer.
Special servicers earn an annual fee (typically approximately 50 basis
points of the Face Value of the delinquent or nonperforming loans
subject to special servicing), plus a 50 to 200 basis points
resolution fee based on the total cash flow from resolution of each
such loan as it is received. As of December 31, 1998, the Company was
the designated special servicer for securitized pools holding
approximately $20.2 billion (Face Value) of loans, $574.0 million
(Face Value) of which had been assigned to the Company for resolution
in its capacity as special servicer.
Commercial Mortgage Banking Business
General. The Company performs a wide range of commercial
mortgage banking services, including originating, underwriting,
placing, selling and servicing commercial real estate loans through
Holliday Fenoglio Fowler, AMRESCO Capital and AMRESCO Services.
Real Estate Capital Markets. The Company provides a wide range
of real estate capital markets services to lenders on, and owners and
developers of, commercial real estate properties. The typical
consumers of commercial real estate mortgage banking services are both
real estate developers and owners (as borrowers) and investor/lenders
(as funding sources). Due to the specialized nature of commercial
mortgage lending, borrowers rely on commercial mortgage bankers to
find competitive lenders, and these lenders (particularly insurance
companies and pension plans, which do not generally have origination
staffs located in multiple branches) rely on commercial mortgage
bankers to source potential borrowers. Lenders generally include
banks, pension funds and insurance companies. In arranging loans, the
Company works closely with both the borrower and potential lenders
from the time a loan prospect is first contacted, through the
application and proposal process and throughout the documentation of
the loan to final funding.
Holliday Fenoglio Fowler was one of the largest commercial
mortgage bankers in the United States in 1998 (based on origination
volume) and primarily serves commercial real estate developers and
owners by arranging commercial real estate loans and providing
brokerage and other real estate capital markets services for
commercial real estate transactions. Holliday Fenoglio Fowler
arranged approximately $7.3 billion, $4.7 billion and $2.5 billion of
commercial real estate loans during 1998, 1997 and 1996, respectively.
Holliday Fenoglio Fowler principally targets developers and owners of
commercial and multifamily real estate properties. Holliday Fenoglio
Fowler serves prospective borrowers through its own commission-based
mortgage bankers in 24 nationwide offices. The loans arranged by
Holliday Fenoglio Fowler generally are funded by institutional
lenders, primarily insurance companies, and by Conduit Purchasers.
The Company estimates that Holliday Fenoglio Fowler has retained the
servicing rights on approximately 19% of such loans over the last
three years. The Company believes that Holliday Fenoglio Fowler's
relationship and credibility with its institutional lender network
provide the Company a competitive advantage in the commercial mortgage
banking industry.
The Company provided brokerage and other real estate capital
markets services on commercial real estate sales and other real estate
transactions, including joint ventures and participating mortgages of
approximately $9.8 billion, $6.1 billion and $3.1 billion during 1998,
1997 and 1996, respectively. For the year ended December 31, 1998,
1997 and 1996, Holliday Fenoglio Fowler earned gross fees of $69.8
million, $44.0 million and $24.0 million, respectively, for brokerage
services.
Holliday Fenoglio Fowler generally earns a fee of between 50 and
100 basis points of the loan amount for originated or underwritten
loans, plus certain additional processing fees. From time to time,
Holliday Fenoglio Fowler also originates nontraditional financing
involving hybrid forms of debt, equity participation's and other
creative financing structures. Fees for equity or joint venture
structures are typically higher.
Holliday Fenoglio Fowler has established relationships with over
200 institutional lenders that include insurance companies, pension
plans and Conduit Purchasers. In 1998, 1997 and 1996, Holliday
Fenoglio Fowler placed 1,109, 709 and 410 loans with approximately
198, 128 and 107 different lenders, respectively. Forty-eight
institutional lenders have retained Holliday Fenoglio Fowler as their
exclusive or semi-exclusive loan originator in selected cities and
regions.
Holliday Fenoglio Fowler has significantly expanded its East
Coast business with the 1998 acquisitions of Fowler, Goedecke, Ellis &
O'Connor Incorporated and PNS Realty Partners, L.P.
Commercial Real Estate Lending. AMRESCO Capital is a commercial
real estate lender, which originates, underwrites and closes long term
fixed rate commercial mortgages for sale to various investors. During
1998, 1997 and 1996, AMRESCO Capital closed approximately $2.4
billion, $1.7 billion and $0.6 billion, respectively, of commercial
real estate mortgages. AMRESCO Capital serves its market directly
through 13 offices located in 12 states as well as through a network
of approximately 40 independent mortgage brokers located throughout
the United States. These independent mortgage brokers serve AMRESCO
Capital on a nonexclusive basis and receive fees and commissions based
on transaction size, type and complexity. For years ended December
31, 1998 and 1997, approximately 45% and 39% of the loans,
respectively, underwritten by AMRESCO Capital were originated by
Holliday Fenoglio Fowler.
During the fourth quarter of 1998, AMRESCO Capital suffered
significant losses related to its commercial mortgage conduit
operation. As a result, AMRESCO Capital made the strategic decision
to exit the commercial mortgage conduit business as a principal so as
to avoid the significant capital markets risk associated with the
accumulation and securitization of commercial mortgage loans. AMRESCO
Capital's business is now focused on commercial mortgage lending
through agency programs such as the Fannie Mae DUS program. In
addition, as described below, AMRESCO Capital recently implemented
conduit programs with major financial institutions that will provide
fee income and a profit participation to AMRESCO Capital without the
requirement to place significant capital at risk.
AMRESCO Capital is approved by Fannie Mae to participate in its
DUS program. An approved DUS lender is delegated the authority to
approve, commit and close loans for multifamily mortgages on a
national basis with the assurance that Fannie Mae will purchase the
loans with the lender retaining the servicing. In return for the
delegated authority to make loans and the subsequent purchase of such
loans by Fannie Mae, DUS lenders must maintain a minimum capital base,
and retain a certain level of credit risk on the loans they make. The
DUS lender takes first loss risk up to 5% of the loan amount, and
above 5% of the loan amount Fannie Mae and the DUS lender share the
loss, with the DUS lender's maximum loss capped at 20% of the loan
amount. AMRESCO Capital, as a DUS lender, had experienced no losses
on its portfolio of sold DUS loans as of December 31, 1998, but, had a
reserve of $6.1 million as of December 31, 1998 included in other
liabilities. AMRESCO Capital is one of only 28 currently approved DUS
lenders. While all DUS lenders operate on a national basis, the
Company believes that 10 such lenders (including AMRESCO Capital)
account for the majority of DUS volume.
AMRESCO Capital is also a member of the Freddie Mac Program Plusr
multifamily seller/servicer program. Through this program, the
Company is authorized to originate multi-family mortgages for Freddie
Mac in the states of Florida, New York, North Carolina, South Carolina
and Pennsylvania. Freddie Mac recently has announced changes to its
program that will have the effect of significantly expanding the
number of areas in which the Company is authorized to originate
mortgages.
The Company believes that AMRESCO Capital, as an authorized
Fannie Mae DUS and Freddie Mac Program Plusr lender, has certain
competitive advantages in the multifamily mortgage origination
business. These advantages include the competitive pricing afforded
by Fannie Mae's and Freddie Mac's positions as the largest purchasers
of housing related mortgages in the nation and AMRESCO Capital's
affiliation with Holliday Fenoglio Fowler, one of the largest mortgage
banking company's in the nation. For these reasons, the Company
expects Fannie Mae and Freddie Mac loan originations to become a
larger portion of its commercial mortgage banking activities.
Holliday Fenoglio Fowler has been and is expected to be a significant
source of such loan originations.
During February 1999, AMRESCO Capital announced that formation of
a strategic alliance with LaSalle National Bank in which commercial
mortgage loans originated by AMRESCO Capital will be funded by LaSalle
National Bank and securitized by LaSalle's affiliate, ABN AMRO
Incorporated. Also in February 1999, AMRESCO Capital announced a
strategic alliance with Morgan Stanley Dean Witter to originate fixed
rate commercial mortgage loans to be purchased by Morgan Stanley Dean
Witter and included in commercial mortgage-backed securities to be
lead managed by Morgan Stanley Dean Witter. The arrangements with
LaSalle National Bank and Morgan Stanley Dean Witter both provide for
AMRESCO Capital to earn fees for its origination and related services
and to participate in the profits associated with the subsequent
securitization of the commercial mortgage loans. AMRESCO Capital does
not assume any significant funding risk associated with these conduit
programs.
Commercial Loan Servicing. AMRESCO Services is a servicer for
securitized pools of commercial mortgages and whole loans. The
average life of these securitized pools is expected to be
approximately eight years. At December 31, 1998, 1997, 1996, 1995 and
1994, AMRESCO Services acted as servicer with respect to approximately
$31.0 billion, $25.9 billion, $16.7 billion, $13.5 billion and
$5.6 billion, of loans, respectively. The dominant users of
commercial loan servicers are commercial mortgage-backed bond trusts
and other owners of commercial real estate loans, including lenders
accumulating loans for securitization or sale that contract for
servicing on an interim basis. Historically, the revenue stream from
servicing contracts on commercial mortgages has been relatively
predictable as prepayment penalties in commercial mortgages tend to
discourage early loan payoffs.
Primary servicing of whole loans involves collecting monthly
mortgage payments, maintaining escrow accounts for the payment of ad
valorem taxes and insurance premiums on behalf of borrowers, remitting
payments of principal and interest promptly to investors in the
underlying mortgages, reporting to those investors on financial
transactions related to such mortgages and generally administering the
loans. The servicer of whole loans also must cause properties to be
inspected periodically, determine the adequacy of insurance coverage
on each property and monitor delinquent accounts for payment.
Servicer rates are determined by a bidding and negotiating process.
AMRESCO Services is approved as a primary servicer by all four rating
agencies.
Master servicing involves providing administrative and reporting
services to securitized pools of mortgage-backed securities.
Typically, mortgages underlying mortgage-backed securities are
serviced by a number of primary servicers. In fact, AMRESCO Services
is a primary servicer for many of the loans for which it is also a
master servicer. Under most master servicing arrangements, the
primary servicers retain principal responsibility for administering
the mortgage loans and the master servicer acts as an intermediary in
overseeing the work of the primary servicers, monitoring their
compliance with the issuer's standards and consolidating their
respective periodic accounting reports for transmission to the
securitization trustee in respect of the related securities. The
Company frequently is designated as the full servicer for a pool of
mortgages, in which case the Company acts as master, primary, and, in
some cases, special servicer for the pool. Master/full servicers are
typically paid fees based on the Face Value of loans under management,
and the compensation is determined by a bidding and negotiating
process. AMRESCO Services is approved as a master servicer by all
four rating agencies.
Home Equity Lending Business
General. Through home equity lending, the Company originates,
acquires, warehouses, services and sells home equity loans. Home
equity lending's loan production was $3.5 billion as compared to $3.6
billion for the years ended December 31, 1998 and 1997, respectively.
In late 1998, the Company suffered significant losses related to home
equity loans accumulated and held for subsequent securitization. As a
result, the Company discontinued its "bulk" purchase of home equity
loans and origination of home equity loans through correspondent
channels, which collectively accounted for approximately $2.4 billion
and $2.7 billion of loan volumes for the year ended December 31, 1998
and 1997, respectively. Currently, all loans originated by the
Company are sold in "whole loan" sale transactions. The Company has
re-focused its home equity lending business toward its retail and
wholesale operations, the area of the home equity lending segment
considered to hold the greatest potential for profitable growth.
Borrower Profile and Underwriting. The Company targets borrowers
that have credit profiles that preclude their loans from being sold in
the government agency secondary markets. Such credit profiles may
include consumer or mortgage loan delinquencies, high debt-to-income
ratios, previous bankruptcy or inability to provide income
documentation. Borrowers in the Company's targeted market typically
have significant equity in their homes and may be charged higher
interest rates for loans than more creditworthy borrowers. The
Company believes that the higher interest rates and the more favorable
loan-to-value characteristics of this market mitigate the greater
credit risk associated with such borrowers and make this an attractive
market for the Company.
The home equity loans originated or acquired by the Company are
underwritten in accordance with the Company's guidelines or the
guidelines of the third party originator which have been submitted to
and approved by the Company. In general, higher credit risk mortgage
loans are graded in categories which permit higher debt ratios and
more (or more recent) major derogatory credit items such as
outstanding judgments or prior bankruptcies. The underwriting
guidelines generally establish lower loan-to-value ratios and loan
amounts for higher credit risk mortgage loans.
Loan Products. The home equity loans originated and acquired by
the Company consist of fixed and adjustable rate conventional,
nonconforming mortgage loans with remaining terms to maturity of not
more than 360 months and secured by deeds of trust, security deeds or
mortgages. The properties securing the home equity loans consist
primarily of single family residences (which may be attached,
detached, part of a two-to-four-family dwelling, a condominium unit or
a unit in a planned unit development). The properties securing the
home equity loans may be owner occupied or non-owner occupied
investment properties. The Company's home equity loan products
include fixed rate loans that bear a fixed rate of interest for the
life of the loan, adjustable rate loans that bear interest at rates
that adjust, along with related monthly payments, periodically
(generally semiannually) based on a specified financial index or
quoted rate and loans that bear a fixed rate of interest for a
specified period following origination (generally 2, 3 or 5 years)
with periodic rate adjustments thereafter based on a specified
financial index or quoted rate. In a majority of cases, the home
equity loans can be prepaid by the mortgagor in whole or in part at
any time, although the mortgagor may be required to pay a fee in
connection with certain prepayments.
Loan Sources. Since restructuring its operations in October
1998, the Company has obtained home equity loans through its wholesale
broker operations and through various retail channels, including
telemarketing, direct mail and retail branches. Wholesale operations
involve the origination of loans through the Company's network of
branch offices. Retail operations involve consumer direct mail, a
retail sales center and retail branch operations. In its retail
operations the Company works directly with consumers to originate,
underwrite and close mortgage loans.
Portfolio Performance. The following table provides information
with respect to prepayments, delinquencies and net losses for each of
the Company's securitizations as of December 31, 1998 prior to any
potential recoveries:
<TABLE>
<CAPTION>
Issuance Original Balance CPR % Delinquencies (2) % Net
Security Date Balance Outstanding Actual(1) 30-59 60-89 90+ Losses(3)
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-1 01/25/96 $ 275 $ 72 34.86% 2.10% 2.10% 5.19% 0.89%
1996-2 04/25/96 257 48 43.69 1.25 1.73 5.84 0.64
1996-3 06/20/96 267 114 26.27 1.29 1.02 6.75 0.57
1996-4 08/28/96 311 81 40.02 2.67 1.80 15.16 0.57
1996-5 12/18/96 700 247 35.98 3.04 1.79 15.29 0.52
1997-1 03/26/97 605 329 27.02 2.39 1.29 12.81 0.43
1997-2 06/12/97 740 440 26.67 2.29 1.16 11.24 0.33
1997-3 09/16/97 950 640 24.03 2.11 1.64 8.61 0.20
1998-1 02/12/98 1,000 773 22.43 3.08 1.76 9.16 0.03
1998-2 06/12/98 1,000 805 29.26 2.52 1.48 5.07 0.00
1998-3 09/29/98 1,000 939 14.55 2.46 1.10 1.92 0.00
Weighted average (4) 24.57% 2.49% 1.45% 7.59% 0.17%
</TABLE>
(1) The Constant Prepayment Rate ("CPR") represents the rate of
prepayment experienced by the referenced securitized pool of
mortgage loans, expressed as an annual rate, relative to the
outstanding principal balance over the life of mortgage loans. CPR
is equal to Pure Prepayment ("PPR") (5) - Liquidation Proceeds +
Realized Losses + Buyouts + Scheduled Principal Payments.
(2) The period of delinquency is based on the number of days payments
are contractually past due. The delinquency statistics for the 90+
days data includes loans in foreclosure.
(3) Net losses represents the aggregate amount, expressed as a
percentage of the original balance, which has been determined to be
uncollectible relating to mortgage loans, less recoveries from
liquidation proceeds and deficiency judgments.
(4) Based on the balance outstanding at December 31, 1998.
(5) "PPR" is equal to voluntary borrower payoffs plus curtailments.
Home Equity Loan Servicing. Since the acquisition of the assets
and business of Quality Mortgage USA in October 1996, the Company has
performed delinquency management and related servicing functions for
the asset portfolios acquired from Quality Mortgage USA and for loans
originated by the Company after October 1, 1997 or acquired by it on a
servicing released basis. As of December 31, 1998, the Company was
the special servicer for $3.0 billion of home equity loans. In
addition, the Company is in the process of developing the appropriate
infrastructure and systems to support a broader array of customer-
intensive servicing functions, including general customer relations.
The Company believes that customer intensive servicing functions, such
as collections, delinquency management and general customer relations
provide the opportunity to manage and improve the performance of its
home equity loan portfolios by mitigating credit losses and prepayment
risk through direct involvement with borrowers. The Company will
continue to utilize recognized third party providers for portfolios of
home equity loans currently being serviced by such providers, as well
as for standardized, systems intensive servicing functions, such as
payment processing and tax, insurance and investor reporting.
Commercial Finance Business
General. In 1996, the Company formally organized the commercial
finance group which has grown through a combination of corporate
acquisitions and business development to provide financing to
commercial borrowers in various targeted lending markets. The
commercial finance group is divided into four operating units:
business lending, real estate structured finance, communications
lending and builder finance.
Business Lending. The business lending group, which essentially
began operations through the 1997 acquisition of Commercial Lending
Corporation ("ACLC"), focuses on three lending sub-markets;
conventional small business loans, government guaranteed SBA loans
("Program 7A") and, telephone and equipment financing.
Conventional small business lending concentrates on the
origination, securitization and servicing of loans made to small
business owners or franchisees of nationally recognized fast food
chains, family dining establishments, hotels and motels, automotive
after-market service providers and truck stops. Borrower profiles
emphasize, among other things, the borrower's experience with the
particular operating concept (i.e. fast food, quick oil change, etc.)
and cash flow of the respective operating units. Typically, loans are
for refinance, construction, remodeling or purchase of existing
facilities. The loans are funded primarily by a dedicated warehouse
facility until they are securitized and sold.
The SBA lending group was formed by the July 1998 acquisition of
Independence Funding Company, LLC ("IFC"). As one of only 14 non-bank
SBA lenders in the United States, the SBA lending group makes loans
under SBA Program 7A to qualifying small business owners. A portion,
typically 75%, of the principal balance is guaranteed by the SBA and
sold at a premium to individual investors via a bid process
approximately two to three weeks after the loan is closed. The
remaining non-guaranteed portion of the loan is retained for future
securitization along with the interest spread between the contractual
rate and the investor pass-through rate on the guaranteed portion.
The SBA loans are funded primarily by a warehouse debt facility.
The telephone equipment finance group was formed by the July 1998
acquisition of TeleCapital, L.P. ("TeleCapital"). The group's primary
focus is the origination and servicing of loans which are
collateralized by privately owned and operated payphone routes and
related equipment. The loans are primarily accumulated for the
purpose of securitization and sale and they are funded largely through
a warehouse debt facility.
The equipment finance group also provides lease financing for
business equipment, primarily restaurant equipment, based on referrals
from business lending borrowers. Typically this group will fund the
individual equipment purchases during installation and then sell the
lease to a third party once fully funded and installed. The total
leasing advances in 1998 and 1997 were $5.8 million and $3.3 million,
respectively, and sales of completed leases were $5.6 million and $3.3
million, respectively.
The business lending group processes, underwrites, sells,
securitizes and services loans originated from producers in over 20
offices. The producers solicit business using a combination of
marketing efforts that include direct solicitation, convention
attendance and referrals from previous borrowers. The following table
summarizes loan origination volumes for the years ended December 31,
1998 and 1997, respectively (dollars in thousands):
% of % of
12/31/98 Total 12/31/97 Total
Conventional lending (1) $392,303 82.2% $247,104 100.0%
SBA lending (2) 59,228 12.4
Telephone equipment
lending (2) 25,920 5.4
Total $477,541 100.0% $247,104 100.0%
(1) The Company acquired the business and assets of ACLC effective
March 31, 1997.
(2) Acquired July 16, 1998.
Since the acquisition of ACLC in 1997, the Company has completed
five securitizations aggregating $686.9 million. The loans included
in each securitization are grouped according to type of borrower
consisting of either (i) loans to franchisees of nationally recognized
concepts (i.e. Taco Bell, Pizza Hut, etc.) or (ii) loans to owners of
other independent small businesses. The securitization structure
consists of (i) multiple classes of investment grade certificates that
are sold via private placement to investors and (ii) an equity
interest and subordinated certificate retained by the Company.
Investment grade ratings for the securities are achieved by (i)
limited cross-guarantee loan provisions for the various borrowers
within the securitization and (ii) financial guarantee insurance. In
the limited cross-guarantee arrangement, each borrower signs a Note
for an amount greater than their net loan proceeds and makes payments
based on the higher Note amount. This increment above the loan
amount, known as the credit enhancement amount, is rebated to the
borrower after they make their monthly payment assuming no deficiency
exists in the securitization pool. Should a deficiency occur within
the pool, the rebates of the performing loans have been pledged to
cure such deficiency and are applied in an amount to bring the loan
pool to a non-delinquent status. Once the deficiency is cured, the
recovered rebates are returned to the appropriate borrowers.
As noted above, the business lending group retains a subordinated
interest in the securitization. The certificate's value at any point
in time is based on the projected future cash flow spread between the
interest collected from borrowers and interest paid to certificate
holders, discounted to present value. The following table depicts the
business lending group's retained interests in securitizations
balances and related portfolio delinquency percentages (including an
SBA residual acquired as a result of the purchase of IFC) as of
December 31, 1998 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
Retained Delinquency Retained Delinquency
Interest % of Percentage Interest % of Percentage
Balance Total 90+ days Balance Total 90+ days
<S> <C> <C> <C> <C> <C> <C>
Franchise $39,412 50.9% 1.2% $28,732 100.0% 1.0%
Conventional small business 31,259 40.3 0.0
SBA Loans 6,831 8.8 3.1
Total $77,502 100.0% 1.0% $28,732 100.0% 1.0%
</TABLE>
The business lending group retains the servicing rights to loans
following sale or securitization. Due primarily to the cross-
guarantee credit enhancement feature of the securities described
above, the Company has developed a specialized servicing process for
these loans. In addition, loan servicing utilizes a third party
software system customized for the servicing of SBA loans. The
following table summarizes the loan servicing portfolio and related
delinquency profile as of December 31, 1998 and 1997, respectively
(dollars in thousands):
% of % of
12/31/98 Total 12/31/97 Total
Conventional lending (1) $ 898,505 74.4% $563,718 100.0%
SBA lending (2) 267,830 22.2
Telephone equipment lending(2) 41,054 3.4
Total $1,207,389 100.0% $563,718 100.0%
Delinquencies (3):
31-60 Days $ 6,616
61-90 Days 1,145
90+ Days 11,870 $5,729
Total $19,631 $5,729
Total delinquencies as a
percentage of total
loan balances (4): 1.63% 1.02%
(1) The Company acquired the business and assets of ACLC effective
March 31, 1997.
(2) Acquired July 16, 1998.
(3) The period of delinquency is based on the number of days payments
are contractually past due.
(4) Reflects contractual delinquencies. At December 31, 1998 and
1997, all borrower delinquencies related to business lending loans
were paid by borrower cross guarantees. See Note 6 of the Notes to
Consolidated Financial Statements included in "Item 8. Financial
Statements and Supplementary Data" for a discussion of borrower
cross guarantees.
Real Estate Lending. In 1995, the Company began making loans
through AMRESCO Funding which was subsequently divided into the real
estate lending and communication finance divisions. In the real
estate lending operation, the Company provides mid-to-high yield
financing to borrowers in special situations that generally preclude
financing from traditional funding sources. In these transactions,
the Company funds senior and subordinated indebtedness generally
ranging from $2 to $15 million for terms of 1-4 years to borrowers
with an established management record. Borrowers targeted by the
Company usually have a reputation for enhancing value, but may lack
the financial capacity to qualify for bank financing beyond a certain
level. Typically these loans have a defined exit strategy such as
bridge loans, mezzanine debt or construction loans and are often
extended for the purpose of turning around or repositioning assets to
maximize their value. Loan structures vary as they are usually
customized to fit the characteristics and purpose of the loans.
Income is generally derived by a combination of interest, fees and (in
some cases) a net profit interest tied to the performance of the
collateral at loan payoff. Also, the Company makes limited equity
investments in ventures where they are also a lender. The Company had
loan balances outstanding of $195.1 million, $109.7 million, $21.9
million and $0.7 million as of December 31, 1998, 1997, 1996 and 1995,
respectively. The following table shows the combined real estate loan
and joint venture equity balances as of December 31, 1998 and 1997 by
collateral type (dollars in thousands):
1998 1997
Delinquency Delinquency
% of Percentage % of Percentage
Balance Total 90+ days Balance Total 90+ days
Multi-family $ 57,474 29.5% 0.0% $32,521 29.6% 0.0%
Office 52,371 26.8 0.0 38,054 34.7 0.0
Industrial 26,911 13.8 0.0 0.0
Hospitality 19,584 10.0 0.0 3,518 3.2 0.0
Retail 19,356 9.9 0.0 17,760 16.2 0.0
Mixed Use 13,040 6.7 0.0 1,664 1.5 0.0
Other 6,396 3.3 0.0 16,203 14.8 0.0
Total $195,132 100.0% 0.0% $109,720 100.0% 0.0%
Communications Lending. The Company also specializes in mid-to-
high yield lending in the communications industry to operators that
cannot obtain traditional bank financing. Loan amounts range from $3
million to $40 million, though loans in the upper half of this range
typically are participated to other lenders. Borrowers generally use
proceeds to acquire radio and television stations, provide working
capital and refinance existing third party debt. The Company had loan
balances outstanding of $144.8 million, $38.7 million, $11.7 million
and $1.0 million as of December 31, 1998, 1997, 1996 and 1995,
respectively. The following table depicts the collateral distribution
of the communications portfolio as of December 31, 1998 and 1997
(dollars in thousands):
1998 1997
Delinquency Delinquency
% of Percentage % of Percentage
Balance Total 90+ days Balance Total 90+ days
Radio $112,940 78.0% 0.0% $36,302 93.7% 0.0%
Television 31,872 22.0 0.0 2,430 6.3 0.0
Total $144,812 100.0% 0.0% $38,732 100.0% 0.0%
Builder Finance Group. In January 1997, the Company established
the builder finance group to provide construction financing to
builders of first time and first move-up homes. To facilitate this
effort, the Company hired an experienced lending and servicing team
formerly associated with a Texas financial institution. Builder
finance targets experienced homebuilders that are starting anywhere
from 100 to 1500 units per year in the $90,000 to $200,000 price
range. Prospective borrowers must also have a minimum of three years
proven experience in building and selling homes, satisfactory
financial condition and acceptable credit history. Builder finance
also provides a limited amount of acquisition and development lending
for residential lots that are ready for home building which will serve
as feeder stock for the construction loan program. Funding for these
loans is provided by a warehouse debt facility.
Based in Houston, Texas with a state of the art loan servicing
facility, the builder finance group currently has 10 loan production
offices in the United States and plans to further expand the
production office network in 1999. Producers are (and will be)
located in markets that have large or growing populations of home
buying age with qualifying incomes. These markets must also have a
good balance of housing inventory as well as acceptable lot and home
absorption patterns. General economic and employment conditions must
be positive as well.
As of December 31, 1998 and 1997, loan balances outstanding were
$128.4 million and $65.5 million on year-to-date advances of $268.9
million and $124.3 million, respectively.
Residential Mortgage Banking
General. Through the August 12, 1998 acquisition of MIC, the
Company refinances and sells Veteran's Administration ("VA")
residential mortgage loans under the VA's interest rate reduction
refinance loan ("IRRRL") program. All loans refinanced under the
IRRRL program are guaranteed or insured, usually within 61 days of
funding. MIC's loan refinancings aggregated $1.6 billion for the
August 12, 1998 through December 31, 1998 period.
Loan Product. The residential mortgage loans refinanced by MIC
consist solely of 30-year fixed rate loans. No other loan products
were offered in 1998. Typically, the refinanced loans have a well-
seasoned pay history and are refinanced at below market interest
rates. Management believes that these loans are attractive to
investors and servicers because of the historically low prepayment and
default rates and the below market interest rates offered. Prepayment
and default rates on these loans tend to be low due to the lower
monthly payment as a result of the refinance and the underlying
guarantee which limits exposure to losses. The Company anticipates
diversifying into additional products in 1999 potentially in the form
of FHA adjustable rate product, second mortgages and/or insurance.
Loan Sources. The Company obtains its refinanced loans through
its own focused telemarketing database and related loan officers, of
which the primary operating expense of MIC is commissions to the loan
officers which vary with production. The loan officers are located in
41 offices throughout the United States. The telemarketing and loan
processing functions are centralized in St. Petersburg, Florida, thus
allowing the loan officers to focus solely on selling.
Sales of Loans and Servicing. Throughout 1998, MIC sold all
loans on a servicing released basis. The Company typically enters
into forward sale agreements in the 30-year fixed rate GNMA market for
all production. The production is typically sold at a discount due to
the below market interest rates on the refinanced loans. MIC sells
the loans to the entity that will be the ultimate servicer of the
loans and the servicer assumes the Company's obligation to deliver on
the GNMA forward sale commitment. The servicer pools the loans and
creates a 30-year fixed rate GNMA security, delivers on the forward
sale commitment, and retains the servicing.
Competition
General. The Company's competition varies by business line and
geographic market. Generally, competition within each of the business
lines in which the Company competes is fragmented, with national,
local and regional competitors, none of which dominates a particular
business line. Certain of the Company's competitors within each of
its business lines are larger and have greater financial resources
than the Company.
Asset Management. The Asset Management business is a nationwide
(and increasingly international) business with numerous financially
strong and experienced competitors. The Company continues to
encounter increased competition in the market for asset portfolios
which could cause the Company to experience decreasing profit margins
in this business line in order to remain a competitive bidder for
asset portfolios. In addition, declining profit margins presented by
current bidding opportunities has caused the Company to re-deploy its
capital in more profitable product lines.
Commercial Mortgage Banking. The Company's commercial mortgage
banking business consists of real estate capital markets, commercial
real estate lending and commercial loan servicing business lines. In
each of these business lines, the Company competes on a nationwide
basis. The real estate capital markets and commercial real estate
lending businesses are fragmented, composed primarily of small local
or regional firms. The Company believes that the commercial mortgage
banking industry is moving toward greater consolidation and that well
capitalized, full service, nationwide mortgage banking firms will
emerge from this consolidation.
The commercial loan servicing business is highly competitive.
Distinct markets have developed for the servicing of performing loan
pools, under-performing loan pools and non-performing loan pools. The
Company has focused its commercial loan servicing business on the
market for performing loan pools, the servicing market that management
believes has the greatest potential for growth.
Home Equity Lending. The Company has encountered increased
competition in the market for conventional, nonconforming home equity
loans as more originators enter this market which could impact
origination volume and profit margins. In addition, certain of the
Company's larger, national competitors have access to greater
financial resources and lower costs of capital.
Commercial Finance. The markets in which the Commercial Finance
business operates are highly competitive and are characterized by
competitive factors that vary based upon product and geographic
region. The Commercial Finance Group's competitors include captive
and independent diversified finance companies, specialty finance
companies (including specialty franchise finance companies),
commercial banks, thrift institutions, asset-based lenders, real
estate investment trusts and leasing companies. Many of the
competitors of the Commercial Finance Group are large companies that
have substantial capital, technological and marketing resources, and
some of these companies may have lower costs of capital than is
available to the Commercial Finance business.
Residential Mortgage Banking. The market in which the
Residential Mortgage Banking business operates is characterized by few
originators of streamlined VA refinanced loans. The Company believes
that it is an effective competitor in this market.
Employees
At December 31, 1998, the Company and its subsidiaries employed
3,693 persons. Of that total, 189 were employed in the asset
management group, 718 in the commercial mortgage banking group, 698
persons in the home equity lending group, 262 in the commercial
finance group, 1,554 in the residential mortgage banking group and 272
in general corporate administration. The Company believes that its
employee relations are generally good. The Company has no collective
bargaining arrangements.
Certain Definitions
The following are certain defined terms used herein:
"ACLC" means AMRESCO Commercial Lending Corporation, a subsidiary
of the Company.
"AMRESCO Capital" means AMRESCO Capital L.P., a limited
partnership.
"AMRESCO Funding" means AMRESCO Funding Corporation, a subsidiary
of the Company.
"AMRESCO Services" means a division of AMRESCO Management, Inc.,
a subsidiary of the Company.
"Company" means, unless otherwise stated herein or unless the
context otherwise requires, the Company and each of its subsidiaries.
"Conduit Purchasers" means investment bankers and other financial
intermediaries who purchase or otherwise accumulate pools or
portfolios of loans having common features (e.g., real estate
mortgages, etc.), with the intent of securitizing such loan assets and
selling them to a trust that secures its funds by selling ownership
interests in the trust to public or private investors.
"DUS" means the Delegated Underwriting and Servicing program
established by Fannie Mae that permits a DUS approved lender to commit
and close loans for multifamily mortgages for resale to Fannie Mae
without Fannie Mae's prior approval of such loans.
"Face Value" means, with respect to any loan or Asset Portfolio,
the aggregate unpaid principal balance of a loan or loans.
"Fannie Mae" means the Federal National Mortgage Association.
"Freddie Mac" means the Federal Home Loan Mortgage Corporation.
"Holliday Fenoglio Fowler" means Holliday Fenoglio Fowler, L.P.,
a limited partnership.
"MIC" means Mortgage Investors Corporation a Florida based
corporation.
"Quality Mortgage USA" means Quality Mortgage USA, Inc., a
California corporation.
"securitization" and "securitized" mean a transaction in which
loans originated or purchased by an entity are sold to special purpose
entities organized for the purpose of issuing asset-backed securities.
Item 2. Properties
The Company leases approximately 199,087 square feet in the North
Tower of the Plaza of the Americas in Dallas, Texas for its
centralized corporate functions including executive, business
development and marketing, accounting, legal, human resources and
support and also certain line of business operations. This lease has
an initial termination date of October 31, 2006 and has an initial
annual base rent of approximately $2.2 million. The Company also
leases space for branch offices pursuant to leases with varying terms.
The Company believes that its facilities are adequate for its
immediate needs and that additional or substitute space is available,
if needed, to accommodate expansion.
Item 3. Legal Proceedings
The Company is involved from time to time in various legal
proceedings arising in the ordinary course of business. In connection
with the Company's loan servicing, asset management and resolution
activities, the Company is indemnified to varying degrees by the party
on whose behalf the Company is acting. The Company also maintains
insurance that management believes is adequate for the Company's
operations. None of the legal proceedings in which the Company is
currently involved, either individually or in the aggregate (and after
consideration of available indemnities and insurance), is expected to
have a material adverse effect on the Company's business or financial
condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security
holders during the fiscal quarter ended December 31, 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters
The Company's common stock (Symbol: AMMB) is listed on the Nasdaq
Stock Market. At March 22, 1999, there were approximately 2,600
stockholders of record of the Company's common stock. Presented below
are the high and low last sale prices per share for 1998 and 1997, as
reported by NASDAQ. The Company discontinued declaring dividends
beginning with the fourth quarter of 1995 and the Company does not
expect to declare dividends on its common stock in the foreseeable
future.
High Low
1997
First Quarter $25.500 $15.125
Second Quarter 21.500 13.875
Third Quarter 37.125 21.750
Fourth Quarter 37.125 24.000
1998
First Quarter $33.750 $23.250
Second Quarter 38.750 29.125
Third Quarter 30.125 7.250
Fourth Quarter 8.938 2.031
Item 6. Selected Financial Data
The selected financial data set forth below for the five years
ended December 31, 1998 has been derived from the Company's audited
consolidated financial statements. This information should be read in
conjunction with "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations," as well as the audited consolidated financial statements
and notes thereto included in "Item 8. Financial Statements and
Supplementary Data."
<TABLE>
<CAPTION>
Year Ended and as of
December 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995 1994
(in thousands, except per share data)
Operating Results:
<S> <C> <C> <C> <C> <C>
Revenues $526,804 $ 418,273 $ 200,067 $110,486 $129,791
Income (loss) from continuing operations (69,171) 56,224 31,332 18,665 20,933
Net income (loss) (69,171) 56,224 31,332 21,090 18,748
Earnings (loss) per shre from continuing
operations:
Basic (1.61) 1.59 1.16 0.77 0.91
Diluted (1.61) 1.53 1.06 0.75 0.88
Earnings per share:
Basic (1.61) 1.59 1.16 0.87 0.82
Diluted (1.61) 1.53 1.06 0.85 0.79
Dividends per share - - - 0.15 0.20
Balance Sheet Data:
Total assets 2,918,710 2,633,848 1,075,941 521,713 172,340
Long-term obligations (1) 1,052,877 695,845 293,956 112,500
Total liabilities 2,333,303 2,225,348 774,426 360,919 58,754
Total shareholders' equity 585,407 408,500 301,515 160,794 113,586
</TABLE>
(1) The December 31, 1998 balance does not include $167.5 million of
indebtedness under the Company's $737.5 million Credit Agreement which
is due August 11, 1999 and $57.5 million of indebtedness under the
Company's Senior Notes due July 1, 1999. As of December 31, 1998,
$640.2 million was outstanding under the Company's Credit Agreement.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
The Company is a diversified financial services company with five
principal lines of business: asset management, commercial mortgage
banking, home equity lending, commercial finance and residential
mortgage banking. 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 fee based origination and servicing of
commercial real estate mortgages and commercial real estate brokerage.
The home equity lending business involves originating, selling and
servicing nonconforming first mortgage 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. The residential mortgage banking
line of business (which consists of the newly acquired operations of
Mortgage Investors Corporation ("MIC")) originates and sells Veterans
Administration ("VA") streamlined re-financed loans.
During the latter part of 1998, the capital markets experienced
rapid and extreme changes evidenced by a decline of investor demand
for corporate fixed income investments, including mortgage-backed
securities ("MBS"), and a widening of spreads between interest rates
on treasury securities and interest rates on MBS. The widening of
spreads between treasury securities and MBS resulted in securitized
lenders, such as the Company, having to meet significant margin calls
from the lenders who had financed the accumulation of mortgage loans
intended for securitization and margin calls caused by the decline in
the value of related hedge positions. At this time the Company held
approximately $2.4 billion of commercial mortgage and home equity
loans on its balance sheet.
The Company made the decision to re-focus its commercial mortgage
banking business to emphasize its operations which have historically
provided strong and predictable earnings growth: (i) core real estate
investment banking and mortgage banking through Holliday Fenoglio
Fowler, (ii) commercial mortgage loan originations and sales under
agency multifamily lending programs with quasi-governmental agencies,
such as Fannie Mae and Freddie Mac, and "private label" conduit
programs with institutional participants and (iii) commercial mortgage
loan servicing through AMRESCO Services. In connection with this
decision, and in response to the Company's rapidly changing liquidity
needs, the Company sold its portfolio of commercial mortgage loans
aggregating approximately $1.0 billion. Based upon current market
conditions, the Company is currently not operating as a principal in
the commercial mortgage loan conduit business. Additionally, the
Company made the decision to focus its home equity lending business on
its retail and wholesale operations which possess the most potential
for growth. In connection with this decision, and in response to the
Company's rapidly changing liquidity needs, the Company decided to
sell its portfolio of performing home equity loans aggregating
approximately $1.4 billion. The Company discontinued the "bulk"
purchase of home equity loans and the origination of home equity loans
through its correspondent channel. These significant changes in the
composition of the Company's business are reflected in the Company's
results of operations and may limit the comparability of the Company's
results from period to period. In connection with the sales of these
loans and related matters in the third and fourth quarters of 1998,
the Company incurred significant losses. See further discussion under
"Results of Operations."
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, (iii) servicing
of loans and (iv) interest earned on commercial loans held for sale.
Revenues from the Company's home equity lending activities primarily
consist of interest earned on originated and purchased home equity
loans, accrued earnings on retained interests in securitizations,
gains on the securitization and sale of home equity loans and other
related securities and fees generated by the origination, underwriting
and servicing of home equity loans. Revenues from the Company's
commercial finance business are primarily earned from (i) interest and
fees on real estate structured and communications lending 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 loans. Revenues from the Company's
residential mortgage banking activities consist primarily of cash
gains from sales of VA streamlined re-financed loans.
Retained interests in securitizations are classified as trading
and are carried at estimated fair market value. Changes in such
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 based upon the expected timing of the release of the cash by the
securitization trust ("cash-out method") over the anticipated 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 24.6% for the
period from inception of each security through December 31, 1998,
which is slightly higher than originally projected, and is estimated
to be 29.4% for the next twelve months. Prepayment rates on the
Company's franchise and small business loan securitizations have been
consistent with original 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 the
underlying loan rate and the 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 retained interests at December 31, 1998 was 18.0%. The
Company has utilized, for initial valuation purposes in 1998, a 20%
discount rate on its home equity securitizations, discount rates
ranging from 18% - 20% for its commercial finance franchise loan
securitizations and a 15% discount rate on its commercial finance
small business loan securitizations. As discussed, the estimated
market rate changes over time to reflect management's estimate of
market rates. The lower discount rate on the commercial finance
securitizations were due to the reduced risk related to a borrower
cross-collateralization feature in these securitizations. For
additional information regarding the Company's retained interests in
securitizations see "Item 1. Business" and notes 1 and 6 to the Notes
to Consolidated Financial Statements included in "Item 8. Financial
Statements and Supplementary Data."
Results of Operations
The following discussion and analysis presents the significant
changes in financial condition and results of operations of the
Company by primary business line for the years ended December 31,
1998, 1997 and 1996. 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 "Item
1. Business" and "Item 8. Financial Statements and Supplementary
Data" (in thousands, except per share data).
1998 1997 1996
Revenues:
Asset management $ 112,687 $103,581 $88,755
Commercial mortgage banking 71,018 97,533 54,625
Home equity lending 145,069 166,407 56,864
Commercial finance 122,047 51,212 2,947
Residential mortgage banking 74,702
Corporate, other and intercompany eliminations 1,281 (460) (3,124)
Total revenues 526,804 418,273 200,067
Operating expenses:
Asset management 72,849 57,711 47,469
Commercial mortgage banking 175,389 70,334 43,163
Home equity lending 219,788 120,244 29,543
Commercial finance 75,456 32,137 2,252
Residential mortgage banking 41,776
Corporate, other and intercompany eliminations 43,379 45,750 27,174
Total operating expenses 628,637 326,176 149,601
Operating income (loss):
Asset management 39,838 45,870 41,286
Commercial mortgage banking (104,371) 27,199 11,462
Home equity lending (74,719) 46,163 27,321
Commercial finance 46,591 19,075 695
Residential mortgage banking 32,926
Corporate, other and intercompany eliminations (42,098) (46,210) (30,298)
Total operating income(loss) (101,833) 92,097 50,466
Income tax expense (benefit) (32,662) 35,873 19,134
Net income (loss) $ (69,171) $ 56,224 $ 31,332
Earnings (loss) per share:
Basic $(1.61) $1.59 $1.16
Diluted (1.61) 1.53 1.06
Weighted average number of common
shares outstanding - diluted 42,846 36,663 31,774
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The Company reported revenues of $526.8 million, an increase from
$418.3 million, or 26%, from the year ended December 31, 1997, an
operating loss of $101.8 million as compared to 1997 operating income
of $92.1 million and a net loss of $69.2 million as compared to 1997
net income of $56.2 million. The losses were due primarily to the
sale of $1.4 billion and $936 million of home equity lending and
commercial mortgage banking loans held for sale, respectively, which
occurred in response to unprecedented capital market conditions that
caused spreads on MBS and related instruments to widen. Diluted
weighted average common shares outstanding increased 17% due primarily
to the early 1998 offering of 5.2 million of the Company's common
shares and new shares issued in business acquisitions.
Asset Management. Revenues for the year ended December 31, 1998
primarily consisted of $89.6 million in interest and other investment
income, $17.7 million in asset management and resolution fees and $3.4
million of gains on sales of loans and investments. The $9.1 million
increase in revenues from $103.6 million for 1997 to $112.7 million
for the year ended December 31, 1998 was primarily comprised of a
$30.4 million increase in interest and other investment income offset,
in part, by a $14.5 million decrease in gain on sale of loans and
investments and a $7.2 million decrease in management and resolution
fees. Interest and other investment income increased due primarily to
a significant increase in aggregate investments for the Company's own
account. Gain on sale of loans and investments decreased due
primarily to impairment and hedging losses on MBS in 1998 as opposed
to MBS sale gains in 1997.
Operating expenses for the year ended December 31, 1998 primarily
consisted of $38.0 million in interest expense, $16.4 million in other
general and administrative expenses and $15.3 million in personnel
expenses. The $15.1 million increase in expenses from $57.7 million
for the prior year to $72.8 million for the year ended December 31,
1998 was due primarily to a $15.4 million increase in interest expense
related to the financing of increased levels of investments and a $5.2
million increase in other general and administrative expenses offset,
in part, by a $2.2 million decrease in personnel expenses resulting
from fewer assets being managed.
Commercial Mortgage Banking. Revenues for the year ended
December 31, 1998 were $71.0 million, a decrease of $26.5 million from
the prior year period. Revenues for the year ended December 31, 1998
primarily consisted of $103.7 million in origination, underwriting and
servicing revenues and $71.6 million in interest and other investment
income and reflect an increase of $52.4 million increase in interest
earned on a higher balances of loans held for sale and escrow deposits
from increased servicing volumes and a $39.2 million increase in
mortgage banking and servicing revenues due primarily to transaction
volume of $12.6 billion for the year ended December 31, 1998 as
compared to $7.8 billion for 1997. The decrease in revenues is
primarily attributable to losses of $117.6 million related to the
commercial mortgage conduit loans sale and related matters described
below.
In October of 1998, in response to the market turmoil caused by
the unprecedented widening of interest rate spreads on MBS and due to
the Company's rapidly changing liquidity needs, the Company decided to
sell its portfolio of commercial mortgage conduit loans aggregating
approximately $936.0 million and to negotiate with borrowers to
release the Company from commitments to fund approximately $400.0
million of commercial mortgage loans in the conduit program. In
connection with the commercial mortgage conduit loan sale, the Company
retained an interest in the loans sold which entitles the Company to
receive a portion of the proceeds of a subsequent securitization or
sale of the loans sold in excess of the purchase price, investment
banking fees and transaction costs. As of December 31, 1998, the
retained interest balance was approximately $23.2 million, related to
approximately $500.0 million of commercial mortgage loans, which
represents the Company's remaining maximum exposure related to this
loan sale.
Operating expenses for the year ended December 31, 1998 primarily
consisted of $82.9 million in personnel expense, $44.3 million in
other general and administrative expense and $40.6 million in interest
expense. The $105.1 million increase in expenses from $70.3 million
for the prior year to $175.4 million for the year ended December 31,
1998 was due primarily to an increase of $37.4 million in interest
expense related to warehouse debt for loans held for sale, $33.6
million in personnel expenses primarily related to commissions on
increased originations and expansion and an increase of $31.9 million
in other general and administrative expense due to expanded
operations.
Home Equity Lending. Revenues for the year ended December 31,
1998 were $145.1 million, a decrease of $21.3 million from the prior
year period. Revenues for the year ended December 31, 1998 primarily
consisted of $152.8 million in interest and other investment income
and reflect a $62.6 million increase in interest income, which is
after mark-to-market reductions on retained interests in
securitizations of $16.1 million, generated by higher average balances
of mortgage loans held for sale during 1998 offset, in part, by $16.6
million of loss on sale of loans held for sale. The decrease in
revenues and the $16.6 million loss on sale is primarily attributable
to a $101.6 million loss on sale of loans held for sale as described
below.
In October of 1998, due to the market turmoil caused by the
widening of spreads in the MBS market and in response to the Company's
rapidly changing liquidity needs, the Company decided to sell its
portfolio of performing home equity loans aggregating approximately
$1.4 billion. The Company also decided to negotiate the termination
of a commitment to purchase approximately $260.0 million of home
equity loans. As of December 31, 1998, a $19.4 million retained
interest (of which $15.0 million was collected subsequent to December
31, 1998) was carried on the Company's balance sheet representing the
Company's interest in a subsequent securitization or sale of the home
equity loans sold and also represents the Company's remaining maximum
exposure related to the home equity loan sale.
Operating expenses for the year ended December 31, 1998 primarily
consisted of $99.2 million in interest expense, $55.0 million in
personnel expense, $37.4 million in other general and administrative
expense and $21.7 million in provisions for loan losses. Operating
expenses increased by $99.6 million from $120.2 million for the prior
year period to $219.8 million for the year ended December 31, 1998.
This increase primarily consisted of $45.3 million in interest expense
related to higher average balances of warehouse debt supporting higher
average balances of loans held for sale, $20.1 million in other
general and administrative expenses due primarily to AMRESCO
Residential Mortgage Corporation ("ARMC") expansion, $17.2 million in
personnel expense and $14.1 million in provisions for investment and
loan losses primarily related to delinquent loans.
Commercial Finance. Revenues for the year ended December 31,
1998 primarily consisted of $80.5 million of interest and other
investment income and $38.6 million of gain on securitization and sale
of loans and investments. The $70.8 million increase in revenues from
$51.2 million for the prior year period to $122.0 million for the year
ended December 31, 1998 relates primarily to a $50.1 million increase
in interest and other investment income generated by higher average
balances of small business and franchise loans held for sale held
during 1998 and increased balances of retained interests. Gain on
sale increased $22.8 million due primarily to the securitization and
sale of approximately $375.8 million of small business and franchise
loans by business lending (formerly known as commercial lending
corporation) during 1998 as compared to $265.4 million of
securitization and sales in 1997.
Operating expenses for the year ended December 31, 1998 primarily
consisted of $38.7 million in interest expense, $17.6 million in
personnel cost, $7.9 million in other general and administrative
expenses and $5.8 million of provision for loan losses. The $43.4
million increase in expenses from $32.1 million for the prior year to
$75.5 million for the year ended December 31, 1998 was due primarily
to an increase of $25.4 million in interest expense related to the
financing for increased levels of investments and loans held for sale
from 1997, $9.4 million in personnel expense related to expanded
operations and $3.8 million in other general and administrative
expenses primarily related to expanded operations.
Residential Mortgage Banking. The residential mortgage banking
line of business is comprised of the newly acquired operations of MIC.
Revenues for the period from inception (August 11, 1998) through
December 31, 1998 primarily consisted of $72.1 million of gain on sale
of VA streamlined re-financed loans. Operating expenses of $41.8
million primarily consisted of $30.4 million in personnel expense
(primarily commissions) and $6.7 million in other general and
administrative expense.
Corporate, Other and Intercompany Eliminations. Operating loss
for the year ended December 31, 1998 improved $4.1 million due
primarily to a $7.4 million decrease in personnel costs related
primarily to reduced incentive compensation accruals due to 1998
losses offset, in part, by a $3.5 million increase in interest expense
related to the $330.2 million subordinated debt issuance in early
1998.
Income Taxes. As of December 31, 1998, the Company had a net
federal income tax receivable due primarily from the 1998 net loss of
which $34.8 million was received in January 1999 and $44.5 million was
received in March 1999. In addition, as of December 31, 1998, the
Company had a deferred tax asset for which the Company must have
future taxable income to realize. Certain of these benefits begin to
expire in 2002 and are subject to annual utilization limitations.
Management believes that recorded net deferred tax assets will be
realized in the normal course of business. The decrease in the 1998
effective tax rate to 32% from 39% in 1997 was due primarily to the
1998 losses primarily occurring in subsidiary entities which have more
efficient tax structures.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The Company reported a 109% increase in revenues from $200.1
million to $418.3 million, an 82% increase in operating income from
$50.5 million to $92.1 million and a 79% increase in net income from
$31.3 million to $56.2 million compared to the prior year period. The
increases were due primarily to additional contributions by home
equity lending, commercial finance and commercial mortgage banking
operations. Diluted weighted average common shares outstanding
increased 15% due primarily to the late 1996 conversion of the
Company's convertible subordinated debentures, the late 1996 public
offering of the Company's common stock and the March 1997 purchase of
AMRESCO Commercial Lending Corporation ("ACLC") with the Company's
common stock. Diluted earnings per share increased 44% from $1.06 to
$1.53.
Asset Management. Revenues for the year ended December 31, 1997
primarily consisted of $59.2 million in interest and other investment
income, $24.9 million in asset management and resolution fees and
$18.0 million of gains on sales of loans and investments. The $14.8
million increase in revenues from $88.8 million for 1996 to $103.6
million for the year ended December 31, 1997 was primarily comprised
of a $16.7 million increase in gain on sale of loans and investments
and an $8.4 million increase in interest and other investment income
offset, in part, by a $9.3 million decrease in management and
resolution fees. Gain on sale of loans and investments increased due
primarily to the sales of asset-backed securities and sales of
foreclosed real estate. Interest and other investment income
increased due primarily to a significant increase in aggregate
investments for the Company's own account since early 1996. Asset
management and resolution fees decreased as a result of a shift in
business away from primarily managing and investing in partnerships
and joint ventures to investing in wholly-owned portfolios.
Operating expenses for the year ended December 31, 1997 primarily
consisted of $22.6 million in interest expense, $17.4 million in
personnel cost, $11.2 million in other general and administrative
expenses and a $4.5 million provision for investment and loan losses.
The $10.2 million increase in expenses from $47.5 million for the
prior year to $57.7 million for the year ended December 31, 1997 was
due primarily to a $7.3 million increase in interest expense related
to the financing of increased levels of investments from early 1996, a
$4.5 million provision on owned portfolios and special servicing
receivables and a $2.5 million increase in other general and
administrative expenses, offset, in part, by a $3.5 million decrease
in personnel expenses resulting from a lower level of assets being
managed.
Commercial Mortgage Banking. Revenues for the year ended
December 31, 1997 primarily consisted of $64.5 million in origination,
underwriting and servicing revenues, $19.2 million in interest and
other investment income and $13.9 million in other revenue. The $42.9
million increase in revenues from $54.6 million for the prior year
period to $97.5 million for the year ended December 31, 1997 relates
to an increase of $24.4 million in mortgage banking and servicing
revenues due primarily to transaction volume of $7.8 billion during
1997 compared to $3.8 billion for 1996. The other revenues primarily
relate to income from an equity affiliate of $13.9 million for 1997
from AMRESCO Capital's 50% share in a joint venture which originated
and securitized loans. Interest and other investment income increased
$4.9 million due primarily to interest earned on loans held for sale
and escrow deposits, both of which have increased significantly since
early 1996.
Operating expenses for the year ended December 31, 1997 primarily
consisted of $49.3 million in personnel expense, $12.4 million in
other general and administrative expense, $3.2 million in interest
expense and $3.2 million in intangible amortization. The $27.1
million increase in expenses from $43.2 million for the prior year to
$70.3 million for the year ended December 31, 1997 was due primarily
to an increase of $19.9 million in personnel expenses primarily
related to commissions on increased originations and an increase of
$4.5 million in other general and administrative expense due to
expanded operations.
Home Equity Lending. Revenues for the year ended December 31,
1997 primarily consisted of $90.1 million in interest and other
investment income and $69.6 million of gains on securitization and
sale of home equity mortgage loans and related securities. The $109.5
million increase in revenues from $56.9 million for the prior year
period to $166.4 million for the year ended December 31, 1997
primarily related to increased levels of loan originations,
acquisitions and securitizations and the acquisition by ARMC of the
assets and business of Quality Mortgage USA ("Quality"). The increase
in revenues was primarily comprised of a $52.7 million increase in
gain on the securitization and sale of home equity mortgage loans and
a $50.3 million increase in interest and other investment income.
The increased gain on the securitization and sale of home equity
mortgage loans was due primarily to the securitization and sale of
approximately $3.0 billion of home equity mortgage loans during the
year ended December 31, 1997, including approximately $142.0 million
of home equity mortgage loans securitized on a pre-fund basis in
December 1996, as compared to gains on approximately $1.7 billion of
loans securitized and sold in 1996. In addition to greater loan
volumes, the increase in gain on securitization and sale was
attributable in part to the inclusion of loans in the 1997
securitizations originated by ARMC, which had a lower basis than loans
purchased from third parties and thus resulted in larger gains.
Interest and other investment income primarily consisted of interest
earned on loans held for sale, which have increased significantly
since early 1996, and retained interests in securitizations.
Operating expenses for the year ended December 31, 1997 primarily
consisted of $53.9 million in interest expense, $37.9 million in
personnel expense, $17.3 million in other general and administrative
expense and $7.6 million of provisions for investment and loan losses.
Operating expenses increased by $90.7 million from $29.5 million for
the prior year period to $120.2 million for the year ended December
31, 1997. This increase primarily consisted of $35.4 million in
interest expense, $31.5 million in personnel expense, $13.5 million in
other general and administrative expenses and $7.6 million in
provisions for investment and loan losses. Interest expense primarily
related to borrowings under warehouse loans payable which funded the
origination, acquisition and warehousing of mortgage loans held for
sale. Personnel and other general and administrative costs increased
significantly from the prior year period due primarily to the
increased operations of the home equity origination business through
ARMC. The provision for loan losses related primarily to delinquent
loans the Company elected to repurchase from the securitization
trustee in certain of the Company's securitizations.
Commercial Finance. Revenues for the year ended December 31,
1997 primarily consisted of $30.4 million of interest and other
investment income and $15.8 million of gain on securitization and sale
of loans and investments. The $48.3 million increase in revenues from
$2.9 million for the prior year period to $51.2 million for the year
ended December 31, 1997 relates primarily to the acquisition of ACLC
in March 1997 and increased lending activity. Interest and other
investment income increased $27.6 million due primarily to interest
earned on loans and securities retained in securitizations both of
which have increased significantly since early 1996. The $15.8
million gain primarily relates to gain on securitization and sale of
approximately $266.0 million of franchise loans in 1997 by ACLC.
Operating expenses for the year ended December 31, 1997 primarily
consisted of $13.2 million in interest expense, $8.2 million in
personnel cost, $4.6 million of provision for loan losses and $4.2
million in other general and administrative expenses. The $29.8
million increase in expenses from $2.3 million for the prior year to
$32.1 million for the year ended December 31, 1997 was due primarily
to an increase of $12.3 million in interest expense related to the
financing for increased levels of investments from 1996, $7.9 million
in personnel expense related to expanded operations, $4.6 million of
additional provision for loan losses and $3.1 million in other general
and administrative expenses primarily related to expanded operations.
Corporate, Other and Intercompany Eliminations. Operating loss
for the year ended December 31, 1997 increased $15.9 million due
primarily to increases in personnel costs and other overhead related
to expanded operations. The rapid growth of the home equity lending,
commercial mortgage banking and commercial finance operations have
necessitated the hiring of additional personnel and the related
development of corporate infrastructure.
Income Taxes. The increase in the 1997 effective tax rate to 39%
from 38% in 1996 was due primarily to the amortization of the
intangible asset recorded related to the ACLC acquisition, which is
not deductible for tax purposes.
Liquidity and Funding
Liquidity is a measure of a company's ability to meet potential
cash requirements, including ongoing commitments to repay borrowings,
fund investment and lending activities and for general business
purposes. Cash for investing, originating and underwriting loans,
general operating expenses and business acquisitions is primarily
obtained through cash flow from operations and credit facilities,
including advances on the corporate and portfolio credit lines,
mortgage warehouse lines, non-recourse debt and other financing
sources.
The Company has significant ongoing liquidity needs to support
its existing business and continued growth. The Company's liquidity
is actively managed on a daily basis and the Company's financial
status, including its liquidity, is reviewed periodically by the Board
of Directors. This process is intended to ensure the maintenance of
sufficient funds to meet the needs of the Company.
Cash and cash equivalents totaled $66.4 million and $25.9 million
at December 31, 1998 and 1997, respectively. Cash flows from
operating activities plus principal cash collections on loans, asset
portfolios and asset-backed securities totaled $388.8 million for the
year ended December 31, 1998 compared to $196.9 million for 1997. The
increase in cash flows from these activities resulted primarily from
collections on loans and asset portfolios. The following is a summary
of certain cash flow data (dollars in thousands):
Year Ended December 31,
1998 1997
Net cash used in operating activities $ (284,566) $ (103,952)
Net cash used in investing activities (432,381) (347,170)
Net cash provided by financing activities 757,503 447,942
Other financial measures:
Cash flow from operations and collections on loans,
asset portfolios and asset-backed securities. 388,832 196,904
Cash provided by new capital and borrowings, net
(excluding warehouse loans payable) 768,732 441,994
Cash used for purchase of asset portfolios and
asset-backed securities and originations of loans (1,020,439) (675,618)
Ratio of total debt to equity 3.7:1 5.2:1
Ratio of core debt to equity (1) 2.7:1 2.2:1
EBITDA (2) 156,519 208,608
Interest coverage ratio (3) 0.7x 2.0x
_______________
(1) Excludes indebtedness under warehouse lines of credit.
(2) 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.
(3) Interest coverage ratio means the rolling twelve month ratio of
earnings before interest, taxes, depreciation and amortization to
interest expense.
The following table shows the components of the Company's capital
structure, including certain short-term debt, as of December 31, 1998
and 1997 (dollars in millions):
1998 1997
% of % of
Dollars Total Dollars Total
Shareholders' equity $ 585.4 21% $ 408.5 16%
Senior notes 57.5 2 57.5 2
Senior subordinated notes 580.2 21 250.0 10
Mortgage warehouse loans 587.4 21 1,216.8 49
Notes payable 957.9 35 583.4 23
Total $2,768.4 100% $2,516.2 100%
Total assets increased $0.3 billion to $2.9 billion at December
31, 1998 from $2.6 billion at December 31, 1997. This increase was
due primarily to increased loans and asset portfolios, retained
interests primarily created in securitization, and intangible assets
related to 1998 acquisitions offset, in part, by reduced balances of
loans held for sale due primarily to the sales of home equity and
commercial conduit loans.
Senior Credit Facility
Effective August 12, 1998 the Company entered into a Credit
Agreement (the "Credit Agreement") with a syndicate of lenders led by
NationsBank, N.A., as administrative agent and Credit Suisse First
Boston, as syndication agent, replacing the Third Amended and Restated
Loan Agreement (as modified and amended) dated as of September 30,
1997. The Credit Agreement provides for a revolving loan commitment
with short and long term commitments of $167.5 million and $502.5
million, respectively, and a term commitment of $67.5 million. The
short and long term revolving facilities terminate August 11, 1999 and
August 12, 2001, respectively, and the term loan commitment terminates
August 12, 2003. As of December 31, 1998, $640.2 million was
outstanding under the Credit Agreement. The Company currently
anticipates it will have sufficient funds to repay the entire $167.5
million revolving loan commitment that matures August 11, 1999,
however, some portion of the banks that are parties to the Credit
Agreement may not call for repayment of the entire amount as of that
date. On February 28, 1999, the Credit Agreement was amended to
replace a waiver which, among other things, adjusted the ratios to
allow for the loss incurred in 1998.
Commercial Mortgage Banking Facilities
During the year ended December 31, 1998, the Company financed its
commercial mortgage lending operations with warehouse lines of credit
with aggregate credit limits of $1.6 billion. As a result of the
restructuring of the commercial mortgage banking operations discussed
above, the Company's financing requirements and financing sources have
been significantly reduced.
As of December 31, 1998, $21.9 million was outstanding under a
Master Loan and Security Agreement with Morgan Stanley Mortgage
Capital Inc. which was subsequently paid off. The Master Loan and
Security Agreement was terminated on January 29, 1999.
The First Amended and Restated Promissory Note ("Promissory
Note") dated October 16, 1998, between a wholly-owned subsidiary of
the Company and Residential Funding Corporation provides financing in
an amount not to exceed $325.0 million for the purpose of financing
the origination and acquisition of commercial mortgage loans,
principally loans originated in the Fannie Mae program. The
Promissory Note replaced a prior financing arrangement with
Residential Funding Corporation. At December 31, 1998, $289.2 million
was outstanding under such financing arrangement.
Home Equity Lending Facilities
During the year ended December 31, 1998, the Company financed its
home equity lending operations with warehouse lines of credit with
aggregate credit limits of $2.9 billion. As a result of the
restructuring of the home equity lending business described above, the
Company's financing requirements and financing sources have been
significantly reduced.
The Interim Warehouse and Security Agreement (the "Security
Agreement") dated February 27, 1998, between a wholly-owned subsidiary
of the Company and Prudential provides financing in an amount not to
exceed $250.0 million for the origination and purchase of certain home
equity loans and financing for certain retained interests. As of
December 31, 1998, $128.0 million was outstanding under the Security
Agreement.
In October 1998, a wholly-owned subsidiary of the Company entered
into an agreement with Lehman Brothers ("Lehman") to finance certain
delinquent home equity loans. As of December 31, 1998, $8.1 million
was outstanding under the agreement.
Commercial Finance Facilities
The Interim Warehouse and Security Agreement (the "Commercial
Concepts Agreement") dated February 26, 1998, between a wholly-owned
subsidiary of the Company and Prudential Securities Credit Corporation
("Prudential") provides financing in an amount not to exceed $200.0
million for the origination and purchase of small business loans. At
December 31, 1998, $32.2 million was outstanding under the Commercial
Concepts Agreement.
The Interim Warehouse and Security Agreement (the "Franchise
Agreement") dated March 17, 1998, between a wholly-owned subsidiary of
the Company and Prudential provides financing in an amount not to
exceed $150.0 million for the origination and purchase of certain
franchise and construction loans. At December 31, 1998, $29.1 million
was outstanding under the Franchise Agreement.
The Loan Agreement ("Loan Agreement") dated August 31, 1998,
between a wholly-owned subsidiary of the Company and Salomon Brothers
Realty Corporation provides financing in an amount not to exceed
$200.0 million to provide financing for the origination of commercial
mortgage loans secured by certain real estate properties originated or
acquired. At December 31, 1998, $23.2 million was outstanding under
the Loan Agreement.
The Loan Agreement ("Transamerica Loan Agreement"), dated
December 18, 1998 between a wholly-owned subsidiary of the Company and
Transamerica Business Credit Corporation provides a working capital
facility in the maximum aggregate principal amount of up to $75.0
million for the purpose of funding new Small Business Administration
("SBA") loans. At December 31, 1998, $55.7 million was outstanding
under the Transamerica Loan Agreement.
General
Current liquidity, unused revolver availability and cash
available, as of March 22, 1999, was approximately $114.4 million.
The primary sources of liquidity currently include the Credit
Agreement and, to the extent described above, the Warehouse
Facilities, and internally generated funds. In addition to the loan
sales and other matters described above, the Company expects to manage
its liquidity from cash flows generated from its existing operations
(primarily residential mortgage banking cash flows), and returns of
and on investments in the ordinary course of business. The Company
received $34.8 million in tax refunds in January 1999 for 1998 tax
deposits and $44.5 million in March 1999 for 1997 and 1996 taxes due
to 1998 losses. In addition, the Company is seeking to obtain third
party financing for certain assets which, if successful, would result
in additional capacity under the Credit Agreement, subject to
borrowing base limitations which may impact additional capacity
created by such transactions. The Company believes that it has
sufficient liquidity to meet its obligations, including the potential
repayment of the entire $167.5 million short term facility under the
Credit Agreement due in August 1999, the $57.5 million of senior notes
due July 1999 and to fund its operations at current levels.
The Credit Agreement, the Warehouse Facilities and the indentures
under which the senior notes and senior subordinated notes are issued
contain certain financial covenants relating to among other things,
interest coverage, leverage and tangible net worth. If the Company
experiences additional losses it may be in default under the financial
covenants. Any such default could materially impact the Company's
financial condition and prospects. The Company does not anticipate
that it will be in default under any of its credit agreements and
facilities in the foreseeable future. Although the Company is in
compliance with all its respective debt agreements, these debt
agreements contain restrictions on the incurrence of additional debt.
These restrictions currently preclude the incurrence of additional
debt, other than under the Credit Agreement (or any replacement or
successor thereto) and pursuant to warehouse lines of credit,
asset-based financings and other similar arrangements designed to
support its various lines of business.
The Company has historically accessed the capital markets as an
important part of its capital raising activities, including to raise
funds in debt and equity offerings, to finance the acquisition of
assets and the origination and accumulation of loans, and to
securitize and sell mortgage loans originated by its different
business lines. The Company anticipates that its access to the
capital markets will be significantly limited for the foreseeable
future and that other sources of third party financing will also be
limited.
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 MIC, a privately held
specialized producer of VA 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.
In October 1998, the Financial Accounting Standards Board issued
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained
after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise," which establishes accounting and reporting
standards for certain activities of mortgage banking enterprises and
other enterprises that conduct operations that are substantially
similar to the primary operations of a mortgage banking enterprise.
SFAS No. 134 requires that after the securitization of mortgage loans
held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities based upon its
ability and intent to sell or hold those investments. This statement
is effective for the first fiscal quarter beginning after December 31,
1998 with early adoption permitted. The Company will apply the new
rules of SFAS 134 for its fiscal year beginning January 1, 1999. The
Company believes the adoption of SFAS 134 will not have a material
impact on the Company's results of operations or financial position.
Year 2000
General
Many of the world's computers, software programs and other
equipment using microprocessors or embedded chips currently have date
fields that use two digits rather than four digits to define the
applicable year. These computers, programs and chips may be unable to
properly interpret dates beyond the year 1999; for example, computer
software that has date sensitive programming using a two-digit format
may recognize a date using "00" as the year 1900 rather than the year
2000. Such errors could potentially result in a system failure or
miscalculation causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage
in similar normal business activities, which, in turn, could lead to
disruptions in the Company's operations or performance.
The Company's assessments of the cost and timeliness of
completion of Year 2000 modifications set forth below 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 internal and external resources
and third party readiness plans. Furthermore, as the Company's Year
2000 initiative (described below) progresses, the Company continues to
revise its estimates of the likely problems and costs associated with
the Year 2000 problem and to adapt its contingency plan. However,
there can be no assurance that any estimate or assumption will prove
to be accurate.
The Company's Year 2000 Initiative
The Company is conducting a comprehensive Year 2000 initiative
with respect to its internal business-critical systems. This
initiative encompasses information technology ("IT") systems and
applications, as well as non-IT systems and equipment with embedded
technology, such as fax machines and telephone systems, which may be
impacted by the Year 2000 problem. Business-critical systems
encompass internal accounting systems, including general ledger,
accounts payable and financial reporting applications; cash management
systems; loan servicing systems; and decision support systems; as well
as the underlying technology required to support the software. The
initiative includes assessing, remediating or replacing, testing and
upgrading the Company's business-critical IT systems with the
assistance of a consulting firm that specializes in Year 2000
readiness. Based upon a review of the completed and planned stages of
the initiative, and the testing done to date, the Company does not
anticipate any material difficulties in achieving Year 2000 readiness
with respect to its internal business-critical systems, and the
Company anticipates that Year 2000 readiness with respect to virtually
all its internal business-critical systems will be achieved by March
31, 1999.
In addition to its own internal IT systems and non-IT systems,
the Company may be at risk from Year 2000 failures caused by or
occurring to third parties. These third parties can be classified
into two groups. The first group includes borrowers, significant
business partners, lenders, vendors and other service providers with
whom the Company has a direct contractual relationship. The second
group, while encompassing certain members of the first group, is
comprised of third parties providing services or functions to large
segments of society, both domestically and internationally such as
airlines, utilities and national stock exchanges.
As is the case with most other companies, the actions the Company
can take to avoid any adverse effects from the failure of companies,
particularly those in the second group, to become Year 2000 ready is
extremely limited. However, the Company is in the process of
communicating with those companies that have significant business
relationships with the Company, particularly those in the first group,
to determine their Year 2000 readiness status and the extent to which
the Company could be affected by any of their Year 2000 readiness
issues. In connection with this process, the Company is seeking to
obtain written representations and other independent confirmations of
Year 2000 readiness from the third parties with whom the Company has
material contracts. Responses from all third parties having material
contracts with the Company have not been received. In addition to
contacting these third parties, where there are direct interfaces
between the Company's systems and the systems of these third parties
in the first group, the Company plans to conduct testing in the second
quarter of 1999 in conformance with the guidelines of the Federal
Financial Institutions Examination Council. Based on responses
received and testing to date, it is not currently anticipated that the
Company will be materially affected by any third party Year 2000
readiness issues.
For all business-critical systems interfaces, readiness is
scheduled to be achieved by March 31, 1999. Significant third party
service providers that have not completed their Year 2000 initiatives
by March 31, 1999 are scheduled to be replaced with comparable firms
that are believed to be compliant. The Company anticipates that this
portion of its Year 2000 initiative will be completed within the
scheduled time periods.
There can be no assurance that the systems of the Company or
those of third parties will be timely converted. Furthermore, there
can be no assurance that a failure to convert by another company, or a
conversion that is not compatible with the Company's systems or those
of other companies on which the Company's systems rely, would not have
a material adverse effect on the Company.
The Company does not anticipate that it will incur material
expenditures in connection with any modifications necessary to achieve
Year 2000 readiness. The Company estimates that it has incurred
approximately $750,000 of costs related to its Year 2000 initiative
through December 31, 1998, and the Company anticipates that it will
incur approximately $500,000 of costs in the future with respect to
the initiative. These cost estimates do not include costs associated
with internal resources assigned to the initiative.
Potential Risks
In addition to the Company's internal systems and the systems and
embedded technology of third parties with whom the Company does
business, there is a general uncertainty regarding the overall success
of global remediation efforts relating to the Year 2000 problem,
including those efforts of providers of services to large segments of
society, as described above in the second group. Due to the
interrelationships on a global scale that may be impacted by the Year
2000 problem, there could be short-term disruptions in the capital or
real estate markets or longer-term disruptions that would affect the
overall economy.
Due to the general uncertainty with respect to how this issue
will affect businesses and governments, it is not possible to list all
potential problems or risks associated with the Year 2000 problem.
However, some examples of problems or risks to the Company that could
result from the failure by third parties to adequately deal with the
Year 2000 problem include:
in the case of lenders, the potential for liquidity stress due to
disruptions in funding flows;
in the case of exchanges and clearing agents, the potential for
funding disruptions and settlement failures; and
in the case of vendors or providers, service failures or
interruptions, such as failures of power, telecommunications and the
embedded technology of building systems (such as HVAC, sprinkler and
fire suppression, elevators, alarm monitoring and security, and
building and parking garage access).
With respect to the Company's loan portfolios, risks due to the
potential failure of third parties to be ready to deal with the Year
2000 problem include:
potential borrower defaults resulting from computer failures of
retail systems of major tenants in retail commercial real estate
properties such as shopping malls and strip shopping centers;
potential borrower defaults resulting from increased expenses or
legal claims related to failures of embedded technology in building
systems, such as HVAC, sprinkler and fire suppression, elevators,
alarm monitoring and security, and building and parking garage access;
and
delays in reaching projected occupancy levels due to construction
delays, interruptions in service or other market factors.
These risks are also applicable to the Company's portfolios of
MBS, as these securities are dependent upon the pool of mortgage loans
underlying them. If the investors in these types of securities demand
higher returns in recognition of these potential risks, the market
value of any future MBS portfolios of the Company also could be
adversely affected.
Other problems that could result from the failure of the Company
or third parties to achieve Year 2000 readiness include impairment of
the Company's ability to report to investors and owners with respect
to portfolio performance and collect and remit payments, including
those with respect to return on investments, taxes and insurance.
Furthermore, the Company's loan servicing operations rely on computers
to process and manage loans. These operations are of such a volume
and nature that manual processing would be time consuming and
expensive. Therefore, a failure of the Company's own systems or the
systems provided by third parties and used by the Company to be timely
compliant could have a material adverse effect on the Company's loan
servicing operations.
The Company believes that the risks most likely to affect the
Company adversely relate to the failure of third parties, including
its borrowers and sources of capital, to achieve Year 2000 readiness.
If its borrowers' systems fail, the result could be a delay in making
payments to the Company or the complete business failure of such
borrowers. The failure, although believed to be unlikely, of the
Company's sources of capital to achieve Year 2000 readiness could
result in the Company being unable to obtain the funds necessary to
continue its normal business operations.
Some of the risks associated with the Year 2000 problem may be
mitigated through insurance maintained or purchased by the Company,
its business partners, borrowers and vendors. However, the scope of
insurance coverage in addressing these potential issues under existing
policies has yet to be tested, and the economic impact on the solvency
of the insurers has not been explored. Therefore, no assurance can be
given that insurance coverage will be available or, if it is
available, that it will be available on a cost-effective basis or that
it will cover all or a significant portion of any potential loss.
Business Continuity/Disaster Recovery Plan
The Company currently has a business continuity/disaster recovery
plan that includes business resumption processes that do not rely on
computer systems and the maintenance of hard copy files, where
appropriate. The business continuity/disaster recovery plan is
monitored and updated as potential Year 2000 readiness issues of the
Company and third parties are specifically identified. Due to the
inability to predict all of the potential problems that may arise in
connection with the Year 2000 problem, there can be no assurance that
all contingencies will be adequately addressed by such plan.
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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk generally represents the risk of loss that may result
from the potential change in the value of a financial instrument as a
result of fluctuations in interest and currency exchange rates and in
equity and commodity prices. Market risk is inherent to both
derivative and non-derivative financial instruments, and accordingly,
the scope of the Company's market risk management procedures extends
beyond derivatives to include all market risk sensitive financial
instruments.
The following is a discussion of the Company's primary market
risk exposures as of December 31, 1998, including a discussion of how
those exposures are managed.
Interest Rate Risk
The Company is subject to interest rate risk due to the Company's
balance sheet being primarily comprised of loans and interest bearing
investments primarily financed by LIBOR based notes payable and
warehouse loans payable. The Company manages this risk by striving to
balance its origination and mortgage banking activities with its asset
management and servicing operations which are generally counter
cyclical in nature. In addition, the Company is a party to financial
instruments with off-balance sheet risk in the normal course of
business to hedge against changes in interest rates. The Company may
reduce its exposure to fluctuations in interest rates by creating
offsetting positions through the use of derivative financial
instruments. Derivatives are used to lower funding costs, to
diversify sources of funding, or to alter interest rate exposures
arising from mismatches between assets and liabilities. The Company
does not use derivative financial instruments for trading or
speculative purposes, nor is the Company party to highly leveraged
derivatives. These financial instruments include interest rate cap
agreements, put options and forward and futures contracts. The
instruments involve, to varying degrees, elements of interest rate
risk in excess of the amount recognized in the consolidated statements
of financial condition. The Company controls the risk of its hedging
agreements, interest rate cap agreements and forward and futures
contracts through approvals, limits and monitoring procedures.
The Company purchases interest rate cap agreements to reduce the
impact of changes in interest rates on its floating rate debt. The
Company enters into these agreements to change the fixed/variable
interest rate mix of the debt portfolio to reduce the Company's
aggregate risk to movements in interest rates. Accordingly, the
Company enters into agreements to effectively convert variable-rate
debt to fixed-rate debt to reduce the Company's risk of incurring
higher interest costs due to rising interest rates. The cap
agreements entitle the Company to receive from the counterparties the
amounts, if any, by which an interest rate index exceeds agreed-upon
thresholds. The potential loss in fair value related to such cap
agreements resulting from a 10% adverse change in interest rates is
not material.
Futures and forward contracts are commitments to either purchase
or sell designated financial instruments at a future date for a
specified price and may be settled in cash or through delivery.
Initial margin requirements are met in cash or other instruments.
Futures contracts have little credit risk because futures exchanges
are the counterparties. Forward agreements and interest rate swaps
and caps are subject to the creditworthiness of the counterparties,
which are principally large financial institutions.
Interest rate sensitivity analyses are used to measure the
Company's interest rate risk related to its trading and other than
trading portfolios by computing hypothetical changes in fair values of
interest rate sensitive assets, liabilities and off balance sheet
items in the event of a hypothetical changes in interest rates. The
following are the Company's interest rate sensitivity analyses as of
December 31, 1998 (dollars in millions):
Retained Interests in Securitization (trading):
Change in Hypothetical Hypothetical
Interest Rates Fair Value Change ($) Change (%)
10% $557.3 $18.3 3.4%
0 539.0 - -
(10)% 530.5 (8.5) (1.6)
A hypothetical increase in interest rates is projected to
decrease loan pre-payments increasing the fair value of the retained
interests. This increase is projected to more than offset a decrease
in fair value of the retained interests caused by higher market
interest rates.
Other than Trading:
Change in Hypothetical Hypothetical
Interest Rates Fair Value Change Change
10% $707.2 $1.3 0.2%
0 705.9 - -
(10)% 702.3 (3.6) 0.5
The other than trading category includes loans held for sale,
loans and asset portfolios, asset backed securities, derivative
positions, senior notes, senior subordinated notes and the amount
outstanding under the Company's Credit Agreement to the extent the
fair value could be affected by a widening of spreads. In an
increasing interest rate environment, the Company projects the fair
value of its debt obligations to decrease offset, in part, by a fair
value reduction in its asset and derivative portfolio.
Any market interest rate change would adjust the Company's
projected cash flows from its variable rate assets and liabilities.
Such changes in cash flows are not reflected in the above analysis as
the fair values of variable assets and liabilities would not
materially be affected by a 10% change in interest rates. As with any
method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table.
For example, although certain assets and liabilities may have similar
maturities or periods to re-pricing, they may react in different
degrees to changes in interest rates. Changes in interest rates
related to certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates while changes in interest
rates related to other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as variable
rate loans, have features which restrict changes in interest rates on
a short-term basis and over the life of the asset. Additionally,
changes in market interest rates may increase or decrease due to pre-
payments and defaults influenced by changes in market interest rates
affecting the valuation of certain assets. Accordingly, the data
presented in the above table should not be relied upon as indicative
of actual results in the event of changes in interest rates.
Foreign Exchange Risk
Foreign exchange risk arises from the possibility that changes in
foreign exchange rates will impact the value of financial instruments.
The Company is subject to foreign exchange risk to the extent its
income bearing assets exceeds its related foreign denominated debt.
At December 31, 1998, the Company had no derivative contracts in place
to hedge against foreign exchange rate exposure. The following table
summarizes the hypothetical impact to the Company's financial position
due to changes in foreign currency exchange rates (dollars in
millions):
Change in
Foreign
Exchange Rates Hypothetical Hypothetical
per Dollar Fair Value Change Change
10% $70.9 $ (5.1) (6.7)%
0 76.0 - -
(10)% 86.6 10.6 13.9%
Other Market Risks
As with any entity's investment or asset portfolio, the Company
is subject to the risk that certain unpredictable conditions can exist
which combine to have the effect of limiting the Company's ability to
liquidate its assets through sale or securitization. As was the case
in late 1998 when unprecedented market conditions caused a widening of
interest rate spreads resulting in losses to the Company and
substantial requirements on the Company's liquidity position, certain
events, however remote a possibility, can again exist reducing the
Company's ability to liquidate certain assets. The Company believes
its exposure to this liquidity risk is remote and would not be present
under a scenario of a 10% change in interest rates.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements on Page F-1 of this Annual
Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is set forth under the
caption "Management" in the Company's definitive Proxy Statement (the
"Proxy Statement"), which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities
Exchange Act of 1934 and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this Item is set forth under the
caption "Executive Compensation" in the Proxy Statement, which will be
filed with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934 and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information required by this Item is set forth under the
caption "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement, which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under
the Securities Exchange Act of 1934 and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is set forth under the
caption "Certain Relationships and Related Transactions" in the Proxy
Statement, which will be filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Securities Exchange
Act of 1934 and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(1) Financial Statements
See Index to Financial Statements on page F-1 of this Annual
Report on Form 10-K.
(2) Financial Statement Schedules
Financial statement schedules under the applicable rules and
regulations of the Securities and Exchange Commission have been
omitted as the schedules are not applicable or the information
required thereby is included in the Company's consolidated financial
statements or notes thereto.
(3) Exhibits
The following instruments are included as exhibits to the report.
Exhibits incorporated by reference are so indicated.
Exhibit
Number Description of Exhibit
3.(a) Restated Certificate of Incorporation. (1)
(b) Amended and Restated Bylaws effective as of February 25, 1997
filed as exhibit 3 (b) to Registrant's Form 10-K for the
fiscal year ended December 31, 1996, which is incorporated
herein by reference.
4.(a) See Exhibits 3(a) and (b).
(b) Indenture, dated as of January 15, 1996, between the
Registrant and Bank One, Columbus, N.A., as trustee, filed as
Exhibit 4.1 to the Registrant's Form 8-K dated February 2,
1996, which exhibit is incorporated herein by reference.
(c) Indenture, dated as of March 1, 1997, between the Company and
Bank One, Columbus, N.A., as trustee, filed as Exhibit 4.1 to
the Registrant's Form 8-K dated March 12, 1997, which exhibit
is incorporated herein by reference.
(d) Officers' Certificate and Company Order dated as of March 12,
1997, establishing the terms of the Company's Senior
Subordinated Notes, Series 1997-A due 2004, filed as Exhibit
4.2 to the Registrant's Form 8-K dated March 12, 1997, which
exhibit is incorporated herein by reference.
(e) Officers' Certificate and Company Order dated as of February
23, 1998, establishing the terms of the Company's Senior
Subordinated Notes, Series 1998-A due 2005. (1)
(f) Specimen Common Stock Certificate, filed as Exhibit 4.4 to
the Company's Registration Statement on Form S-3 (No. 33-
63683), which exhibit is incorporated herein by reference.
10.(a)Form of Indemnification Agreement together with a list of all
officers and directors who have signed such agreement, filed
as Exhibit 10(g) to the Registrant's Annual Report on
Form 10-K for the year ended October 31, 1987, which exhibit
is incorporated herein by reference.
(b) Form of Indemnification Agreement dated as of August 24,
1993, together with a list of all officers and directors who
have signed such agreement, filed as Exhibit 10(g) to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 31, 1993, which exhibit is incorporated
herein by reference.
(c) Fifth Amended and Restated Incentive Stock Option Plan dated
as of November 20, 1990, filed as Exhibit 10(h) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991, which exhibit is incorporated herein by
references.(2)
(d) Fourth Amended and Restated Stock Option Plan dated as of
November 20, 1991, filed as Exhibit 10(i) to the Registrants
Annual Report on Form 10-K for the year ended December 31,
1991, which exhibit is incorporated herein by reference.(2)
(e) Stock Option Agreement, dated as of April 17, 1990, between
the Registrant and Bruce W. Schnitzer, and Termination of
Warrant between Mr. Schnitzer and the Registrant, filed as
Exhibit 10(s) to the Registrant's Annual Report on Form 10-K
for the year ended October 31, 1990, which exhibit is
incorporated herein by reference.(2)
(f) Promissory Note dated October 31, 1990 issued by James P.
Cotton, Jr. to the Registrant, filed as Exhibit 10(s) to the
Registrant's Annual Report on Form 10-K for the year ended
October 31, 1990, which exhibit is incorporated herein by
reference.
(g) Promissory Note dated October 31, 1990 issued by Gerald E.
Eickhoff to the Registrant, filed as Exhibit 10(w) to the
Registrant's Annual Report Form 10-K for the year ended
October 31, 1990, which exhibit is incorporated herein by
reference.
(h) Registrant's 1993 Key Individual Stock Option Plan filed as
Exhibit 10(z) to the Registration Statement of Registrant on
Form S-4 under the Securities Act of 1993 (File No.
33-72732), which exhibit is incorporated herein by
reference.(2)
(i) Indemnification Agreement, dated March 30, 1993, between
AMRESCO Holdings, Inc. and Richard L. Cravey, filed as
Exhibit 10(ab) to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993, which exhibit is
incorporated herein by reference.
(j) Indemnification Agreement, dated March 30, 1993, between
AMRESCO Holdings, and William S. Green, filed as
Exhibit 10(ac) to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993, which exhibit is
incorporated herein by reference.
(k) The Registrant's Retirement Savings and Profit Sharing Plan
and Trust filed as Exhibit 10(ag) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993,
which exhibit is incorporated herein by reference.(2)
(l) The Registrant's Retention Bonus Plan, as amended, filed as
Exhibit 10(ah) to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 and as Exhibit 10(y) to
the Registration Statement of the Registrant on Form S-4
under the Securities Act of 1993 (File No. 33-72321), which
exhibits are incorporated herein by reference.(2)
(m) The Registrant's Severance Pay Plan filed as Exhibit 10(ai)
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993, which exhibit is incorporated herein
by reference.(2)
(n) The Registrant's Thrift Restoration Plan filed as
Exhibit 10(ak) to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993, which exhibit is
incorporated herein by reference.(2)
(o) Employment Agreement, dated as of May 31, 1994, between
Registrant and Robert H. Lutz, Jr., filed as Exhibit 10(y)
to the Registrant's Form 10-K for the fiscal year ended
December 31, 1994, which exhibit is incorporated herein by
reference.(2)
(p) Amendment to Stock Option Agreement, dated as of April 1,
1995, between the Registrant and Bruce W. Schnitzer filed as
Exhibit 10(an) to the Registrant's Form 10-K for the fiscal
year ended December 31, 1995, which exhibit is incorporated
herein by reference. (2)
(q) Office Lease, dated as of February 9, 1996, between K-P Plaza
Limited Partnership and the Registrant filed as
Exhibit 10(ao) to the Registrant's Form 10-K for the fiscal
year ended December 31, 1995, which exhibit is incorporated
herein by reference.
(r) First Amendment to Office Lease dated July 17, 1996.
(s) Second Amendment to Lease Agreement dated May 27, 1997.
(t) Third Amendment to Lease Agreement dated September 22, 1997.
(u) Lease Expansion and Fourth Amendment to Lease Agreement dated
January 6, 1998.
(v) Form of Severance Agreement, dated as of May 29, 1996, with
Robert H Lutz, Jr., Robert L. Adair, Barry L. Edwards, L.
Keith Blackwell, Ronald B. Kirkland and Ronald Castleman
filed as exhibit 10.(x) to the registrants Form 10-K for the
fiscal year ended December 31, 1996, which is incorporated
herein by reference. (2)
(w) Form of Letter Agreement, dated as of March 20, 1997, with
Harold E. Holliday, Jr. and Scott J. Reading filed as exhibit
10.(y) to the registrants Form 10-K for the fiscal year ended
December 31, 1996, which is incorporated herein by reference.
(2)
(x) Incentive Compensation Program, dated August 15, 1996, for
certain employees of AMRESCO Residential Credit Corporation
filed as exhibit 10.(z) to the registrants Form 10-K for the
fiscal year ended December 31, 1996, which is incorporated
herein by reference. (2)
(y) AMRESCO, INC. 1997 Stock Option Plan filed as exhibit 10.(ac)
to the registrants Form 10-K for the fiscal year ended
December 31, 1996, which is incorporated herein by reference.
(2)
(z) AMRESCO, INC. 1995 Stock Option and Award Plan, as amended
and restated. (2)
(aa) AMRESCO, INC. 1998 Stock Option and Award Plan filed as
Exhibit 10 to the registrants' Form 10-Q for the fiscal
quarter ended June 30, 1998, which is incorporated herein by
reference. (2)
(ab) Credit Agreement entered into as of August 12, 1998 among
AMRESCO, INC., as borrower, NationsBank, N.A. as
administrative agent and Credit Suisse First Boston as
syndication agent for the "Lenders" filed as Exhibit 10 to
the registrant's Form 10-Q for the fiscal quarter ended
September 30, 1998, which is incorporated herein by
reference.
(ac) The First Modification of Credit Agreement entered into as of
September 17, 1998 among AMRESCO, INC., as borrower, and
NationsBank, N.A. as administrative agent for the "Lenders."
(1)
(ad) The Second Modification of Credit Agreement entered into as
of November 30, 1998, among AMRESCO, INC., as borrower, and
NationsBank, N.A. as administrative agent for the "Lenders."
(1)
(ae) The Third Modification of Credit Agreement and Consent
entered into as of February 28, 1999 among AMRESCO, INC., as
borrower, and NationsBank, N.A. as administrative agent for
the "Lenders." (1)
(af) Amendment No.1 to Rights Agreement, dated as of March 2,
1999, executed by and between AMRESCO, INC. and The Bank of
New York, as Rights Agent (attached as Exhibit 1a to the
Registrants Form 8-A [Amendment No.1] filed as of March 24,
1999.
11. Statement re: Computation of Per Share Earnings. (1)
21. Subsidiaries of the Registrant. (1)
23. Consent of Independent Auditors-Deloitte & Touche LLP (1)
27.(a) Financial Data Schedule- Fiscal year end 1998. (1)
(b) Financial Data Schedule- Fiscal year ends 1996, 1997 and
Quarters 1, 2 and 3 of 1997. (1)
(c) Financial Data Schedule- Quarters 1, 2 and 3 of 1998. (1)
(1) Filed herewith.
(2) Management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of this Report.
Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K, dated October
12, 1998, reporting pursuant to Items 5 and 7 of such Form the
completed sale of approximately $936 million of commercial mortgage
loans, the completed sale of $1.0 billion of home equity loans and the
entering into an agreement to sell approximately $400 million of
additional home equity loans.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 25th day of March, 1999.
AMRESCO, INC.
By: /s/ L. Keith Blackwell
L. Keith Blackwell
Senior Vice President, General Counsel
and Secretary
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the 25th day of
March, 1999:
Signature Title
ROBERT H. LUTZ, JR. Chairman of the Board and Chief
Robert H. Lutz, Jr. Executive Officer
ROBERT L. ADAIR III Director, President and Chief
Robert L. Adair III Operating Officer
BARRY L. EDWARDS Executive Vice President and Chief
Barry L Edwards Financial Officer (Principal Financial Officer)
JAMES P. COTTON, JR. Director
James P. Cotton, Jr.
RICHARD L. CRAVEY Director
Richard L. Cravey
GERALD E. EICKHOFF Director
Gerald E. Eickhoff
AMY J. JORGENSEN Director
Amy J. Jorgensen
__________________ Director
Bruce W. Schnitzer
SIDNEY E. HARRIS Director
Sidney E. Harris
RON B. KIRKLAND Senior Vice President and Chief
Ron B. Kirkland Accounting Officer
(Principal Accounting Officer)
INDEX TO FINANCIAL STATEMENTS
Page
I. Financial
Statements of AMRESCO, INC. and Subsidiaries
Consolidated Balance Sheets, December 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the Years Ended F-3
December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the Years F-4
Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended F-5
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements F-6
Independent Auditors' Report F-27
AMRESCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(In thousands, except for share amounts)
1998 1997
ASSETS
Cash and cash equivalents $ 66,422 $ 25,866
Loans held for sale, net 694,397 1,330,337
Loans and asset portfolios, net 943,119 648,694
Retained interests in securitizations - trading (at
fair value) 538,977 294,062
Asset-backed securities - available for sale (at fair
value) 141,181 107,677
Accounts receivable, net of reserves of $696 and $455 20,683 19,183
Income taxes receivable 65,937
Deferred income taxes 30,755 28,324
Premises and equipment, net of accumulated
depreciation of $16,769 and $10,641 23,223 10,147
Intangible assets, net of accumulated amortization of
$34,470 and $20,038 262,815 113,841
Mortgage servicing rights, net of accumulated
amortization of $3,872 and $191 49,387 3,394
Other assets 81,814 52,323
TOTAL ASSETS $2,918,710 $2,633,848
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 43,280 $ 22,821
Accrued employee compensation and benefits 28,420 33,609
Notes payable 957,871 583,442
Warehouse loans payable 587,426 1,216,796
Senior notes 57,500 57,500
Senior subordinated notes 580,179 250,000
Income taxes payable 19,185
Other liabilities 78,627 41,995
TOTAL LIABILITIES 2,333,303 2,225,348
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY:
Common stock, $0.05 par value, authorized 150,000,000
shares; 49,099,135 and 36,543,210 shares issued 2,456 1,827
Capital in excess of par 543,871 257,941
Unamortized stock compensation (4,981) (2,713)
Treasury stock, $0.05 par value, 1,057,953 and 24,339
shares (17,363) (160)
Accumulated other comprehensive income (loss) (12,651) 8,359
Retained earnings 74,075 143,246
TOTAL SHAREHOLDERS' EQUITY 585,407 408,500
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,918,710 $2,633,848
See notes to consolidated financial statements.
AMRESCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998, 1997 and 1996
(In thousands, except per share data)
1998 1997 1996
REVENUES:
Interest and other investment income $ 397,817 $198,165 $103,639
Gain (loss) on sale of loans and
investments, net (7,230) 103,385 18,394
Mortgage banking and servicing fees 113,634 75,250 40,697
Asset management and resolution fees 17,714 24,948 34,300
Other revenues 4,869 16,525 3,037
Total revenues 526,804 418,273 200,067
EXPENSES:
Personnel 227,117 146,018 78,864
Interest 232,497 102,063 36,763
Other general and administrative 113,534 45,883 21,903
Provisions for loan and asset portfolio
losses 29,634 17,764 3,195
Depreciation and amortization 25,855 14,448 8,876
Total expenses 628,637 326,176 149,601
Income (loss) before income taxes (101,833) 92,097 50,466
Income tax expense (benefit) (32,662) 35,873 19,134
NET INCOME (LOSS) $ (69,171) $ 56,224 $ 31,332
Earnings (loss) per share:
Basic $(1.61) $1.59 $1.16
Diluted (1.61) 1.53 1.06
Weighted average number of common shares
outstanding - diluted 42,846 36,663 31,774
See notes to consolidated financial statements.
AMRESCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
Common Stock
$0.05 par value
Number Capital in Unamort. Other Compr. Total
of excess of Stock Treasury Comprehen. Retained Income Shareholders'
Shares Amount Par Comp. Stock Income(Loss) Earnings (Loss) Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1996 26,689 $1,334 $106,054 $(2,238) $(160) $ 114 $ 55,690 160,794
Comprehensive income:
Net income 31,332 $31,332
Other comprehensive income,
net of tax:
Unrealized gains on securities 479 479
Foreign currency translation
adjustments (344) (344)
Other comprehensive income 135
Comprehensive income $31,467 31,467
Common stock offering 2,992 150 60,740 60,890
Debt conversion to
common stock 3,600 180 42,879 43,059
Exercise of stock options
(including tax benefit) 467 23 3,475 3,498
Issuance of common stock
for earnout 57 3 774 777
Amortization of unearned stock
compensation 1,015 1,015
Other (9) (79) 94 15
DECEMBER 31, 1996 33,796 1,690 213,843 (1,129) (160) 249 87,022 301,515
Comprehensive income:
Net income 56,224 $56,224
Other comprehensive income,
net of tax
Unrealized gains on securities 9,489 9,489
Reclassification of gains included
in net income (1,344) (1,344)
Foreign currency translation
adjustments (35) (35)
Other comprehensive income 8,110
Comprehensive income $64,334 64,334
Issuance of common
stock for acquisition 2,095 105 34,203 34,308
Exercise of stock options
(including tax benefit) 442 21 5,927 5,948
Issuance of common stock for
unearned stock compensation 169 9 3,335 (3,344)
Issuance of common stock
for earnout 44 2 775 777
Amortization of unearned
stock compensation 1,718 1,718
Other (3) (142) 42 (100)
DECEMBER 31, 1997 36,543 1,827 257,941 (2,713) (160) 8,359 143,246 408,500
Comprehensive loss:
Net loss (69,171) $(69,171)
Other comprehensive loss,
net of tax
Unrealized loss on securities (19,745) (19,745)
Reclassification of gaines
included in net loss (769) (769)
Foreign currency translation
adjustments (496) (496)
Other comprehensive loss (21,010)
Comprehensive loss $(90,181) (90,181)
Common stock offering,
net of offering costs 5,175 259 147,113 147,372
Issuance of common stock
for purchase of subsidiaries 3,562 177 98,142 98,319
Issuance of common stock for
earnout 3,359 168 29,914 30,082
Exercise of stock options
(including tax benefit) 307 17 5,957 5,974
Issuance of common stock for
unearned stock compensation 220 11 6,515 (6,526)
Amortization of unearned
stock compensation 2,544 2,544
Acquisition of treasury stock (17,203) (17,203)
Other (67) (3) (1,711) 1,714
DECEMBER 31, 1998 49,099 $2,456 $543,871 $(4,981) $(17,363) $(12,651) $74,075 $585,407
</TABLE>
<TABLE>
<CAPTION>
See notes to consolidated financial statements.
AMRESCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<S> <C> <C> <C>
1998 1997 1996
OPERATING ACTIVITIES:
Net income (loss) $ (69,171) $ 56,224 $ 31,332
Adjustments to reconcile net income (loss) to
net cash used in operating activities
Loss (gain) on sale of loans and investments 7,230 (103,385) (18,394)
Depreciation and amortization 25,855 14,448 8,876
Accretion of interest income (11,266) (35,233) (13,063)
Provisions for loan and asset portfolio losses 29,634 17,764 3,195
Deferred tax benefit (2,431) (15,039) (1,101)
Other 9,863 2,438 1,015
Decrease in cash for changes in (exclusive
of assets and liabilities acquired in business
combinations):
Accounts receivable, net 1,433 (6,833) 6,369
Loans held for sale, net 668,901 (876,829) (128,713)
Retained interests in securitizations (208,125) (44,099) (58,873)
Other assets (62,538) (14,284) (6,441)
Accounts payable and accrued compensation
and benefits 15,378 10,595 1,393
Warehouse loans payable (629,370) 826,812 116,962
Income taxes payable/receivable (87,411) 15,443 845
Other liabilities 27,452 48,026 6,222
Net cash used in operating activities (284,566) (103,952) (50,376)
INVESTING ACTIVITIES:
Sale (purchase) of temporary investments, net 34,190 (12,248)
Origination of loans and purchase of asset
portfolios (903,816) (599,937) (218,879)
Collections on loans and asset portfolios 613,755 240,552 106,785
Purchase of asset-backed securities available
for sale (116,623) (75,681) (21,877)
Proceeds from sale of and collections on
asset-backed securities available for sale 59,643 60,304 237
Cash used for purchase of subsidiaries (68,951) (2,176) (57,437)
Investment in and advances to joint venture (28,995) (25,065) (13,905)
Distribution from joint venture 26,802 17,789
Proceeds from sale of premises 15,813
Purchase of premises and equipment (14,196) (12,959) (6,480)
Net cash used in investing activities (432,381) (347,170) (223,804)
FINANCING ACTIVITIES:
Net proceeds from notes payable and other debt 1,723,696 1,083,291 1,108,720
Repayment of notes payable and other debt (1,423,164) (827,443) (886,036)
Proceeds from issuance of senior subordinated
notes, net of issuance costs 320,828 186,146
Proceeds from common stock offerings 147,372 60,890
Acquisition of treasury stock (17,203)
Stock options exercised and tax benefits from
employee stock compensation 5,974 5,948 3,513
Net cash provided by financing activities 757,503 447,942 287,087
Net increase (decrease) in cash and cash equivalents 40,556 (3,180) 12,907
Cash and cash equivalents, beginning of year 25,866 29,046 16,139
Cash and cash equivalents, end of year $ 66,422 $ 25,866 $ 29,046
SUPPLEMENTAL DISCLOSURES:
Interest paid $224,067 $92,965 $35,667
Common stock issued for purchase of
subsidiaries and earnouts 128,401 35,085 777
Income taxes paid 27,505 35,826 18,289
Common stock issued for unearned stock compensation 6,526 3,344
Conversion of convertible debt to common stock 45,000
Accrued earnout payment for purchase of
mortgage banking subsidiary 3,883
</TABLE>
See notes to consolidated financial statements.
AMRESCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
AMRESCO, INC. (the "Company") is engaged primarily in the
business of real estate lending, commercial finance and the
acquisition, resolution and servicing of nonperforming and
underperforming commercial loans. The Company's business may be
affected by many factors, including real estate and other asset
values, the level of and fluctuations in interest rates, changes in
the securitization market (the Company is still active in the small
business and franchise loan securitization markets) and competition.
In addition, the Company's operations require continued access to
short and long term sources of financing.
Principles of Consolidation. The consolidated financial
statements include the accounts of the Company and its majority owned
subsidiaries. Significant intercompany accounts and transactions have
been eliminated in consolidation.
Interest and Other Investment Income. The Company's interest
income consists of interest earned on loans and asset portfolios and
accrued earnings on securities purchased or retained from
securitization trusts. Interest income on loans and retained
interests in securitizations is recorded as earned. Interest income
represents the interest earned on the loans during the warehousing
period (the period prior to their securitization), as well as loans
held on the balance sheet on a long-term basis, and the recognition of
interest income on the securities retained after securitization.
Interest income is recognized using the effective yield method and
includes accretion of discounts, amortization of premiums and market
valuation adjustments for securities classified as trading.
Gain (Loss) on Sale of Loans and Investments. The Company
computes a gain or loss on the sale and/or securitization of loans and
investments based on the fair value of proceeds received over the
allocated basis (between the assets sold and any retained interests)
based upon their relative fair values at the date of sale. Retained
interests in assets sold are initially recorded at their allocated
basis and are classified as trading securities which are carried at
estimated fair market value.
Mortgage Banking and Servicing Fees. Loan placement fees,
commitment fees, loan servicing fees and real estate brokerage
commissions are recognized as earned. Placement and servicing
expenses are charged to expense as incurred.
Asset Management and Resolution Fees. Asset management and
resolution fees from management contracts are based on the amount of
assets under management and the net proceeds from the resolution of
such assets, respectively, and are recognized as earned. Expenses
incurred in managing and administering the assets subject to
management contracts are charged to expense as incurred. The Company
provides asset management and resolution services primarily for
private investors. Generally, the contracts provide for the payment
of a fixed management fee which is reduced proportionately as managed
assets decrease, a resolution fee using specified percentage rates
based on net cash collections and an incentive fee for resolution of
certain assets. Asset management and resolution contracts are of a
finite duration, typically three to five years. Unless new assets are
added to these contracts during their terms, the amount of total
assets under management decreases over the terms of these contracts.
Cash and Cash Equivalents. Cash and cash equivalents include all
highly liquid investments with a maturity of three months or less when
purchased.
Accounts Receivable. Accounts receivable primarily represent
receivables related to certain contracts. Receivables are recorded as
the related revenues are earned according to the respective contracts.
The Company's exposure to credit loss in the event that payment is not
received for revenue recognized equals the balance of accounts
receivable on the balance sheet.
Loans Held for Sale. Loans held for sale are carried at the
lower of cost or market, net of deferred loan origination fees and
associated direct costs and an allowance for loan loss. Loan
origination fees and associated direct costs are deferred and
recognized upon sale. Market value is determined based upon the
estimated fair value of similar loans for the month of expected
delivery.
Loans and Asset Portfolios. Loans are stated at face value, net
of deferred loan origination fees and associated direct costs and net
of an allowance for loan losses. Loan origination fees and
incremental direct costs are deferred and recognized over the life of
the loan as an adjustment to yield, using the interest method. Asset
portfolios consist of pools of loans or real estate acquired at
significant discounts to face value. The Company classifies its asset
portfolios as loan portfolios, partnerships and joint ventures and
real estate. The original cost of an asset portfolio is allocated to
individual assets within that portfolio based on their relative fair
value to the total purchase price. The difference between gross
estimated cash flows from loans and its cost is accrued using the
level yield method. The Company accounts for its investments in
partnerships and joint ventures using the equity method which
generally results in the pass-through of the Company's pro rata share
of earnings as if the Company had a direct investment in the
underlying assets. Loan portfolios, partnerships and joint ventures,
and real estate are carried at the lower of cost, adjusted for equity
earnings, or estimated fair value.
Allowances for Loan and Asset Portfolio Losses. The Company
provides for estimated loan and asset portfolio losses by establishing
allowances for losses through a charge to earnings. Actual losses
reduce, and subsequent recoveries increase, each allowance.
Management's periodic evaluation of each allowance for estimated
losses is based upon an analysis of the portfolio, historical loss
experience, economic conditions and trends, collateral values and
other relevant factors.
Asset-Backed Securities. The Company's investments in asset-
backed securities are classified as available for sale and are carried
at estimated fair value determined by quoted market rates when
available, otherwise by discounting estimated cash flows at current
market rates. Any unrealized gains or losses on asset-backed
securities are excluded from earnings and included in accumulated
other comprehensive income, a separate component of shareholders'
equity, net of tax effects. Any realized gains or losses are included
in earnings and are calculated based upon the specific identification
method. Any impairment, other than temporary, in the value of a
security is included in earnings.
Retained Interests in Securitizations. Retained interests in
securitizations are classified as trading and are carried at estimated
fair market value. The carrying value of the retained interests in
securitizations is analyzed by the Company on a disaggregated basis to
determine whether historical prepayment and loss experience, economic
conditions and trends, collateral values and other relevant factors
have had an impact on the carrying value. Changes in market value are
included in earnings. Cash flows for retained interests in
securitizations are generally subordinated to other security holders
in a securitization trust. The retained interests in securitizations
are valued at the discounted present value of the cash flows based
upon the expected timing of the release of cash by the securitization
trust ("cash-out method") over the anticipated 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.
Premises and Equipment. Premises and equipment, primarily
building and improvements, are stated at cost less accumulated
depreciation. The related assets are depreciated using the straight-
line method over their estimated service lives, which range from one
to fifteen years. Improvements to leased property are amortized over
the life of the lease or the life of the improvement, whichever is
shorter.
Intangible Assets. Intangible assets represent the excess of
purchase price over the fair market value of tangible net assets
acquired in connection with the purchases of other businesses. These
intangible assets, principally goodwill, are amortized using the
straight-line method over periods ranging from one to twenty-two
years. The Company periodically assesses the recoverability of
intangible assets and estimates the remaining useful life by reviewing
projected results of acquired operations, servicing rights and
contracts.
Mortgage Servicing Rights. The Company recognizes as separate
assets the rights to service mortgage loans for others, whether the
servicing rights are purchased or obtained through loan originations
and contractually separated from the underlying loans by sale or
securitization, by allocating total costs incurred between the loan
sold and the servicing rights retained based upon their relative fair
values. Amortization of mortgage servicing rights ("MSRs") is based
upon the ratio of net servicing income received in the current period
to total net servicing income projected to be realized from the MSRs.
Projected net servicing income is in turn determined on the basis of
the estimated future balance of the underlying mortgage loan
portfolio, which declines over time from pre-payments and scheduled
loan amortization. The Company estimates future pre-payment rates
based upon current interest rate levels, other economic conditions and
market forecasts, as well as relevant characteristics of the servicing
portfolio, such as loan types, interest rate stratification and recent
prepayment experience. MSRs are periodically assessed for impairment
which would be recognized in the consolidated statement of operations.
The Company evaluates impairment through stratification of its loan
portfolio based upon certain risk characteristics including loan type
(commercial or residential) and note rate (fixed or adjustable).
Investment in AMRESCO Capital Trust. The Company currently owns
approximately 1.5 million common shares, or 15%, of the outstanding
common stock of AMRESCO Capital Trust ("ACT"), which is a real estate
investment trust, and acts as manager of ACT. At December 31, 1998,
the Company's investment in ACT was approximately $22.9 million, which
is included in other assets, and is accounted for under the equity
method of accounting. Subject to certain limited exceptions, the
Company has granted to ACT a right of first refusal with respect to
the first $100 million of targeted mortgage loan investments which are
identified by or to the Company during any calendar quarter and all
mortgage-backed securities (other than mortgage-backed securities
issued in securitizations sponsored in whole or in part by the
Company).
Income Taxes. The Company and its subsidiaries file consolidated
tax returns. Deferred income taxes are recorded for temporary
differences between the bases of assets and liabilities as recognized
by tax laws and their carrying value as reported in the financial
statements.
Earnings per Share. Basic earnings per share is calculated by
dividing income available to common shareholders by the weighted-
average number of common shares outstanding during the period.
Diluted earnings per share is calculated by dividing income available
to common shareholders plus the after tax amount of interest
recognized in the period associated with any convertible debt by the
weighted-average number of common shares outstanding including the
number of additional common shares that would have been outstanding if
any dilutive potential common shares had been issued during the
period.
Foreign Currency Translation. Assets and liabilities of foreign
subsidiaries are translated into United States dollars at the
prevailing exchange rate on the balance sheet date. Revenue and
expense accounts for these subsidiaries are translated using the
weighted-average exchange rate during the period. Equity accounts are
translated at the historical exchange rate. These translation methods
give rise to cumulative foreign currency translation adjustments,
which are reported as a component of accumulated other comprehensive
income with the exception of translation adjustments arising from the
Company's investment in its Mexican subsidiary which is deemed by the
Company to operate in a highly inflationary economy. Accordingly,
such translation adjustments are included the current consolidated
statement of operations.
Derivative Financial Instruments. Derivative financial
instruments are utilized by the Company to reduce interest rate risk.
Derivative financial instruments include interest rate swaps and caps
and futures and forward contracts. The Company does not hold or issue
derivative financial instruments for speculative or trading purposes.
Gains and losses resulting from the termination of derivative
financial instruments are recognized over the shorter of the remaining
original contract lives of the derivative financial instruments or the
lives of the related hedged positions or, if the hedged positions are
sold, are recognized in the current period as gain or loss on sale
(see Note 14).
New Accounting Standards. 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
stand-alone derivative instruments and 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.
In October 1998, the Financial Accounting Standards Board issued
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained
after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise," which establishes accounting and reporting
standards for certain activities of mortgage banking enterprises and
other enterprises that conduct operations that are substantially
similar to the primary operations of a mortgage banking enterprise.
SFAS No. 134 requires that after the securitization of mortgage loans
held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities based upon its
ability and intent to sell or hold those investments. This statement
is effective for the first fiscal quarter beginning after December 15,
1998 with early adoption permitted. The Company will apply the new
rules of SFAS 134 for its fiscal year beginning January 1, 1999. The
Company believes the adoption of SFAS 134 will not have a material
impact on the Company's results of operations or financial position.
Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect reported
amounts of certain assets, liabilities, revenues and expenses.
Significant estimates include the valuation of retained interests in
securitizations, asset-backed securities and the allowances for loan
and asset portfolio losses. Actual results may differ from such
estimates.
Reclassifications. Certain reclassifications of prior year
amounts have been made to conform to the current year presentation.
2. Acquisitions
All of the Company's acquisitions have been accounted for as
purchases. Operations of acquired companies are included with those
of the Company after the acquisition date. Goodwill related to the
following acquisitions is amortized using the straight-line method
over 10 to 15 years. Stock issued in connection with acquisitions was
valued at the price of the stock at the time of the agreements.
On August 11, 1998, the Company acquired Mortgage Investors
Corporation and an affiliated entity ("MIC"), a privately held
producer of Veteran's Administration ("VA") 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.
On July 22, 1998, the Company acquired the commercial mortgage
banking business of Vanguard Commercial Mortgage, Inc. ("Vanguard")
for 20,915 shares of the Company's common stock. In addition to the
common stock, the Company paid $1.0 million in cash in connection with
such acquisition.
On July 16, 1998, the Company purchased the assets of
Independence Funding Company 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 April 30, 1998, the Company acquired the commercial mortgage
banking business of PNS Realty Partners, L.P., PNS Realty
Partners/Kentucky L.L.C., PNS Realty Partners/Indiana L.P. and PNS
Realty Partners Multifamily (collectively "PNS") for 30,930 shares of
common stock. In addition to the common stock, the Company paid
approximately $7.3 million in cash in connection with such acquisition
and will pay up to an additional $5.7 million 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. At December 31,
1998, such performance goal was not attained requiring no performance
accrual by the Company.
On February 23, 1998, the Company acquired the commercial
mortgage banking business of Fowler, Goedecke, Ellis & O'Connor
Incorporated ("Fowler") for 124,714 shares of Company's common stock.
In addition to the common stock, the Company paid $12.8 million in
cash in connection with such acquisition and will pay up to an
additional $8.0 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. At December 31, 1998, such performance
goal was not attained requiring no performance accrual by the Company.
On January 28, 1998, the Company acquired the home equity lending
business and operations of City Federal Funding & Mortgage Corp. and
its affiliate, Finance America Corporation (collectively "City
Federal") for 286,996 shares of the Company's common stock. In
addition to the Common Stock, the Company paid $2.0 million in cash in
connection with such acquisition and was to pay up to an additional
$8.5 million 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. At December 31, 1998, such performance goal was
not attained requiring no performance accrual by the Company.
The purchase prices for the 1998 acquisitions were allocated as
follows (in thousands):
<TABLE>
<CAPTION>
City
MIC Vanguard IFC TeleCapital PNS Fowler Federal
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 263
Accounts receivable $ 2,085 $ 639 209
Loans held for sale 49,008 36,116
Loans 1,390
Retained interests in
securitizations 7,630
Premises and equipment 4,034 250 25 $1,205
Intangible assets - goodwill 54,154 $1,600 40,843 13,956 $8,335 13,700 9,889
Other assets 113 4,517 2,300 34
Accounts payable and
accrued liabilities (4,526) (1,560) (94)
Income taxes payable (2,289) (118)
Notes payable (2,927) (39,659) (31,193)
Other liabilities (877) (1,519)
Net assets acquired $50,644 $1,600 $ 62,181 $ 17,857 $8,335 $15,882 $11,034
</TABLE>
The following pro forma financial information for the twelve
months ended December 31, 1998 and 1997 is presented as if the MIC,
IFC and TeleCapital acquisitions occurred at the beginning of the
periods presented and is not necessarily indicative of the results of
operations that would have occurred if MIC, IFC and TeleCapital would
have been purchased on these dates or of results that may occur in the
future. Pro-forma financial information related to Vanguard, PNS,
Fowler and City Federal was not included as the amounts are not
material (in thousands, except per share data):
Year Ended
December 31,
1998 1997
Total revenues $611,236 $481,650
Net income (65,275) 63,256
Earnings per share:
Basic $(1.47) $1.63
Diluted (1.47) 1.59
On March 31, 1997, the Company purchased the stock of Commercial
Lending Corporation and the operations and specific assets of certain
of its affiliates ("CLC"). CLC's primary line of business was
originating, securitizing, selling and servicing franchise loans. The
purchase price consisted of approximately 2.1 million shares of the
Company's common stock valued at $34.3 million, the assumption of
certain liabilities and contingent earnout payments of additional
shares of the Company's common stock based upon a percentage of
adjusted net income of the acquired entities through March 31, 2000.
Approximately 3.4 million shares of the Company's common stock were
issued in 1998 based on 1998 and 1997 performance targets. The
purchase price was allocated as follows (in thousands):
Cash and cash equivalents $ 930
Accounts receivable 1,345
Loans held for sale 86,600
Retained interests in securitizations 7,848
Deferred income taxes 705
Intangible assets - goodwill 41,023
Other assets 1,403
Accounts payable and accrued liabilities (296)
Warehouse loans payable (87,291)
Notes payable (15,633)
Other liabilities (2,326)
Net assets acquired $ 34,308
3. Loans Held for Sale
Loans held for sale were originated or acquired by the Company
and are held for future sale or securitization. Such loans have
mortgages on the underlying real estate or first liens on the related
property and equipment. All of the Company's loans held for sale are
pledged as collateral under the Company's various debt facilities.
The maximum accounting loss if the borrower fails to pay is the
carrying value. The Company does not believe it has significant
concentration risk in any geographic area that could have a
detrimental effect upon the Company. Loans held for sale at December
31, 1998 and 1997 consisted of the following (in thousands):
1998 1997
Commercial and multifamily mortgage loans $349,681 $ 286,657
Franchise and small business loans 176,700 57,026
Single family home equity loans 175,928 995,038
702,309 1,338,721
Allowance for loan losses (7,912) (8,384)
Balance, end of year, net $694,397 $1,330,337
At December 31, 1998, the Company was committed to sell as part
of a December 1998 securitization approximately $45.4 million of small
business loans.
The Company participates in the Federal National Mortgage
Association ("Fannie Mae") Delegated Underwriting and Servicing
("DUS") program. As a DUS lender, a subsidiary of the Company takes
first loss risk up to 5% of the loan amount and above 5% Fannie Mae
and the subsidiary of the Company share the loss, with the subsidiary
of the Company's maximum loss capped at 20% of the loan amount. The
Company has experienced no losses in its total $991.6 million
portfolio of sold DUS loans through December 31, 1998, however, the
reserve for such loans stands at $6.1 million through December 31,
1998, and is included in other liabilities.
The activity in the allowance for loan losses for loans held for
sale for the years ended December 31, 1998 and 1997 is summarized as
follows (in thousands):
1998 1997
Balance, beginning of year $ 8,384 $ 1,390
Provision for loan losses 15,467 8,083
Charge-offs (15,939) (1,089)
Balance, end of year $ 7,912 $ 8,384
4. Loans and Asset Portfolios
The Company's loans consist primarily of high yield loans to
businesses and projects that were unable to access traditional lending
sources and loans for single family residential construction. Asset
portfolios consist of loans purchased at a substantial discount from
their principal amount, real estate and investments in partnerships
and joint ventures that invest in such assets. Substantially all of
the Company's loan and asset portfolios are backed by commercial
mortgage real estate. All of the Company's loans and asset portfolios
are collateral under the Company's various debt facilities. The
Company does not believe it has significant concentration risk in any
geographic area that could have a detrimental effect upon the Company.
The maximum accounting loss if the borrower fails to pay is the
carrying value. Loans and asset portfolios at December 31, 1998 and
1997 consisted of the following (in thousands):
1998 1997
Loans:
Commercial loans $359,145 $168,347
Residential construction loans 129,613 65,931
Total loans 488,758 234,278
Asset portfolios:
Commercial real estate mortgages 216,276 296,591
Real estate 223,126 100,315
Partnerships and joint ventures 31,376 26,012
Total asset portfolios 470,778 422,918
Allowance for loan and asset portfolio losses (16,417) (8,502)
Balance, end of year, net $943,119 $648,694
The activity in the allowance for loan and asset portfolio losses
for the years ended December 31, 1998 and 1997 is summarized as
follows (in thousands):
1998 1997
Balance, beginning of year $ 8,502 $ 905
Provision for loan and asset portfolio losses 7,971 9,136
Charge-offs (56) (1,539)
Balance, end of year $16,417 $ 8,502
5. Asset-backed Securities
Asset-backed securities available for sale, carried at estimated
fair value, at December 31, 1998 and 1997, were as follows (in
thousands):
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Fair Value
1998 $160,351 $18,173 $(37,343) $141,181
1997 93,272 21,601 (7,196) 107,677
Net proceeds from sales of asset-backed securities aggregated
$18.5 million and $52.3 million for the years ended December 31, 1998
and 1997, respectively, which resulted in gross realized gains of $8.0
million and $2.1 million in 1998 and 1997, respectively, and a gross
realized loss of $6.7 million in 1998. Net proceeds from sales of
asset-backed securities and the resulting gain were insignificant in
1996. Maturities of securities available for sale are not presented
because the loans underlying such securities are subject to
prepayment. All of the Company's asset-backed securities are
collateral under the Company's various debt facilities.
6. Retained Interests in Securitizations
The Company's retained interests in securitizations consist
primarily of interest only certificates retained in the Company's
securitizations of home equity, franchise and small business loans and
are generally subordinated to other security holders in a
securitization trust. The retained interests are classified as
trading securities and are carried on the Company's balance sheet at
fair value, with the change in fair value during the period being
included in earnings. The timing and amount of cash flows on these
securities are significantly influenced by prepayments on the
underlying loans, estimated foreclosure losses to the extent the
Company has retained the risk of such losses and normal servicing and
other related fees. The carrying value of the retained interests in
securitizations at December 31, 1998 was determined by the Company on
a disaggregated basis by discounting future cash flows using a
weighted average discount rate of approximately 18%.
The Company has utilized, for initial valuation purposes in 1998,
a 20% discount rate on its home equity securitizations, discount rates
ranging from 18% - 20% for its commercial finance franchise loan
securitizations and a 15% discount rate on its commercial finance
small business loan securitizations. The actual weighted average
annual prepayment rate on the Company's home equity securitizations
was 24.57% for the period from inception of each security through
December 31, 1998, which is higher than originally projected, and is
modeled to be 28.34% for the next twelve months. 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 the underlying loan rate
and the volatility and predictability of the underlying cash flows
which generally become more certain as the securities season and
prepayments and credit losses are more predictable.
The Company structures its franchise and small business loans
with limited cross guarantees between borrowers such that the
borrowers within a defined pool of loans absorb the first 5% - 10% of
net losses. At the present time, the Company considers it unlikely
that net losses on such loan portfolios will exceed the 5% - 10%
range. Accordingly, losses are assumed to be zero. The Company has
assumed no prepayments on its franchise and small business loan
securitizations based on the significant prepayment penalties
applicable to the loans and historical prepayment experience.
Net proceeds from sale of retained interests in securitizations
were $102.2 million in 1997 with no such sale occurring in 1998.
The Company's retained interests in securitizations were measured
by allocating the previous carrying amount between the assets sold and
the interests retained (including mortgage servicing rights, if any)
based on their relative fair values at the date of transfer. During
1998, the interests retained were subsequently marked-to-market which
resulted in a $16.1 million decrease in the value of retained
interests in securitizations, which is reflected as a reduction of
interest and other investment income. In all of the Company's
securitization transactions completed in 1998 and 1997, the Company
has not retained any recourse obligation, other than retained
interests, with respect to the assets sold other than standard
representations and warranties. As of December 31, 1998, the Company
had $23.2 million and $19.4 million of retained interests related to
the Company's remaining interest from sales of commercial mortgage
conduit and home equity loans in October 1998, respectively, and are
expected to be collected in the first half of 1999. Retained
interests in securitizations at December 31, 1998 and 1997 consisted
of the following (dollars in thousands):
1998 1997
Home equity loan interests $413,412 $265,330
Conventional small business and franchise interests 69,892 28,732
Commercial mortgage whole loan sale interest 23,203
Home equity whole loan sale interest 19,441
SBA interests 7,612
Other 5,417
Total $538,977 $294,062
7. Mortgage Servicing Rights:
The activity in mortgage servicing rights for the years ended
December 31, 1998 and 1997 was as follows (in thousands):
1998 1997
Balance at beginning of period $ 3,394 $ -
Purchased 33,638
Originated 16,227 3,585
Amortization (3,872) (191)
Balance at end of period $49,387 $3,394
8. Notes Payable and Other Debt:
The Company's notes payable and other debt at December 31, 1998
and 1997, consisted of the following (in thousands):
1998 1997
Notes payable:
Revolving loan agreements $640,198 $388,345
Non-recourse debt 176,960 121,647
Commercial paper conduit and builder note payable 85,434 51,869
Retained interest financing 54,411 21,581
Other 868
Total notes payable $957,871 $583,442
Warehouse loans payable:
Commercial mortgage banking facilities $311,142 $258,046
Home equity lending facilities 136,051 916,006
Commercial finance facilities 140,233 42,744
Total warehouse loans payable $587,426 $1,216,796
8.75% senior notes due July 1, 1999 $57,500 $57,500
Senior subordinated notes:
10.0% notes due January 15, 2003 $ 57,500 $ 57,500
10.0% notes due March 15, 2004 192,500 192,500
9.875% notes due March 15, 2005 330,179
Total senior subordinated notes $580,179 $250,000
Revolving Loan Agreements. Effective August 12, 1998, the
Company entered into a Credit Agreement (the "Credit Agreement") with
a syndicate of lenders led by NationsBank, N.A., as administrative
agent and Credit Suisse First Boston, as syndication agent, which
replaced the Third Amended and Restated Loan Agreement (as modified
and amended) dated as of September 30, 1997. The Credit Agreement was
entered into in order to increase the Company's borrowing limits,
among other things.
The Credit Agreement constitutes senior debt and provides for a
revolving loan commitment with short and long term commitments of
$167.5 million and $502.5 million, respectively, and a term commitment
of $67.5 million. Interest is payable quarterly and at the end of
each advance period. The Credit 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. Indebtedness under the Credit Agreement generally bears
interest at a rate based on the lower of (i) the applicable rate (as
defined in the Credit Agreement) selected by the borrower between a
variable rate (as defined in the Credit Agreement) or a London
Interbank Offered Rate ("LIBOR") based rate (as defined in the Credit
Agreement) or (ii) the maximum lawful rate (as defined in the Credit
Agreement). The short and long term revolving facilities terminate
August 11, 1999 and August 12, 2001, respectively, and the term loan
commitment terminates August 12, 2003. The debt offering costs were
included in other assets and are amortized over the life of the debt
using the effective interest method. On November 30, 1998, the Credit
Agreement was amended to, among other things, adjust interest rate
margins based upon certain net worth calculations. As of December 31,
1998, a total of $640.2 million was outstanding under the Credit
Agreement bearing interest at 8.3% with availability under the Credit
Agreement of approximately $88.2 million. At December 31, 1998, the
Company had outstanding $9.1 million in face amount of letters of
credit pursuant to such facility. (See Note 16.)
Non-recourse Debt, Commercial Paper Conduit and Builder Note
Payable, Retained Interest Financing and Warehouse Loans Payable. Non-
recourse debt is used primarily to fund purchases of real estate
mortgage backed securities and under-performing loan portfolios and is
secured by the specific assets purchased totaling $210.5 million at
December 31, 1998. The commercial paper conduit and builder note
payable is used primarily to provide construction financing to various
home builders and is secured by the specific assets funded with such
debt totaling $87.6 million at December 31, 1998. Retained interest
financing is used primarily to finance certain retained interests
purchased or created during the Company's securitization process and
is secured by the specific assets funded with such debt totaling $99.5
million at December 31, 1998. The Warehouse debt is used primarily to
fund purchases and originations of commercial mortgage and home equity
loans and is secured by the specific assets funded with such debt
totaling $694.4 million at December 31, 1998. The following table
summarizes the Company's non-recourse debt, commercial paper conduit
and builder note payable, retained interest financing and warehouse
loans payable at December 31, 1998 (in thousands of dollars):
<TABLE>
<CAPTION>
Maximum Outstanding Maturity 12/31/98
Lender Available Balance Date Base Interest Rate Interest Rate
Non-recourse:
<S> <C> <C> <C> <C> <C>
Nationwide Building Society $ 82,895 $ 57,437 October 2005 LIBOR + 0.95% to 1.25% 8.30%
Merrill Lynch 43,539 14,744 November 2000 90-day LIBOR + 2.20% to 3.20% 7.83
Bayerische Hypotheken 22,123 22,123 March 2000 90-day LIBOR + 1.25% 7.90
Morgan Stanley 21,528 21,528 30-day renewals 90-day LIBOR + 0.50% to 1.15% 8.81
Nomura 13,985 13,985 30-day renewals 90-day LIBOR + 1.00% to 1.50% 6.70
Prudential 10,791 10,791 30-day renewals 90-day LIBOR + 0.375% 5.44
Bayerische Handelsbank 10,044 10,044 March 2003 4.40% 4.40
Greenwich 7,838 7,838 30-day renewals 90-day LIBOR + 1.00% 6.07
First Union 6,008 6,008 30-day renewals 90-day LIBOR + 1.00% to 1.50% 6.21
Residential Funding Corporation 4,317 4,317 30-day renewals 90-day LIBOR + 1.25% to 1.50% 6.32
Donaldson Lufkin & Jenrette 3,609 3,609 30-day renewals 90-day LIBOR + 1.00% 6.07
Lehman Brothers 2,026 2,026 30-day renewals 90-day LIBOR + 1.50% 6.57
First American Bank Texas 1,029 1,029 June 2000 Prime Rate + 1.00% 8.34
NationsBank 841 841 30-day renewals 90-day LIBOR + 1.00% to 1.50% 6.26
Freemont Investment & Loan 640 640 June 2000 180 Day LIBOR + 3.50% 8.47
Total non-recourse $231,213 $176,960
Commercial Paper Conduit:
Kitty Hawk Funding $100,000 $85,434 June 1999 LIBOR + 1.40% 5.50%
Total commercial paper conduit $100,000 $85,434
Retained Interest Financing:
Prudential (1) $40,000 $40,000 January 1999 LIBOR + 2.00% 7.10%
Donaldson Lufkin & Jenrette 14,411 14,411 30-day renewals LIBOR + 0.75% to 0.88% 6.10
Total retained
interest financing $54,411 $54,411
Warehouse debt:
Commercial mortgage banking:
RFC $325,000 $289,229 August 1999 LIBOR + 0.75% to 1.50% 6.42%
Morgan Stanley 21,913 21,913 January 1999 Eurodollar +0.70% to 1.25% 6.31
Total commercial mortgage
banking $346,913 $311,142
Home equity lending:
Prudential (1) $250,000 $127,957 30-day renewals LIBOR + 1.00% 5.60%
Lehman Brothers 8,094 8,094 30-day renewals LIBOR + 1.50% 6.57
Total home equity lending $258,094 $136,051
Commercial finance:
Prudential (small business
loans) (1) $200,000 $ 32,189 March 1999 LIBOR + 0.75% 5.85%
Prudential(franchise
loans) (1) 150,000 29,160 May 1999 LIBOR + 0.75% 6.06
Salomon Brothers 200,000 23,202 March 2000 LIBOR + 0.95% 6.50
Transamerica 75,000 55,682 December 2001 LIBOR + 2.00% to 2.25% 7.76
Total commercial finance $625,000 $140,233
</TABLE>
__________
(1) The Prudential warehouse facility is subject to a combined
maximum facility limit of $550.0 million. The home equity lending
maximum available facility was $250.0 million as of December 31, 1998,
of which a maximum of $40.0 million was available for residual
financing. A maximum of $200.0 million and $150.0 million is
available for the purpose of facilitating the origination and
warehousing of small business loans and franchise loans, respectively,
with a combined commercial finance maximum facility of $250.0 million.
8.75% Senior Notes Due July 1, 1999. On July 1, 1996, the
Company issued $57.5 million principal amount of senior notes with net
proceeds of approximately $55.8 million. There is no sinking fund or
amortization of principal prior to maturity and the senior notes are
not redeemable prior to maturity. The debt offering costs have been
included in other assets and are amortized over the life of the debt
using the effective interest method. The senior notes are unsecured
senior obligations of the Company and subordinated to the rights of
holders of secured unsubordinated indebtedness of the Company to the
extent of the value of the collateral securing such indebtedness.
10% Senior Subordinated Notes Due January 15, 2003. On
January 30, 1996, the Company issued $57.5 million principal amount of
senior subordinated notes with net proceeds of approximately $54.9
million. There is no sinking fund or amortization of principal prior
to maturity and the senior subordinated notes are not redeemable prior
to January 15, 2001. The debt offering costs were included in other
assets and are amortized over the life of the debt using the effective
interest method. The senior subordinated notes are unsecured general
obligations of the Company and subordinated to all existing and future
senior indebtedness (as defined in the Indenture) of the Company.
10% Senior Subordinated Notes Due March 15, 2004. On March 12,
1997, the Company issued $192.5 million aggregate principal amount of
senior subordinated notes with net proceeds of approximately $186.6
million. The senior subordinated notes are unsecured obligations of
the Company and are subordinated to prior payment of all existing and
future senior debt and to indebtedness and other liabilities of the
Company's subsidiaries. The debt offering costs were included in
other assets and are amortized over the life of the debt using the
effective interest method. The notes are not redeemable prior to
maturity.
9.875% Senior Subordinated Notes Due March 15, 2005. 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 with net proceeds of approximately $320.7 million.
The senior subordinated notes are unsecured obligations of the Company
and are subordinated to prior payment of all existing and future
senior debt and to indebtedness and other liabilities of the Company's
subsidiaries. The debt offering costs were included in other assets
and are amortized over the life of the debt using the effective
interest method. The notes are redeemable prior to maturity at
104.938% of their principal amount, plus accrued interest, any time
after March 15, 2002, declining ratably to 100% of their principal
amount, plus accrued interest, on or after March 15, 2004.
Covenants -- Each of the Company's notes payable and other debt
agreements has certain covenants which include financial tests,
including minimum consolidated tangible net worth, maximum
consolidated funded debt to consolidated capitalization ratio, minimum
fixed payment ratio, minimum interest coverage ratio, maximum debt to
net worth ratio and minimum asset coverage ratio. The agreements also
contain covenants that, among other things, limit the incurrence of
additional indebtedness, investments, asset sales, loans to
shareholders, dividends, transactions with affiliates, acquisitions,
mergers and consolidations, liens and encumbrances and other matters
customarily restricted. (See Note 16.)
Aggregate amounts of notes payable and other debt that mature
during the next five years were as follows (in thousands):
For the Year Ended December 31,
1999 2000 2001 2002 2003 Thereafter
Notes payable $281,855 $38,535 $502,500 $ 77,544 $ 57,437
Warehouse loans payable 508,542 23,202 55,682
8.75% senior notes due
July 1, 1999 57,500
Senior subordinated notes 57,500 522,679
Total $847,897 $61,737 $558,182 $135,044 $580,116
9. Income Taxes
Income tax expense (benefit) consisted of the following for the
years ended December 31, 1998, 1997 and 1996 (in thousands):
1998 1997 1996
Current:
Federal $(32,850) $ 47,794 $18,456
State 2,619 3,118 1,779
Total current tax expense (benefit) (30,231) 50,912 20,235
Deferred tax expense (benefit):
Federal (2,642) (14,118) (1,004)
State 211 (921) (97)
Total deferred tax benefit (2,431) (15,039) (1,101)
Total income tax expense (benefit) $(32,662) $ 35,873 $19,134
A reconciliation of income taxes on reported pretax income at
statutory rates to actual income tax expense for the years ended
December 31, 1998, 1997 and 1996, is as follows (dollars in
thousands):
1998 1997 1996
Dollars Rate Dollars Rate Dollars Rate
Income tax at statutory rates $(35,642) 35% $32,234 35% $17,663 35%
Non-deductible goodwill and other 2,289 (2) 851 1 234 1
State income taxes, net of
Federal tax benefit 691 (1) 2,788 3 1,237 2
Total income tax expense $(32,662) 32% $35,873 39% $19,134 38%
The net deferred tax assets at December 31, 1998 and 1997,
consisted of the tax effects of temporary differences related to the
following (in thousands):
1998 1997
Reserves for loan and asset portfolio losses $14,225 $ 7,556
Net operating loss carryforwards of acquired companies 6,976 7,327
Accrued employee compensation 4,486 2,782
Foreign tax credit carryforward 3,592
Intangible assets 2,433 2,721
AMT credit carryforwards 602 602
Investment in subsidiaries 426 426
Securitized loans and investments (5,293) 9,222
Other 4,483 1,963
Deferred tax asset before valuation allowance 31,930 32,599
Valuation allowance (1,175) (4,275)
Net deferred tax asset $30,755 $28,324
Realization of deferred tax assets is dependent on generating
sufficient taxable income prior to expiration of the loss
carryforwards. Although realization is not assured, management
believes it is more likely than not that all of the deferred tax
asset, net of applicable valuation allowance, will be realized. The
amount of the deferred tax asset considered realizable could be
reduced or increased if estimates of future taxable income during the
carryforward period are reduced or increased. As a result of
acquisitions, the Company has available for its use the acquired net
operating loss carryforwards existing at the acquisition dates. The
Company is subject to certain annual limitations on the utilization of
such losses. The following were the expiration dates and the
approximate net operating loss carryforwards at December 31, 1998 (in
thousands):
Expiration Date Amount
2002 $ 874
2003 1,459
2006 372
2007 2,867
2008 3,838
2011 9,283
Total $18,693
10. Employee Stock Compensation
The Company has a stock option and award plan for the benefit of
key individuals, including its directors, officers and key employees.
The plan is administered by a committee of the Board of Directors.
On October 20, 1998, the Board of Directors adopted a resolution
to exchange approximately 5.7 million options to purchase the
Company's common shares at exercise prices ranging from $7.50 to
$34.56 per common share for approximately 4.0 million options having
an exercise price of $7.44 per common share, representing fair market
value at date of grant, which had no impact on the Company's financial
statements. Stock option activity under the plan for the years ended
December 31, 1998, 1997 and 1996 was as follows:
Weighted
Option Price Average
Number Per Option
of Share Range Price Per
Shares Share
Options outstanding at December 31,1995 2,301,793 $ 0.60 - $11.38 $ 6.77
Granted 45,500 13.13 - 21.75 17.39
Exercised (466,760) 3.50 - 11.38 4.28
Forfeited (68,181) 4.50 - 11.38 6.98
Options outstanding at December 31, 1996 1,812,352 0.60 - 21.75 7.67
Granted 2,458,239 17.63 - 34.56 20.16
Exercised (441,915) 0.60 - 21.75 6.33
Forfeited (11,796) 6.88 - 11.38 9.34
Options outstanding at December 31, 1997 3,816,880 0.60 - 34.56 15.87
Granted 3,215,312 7.53 - 34.44 29.57
Exercised (307,399) 3.50 - 21.75 12.64
Forfeited (2,037,725) 3.50 - 34.56 24.82
Options outstanding at December 31, 1998 4,687,068 0.60 - 19.88 7.27
Options exercisable at December 31, 1998 1,709,659 0.60 - 19.88 6.85
Options available for grant at
December 31, 1998 4,575,423
The following table summarizes information about stock options
outstanding at December 31, 1998:
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Price Price of
Range of Options Contractual of Outstanding Options Exercisable
Exercise Prices Outstanding Life Options Exercisable Options
$ 0.60 - $2.75 125,045 2 $ 2.49 125,045 $ 2.49
3.50 85,300 5 3.50 85,300 3.50
6.88 - 7.00 336,928 6 6.93 289,146 6.94
7.44 4,015,795 9 7.44 1,182,168 7.44
7.53 92,000 10 7.53 18,400 7.53
11.38 - 19.88 32,000 8 18.18 9,600 17.04
Total 4,687,068 7.27 1,709,659 6.85
At December 31, 1998, the Company has reserved a total of
4,687,068 shares of common stock for exercise of stock options.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its
stock option and award plans. Under the terms of the plans, the
exercise price of each option is equal to the market price of the
Company's stock on the date of grant. Accordingly, no compensation
expense has been recognized under these plans. Net income (loss) and
earnings (loss) per share on a pro forma basis as if the Company had
utilized fair value accounting methodology would have been as follows
(in thousands, except per share data):
For the Years Ended
December 31,
1998 1997 1996
Net income (loss):
As reported $(69,171) $56,224 $31,332
Pro forma (75,430) 48,318 30,516
Basic earnings (loss) per
share:
As reported $(1.61) $1.59 $1.16
Pro forma (1.76) 1.36 1.13
Diluted earnings (loss) per share:
As reported $(1.61) $1.53 $1.06
Pro forma (1.76) 1.32 0.96
The estimated fair value of options granted during 1998, 1997 and
1996 was $4.21, $11.08 and $9.61 per share, respectively. For
purposes of determining fair value of each option, the Company used
the Black-Scholes model with the following assumptions:
1998 1997 1996
Risk-free interest 4.19% - 4.50% 5.82% - 6.26% 5.98% - 7.21%
Expected life 5 years 7 years 7-8 years
Expected volatility 54% 43% - 46% 43% - 45%
Expected dividends - - -
During 1998, the Company issued 186,471 shares of restricted
common stock at prices ranging from $28.69 per share to $30.19 per
share, with a weighted average price of $30.02 per share, under the
Company's stock option and award plan. The Company's restricted stock
typically vests over a period of five years with certain 1998 grants
vesting in lump sum in the year 2001. During 1998, 1997 and 1996,
$2.5 million, $1.7 million and $1.0 million in unearned stock
compensation was amortized as compensation expense, respectively. At
December 31, 1998 and 1997 reductions for employee stock included
unearned stock compensation of $4.9 million and $2.6 million,
respectively.
11. Common Stock
During July and August 1998, the Company repurchased 1.0 million
shares of the Company's outstanding common stock at an average price
of $17.20 per common share.
On July 16, 1998, the Company purchased the assets of IFC and
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 the
operations of MIC, a privately held specialized producer of VA
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.
On February 24, 1998, March, 4, 1998, May 18, 1998 and July 28,
1998 the Company issued options to purchase approximately 331,000,
15,000, 152,000 and 2,629,000 shares, respectively, of common stock.
On February 24, 1998, July 17, 1998 and July 22, 1998 the Company
issued approximately 166,000, 34,000 and 21,000 restricted shares,
respectively, of the Company's common stock to certain key employees.
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 underwriter's 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.
On May 28, 1997, the Company adopted a Stockholders Rights Plan
pursuant to which rights were distributed to stockholders of record as
of June 9, 1997. The Stockholders Rights Plan provides, among other
things, that if a person (or group of affiliated or associated
persons) acquires (or ten days after the commencement of a tender
offer to acquire) "beneficial ownership" of 15% or more of the
outstanding shares of common stock, the rights previously distributed
to stockholders, other than those owned by such acquiring person or
group, will become exercisable. Under the Stockholders Rights Plan,
the acquisition of 15% or more of the outstanding common stock or the
completion of the tender offer will entitle the holder to purchase
shares of common stock having a market value equal to twice the
purchase price of the right.
On December 27, 1996, the Company redeemed its outstanding 8%
convertible subordinated debentures due 2005 (the "Convertible
Debentures"). The Convertible Debentures, with an aggregate face
amount of $45.0 million, were converted into 3.6 million shares of the
Company's common stock at a conversion price of $12.50 per share. All
unamortized debt-offering costs related to the Convertible Debentures
and included in other assets were recorded as a reduction to capital
in excess of par.
A reconciliation of the numerators and denominators used in the
basic and diluted earnings (loss) per share computations for net
income (loss) is as follows (in thousands):
1998 1997 1996
Net income (loss) - basic $(69,171) $56,224 $31,332
Effect of convertible debt, net of taxes 2,196
Net income (loss) - diluted $(69,171) $56,224 $33,528
Weighted average shares outstanding (basic) 42,846 35,412 27,043
Assuming conversion of convertible debt 3,600
Dilutive stock options 958 905
Contingently issuable shares 293 226
Weighted average shares outstanding (diluted) 42,846 36,663 31,774
As the Company posted a net loss for the year ended December 31,
1998, the effects of dilutive stock options and contingently issuable
shares for the year ended December 31, 1998 are anti-dilutive and not
included in the computation of diluted loss per share. Diluted loss
per share including such anti-dilutive effects would have resulted in
diluted loss per share of $(1.57). A reconciliation of the numerators
and denominators used in the basic and diluted loss per share
computation including such anti-dilutive effects for the year ended
December 31, 1998 is as follows (in thousands):
1998
Net loss (diluted) $(69,171)
Weighted average shares outstanding (basic) 42,846
Dilutive stock options 789
Contingently issuable shares 370
Weighted average shares outstanding (diluted) 44,005
At December 31, 1998, the Company had 20,000 stock appreciation
rights outstanding related to the market value of the Company's common
stock which were granted to certain non-employees of the Company. The
stock appreciation rights have an award value of $13.125 and an
automatic conversion into cash on February 20, 2006.
12. Employee Compensation and Benefits
Accrued employee compensation and benefits at December 31, 1998
and 1997 included amounts for incentive compensation, severance and
benefits. Certain employees are eligible to receive a bonus from a
pool computed on pretax income over predetermined minimum earning
levels.
The AMRESCO Retirement Savings and Profit Sharing Plan ("Plan")
qualifies under Section 401(k) of the Internal Revenue Code and
incorporates both a savings component and a profit sharing component
for eligible employees. As determined each year by the Board of
Directors, the Company may match the employee contribution up to 6% of
their base pay based on the Company's performance. For 1998 and 1997,
the matching contribution was set at $.50 for each $1.00 contributed
by the employees. In addition to the matching savings contribution in
1997, the Company provided an annual contribution to the profit
sharing retirement component of the Plan on behalf of all eligible
employees. This portion of the Plan has been amended to assure that
the Company is not required to make an employer profit sharing
contribution to the Plan. No such contributions were made in 1998 due
to the Company's net loss, however, it is anticipated that some level
of profit sharing contribution will resume in future periods. For
the years ended December 31, 1997 and 1996, the Company accrued profit
sharing contributions of $3.1 million and $1.5 million, respectively.
Allocation of the Company's contribution will be based on a percentage
of an employee's weighted total pay. Weighted total pay places a
stronger emphasis on the age of the employee and provides an
increasingly larger profit sharing contribution as an employee nears
retirement.
13. Commitments and Contingencies
The Company has entered into non-cancelable operating leases
covering office facilities which expire at various dates through 2007.
Certain of the lease agreements provide for minimum annual rentals
with provisions to increase the rents to cover increases in real
estate taxes and other expenses of the lessor. The Company also has
leases on equipment, some of which are non-cancelable, which expire on
various dates through 2005. The total rent expense for the years
ended December 31, 1998, 1997 and 1996, was approximately $17.7
million, $9.9 million and $5.3 million, respectively. The future
minimum annual rental commitments under non-cancelable operating lease
agreements having a remaining term in excess of one year at
December 31, 1998 were as follows (in thousands):
Year Ended December 31,
1999 $11,615
2000 10,553
2001 8,669
2002 7,831
2003 6,499
Thereafter 10,913
The Company is a defendant in various legal actions. In the
opinion of management, such actions will not materially affect the
financial position, results of operations or cash flows of the
Company.
14. Segment and Related Information
The Company has five reportable segments which have separate
management teams and infrastructures that engage in different
investments and offer different services: asset management, commercial
mortgage banking, home equity lending, commercial finance and
residential mortgage banking. 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 origination, warehousing, placement and
servicing of commercial real estate mortgages and commercial real
estate brokerage. The home equity lending business involves
originating, selling and servicing nonconforming residential mortgage
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. The residential
mortgage banking line of business (which consists of the newly
acquired operations of MIC) originates and sells VA streamlined re-
financed loans.
The accounting policies are the same as those described in the
summary of significant accounting policies with the exception of
interest expense incurred by the Company being allocated to the
subsidiaries in 1998 and 1997 based upon the subsidiaries' combined
balance of common stock, paid in capital and intercompany accounts.
During 1996, interest income and expense was recorded by the Company
and the subsidiaries based upon the subsidiaries' intercompany balance
multiplied by an interest rate pre-determined by management. The
Company evaluates performance based upon operating income which is
determined by adjusting operating profit to include intangible
amortization expense.
The following represents the Company's reportable segment
position as of and for the years ended December 31, 1998, 1997 and
1996 (in thousands):
<TABLE>
<CAPTION>
1998
Commercial Home Residential
Asset Mortgage Equity Commercial Mortgage
Management Banking Lending Finance Banking(1) All Other Eliminations Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues from external sources $112,387 $ 71,018 $145,069 $122,047 $74,702 $ 1,281 $ $ 526,804
Interest expense 37,973 40,617 99,194 38,674 2,260 13,779 232,497
Depreciation and amortization 1,075 7,541 6,391 5,504 2,391 2,953 25,855
Operating income (loss) 39,838 (104,371) (74,719) 46,591 32,926 (42,098) (101,833)
Other significant non-cash items:
Gain on sale of loans and
investments 61,679 34,250 95,929
Segment assets 347,355 313,961 359,439 453,635 99,070 1,913,857 (568,607) 2,918,710
(1) Began operations August 11, 1998.
1997
Commercial Home
Asset Mortgage Equity Commercial
Management Banking Lending Finance All Other Eliminations Total
Revenues from external sources $ 103,581 $ 97,533 $165,294 $ 51,212 $ 653 $ - $ 418,273
Intersegment revenue 1,113 (1,113)
Total revenues 103,581 97,533 166,407 51,212 653 (1,113) 418,273
Interest expense 22,590 3,193 53,939 13,224 10,230 (1,113) 102,063
Depreciation and amortization 1,957 4,491 3,511 1,940 2,549 14,448
Operating income (loss) 45,870 27,199 46,163 19,075 (46,210) 92,097
Other significant non-cash items:
Gain on sale of loans and
investments 69,615 15,453 85,068
Segment assets 298,311 1,131,317 337,807 174,079 966,982 (274,648) 2,633,848
1996
Commercial Home
Asset Mortgage Equity Commercial
Management Banking Lending Finance All Other Eliminations Total
Revenues from external sources $ 87,337 $ 54,438 $ 54,195 $2,976 $ 1,121 $ $ 200,067
Intersegment revenus 1,418 187 2,669 (29) 13,002 (17,247)
Total revenues 88,755 54,625 56,864 2,947 14,123 (17,247) 200,067
Interest expense 15,151 2,269 18,541 959 17,090 (17,247) 36,763
Depreciation and amortization 2,468 3,683 810 1,915 8,876
Operating income (loss) 41,286 11,462 27,321 695 (30,298) 50,466
Other significant non-cash items:
Gain on sale of loans and
investments 16,933 16,933
Segment assets 123,978 121,328 390,612 2,467 595,578 (158,022) 1,075,941
</TABLE>
15. Financial Instruments and Risk Management
The Company is a party to financial instruments with off-balance
sheet risk in the normal course of business to hedge against changes
in interest rates. The Company may reduce its exposure to
fluctuations in interest rates by creating offsetting positions
through the use of derivative financial instruments. Derivatives are
used to lower funding costs, to diversify sources of funding, or to
alter interest rate exposures arising from mismatches between assets
and liabilities. The Company does not use derivative financial
instruments for trading or speculative purposes, nor is the Company
party to highly leveraged derivatives. These financial instruments
include interest rate cap agreements, put options and forward and
futures contracts. The instruments involve, to varying degrees,
elements of interest rate risk in excess of the amount recognized in
the consolidated statements of financial condition. The Company
controls the risk of its hedging agreements, interest rate cap
agreements and forward and futures contracts through approvals, limits
and monitoring procedures.
Futures and forward contracts are commitments to either purchase
or sell designated financial instruments at a future date for a
specified price and may be settled in cash or through delivery.
Initial margin requirements are met in cash or other instruments.
Futures contracts have little credit risk because futures exchanges
are the counterparties. Forward agreements and interest rate swaps
and caps are subject to the creditworthiness of the counterparties,
which are principally large financial institutions.
The notional amount of derivatives do not represent amounts
exchanged by the parties and, thus, are not a measure of the exposure
of the Company through its use of derivatives. The amounts exchanged
are calculated on the basis of the notional amounts and the other
terms of the derivatives, which relate to interest rates, exchange
rates, securities prices, or financial or other index. Market values
of derivatives transactions fluctuate based upon movements in the
underlying financial indices such as interest rates. Market values
are monitored on a continual basis through external pricing mechanisms
and internal calculations. The Company's objective measurement system
together with risk limits and timely reporting to senior management
help to mitigate the risks associated with market fluctuations. In
the event that a derivative product were terminated prior to its
contractual maturity, it is the Company's policy to recognize the
resulting gain or loss over the shorter of the remaining original life
of the derivative financial instrument or the life of the underlying
hedged asset or liability. If the item being hedged is sold, settled
or terminated, the derivative financial instrument is marked-to-market
and any gain (loss) is recognized in earnings. No such terminations
of derivative transactions prior to contractual maturity occurred
during 1998 or 1997. If the derivative fails to effectively perform
as a hedge and/or does not qualify as a hedge, it is marked-to-market
and any gain (loss) is recognized in earnings.
At December 31, 1998, the Company had sold five forward contracts
with a total notional amount of $162.3 million to hedge the interest
rate risk associated with balances of loans held for sale, commitments
to sell loans held for sale and balances of residential MBS which had
carrying values of approximately $82.9 million, $65.0 million and
$35.3 million, respectively, as of December 31, 1998. As of December
31, 1998, the Company had (i) two (U.S. Treasury and Federal National
Mortgage Association ("Fannie Mae")) security contracts with a total
notional amount of $63.8 million related to hedging $82.9 million of
loans held for sale with settlement dates of January and February
1999, (ii) two Government National Mortgage Association thirty-year
6.0% contracts to sell approximately $65.0 million of residential
mortgage banking loans to be delivered in February 1999 and (iii) one
U.S. Treasury contract with a notional amount of $33.5 million which
hedges approximately $35.3 million of residential MBS with a
settlement date of January 1999. Any gain or loss on a forward
contract is deferred and recognized when the related assets are sold.
As of December 31, 1997, the Company had two forward contracts to sell
ten-year U.S. Treasury securities which hedged a portion of the
Company's MBS portfolio with a total notional amount of $48.2 million.
In addition, four forward contracts were outstanding in with a
notional amount of $101.5 million to sell Fannie Mae mortgage backed
securities.
At December 31, 1998, the Company had one option contract to sell
(put option) ten-year U.S. Treasury securities at contracted forward
prices. The contract matures in March 1999 and hedges two commercial
MBS with a carrying value of $25.6 million.
At December 31, 1998, the Company had one ten-year treasury note
Fannie Mae futures contract with a notional amount of $21.4 million
related to hedging approximately $18.9 million of loans. As of
December 31, 1997, the Company had futures contracts with notional
amounts of $445.2 million and $6.0 billion to hedge home equity
lending loans held for sale and retained interests in securitizations,
respectively.
At December 31, 1998, the Company had an amortizing interest rate
cap with a notional amount of $1.0 billion hedging approximately
$384.9 million of retained interests in securitizations. The cap
requires monthly payments from the counterparty when one month LIBOR
exceeds 5.9375%. The notional amount amortizes monthly based upon
levels agreed to with the counterparty through the expiration of the
agreement on July 26, 1999. The Company paid an initial premium of
approximately $3.2 million for the cap. All such futures, options on
futures contracts and caps are marked-to-market as are the retained
interests in securitization. All realized and unrealized gains
(losses) are recognized in earnings.
The Company purchases interest rate swap and cap agreements to
reduce the impact of changes in interest rates on its floating rate
debt. The Company enters into these agreements to change the
fixed/variable interest rate mix of the debt portfolio to reduce the
Company's aggregate risk to movements in interest rates. Accordingly,
the Company enters into agreements to effectively convert variable-
rate debt to fixed-rate debt to reduce the Company's risk of incurring
higher interest costs due to rising interest rates. The cap
agreements entitle the Company to receive from the counterparties the
amounts, if any, by which an interest rate index exceeds agreed-upon
thresholds. At December 31, 1998, the Company had four such
agreements outstanding with a total notional amount of $31.7 million
which hedge floating rate debt related to the Company's balances of
residential MBS with a carrying value of $37.5 million. The contracts
have cap rates ranging from 6.375% to 6.875% based upon one month
LIBOR and expire on various dates between November 1999 and April
2000. The premiums paid for interest rate cap agreements purchased
are included in other assets in the consolidated statements of
financial condition and are amortized to interest expense over the
terms of the agreements. Amounts received under cap agreements are
recognized as yield adjustments to the related debt. At December 31,
1997, the Company had three cap agreements outstanding with notional
amounts of $64.6 million which hedged floating rate debt with a
carrying value of $62.6 million.
Credit risk represents the accounting loss that would be
recognized at the reporting date if counterparties failed completely
to perform as contracted. Concentrations of credit risk that arise
from financial instruments exist for counterparties when they have
similar economic characteristics that would cause their ability to
meet contractual obligations to be similarly affect by changes in
economic or other conditions. The Company uses commercial rating
agencies to evaluate the credit quality of the counterparties, all of
whom are major international financial institutions. The Company does
not have a significant exposure to any individual counterparty and
does not anticipate a loss resulting from any credit risk of these
institutions.
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No.
107, "Disclosures About Fair Value of Financial Instruments." The
estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret
market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts the Company could realize in a current market exchange. The
use of different market assumptions and/or estimation methodologies
may have a material effect on the estimated fair value amounts.
December 31, 1998 December 31, 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(Dollars in thousands)
Assets:
Cash and cash equivalents $ 66,422 $ 66,422 $ 25,866 $ 25,866
Loans held for sale, net 694,397 694,397 1,330,337 1,330,337
Loans and asset portfolios, net 943,119 983,988 648,694 674,081
Retained interests in
securitizations - trading 538,977 538,977 294,062 294,062
Asset-backed securities -
available for sale 141,181 141,181 107,677 107,677
Accounts receivable, net 86,620 86,620 19,183 19,183
Mortgage servicing right, net 49,387 49,387 3,394 3,394
Liabilities:
Accounts payable 43,280 43,280 22,821 22,821
Notes payable and warehouse
loans payable 1,545,297 1,545,297 1,800,238 1,800,238
Senior notes 57,500 56,063 57,500 58,147
Senior subordinated notes 580,179 416,606 250,000 257,356
Derivative Financial Instruments:
Interest rate caps (3,267) 2,498
Forward contracts (828) (88)
Futures contracts 164 (6,682)
Call options 8,979
Put options (148) 135
The fair value of loans, asset portfolios, asset-backed
securities, retained interests in securitizations, notes payable and
other debt, senior notes and senior subordinated notes were estimated
based on quoted market prices when available, otherwise, they were
based on present values of estimated cash flows using current entry-
value interest rates applicable to each category of such financial
instruments (which notes reflect the credit risk applicable to the
instruments). Mortgage loans held for sale were valued at their
contracted sales prices. The carrying amount of cash and cash
equivalents, accounts receivable, net of reserves, and accounts
payable approximated fair value. The Company has reviewed its
exposure on standby letters of credit and has determined that the fair
value of such exposure is not material. The fair values of the
interest rate cap agreements, forward and futures contracts and call
and put options were estimated using market quotes. The fair value
estimates presented herein were based on pertinent information
available to management as of December 31, 1998 and 1997. Although
management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements
since the date presented, and therefore, current estimates of fair
value may differ significantly from the amounts presented herein.
16. Subsequent Events (Unaudited)
On February 28, 1999, the Credit Agreement was amended to replace
a waiver which, among other things, adjusted the ratios to allow for
the loss incurred in 1998. The interest rate remained consistent with
the November 1998 amendment.
17. Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly results of
operations for the years ended December 31, 1998 and 1997 (in
thousands, except per share amounts):
Year Ended December 31, 1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
Revenues $140,798 $175,167 $180,040 $30,799
Income (loss) before income taxes 22,907 32,229 1,335 (158,304)
Net income (loss) 14,049 19,660 758 (103,638)
Earnings (loss) per share:
Basic 0.36 0.46 0.02 (2.27)
Diluted 0.35 0.45 0.02 (2.27)
Year Ended December 31, 1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
Revenues $74,133 $103,083 $111,535 $129,522
Income before income taxes 13,606 20,686 25,552 32,253
Net income 8,561 12,486 15,336 19,841
Earnings per share:
Basic 0.25 0.35 0.43 0.55
Diluted 0.25 0.34 0.41 0.53
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of AMRESCO, INC.:
We have audited the accompanying consolidated balance sheets of
AMRESCO, INC. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility
of AMRESCO, INC.'s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of AMRESCO,
INC. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
\s\ Deloitte & Touche LLP
Dallas, Texas
February 9, 1999
FIRST MODIFICATION OF CREDIT AGREEMENT
THIS FIRST MODIFICATION OF CREDIT AGREEMENT (this
"Modification Agreement") is entered into as of September 17,
1998, by and between AMRESCO, INC., a Delaware corporation
("Borrower"), and NationsBank, N.A., a national banking
association, as Administrative Agent ("Administrative Agent") for
the Lenders (defined below).
W I T N E S S E T H:
WHEREAS, reference is made to the credit facilities made
pursuant to and governed by that certain Credit Agreement (the
"Credit Agreement") dated as of August 12, 1998, executed by and
among Borrower, Administrative Agent, Credit Suisse First Boston,
as Syndication Agent, and the financial institutions, funds and
other entities listed as "Lenders" therein (the "Lenders") (each
capitalized term used but not otherwise defined herein shall be
defined as set forth in the Credit Agreement); and
WHEREAS, Borrower has requested certain modifications to the
Credit Agreement; and
WHEREAS, the Lenders, acting through Administrative Agent
pursuant to the Credit Agreement, have agreed to the requested
modifications and waiver with respect thereto, subject to and
upon the terms and conditions contained herein.
NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS, That for and
in consideration of the terms and conditions contained herein and
for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Administrative
Agent, for and on behalf of the Lenders, and Borrower hereby
agree as follows:
1. Amendment to Asset Coverage Requirement. Borrower has
requested that the Asset Coverage Requirement set forth in
Section 8.4 of the Credit Agreement be modified such that the
ratio set forth therein is reduced to 1.2 to 1.0 during the
period from September 2, 1998 through and including November 30,
1998. Accordingly, the second sentence of Section 8.4 of the
Credit Agreement is hereby modified and amended to read as
follows:
"In addition, Borrower shall not permit the ratio of
the Asset Coverage Values to the aggregate outstanding
balance of the Revolving Credit Facility (including
Swingline Advances and Competitive Bid Loans), the Term
Facility and the Letter of Credit Exposure to be less
than (i) 1.4 to 1.0 from the Closing Date through and
including September 1, 1998, and at any time from and
after December 1, 1998, or (ii) 1.2 to 1.0 during the
period commencing on September 2, 1998 through and
including November 30, 1998 (the "Asset Coverage
Requirement"), for any two consecutive Business Days."
2. Waiver Regarding Asset Coverage Requirement. To the
extent that any Default or Event of Default occurred solely due
to noncompliance with the Asset Coverage Requirement as set forth
in Section 8.4 of the Credit Agreement during the period from
September 2, 1998 until the effectiveness of the amendment to
Section 8.4 set forth in the preceding paragraph 1 hereof, and
provided that such Default or Event of Default would not have
occurred under the terms of Section 8.4 as so amended, such
Default or Event of Default is waived by the Lenders.
3. Treasury Stock Purchase. Borrower agrees that,
notwithstanding anything to the contrary in the Credit Agreement
(including without limitation the provisions of Section 8.19
thereof), Borrower shall not purchase any of its stock or other
equity securities whatsoever at any time during the period
commencing on the date hereof through and including November 30,
1998. Any such purchase from and after December 1, 1998 shall
remain subject in all respects to the terms and conditions of the
Credit Agreement, including without limitation Section 8.19
thereof.
4. Investments Definition. The definition of
"Investments" in Section 1.1 of the Credit Agreement incorrectly
refers to Section 8.10 rather than 8.9; accordingly, such
definition is hereby amended to read as follows: "Investments
has the meaning set forth in Section 8.9 hereof."
5. Definition of Loan Documents. The definition of "Loan
Documents", as defined in the Credit Agreement and as used in the
Credit Agreement, the other Loan Documents and herein, shall be,
and is hereby, modified to include this Modification Agreement
and any and all documents executed in connection herewith.
6. Conditions Precedent to this Modification Agreement.
As conditions precedent to this Modification Agreement and the
modifications to the Credit Agreement pursuant hereto, all of the
following shall have been satisfied:
(a) Borrower and the Guarantors shall have executed and
delivered to Administrative Agent this Modification Agreement;
and
(b) Borrower shall have delivered to Administrative Agent
all corporate resolutions, consents, powers of attorney,
certificates or documents as Administrative Agent may request
relating to (i) the existence of Borrower, and (ii) the corporate
and partnership authority for the execution and validity of this
Modification Agreement, together with all other documents,
instruments and agreements and any other matters relevant hereto
or thereto, all in form and content satisfactory to
Administrative Agent.
7. Reaffirmation of Debt and Liens. Borrower acknowledges
and agrees that it is well and truly indebted to Lenders pursuant
to the terms of the Notes, the Credit Agreement and the other
Loan Documents, as modified hereby, and that all liens and
security interests securing the Obligations are and remain in
full force and effect.
8. Ratification. Except as otherwise expressly modified
by this Modification Agreement, all terms and provisions of the
Credit Agreement, the Notes, and the other Loan Documents shall
remain unchanged and hereby are ratified and confirmed and shall
be and shall remain in full force and effect, enforceable in
accordance with their terms.
9. Payment of Expenses. Borrower shall pay to
Administrative Agent, on behalf of the Lenders, upon demand, the
reasonable attorneys' fees and expenses of Administrative Agent's
counsel and all filing and recording fees and other reasonable
expenses incurred by Administrative Agent in connection with this
Modification Agreement.
10. Further Assurances. Borrower shall execute and deliver
to Administrative Agent such other documents as may be necessary
or as may be required, in the opinion of counsel to
Administrative Agent, to effect the transactions contemplated
hereby and to protect the Lenders' liens and security interests.
11. Binding Agreement. This Modification Agreement shall
be binding upon, and shall inure to the benefit of, the parties
and their respective heirs, representatives, successors and
assigns.
12. Enforceability. In the event the enforceability or
validity of any portion of this Modification Agreement, the
Credit Agreement, the Notes, or any of the other Loan Documents
is challenged or questioned, such provision shall be construed in
accordance with, and shall be governed by, whichever applicable
federal or New York law would uphold or would enforce such
challenged or questioned provision.
13. Choice of Law. THIS MODIFICATION AGREEMENT AND THE
OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE
EXTENT FEDERAL LAWS PREEMPT THE LAWS OF THE STATE OF NEW YORK.
14. Counterparts. This Modification Agreement may be
executed in multiple counterparts, all of which are identical,
each of which shall be deemed an original, and all of which
counterparts together shall constitute one and the same
instrument.
15. Entire Agreement. This Modification Agreement, the
Credit Agreement and the Notes, together with the other Loan
Documents, contain the entire agreements between the parties
relating to the subject matter hereof and thereof and all prior
agreements relative thereto which are not contained herein or
therein are terminated.
THIS MODIFICATION AGREEMENT AND THE OTHER WRITTEN
INSTRUMENTS, AGREEMENTS AND DOCUMENTS EXECUTED IN CONNECTION WITH
THIS MODIFICATION AGREEMENT, AND THE CREDIT AGREEMENT, THE NOTES,
AND THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
IN WITNESS WHEREOF, this Agreement is executed effective as
of the date first written above.
BORROWER:
AMRESCO, INC., a Delaware corporation
By:
Thomas J. Andrus,
Vice President and Treasurer
ADMINISTRATIVE AGENT:
NATIONSBANK, N.A.,
a national banking association, as Administrative
Agent for the Lenders
By:
Elizabeth Kurilecz,
Senior Vice President
ACKNOWLEDGED AND AGREED TO as of the
17th day of September, 1998, by:
GUARANTORS:
AFC EQUITIES, INC.
AFC EQUITIES MANAGEMENT, INC.
ALPINE, INC.
AMREIT HOLDINGS, INC.
AMREIT MANAGERS GP, INC.
AMRESCO ATLANTA INDUSTRIAL, INC.
AMRESCO BUILDERS GROUP, INC.
AMRESCO CAPITAL CONDUIT CORPORATION
AMRESCO CAPITAL LIMITED, INC.
AMRESCO CAPITAL, L.P.
AMRESCO CMF, INC.
AMRESCO COMMERCIAL FINANCE, INC.
AMRESCO CONSOLIDATION CORP.
AMRESCO EQUITY INVESTMENTS, INC.
AMRESCO EQUITY INVESTMENTS II, INC.
AMRESCO FINANCE AMERICA CORPORATION
AMRESCO FINANCIAL I, INC.
AMRESCO FINANCIAL I, L.P.
AMRESCO FUNDING CORPORATION
AMRESCO FUNDING OF GEORGIA, L.P.
AMRESCO FUNDING INVESTORS, INC.
AMRESCO FUNDING MANAGEMENT, INC.
AMRESCO FUNDING MID-ATLANTIC, INC.
AMRESCO FUNDING PACIFIC, INC.
AMRESCO INDEPENDENCE FUNDING, INC.
AMRESCO INSTITUTIONAL, INC.
AMRESCO INVESTMENTS, INC.
AMRESCO MANAGEMENT, INC.
AMRESCO MBS II, INC.
AMRESCO MORTGAGE CAPITAL LIMITED-I, INC.
AMRESCO MORTGAGE SERVICES LIMITED, INC.
AMRESCO NEW ENGLAND, L.P.
AMRESCO NEW ENGLAND II, L.P.
AMRESCO NEW ENGLAND, INC.
AMRESCO NEW ENGLAND II, INC.
AMRESCO NEW HAMPSHIRE, INC.
AMRESCO NEW HAMPSHIRE, L.P.
AMRESCO OVERSEAS, INC.
AMRESCO PORTFOLIO INVESTMENTS, INC.
AMRESCO PRINCIPAL MANAGERS I, INC.
AMRESCO PRINCIPAL MANAGERS II, INC.
AMRESCO RESIDENTIAL CAPITAL MARKETS, INC.
AMRESCO RESIDENTIAL CREDIT CORPORATION
AMRESCO RESIDENTIAL MORTGAGE CORPORATION
AMRESCO RESIDENTIAL PROPERTIES, INC.
AMRESCO RHODE ISLAND, INC.
AMRESCO SERVICES, L.P.
AMRESCO VENTURES, INC.
AMRESCO 1994-N2, INC.
AMRESCO TEXAS, INC.
ASSET MANAGEMENT RESOLUTION COMPANY
BEI 1992 - N1, INC.
BEI 1993 - N3, INC.
BEI 1994 - N1, INC.
BEI MULTI-POOL, INC.
BEI PORTFOLIO INVESTMENTS, INC.
BEI PORTFOLIO MANAGERS, INC.
BEI REAL ESTATE SERVICES, INC.
BEI SANJAC, INC.
COMMONWEALTH TRUST DEED SERVICES, INC.
ENT MIDWEST, INC.
ENT NEW JERSEY, INC.
ENT SOUTHERN CALIFORNIA, INC.
EXPRESS FUNDING, INC.
FINANCE AMERICA CORPORATION
GRANITE EQUITIES, INC.
HOLLIDAY FENOGLIO FOWLER, L.P.
LIFETIME HOMES, INC.
MARKETING SOLUTION PUBLICATIONS, INC.
MORTGAGE INVESTORS CORPORATION
OAK CLIFF FINANCIAL, INC.
PRESTON HOLLOW ASSET HOLDINGS, INC.
QUALITY FUNDING, INC.
SAVE-MORE INSURANCE SERVICES INC.
WHITEROCK INVESTMENTS, INC.
By: AMRESCO, INC., a Delaware corporation, as
agent and attorney-in-fact
By: Thomas J. Andrus,
Vice President and Treasurer
SECOND MODIFICATION OF CREDIT AGREEMENT
THIS SECOND MODIFICATION OF CREDIT AGREEMENT (this
"Modification Agreement") is entered into as of November 30,
1998, by and between AMRESCO, INC., a Delaware corporation
("Borrower"), and NationsBank, N.A., a national banking
association, as Administrative Agent ("Administrative Agent"),
for and on behalf of the Lenders (defined below).
W I T N E S S E T H:
WHEREAS, reference is made to the credit facilities made
pursuant to and governed by that certain Credit Agreement (as
amended, the "Credit Agreement") dated as of August 12, 1998,
executed by and among Borrower, Administrative Agent, Credit
Suisse First Boston, as Syndication Agent, and the financial
institutions, funds and other entities listed as "Lenders"
therein (the "Lenders"), as amended by First Modification of
Credit Agreement (the "First Modification") dated as of
September 17, 1998 (the "First Amendment") (each capitalized term
used but not otherwise defined herein shall be defined as set
forth in the Credit Agreement); and
WHEREAS, Borrower has requested certain consents and
modifications to the Credit Agreement; and
WHEREAS, the Lenders, acting through Administrative Agent
pursuant to the Credit Agreement, have agreed to the requested
modifications, subject to and upon the terms and conditions
contained herein.
NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS, That for and
in consideration of the terms and conditions contained herein and
for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Administrative
Agent, for and on behalf of the Lenders, and Borrower hereby
agree as follows:
1. Covenant Amendments. Borrower has requested the
following amendments to the referenced covenants contained in the
Credit Agreement:
(a) Minimum Consolidated Net Worth: The dollar amount
set forth in clause (a) of Section 8.1 of the Credit Agreement
will be reduced to $275,000,000 for the period commencing
December 1, 1998 through and including February 28, 1999;
accordingly, Section 8.1 is hereby amended to read in its
entirety as follows:
"Section 8.1. Minimum Consolidated Tangible Net
Worth . Borrower shall not permit Consolidated
Tangible Net Worth to be less than the sum of (a) Three
Hundred Thirty-Five Million and No/100 Dollars
($335,000,000) from the Closing Date through and
including November 29, 1998, and at any time from and
after March 1, 1999, or $275,000,000 for the period
commencing November 30, 1998 through and including
February 28, 1999, plus (b) seventy-five percent (75%)
of the cumulative Consolidated Net Income for each
calendar quarter commencing on July 1, 1998, through
the quarter ending immediately prior to, or on, the
date as of which compliance with this covenant is being
measured, plus (c) seventy-five percent (75%) of the
amount of any proceeds (less reasonable and customary
transaction costs) received by Borrower from the
issuance of any additional shares of stock or other
equity instruments."
(b) Asset Coverage Requirement: The amendment to
Section 8.4 of the Credit Agreement set forth in the First
Modification will be extended through February 28, 1999 at the
reduced ratio of 1.15 to 1.0; accordingly, Section 8.4 of the
Credit Agreement is hereby amended to read in its entirety as
follows:
"Section 8.4. Capital Adequacy; Asset Coverage.
Borrower shall not permit an amount equal to Total
Consolidated Debt less fifty percent (50%) of the face
value of all Approved Subordinated Debt as of the last
day of any fiscal quarter of Borrower to exceed the
Adjusted Asset Amount at such time. In addition,
Borrower shall not permit the ratio of the Asset
Coverage Values to the aggregate outstanding balance of
the Revolving Credit Facility (including Swingline
Advances and Competitive Bid Loans), the Term Facility
and the Letter of Credit Exposure to be less than (i)
1.4 to 1.0 from the Closing Date through and including
September 1, 1998, and at any time from and after
March 1, 1999, or (ii) 1.2 to 1.0 during the period
commencing on September 2, 1998 through and including
November 30, 1998, or (iii) 1.15 to 1.0 during the
period commencing December 1, 1998 through and
including February 28, 1999 (the "Asset Coverage
Requirement"), for any two consecutive Business Days."
(c) Advance Percentage for Cash. The advance
percentage for "Cash and Equivalents" as noted under the column
designated "Advance %" on both Schedule III and Schedule IV of
the Credit Agreement is increased from 100% to 115%; accordingly
Schedule III and Schedule IV of the Credit Agreement are hereby
amended to reflect 115% as the Advance % for Cash and
Equivalents.
2. Pricing Increase. (a) From and after the effective
date hereof, the LIBOR Margins and the Letter of Credit Fee
percentages shall increase from those originally set forth in
Schedule II to the Credit Agreement to those set forth in the new
Schedule II attached as Exhibit A to this Modification Agreement,
and the Schedule II attached to the Credit Agreement shall be
modified, restated and replaced in its entirety by the Schedule
II attached hereto as Exhibit A.
(b) From and after the effective date hereof, the
Variable Rate shall increase from that set forth in the Credit
Agreement; accordingly, the definition of Variable Rate in the
Credit Agreement is hereby amended to read in its entirety as
follows:
"Variable Rate" means a fluctuating rate of
interest equal to the sum of the Base Rate
plus .625%; provided, however, that at any
time that the ratio of the Asset Coverage
Values to the aggregate outstanding balance
of the Revolving Credit Facility (including
Swingline Advances and Competitive Bid
Loans), the Term Facility and the Letter of
Credit Exposure is less than 1.4 to 1.0, as
indicated in a monthly report calculating the
Asset Coverage Requirement delivered to
Administrative Agent pursuant to
Section 7.1(f) , the Variable Rate shall be
increased by 37.5 basis points (such that it
equals the sum of the Base Rate plus 1.00%)
upon Administrative Agent's receipt of such
report until such time as Borrower delivers
to Administrative Agent a subsequent monthly
report calculating the Asset Coverage
Requirement, as required under
Section 7.1(f), showing that such ratio is
equal to or greater than 1.4 to 1.0.
3. SBA Loans. Notwithstanding anything to the contrary
contained in the Credit Agreement or any of the Security
Documents (including without limitation the Collateral Assignment
and the Security Agreement), the Collateral shall not include
loans ("SBA Guaranteed Loans") that are originated or held by
AMRESCO Independence Funding, Inc. (or another Subsidiary of
Borrower licensed to originate or hold SBA guaranteed loans,
subject to Administrative Agent's prior written approval of any
such other Subsidiary) for which the Small Business
Administration (the "SBA") has issued or is to issue a guaranty
for a portion of any such loan pursuant to an agreement between
AMRESCO Independence Funding, Inc. (or such other Subsidiary
licensed to originate or hold SBA guaranteed loans and so
approved by Administrative Agent) and the SBA (an "SBA Lender
Agreement"), the SBA loan customer lists, the servicing rights
and other general intangibles related to such SBA Guaranteed
Loans or the collection or servicing thereof (excluding deposit
accounts not containing any payments on account of or other
proceeds of SBA Guaranteed Loans or the collection or servicing
thereof), and computer hardware and software related to and
utilized in the servicing solely of such SBA Guaranteed Loans and
other SBA Lender Agreement Assets (as hereinafter defined), or
any proceeds or products of such SBA Guaranteed Loans or other
items for which the applicable SBA Lender Agreement prohibits
assignment thereof, including without limitation retained
interests in SBA Guaranteed Loans or securitizations thereof,
collection accounts and other cash deposit accounts related to
such SBA Guaranteed Loans, and real property acquired by
foreclosure of such SBA Guaranteed Loans (collectively "SBA
Lender Agreement Assets"), and such SBA Guaranteed Loans and
related SBA Lender Agreement Assets shall not be included in the
definitions of Collateral or Assigned Loans. Administrative
Agent and Lenders agree that all such SBA Guaranteed Loans and
related SBA Lender Agreement Assets are and shall be deemed
excluded as Collateral under the Loan Documents and shall not be
covered by or subject to the Security Agreement or the Collateral
Assignment or the financing statements executed by AMRESCO
Independence Funding, Inc. or any such other Subsidiary that
originates or holds SBA Guaranteed Loans as approved by
Administrative Agent.
4. Treasury Stock Purchase. Borrower agrees that,
notwithstanding anything to the contrary in the Credit Agreement
(including without limitation the provisions of Section 8.19
thereof), Borrower shall not purchase any of its stock or other
equity securities whatsoever at any time during the period
commencing on December 1, 1998 through and including February 28,
1999. Any such purchase from and after March 1, 1999 shall
remain subject in all respects to the terms and conditions of the
Credit Agreement, including without limitation Section 8.19
thereof.
5. Definition of Loan Documents. The definition of "Loan
Documents", as defined in the Credit Agreement and as used in the
Credit Agreement, the other Loan Documents and herein, shall be,
and is hereby, modified to include this Modification Agreement
and any and all documents executed in connection herewith.
6. Conditions Precedent to this Modification Agreement.
As conditions precedent to this Modification Agreement and the
modifications to the Credit Agreement pursuant hereto, all of the
following shall have been satisfied:
(a) Borrower and the Guarantors shall have executed
and delivered to Administrative Agent this Modification
Agreement;
(b) Borrower shall have delivered to Administrative
Agent all corporate resolutions, consents, powers of attorney,
certificates or documents as Administrative Agent may request
relating to (i) the existence of Borrower, and (ii) the corporate
and partnership authority for the execution and validity of this
Modification Agreement, together with all other documents,
instruments and agreements and any other matters relevant hereto
or thereto, all in form and content satisfactory to
Administrative Agent;
(c) Borrower shall have paid all applicable amendment
and other fees as agreed in connection with this Modification
Agreement.
7. Reaffirmation of Debt and Liens. Borrower acknowledges
and agrees that it is well and truly indebted to Lenders pursuant
to the terms of the Notes, the Credit Agreement and the other
Loan Documents, as modified hereby, and that all liens and
security interests securing the Obligations are and remain in
full force and effect.
8. Ratification. Except as otherwise expressly modified
by this Modification Agreement, all terms and provisions of the
Credit Agreement (as previously modified), the Notes, and the
other Loan Documents shall remain unchanged and hereby are
ratified and confirmed and shall be and shall remain in full
force and effect, enforceable in accordance with their terms.
9. Payment of Expenses. Borrower shall pay to
Administrative Agent, on behalf of the Lenders, upon demand, the
reasonable attorneys' fees and expenses of Administrative Agent's
counsel and all filing and recording fees and other reasonable
expenses incurred by Administrative Agent in connection with this
Modification Agreement.
10. Further Assurances. Borrower shall execute and deliver
to Administrative Agent such other documents as may be necessary
or as may be required, in the opinion of counsel to
Administrative Agent, to effect the transactions contemplated
hereby and to protect the Lenders' liens and security interests.
11. Binding Agreement. This Modification Agreement shall
be binding upon, and shall inure to the benefit of, the parties
and their respective heirs, representatives, successors and
assigns.
12. Enforceability. In the event the enforceability or
validity of any portion of this Modification Agreement, the
Credit Agreement, the Notes, or any of the other Loan Documents
is challenged or questioned, such provision shall be construed in
accordance with, and shall be governed by, whichever applicable
federal or New York law would uphold or would enforce such
challenged or questioned provision.
13. Choice of Law. THIS MODIFICATION AGREEMENT AND THE
OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE
EXTENT FEDERAL LAWS PREEMPT THE LAWS OF THE STATE OF NEW YORK.
14. Counterparts. This Modification Agreement may be
executed in multiple counterparts, all of which are identical,
each of which shall be deemed an original, and all of which
counterparts together shall constitute one and the same
instrument.
15. Entire Agreement. This Modification Agreement, the
Credit Agreement and the Notes, together with the other Loan
Documents, contain the entire agreements between the parties
relating to the subject matter hereof and thereof and all prior
agreements relative thereto which are not contained herein or
therein are terminated.
THIS MODIFICATION AGREEMENT AND THE OTHER WRITTEN
INSTRUMENTS, AGREEMENTS AND DOCUMENTS EXECUTED IN CONNECTION WITH
THIS MODIFICATION AGREEMENT, AND THE CREDIT AGREEMENT, THE NOTES,
AND THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
IN WITNESS WHEREOF, this Agreement is executed effective as
of the date first written above.
BORROWER:
AMRESCO, INC., a Delaware corporation
By:
Thomas J. Andrus,
Vice President and Treasurer
ADMINISTRATIVE AGENT:
NATIONSBANK, N.A.,
a national banking association, as Administrative
Agent for the Lenders
By:
Elizabeth Kurilecz,
Senior Vice President
ACKNOWLEDGED AND AGREED TO as of the
30th day of November, 1998, by:
GUARANTORS:
AFC EQUITIES, INC.
AFC EQUITIES MANAGEMENT, INC.
ALPINE, INC.
AMREIT HOLDINGS, INC.
AMREIT MANAGERS GP, INC.
AMRESCO ATLANTA INDUSTRIAL, INC.
AMRESCO BUILDERS GROUP, INC.
AMRESCO CAPITAL CONDUIT CORPORATION
AMRESCO CAPITAL LIMITED, INC.
AMRESCO CAPITAL, L.P.
AMRESCO CMF, INC.
AMRESCO COMMERCIAL FINANCE, INC.
AMRESCO CONSOLIDATION CORP.
AMRESCO EQUITY INVESTMENTS, INC.
AMRESCO EQUITY INVESTMENTS II, INC.
AMRESCO FINANCE AMERICA CORPORATION
AMRESCO FINANCIAL I, INC.
AMRESCO FINANCIAL I, L.P.
AMRESCO FUNDING CORPORATION
AMRESCO FUNDING OF GEORGIA, L.P.
AMRESCO FUNDING INVESTORS, INC.
AMRESCO FUNDING MANAGEMENT, INC.
AMRESCO FUNDING MID-ATLANTIC, INC.
AMRESCO FUNDING PACIFIC, INC.
AMRESCO INDEPENDENCE FUNDING, INC.
AMRESCO INSTITUTIONAL, INC.
AMRESCO INVESTMENTS, INC.
AMRESCO MANAGEMENT, INC.
AMRESCO MBS II, INC.
AMRESCO MORTGAGE CAPITAL LIMITED-I, INC.
AMRESCO MORTGAGE SERVICES LIMITED, INC.
AMRESCO NEW ENGLAND, L.P.
AMRESCO NEW ENGLAND II, L.P.
AMRESCO NEW ENGLAND, INC.
AMRESCO NEW ENGLAND II, INC.
AMRESCO NEW HAMPSHIRE, INC.
AMRESCO NEW HAMPSHIRE, L.P.
AMRESCO OVERSEAS, INC.
AMRESCO PORTFOLIO INVESTMENTS, INC.
AMRESCO PRINCIPAL MANAGERS I, INC.
AMRESCO PRINCIPAL MANAGERS II, INC.
AMRESCO RESIDENTIAL CAPITAL MARKETS, INC.
AMRESCO RESIDENTIAL CREDIT CORPORATION
AMRESCO RESIDENTIAL MORTGAGE CORPORATION
AMRESCO RESIDENTIAL PROPERTIES, INC.
AMRESCO RHODE ISLAND, INC.
AMRESCO SERVICES, L.P.
AMRESCO VENTURES, INC.
AMRESCO 1994-N2, INC.
AMRESCO TEXAS, INC.
ASSET MANAGEMENT RESOLUTION COMPANY
BEI 1992 - N1, INC.
BEI 1993 - N3, INC.
BEI 1994 - N1, INC.
BEI MULTI-POOL, INC.
BEI PORTFOLIO INVESTMENTS, INC.
BEI PORTFOLIO MANAGERS, INC.
BEI REAL ESTATE SERVICES, INC.
BEI SANJAC, INC.
COMMONWEALTH TRUST DEED SERVICES, INC.
ENT MIDWEST, INC.
ENT NEW JERSEY, INC.
ENT SOUTHERN CALIFORNIA, INC.
EXPRESS FUNDING, INC.
FINANCE AMERICA CORPORATION
GRANITE EQUITIES, INC.
HOLLIDAY FENOGLIO FOWLER, L.P.
LIFETIME HOMES, INC.
MARKETING SOLUTION PUBLICATIONS, INC.
MORTGAGE INVESTORS CORPORATION
OAK CLIFF FINANCIAL, INC.
PRESTON HOLLOW ASSET HOLDINGS, INC.
QUALITY FUNDING, INC.
SAVE-MORE INSURANCE SERVICES INC.
WHITEROCK INVESTMENTS, INC.
By: AMRESCO, INC., a Delaware corporation, as
agent and attorney-in-fact
By:
Thomas J. Andrus,
Vice President and Treasurer
EXHIBIT A
SCHEDULE II
COMMITMENT FEE PERCENTAGE; LIBOR MARGIN; LETTER OF CREDIT FEES
Ratio of Total
Consolidated Debt
Less Outstanding Commitment Letter of
Balance of Warehouse LIBOR Credit Fee
TIERS Lines to Borrower's Margin** Fee Percentages**
Consolidated Net
Worth* Percentages
I Greater than or (a) 237.5 b.p. (c) 37.5 b.p. 237.5 b.p
equal to 2.50X (b) 337.5 b.p. (d) 35.0 b.p.
II Greater than or (a) 212.5 b.p. (c) 25.0 b.p. 212.5 b.p
equal to 1.50X but (b) 312.5 b.p. (d) 22.5 b.p.
less than 2.50X
III Greater than or (a) 200.0 b.p. (c) 25.0 b.p. 200.0 b.p
equal to 1.00X but (b) 300.0 b.p. (d) 22.5 b.p.
less than 1.50X
IV Less than 1.00X (a) 187.5 b.p. (c) 25.0 b.p. 187.5 b.p
(b) 287.5 b.p. (d) 22.5 b.p.
(a) - The LIBOR Margin for the Revolving Credit Facility.
(b) - The LIBOR Margin for the Term Facility.
(c) - The Commitment Fee for the Long Term Revolving Facility
(d) - The Commitment Fee for the Short Term Revolving Facility
* - The calculation of the applicable ratio of Total
Consolidated Debt less outstanding balance of Warehouse
Lines to Borrower's Consolidated Net Worth shall be
made and effective on the first day of the calendar
month in which Administrative Agent receives the
quarterly financial statements and related officer's
certificate required to be delivered by Borrower
pursuant to Section 7.2 (b) and (c) showing that such
adjustment is appropriate (except that with respect to
any Adjusted LIBOR Rate or Competitive Bid Loan then in
effect, such change shall occur at the end of the
applicable Interest Period or maturity as to the
related Advance, LIBOR Rate Portion or Competitive Bid
Loan),
** - Should Borrower receive an Investment Grade rating on
its senior unsecured long term debt from both Standard
& Poor's Ratings Group (a Division of McGraw - Hill,
Inc.) and Moody's Investors Service, Inc., the LIBOR
Margin and Letter of Credit Fee Percentages shall be
reduced by 25 basis points
- At any time that the ratio of the Asset Coverage Values
to the aggregate outstanding balance of the Revolving
Credit Facility (including Swingline Advances and
Competitive Bid Loans), the Term Facility and the
Letter of Credit Exposure is less than 1.4 to 1.0, as
indicated in a monthly report calculating the Asset
Coverage Requirement delivered to Administrative Agent
pursuant to Section 7.1(f) of the Credit Agreement,
each LIBOR Margin shall be increased by 37.5 basis
points upon Administrative Agent's receipt of such
report until such time as Borrower delivers to
Administrative Agent a subsequent monthly report
calculating the Asset Coverage Requirement, as required
under Section 7.1(f) of the Credit Agreement, showing
that such ratio is equal to or greater than 1.4 to 1.0.
THIRD MODIFICATION OF CREDIT AGREEMENT
AND CONSENT
THIS THIRD MODIFICATION OF CREDIT AGREEMENT AND CONSENT
(this "Modification Agreement") is entered into as of
February 28, 1999, by and between AMRESCO, INC., a Delaware
corporation ("Borrower"), and NationsBank, N.A., a national
banking association, as Administrative Agent ("Administrative
Agent"), for and on behalf of the Lenders (defined below).
W I T N E S S E T H:
WHEREAS, reference is made to the credit facilities made
pursuant to and governed by that certain Credit Agreement (as
amended, the "Credit Agreement") dated as of August 12, 1998,
executed by and among Borrower, Administrative Agent, Credit
Suisse First Boston, as Syndication Agent, and the financial
institutions, funds and other entities from time to time
designated as "Lenders" therein (the "Lenders"), as amended by
(i) First Modification of Credit Agreement (the "First
Modification") dated as of September 17, 1998, and (ii) Second
Modification of Credit Agreement (the "Second Modification")
dated as of November 30, 1998 (each capitalized term used but not
otherwise defined herein shall be defined as set forth in the
Credit Agreement); and
WHEREAS, Borrower has requested certain consents and
modifications to the Credit Agreement; and
WHEREAS, the Lenders, acting through Administrative Agent
pursuant to the Credit Agreement, have agreed to the requested
modifications, subject to and upon the terms and conditions
contained herein.
NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS, That, for
and in consideration of the terms and conditions contained herein
and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Administrative
Agent, for and on behalf of the Lenders, and Borrower hereby
agree as follows:
1. Definitions. (a) The following definitions shall be
inserted in alphabetical order in Section 1.1 of the Credit
Agreement.
(i) AMRESCO Pendragon Entity means AMRESCO Equity
Investments, Inc., a Subsidiary of Borrower that is currently the
holder of 490 shares of Series A common stock of Pendragon Corp.,
and that is now and will be the holder of any common and
preferred stock of, or other equity interests in, Pendragon Corp.
owned at any time by Borrower or any of its Subsidiaries.
(ii) Asset Coverage Ratio means the ratio of the Asset
Coverage Values to the aggregate outstanding balance of the
Revolving Credit Facility (including Swingline Advances and
Competitive Bid Loans), the Term Facility and the Letter of
Credit Exposure.
(iii) Asset Coverage Variance Fee means the fee
payable by Borrower to Lenders at such time or times that the
Asset Coverage Ratio is less than 1.20 to 1.00, as described in
and pursuant to Section 4 of the Third Modification of Credit
Agreement and Consent.
(iv) Fixed Payment Ratio means as to Borrower (on a
consolidated basis), for any date of determination, the ratio of
(a) the sum of consolidated net income of Borrower and its
Subsidiaries before taxes, plus depreciation and amortization
(determined in accordance with GAAP), less any non-cash gains
resulting from securitization transactions by or through
Borrower's home equity lending line of business (to the extent
included in the computation of consolidated net income), plus the
amount of any proceeds (less reasonable and customary transaction
costs) received by Borrower or its Subsidiaries from the issuance
of any additional shares of stock or other equity interests from
and after January 1, 1999, to (b) the aggregate amount, without
duplication, of all payments by Borrower (or any Subsidiary or
Affiliate of Borrower) to prepay outstanding amounts under the
Senior Notes.
(v) MIC means Mortgage Investors Corporation, an Ohio
corporation.
(vi) MIC Merger Agreement means the Agreement and Plan
of Merger described in the definition of MIC Convertible Debt.
(vii) NIM Intermediate Trust Subsidiary means the
Delaware business trust to be formed in connection with the NIM
Transaction and to be the holder of 100% of the beneficial
interest in the NIM Issuing Trust Subsidiary.
(viii) NIM Issuing Trust Subsidiary means AMRESCO
Securitized Net Interest Margin Trust 1999-1, a Delaware business
trust to be formed in connection with the NIM Transaction.
(ix) NIM Subsidiaries means the NIM Intermediate Trust
Subsidiary and the NIM Issuing Trust Subsidiary.
(x) NIM Transaction means the transaction comprised of
the establishment of the NIM Subsidiaries, the transfer of the
Residual Assets Certificates to the NIM Subsidiaries (and release
thereof from the Lenders' liens), and the permitted investments
in the NIM Subsidiaries, subject to and in accordance with
Section 9 of the Third Modification Agreement.
(xi) Pendragon Corp. means Pendragon Real Estate
Corporation, a Delaware corporation, having AMRESCO Pendragon
Entity and Shell Pensions Trust Limited as its sole shareholders.
(xii) Residual Assets Certificates means those
certificates described on Exhibit A hereto evidencing the
Retained Residential Residual Interests to be transferred to the
NIM Intermediate Trust Subsidiary, and subsequently transferred
to the NIM Issuing Trust Subsidiary.
(xiii) Retained Residential Residual Interests means
the Retained Residential Residual Interests, as shown on
Borrower's consolidated balance sheet, owned by Borrower or any
Subsidiary of Borrower.
(xiv) Senior Notes means the Senior Notes, Series
1996-A due 1999, issued pursuant to the Senior Notes Indenture
dated as of July 1, 1996, between Borrower and Comerica Bank, as
Trustee, and the related Officer's Certificate and Company Order
dated as of July 19, 1996, in the aggregate principal amount of
$57,500,000.
(b) The following definitions set forth in Section 1.1 of
the Credit Agreement shall be amended and modified as follows:
(i) Consolidated EBITDA. The definition of
Consolidated EBITDA shall be amended to clarify that only non-
recurring gains and losses that conform to the GAAP definition of
"extraordinary" gains and losses shall be deducted for purposes
of calculating Consolidated EBITDA; accordingly, that definition
is amended to read in its entirety as follows:
"Consolidated EBITDA means, for any period,
determined in accordance with GAAP on a consolidated
basis for Borrower and its Subsidiaries, an amount
equal to (a) the sum of consolidated net income before
taxes and extraordinary gains or losses (as determined
in accordance with GAAP), plus depreciation, plus
amortization, plus interest expense, each as deducted
in determining such consolidated net income before
taxes less (b) write downs of retained interests in
securitizations (which includes, without limitation,
interest only strips, servicing rights and other
similar assets) for prior years to the extent prior
year financial statements are restated in the period of
determination to reflect such write downs and such
write downs are not included in calculating net income
for the period of determination; provided, however,
that for all purposes hereunder, the losses related to
the commercial mortgage banking and home equity lending
activities of Borrower and its Subsidiaries (in an
aggregate amount not to exceed $220,500,000) that were
reported in the year-end 1998 Financial Statements of
Borrower shall not be included in calculating
Consolidated EBITDA."
(ii) Eligible Assignee. To provide Borrower approval
rights with respect to an assignee of a Lender under the Credit
Agreement, the definition of Eligible Assignee shall be amended
to read in its entirety as follows:
"Eligible Assignee means (a) a Lender; (b) an
Affiliate of a Lender; (c) a Related Fund of any
Lender; and (d) any other Person approved by the
Administrative Agent and by Borrower (which approval
shall not be unreasonably withheld or delayed and, with
respect to Borrower, shall not be required after the
occurrence of a Default or an Event of Default);
provided, however, that none of Borrower, Guarantors
nor any Affiliate of Borrower or any of the Guarantors
shall qualify as an Eligible Assignee."
(iii) Required Lenders. The definition of
"Required Lenders" shall be amended to delete the requirement of
a unanimous vote by all Lenders to effect an increase in the
Applicable Rate for either Credit Facility. Accordingly,
subsection (vii) of section (a) of the definition of "Required
Lenders" is hereby deleted.
2. Covenant Amendments. The following amendments are made
to the referenced covenants contained in the Credit Agreement:
(a) Monthly Asset Coverage Requirements Reports. The time
limit for delivery of the monthly Asset Coverage Requirement
reports shall be extended from fifteen (15) days to twenty (20)
days. Accordingly, Section 7.1(f) of the Credit Agreement is
amended to read in its entirety as follows:
"(f) Within twenty (20) days after the end of each
calendar month, a report in form as attached hereto as
Schedule IV and certified by an Authorized Officer as
being true and correct calculating the Asset Coverage
Requirement, together with such additional information
related thereto as Administrative Agent shall require."
(b) Minimum Consolidated Net Worth: Section 8.1 is hereby
amended to read in its entirety as follows:
"Section 8.1. Minimum Consolidated Tangible Net
Worth . Borrower shall not permit Consolidated
Tangible Net Worth to be less than (a) $285,000,000
during the period from December 31, 1998, to the date
on which the goodwill attributable to the payments to
be made by Borrower in connection with the MIC
transaction must be reflected in the financial
statements of Borrower prepared in accordance with GAAP
(the "Recognition Date"), (b) $190,000,000 from the
Recognition Date through June 30, 1999, and (c) from
and after July 1, 1999, an amount equal to the sum of
the greater of (i) $200,000,000 or (ii) 85% of actual
Consolidated Tangible Net Worth on June 30, 1999, plus
(A) eighty-five percent (85%) of the cumulative
Consolidated Net Income for each calendar quarter
commencing on July 1, 1999, through the quarter ending
immediately prior to, or on, the date as of which
compliance with this covenant is being measured, plus
(B) ninety percent (90%) of the amount of any proceeds
(less reasonable and customary transaction costs)
received by Borrower or its Subsidiaries from the
issuance of any additional shares of stock or other
equity interests from and after July 1, 1999."
(c) Interest/Dividend Coverage Ratio. Section 8.3 of the
Credit Agreement is amended to read in its entirety as follows:
"Section 8.3. Interest/Dividend Coverage Ratio.
Borrower shall not permit the Interest/Dividend
Coverage Ratio to be less than (i) 1.50 to 1.00 from
the Closing Date through December 30, 1999, and (ii)
1.75 to 1.00 from and after December 31, 1999."
(d) Asset Coverage Requirement: Section 8.4 of the Credit
Agreement is hereby amended to read in its entirety as follows:
"Section 8.4. Capital Adequacy; Asset Coverage.
Borrower shall not permit an amount equal to Total
Consolidated Debt less fifty percent (50%) of the face
value of all Approved Subordinated Debt as of the last
day of any fiscal quarter of Borrower to exceed the
Adjusted Asset Amount at such time. In addition,
Borrower shall not permit the Asset Coverage Ratio to
be less than 1.20 to 1.00 (the "Asset Coverage
Requirement"); provided, however, that Borrower shall
not be in violation of the Asset Coverage Requirement
if for no more than two months in any twelve month
period (which two months cannot be consecutive months),
the Asset Coverage Ratio is less than 1.20 to 1.00, but
is greater than 1.00 to 1.00, and Borrower has paid the
applicable Asset Coverage Variance Fee due to any such
occurrence."
(e) Investments. Section 8.9(c) (prior to clause (i)
thereof), Section 8.9 (d) and Section 8.9(e) are amended to read
in their entirety as follows:
"(c) Investments in Excluded Subsidiaries so long
as (x) in the case of Excluded Subsidiaries other than
the NIM Subsidiaries, the aggregate amount of such
Investments does not exceed $200,000,000, of which
$50,000,000 shall be allocated for and used only in
association with the refinancing of existing
indebtedness provided by Persons other than the Lenders
whereby bankruptcy remote or similar vehicles properly
designated by Borrower as Excluded Subsidiaries are
utilized, and of which $70,000,000 shall be allocated
for and used only in the normal course of business in
support of financing and securitization activities of
the commercial finance activities of Borrower and its
Subsidiaries (as such sublimits may be adjusted from
time to time by Administrative Agent in its sole and
absolute discretion after receipt and review of all
information and documents required by Administrative
Agent in connection with any such adjustment requested
by Borrower), and (y) in the case of the Excluded
Subsidiaries that are the NIM Subsidiaries, so long as
the aggregate amount of such Investments does not
exceed $170,000,000; provided, however, that if the
following requirements with respect to a particular
Excluded Subsidiary are met in Administrative Agent's
determination in its sole and absolute discretion, then
Investments in such Excluded Subsidiary shall not be
included for purposes of calculating the foregoing
limitation:"
"(d) Investments by Borrower and the Guarantors in
Foreign Subsidiaries, so long as the aggregate amount
of such Investments (at original cost) does not exceed
$200,000,000;"
"(e) Loans to any employees of Borrower or any
Subsidiary of Borrower (i) to facilitate relocations, (ii)
who are the former shareholders of MIC, in an aggregate
amount not to exceed $17,000,000, evidenced by promissory
notes that are due and payable in full on or before
September 30, 1999, and are in form and content acceptable
to Administrative Agent, and with respect to which such
loans Borrower or any Subsidiary of Borrower is entitled to
an offset under the MIC Merger Agreement, and (iii) in
addition to those permitted above, so long as the aggregate
of such loans pursuant to this clause (iii) does not exceed
$1,500,000."
(f) Minimum Fixed Payment Ratio. There shall be added a
new Section 8.20 to the Credit Agreement that shall read in its
entirety as follows:
"Section 8.20. Certain Payment Limitations.
Borrower shall not make or permit its Subsidiaries to
make any prepayment on the Senior Notes if at the time
of such prepayment, or as a result thereof, the Fixed
Payment Ratio shall be less than 1.00 to 1.00. For
purposes of determining compliance with this Section
8.20, the Fixed Payment Ratio shall be calculated on a
rolling four quarters basis, commencing on January 1,
1999, or such applicable shorter period until four
quarters have elapsed since January 1, 1999."
3. Pricing. The revised LIBOR Margins, Variable Rate and
Letter of Credit Fee percentages set forth in the Second
Modification shall remain in effect from and after the date
hereof. Attached as Exhibit B to this Modification Agreement is
a new Schedule II to more clearly reflect the applicable tiers of
the LIBOR Margin and Letter of Credit Fee percentages; and the
Schedule II attached to the Credit Agreement (as modified and
replaced in the Second Modification) shall be modified, restated
and replaced in its entirety by the Schedule II attached hereto
as Exhibit B.
4. Asset Coverage Variance Fee. At any time that the
Asset Coverage Ratio is less than 1.20 to 1.00, as indicated in a
monthly report calculating the Asset Coverage Requirement
delivered to Administrative Agent pursuant to Section 7.1(f) of
the Credit Agreement, Borrower shall pay to Administrative Agent,
for the ratable benefit of the Lenders, a fee (the "Asset
Coverage Variance Fee") in an amount equal to the product of
.125% per annum times the aggregate principal amount from day to
day outstanding on the Revolving Credit Facility and the Term
Facility for each day during the period from Administrative
Agent's receipt of such report until such time as Borrower
delivers to Administrative Agent a subsequent monthly report
calculating the Asset Coverage Requirement, as required under
Section 7.1(f), showing that the Asset Coverage Ratio is equal to
or greater than 1.20 to 1.00. Any unpaid Asset Coverage Variance
Fee shall be due and payable on the same dates as interest is due
under the Revolving Notes (but in addition to any other payments
due on such dates). The Asset Coverage Variance Fee shall be
part of the Obligations under and as defined in the Credit
Agreement for all purposes, and nonpayment thereof shall be an
Event of Default under Section 9.1(a) of the Credit Agreement.
5. Revolving Credit Facility Advances. Due to funding
requirements and fluctuations on Alternate Currency Advances, the
penultimate sentence of Section 2.1(a) of the Credit Agreement is
amended to read as follows:
"Advances shall be made under the Short Term
Revolving Facility only after and so long as the Long
Term Revolving Facility is fully funded, except for an
amount under the Long Term Revolving Facility not to
exceed $10,000,000 that may be reserved in
Administrative Agent's sole discretion (but which is
available for advance after advancing under the Short
Term Revolving Facility) for fundings or fluctuations
in Alternate Currency Advances."
6. Inspections. To make clear that Administrative Agent,
in such capacity, is not limited in its inspection rights, the
proviso at the end of the first sentence of Section 7.3 of the
Credit Agreement is amended to read as follows:
"provided, that, prior to the occurrence of a Default,
each Lender (but not including Administrative Agent), will
make no more than two such visits or inspections in any
twelve month period."
7. Assignments. Sections 11.10(a)(iv) and 11.10(c) of the
Credit Agreement are amended to read in their entirety as
follows:
"(iv) the parties to such assignment
shall execute and deliver to Administrative Agent for
its acceptance, with a copy to Borrower, an Assignment
and Acceptance in the form of Exhibit D hereto,
together with any Note subject to such assignment and a
processing fee of $3,500 and payment of all legal fees
and expenses incurred by Administrative Agent with
respect to such assignment."
"(c) Upon its receipt of an Assignment and
Acceptance executed by the parties thereto, together
with any Note subject to such assignment and payment of
the processing fee and the legal fees and expenses of
Administrative Agent, Administrative Agent shall, if
such Assignment and Acceptance has been completed and
is in substantially the form of Exhibit D hereto, (i)
accept such Assignment and Acceptance, (ii) record the
information contained therein in the Register and (iii)
give prompt notice thereof to the parties thereto."
8. Pendragon Asset Transfer and Release. In accordance
with Section 5.7 of the Credit Agreement, Administrative Agent
and the Lenders hereby agree that certain asset management assets
of the AMRESCO Pendragon Entity, with an aggregate book value not
to exceed $25,000,000, may be contributed to Pendragon Corp., and
Administrative Agent will release the Lenders' Liens with respect
to such transferred assets, provided that (a) all capital stock
of Pendragon Corp. (both common and preferred) owned by the
AMRESCO Pendragon Entity or any Subsidiary of Borrower, and all
of the equity interests in the AMRESCO Pendragon Entity, are
pledged to Administrative Agent, for the benefit of Lenders, on
terms acceptable to Administrative Agent, and (b) Administrative
Agent has received copies of and approved the terms of all
documents evidencing the transaction contemplated by the
referenced agreement with Pendragon Corp.
9. NIM Transaction. As a condition to the Lenders'
approval of the NIM Transaction and the amendments to Section
8.9(c) of the Credit Agreement related to investments in the NIM
Subsidiaries, Borrower represents, warrants and agrees with the
Lenders that (a) the NIM Intermediate Trust Subsidiary will be a
Delaware business trust, (b) 100% of the beneficial interests in
the NIM Intermediate Trust Subsidiary will be held by AMRESCO
Residential Capital Markets, Inc. ("ARCMI"), a wholly-owned
Subsidiary of Borrower, (c) the NIM Intermediate Trust Subsidiary
will be formed as an intermediate trust, which trust shall be a
special purpose "bankruptcy remote" entity that has assets
consisting solely of certificates evidencing interests in the NIM
Issuing Trust Subsidiary, including all or a portion of the rated
notes issued by the NIM Issuing Trust Subsidiary, (d) 100% of the
beneficial interests in the NIM Issuing Trust Subsidiary will be
held by the NIM Intermediate Trust Subsidiary, and the sole
purpose of the NIM Issuing Trust Subsidiary will be to issue a
series of rated notes secured by the Residual Assets
Certificates, and (e) neither of the NIM Subsidiaries shall have
any liabilities (including without limitation, federal income tax
liabilities), except for certain liabilities of the NIM Issuing
Trust Subsidiary that are expressly set forth in the trust
indenture governing the NIM Issuing Trust Subsidiary, subject to
Administrative Agent's prior approval (not to be unreasonably
withheld) of the terms of such trust indenture and the specific
terms of any of the liabilities incurred as permitted thereunder.
ARCMI's 100% beneficial ownership certificate in the NIM
Intermediate Trust Subsidiary shall be pledged to Administrative
Agent for the benefit of the Lenders, on terms and subject to
documentation acceptable to Administrative Agent in its sole
discretion, and the NIM Intermediate Trust Subsidiary and the NIM
Issuing Trust Subsidiary shall be Excluded Subsidiaries (as
indicated on the replacement Schedule V to the Credit Agreement
attached hereto as Exhibit E).
10. Treasury Stock Purchase. Notwithstanding anything to
the contrary in the Credit Agreement (including without
limitation the provisions of Section 8.19 thereof), Borrower
shall not purchase any of its stock or other equity interests so
long as any of the Obligations remain unpaid.
11. Prepayment of Senior Notes. Notwithstanding anything
in the Credit Agreement to the contrary, Borrower shall be
entitled to prepay the Senior Notes, in a maximum principal
amount of $57,500,000, provided that at the time of such
prepayment (a) Borrower shall be in compliance with new Section
8.20 of the Credit Agreement (as amended hereby), (b) there shall
not have occurred a Default or Event of Default, and (c) Borrower
shall have delivered written notice to Administrative Agent of
such prepayment.
12. Interest Rate Buy-Downs. Notwithstanding anything
contained in the Credit Agreement or any of the other Loan
Documents, Borrower and any individual Lender (as used in this
Section 12, a "Buy-Down Lender") may enter into an agreement (a
"Buy-Down Agreement") with respect to all or a portion of the
Revolving Commitment and/or the Term Facility held by such Buy-
Down Lender, pursuant to which Buy-Down Agreement the interest
otherwise payable by Borrower to such Buy-Down Lender during any
interest calculation period shall be reduced based on the amount
of certain deposits ("Available Deposits") maintained by Borrower
with such Buy-Down Lender or its Affiliates. Borrower shall give
Administrative Agent prompt written notice of any Buy-Down
Agreement immediately upon execution thereof. Prior to the
occurrence of an Event of Default and acceleration of the
Obligations (upon which acceleration any Buy-Down Agreement shall
terminate), any Buy-Down Lender shall invoice Borrower directly
for all interest accrued and payable to such Buy-Down Lender on
account of its Revolving Commitment and/or Term Note.
Administrative Agent, in rendering any interest charges or
billing pursuant to the Credit Agreement, shall have no
obligation to bill any interest payable to a Buy-Down Lender in
respect of its Revolving Commitment and/or Term Note, or to
verify the amount of any Available Deposits or the interest
amounts payable to any Buy-Down Lender in respect of its
Revolving Commitment and/or Term Note, including without
limitation any deficiency fees or other amounts payable to such
Buy-Down Lender by Borrower under the applicable Buy-Down
Agreement. Borrower shall pay all interest, and any deficiency
fees or other amounts payable under any Buy-Down Agreement,
directly to the applicable Buy-Down Lender as and when required
under the Buy-Down Agreement. Any Buy-Down Lender may elect not
to make demand for the payment of deficiency fees accruing in
respect of Available Deposits from time to time, and it is
expressly agreed and understood that (a) any such deficiency fees
shall not, by reason of such failure of such Buy-Down Lender or
otherwise, be deemed to have been waived by such Buy-Down Lender
(except as such waiver is expressly acknowledged in writing by
such Buy-Down Lender from time to time), and (b) all deficiency
fees accrued and unpaid hereunder and not so expressly waived,
whether or not previously declared due and owing by any such Buy-
Down Lender, shall automatically be due and payable in full upon
the Short Term Revolving Facility Termination Date, the Long Term
Revolving Facility Termination Date, or the Term Facility
Termination Date, as applicable.
13. Definition of Loan Documents. The definition of "Loan
Documents", as defined in the Credit Agreement and as used in the
Credit Agreement, the other Loan Documents and herein, shall be,
and is hereby, modified to include this Modification Agreement
and any and all documents executed in connection herewith.
14. Conditions Precedent to this Modification Agreement.
As conditions precedent to this Modification Agreement and the
modifications to the Credit Agreement pursuant hereto and the
consents granted hereunder, all of the following shall have been
satisfied:
(a) Borrower and the Guarantors (including all new
Guarantors listed on the Supplement to Credit Agreement referred
to in Section 14(d) below) shall have executed and delivered to
Administrative Agent this Modification Agreement;
(b) Borrower shall have delivered to Administrative Agent
all corporate resolutions, consents, powers of attorney,
certificates or documents as Administrative Agent may request
relating to (i) the existence of Borrower, and (ii) the corporate
and partnership authority for the execution and validity of this
Modification Agreement, together with all other documents,
instruments and agreements and any other matters relevant hereto
or thereto, all in form and content satisfactory to
Administrative Agent;
(c) Borrower shall have paid all applicable amendment and
other fees as agreed in connection with this Modification
Agreement; and
(d) Borrower shall have caused to be executed and delivered
to Administrative Agent a Supplement to the Loan Documents to add
all Subsidiaries of Borrower, other than Excluded Subsidiaries,
Foreign Subsidiaries and Investment Advisor Subsidiaries, as
Guarantors under the Guaranty Agreement, and as assigning or
pledging parties under the Collateral Assignment, the Security
Agreement and the Pledge Agreement, and Administrative Agent
shall have received all such corporate existence and authority
documentation, resolutions and other agreements, stock
certificates and other equity ownership certificates, stock
powers, financing statements, instruments and certificates as
Administrative Agent shall reasonably require with respect to
such additional Guarantors. Borrower shall also have caused to
be executed and/or delivered to Administrative Agent such
modifications to the Stock Pledge Agreement and such stock
certificates of, or other evidences of equity interests in, the
Excluded Subsidiaries (with stock powers as applicable) to
effectively evidence and perfect the Lenders' security interests
therein.
15. Reaffirmation of Debt and Liens. Borrower acknowledges
and agrees that it is well and truly indebted to the Lenders
pursuant to the terms of the Notes, the Credit Agreement and the
other Loan Documents, as modified hereby, and that all liens and
security interests securing the Obligations are and remain in
full force and effect.
16. Ratification. Except as otherwise expressly modified
by this Modification Agreement, all terms and provisions of the
Credit Agreement (as previously modified), the Notes, and the
other Loan Documents shall remain unchanged and hereby are
ratified and confirmed and shall be and shall remain in full
force and effect, enforceable in accordance with their terms.
17. Payment of Expenses. Borrower shall pay to
Administrative Agent, on behalf of the Lenders, upon demand, the
reasonable attorneys' fees and expenses of Administrative Agent's
counsel and all filing and recording fees and other reasonable
expenses incurred by Administrative Agent in connection with this
Modification Agreement.
18. Current Lenders, Guarantors and Excluded Subsidiaries.
Attached hereto as Exhibit C is a replacement Schedule I to the
Credit Agreement setting forth the names, addresses and
percentages of each of the Lenders as of the date hereof.
Attached hereto as Exhibit D is a correct and complete list of
each of the Subsidiaries of Borrower that are required to be
"Guarantors" under the Credit Agreement and related Loan
Documents as of the date hereof, indicating the initial
Guarantors that executed the Credit Agreement and the additional
Guarantors added by a Supplement to the Loan Documents. Attached
hereto as Exhibit E is a replacement Schedule V to the Credit
Agreement which lists all of the Excluded Subsidiaries as of the
date hereof.
19. Further Assurances. Borrower shall execute and deliver
to Administrative Agent such other documents as may be necessary
or as may be required, in the opinion of Administrative Agent
and/or counsel to Administrative Agent, to effect the
transactions contemplated hereby and to protect the Lenders'
Liens and security interests, and the rights and remedies of
Administrative Agent and/or the Lenders under the Loan Documents.
Specifically, and without limitation of the foregoing or anything
in Section 7.11 of the Credit Agreement, Borrower agrees to
prepare and cause to be executed and delivered by such
Subsidiaries of Borrower as Administrative Agent may designate
from time to time in its sole discretion, promissory notes
payable to Borrower evidencing the intercompany receivables of
Borrower owing by such Subsidiaries, which intercompany notes
shall be in form acceptable to Administrative Agent, and shall be
endorsed to Administrative Agent by allonge, with the originals
thereof being delivered to Administrative Agent, and shall be
subject to and covered by the Security Agreement.
20. Binding Agreement. This Modification Agreement shall
be binding upon, and shall inure to the benefit of, the parties
hereto, and the Lenders, and their respective legal
representatives, successors and assigns.
21. Enforceability. In the event the enforceability or
validity of any portion of this Modification Agreement, the
Credit Agreement, the Notes, or any of the other Loan Documents
is challenged or questioned, such provision shall be construed in
accordance with, and shall be governed by, whichever applicable
federal or New York law would uphold or would enforce such
challenged or questioned provision.
22. Choice of Law. THIS MODIFICATION AGREEMENT AND THE
OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE
EXTENT FEDERAL LAWS PREEMPT THE LAWS OF THE STATE OF NEW YORK.
23. Counterparts. This Modification Agreement may be
executed in multiple counterparts, all of which are identical,
each of which shall be deemed an original, and all of which
counterparts together shall constitute one and the same
instrument.
24. Entire Agreement. This Modification Agreement, the
Credit Agreement and the Notes, together with the other Loan
Documents, contain the entire agreements between the parties
relating to the subject matter hereof and thereof and all prior
agreements relative thereto which are not contained herein or
therein are terminated.
THIS MODIFICATION AGREEMENT AND THE OTHER WRITTEN
INSTRUMENTS, AGREEMENTS AND DOCUMENTS EXECUTED IN CONNECTION WITH
THIS MODIFICATION AGREEMENT, AND THE CREDIT AGREEMENT, THE NOTES,
AND THE OTHER LOAN DOCUMENTS, REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
IN WITNESS WHEREOF, this Agreement is executed effective as
of the date first written above.
BORROWER:
AMRESCO, INC., a Delaware corporation
By:
Thomas J. Andrus,
Vice President and Treasurer
ADMINISTRATIVE AGENT:
NATIONSBANK, N.A.,
a national banking association, as Administrative
Agent for the Lenders
By:
Elizabeth Kurilecz,
Senior Vice President
ACKNOWLEDGED AND AGREED TO as of the
28th day of February, 1999, by:
GUARANTORS:
AFC EQUITIES INVESTORS, INC., f/k/a AFC EQUITIES, INC.
AFC EQUITIES MANAGEMENT, INC. ALPINE, INC.
AMREIT HOLDINGS, INC.
AMREIT MANAGERS GP, INC.
AMRESCO ATLANTA INDUSTRIAL, INC.
AMRESCO BUILDERS GROUP, INC.
AMRESCO CAPITAL CONDUIT CORPORATION
AMRESCO CAPITAL LIMITED, INC.
AMRESCO CAPITAL, L.P.
AMRESCO CMF, INC.
AMRESCO COMMERCIAL FINANCE, INC.
AMRESCO CONSOLIDATION CORP.
AMRESCO EQUITY INVESTMENTS, INC.
AMRESCO EQUITY INVESTMENTS II, INC.
AMRESCO FINANCE AMERICA CORPORATION
AMRESCO FINANCIAL I, INC.
AMRESCO FINANCIAL I, L.P.
AMRESCO FUNDING CORPORATION
AMRESCO FUNDING OF GEORGIA, L.P.
AMRESCO FUNDING INVESTORS, INC.
AMRESCO FUNDING MANAGEMENT, INC.
AMRESCO FUNDING MID-ATLANTIC, INC.
AMRESCO FUNDING PACIFIC, INC.
AMRESCO INDEPENDENCE FUNDING, INC.
AMRESCO-INSTITUTIONAL, INC.
AMRESCO INVESTMENTS, INC.
AMRESCO MANAGEMENT, INC.
AMRESCO MBS-II, INC.
AMRESCO MORTGAGE CAPITAL LIMITED-I, INC.
AMRESCO MORTGAGE SERVICES LIMITED, INC.
AMRESCO NEW ENGLAND, L.P.
AMRESCO NEW ENGLAND II, L.P.
AMRESCO NEW ENGLAND, INC.
AMRESCO NEW ENGLAND II, INC.
AMRESCO NEW HAMPSHIRE, INC.
AMRESCO NEW HAMPSHIRE, L.P.
AMRESCO OVERSEAS, INC.
AMRESCO PORTFOLIO INVESTMENTS, INC.
AMRESCO PRINCIPAL MANAGERS I, INC.
AMRESCO PRINCIPAL MANAGERS II, INC.
AMRESCO RESIDENTIAL CAPITAL MARKETS, INC.
AMRESCO RESIDENTIAL CREDIT CORPORATION
AMRESCO RESIDENTIAL MORTGAGE CORPORATION
AMRESCO RESIDENTIAL PROPERTIES, INC.
AMRESCO RHODE ISLAND, INC.
AMRESCO SERVICES, L.P.
AMRESCO VENTURES, INC.
AMRESCO 1994-N2, INC.
AMRESCO TEXAS, INC.
ASSET MANAGEMENT RESOLUTION COMPANY
BEI 1992 - N1, INC.
BEI 1993 - N3, INC.
BEI 1994 - N1, INC.
BEI MULTI-POOL, INC.
BEI PORTFOLIO INVESTMENTS, INC.
BEI PORTFOLIO MANAGERS, INC.
BEI REAL ESTATE SERVICES, INC.
BEI SANJAC, INC.
COMMONWEALTH TRUST DEED SERVICES, INC.
ENT MIDWEST, INC.
ENT NEW JERSEY, INC.
ENT SOUTHERN CALIFORNIA, INC.
EXPRESS FUNDING, INC.
FINANCE AMERICA CORPORATION
GRANITE EQUITIES, INC.
HOLLIDAY FENOGLIO FOWLER, L.P.
LIFETIME HOMES, INC.
MSPI, INC., f/k/a MARKETING SOLUTION PUBLICATIONS, INC.
MORTGAGE INVESTORS CORPORATION
OAK CLIFF FINANCIAL, INC.
PRESTON HOLLOW ASSET HOLDINGS, INC.
QUALITY FUNDING, INC.
AMRESCO INSURANCE SERVICES, INC., f/k/a
SAVE-MORE INSURANCE SERVICES, INC.
WHITE ROCK INVESTMENTS, INC.
AFC EQUITIES, L.P.
AMREIT MANAGERS, L.P.
AMRESCO-MBS I, INC.
AMRESCO MORTGAGE CAPITAL, INC.
HF ACQUISITION SUB, INC.
By: AMRESCO, INC., a Delaware corporation, as
agent and attorney-in-fact
By:
Thomas J. Andrus,
Vice President and Treasurer
EXHIBIT A
NIM CERTIFICATES
1. AMRESCO Residential Securities Corporation Mortgage Loan
Trust Series 1996-4
Class B-IO Certificate
Class R Certificate
2. AMRESCO Residential Securities Corporation Mortgage Loan
Trust Series 1996-5
Class B-IO Certificate
Class R Certificate
3. AMRESCO Residential Securities Corporation Mortgage Loan
Trust Series 1998-3
Class C-AI Certificate
Class C-FIO Certificate
Class R Certificate
(The Class D and Class S Certificate
will remain pledged)
EXHIBIT B
SCHEDULE II
COMMITMENT FEE PERCENTAGE; LIBOR MARGIN; LETTER OF CREDIT FEES
1. If the Asset Coverage Ratio is equal to or greater than 1.40
to 1.00:
Ratio of Total
Consolidated Debt
Less Outstanding Commitment Letter of
Balance of Warehouse LIBOR Credit Fee
TIERS Lines to Borrower's Margin** Fee Percentages**
Consolidated Net Percentages
Worth*
I Greater than or (a) 237.5 b.p. (c) 37.5 b.p. 237.5 b.p
equal to 2.50X (b) 337.5 b.p. (d) 35.0 b.p.
II Greater than or (a) 212.5 b.p. (c) 25.0 b.p. 212.5 b.p
equal to 1.50X but (b) 312.5 b.p. (d) 22.5 b.p.
less than 2.50X
III Greater than or (a) 200.0 b.p. (c) 25.0 b.p. 200.0 b.p
equal to 1.00X but (b) 300.0 b.p. (d) 22.5 b.p.
less than 1.50X
IV Less than 1.00X (a) 187.5 b.p. (c) 25.0 b.p. 187.5 b.p
(b) 287.5 b.p. (d) 22.5 b.p.
(a) - The LIBOR Margin for the Revolving Credit Facility.
(b) - The LIBOR Margin for the Term Facility.
(c) - The Commitment Fee for the Long Term Revolving Facility
(d) - The Commitment Fee for the Short Term Revolving Facility
* - The calculation of the applicable ratio of
Total Consolidated Debt less outstanding balance of
Warehouse Lines to Borrower's Consolidated Net Worth
shall be made and effective on the first day of the
calendar month in which Administrative Agent receives
the quarterly financial statements and related
officer's certificate required to be delivered by
Borrower pursuant to Section 7.2 (b) and (c) showing
that such adjustment is appropriate (except that with
respect to any Adjusted LIBOR Rate or Competitive Bid
Loan then in effect, such change shall occur at the end
of the applicable Interest Period or maturity as to the
related Advance, LIBOR Rate Portion or Competitive Bid
Loan),
** - Should Borrower receive an Investment Grade
rating on its senior unsecured long term debt from both
Standard & Poor's Ratings Group (a Division of McGraw -
Hill, Inc.) and Moody's Investors Service, Inc., the
LIBOR Margin and Letter of Credit Fee Percentages shall
be reduced by 25 basis points
2. If the Asset Coverage Ratio is less than 1.40 to 1.00:
Ratio of Total
Consolidated Debt
Less Outstanding Commitment Letter of
Balance of Warehouse LIBOR Credit Fee
TIERS Lines to Borrower's Margin** Fee Percentages**
Consolidated Net Percentages
Worth*
I Greater than or (a) 275.0 b.p. (c) 37.5 b.p. 275.0 b.p
equal to 2.50X (b) 337.5 b.p. (d) 35.0 b.p.
II Greater than or (a) 250.0 b.p. (c) 25.0 b.p. 250.0 b.p
equal to 1.50X but (b) 312.5 b.p. (d) 22.5 b.p.
less than 2.50X
III Greater than or (a) 237.5 b.p. (c) 25.0 b.p. 237.5 b.p
equal to 1.00X but (b) 300.0 b.p. (d) 22.5 b.p.
less than 1.50X
IV Less than 1.00X (a) 225.0 b.p. (c) 25.0 b.p. 225.0 b.p
(b) 287.5 b.p. (d) 22.5 b.p.
(a) - The LIBOR Margin for the Revolving Credit Facility.
(b) - The LIBOR Margin for the Term Facility.
(c) - The Commitment Fee for the Long Term Revolving Facility
(d) - The Commitment Fee for the Short Term Revolving Facility
* - The calculation of the applicable ratio of
Total Consolidated Debt less outstanding balance of
Warehouse Lines to Borrower's Consolidated Net Worth
shall be made and effective on the first day of the
calendar month in which Administrative Agent receives
the quarterly financial statements and related
officer's certificate required to be delivered by
Borrower pursuant to Section 7.2 (b) and (c) showing
that such adjustment is appropriate (except that with
respect to any Adjusted LIBOR Rate or Competitive Bid
Loan then in effect, such change shall occur at the end
of the applicable Interest Period or maturity as to the
related Advance, LIBOR Rate Portion or Competitive Bid
Loan),
** - Should Borrower receive an Investment Grade
rating on its senior unsecured long term debt from both
Standard & Poor's Ratings Group (a Division of McGraw -
Hill, Inc.) and Moody's Investors Service, Inc., the
LIBOR Margin and Letter of Credit Fee Percentages shall
be reduced by 25 basis points
EXHIBIT C
SCHEDULE 1
(Replacement as of February 28, 1999)
LENDERS AND BORROWER
I. LENDERS, AGENTS AND ARRANGERS
A. ADMINISTRATIVE AGENT
NationsBank, N.A.
901 Main Street, 66th Floor
Dallas, Texas 75202
Attn: Elizabeth Kurilecz
Tel: (214) 508-0975
Fax: (214) 508-0604
B. SYNDICATION AGENT
Credit Suisse First Boston
Eleven Madison Avenue, 20th Floor
New York, New York 10010-3629
Attn: Jay Chall
Tel: (212) 325-9010
Fax: (212) 325-8320
C. ARRANGERS
NationsBanc Montgomery Securities LLC
901 Main Street, 66th Floor
Dallas, Texas 75202
Attn: Gary Kahn
Tel: (214) 508-3507
Fax: (214) 325-8320
Credit Suisse First Boston
Eleven Madison Avenue, 20th Floor
New York, New York 10010-3629
Attn: Jay Chall
Tel: (212) 325-9010
Fax: (212) 325-8320
C. REVOLVING LENDERS:
NationsBank, N.A.
901 Main Street, 66th Floor
Dallas, Texas 75202
Attn: Elizabeth Kurilecz
Tel: (214) 508-0975
Fax: (214) 508-0604
Bank One, Texas, NA
1717 Main Street, 4th Floor
Dallas, Texas 75201
Attn: Kristin Blanchard
Tel: (214) 290-3028
Fax: (214) 290-2054
Bank United
3200 S.W. Freeway
Suite 2422
Houston, TX 77027
Attn: Deborah A. Bourque
Tel: (713) 543-6397
Fax: (713) 543-6022
Comerica Bank - Texas
8828 Stemmons, Suite 441
Dallas, Texas 75247
Attn: David Terry
Tel: (214) 841-4419
Fax: (972)-263-9837
Credit Lyonnais, New York Branch
1301 6th Avenue
New York, New York 10019
Attn: Paul Connolly
Tel: (212) 261-3885
Fax: (212) 261-3401
Fleet Bank, N.A.
1185 Avenue of the Americas
16th Floor
New York, New York 10036
Attn: Kevin Batterton
Tel: (212) 819-6076
Fax: (212) 819-6207
The Bank of New York
One Wall Street, 17th Floor
New York, NY 10286
Attn: Robert A. Tweed
Tel: (212) 635-6465
Fax: (212) 635-6468
LaSalle National Bank
135 South LaSalle Street
Chicago, Illinois 60603
Attn: Terry Keating
Tel: (312) 904-2689
Fax: (312) 904-2982
U.S. Bank National Association
601 2nd Avenue South
MPFP 0508
Minneapolis, Minnesota 55402-4302
Attn: John P. Crenshaw
Tel: (612) 973-0572
Fax: (612) 973-0826
Farallon Debt Investors I, LLC1
c/o Farallon Capital Management, LLC
One Maritime Plaza, Suite 1325
San Francisco, California 94111
Attn: Ms. Meridee Moore
Ms. Kirsten Lynch
Tel: (415) 421-2132
Fax: (415) 421-2133
ING Baring (U.S.) Capital LLC2
135 E. 57th Street, 6th Floor
New York, New York 10022
Attn: Ms. Ann Sutton
Tel: (212) 409-1581
Fax: (212) 371-9295
Credit Suisse First Boston
Eleven Madison Avenue, 20th Floor
New York, New York 10010-3629
Attn: Jay Chall
Tel: (212) 325-9010
Fax: (212) 325-8320
Bear Stearns Investment Products, Inc.
245 Park Avenue, 4th Floor
New York, NY 10167
Attn: Mark A. Sorenson
Tel: (212) 272-7959
Fax: (212) 272-4844
Prudential Securities Credit Corp.
One Seaport Plaza
27th Floor
New York, NY 10292
Attn: Jeffrey French
Tel: (212) 214-7558
Fax: (212) 214-7678
Dresdner Bank AG,
New York & Grand Cayman Branches
75 Wall Street
New York, NY 10005
Attn: J. Curtin Beaudouin
Tel: (212) 429-2120
Fax: (212) 429-2524
PNC Bank, N.A.
500 West Jefferson Street
Suite 1100
Louisville, Ky 40202
Attn: Janice Bolling
Tel: (502) 581-3112
Fax: (502) 581-3844
D. TERM LENDERS
The Bank of New York
One Wall Street, 17th Floor
New York, NY 10286
Attn: Robert A. Tweed
Tel: (212) 635-6465
Fax: (212) 635-6468
Allstate Life Insurance Company
3075 Sanders Road, Suite G3A
Northbrook, IL 60062-7127
Attn: Tom Napholz
Tel: (847) 402-7835
Fax: (847) 402-3092
KZH III LLC, f/k/a/
KZH Holding Corporation III
c/o The Chase Manhattan Bank
450 West 33rd Street - 15th Floor
New York, NY 10001
Attn: Virginia Conway
Tel: (212) 946-7575
Fax: (212) 946-7776
Tyler Trading3
100 North Tryon Street
NCI-007-06-07
Charlotte, NC 28255
Attn: Kelly C. Walker
Tel: (704) 388-8943
Fax: (704) 388-0648
Strata Funding Ltd.
c/o Deutsche Morgan Grenfell (Cayman) Limited
P.O. 10184 GT, Elizabethan Square
Grand Cayman, Cayman Islands
Attn: Director
Tel: (345) 949-8244
Fax: (345) 949-8178
Ceres Finance Ltd.
c/o Deutsche Morgan Grenfell (Cayman) Limited
P.O. 10184 GT, Elizabethan Square
Grand Cayman, Cayman Islands
Attn: Director
Tel: (345) 949-8244
Fax: (345) 949-8178
Pacifica Partners I, L.P.4
c/o Imperial Credit Asset Management
150 S. Rodeo Drive, Suite 230
Beverly Hills, CA 90212
Attn: Mike Bacevich
Tel: (310) 246-3726
Fax: (310) 777-3026
LaSalle National Bank
135 South LaSalle Street
Chicago, Illinois 60603
Attn: Terry Keating
Tel: (312) 904-2689
Fax: (312) 904-2982
Allstate Insurance Company
3075 Sanders Road, Suite G3A
Northbrook, IL 60062-7127
Attn: Tom Napholz
Tel: (847) 402-7835
Fax: (847) 402-3092
Morgan Stanley Emerging Markets, Inc.5
1585 Broadway, 10th Floor
New York, New York 10036
Attn: James Morgan
Tel: (212) 761-4866
Fax: (212) 761-0592
Merrill Lynch, Pierce, Fenner & Smith Incorporated6
World Financial Center, 16th Floor
250 Vessey Street
New York, New York 10281
Attn: Brian Buttenmuller
Tel: (212) 449-4972
Fac: (212) 449-9435
1 By partial assignment from Lehman Commercial Paper, Inc.,
assignee from Wells Fargo Bank (Texas), N.A.
2 By partial assignment from (i) Lehman Commercial Paper,
Inc., assignee from Wells Fargo Bank (Texas)
N.A., and (ii) Bear Stearns Investment Products, Inc.
3 By assignment from NationsBank, N.A. (2 Notes)
4 By assignment from NationsBank, N.A.
5 By partial assignment from ML CLO XIX Sterling (Cayman)
Ltd.
6 By assignment of remaining interest from ML CLO XIX
Sterling (Cayman) Ltd.
Revolving Loan Commitment Amount
Revolving
Short Long Term Aggregate Loan
Term Percentage
Revolving
Lenders:
NationsBank $18,750,000 $56,250,000 $75,000,000 11.19402985%
Credit Suisse $18,750,000 $56,250,000 $75,000,000 11.19402985%
First Boston
U.S. Bank $18,750,000 $56,250,000 $75,000,000 11.19402985%
Bank One $12,500,000 $37,500,000 $50,000,000 7.46268657%
Bank United $12,500,000 $37,500,000 $50,000,000 7.46268657%
Fleet Bank $12,500,000 $37,500,000 $50,000,000 7.46268657%
Prudential Sec. $12,500,000 $37,500,000 $50,000,000 7.46268657%
LaSalle $11,250,000 $33,750,000 $45,000,000 6.71641791%
Bank of New York $11,250,000 $33,750,000 $45,000,000 6.71641791%
Dresdner Bank $8,750,000 $26,250,000 $35,000,000 5.22388060%
Comerica $7,500,000 $22,500,000 $30,000,000 4.47761194%
Bear Stearns $5,000,000 $15,000,000 $20,000,000 2.98507463%
Credit Lyonnais $6,250,000 $18,750,000 $25,000,000 3.73134328%
Farallon Debt1 $4,750,000 $14,250,000 $19,000,000 2.83582090%
ING Baring2 $2,750,000 $8,250,000 $11,000,000 1.64179104%
PNC Bank $3,750,000 $11,250,000 $15,000,000 2.23880597%
Total $167,500,000 $502,500,000 $670,000,000 100.000000%
1 By partial assignment from Lehman Commercial Paper, Inc., assignee
of Wells Fargo Bank (Texas), N.A.
2 By partial assignment from Lehman Commercial Paper, Inc., assignee
of Wells Fargo Bank (Texas), N.A. ($1,500,000 ST
and $4,500,000 LT); and by partial assignment from Bear Stearns
Investment Products, Inc. ($1,250,000 ST and $3,750,000 LT).
Term Loan Term Loan
Commitment Percentage
Amount
Term Lenders:
Pacifica Partners1 $10,000,000 14.8148148%
Morgan Stanley2 $3,000,000 4.4444444%
Merrill Lynch3 $7,000,000 10.3703704%
Tyler Trading4 $7,500,000 11.1111112%
KZH III LLC $5,100,000 7.5555556%
Allstate Life $5,000,000 7.4074074%
Insurance Company
Allstate Insurance $5,000,000 7.4074074%
Company
Bank of New York $5,000,000 7.4074074%
Tyler Trading4 $5,000,000 7.4074074%
LaSalle Bank $5,000,000 7.4074074%
Ceres $4,950,000 7.3333333%
Strata $4,950,000 7.3333333%
Total $67,500,000 100.0%
1 By total assignment from NationsBank, N.A.
2 By partial assignment from ML CLO XIX Sterling
3 By assignment of remaining interest of ML CLO XIX Sterling
4 By assignment from NationsBank, N.A.
II. BORROWER with copy to:
AMRESCO, INC. AMRESCO, INC.
700 N. Pearl Street 700 N. Pearl Street
Suite 2400 Suite 2400
Dallas, Texas 75201-7424 Dallas, Texas 75201-7424
Attn: Treasurer Attn: General Counsel
Fax No.: (214) 953-7828 Fax No.: (214) 953-7757
EXHIBIT D
GUARANTOR SUBSIDIARIES OF BORROWER
AS OF FEBRUARY 28, 1999
INITIAL GUARANTORS ON CREDIT AGREEMENT 8/12/98:
AFC EQUITIES INVESTORS, INC., f/k/a AFC EQUITIES, INC.
AFC EQUITIES MANAGEMENT, INC.
ALPINE, INC.
AMREIT HOLDINGS, INC.
AMREIT MANAGERS GP, INC.
AMRESCO ATLANTA INDUSTRIAL, INC.
AMRESCO BUILDERS GROUP, INC.
AMRESCO CAPITAL CONDUIT CORPORATION
AMRESCO CAPITAL LIMITED, INC.
AMRESCO CAPITAL, L.P.
AMRESCO CMF, INC.
AMRESCO COMMERCIAL FINANCE, INC.
AMRESCO CONSOLIDATION CORP.
AMRESCO EQUITY INVESTMENTS, INC.
AMRESCO EQUITY INVESTMENTS II, INC.
AMRESCO FINANCE AMERICA CORPORATION
AMRESCO FINANCIAL I, INC.
AMRESCO FINANCIAL I, L.P.
AMRESCO FUNDING CORPORATION
AMRESCO FUNDING OF GEORGIA, L.P.
AMRESCO FUNDING INVESTORS, INC.
AMRESCO FUNDING MANAGEMENT, INC.
AMRESCO FUNDING MID-ATLANTIC, INC.
AMRESCO FUNDING PACIFIC, INC.
AMRESCO INDEPENDENCE FUNDING, INC.
AMRESCO-INSTITUTIONAL, INC.
AMRESCO INVESTMENTS, INC.
AMRESCO MANAGEMENT, INC.
AMRESCO MBS-II, INC.
AMRESCO MORTGAGE CAPITAL LIMITED-I, INC.
AMRESCO MORTGAGE SERVICES LIMITED, INC.
AMRESCO NEW ENGLAND, L.P.
AMRESCO NEW ENGLAND II, L.P.
AMRESCO NEW ENGLAND, INC.
AMRESCO NEW ENGLAND II, INC.
AMRESCO NEW HAMPSHIRE, INC.
AMRESCO NEW HAMPSHIRE, L.P.
AMRESCO OVERSEAS, INC.
AMRESCO PORTFOLIO INVESTMENTS, INC.
AMRESCO PRINCIPAL MANAGERS I, INC.
AMRESCO PRINCIPAL MANAGERS II, INC.
AMRESCO RESIDENTIAL CAPITAL MARKETS, INC.
AMRESCO RESIDENTIAL CREDIT CORPORATION
AMRESCO RESIDENTIAL MORTGAGE CORPORATION
AMRESCO RESIDENTIAL PROPERTIES, INC.
AMRESCO RHODE ISLAND, INC.
AMRESCO SERVICES, L.P.
AMRESCO VENTURES, INC.
AMRESCO 1994-N2, INC.
AMRESCO TEXAS, INC.
ASSET MANAGEMENT RESOLUTION COMPANY
BEI 1992 - N1, INC.
BEI 1993 - N3, INC.
BEI 1994 - N1, INC.
BEI MULTI-POOL, INC.
BEI PORTFOLIO INVESTMENTS, INC.
BEI PORTFOLIO MANAGERS, INC.
BEI REAL ESTATE SERVICES, INC.
BEI SANJAC, INC.
COMMONWEALTH TRUST DEED SERVICES, INC.
ENT MIDWEST, INC.
ENT NEW JERSEY, INC.
ENT SOUTHERN CALIFORNIA, INC.
EXPRESS FUNDING, INC.
FINANCE AMERICA CORPORATION
GRANITE EQUITIES, INC.
HOLLIDAY FENOGLIO FOWLER, L.P.
LIFETIME HOMES, INC.
MSPI, INC., f/k/a MARKETING SOLUTION PUBLICATIONS, INC.
MORTGAGE INVESTORS CORPORATION
OAK CLIFF FINANCIAL, INC.
PRESTON HOLLOW ASSET HOLDINGS, INC.
QUALITY FUNDING, INC.
AMRESCO INSURANCE SERVICES, INC.,
f/k/a SAVE-MORE INSURANCE SERVICES, INC.
WHITE ROCK INVESTMENTS, INC.
ADDITIONAL GUARANTORS BY SUPPLEMENT DATED 2/28/99:
AFC EQUITIES, L.P.
AMREIT MANAGERS, L.P.
AMRESCO-MBS I, INC.
AMRESCO MORTGAGE CAPITAL, INC.
HF ACQUISITION SUB, INC.
EXHIBIT E
As of February 28, 1999
SCHEDULE V
List of Excluded Subsidiaries
Subsidiary Net Worth Total Capital Total
Invested Assets
AMRESCO Leasing Corporation $344,260 $2,391,632
AMRESCO Residential Securities (60,787) 100,184
Corporation
AMRESCO Shell, Inc., f/k/a 0 0
AMRESCO Securities Inc.
AMRESCO Advisors, Inc. 1,137,637 6,340,642
AMRESCO - MBS III, Inc. 10,687,674 8,985,430
AFBT I, LLC 15,399,452 14,317,706
AFBT II, LLC 2,917,430 2,977,433
Scottsdale Inn, LLC 9,925,597 9,776,888
AMRESCO Builders Funding Corp. 0 0
11 South LaSalle, LLC 11,325,650 10,615,012
Noble Building Investors, LLC 1,043,000 1,043,000
Oakmont Land Three, L.P. 0 0
ACLC Funding Corporation
CLC Funding Corporation
AMRESCO Securitized Net
Interest Margin Trust 1999-1
AMRESCO Funding Trust
Independence Funding Holding
Corporation
Independence Funding Holding
Company, L.L.C.
AMREIT II, Inc.
AMRESCO Commercial Mortgage
Funding I Corporation
Total $_________ $_________
AMRESCO, INC.
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Basic:
Net income (loss) $(69,171,000) $56,224,000 $31,332,000
Weighted average common shares outstanding 43,161,919 35,692,030 27,254,346
Contingently issuable shares 54,724 12,735 14,297
Restricted shares (370,431) (292,669) (225,903)
Total 42,846,212 35,412,096 27,042,740
Earnings (loss) per share $(1.61) $1.59 $1.16
Diluted:
Net income (loss) $(69,171,000) $56,224,000 $31,332,000
Effects of convertible debt net of taxes 2,196,000
Net income (loss) $(69,171,000) $56,224,000 $33,528,000
Weighted average common shares outstanding 42,846,212 35,412,096 27,042,740
Contingently issuable shares 292,669 225,903
Additional shares assuming conversion of
convertible debentures to 3,600,000 of
common stock in November 1995 3,600,000
Net effect of dilutive stock options based on
the Treasury stock method using the average
market price 958,712 905,125
Total 42,846,212 36,663,477 31,773,771
Earnings (loss) per share $(1.61) $1.53 $1.06
</TABLE>
AMRESCO, INC.
Exhibit 21. - Subsidiaries of the Registrant
Name
11 South LaSalle, LLC
ACLC Funding Corp.
AFBT I, LLC
AFBT II, LLC
AFC Equities Investors, Inc.
AFC Equities Management, Inc.
AFC Equities, L.P.
AFLQ, S. de R.L. de C.V.
Alpine, Inc.
AM Servicios de Personal, S.A. de C.V.
AMREIT Holdings, Inc.
AMREIT Managers G.P., Inc.
AMREIT Managers, L.P.
AMRESCO 1994-N2, Inc.
AMRESCO Atlanta Industrial, Inc.
AMRESCO Builders Funding Corp.
AMRESCO Canada Inc.
AMRESCO Canada, L.P.
AMRESCO Capital Conduit Corporation
AMRESCO Capital Limited, Inc.
AMRESCO Capital, L.P.
AMRESCO CMF, Inc.
AMRESCO Commercial Finance, Inc.
AMRESCO Commercial Mortgage Funding I Corporation
AMRESCO Commercial Mortgage Funding, L.P.
AMRESCO de Mexico Equities, S.A. de C.V.
AMRESCO Equities Canada Inc.
AMRESCO Equity Investments II, Inc.
AMRESCO Equity Investments, Inc.
AMRESCO Finance America Corporation
AMRESCO Financial I, Inc.
AMRESCO Financial I, L.P.
AMRESCO Funding Canada Inc.
AMRESCO Germany I GmbH
AMRESCO Independence Funding, Inc.
AMRESCO Insurance Services, Inc.
AMRESCO Investments, Inc.
AMRESCO Japan, Inc.
AMRESCO Jersey Ventures Limited
AMRESCO Leasing Corporation
AMRESCO Management, Inc.
AMRESCO MBS-II, Inc.
AMRESCO Mexico S.A. de C.V.
AMRESCO Mortgage Capital Limited-I, Inc.
AMRESCO Mortgage Capital, Inc.
AMRESCO Mortgage Services Limited, Inc.
AMRESCO New England II, Inc.
AMRESCO New England II, L.P.
AMRESCO New England, Inc.
AMRESCO New England, L.P.
AMRESCO New Hampshire, Inc.
AMRESCO New Hampshire, L.P.
AMRESCO Overseas, Inc.
AMRESCO Portfolio Investments, Inc.
AMRESCO Principal Managers I, Inc.
AMRESCO Principal Managers II, Inc.
AMRESCO Residential Capital Markets, Inc.
AMRESCO Residential Mortgage Corporation
AMRESCO Residential Properties, Inc.
AMRESCO Residential Securities Corporation
AMRESCO Retail Ventures I Limited
AMRESCO Retail Ventures II Limited
AMRESCO Securities, Inc.
AMRESCO Services Canada Inc.
AMRESCO Services, L.P.
AMRESCO UK Holdings Limited
AMRESCO UK Limited
AMRESCO UK Ventures II Limited
AMRESCO UK Ventures Limited
AMRESCO Ventures, Inc.
AMRESCO-Institutional, Inc.
AMRESCO-MBS I, Inc.
AMRESCO-MBS III, Inc.
AMRESCO/CPC Joint Venture
BCS Asset Management Corporation
BCS Management Corp. I
BEI 1992-N1, Inc.
BEI 1993-N3, Inc.
BEI 1994-N1, Inc.
BEI Multi-Pool, Inc.
BEI Portfolio Investments, Inc.
BEI Portfolio Managers, Inc.
BEI SanJac, Inc.
BEI/RITZ Joint Venture #1
BEI/RITZ Joint Venture #2
CLC Funding Corp.
Commonwealth Trust Deed Services, Inc.
Express Funding, Inc.
Finance America Corporation
Granite Equities, Inc.
HF Acquisition Sub, Inc.
Holliday Fenoglio Fowler, L.P.
Independence Funding Holding Company, LLC
Independence Funding Holding Corporation
Kennard Court (Home Reversions) Limited
Leadenhall Residential II Limited
Leadenhall Residential Limited
Mortgage Investors Corporation
Noble Building Investors, LLC
Oak Cliff Financial, Inc.
Oakmont Land Three, L.P.
Old Midland House Limited
PLT (Brampton) Limited
PLT (Newcastle Development) Limited
PLT (Property) Limited
PLT Limited
PLT Nominees Limited
Preston Hollow Asset Holdings, Inc.
Quality Funding, Inc.
Scottsdale Inn, L.L.C.
The PavilionAsia Co., Ltd.
Undiscovered Managers, LLC
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
AMRESCO, INC.
We consent to the incorporation by reference in
Registration Statements No. 333-57635, No. 333-62145
and No. 333-63543 on Form S-3 and Registration
Statements No. 333-62143 and No. 333-66989 on Form S-8
of our report dated February 9, 1999, appearing in this
Annual Report on Form 10-K of AMRESCO, INC. for the
year ended December 31, 1998.
\S\ Deloitte & Touche LLP
Dallas, Texas
March 25, 1999
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<LOSS-PROVISION> 3,195 17,764 1,920 7,218
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<DEPRECIATION> 11,623 13,251 14,917
<TOTAL-ASSETS> 3,633,150 3,678,561 4,784,395
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<BONDS> 1,095,103 1,249,431 1,561,244
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