<PAGE> 1
As filed with the Securities and Exchange Commission on September 23, 1996
Registration No. 333-06969
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
PRE EFFECTIVE AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
Aames Financial Corporation
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4340340
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3731 WILSHIRE BOULEVARD, 10TH FLOOR, LOS ANGELES, CALIFORNIA 90010
(213) 351-6100
(Address, including ZIP code, and telephone number,
including area code, of Registrant's principal executive offices)
BARBARA S. POLSKY, ESQ.
AAMES FINANCIAL CORPORATION
3731 WILSHIRE BOULEVARD, 10TH FLOOR
LOS ANGELES, CALIFORNIA 90010
(213) 351-6100
(Name, address, including ZIP code, and telephone number,
including area code, of agent for service)
------------------------
Copies to:
C.N. FRANKLIN REDDICK III, ESQ. DAVID J. JOHNSON, JR., ESQ.
TROOP MEISINGER STEUBER & PASICH DANIEL F. PASSAGE, ESQ.
10940 WILSHIRE BOULEVARD ANDREWS & KURTH, L.L.P.
LOS ANGELES, CALIFORNIA 90024 601 S. FIGUEROA STREET
(310) 824-7000 LOS ANGELES, CALIFORNIA 90017
(213) 896-3100
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement. If the only
securities on this form are being offered pursuant to dividend or interest
reinvestment plans, please check the following box: [ ] If any of the
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
<PAGE> 2
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X] If this Form is a post-
effective amendment filed pursuant to Rule 462(c) under the Securities Act,
check the following box and list the Securities Act registration number of the
earlier effective registration statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE> 3
PROSPECTUS
$48,250,000
AAMES FINANCIAL CORPORATION
5 1/2% CONVERTIBLE SUBORDINATED DEBENTURES
DUE MARCH 15, 2006
(INTEREST PAYABLE MARCH 15 AND SEPTEMBER 15)
AND
1,723,215 SHARES OF COMMON STOCK
---------------
This Prospectus relates to the public offering by the Selling Security
Holders (see "Selling Security Holders") of up to $48,250,000 aggregate
principal amount of 5 1/2% Convertible Subordinated Debentures due March 15,
2006 (the "Debentures") of Aames Financial Corporation, a Delaware corporation
(the "Company"), and the shares of common stock, par value $0.001 per share, of
the Company (the "Common Stock" and, together with the Debentures, the
"Securities") that are issuable upon conversion of the Debentures. The
Debentures are convertible into a maximum of 1,723,215 shares of Common Stock
at a conversion price of $28.00 per share, subject to adjustment in certain
circumstances, at any time prior to redemption or maturity. See "Description
of the Debentures." The Common Stock is traded on the New York Stock Exchange
(the "NYSE") under the symbol "AAM." The last reported sales price of the
Common Stock on the NYSE on September 17, 1996 was $56.00 per share. See
"Description of Capital Stock."
Interest on the Debentures is payable semi-annually in arrears on each of
March 15 and September 15, commencing September 15, 1996, and the Debentures
will mature on March 15, 2006, unless previously redeemed. See "Description of
the Debentures."
The Debentures are redeemable at the option of the Company, in whole or in
part, at any time on or after March 15, 1999, at the redemption prices set
forth herein, plus accrued and unpaid interest to the redemption date. In the
event of a Change of Control (as defined herein), each holder of the Debentures
will have the right to cause the Company to repurchase the Debentures, in whole
but not in part, at a price equal to 100% of the principal amount thereof plus
accrued and unpaid interest to the repurchase date. See "Description of the
Debentures-Redemption" and "-Change of Control."
The Debentures are general unsecured obligations of the Company,
subordinated to all existing and future Senior Indebtedness (as defined
herein), which at June 30, 1996 was approximately $34.1 million. See
"Description of the Debentures."
The Company will not receive any proceeds from this offering. The
aggregate proceeds to the Selling Security Holders from the sale of the
Securities will be the offering price of the Securities sold, less applicable
agents' commissions and underwriters' discounts, if any. The Company will pay
<PAGE> 4
all expenses incident to the preparation and filing of a registration statement
for the Securities under federal securities laws. The Selling Security Holders
may sell the Securities from time to time on terms to be determined at the time
of sale, either directly or through agents designated from time to time or
dealers or underwriters designated from time to time. To the extent required,
the principal amount of Debentures or the number of shares of Common Stock to
be sold, the offering price thereof, the name of each Selling Security Holder
and each agent, dealer and underwriter, if any, and any applicable commissions
or discounts with respect to a particular offering will be set forth in an
accompanying Prospectus Supplement. See "Plan of Distribution."
----------------
There is no public market for the Debentures prior to the offering hereby.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 HEREOF FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF
THE SECURITIES.
---------------
The date of this Prospectus is September 25, 1996
---------------
THE DEBENTURES AND THE UNDERLYING SHARES OF COMMON STOCK HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR BY ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION REVIEWED OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
FOR NEW HAMPSHIRE RESIDENTS: NEITHER THE FACT THAT A REGISTRATION STATE-
MENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER RSA 421-B WITH THE
STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED
OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY
THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COM-
PLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION
OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE
SECRETARY OF STATE OF THE STATE OF NEW HAMPSHIRE HAS PASSED IN ANY WAY UPON THE
MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON,
SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY
PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH
THE PROVISIONS OF THIS PARAGRAPH.
<PAGE> 5
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement) under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus, which constitutes part of the
Registration Statement does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to such Registration Statement, and the exhibits and
schedules thereto which may be obtained from the Commission's principal office
in Washington, D.C., upon payment of the fees prescribed by the Commission.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files periodic reports and other information with the Securities and
Exchange Commission (the "Commission"). For further information with respect to
the Company, reference is hereby made to such reports and other information
which can be inspected and copied at the public reference facilities maintained
by the Commission at Room 1025, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's Regional Offices located at Seven World Trade Center,
13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies may also be obtained at
prescribed rates from the Public Reference Section of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition,
reports, proxy statements and other information concerning the Company can also
be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005, on which exchange the Company's Common Stock
is listed.
<PAGE> 6
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the
Commission pursuant to the Exchange Act are incorporated by reference into this
Prospectus:
(1) the Company's Report on Form 10-K for the fiscal year ended June 30,
1996; and
(2) the Company's Current Reports on Form 8-K dated July 10, 1996, August
7, 1996, August 13, 1996 and September 12, 1996.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the securities covered by this Prospectus shall
be deemed to be incorporated by reference herein and to be part hereof from the
date of filing of such documents. Any statement contained herein or in a
document, all or a portion of which is incorporated or deemed to be
incorporated by reference herein, shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon the oral or written
request of any such person, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents, unless such
exhibits are expressly incorporated by reference into such documents). Written
requests for such copies should be directed to the Company's Secretary at 3731
Wilshire Boulevard, 10th Floor, Los Angeles, California 90010, or made by
telephone at (213) 351-6100.
<PAGE> 7
THE COMPANY
Aames Financial Corporation (the "Company"), founded in 1954, is a
consumer finance company engaged in the business of originating, purchasing,
selling and servicing home equity mortgage loans secured by single family
residences. The Company's principal market is credit-impaired borrowers who have
significant equity in their homes but whose borrowing needs are not being met by
traditional financial institutions due to credit exceptions or other factors.
The Company focuses its efforts on collateral lending and believes that it
originates and purchases a greater proportion of lower credit grade loans ("C-"
and "D" loans) than most other lenders to credit-impaired borrowers. These lower
credit grade loans are characterized by lower combined loan-to-value ratios and
higher average interest rates than higher credit grade loans ("A-," "B" and "C"
loans). The Company believes lower credit-quality borrowers represent an
underserved niche of the home equity loan market and present an opportunity to
earn a superior return for the risks assumed. Although the Company has
historically experienced delinquency rates that are higher than those prevailing
in its industry, management believes the Company's historical loan losses are
generally lower than those experienced by most other lenders to credit-impaired
borrowers because of the lower combined loan-to-value ratios on the Company's
lower credit grade loans. The mortgage loans originated and purchased by the
Company are generally used by borrowers to consolidate indebtedness or to
finance other consumer needs rather than to purchase homes. Consequently, the
Company believes that it is not as dependent as traditional mortgage bankers on
levels of home sales or refinancing activity prevailing in its markets.
The Company originates and purchases loans through three production
channels. The Company has historically originated its loans through its retail
loan office network. In 1994, the Company diversified its production channels to
include a wholesale correspondent program which consisted initially of
purchasing loans from other mortgage bankers and financial institutions
underwritten in accordance with the Company's guidelines. In fiscal 1996, this
program was expanded to include the purchase of loans in bulk from other
mortgage bankers and financial institutions. On August 28, 1996, the Company
acquired One Stop Mortgage, Inc. ("One Stop"), which further diversified the
Company's production channels to include the originations and purchase of
mortgage loans from a network of independent mortgage brokers. While the Company
intends to continue focusing on its traditional niche in the "C-" and "D" credit
grade loans, the Company also intends to continue to diversify the loans it
originates and purchases through its three production channels to include more
"A-," "B" and "C" credit grade loans. The Company underwrites every loan it
originates and re-underwrites and reviews appraisals on all loans it purchases.
Substantially all of the mortgage loans originated and purchased by the
Company are sold in the secondary market through public securitizations in order
to enhance profitability, maximize liquidity and reduce the Company's exposure
to fluctuations in interest rates. In a securitization, the Company recognizes a
gain on the sale of loans securitized upon the closing of the securitization,
but does not receive the excess servicing, which is payable over the actual life
of the loans securitized. The excess servicing represents, over the estimated
life of the loans, the excess of the weighted average interest rate on the pool
of loans sold over the sum of the investor pass-through rate, normal servicing
fee and the monoline insurance fee. The net present value of that excess
(determined based on certain prepayment and loss assumptions) less transaction
expenses is recorded as excess servicing gain or loss at the time of the closing
of the securitization. The Company securitized and sold in the secondary market
$107 million, $317 million and $791 million of loans in the years ended June 30,
1994, 1995 and 1996, respectively. Each of the Company's securitizations has
been credit-enhanced by insurance provided by a monoline insurance company to
receive ratings of "Aaa" by Moody's Investors Service and "AAA" from Standard &
Poor's.
The Company retains the servicing rights (collecting loan payments and
handling borrower defaults) to substantially all of the loans it originates or
purchases. At June 30, 1996, the Company had a servicing portfolio of $1.25
billion, 27% of which was serviced by subservicers. In fiscal 1996, the Company
serviced directly all loans in its servicing portfolio which were secured by
mortgaged properties located in Arizona, California, Colorado, Nevada, Oregon,
Utah and Washington. Loans secured by properties located in other states were
serviced through one or more subservicers which were paid a fee per loan and a
participation in certain other fees paid by the borrowers. The Company will
implement in fiscal 1997 a new servicing system which will provide the Company
<PAGE> 8
the capability to service in house all loans originated or purchased by it
regardless of the state in which the mortgaged property is located.
The Company is a Delaware corporation with the principal executive offices
located at 3731 Wilshire Boulevard, 10th floor, Los Angeles, California 90010,
telephone number (213) 351-6100.
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered before making an
investment in the securities offered hereby.
SUBORDINATION; ABILITY TO SERVICE DEBT
The Debentures are subordinated in right of payment to all existing and
future Senior Indebtedness and are effectively subordinated to all existing and
future liabilities (including trade payables) of the Company's subsidiaries.
Neither the Indenture nor the Debentures limit the ability of the Company to
incur additional Senior Indebtedness or other indebtedness by the Company or
its subsidiaries. At June 30, 1996, Senior Indebtedness of the Company and
indebtedness of its subsidiaries aggregated $34.1 million. The Indenture and
the Debentures do not contain any financial covenants or similar restrictions
respecting the Company or its subsidiaries and, therefore, the holders of the
Debentures have no protection (other than rights upon Events of Default as
described in "Description of the Debentures") from adverse changes in the
Company's financial condition. By reason of such subordination of the
Debentures, in the event of insolvency, bankruptcy, liquidation,
reorganization, dissolution or winding up of the business of the Company or
upon a default in payment with respect to any indebtedness of the Company or an
event of default with respect to such indebtedness resulting in the acceleration
thereof, the assets of the Company will be available to pay the amounts due on
the Debentures only after all Senior Indebtedness had been paid in full. The
Debentures rank PARI PASSU with other unsecured subordinated obligations of
the Company.
The Company conducts substantially all of its operations through its
subsidiaries. Accordingly, the Company's ability to meet its cash obligations
is dependent upon the ability of its subsidiaries to make cash distributions to
the Company. The ability of its subsidiaries to make distributions to the
Company is and will continue to be restricted by, among other limitations,
applicable provisions of the laws of the federal or state governments and
contractual provisions. Neither the Indenture nor the Debentures limit the
ability of the Company's subsidiaries to incur such restrictions in the future.
The right of the Company to participate in the assets of any subsidiary upon
liquidation of the subsidiary (and thus the ability of holders of the
Debentures to benefit indirectly from such assets) are generally subject to the
prior claims of creditors of that subsidiary except to the extent that the
Company is recognized as a creditor of such subsidiary, in which case the
Company's claims would still be subject to any security interests of other
creditors of such subsidiary. Therefore, the Debentures are effectively
subordinated to creditors of subsidiaries of the Company with respect to the
assets of the subsidiaries against which such creditors have claims.
After giving pro forma effect to the acquisition by the Company of One Stop
(see "--Recent Acquisition of One Stop") as if it had occurred on July 1, 1995,
the Company would have had net income of $139 million and, on a pro forma basis,
the ratio of earnings to its fixed charges for fiscal 1996 would have been
5.23:1. However, this ratio is not necessarily indicative of the adequacy of the
Company's cash flow from operating activities to cover fixed charges because
loans originated by One Step in the aggregate amount of $320 million were not
scrutinized during the period and net income consists largely of excess
servicing which is a non-cash items. Further, on September 16, 1996, the Company
filed with the Commission a Registration Statement on Form S-3 relating to the
offering of up to $300 million of its unsecured debt securities, which may be
issued from time to time in one or more series, and Common Stock. Although the
Company believes that cash available from operations and financing activities
will be sufficient to enable it to make required interest payments on the
Debentures and its other debt obligations and other required payments, there can
be no assurance in this regard and the Company may encounter liquidity problems
which could affect its ability to meet such obligations while attempting to
withstand competitive pressures or adverse economic conditions. In such
circumstances, the value of the Debentures could be materially adversely
affected.
<PAGE> 9
NEGATIVE CASH FLOWS AND CAPITAL NEEDS
In a securitization, the Company recognizes a gain on sale of the loans
securitized upon the closing of the securitization, but does not receive the
cash representing such gain until it receives the excess servicing, which in
general is payable over the actual life of the loans securitized. The Company
incurs significant expense in connection with a securitization and incurs both
current and deferred tax liabilities as a result of the gain on sale. Net cash
used in operating activities for fiscal 1994, 1995 and 1996 was $13.9 million,
$43.4 million and $122 million, respectively. Therefore, the Company requires
continued access to short- and long-term external sources of cash to fund its
operations. The Company expects to continue to operate on a negative cash flow
basis as the volume of the Company's loan purchases and originations increases
and its securitization program grows. The Company's primary cash requirements
include the funding of: (i) mortgage loan originations and purchases pending
their securitization and sale; (ii) fees and expenses incurred in connection
with the securitization of loans; (iii) reserve account or overcollateralization
requirements in connection with the securitization and sale of the loans; (iv)
tax payments due on recognition of excess servicing gain; (v) ongoing
administrative and other operating expenses; and (vi) interest and principal
payments under the Company's warehouse credit facilities and other existing
indebtedness.
The Company's primary sources of liquidity in the future are expected to be
existing cash, fundings under its warehouse and other credit facilities, sales
of mortgage loans through securitization, and further issuances of debt or
equity.
The Company's primary sources of liquidity as described in the paragraph
above are expected to be sufficient to fund the Company's liquidity requirements
through at least the second quarter of fiscal 1997 if the Company's future
operations are consistent with management's current growth expectations.
However, because the Company expects to continue to operate on a negative cash
flow basis for the foreseeable future, it anticipates that it will need to
effect debt or equity financings regularly. The type, timing and terms of
financing selected by the Company will be dependent upon the Company's cash
needs, the availability of other financing sources and the prevailing conditions
in the financial markets. There can be no assurance that any such sources will
be available to the Company at any given time or as to the favorableness of the
terms on which such sources may be available.
As a result of the limitations describe above, the Company may be
restricted in the amount and type of future debt it may issue.
DELINQUENCIES; NEGATIVE IMPACT ON CASH FLOW; RIGHT TO TERMINATE NORMAL SERVICING
A substantial majority of the Company's servicing portfolio consists of
loans securitized by the Company and sold to REMIC trusts. Generally, the form
of pooling and servicing agreement entered into in connection with these
securitizations contains specified limits on the 90-day delinquency rate
(including properties acquired upon foreclosure and not sold) prevailing on the
loans included in each REMIC trust. If, at any measuring date, the 90-day
delinquency rate with respect to any REMIC trust were to exceed the specified
limit applicable to such trust, provisions of the pooling and servicing
agreements permit the monoline insurance company to terminate the
<PAGE> 10
Company's servicing rights to the pool as more fully described below. In
addition, high delinquency rates have a negative impact on cash flow.
At June 30, 1996, four of the Company's REMIC trusts (representing 23% of
the dollar volume of the Company's servicing portfolio) exceeded the applicable
90-day delinquency standard. These four trusts were formed in the last quarter
of calendar 1994 and each of the first three quarters of calendar 1995. At June
30, 1996, the 90-day delinquency rate on these four trusts ranged from 13.8% to
22.7%. The Company believes that the high delinquency rates it has experienced
are primarily due to the higher proportion of lower credit grade loans ("C-" and
"D" loans) originated and purchased by it compared to most other lenders to
credit-impaired borrowers (which generally have a greater focus on A- through C
loans). However, the Company believes its historical loan losses have been below
those experienced by most other lenders to credit-impaired borrowers as a result
of the higher combined loan-to-value ratios which it requires on its lower
credit grade loans. At June 30, 1996, the initial combined loan-to-value ratio
on loans in the four REMIC trusts was 64%.
The Company has recently implemented a variety of measures designed to
reduce delinquency rates on loans included in REMIC trusts to be formed by the
Company in future periods, including the implementation of new procedures
designed to shorten the time required to transfer servicing on loans purchased
through the Company's wholesale correspondent program and the elimination of its
loan program which has experienced the highest delinquency rates. In addition,
as a result of the expansion of the Company's loan production capacity,
including the acquisition of One Stop, the proportion of higher credit grade
loans originated or purchased by the Company is increasing. The Company expects
that the combined effect of these developments will have a positive impact on
90-day delinquency rates experienced in REMIC trusts formed by the Company in
future periods, although average combined loan-to-value ratios are likely to
increase. However, there can be no assurance that this will in fact occur.
Further, delinquency rates and losses on the Company's existing REMIC trusts and
future REMIC trusts could increase. The Company is also in discussions with a
monoline insurance company regarding possible changes to the structure of future
REMIC trusts that would result in delinquency standards that more accurately
reflect the composition of the Company's business. Although the four REMIC
trusts formed by the Company after September 1995 had delinquency rates at June
30, 1996 within expectations and below the applicable 90-day delinquency
standard (which were raised to 13% with respect to the June 1996 REMIC trust),
the loans included in these latter four trusts were originated or purchased
prior to these developments and have been outstanding for a relatively short
period of time and there can be no assurance that delinquency rates on these
trusts will not increase in future periods.
Under the form of pooling and servicing agreement entered into in
connection with the Company's securitizations, the monoline insurance company
insuring the senior interests in the related REMIC trust may terminate the
Company's normal servicing rights if the 90-day delinquency rate exceeds the
applicable specified limit. Although the monoline insurance company has the
right to terminate servicing with respect to the four REMIC trusts referred to
above, no servicing rights have been terminated. There can be no assurance that
the Company's servicing rights with respect to the mortgage loans in such
trusts, or any other trust which exceeds the specified limits in future periods,
will not be terminated. The monoline insurance company has other rights to
terminate servicing if the Company were to breach its obligations under the
agreement, losses on foreclosure were to exceed specified limits, the insurance
company were required to make payments under its policy or certain bankruptcy or
insolvency events were to occur. None of these events have occurred with respect
to any of the trusts formed by the Company.
The Company's cash flow is also adversely impacted by high delinquency
rates in REMIC trusts. Generally, provisions in the pooling and servicing
agreement have the effect of requiring the overcollateralization account, which
is funded primarily by the excess spread on the loans held in the trust, to be
increased up to about twice the level otherwise required when the delinquency
rates exceed the specified limit. As of June 30, 1996, the Company was required
to maintain an additional $16.5 million in overcollateralization accounts as a
result of the level of its delinquency rates above that which would have been
required to be maintained if the applicable delinquency rates had been below the
specified limit. Of this amount, at June 30, 1996, $12.5 million remains to be
added to the overcollateralization accounts from future spread income on the
loans held by these trusts.
<PAGE> 11
Delinquency and loss rates also affect the assumptions used by the Company
in computing excess servicing gain and could affect the Company's ability to
effect securitizations in the capital markets.
RISKS OF CONTRACTED SERVICING
The Company currently contracts with subservicers for the servicing of all
loans it originates or purchases which are secured by properties located in
states other than Arizona, California, Colorado, Nevada, Oregon, Utah and
Washington. These subservicing arrangements accounted for approximately 27% of
the Company's $1.25 billion servicing portfolio at June 30, 1996. The Company is
subject to risks associated with inadequate or untimely service rendered by
subservicers. Many of the Company's borrowers require notices and reminders to
keep their loans current and to prevent delinquencies and foreclosures. Any
failure by a subservicer to provide adequate or timely service could result in
higher delinquency rates and foreclosure losses on the portfolio of loans.
Although the Company intends to service all loans it originates or purchases
commencing in calendar 1997 (regardless of the location of the mortgaged
property) the Company does not currently intend to transfer the subservicing
previously contracted and would be required to pay a termination fee if it were
to decide to do so.
DEPENDENCE ON FUNDING SOURCES
Dependence on Warehouse and Other Credit Facilities. The Company is
dependent upon its access to warehouse and other credit facilities in order to
fund new originations and purchases of mortgage loans pending securitization.
The Company currently has warehouse and other credit facilities with certain
financial institutions with aggregate commitment of $725 million. The Company's
warehouse and other credit facilities expire between September 30, 1996 and
February 1997. In addition, the Company's growth strategies will require
significant increases in the amount of the Company's warehouse and other credit
facilities. There can be no assurance that the Company will be able to secure
such financing on affordable terms, or at all. The Company expects to be able to
maintain existing warehouse and other credit facilities (or to obtain
replacement or additional financing) as current arrangements expire or become
fully utilized; however, there can be no assurance that such financing will be
obtainable on favorable terms. To the extent that the Company is unable to
extend or replace existing facilities, and arrange new warehouse or other credit
facilities, the Company may have to curtail loan origination and purchasing
activities, which would have a material adverse effect on the Company's
financial position and results of operations.
Dependence on Securitization Program. The Company relies on its ability to
securitize and sell its mortgage loans in the secondary market in order to
generate cash proceeds for repayment of its warehouse facilities. Accordingly,
adverse changes in the Company's securitization program or in the secondary
mortgage market could impair the Company's ability to originate, purchase and
sell mortgage loans on a favorable or timely basis. Any such impairment could
have a material adverse effect upon the Company's financial position and results
of operations. In addition, in order to gain access to the secondary market, the
Company has relied upon monoline insurance companies to provide financial
guarantee insurance on the senior interests in loans sold in the secondary
market in order to obtain ratings for such interests. To date, the Company has
not structured a pool of loans for securitization and sale in the secondary
market based solely on the internal credit enhancements of the pool of loans or
the Company's credit. Any substantial reduction in the size or availability of
the secondary market of the Company's loans, or the unwillingness of the
monoline insurance companies to provide financial guarantee insurance for the
senior interests in loans sold in the secondary market, or other accounting, tax
or regulatory changes adversely affecting the Company's securitization program,
could have a material adverse effect on the Company's financial position and
results of operations.
CAPITALIZED EXCESS SERVICING RECEIVABLE; MORTGAGE SERVICING RIGHTS
The majority of the Company's revenue is recognized as excess servicing
gain, which represents the present value of the excess servicing, less
transaction expenses, on mortgage loans sold servicing retained by the Company.
The Company recognizes excess servicing gain in the fiscal year in which such
loans are sold, although cash (representing the excess servicing and normal
servicing fees) is received by the Company over the life of the loans.
<PAGE> 12
Concurrent with recognizing excess servicing gain, the Company records an excess
servicing receivable as an asset on its consolidated balance sheet.
The amount of the excess servicing receivable is computed using prepayment,
loss and discount rate assumptions that the Company believes market participants
would use for similar instruments at the time of sale. Because of changes in the
markets in which the Company competes and the mix of loans included in any
particular pool, the prepayment, default and interest rate assumptions
applicable to the Company's pools may differ. Consequently, the performance of
prior securitizations effected by the Company may not constitute an accurate
predictor of future performance. In particular, the Company expects to realize a
lower percentage of excess servicing gain on the sale of loans than was the case
in prior securitizations completed by the Company as a result of changes in the
composition of the Company's loan product mix and other factors. The Company is
not aware of an active market for its excess servicing receivable. No assurance
can be given that excess servicing receivable could in fact be sold or monetized
at its stated value on the balance sheet, if at all.
The Company's capitalized excess servicing receivable is amortized over the
estimated remaining life of the underlying mortgage loans as an offset against
the excess servicing component of servicing income actually received in
connection with such loans. Although management of the Company believes that it
has made reasonable estimates, on a pool-by-pool basis, of the excess servicing
likely to be realized over the life of each pool, the rates of prepayment and
loss assumptions utilized by the Company are estimated and actual experience may
vary from these estimates. The Company reviews quarterly, on a pool-by-pool
basis, its prepayment and loss assumptions in relation to then current pool
performance and market conditions and, if necessary, would write down the
remaining asset to the net present value of the revised estimated remaining
future excess servicing receivable.
An increase in losses from those initially assumed in valuing excess
servicing could result in capitalized excess servicing amortization expense
exceeding realized excess servicing, thereby adversely affecting the Company's
servicing income and resulting in a reduction in cash flow and a charge to
earnings in the period of adjustment. Likewise, if liquidations with respect to
such mortgage loans were to occur sooner and/or with greater frequency than
initially assumed, capitalized excess servicing amortization would occur more
quickly than originally anticipated, which would have an adverse effect on
servicing income in the period of such adjustment. The rates of foreclosures
experienced by credit-impaired borrowers in certain economic conditions may
exceed those experienced by other mortgage borrowers.
In complying with SFAS No. 122, beginning in fiscal 1996, the Company
records mortgage servicing rights as assets in the period of the Company's sale
or securitization of the related mortgage loans, which include the Company's
estimates of future servicing fees, prepayment fees and other ancillary income
with respect to the underlying mortgage loan, whereas, under the prior standard,
the Company recorded such amounts as received. This accounting method has
resulted in and may, in future periods in which the Company originates or
purchases mortgage loans the terms of which provide for significant prepayment
penalties or other ancillary income, result in earlier recognition of excess
servicing gain than did the Company's reporting under the prior standard.
Furthermore, insofar as the Company's ability to originate or purchase mortgage
loans with such terms may be adversely affected by federal or state regulations
(see "--Government Regulation") or market conditions, the Company's revenue in
future periods may be negatively affected. There can be no assurance as to the
Company's ability in any future period to originate or purchase loans providing
for the same prepayment penalties or other ancillary income to the servicer.
In addition, SFAS No. 122 requires recognition of impairment of capitalized
mortgage servicing rights, including the Company's excess servicing receivable,
on a disaggregated basis in terms of differentiated groups of mortgage loans
identified by the predominant risk characteristics of such mortgage loans (e.g.
seasoning of the mortgage loans or whether the related interest rates are fixed
or adjustable). Compliance with SFAS No. 122 may, depending on market conditions
in future periods, require the Company to recognize greater levels of impairment
(and corresponding write-downs of its Company's excess servicing receivable)
than the Company might have recognized in its reporting under the prior
standard.
<PAGE> 13
RECENT ADDITION OF WHOLESALE CORRESPONDENT PROGRAM
Until 1994, the Company originated substantially all of the loans it
serviced and sold through its retail loan office network. In 1994, the Company
commenced its wholesale correspondent program and in 1995 expanded it to include
purchases of loans in bulk resulting in substantial growth in the number of
loans purchased. The extent of credit or other problems associated with loans
purchased pursuant to this recent expansion into a new channel of loan
production will not become apparent until sometime in the future.
The Company's significant growth and expansion have placed substantial new
and increased pressures on the Company's personnel and systems. In order to
support the growth of its business, the Company has added a significant number
of new operating procedures, facilities and personnel. Although the Company
believes the addition of new operating procedures and personnel will be
sufficient to enable it to meet its growing operating needs, there can be no
assurance that this will be the case. Failure by the Company to manage its
growth effectively, or to sustain its historical levels of performance in credit
analysis, property appraisal and transaction structuring with respect to the
increased loan origination and purchase volume, could have a material adverse
effect on the Company's results of operations and financial condition.
RECENT ACQUISITION OF ONE STOP
On August 28, 1996, the Company acquired One Stop in a merger transaction.
One Stop will be operated as a wholly-owned subsidiary of the Company. The
Company acquired One Stop with the expectation that the acquisition will result
in beneficial synergies for the combined business. The Company's ability to
achieve these beneficial synergies will depend in part on whether the operations
of One Stop can be integrated into the Company's in an efficient, effective and
timely manner. Integral to this process is the integration of the two companies'
management teams and operating procedures. There is no assurance that this
integration will be accomplished smoothly or successfully, and the difficulties
of such integration may be increased by the necessity of coordinating
geographically separated organizations with different cultures. The integration
of operations of One Stop's business will require the dedication of management
resources, which may temporarily distract attention from the day-to-day business
of each of the companies' businesses. The inability of management to integrate
successfully the operations of One Stop's business in a timely manner may have
an adverse effect on the business, results of operations and financial condition
of the Company's business on a consolidated basis.
One Stop commenced operations in October 1995. One Stop had net income of
$547,000 for the period ended December 31, 1995 and a $1.8 million loss for the
six months ended June 30, 1996. There can be no assurance that One Stop will
achieve profitability or successfully implement its business strategy.
Since commencement of operations in October 1995, One Stop's rate of growth
in originating and purchasing loans has been significant. Further, One Stop has
generally sold its loans on a whole-loan basis or retained them in its
portfolio. The Company intends to include One Stop's loans in the Company's
securitizations. It is not known what impact, if any, the inclusion of these
loans will have on the structure or pricing of the Company's securitizations. In
light of One Stop's growth and the expected changes in its operations, the
historical financial performance of One Stop is of limited relevance in
predicting future performance. Also, the loans originated and purchased by One
Stop and to be included in the Company's securitization in September 1996 have
been outstanding for a relatively short period of time. Consequently, the
delinquency and loss experience of One Stop's loans to date may not be
indicative of that to be achieved in future periods, and One Stop may not be
able to maintain delinquency and loan loss ratios at their present levels as One
Stop's loan portfolio becomes more seasoned.
Further, there can be no assurance that the present and potential brokers
doing business with One Stop will continue their current utilization patterns
without regard to the acquisition. Prior to its acquisition by the Company, a
substantial portion of the loans originated or purchased by One Stop were "A-,"
"B," or "C" loans. Beginning in September 1996, One Stop intends to increase the
percentage of "C-" and "D" loans originated and purchased
<PAGE> 14
by it. All loans originated by One Stop will be underwritten in accordance with
the Company's underwriting guidelines. Once approved, the loan is funded or
purchased by One Stop directly. This change in underwriting guidelines could
also have a negative impact on relations with One Stop's brokers. Any
significant reduction in utilization patterns by brokers doing business with One
Stop could have an adverse effect on the near-term business and results of
operations of One Stop, and on the Company on a consolidated basis.
The One Stop acquisition is intended to be accounted for on a
pooling-of-interests basis. Under the pooling rules, the historical financial
results of the Company will be restated to reflect the combination. Following
the consummation of the acquisition, the historical results of the Company will
be restated to reflect the historical losses of One Stop. Further, under the
pooling rules, the costs incurred by the Company and One Stop in consummating
the acquisition will be expensed during the first quarter of fiscal 1997.
CONCENTRATION OF WHOLESALE CORRESPONDENT PROGRAM
The Company has implemented a program for purchasing mortgage loans in bulk
as well as on an ongoing or "flow" basis from mortgage bankers and financial
institutions. This program accounted for 74% of all mortgage loans originated or
purchased by the Company in fiscal 1996. Although the Company acquires mortgage
loans from a variety of sources, a significant portion of the volume of mortgage
loans acquired by the Company has been concentrated among a relatively small
number of correspondents and bulk purchase transactions, with one such
correspondent representing approximately 32% of total mortgage loans purchased
in fiscal 1996. Any significant reduction in the amount of mortgage loans
available for sale from this source or the failure to effect purchases or a
delay of a significant number of such purchases beyond the end of a quarter,
could have a material adverse impact on total loan purchases by the Company
during a quarter with a consequent material adverse impact on the Company's
revenue and results of operations.
COMPETITION
As a marketer of home equity mortgage loans, the Company faces intense
competition. Traditional competitors in the financial services business include
other mortgage banking companies, commercial banks, credit unions, thrift
institutions and finance companies. Many of these competitors in the financial
services business are substantially larger and have more capital and other
resources than the Company. Competition can take many forms, including
convenience in obtaining a loan, customer service, marketing and distribution
channels and interest rates. In addition, the current level of gains realized by
the Company and its competitors on the sale of their sub-prime mortgage loans is
attracting additional competitors into this market with the possible effect of
lowering gains that may be realized on the Company's future loan sales.
Competition may be affected by fluctuations in interest rates and general
economic conditions. During periods of rising rates, competitors which have
locked in lower borrowing costs may have a competitive advantage. During periods
of declining rates, competitors may solicit the Company's customers to refinance
their loans. During economic slowdowns or recessions, credit-impaired borrowers
may have new financial difficulties and may be receptive to offers by the
Company's competitors.
The Company's wholesale correspondent program depends largely on
independent mortgage bankers and other financial institutions for the purchases
of new loans. The Company's competitors also seek to establish relationships
with the same mortgage bankers and other financial institutions. In addition,
the Company expects the volume of loans purchased by the Company to increase and
the relative proportion of purchased loans when compared with retail loans will
continue to expand. The Company's future results may become more exposed to
fluctuations in the volume and cost of the Company's wholesale correspondent
program resulting from competition from other purchasers of such loans, market
conditions and other factors. In addition, a number of the Company's competitors
have recently increased their access to the capital markets, which fosters their
growth and therefore competition.
<PAGE> 15
CONCENTRATION OF OPERATIONS IN CALIFORNIA
At June 30, 1996, a significant majority of the loans serviced by the
Company were secured by properties located in California. Because the Company's
servicing portfolio is currently concentrated in California, the Company's
financial position and results of operations have been and are expected to
continue to be influenced by general trends in the California economy and its
residential real estate market. The California economy has experienced a
slowdown or recession over the last several years which has been accompanied by
a sustained decline in the values of California real estate. Residential real
estate market declines may adversely affect the values of the properties
securing loans such that the principal balances of such loans, together with any
primary financing on the mortgaged properties, will equal or exceed the value of
the mortgaged properties. In addition, California historically has been
vulnerable to certain natural disaster risks, such as earthquakes and
erosion-caused mudslides, which are not typically covered by the standard hazard
insurance policies maintained by borrowers. Uninsured disasters may adversely
impact borrowers' ability to repay loans made by the Company and adversely
impact the Company's results of operations.
TIMING OF LOAN SALES
The Company endeavors to effect the securitization and sale of a loan pool
each quarter. However, market and other considerations, including the conformity
of loan pools to monoline insurance company and rating agency requirements,
could affect the timing of such transactions. Any delay in the sale of a loan
pool beyond a quarter-end would postpone the recognition of excess servicing
gain related to such loans until their sale and would likely result in losses
for such quarter being reported by the Company.
DEPENDENCE ON MANAGEMENT; EMPLOYMENT AGREEMENTS
The Company's success will continue to depend to a significant extent on
its executive officers and other key management, particularly its Chief
Executive Officer, Gary K. Judis; its Chief Operating Officer, Cary H. Thompson;
and its Executive Vice President and President of One Stop, Neil B. Kornswiet.
The Company's Chief Executive Officer, Chief Operating Officer and the Chief
Executive Officer of One Stop are each parties to employment agreements with the
Company which provide for bonus payments based upon the net income or return on
equity of the Company or One Stop, as applicable. In the case of the Chief
Executive Officer of the Company, he is entitled to receive a base salary of
$850,000 per annum and, for each quarter ended December 31, 1996, a bonus equal
to 7.5% of the Company's pre-tax income (prior to bonuses and prior to any
extraordinary charges). Commencing in January 1997, the Chief Executive Officer
of the Company will receive a bonus measured by the Company's return on equity.
The Company's Chief Operating Officer is entitled to a base salary of $500,000
per annum and a quarterly bonus measured by the Company's return on equity. The
Chief Executive Officer of One Stop is entitled to a base salary of $750,000 per
annum and a quarterly bonus equal to 7.5% of One Stop's pre-tax income. Other
members of senior management are participants in a management bonus plan which
awards bonuses measured by the Company's return on equity.
ECONOMIC CONDITIONS
General. The risks associated with the Company's business become more acute
in any economic slowdown or recession. Periods of economic slowdown or recession
may be accompanied by decreased demand for consumer credit and declining real
estate values. Any material decline in real estate values reduces the ability of
borrowers to use home equity to support borrowings and increases the current
combined loan-to-value ratios of loans previously made by the Company, thereby
weakening collateral coverage and increasing the possibility of a loss in the
event of default. Further, delinquencies, foreclosures and losses generally
increase during economic slowdowns or recessions. Because of the Company's focus
on credit-impaired borrowers, the actual rates of delinquencies, foreclosures
and losses on such loans could be higher than those generally experienced in the
mortgage lending industry. In addition, in an economic slowdown or recession,
the Company's servicing costs may increase. Any sustained period of increased
delinquencies, foreclosure, losses or increased costs could adversely affect the
<PAGE> 16
Company's ability to securitize or sell loans in the secondary market and could
increase the cost of securitizing and selling loans in the secondary market.
The Company's principal market is credit-impaired borrowers who have
significant equity in their homes and whose borrowing needs are not being met by
traditional financial institutions. Loans made to such borrowers may entail a
higher risk of delinquency and higher losses than loans made to more
creditworthy borrowers. While the Company believes that the underwriting
criteria and collection methods it employs enable it to reduce the higher risks
inherent in loans made to credit-impaired borrowers, no assurance can be given
that such criteria or methods will afford adequate protection against such
risks. In the event that pools of loans sold and serviced by the Company
experience higher delinquencies, foreclosures or losses than anticipated, the
Company's financial condition or results of operations could be adversely
affected.
Interest rates. The Company's earnings may be directly affected by the
level of and fluctuations in interest rates which affect the Company's ability
to earn a spread between interest received on its loans and the costs of its
liabilities. While the Company monitors the interest rate environment and
employs a hedging strategy designed to mitigate the impact of changes in
interest rates, there can be no assurance that the earnings of the Company would
not be adversely affected during any period of unexpected changes in interest
rates. During periods of increasing interest rates, the Company generally
experiences market pressure to reduce its servicing spread or commissions on
originations. A substantial and sustained increase in interest rates could
adversely affect the ability of the Company to originate loans and could reduce
the gains recognized by the Company upon their securitization and sale. A
significant decline in interest rates could decrease the size of the Company's
loan servicing portfolio by increasing the level of loan prepayments, thereby
shortening the life and impairing the value of the excess servicing receivables
and mortgage servicing rights. Fluctuating interest rates also may affect the
net interest income earned by the Company resulting from the difference between
the yield to the Company on mortgage loans held pending sale and the interest
paid by the Company for funds borrowed under the Company's warehouse credit
facilities or otherwise. In addition, inverse or flattened interest yield curves
could have an adverse impact on the earnings of the Company because the loans
pooled and sold by the Company have long-term rates while the senior interests
in the related REMIC trusts are priced on the basis of intermediate rates.
The Company introduced adjustable rate mortgages as a new product in
January 1994. Adjustable rate loans account for a substantial portion of the
mortgage loans originated or purchased by the Company. Substantially all such
adjustable rate mortgages include a "teaser" rate, i.e., an initial interest
rate significantly below the fully indexed interest rate at origination.
Although these loans are underwritten at the fully indexed rate at origination,
credit-impaired borrowers may encounter financial difficulties as a result of
increases in the interest rate over the life of the loan.
CONTINGENT RISKS
Although the Company sells substantially all the mortgage loans which it
originates or purchases, the Company retains some degree of credit risk on
substantially all loans sold. During the period of time that loans are held
pending sale, the Company is subject to the various business risks associated
with the lending business including the risk of borrower default, the risk of
foreclosure and the risk that a rapid increase in interest rates would result in
a decline in the value of loans to potential purchasers. The documents governing
the Company's securitization program require the Company to establish deposit
accounts or build overcollateralization levels through retention of excess
servicing distributions in such accounts or application of excess servicing
distributions to reduce the principal balances of the senior interests issued by
the related REMIC trust, respectively. Such amounts serve as credit enhancement
for the related REMIC trust and are therefore available to fund losses realized
on loans held by such trust. The Company continues to be subject to the risks of
default and foreclosure following securitization and the sale of loans to the
extent of excess servicing distributions required to be retained or applied to
reduce principal from time to time. Such amounts are determined by the monoline
insurance company issuing the guarantee of the related interests in each REMIC
trust and are a condition to obtaining the requisite rating thereon. In
addition, documents governing the Company's securitization program require the
Company to commit to repurchase or replace loans which do not conform to the
representations and warranties made by the Company at the time of sale.
<PAGE> 17
When borrowers are delinquent in making monthly payments on loans included in a
REMIC trust, the Company is required to advance interest payments with respect
to such delinquent loans to the extent that the Company deems such advances
ultimately recoverable. These advances require funding from the Company's
capital resources but have priority of repayment from collections or recoveries
on the loans in the related pool in the succeeding month.
In the ordinary course of its business, the Company is subject to claims
made against it by borrowers and private investors arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentations, errors and omissions of
employees and officers of the Company (including its appraisers), incomplete
documentation and failures by the Company to comply with various laws and
regulations applicable to its business. The Company believes that liability with
respect to any currently asserted claims or legal actions is not likely to be
material to the Company's financial position or results of operations; however,
any claims asserted in the future may result in legal expenses or liabilities
which could have a material adverse effect on the Company's financial position
and results of operations.
GOVERNMENT REGULATION
Members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Company's loans are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, the competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for loans of the
kind offered by the Company.
The operations of the Company are subject to regulation by federal, state
and local government authorities, as well as to various laws and judicial and
administrative decisions, that impose requirements and restrictions affecting,
among other things, the Company's loan originations, credit activities, maximum
interest rates, finance and other charges, disclosures to customers, the terms
of secured transactions, collection, repossession and claims-handling
procedures, multiple qualification and licensing requirements for doing business
in various jurisdictions, and other trade practices. Although the Company
believes that it is in compliance in all material respects with applicable
local, state and federal laws, rules and regulations, there can be no assurance
that more restrictive laws, rules or regulations will not be adopted in the
future that could make compliance more difficult or expensive, restrict the
Company's ability to originate, purchase or sell loans, further limit or
restrict the amount of interest and other charges earned on loans originated or
purchased by the Company, further limit or restrict the terms of loan
agreements, or otherwise adversely affect the business or prospects of the
Company.
In October 1995, certain amendments to the Truth in Lending Act (the "TILA
Amendments") went into effect. The TILA Amendments provide in general that
lenders may not include prepayment fee clauses in loans regulated by those
amendments ("Section 32 Loans") if the borrower has a debt-to-income ratio in
excess of 50%. In addition, a lender that refinances a Section 32 Loan
previously made by such lender will not be able to enforce any prepayment
penalty clause contained in such refinanced loan. A majority of the loans
originated or purchased by the Company prior to October 1995 would have been
Section 32 Loans if they had been originated after that date. The Company has
modified its loan programs to significantly reduce the number of Section 32
Loans it originates and purchases.
<PAGE> 18
ABSENCE OF EXISTING MARKET FOR DEBENTURES
The Debentures are a new issue of securities with no established trading
market. The Company does not intend to list the Debentures on any national
securities exchange or to seek the admission thereof to trading in the National
Association of Securities Dealers Automated Quotation system. Although the
Debentures represented by the Rule 144A Global Security (as defined below) have
been designated for trading on the Private Offerings, Resales and Trading
through Automatic Linkages ("Portal") System of the National Association of
Securities Dealers, Inc., no assurance can be given that an active trading
market for the Debentures will develop or, if such market develops, as to the
liquidity or sustainability of such market. If a trading market does not
develop or is not maintained, holders of the Debentures may experience
difficulty in reselling the Debentures or may be unable to sell them at all. If
a market for the Debentures develops, any such market may be discontinued at
any time. If a public trading market develops for the Debentures, future
trading prices of the Debentures will depend on many factors, including, among
other things, prevailing interest rates, the Company's results of operations
and the market for similar securities. Depending on prevailing interest rates,
the market for similar securities and other factors, including the financial
condition of the Company, the Debentures may trade at a discount from their
principal amount.
<PAGE> 19
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Debentures
or the Common Stock offered by the Selling Security Holders hereunder.
RATIO OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges represents the ratio
of (i) the sum of income before taxes plus interest expense to (ii) interest
expense. The ratio of earning to fixed charges for each of the five fiscal years
ended June 30, 1992, 1993, 1994, 1995 and 1996 was 25:1, 41:1, 29:1, 6.4:1
and 6.7:1, respectively.
DESCRIPTION OF THE DEBENTURES
Set forth below is a summary of certain provisions of the Debentures. The
Debentures were issued pursuant to an Indenture (the "Indenture"), dated as of
February 26, 1996, by and between the Company and The Chase Manhattan Bank,
N.A., as trustee (the "Trustee"). The following summary of the Debentures, the
Indenture and the Registration Rights Agreement does not purport to be complete
and is subject to, and is qualified in its entirety by, reference to all of the
provisions of the Indenture, the Debentures and the Registration Rights
Agreement, including the definitions therein contained. Copies of the Indenture
and the Registration Rights Agreement can be obtained from the Company upon
request. Capitalized terms used herein without definition have the meaning
ascribed to them in the Indenture and the Registration Rights Agreement, as
appropriate. References under this heading to the "Company" are to Aames
Financial Corporation, and do not include its subsidiaries unless expressly
stated. Wherever particular provisions of the Indenture or the Registration
Rights Agreement are referred to in this summary, such provisions are
incorporated by reference as a part of the statements made and such statements
are qualified in their entirety by such reference. The Debentures offered
hereby were issued as part of an offering of 5 1/2% Convertible Subordinated
Debentures effected by the Company in February 1996. All references to the
term, "Debentures," in this section will refer to the entire issue of 5 1/2%
Convertible Subordinated Debentures, and not just to the Debentures offered
hereby.
GENERAL
The Debentures are unsecured general obligations of the Company, limited in
aggregate principal amount $115,000,000. The Debentures are subordinated in
right of payment to all existing and future Senior Indebtedness of the Company,
as described under "Subordination" below. At June 30, 1996, Senior Indebtedness
of the Company and indebtedness of its subsidiaries aggregated $34.1 million.
Neither the Indenture nor the Debentures limit the amount of Senior Indebtedness
or other indebtedness that the Company or its subsidiaries may incur.
The Debentures will mature on March 15, 2006. The Debentures bear
interest at 5-1/2% per annum from February 26, 1996 or from the most recent
Interest Payment Date to which interest has been paid or provided for, payable
semi-annually in arrears on March 15 and September 15 of each year, commencing
on September 15, 1996. Interest will be calculated on the basis of a 360-day
year consisting of twelve 30-day months. The interest payable on September 15,
1996, amounted to $30.40 per $1,000 principal amount of the Debentures and
on each March 15 and September 15 thereafter will amount to $27.50 per $1,000
principal amount of the Debentures.
<PAGE> 20
SUBORDINATION
The Debentures are obligations exclusively of the Company and not of its
subsidiaries. The Company conducts substantially all of its operations through
its subsidiaries. Accordingly, the Company's ability to meet its cash
obligations is dependent upon the ability of its subsidiaries to make cash
distributions to the Company. The Company's subsidiaries are separate and
distinct legal entities and have no obligation, contingent or otherwise, to pay
any amounts due pursuant to the Debentures or to make funds available therefor,
whether by dividends, loans or other payments. In addition, the payment of
dividends and the making of loans and advances to the Company by its
subsidiaries may be subject to statutory or contractual restrictions, are
contingent upon the earnings of those subsidiaries and are subject to various
business considerations. Neither the Indenture nor the Debentures will restrict
the Company's subsidiaries' ability to incur such restrictions in the future.
The Debentures are subordinated in right of payment to all existing and
future Senior Indebtedness of the Company and rank PARI PASSU with other
unsecured subordinated indebtedness of the Company. The rights of holders of
Debentures are effectively subordinated by operation of law to all existing and
future liabilities (including trade payables and commitments under leases) of
the Company's subsidiaries. Neither the Indenture nor the Debentures restrict
the incurrence of Senior Indebtedness or other indebtedness by the Company or
its subsidiaries. Any right of the Company to receive assets of any of its
subsidiaries upon liquidation or reorganization of the subsidiary (and the
consequent right of the holders of the Debentures to participate in those
assets) will be effectively subordinated to the claims of that subsidiary's
creditors, except to the extent that the Company is itself recognized as a
creditor of such subsidiary, in which case the claims of the Company would
still be subject to any security interests in the assets of such subsidiary and
subordinated to any indebtedness of such subsidiary senior to that held by the
Company.
The Indenture provides that no payment may be made by the Company on
account of the principal of, premium, if any, interest on, or Additional
Amounts (as defined herein) with respect to, the Debentures, or to acquire any
of the Debentures (including repurchases of Debentures at the option of the
holder thereof) for cash or property (other than Junior Securities as defined
herein), or on account of the redemption provisions of the Debentures, (i) upon
the maturity of any Senior Indebtedness of the Company by lapse of time,
acceleration (unless waived) or otherwise, unless and until all principal of,
premium, if any, and interest on such Senior Indebtedness and all other
Obligations in respect thereof are first paid in full (or such payment is duly
provided for), or (ii) in the event of default in the payment of any principal
of, premium, if any, interest on or any other Obligation in respect of any
Senior Indebtedness of the Company when it becomes due and payable, whether at
maturity or at a date fixed for prepayment or by declaration or otherwise (a
"Payment Default"), unless and until such Payment Default has been cured or
waived or otherwise has ceased to exist.
<PAGE> 21
Upon (i) the happening of an event of default (other than a Payment
Default) that permits the holders of Senior Indebtedness or their
representative immediately to accelerate its maturity and (ii) written notice
of such event of default given to the Company and the Trustee, by the holders
of such Senior Indebtedness or their representative (a "Payment Notice"), then,
unless and until such event of default has been cured or waived or otherwise
has ceased to exist, no payment (by setoff or otherwise) may be made by or on
behalf of the Company on account of the principal of, premium, if any, interest
on, or Additional Amounts with respect to, the Debentures, or to acquire or
repurchase any of the Debentures for cash or property, or on account of the
redemption provisions of the Debentures, in any such case other than payments
made with Junior Securities of the Company. Notwithstanding the foregoing,
unless (i) the Senior Indebtedness in respect of which such event of default
exists has been declared due and payable in its entirety within 179 days after
the Payment Notice is delivered as set forth above (the "Payment Blockage
Period"), and (ii) such declaration has not been rescinded or waived, at the
end of the Payment Blockage Period the Company shall be required to pay all
sums not paid to the holders of the Debentures during the Payment Blockage
Period due to the foregoing prohibitions and to resume all other payments as
and when due on the Debentures. Any number of Payment Notices may be given;
PROVIDED, HOWEVER, that (i) not more than one Payment Notice shall be given
within any period of 360 consecutive days, and (ii) no default that existed
upon the date of such Payment Notice or the commencement of such Payment
Blockage Period (whether or not such event of default is on the same issue of
Senior Indebtedness) shall be made the basis for the commencement of any other
Payment Blockage Period.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company (other than Junior Securities) shall be
received by the Trustee or the holders of Debentures at a time when such
payment or distribution is prohibited by the foregoing provisions, such payment
or distribution shall be held in trust for the benefit of the holders of Senior
Indebtedness of the Company, and shall be paid or delivered by the Trustee or
such holders of Debentures, as the case may be, to the holders of the Senior
Indebtedness of the Company remaining unpaid or unprovided for or to their
representative or representatives, or to the trustee or trustees under any
indenture pursuant to which any instruments evidencing any of such Senior
Indebtedness of the Company may have been issued, ratably according to the
aggregate amounts remaining unpaid on account of the Senior Indebtedness of the
Company held or represented by each, for application to the payment of all
Senior Indebtedness of the Company remaining unpaid, to the extent necessary to
pay or to provide for the payment of all such Senior Indebtedness in full after
giving effect to any concurrent payment or distribution to the holders of such
Senior Indebtedness.
<PAGE> 22
Upon any distribution of assets of the Company upon any dissolution,
winding up, total or partial liquidation or reorganization of the Company,
whether voluntary or involuntary, in bankruptcy, insolvency, receivership or a
similar proceeding or upon assignment for the benefit of creditors or any
marshaling of assets or liabilities, (i) the holders of all Senior Indebtedness
of the Company will first be entitled to receive payment in full (or have such
payment duly provided for) before the holders of Debentures are entitled to
receive any payment on account of the principal of, premium, if any, interest
on, or Additional Amounts with respect to, the Debentures (other than Junior
Securities) and (ii) any payment or distribution of assets of the Company of
any kind or character, whether in cash, property or securities (other than
Junior Securities) to which the holders of Debentures or the Trustee on their
behalf would be entitled (by setoff or otherwise), except for the subordination
provisions contained in the Indenture, will be paid by the liquidating trustee
or agent or other person making such a payment or distribution directly to the
holders of Senior Indebtedness of the Company or their representative to the
extent necessary to make payment in full of all such Senior Indebtedness
remaining unpaid, after giving effect to any concurrent payment or distribution
to the holders of such Senior Indebtedness.
No provision contained in the Indenture or the Debentures affects the
obligation of the Company, which is absolute and unconditional, to pay, when
due, principal of, premium, if any, interest on, and Additional Amounts with
respect to, the Debentures. The subordination provisions of the Indenture and
the Debentures will not prevent the occurrence of any default or Event of
Default or limit the rights of any holder of Debentures, subject to the four
immediately preceding paragraphs, to pursue any other rights or remedies with
respect to the Debentures.
As a result of these subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceeding or an assignment for the benefit of the creditors of the Company or
any of its subsidiaries or a marshaling of assets or liabilities of the Company
and its subsidiaries, holders of the Debentures may receive ratably less than
other creditors.
DELIVERY AND FORM OF RESTRICTED DEBENTURES
The Managers arranged for the sale of a portion of the Debentures to
certain institutions in the United States in reliance on exemptions from the
registration requirements of the Securities Act. Those of such Debentures that
were sold to QIBs are represented by a single global Debenture (the "Rule 144A
Global Security"), which was deposited on February 26, 1996 with, or on behalf
of, the Depository and registered in the name of Cede & Co., as nominee of the
Depository (such nominee being referred to herein as the "Rule 144A Global
Security Holder"). The Debentures represented by the Rule 144A Global Security
are eligible for trading on PORTAL. Debentures that were sold to institutional
accredited investors (the "Accredited Investor Debentures") are in fully
registered form. The Rule 144A Global Security and the Accredited Investor
Debentures were delivered for the accounts of the purchasers thereof on
February 26, 1996.
<PAGE> 23
The Depository is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depository's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depository's Participants include securities brokers and
dealers, banks and trust companies, clearing corporations and certain other
organizations. Access to the Depository's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depository's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either
directly or indirectly. Persons who are not Participants may beneficially own
securities held by or on behalf of the Depository only through the Depository's
Participants or the Depository's Indirect Participants.
So long as the Rule 144A Global Security Holder is the registered owner of
any Debentures, the Rule 144A Global Security Holder will be considered the
sole holder under the Indenture of any Debentures evidenced by the Rule 144A
Global Security. Beneficial owners of Debentures evidenced by the Rule 144A
Global Security will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee. Neither the Company nor
the Trustee will have any responsibility or liability for any aspect of the
records of the Depository or for maintaining, supervising or reviewing any
records of the Depository relating to the Debentures.
Payments in respect of the principal of, premium, if any, interest on, and
Additional Amounts with respect to, any Debentures registered in the name of
the Rule 144A Global Security Holder on the applicable record date are payable
by the Trustee to or at the direction of the Rule 144A Global Security Holder
in its capacity as the registered holder under the Indenture. Under the terms
of the Indenture, the Company and the Trustee may treat the persons in whose
names the Debentures, including the Rule 144A Global Security, are registered
as the owners thereof for the purpose of receiving such payments. Consequently,
neither the Company nor the Trustee has or will have any responsibility or
liability for the payment of such amounts to beneficial owners of Debentures.
The Company believes, however, that it is currently the policy of the
Depository immediately to credit the accounts of the relevant Participants with
such payments, in amounts proportionate to their respective holdings of
beneficial interests in the relevant security as shown on the records of the
Depository. Payments by the Depository's Participants and the Depository's
Indirect Participants to the beneficial owners of Debentures are governed by
standing instructions and customary practice and are the responsibility of the
Depository's Participants or the Depository's Indirect Participants.
<PAGE> 24
EXCHANGE AND TRANSFER
At the option of the holder thereof and subject to the terms of the
Debentures and of the Indenture, Registered Debentures are exchangeable for an
equal aggregate principal amount of Registered Debentures of different
authorized denominations, without service charge (other than the cost of
delivery) and upon payment of any taxes and other governmental charges.
Registered Debentures shall be registered as provided in the Indenture. The
registered holder of a Registered Debenture will be treated by the Company, the
Trustee and their respective agents for all purposes as the owner of such
Registered Debenture.
The transfer of Registered Debentures may be registered, and Registered
Debentures may be presented in exchange for other Registered Debentures of
different authorized denominations, at the office of the Trustee in The City of
New York, without service charge (other than the cost of delivery) and upon
payment of any taxes or other governmental charges. Registered Debentures may
also be presented for purposes of transfer or such exchange at the offices of
the paying agents in London (which will initially be The Chase Manhattan Bank,
N.A. or Luxembourg (which will initially be Chase Manhattan Bank Luxembourg,
S.A.), or such other paying agents as may be specified in notices to the
holders of Debentures in accordance with "--Notices" below.
In the event of a redemption in part, the Company is not required to
(i) register the transfer of Registered Debentures for a period of 15 days
immediately preceding the date on which notice is given identifying the serial
numbers of the Debentures called for such redemption, or (ii) to register the
transfer or exchange of any such Registered Debenture, or portion thereof,
called for redemption.
Subject to certain conditions, any person having a beneficial interest in
the Rule 144A Global Security may, upon request to the Trustee, exchange such
beneficial interest for Debentures in the form of certificated Debentures. Upon
any such issuance, the Trustee is required to register such certificated
Debentures in the name of, and cause the same to be delivered to, such person
or persons (or the nominee of any thereof). All such certificated Debentures
will be subject to the legend requirements described herein under "Notice to
Investors." In addition, if (i) the Company notifies the Trustee in writing
that the Depository is no longer willing or able to act as a depository and the
Company is unable to locate a qualified successor within 90 days or (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of Debentures in the form of certificated Debentures under the
Indenture, then, upon surrender by the Rule 144A Global Security Holder of the
Rule 144A Global Security, Debentures in certificated form will be issued to
each person that the Rule 144A Global Security Holder and the Depository
identify as being the beneficial owner of the related Debentures.
Neither the Company nor the Trustee is liable for any delay by the
Rule 144A Global Security Holder or the Depository in identifying the
beneficial owners of Debentures, and the Company and the Trustee may
conclusively rely on, and are protected in relying on, instructions from the
Rule 144A Global Security Holder or the Depository for all purposes.
<PAGE> 25
CONVERSION RIGHTS
The Debentures are convertible into Common Stock, initially at the
conversion price of $28.00 per share (equivalent to approximately 35.71 shares
of Common Stock for each $1,000 principal amount of Debentures), at any time on
and after the Exchange Date, and prior to redemption or maturity. The right to
convert a Debenture called for redemption or delivered for repurchase will
terminate at the close of business on the fifth day (or if such day is not a
Business Day, the next succeeding Business Day) next preceding the redemption
date for such Debenture. Holders of the Debentures will have the right to
convert Debentures called for redemption until terminated in accordance with
the preceding sentence.
The right of conversion attaching to any Debenture may be exercised by the
holder thereof by delivering the Debenture at the specified office of a
conversion agent (including such office in Luxembourg, as described under
"--Payments, Paying Agents and Conversion Agents" below), accompanied by a duly
signed and completed notice of conversion. The conversion date shall be the
date on which the Debenture and the duly signed and completed notice of
conversion shall have been so delivered. As promptly as practicable on or
after the conversion date, the Company will cause to be delivered at such
office of the conversion agent certificates representing the number of shares
of Common Stock deliverable upon conversion, together with payment in lieu of
any fractional shares. A holder delivering a Debenture for conversion will not
be required to pay any taxes or duties payable in respect of the issuance or
delivery of Common Stock on conversion but will be required to pay any tax or
duty which may be payable in respect of any transfer involved in the issuance
or delivery of the Common Stock in a name other than that of the holder of the
Debenture. Certificates representing shares of Common Stock issuable upon
conversion of the Debentures will be issued and delivered by the Company's
transfer agent upon notice from the conversion agent under the Indenture only
after all taxes and duties, if any, payable by such holder have been paid. Such
certificates will be delivered to the address specified by such holder in its
completed notice of conversion.
In the case of any Registered Debenture that has been converted after any
Interest Record Date, but on or before the next Interest Payment Date,
interest, the stated due date of which is on such Interest Payment Date, shall
be payable on such Interest Payment Date notwithstanding such conversion, and
such interest shall be paid to the holder of such Registered Debenture who is a
holder on such Interest Record Date. Any Registered Debenture so converted must
be accompanied by payment of an amount equal to the interest payable on such
Interest Payment Date on the principal amount of Registered Debentures being
surrendered for conversion, except that Registered Debentures called for
redemption on March 15, 1999 shall not be accompanied by such payment.
<PAGE> 26
The conversion price is subject to adjustment in certain events, including
(a) dividends (and other distributions) payable in Common Stock on any class of
capital stock of the Company, (b) the issuance to all holders of Common Stock
of rights, options or warrants entitling them to subscribe for or purchase
Common Stock (or securities convertible into Common Stock) at less than the
then-current market price (as determined in accordance with the Debentures)
unless holders of Debentures are entitled to receive the same upon conversion,
(c) subdivisions, combinations and reclassifications of Common Stock and
(d) distributions to all holders of Common Stock of evidences of indebtedness
of the Company or assets (including securities, but excluding those rights,
options, warrants, dividends and distributions referred to above, dividends and
distributions paid in cash out of the retained earnings of the Company and
regular quarterly dividends consistent with past practice). In addition to the
foregoing adjustments, the Company is permitted to make such downward
adjustments in the conversion price as it considers to be advisable in order
that any event treated for United States federal income tax purposes as a
dividend of stock or stock rights will not be taxable to the holders of the
Common Stock. Adjustments in the conversion price of less than $0.25 will not
be required, but any adjustment that would otherwise be required to be made
will be taken into account in the computation of any subsequent adjustment.
Fractional shares of Common Stock are not to be issued or delivered upon
conversion, but, in lieu thereof, a cash adjustment will be paid based upon the
then-current market price of Common Stock.
Subject to the foregoing, no payments or adjustments will be made upon
conversion on account of accrued interest on the Debentures or for any
dividends or distributions on any shares of Common Stock delivered upon such
conversion. Notice of any adjustment of the conversion price will be given in
the manner set forth herein under "--Notices" below.
Conversion price adjustments or omissions in making such adjustments may,
under certain circumstances, be deemed to be distributions that could be
taxable as dividends under the Internal Revenue Code of 1986, as amended, to
holders of Debentures or of Common Stock.
If at any time the Company makes a distribution of property to its
stockholders that would be taxable to such stockholders as a dividend for
federal income tax purposes (E.G., distribution of evidences of indebtedness or
assets of the Company, but generally not stock dividends or rights to subscribe
for Common Stock) and, pursuant to the antidilution provisions of the
Debentures, the conversion price of the Debentures is reduced, such reduction
may be deemed to be the payment of a taxable dividend to holders of Debentures.
Such a deemed dividend might be subject to a 30% or then applicable federal
withholding tax unless the holder is entitled to a reduction of the tax under a
tax treaty.
In the event that the Company should merge with another company, become a
party to a consolidation or sell or transfer all or substantially all of its
assets to another company, each Debenture then outstanding would, without the
consent of any holder of Debentures, become convertible only into the kind and
amount of securities, cash and other property receivable upon the merger,
consolidation or transfer by a holder of the number of shares of Common Stock
into which such Debenture might have been converted immediately prior to such
merger, consolidation or transfer.
<PAGE> 27
REDEMPTION
Unless previously redeemed, converted or purchased and canceled by the
Company, the Debentures will mature on March 15, 2006 and shall be redeemed at
their principal amount.
OPTIONAL REDEMPTION
The Debentures may be redeemed, at the option of the Company, in whole or
in part, at any time on and after March 15, 1999, upon notice as described
below, at a redemption price equal to 103% of their principal amount if
redeemed during the 12-month period commencing March 15, 1999, 102% of their
principal amount if redeemed during the 12-month period commencing March 15,
2000, 101% of their principal amount if redeemed during the 12-month period
commencing March 15, 2001 and 100% of their principal amount if redeemed during
the 12-month period commencing March 15, 2002 and thereafter, in each case
together with accrued and unpaid interest to the date fixed for redemption. In
the event of a partial redemption, the Debentures to be redeemed will be
selected by the Trustee not more than 75 days before the date fixed for
redemption, by such method as the Trustee shall deem fair and appropriate.
Debentures may be redeemed, in whole but not in part, upon notice as
described below, at the option of the Company at any time, if the Company shall
determine that as a result of any change in or amendment to the laws or any
regulations or rulings of the United States or any political subdivision or
taxing authority thereof or therein affecting taxation, or any amendment to, or
change in, an official application or interpretation of such laws, regulations
or rulings, which amendment or change is announced or becomes effective on or
after February 16, 1996, the Company has or will become obligated to pay
Additional Amounts on the Debentures or coupons, as described below under
"Payment of Additional Amounts," and such obligation cannot be avoided by the
Company taking reasonable measures available to it; PROVIDED, HOWEVER, that no
such notice of redemption shall be given earlier than 90 days prior to the
earliest date on which the Company would be obligated to pay such Additional
Amounts were a payment in respect of the Debentures then due; and PROVIDED
FURTHER, that at the time such notice is given, such obligation to pay such
Additional Amounts remains in effect. In case of any such redemption, the
redemption price will be 100% of the principal amount of the Debentures,
together in each case with accrued and unpaid interest to the date fixed for
redemption. The Company is required to deliver to the Trustee a certificate
stating that the Company is entitled to effect such redemption and that the
conditions precedent to the right of the Company to redeem the Debentures have
occurred and an opinion of counsel stating that the legal conditions precedent
to the right of the Company to effect such redemption have occurred.
<PAGE> 28
NOTICES OF REDEMPTION
Notice of intention to redeem Debentures will be given as described under
"--Notices" below. In the case of redemption of all Debentures, notice will be
given once not more than 60 nor less than 30 days prior to the date fixed for
redemption. In the case of a partial redemption, notice will be given twice,
the first such notice to be given not more than 60 nor less than 45 days prior
to the date fixed for redemption and the second such notice to be given not
more than 45 nor less than 30 days prior to the date fixed for redemption.
Notices of redemption will specify the date fixed for redemption, the
applicable redemption price, the date on which the conversion privilege expires
and, in the case of a partial redemption, the aggregate principal amount of
Debentures to be redeemed and the aggregate principal amount of Debentures
which will be outstanding after such partial redemption. In addition, in the
case of a partial redemption, the first notice will specify the last date on
which exchanges or transfers of Debentures may be made pursuant to the
provisions of "--Exchange and Transfer" above and the second notice will
specify the serial numbers of the Debentures and the portions thereof called
for redemption.
In addition, the Company may at any time and from time to time repurchase
the Debentures in the open market or in private transactions at prices it
considers attractive. Debentures repurchased by the Company will be canceled.
CHANGE OF CONTROL
Each holder of a Debenture has the right, at such holder's option, to
cause the Company to purchase such Debenture, in whole but not in part, for a
cash amount equal to 100% of the principal amount, together with accrued and
unpaid interest to the repurchase date, if a Change of Control (as defined
herein) occurs or has occurred. Notice with respect to the occurrence of a
Change of Control will be given as described under "--Notices" below and not
later than 30 days after the Exchange Date or the date of the occurrence of
such Change of Control. The date fixed for such purchase will be a date not
less than 30 nor more than 60 days after notice of the occurrence of a Change
of Control is given (except as otherwise required by law). To be purchased, a
Debenture must be received with a duly executed written notice, substantially
in the form provided on the reverse side of such Debenture, at the office of a
paying agent not later than the fifth day (or if such day is not a Business
Day, the next succeeding Business Day) prior to the date fixed for such
purchase. All Debentures purchased by the Company will be canceled. Holders of
Debentures who have tendered a notice of purchase will be entitled to revoke
their election by delivering a written notice of such revocation to a paying
agent on or prior to the date fixed for such purchase. In addition, holders of
Debentures will retain the right to require such Debentures to be converted
into Common Stock (or other securities, property or cash, payable in lieu
thereof by reference to the adjustment price as provided under the adjustment
provision, see "--Conversion Rights") prior to the purchase date, so long as
notice to that effect, including such holder's nontransferable receipt for the
Debentures from a paying agent, is delivered to a paying agent on or prior to
the close of business on the fifth day (or if such day is not a Business Day,
the next succeeding Business Day) next preceding the applicable Redemption
Date.
<PAGE> 29
A "Change of Control" will be deemed to have occurred (i) upon any merger
or consolidation of the Company with or into any person or any sale, transfer
or other conveyance, whether direct or indirect, of all or substantially all of
the assets of the Company, on a consolidated basis, in one transaction or a
series of related transactions, if, immediately after giving effect to such
transaction, any "person" or "group" (as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) is or
becomes the "beneficial owner," directly or indirectly, of more than 50% of the
total voting power in the aggregate normally entitled to vote in the election
of directors, managers, or trustees, as applicable, of the transferee or
surviving entity, (ii) when any "person" or "group" (as such terms are used for
purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not
applicable) is or becomes the "beneficial owner," directly or indirectly, of
more than 50% of the total voting power in the aggregate normally entitled to
vote in the election of directors of the Company, or (iii) when, during
any period of 12 consecutive months after the Closing Date, individuals who at
the beginning of any such 12-month period constituted the Board of Directors of
the Company (together with any new directors whose election by such Board or
whose nomination for election by the shareholders of the Company was approved
by a vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved), cease for any reason to constitute a
majority of the Board of Directors of the Company then in office.
The phrase "all or substantially all" of the assets of the Company is
likely to be interpreted by reference to applicable state law at the relevant
time, and will be dependent on the facts and circumstances existing at such
time. As a result, there may be a degree of uncertainty in ascertaining whether
a sale or transfer of "all or substantially all" of the assets of the Company
has occurred. For purposes of this definition, (i) the terms "person" and
"group" shall have the meaning used for purposes of Rules 13d-3 and 13d-5 of
the Exchange Act as in effect on the Closing Date, whether or not applicable;
and (ii) the term "beneficial owner" shall have the meaning used in Rules 13d-3
and 13d-5 under the Exchange Act as in effect on the Closing Date, whether or
not applicable, except that a "person" shall not be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time or upon
the occurrence of certain events.
The Change of Control provisions described above may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management. The Change of Control provisions will not prevent a leveraged
buyout led by Company management, a recapitalization of the Company or change
in a majority of the members of the Board of Directors which is approved by the
then-current Board of Directors and may not afford the holders of Debentures
protection in the event of a highly leveraged transaction, reorganization,
restructuring, merger, spin-off or similar transaction that may adversely
affect such holders, if such transaction does not constitute a Change of
Control, as set forth above.
<PAGE> 30
The Company will comply with the provisions of Rule 13e-4 and any other
tender offer rules under the Exchange Act which may then be applicable and will
file a Schedule 13E-4 or any other schedule required thereunder in connection
with any offer by the Company to purchase Debentures at the option of holders
thereof upon a Change of Control. The Change of Control purchase feature is
not, however, as of the date of this Offering Circular, the result of
management's knowledge of any specific efforts to accumulate shares of Common
Stock or to obtain control of the Company by means of a merger, tender offer,
solicitation of proxies or consents or otherwise, or part of a plan to
implement a series of anti-takeover measures.
The Company could, in the future, enter into certain transactions,
including certain recapitalizations of the Company, that would not constitute a
Change of Control under the Debentures, but that would increase the amount of
Senior Indebtedness (or any other indebtedness of the Company or its
subsidiaries) outstanding at such time. There are no restrictions in the
Debentures or the Indenture on the creation of additional Senior Indebtedness
(or any other indebtedness or the Company or its subsidiaries), and, under
certain circumstances, the incurrence of significant amounts of additional
indebtedness by the Company or any of its subsidiaries could have an adverse
effect on the Company's ability to service its indebtedness, including the
Debentures. If such a Change of Control were to occur, there can be no
assurance that the Company would have sufficient funds at the time of such
event to pay the Change of Control purchase price for all Debentures tendered
by the holders thereof. A default by the Company on its obligation to pay the
Change of Control purchase price could, pursuant to cross-default provisions,
result in acceleration of the payment of other indebtedness of the Company
outstanding at that time.
Certain of the Company's existing and future agreements relating to its
indebtedness could prohibit the purchase by the Company of the Debentures
pursuant to the exercise by a holder of Debentures of the foregoing option,
depending on the financial circumstances of the Company at the time any such
purchase may occur, because such purchase could cause a breach of certain
covenants contained in such agreements. Such a breach may constitute an event
of default under such indebtedness as a result of which any repurchase could,
absent a waiver, be blocked by the subordination provision of the Debentures.
See "--Subordination." Failure of the Company to repurchase the Debentures when
required would result in an Event of Default with respect to the Debentures
whether or not such repurchase is permitted by the subordination provisions.
<PAGE> 31
PAYMENTS, PAYING AGENTS AND CONVERSION AGENTS
The principal of, premium, if any, and interest on Registered Debentures
is payable in United States dollars. Payments of such principal and premium, if
any, will be made against surrender of Registered Debentures at the corporate
trust office of the Trustee in The City of New York or, subject to any
applicable laws and regulations, at the offices of the paying agents in London
or Luxembourg (or such other paying agencies as may be specified in notices to
the holders of Debentures in accordance with "--Notices" below) by United
States dollar check drawn on, or wire transfer to a United States dollar
account maintained by the holder with, a bank located in The City of New York.
Payments of any installment of interest on Registered Debentures will be made
by a United States dollar check drawn on a bank in The City of New York mailed
to the holder at such holder's registered address or (if arrangements
satisfactory to the Company and the Trustee are made) by wire transfer to a
dollar account maintained by the holder with a bank in The City of New York.
Payment of such interest on any Interest Payment Date will be made to
the person in whose name such Registered Debenture is registered at the close
of business on the Interest Record Date prior to the relevant Interest Payment
Date. Accrued interest payable on any Registered Debenture that is redeemed
will be payable against surrender of such Registered Debenture in the manner
described above with respect to payments of principal on Registered Debentures,
except Registered Debentures that are redeemed on a date after the close of
business on the Interest Record Date immediately preceding such Interest
Payment Date and on or before the Interest Payment Date, on which interest will
be paid to the holder of record on the Interest Record Date.
The Debentures may be surrendered for conversion or exchange at the
corporate trust office of the Trustee in The City of New York or, at the option
of the holder and subject to applicable laws and regulations, at the office of
any of the conversion agents.
The Company has initially appointed the Trustee as paying agent and
conversion agent and has initially appointed Chase Manhattan Bank Luxembourg
S.A. as additional paying agent in Luxembourg. These appointments may be
terminated at any time and additional or other paying and conversion agents may
be appointed, provided that until the Debentures have been delivered for
cancellation, or monies sufficient to pay the principal of and premium, if any,
and interest on the Debentures have been made available for payment and either
paid or returned to the Company as provided in the Indenture, a paying,
conversion and transfer agent will be maintained (a) in The City of New York
for the payment of the principal of and premium, if any, and interest on
Registered Debentures only and for the surrender of Debentures for conversion
and (b) in a European city that, so long as the Debentures are listed on the
Luxembourg Stock Exchange and the rules of such Exchange shall so require, will
be Luxembourg, for the payment of the principal of and premium, if any, and
interest on Debentures and for the surrender of Debentures for conversion,
payment, redemption, transfer or exchange. Notice of any such termination or
appointment and of any change in the office through which any paying,
conversion, or transfer agent will act will be given in accordance with "
- - --Notices" below.
<PAGE> 32
All monies paid by the Company to a paying agent for the payment of
principal of, premium, if any, or interest on any Debenture that remain
unclaimed at the end of two years after such principal, premium or interest
shall have become due and payable will be repaid to the Company, and the holder
of such Debenture or any related coupon will thereafter look only to the
Company for payment thereof.
PAYMENT OF ADDITIONAL AMOUNTS
The Company will pay to the holder of any Debenture or any related coupon
who is a United States Alien (as defined above) such additional amounts
("Additional Amounts") as may be necessary in order that every net payment of
the principal of, premium, if any, and interest on such Debenture, and any cash
payments made in lieu of issuing shares of Common Stock upon conversion of a
Debenture, after withholding for or on account of any present or future tax,
assessment or governmental charge imposed upon or as a result of such payment
by the United States or any political subdivision or taxing authority thereof
or therein, will not be less than the amount provided for in such Debenture or
in such coupon to be then due and payable; PROVIDED, HOWEVER, that the
foregoing obligations to pay Additional Amounts shall not apply to any one or
more of the following:
(a) any tax, assessment or other governmental charge which would not have
been so imposed but for (i) the existence of any present or former connection
between such holder (or between a fiduciary, settlor, beneficiary, member or
stockholder of, or a person holding a power over, such holder, if such holder
is an estate, trust, partnership or corporation) and the United States,
including, without limitation, such holder (or such fiduciary, settlor,
beneficiary, member, stockholder or person holding a power) being or having
been a citizen or resident or treated as a resident thereof or being or having
been engaged in a trade or business therein or being or having been present
therein or having or having had a permanent establishment therein, (ii) such
holder's present or former status as a personal holding company,
foreign personal holding company, passive foreign investment company, foreign
private foundation or other foreign tax-exempt entity, or controlled foreign
corporation for United States federal income tax purposes or a corporation
which accumulates earnings to avoid United States federal income tax, or
(iii) such holder's status as a bank extending credit pursuant to a loan
agreement entered into in the ordinary course of business;
(b) any tax, assessment or other governmental charge which would not have
been so imposed but for the presentation by the holder of such Debenture or any
related coupon for payment on a date more than 10 days after the date on which
such payment became due and payable or on the date on which payment thereof is
duly provided, whichever occurs later;
(c) any estate, inheritance, gift, sales, transfer or personal or
intangible property tax or any similar tax, assessment or other governmental
charge;
<PAGE> 33
(d) any tax, assessment or other governmental charge which would not have
been imposed but for the failure to comply with certification, information,
documentation or other reporting requirements concerning the nationality,
residence, identity or present or former connection with the United States of
the holder or beneficial owner of such Debenture or any related coupon if such
compliance is required by statute, regulation or ruling of the United States or
any political subdivision or taxing authority thereof or therein as a
precondition to relief or exemption from such tax, assessment or other
governmental charge;
(e) any tax, assessment or other governmental charge which is payable
otherwise than by deduction or withholding from payments of principal of and
premium, if any, or interest on such Debenture;
(f) any tax, assessment or other governmental charge imposed on interest
received by a person holding, actually or constructively, 10% or more of the
total combined voting power of all classes of stock of the Company entitled to
vote; or
(g) any tax, assessment or other governmental charge required to be
withheld by any paying agent from any payment of principal of, or premium, if
any, or interest on any Debenture or interest on any coupon appertaining
thereto if such payment can be made without such withholding by any other
paying agent;
nor will Additional Amounts be paid with respect to payment of the principal
of, premium, if any, or interest on any such Debenture (or cash in lieu of
issuance of shares of Common Stock upon conversion) to a person other than the
sole beneficial owner of such payment, or that is a partnership or a fiduciary
to the extent such beneficial owner, member of such partnership or beneficiary
or settlor with respect to such fiduciary would not have been entitled to the
Additional Amounts had such beneficial owner, member, beneficiary or settlor
been the holder of such Debenture or any related coupon.
EVENTS OF DEFAULT
The Indenture defines an Event of Default with respect to the Debentures
as any of the following events: (i) the failure by the Company to pay any
installment of interest on, or Additional Amounts with respect to, the
Debentures as and when the same becomes due and payable and the continuance of
any such failure for a period of 30 days, (ii) the failure by the Company to
pay all or any part of the principal of, or premium, if any, on the Debentures
as and when the same becomes due and payable at maturity, redemption, by
acceleration or otherwise, (iii) the failure of the Company to perform any
conversion of Debentures required under the Indenture and the continuance of
any such failure for a period of 60 days, (iv) the failure by the Company to
observe or perform any other covenant or agreement contained in the Debentures
<PAGE> 34
or the Indenture and, subject to certain exceptions, the continuance of such
failure for a period of 60 days after appropriate written notice is given to
the Company by the Trustee or to the Company and the Trustee by the holders of
at least 25% in aggregate principal amount of the Debentures outstanding,
(v) certain events of bankruptcy, insolvency or reorganization in respect of
the Company or any of its subsidiaries, (vi) a default in the payment of
principal, premium or interest when due that extends beyond any stated period
of grace applicable thereto or an acceleration for any other reason of the
maturity of any Indebtedness of the Company or any of its subsidiaries with an
aggregate principal amount in excess of $10 million, and (vii) final judgments
not covered by insurance aggregating in excess of $2 million, at any one time
rendered against the Company or any of its significant subsidiaries and not
satisfied, stayed, bonded or discharged within 60 days.
The Debentures provide that if an Event of Default occurs and is
continuing, then the Company will provide notice thereof to the Trustee within
five Business Days after the Company becomes aware of such Event of Default,
and the Trustee shall then notify the holders of Debentures thereof within
90 days after its receipt of notice from the Company. If an Event of Default
occurs and is continuing, the Trustee or the holders of 25% in aggregate
principal amount of the Debentures then outstanding may, by notice in writing
to the Company (and to the Trustee, if given by the holders) (an "Acceleration
Notice"), declare all principal and accrued interest thereon and Additional
Amounts thereof, if any, to be due and payable immediately.
Prior to the declaration of acceleration of the maturity of the
Debentures, the holders of a majority in aggregate principal amount of the
Debentures at the time outstanding may waive on behalf of all the holders any
default, except a default in the payment of principal of or interest on any
Debenture not yet cured, or a default with respect to any covenant or provision
that cannot be modified or amended without the consent of the holder of each
outstanding Debenture affected. Subject to the provisions of the Indenture
relating to the duties of the Trustee, the Trustee is under no obligation to
exercise any of its rights or powers under the Indenture at the request, order
or direction of any of the holders, unless such holders have offered to the
Trustee reasonable security or indemnity. Subject to all provisions of the
Indenture and applicable law, the holders of a majority in aggregate principal
amount of the Debentures at the time outstanding have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee, or exercising any trust or power conferred on the Trustee.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture provides that the Company may not, directly or indirectly,
consolidate with or merge with or into another person or sell, lease, convey or
transfer all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions, to
another Person or group of affiliated Persons, unless (i) either (a) in the
case of a merger or consolidation the Company is the surviving entity or
(b) the resulting, surviving or transferee entity is a corporation organized
under the laws of the United States, any state thereof or the District of
Columbia and expressly assumes by written agreement all of the obligations of
the Company in connection with the Debentures and the Indenture; and (ii) no
default or Event of Default shall exist or shall occur immediately after giving
effect on a PRO FORMA basis to such transaction.
<PAGE> 35
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company in accordance with the foregoing, the
successor corporation formed by such consolidation or into which the Company is
merged or to which such transfer is made, shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under the Indenture
with the same effect as if such successor corporation had been named therein as
the Company, and the Company will be released from its obligations under the
Indenture and the Debentures, except as to any obligations that arise from or
as a result of such transaction.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Company and the Trustee
to enter into a supplemental indenture for certain limited purposes without the
consent of the holders. With the consent of the holders of not less than a
majority in aggregate principal amount of the Debentures at the time
outstanding, the Company and the Trustee are permitted to amend or supplement
the Indenture or any supplemental indenture or modify the rights of the holders
or waive compliance by the Company with any provision of the Indenture or the
Debentures; PROVIDED, that no such amendment, supplement, modification or
waiver may, without the consent of each holder affected thereby: (i) change the
Stated Maturity of any Debenture or reduce the principal amount thereof or the
rate (or extend the time for payment) of interest thereon or any premium
payable upon the redemption thereof, or change the place of payment where, or
the coin or currency in which, any Debenture or any premium or the interest
thereon is payable, or impair the right to institute suit for the enforcement
of any such payment or the conversion of any Debenture on or after the due date
thereof (including, in the case of redemption, on or after the redemption
date), or reduce the redemption price, or alter the redemption or Change of
Control provisions in a manner adverse to the holders, (ii) reduce the
percentage in principal amount of the outstanding Debentures, the consent of
whose holders is required for any such amendment, supplemental indenture or
waiver provided for in the Indenture, (iii) adversely affect the right of such
holder to convert Debentures or (iv) modify any of the waiver provisions,
except to increase any required percentage or to provide that certain other
provisions of the Indenture cannot be modified or waived without the consent of
the holder of each outstanding Debenture affected thereby.
Any instrument given by or on behalf of any holder of a Debenture in
connection with any consent to any such amendment, supplement, modification or
waiver will be irrevocable once given and will be conclusive and binding on all
subsequent holders of such Debenture and related coupons. Any amendment,
supplement, modification or waiver to the Indenture or to the terms and
conditions of the Debentures will be conclusive and binding on all holders of
Debentures and related coupons, whether or not they have given such consent or
were present at any meeting, and on holders of Debentures and related coupons,
whether or not notation of such amendment, supplement, modification or waiver
is made upon the Debentures or related coupons.
<PAGE> 36
RULE 144A INFORMATION REQUIREMENT
The Company has agreed to furnish to the holders or beneficial owners of
the Debentures or the underlying Common Stock and prospective purchasers of the
Debentures or the underlying Common Stock designated by the holders of the
Debentures or the underlying Common Stock, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act
until such time as such securities are no longer "restricted securities" within
the meaning of Rule 144 under the Securities Act.
REPORTS
The Company shall deliver to the Trustee and to each holder of Debentures,
within 15 days after it is required to file such with the Commission, annual
and quarterly consolidated financial statements substantially equivalent to
financial statements required to be included in reports filed with the
Commission including, with respect to annual information only, a report thereon
by the Company's certified independent public accountants as such is required
in such reports to the Commission, in each case, together with managements
discussion and analysis of financial condition and results of operations.
NOTICES
Notices to holders of the Debentures will be given by publication in a
leading daily newspaper in the English language of general circulation in The
City of New York and in London and, so long as the Debentures are listed on the
Luxembourg Stock Exchange, in a daily newspaper of general circulation in
Luxembourg or, if publication in either London or Luxembourg is not practical,
in Europe. Such publication is expected to be made in THE WALL STREET JOURNAL
(Eastern Edition), the FINANCIAL TIMES and the LUXEMBOURG WORT. In addition,
notices to holders of Registered Debentures will be given by mail to the
addresses of such holders as they appear in the register maintained by the
Trustee on the fifteenth day prior to such mailing. Such notices will be deemed
to have been given on the date of such publication or mailing or, if published
in such newspapers on different dates, on the date of the first such
publication.
REPLACEMENT OF DEBENTURES AND RELATED COUPONS
Debentures (including related coupons, if any) that become mutilated,
destroyed, stolen or lost will be replaced by the Company at the expense of the
holder thereof upon delivery to the Trustee of the Debentures and related
coupons or evidence of the loss, theft or destruction thereof satisfactory to
the Company and the Trustee. In the case of a lost, stolen or destroyed
Debenture or related coupon, an indemnity satisfactory to the Company and the
Trustee may be required at the expense of the holder of such Debenture or
related coupon before a replacement Debenture or related coupon, as the case
may be, will be issued.
GOVERNING LAW
The Debentures, any related coupons and the Indenture are governed by and
construed in accordance with the laws of the State of New York, without giving
effect to its conflicts of law rules.
<PAGE> 37
MARKETABILITY; REGISTRATION RIGHTS
Prior to the offering hereby, there has been no public market for the
Debentures, and it is likely that only a limited market developed prior to the
date of the Registration Statement. The Debentures were initially sold
pursuant to exemptions from registration under the Securities Act.
CERTAIN DEFINITIONS
"BUSINESS DAY" means, with respect to any act to be performed pursuant to
the Indenture or the terms of the Debentures, each Monday, Tuesday, Wednesday,
Thursday or Friday that is not a day on which banking institutions in the place
where such act is to occur are authorized or obligated by applicable law,
regulation or executive order to close.
"CAPITAL STOCK" means, with respect to any corporation, any and
all shares, interests, rights to purchase (other than convertible or
exchangeable indebtedness), warrants, options, participations or other
equivalents of or interests (however designated) in stock issued by that
corporation.
"INDEBTEDNESS" of any person means, without duplication, (a) all
liabilities and obligations, contingent or otherwise, of any such person,
(i) in respect of borrowed money (whether or not the recourse of the lender is
to the whole of the assets of such person or only to a portion thereof),
(ii) evidenced by bonds, notes, debentures or similar instruments, (iii)
representing the balance deferred and unpaid of the purchase price of any
property or services, except such as would constitute trade payables to trade
creditors in the ordinary course of business that are not more than 90 days
past their original due date, (iv) evidenced by bankers acceptances or similar
instruments issued or accepted by banks, (v) for the payment of money relating
to a capitalized lease obligation, or (vi) evidenced by a letter of credit or a
reimbursement obligation of such person with respect to any letter of credit;
(b) all net obligations of such person under interest swap and hedging
obligations; (c) all liabilities of others of the kind described in the
preceding clauses (a) or (b) that such person has guaranteed or that is
otherwise its legal liability and all obligations to purchase, redeem or
acquire any Capital Stock; and (d) any and all deferrals, renewals, extensions,
refinancings and refundings (whether direct or indirect) of any liability of
the kind described in any of the preceding clauses (a), (b) or (c), or this
clause (d), whether or not between or among the same parties.
"JUNIOR SECURITIES" of any person means any Capital Stock and any
Indebtedness of such person that is (i) subordinated in right of payment to the
Debentures and has no scheduled installment of principal due, by redemption,
sinking fund payment or otherwise, on or prior to the Stated Maturity of the
Debentures and (ii) subordinated in right of payment to all Senior Indebtedness
at least to the same extent as the Debentures.
"OBLIGATIONS" means any principal, premium, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Senior Indebtedness.
<PAGE> 38
"SENIOR INDEBTEDNESS" of the Company means any principal, premium, if any,
and interest or other monetary obligation on any Indebtedness of the Company
other than the Debentures and Indebtedness ranking PARI PASSU with or
subordinate to the Debentures pursuant to the terms of the instrument creating
or evidencing such indebtedness, but including guarantees given by the Company,
whether outstanding on the date of the Indenture or thereafter. In no event
shall Senior Indebtedness include (a) indebtedness of the Company owed or owing
to any subsidiary of the Company or any officer, director or employee of the
Company or any subsidiary thereof or (b) any liability for taxes owed or owing
by the Company.
"STATED MATURITY" when used with respect to any Debenture, means March 15,
2006.
GOVERNING LAW
The Indenture and the Debt Securities will be governed by, and
construed in accordance with, the laws of the State of New York.
REGARDING THE TRUSTEE
The Indenture contains certain limitations on the right of the Trustee,
if and when the Trustee becomes a creditor of the Company (or any other obligor
upon the Debt Securities), regarding the collection of such claims against the
Company (or any such other obligor). Except as provided in the following
sentence, the Indenture does not prohibit the Trustee from serving as trustee
under any other indenture to which the Company may be a party from time to time
or from engaging in other transactions with the Company. If the Trustee acquires
any conflicting interest and there is a default with respect to any series of
Debt Securities, it must eliminate such conflict or resign.
DESCRIPTION OF CAPITAL STOCK
The total number of shares that the Company is authorized to issue is
51,000,000, consisting of 50,000,000 shares of Common Stock, par value $0.001
per share, and 1,000,000 shares of Preferred Stock, par value $0.001 per share.
The following statements are brief summaries of certain provisions relating to
the Company's capital stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by the stockholders. The holders of
Common Stock are entitled to receive ratably dividends when, as and if declared
by the Board of Directors out of funds legally available therefor. In the event
of a liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled, subject to the rights of holders of Preferred Stock
issued by the Company, if any, to share ratably in all assets remaining
available for distribution to them after payment of liabilities and after
provision is made for each class of stock, if any, having preference over the
Common Stock.
The holders of Common Stock, as such, have no conversion, preemptive or
other subscription rights and there are no redemption provisions applicable to
the Common Stock. All the outstanding shares of Common Stock are, and the shares
of Common Stock to be issued on conversion of the Debentures offered hereby will
be, validly issued, fully paid and nonassessable.
The Company distributes periodic reports and other information,
including notices of annual meetings and special meetings of the stockholders of
the Company, to recordholders of Common Stock to the addresses indicated on the
Company's stock records.
PREFERRED STOCK
The Board of Directors has the authority to issue the authorized and
unissued Preferred Stock in one series with such designations, rights and
preferences as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder approval,
to issue Preferred Stock with dividend, liquidation, conversion, voting or other
rights which adversely affect the voting power or other rights of the holders of
the Common Stock. In the event of issuance, the Preferred Stock could be
utilized under certain circumstances as a way of discouraging, delaying or
preventing an acquisition or change in control of the Company.
The Company does not currently intend to issue any shares of its Preferred
Stock.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws include a number
of provisions which may have the effect of discouraging persons from pursuing
non-negotiated takeover attempts. These provisions include a
<PAGE> 39
classified Board of Directors, the inability of stockholders to take action by
written consent without a meeting, the inability of stockholders to call for a
special meeting of stockholders under certain circumstances without the approval
of the Board and the inability of stockholders to remove directors without
cause.
The Company's employment arrangements with its Chief Executive Officer,
Chief Operating Officer, Executive Vice President and President of One Stop,
and certain other senior executives provide for the payment of multiple years
of compensation and acceleration of stock options in the event of certain
changes in control.
Each share of the Company's outstanding Common Stock also evidences one
stock purchase right (a "Right") pursuant to the terms and conditions of a
Stockholders' Rights Plan adopted by the Company in June 1996 (the "Rights
Plan"). In general, the Rights will not be exercisable, or transferable, apart
from the Common Stock, until the tenth day after a person or group (other than
an "Exempt Person" as defined in the Rights Plan) either: (i) acquires
beneficial ownership of 15% or more of the outstanding Common Stock; or (ii)
commences a tender offer or an exchange offer, to acquire beneficial ownership
of 15% or more of the outstanding Common Stock; or (iii) who previously acquired
15% or more of the Common Stock in a transaction approved by the Board of
Directors increases its ownership of Common Stock by more than 1%; or (iv) files
a registration statement with the SEC with respect to an exchange offer to
acquire 15% or more of the Common Stock; or (v) who beneficially owns 10% or
more of the outstanding Common Stock is declared an "Adverse Person" by the
Board of Directors
Following an event described above, each Right will be converted into a
right to purchase from the Company, for the Exercise price, that number of one
one-hundredth (1/100th) of a share of Preferred Stock (or, in certain
circumstances, Common Stock, cash, property, or other securities of the Company)
having a market value of twice the Exercise Price. Further, if after the Rights
become exercisable, the Company or a majority of its assets or earning power is
acquired by merger, consolidation, transfer, sale or otherwise, each Right will
be converted into the right to purchase that number of shares of common stock of
the surviving entity or (in certain circumstances) its parent corporation,
having a market value of twice the Exercise Price. In general, no Adverse
Person, nor the person or group whose purchase transaction or tender or exchange
offer triggers the exercisability of the Rights, nor any of that person's or
group's transferees, may exercise Rights held by them.
Each Right, at the option of the holder of the Right, also may be
exercised without the payment of cash. In such case, the Right's holder will
receive securities having a value equal to the difference between the value of
the securities that would have been issuable upon payment of the exercise price
and the exercise price.
At any time prior to the tenth day following an event described in (i)
through (v), above, the Board of Directors may redeem all outstanding Rights at
a price of $0.001 per Right, and may amend the Rights Agreement and the Rights
in any and all respects. The Rights will expire at the earliest date of their
redemption or June 20, 2006.
<PAGE> 40
SECTION 203 OF THE DELAWARE LAW
The Company is a Delaware corporation and is subject to Section 203 of
the Delaware General Corporation Law the ("DGCL"). Section 203 of the DGCL
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of a corporation's outstanding voting stock or an affiliate of such
person) from engaging in a "business combination" (as defined) with a Delaware
corporation for three years following the date such person became an interested
stockholder unless (i) before such person became an interested stockholder, the
board of directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation outstanding
at the time the transaction commenced (excluding stock held by directors who are
also officers of the corporation and employee stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer); or (iii) following
the transaction in which such person became an interested stockholder, the
business combination is approved by the board of directors of the corporation
and authorized at a meeting of stockholders by vote of the holders of two-thirds
of the outstanding voting stock of the corporation not owned by the interested
stockholder. Under Section 203 of the DGCL, the restrictions described above
also do not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who had not
been an interested stockholder during the previous three years or became an
interested stockholder with the approval of a majority of the corporation's
directors. The provisions of Section 203 of the DGCL requiring a supermajority
vote of disinterested shares to approve certain corporate transactions could
enable a minority of the Company's stockholders to exercise veto power
over such transactions.
<PAGE> 41
TRANSFER AGENT
The Company's transfer agent and registrar for its Common Stock is Wells
Fargo Bank, N.A.
SELLING SECURITY HOLDERS
The Debentures were issued by the Company on February 26, 1996, in a
private placement pursuant to Rule 144A and Regulation D under the Securities
Act. The names of the Selling Security Holders, the principal amount of the
Securities owned, and that may be sold, by each such Selling Security Holder
shall be
<PAGE> 42
identified and set forth in Prospectus Supplements from time to time.
Because the Selling Security Holders may offer all or only some of the
Debentures that they now hold and/or shares of Common Stock issued upon
conversion thereof in the offering contemplated by this Prospectus and because
there are presently no agreements, arrangements or understandings concerning
the sale of any of the Debentures or shares of Common Stock issuable upon
conversion thereof, no estimate can be given about the principal amount of
Debentures or shares of Common Stock that will be held by the Selling Security
Holders after completion of this offering. See "Plan of Distribution" herein.
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds from this offering. The
Selling Security Holders may sell all or a portion of the Debentures and shares
of Common Stock issuable upon conversion thereof from time to time directly to
purchasers or through agents, dealers (who may act as principals for their own
account) or underwriters on terms to be determined at the times of such sales.
Any agent, dealer or underwriter through whom Debentures or shares of Common
Stock are sold may receive compensation in the form of underwriting discounts,
commissions or concessions from the Selling Security Holders and/or the
purchasers of the Debentures or shares of Common Stock for whom they act as
agent. To the extent required, the principal amount of the Debentures or the
number of shares of Common Stock to be sold, the offering price thereof, the
name of each Selling Security Holder and each agent, dealer and underwriter, if
any, and any applicable discounts or commissions concerning a particular
offering will be set forth in an accompanying Prospectus Supplement. The
aggregate proceeds to the Selling Security Holders from the Debentures and
shares of Common Stock offered by the Selling Security Holders hereby will be
the offering price of such Debentures and shares of Common Stock less
applicable commissions or discounts.
There is no assurance that the Selling Security Holders will sell any of
the Debentures or shares of Common Stock offered hereby.
In order to comply with the securities laws of certain States or other
jurisdictions, if applicable, the Debentures and shares of Common Stock will be
sold in such jurisdictions only through registered or licensed brokers or
dealers. In addition, in certain States or other jurisdictions the Debentures
and shares of Common Stock may not be sold unless they have been registered or
qualified for sale under the securities laws of such jurisdictions or an
exemption from the registration and qualification requirements of such laws is
available and the conditions of such exemption are satisfied.
<PAGE> 43
The Selling Security Holders and any broker-dealers, agents or
underwriters that participate with the Selling Security Holders in the
distribution of the Debentures or shares of Common Stock may be deemed to be
"underwriters" within the meaning of the Securities Act, in which case any
commissions received by such broker-dealers, agents or underwriters and any
profit on the resale of the Debentures or shares of Common Stock purchased by
them may be deemed to be underwriting commissions or discounts under the
Securities Act.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Debentures or shares of Common Stock offered
hereby may not simultaneously engage in market making activities for either the
Debentures or the Common Stock for a period of nine business days (in the case
of the Debentures) or two business days (in the case of the Common Stock) prior
to the commencement of such distribution. In addition, each Selling Security
Holder and any other person who participates in a distribution of the
Debentures or shares of Common Stock will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, including Rules
10b-2, 10b-6 and 10b-7, which provisions may limit the timing of purchases and
sales of Debentures or shares of Common Stock by the Selling Security Holders.
The applicable provisions of the Exchange Act and the rules and regulations
thereunder may effect the marketability of the Debentures and shares of Common
Stock and the ability of any person to engage in market making activities for
the Debentures or shares of Common Stock.
To the Company's knowledge, no person presently intends to make a market
in the Debentures.
Pursuant to the Indenture, the Company will pay all expenses incident to
the preparation and filing of the Registration Statement.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Barbara S. Polsky, Esq., Senior Vice President and General Counsel
of the Company.
<PAGE> 44
EXPERTS
The audited consolidated financial statements of the Company
incorporated in this Prospectus by reference to the Company's Annual Report on
Form 10-K for the year ended June 30, 1996, and the audited supplementary
consolidated financial statements of the Company incorporated in this Prospectus
by reference to the Company's Current Report on Form 8-K/A dated September 16,
1996, have been so incorporated in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting. The audited financial statements of One Stop Mortgage,
Inc. incorporated in this Prospectus by reference to the Company's Current
Report on Form 8-K dated September 12, 1996, have been so incorporated in
reliance on the report of KPMG Peat Marwick LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
<PAGE> 45
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS, OR ANY PROSPECTUS SUPPLEMENT, AND
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROSPECTUS AND ANY PROSPECTUS SUPPLEMENT DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
Available Information.......................................................
Incorporation of Certain Documents by Reference.............................
The Company.................................................................
Risk Factors................................................................
Use of Proceeds.............................................................
Ratio of Earnings to Fixed Charges..........................................
Description of Debt Securities..............................................
Description of Capital Stock................................................
Selling Stockholders........................................................
Plan of Distribution........................................................
Legal Matters...............................................................
Experts.....................................................................
------------
$48,250,000
AAMES FINANCIAL CORPORATION
5-1/2 CONVERTIBLE SUBORDINATED DEBENTURES
DUE MARCH 15, 2006
(INTEREST PAYABLE MARCH 15 AND SEPTEMBER 15)
AND 1,723,215 SHARES
OF COMMON STOCK
------------
PROSPECTUS
------------
<PAGE> 46
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the offering are as follows:
<TABLE>
<CAPTION>
Amount
-------
<S> <C>
Registration Fee Under Securities Act of 1933. . . . . . . . . . . . $16,638
NASD Filing Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . $ *
Blue Sky Fees and Expenses. . . . . . . . . . . . . . . . . . . . . .$ *
Printing and Engraving Certificates. . . . . . . . . . . . . . . . . $ *
Legal Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . $10,000
Accounting Fees and Expense. . . . . . . . . . . . . . . . . . . . . $ 5,000
Registrar and Transfer Agent Fees. . . . . . . . . . . . . . . . . . $ *
Miscellaneous Expenses. . . . . . . . . . . . . . . . . . . . . . . $ 362
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,000
=======
</TABLE>
_________________
* Not applicable or none.
<PAGE> 47
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company has adopted provisions in its Certificate of Incorporation
which limit the liability of directors. As permitted by applicable provisions
of the Delaware General Corporation law (the "Delaware Law"), directors will
not be liable to the Company for monetary damages arising from a breach of
their fiduciary duty as directors in certain circumstances. Such limitation
does not affect liability for any breach of a director's duty to the Company or
its stockholders (i) with respect to approval by the director of any
transaction from which he derives an improper personal benefit, (ii) with
respect to acts or omissions involving an absence of good faith, that he
believes to be contrary to the best interests of the Company or its
stockholders, that involve intentional misconduct or knowing and culpable
violation of law, that constitute an unexcused pattern of inattention that
amounts to an abdication of his duty to the Company or its stockholders, or
that show a reckless disregard for his duty to the Company or its stockholders
in circumstances in which he was or should have been aware, in the ordinary
course of performing his duties, of a risk of serious injury to the Company or
its stockholders, or (iii) based on transactions between the Company and its
directors or other corporations with interrelated directors or on improper
distributions, loans or guarantees under applicable sections of the Delaware
Law. Such limitation of liability also does not affect the availability of
equitable remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company must indemnify its directors
and officers to the full extent permitted by the Delaware Law, including
circumstances in which indemnification is otherwise discretionary under the
Delaware Law, and the Company has entered into indemnification agreements (the
"Indemnification Agreements") with its directors providing such indemnity. The
Indemnification Agreements constitute binding agreements between the Company
and each of the other parties thereto, thus preventing the Company from
modifying its indemnification policy in a way that is adverse to any person who
is a party to an Indemnification Agreement.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
See the Exhibit Index of this Registration Statement.
<PAGE> 48
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to the appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to include any material
information with respect to the plan of distribution not previously disclosed
in the Registration Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned Registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the Trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"), in accordance with the rules and regulations
prescribed by the Commission under Section 305(b)(2) of the Trust Indenture
Act.
<PAGE> 49
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Pre Effective
Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Los Angeles, State of California, on
September 12, 1996.
AAMES FINANCIAL CORPORATION
(Registrant)
By: /s/ Gary K. Judis
------------------------
Gary K. Judis
Chairman of the Board and
Chief Executive Officer and President
Pursuant to the requirements of the Securities Act of 1933, this
Pre Effective Amendment No. 1 to Registration Statement has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Gary K. Judis Chief Executive Officer, September 12, 1996
- ---------------------------- President, Director ------------------
Gary K. Judis
/s/ Cary H. Thompson Chief Operating Officer, September 12, 1996
- ---------------------------- Director ------------------
Cary H. Thompson
/s/ Gregory J. Witherspoon Executive Vice President
- ---------------------------- - Finance, Chief Financial September 12, 1996
Gregory J. Witherspoon Officer, Director ------------------
/s/ Bobbie J. Burroughs Executive Vice President September 12, 1996
- ---------------------------- - Administration, Secretary, ------------------
Bobbie J. Burroughs Director
/s/ Neil B. Kornsweet Executive Vice President, September 12, 1996
- ---------------------------- Director ------------------
Neil B. Kornsweet
<PAGE> 50
/s/ Mark E. Elbaum Senior Vice President - September 12, 1996
- - --------------------------- Finance, Principal -------------------
Mark E. Elbaum Accounting Officer
/s/ Joseph R. Cerrell Director September 12, 1996
- - --------------------------- ------------------
Joseph R. Cerrell
Director
- - --------------------------- ------------------
Dennis F. Holt
EXHIBIT INDEX
NO. ITEM PAGE
- - --- ---- ----
4.1 Indenture. <F1>
5.1 Opinion of Barbara S. Polsky, Esq., Senior Vice President,
General Counsel, regarding validity of securities.
12.1 Statement re Computation of Ratio Earnings to Fixed Charges.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Barbara S. Polsky, Esq., Senior Vice President,
General Counsel (included in Exhibit 5.1).
25.1 Statement of Eligibility of Trustee.
<F1> Incorporated by reference from the Corporation's Report on Form 10-Q
for the Three and Nine Months Ended March 31, 1996.
<PAGE> 1
EXHIBIT 5.1
September 18, 1996
Aames Financial Corporation
3731 Wilshire Boulevard
Los Angeles, California 90010
Ladies and Gentlemen:
At your request, the undersigned, Barbara S. Polsky, Esq. Senior Vice
President and General Counsel of Aames Financial Corporation, a Delaware
corporation (the "Company"), has examined the Registration Statement on Form S-3
(the "Registration Statement"), to which this letter is attached as Exhibit 5.1,
filed by the Company in order to register under the Securities Act of 1933 (the
"Securities Act"), the resale by certain selling securityholders of up to
$48,250,000 aggregate principal amount of 5 1/2% Convertible Subordinated
Debentures due March 15, 2006 (the "Debentures") of the Company and the shares
of common stock, par value $0.001 per share, of the Company (the "Common Stock")
that are issuable upon conversion of the Debentures.
I have examined the Certificate of Incorporation of the Company, its
Bylaws, and such other corporate records, certificates, documents and matters of
law as I have deemed necessary to render this opinion.
Based on the foregoing and subject to compliance with applicable state
securities and "Blue Sky" laws and the exceptions set forth below, I am of the
opinion that:
1. The issuance and sale by the Company of the Debentures and the
shares of Common Stock issuable upon the conversion of the Debentures have been
duly and validly authorized by all necessary corporate action of the Company.
2. The Debentures constitute valid and legally binding
obligations of the Company, enforceable against the Company in
accordance with their terms.
<PAGE> 2
Aames Financial Corporation
September 17, 1996
Page 2
3. Assuming that the Debentures are converted in the manner
described in the Registration Statement, the Common Stock issuable upon the
conversion of the Debentures will be duly authorized, validly issued, fully paid
and nonassessable.
The opinion expressed in paragraph 2 above, relating to whether the
securities described therein will be valid and legally binding obligations of
the Company, are qualified as to:
A. limitations imposed by applicable bankruptcy, insolvency,
reorganization, liquidation, receivership, conservatorship, readjustment of
debt, arrangement, moratorium, or other laws relating to or affecting the rights
of creditors, generally;
B. limitations imposed by general principles of equity, including
without limitation, concepts of materiality, reasonableness, good faith and fair
dealing, and the possible unavailability of specific performance, injunctive
relief or other equitable remedies, regardless of whether such enforceability is
considered in a proceeding in equity or at law; and
C. the effect of applicable court decisions holding that
provisions of agreements are unenforceable where the breach thereof imposes
restrictions or burdens on a debtor and it cannot be demonstrated that the
enforcement thereof is necessary for the protection of the creditor; and the
effect of applicable statutes or court decisions limiting in certain
circumstances enforcement of provisions imposing penalties, forfeitures, late
payment charges or increases in interest rates upon delinquency in payment or
default; and the enforceability of any choice of forum which may be included in
the securities, which may be subject to limitation by certain procedural rules
of and statutes applicable to the Federal courts.
I consent to the use of this opinion as an Exhibit to the Registration
Statement and to use of my name in the Prospectus constituting a part thereof.
Respectfully submitted,
/s/ Barbara S. Polsky
--------------------------
Barbara S. Polsky, Esq.
Senior Vice President
and General Counsel
Aames Financial Corporation
<PAGE> 1
EXHIBIT 12.1
RATIO CALCULATIONS
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Earnings to Fixed Charges:
Income before income taxes.... 4,026,000 8,356,000 8,983,000 17,151,000 53,531,000
Interest expense.............. 171,000 211,000 322,000 3,205,000 9,348,000
--------- --------- --------- ---------- ----------
Total................. 4,197,000 8,567,000 9,305,000 20,356,000 62,879,000
divided by divided by divided by divided by divided by
Interest expense.............. 171,000 211,000 322,000 3,205,000 9,348,000
--------- --------- --------- ---------- ----------
Ratio......................... 24.54 40.60 28.90 6.35 6.73
</TABLE>
3
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Pre-Registration
Statement on Form S-3 (No. 333-06969) of our report dated August 12, 1996
appearing in Aames Financial Corporation's Annual Report on Form 10-K for the
year ended June 30, 1996. We also consent to the incorporation by reference of
our report dated August 28, 1996 which appears in the Current Report on
Form 8-K/A filed with the Commission on September 16, 1996, and to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Los Angeles, California
September 18, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (No.
333-06969) on Form S-3 of Aames Financial Corporation ("AFC") of our report
dated August 16, 1996, relating to the balance sheets of One Stop Mortgage,
Inc. as of June 30, 1996 and December 31, 1995 and the related statements of
operations, changes in stockholders' equity and cash flows for the period
January 1, 1996 through June 30, 1996 and the period August 24, 1995
(inception) through December 31, 1995, which report appears in AFC's report on
Form 8-K filed with the United States Securities and Exchange Commission on
September 12, 1996, and to the reference to our firm under the heading
"Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Orange County, California
September 18, 1996
<PAGE> 1
EXHIBIT 25.1
Securities Act of 1933 File No. _________
If application to determine eligibility of trustee
for delayed offering pursuant to Section 305 (b) 2)
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE
PURSUANT TO SECTION 305(b)(2)
------------------
THE CHASE MANHATTAN BANK
(NATIONAL ASSOCIATION)
(Exact name of trustee as specified in its charter)
13-2633612
(I.R.S. Employer Identification Number)
1 CHASE MANHATTAN PLAZA, NEW YORK, NEW YORK
(Address of principal executive offices)
10081
(Zip Code)
---------------
AAMES FINANCIAL CORPORATION
(Exact name of obligor as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
95-4340340
(I.R.S. Employer Identification No.)
3731 WILSHIRE BOULEVARD, 10TH FLOOR
LOS ANGELES, CALIFORNIA
(Address principal executive offices)
90010
(Zip Code)
---------------------------------
DEBT SECURITIES
(Title of the indenture securities)
<PAGE> 2
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Comptroller of the Currency, Washington, D.C.
Board of Governors of The Federal Reserve System,
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
The Trustee is not the obligor, nor is the Trustee directly or
indirectly controlling, controlled by, or under common control with the
obligor.
(See Note on Page 2.)
ITEM 16. LIST OF EXHIBITS.
List below all exhibits filed as a part of this statement of eligibility.
*1. -- A copy of the articles of association of the trustee as now in
effect . (See Exhibit T-1 (Item 12), Registration No. 33-55626.)
*2. -- Copies of the respective authorizations of The Chase Manhattan
Bank (National Association) and The Chase Bank of New York
(National Association) to commence business and a copy of
approval of merger of said corporations, all of which documents
are still in effect. (See Exhibit T-1 (Item 12), Registration
No. 2-67437.)
*3. -- Copies of authorizations of The Chase Manhattan Bank (National
Association) to exercise corporate trust powers, both of which
documents are still in effect. (See Exhibit T-1 (Item 12),
Registration No. 2-67437.)
4. -- A copy of the existing By-Laws of the trustee.
*5. -- A copy of each indenture referred to in Item 4, if the obligor
is in default. (Not applicable.)
*6. -- The consents of United States institutional trustees required by
Section 321(b) of the Act. (See Exhibit T-1 (Item 12),
Registration No. 22-19019.)
7. -- A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its supervising
or examining authority.
<PAGE> 3
- - -------------------
*The Exhibits thus designated are incorporated herein by reference.
Following the description of such Exhibits is a reference to the copy of the
Exhibit heretofore filed with the Securities and Exchange Commission, to which
there have been no amendments or changes.
NOTE
Inasmuch as this Form T-1 is filed prior to the ascertainment by the
trustee of all facts on which to base a responsive answer to Item 2 the answer
to said Item is based on incomplete information.
Item 2 may, however, be considered as correct unless amended by an
amendment to this Form T-1.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
trustee, The Chase Manhattan Bank (National Association), a corporation
organized and existing under the laws of the United States of America, has duly
caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of New York, and the
State of New York, on the 18th day of June 1996.
THE CHASE MANHATTAN BANK
(NATIONAL ASSOCIATION)
By ------------------------------------
John Mynttinen, Second Vice President
<PAGE> 4
EXHIBIT 4
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
BY-LAWS
OF
THE CHASE MANHATTAN BANK
(NATIONAL ASSOCIATION)
AS AMENDED 3/19/96
<PAGE> 5
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
[Rev. 3/1/91/95 (Ptg. 150)]
THE CHASE MANHATTAN BANK
(NATIONAL ASSOCIATION)
BY-LAWS
ARTICLE I
SHAREHOLDERS
Section 1.1. ANNUAL MEETING. The annual meeting of the shareholders of
the Bank for the election of Directors and the transaction of such other
business as may be brought before said meeting shall be held at the main office
of the Bank or such other place as the Board may designate, on the third
Tuesday in April in each year, at 2 P.M. If the third Tuesday in April falls on
a legal holiday in the State of New York such meeting shall be held, and the
Directors elected, on the next following banking day. If, from any cause, an
election of Directors is not made on the day fixed for the annual meeting of
shareholders, or in the event of a legal holiday, on the next following banking
day, an election may be held at any adjournment of the annual meeting of
shareholders or any special meeting of the shareholders or adjournment thereof,
as designated by the Board, but within 60 days of the day fixed for the annual
meeting of shareholders. Notice of such adjournment of special meeting shall be
given in the manner provided in Section 1.3 .
Section 1.2. SPECIAL MEETINGS. Special meetings of the shareholders shall
be held whenever called by the Chairman of the Board, the President, the Board
or any one or more shareholders holding in the aggregate not less than 25% of
the outstanding shares of capital stock of the Bank.
Section 1.3. NOTICE OF MEETINGS AND WAIVERS. Unless otherwise provided by
the laws of the United States, a notice of the time, place and purpose of every
annual and every special meeting of the shareholders shall be given by
first-class mail, postage prepaid, mailed at least 10 days prior to the date of
such meeting to each shareholder of record at his address as shown upon the
books of the Bank. Except as to any notice expressly required by the laws of
the United States, waiver of notice in writing by any shareholder of any
meeting of shareholders. Whether prior or subsequent to such meeting, or
attendance at such meeting by any shareholder, shall be equivalent to notice to
such shareholder of such meeting.
Section 1.4. QUORUM. Except as otherwise provided by the laws of the
United States, the presence in person or by proxy of the holders of one-third
of the outstanding shares of capital stock of the Bank entitled to vote shall
be necessary to constitute a quorum for the transaction of any business at any
meeting of shareholders. In the absence of a quorum the holders of a majority
<PAGE> 6
of the shares of capital stock present in person or by proxy may adjourn any
meeting from time to time until a quorum is present and, except as may be
required by Section 1.1, no notice of any adjourned meeting need be given. At
any such adjourned meeting at which a quorum is present, any business may be
transacted which might have been transacted at the meeting as originally
called.
Section 1.5. ORGANIZATION. At every meeting of shareholders the Chairman
of the Board, or in his absence the President, shall preside. In their absence
a Vice Chairman of the Board shall preside. In the absence of all said
officers, any other officer of the Bank present shall call such meeting to
order and preside. In the absence of the Secretary, the presiding officer may
appoint a secretary of the meeting.
Section 1.6. VOTING. In deciding all matters at meetings of shareholders,
except in the election of Directors, each shareholder of record shall be
entitled to one vote on each share of capital stock of the Bank held by him;
and, except as otherwise provided by the laws of the United States, the
Articles of Association or these By-Laws, all such matters shall be decided by
a majority of the votes cast at a meeting at which quorum is present. In all
elections of Directors, each shareholder shall have the right to vote the
number of shares of capital stock held by him for as many persons as there are
Director to be elected or to cumulate such shares and give one candidate as
many votes as the number of Directors multiplied by the number of his shares
shall equal, or to distribute them on the same principle among as many
candidates as he shall think fit. Any shareholder may vote in person or by
proxy duly authorized in writing and delivered to the Secretary of the meeting.
No officer or employee of the Bank shall act as proxy. Voting for the election
of Directors shall be by ballot and all other voting shall be by ballot or viva
voce as may be determined by the presiding officer.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1. NUMBER. The affairs of the Bank shall be managed by the Board
of Directors (herein referred to as the "Board"), which shall consist of not
less than five nor more than 25 shareholders, the exact number of Directors
within such minimum and maximum limits to be fixed and determined from time to
time by resolution of a majority of the full Board or by resolution of the
shareholders at any annual or special meeting thereof; provided, however, that
a majority of the full Board may not increase the number of Directors to a
number which exceeds the number of Directors last elected by shareholders by
more than (a) four, if the number of Directors so elected was 16 or more, or
(b) two, if the number of Directors so elected was 15 or less. To qualify as a
shareholder, a Director shall own stock of the Bank or of the bank holding
company controlling this Bank meeting the requirements of the Articles of
Association of this Bank.
Section 2.2. ANNUAL ORGANIZATION MEETING. An annual organization meeting
of the Board shall be held at the main office of the Bank immediately following
the annual meeting of shareholders, unless another place or time be fixed by
resolution of the Board. Notice of such meeting need not be give. Any business
may be transacted at such meeting.
<PAGE> 7
Section 2.3. REGULAR MEETINGS. The Board may fix times for regular
meetings of the Board and no notice of such meetings need be given. Any
business may be transacted at any regular meeting.
Section 2.4. SPECIAL MEETINGS. Special meetings of the Board shall be held
whenever called by the Chairman of the Board or the President or a Vice
Chairman of the Board or a Vice Chairman or any three Directors, provided,
however, that a Vice Chairman shall not call a special meeting unless one of
the purposes of the meeting is to appoint one or more officers or Directors to
fill vacancies resulting from disability, death or other cause. Notice of each
such special meeting shall be mailed postage prepaid to each Director,
addressed to him at his residence or usual place of business or other address
filed by him with the Secretary for such purpose, or shall be sent to him by
telegraph, cable or wireless, or shall be delivered or given to him personally
or by telephone, not later than the second day preceding the day on which the
meeting is to be held. Every such notice shall state the time and place but
need not state the purposes of the meeting. Any business may be transacted at
any special meeting. Members of the Board of Directors may participate in such
special meetings through use of conference telephone or similar communications
equipment, so long as all members participating in such meetings can hear one
another.
Section 2.5. WAIVER OF NOTICE OF SPECIAL MEETINGS. Waiver of notice in
writing by any Director of any special meeting of the Board, whether prior or
subsequent to such meeting, or attendance at such meeting by any Director,
shall be equivalent to notice to such Director of such meeting.
Section 2.6. QUORUM AND MANNER OF ACTING. Except as otherwise required by
the laws of the Untied States, the Articles of Association or these By-Laws,
one-third of the Directors then in office shall be necessary to constitute a
quorum for the transaction of any business at any meeting of the Board and the
act of a majority of the Directors present and voting at a meeting at which a
quorum is present shall be the act of the Board. In the absence of a quorum a
majority of the Directors present may adjourn any meeting from time to time
until a quorum is present and no notice of any adjourned meeting need be give.
At any such adjourned meeting at which a quorum is present, any business may be
transacted which might have been transacted at the meeting as originally
called.
Section 2.7. COMPENSATION OF DIRECTORS. Directors who are not officers of
the Bank shall receive such compensation as may be fixed by the Board for
service on the Board or any Committee of the Board.
Section 2.8. VACANCIES. In the event a majority of the full Board
increases the number of Directors to a number which exceeds the number of
Directors last elected by shareholders, as permitted by Section 2.1, Directors
may be appointed to fill the resulting vacancies by vote of such majority of
the full Board. In the event of a vacancy in the Board for any other cause a
Director may be appointed to fill such vacancy by vote of a majority of the
remaining Directors then in office.
<PAGE> 8
ARTICLE III
COMMITTEES
Section 3.1. EXECUTIVE COMMITTEE. There shall be an Executive Committee,
consisting of the Chairman of the Board, the President and each Vice Chairman
of the Board, who shall be ex-officio members, and such number of additional
Directors as may from time to time be appointed by the Board. The Chairman of
the Board shall preside at the meetings of the Executive Committee. The
Chairman of the Board shall have the power to make temporary appointments to
the Executive Committee of members of the Board to act in place of members of
the Executive Committee who temporarily cannot attend a meeting or meetings.
The Board may designate one or more other Directors as alternate members of the
Executive Committee, who may replace any absent or disqualified member, other
than an ex-officio member, at any meeting of the Executive Committee.
The Executive Committee shall exercise such powers as may be assigned to
it by the Board and may consider and make recommendations to the Board in
respect of any matters relating to the affairs of the Bank.
Meeting of the Executive Committee shall be held at such times and places
as the Executive Committee shall determine or upon call of the Chairman of the
Board or the President. One-third of the members of the Executive Committee,
including at least one ex-officio member and three members who are not officers
of the Bank, shall constitute a quorum.
Section 3.2. TRUST COMMITTEE. There shall be a Trust Committee consisting
of such Directors as shall be appointed from time to time by the Board who
shall serve at the pleasure of the Board. The Board may designate one or more
other Directors as alternate members of the Trust Committee, who may replace
any absent or disqualified member at any meeting of the Trust Committee.
The Trust Committee shall have power to review the general conduct of the
trust, other fiduciary and investment advisory activities of the Bank and its
subsidiaries and to pass upon all such matters relating to the conduct of those
activities as may be submitted to the Trust Committee by the chief executive
officer of the Bank and shall from time to time exercise such other powers as
may be assigned to it by the Board.
Meetings of the Trust Committee shall be held at such time and places as
the Committee shall determine or upon call of any member authorized by the
Committee to call such meetings. A majority of the members of the Committee
shall constitute a quorum.
Section 3.3. OTHER COMMITTEES. The Board may also appoint or provide for
the appointment of other Committees from its members and, to the extent
permitted by law, may assign to any such Committee the exercise of such powers
as the Board may see fit. The Board may designate one or more Directors as
alternate members of any such Committee, who may replace any absent or
disqualified member at any meeting of such Committee.
Section 3.4. COMMITTEE RULES; QUORUM; MANNER OF ACTING. Each Committee may
adopt rules consistent with these By-Laws governing the method of calling and
time and place of holding its meetings. One-half of any Committee for which a
quorum is not otherwise set forth in these By-Laws shall constitute a quorum
for the transaction of business, unless the Board shall otherwise provide, and
the act of a majority of the members of such Committee present at a meeting at
which a quorum is present shall be the act of such Committee. Members of all
committees of this Board, other than the Examining Committee, may participate
in meetings of such Committees through use of conference telephone or similar
communications equipment so long as all members participating in such meetings
can hear one another.
<PAGE> 9
ARTICLE IV
OFFICERS
Section 4.1. TITLES. The officers of the Bank shall be a Chairman of the
Board, a President, one or more Vice Chairmen of the Board, one or more Vice
Chairmen, one or more Vice Presidents, a Secretary and such other officers may
be appointed at any time or from time to time by the Board. The Board may by
resolution delegate to such officers as the Board may designate authority to
appoint officers below the Vice Chairman of the Board, or equivalent, level,
assign powers and duties to any officer below the Vice Chairman of the Board or
equivalent, level, rescind or terminate the appointment of any officer below
the Vice Chairman of the Board, or equivalent level, and accept the resignation
of any officer. Any one or more Vice Presidents may be designated Senior
Executive Vice President, Executive Vice President or Senior Vice President.
One person may hold any two or more offices, and perform the duties thereof,
except that no person shall hold the offices of both Chairman or the Board and
Vice Chairman of the Board, both Chairman of the Board and President or both
President and Vice President.
Section 4.2. QUALIFICATION, ELECTION AND TERM OF OFFICE OF OFFICERS. The
Chairman of the Board, the President and each Vice Chairman of the Board shall
be Directors of the Bank. The other officers need not be Directors. The
Chairman of the Board, the President, each Vice Chairman of the Board, and Each
Vice Chairman shall be appointed by the Board to hold office until the next
annual organization meeting of the Board and until their successors are
appointed and qualified. The term of office of all other officers shall be at
the pleasure of the Board. The compensation of all officers of the Bank shall
be fixed by resolution of the Board, except that the Board may authorize the
Chairman of the Board, the President and each Vice Chairman of the Board each
to fix and to delegate to such other officers as the Board may designate
authority to fix any compensation of any person in any official position level
not above a level specified by the Board. Any officer of the Bank may be
dismissed at the pleasure of the Board.
Section 4.3. CHAIRMAN OF THE BOARD AND PRESIDENT. The Chairman of the
Board shall be the chief executive officer of the Bank and shall have the
responsibility for carrying out the policies of the Board and, subject to the
direction of the Board, shall have general supervision over the business and
affairs of the Bank. The President shall be the chief operating officer of the
Bank and shall perform all duties incident to the office of President. The
President shall have general supervision over the operations of the Bank,
subject to the direction of the Board and of the Chairman of the Board. The
Chairman of the Board shall preside at all meetings of the Board and of the
Executive Committee and of the shareholders. In the absence of the Chairman of
the Board, the President shall preside at meetings of the Board and of the
Executive Committee and of the shareholders. The Chairman of the Board and the
President shall have such other powers and perform such other duties as are
prescribed by these By-Laws and as usually pertain to their respective offices
and as may be assigned to them at any time or from time to time by the Board.
<PAGE> 10
Section 4.4. VICE CHAIRMEN OF THE BOARD AND VICE CHAIRMEN. Each Vice
Chairman of the Board and each Vice Chairman shall have such powers and perform
such duties as are prescribed by these By-Laws and as usually pertain to his
office and as may be assigned to him at any time or from time to time by the
Board. In the event of the absence or disability of the Chairman of the Board
and the President, the Vice Chairman of the Board designated by the Chairman of
the Board or the President shall act in their place and assume their duties,
including duties assigned to them in these By-Laws.
Section 4.5. SENIOR EXECUTIVE VICE PRESIDENTS AND EXECUTIVE VICE
PRESIDENTS. Each Senior Executive Vice President and each Executive Vice
President shall , upon request, advise and assist the Chairman of the Board and
the President in managing the Bank and shall have such other powers and perform
such other duties as usually pertain to his office and as may be assigned to
him at any time or from time to time by the board or the Chairman of the board
or the President.
Section 4.6. SECRETARY. The Secretary shall act as Secretary of the Board
and as Secretary at meetings of the shareholders and, in general, shall have
charge of all records of the bank relating to its organization and corporate
action and shall have power to certify the contents thereof, and shall have
such other powers and perform such duties as usually pertain to his office and
as may be assigned to him at any time or from time to time by the Board or the
Chairman of the Board or the President.
Section 4.7. OTHER OFFICERS. Other officers appointed by the Board shall
have such powers and perform such duties as usually pertain to their respective
offices and as may be assigned to them at any time or from time to time by the
Board or the Chairman of the Board or the President.
ARTICLE V
SHARES OF CAPITAL STOCK
Section 5.1. CERTIFICATES FOR SHARES OF CAPITAL STOCK. Certificates for
shares of capital stock of the Bank shall be in such form permitted by the laws
of the United States as shall be approved by the Board. Said certificates shall
be signed by the Chairman of the Board, the President and the Secretary, and
sealed with the corporate seal of the Bank. The signatures of the Chairman of
the Board, the President and the Secretary thereon may be facsimiles, engraved
or printed. In case any such officer who has signed or whose facsimile
signature has been placed upon such certificate shall have ceased to be such
before such certificate is issued, it may be issued by the Bank with the same
effect as if such officer had not ceased to be such at the time of its issue.
The corporate seal may be a facsimile, engraved or printed.
Section 5.2. TRANSFERS OF SHARES OF CAPITAL STOCK. Transfers of shares of
capital stock of the Bank shall be made only on the books of the Bank by the
registered holder thereof or by his attorney thereunto authorized by power of
attorney duly executed, and on surrender of the certificate or certificates for
such shares properly endorsed or accompanied by a proper instrument of
transfer. The Board may make such additional rules and regulations as it may
deem expedient concerning the issue, registration and transfer or certificates
for shares of capital stock of the Bank and may appoint one or more transfer
agents, transfer clerks and/or registrars and require all certificates to bear
the signatures thereof. The Bank shall be entitled to treat the holder of
record of any share or shares of capital stock as the owner thereof in fact.
<PAGE> 11
Section 5.3. CLOSING OF TRANSFER BOOKS. The transfer books may be closed
for the purposes of any meeting of shareholders or the payment of dividends or
for any other purpose, at such time and for such period not exceeding 50 days
as the Board may direct. In lieu of closing the transfer books, the Board may,
in its discretion , fix a day and hour not more than 50 days prior to the day
designated for the holding of any meeting of the shareholders or the day
appointed for the payment of any dividend or for any other purpose as the time
as of which shareholders entitled to notice of and to vote at such meeting or
to receive such dividend or to be treated as shareholders for such other
purpose shall be determined, and only shareholders of record at such time shall
be entitled to notice of or to vote at such meeting or to receive such
dividends or to be treated as shareholders for such other purpose.
ARTICLE VI
SEAL
Section 6.1. SEAL. The corporate seal of the Bank shall be a device
bearing the name "The Chase Manhattan Bank (National Association)" and
otherwise in the form adopted and used by the Bank, imprinted or affixed by any
process. The Secretary and any other officers authorized by resolution of the
Board shall be empowered to use and attest the corporate seal on all documents.
ARTICLE VII
AMENDMENTS
Section 7.1. AMENDMENTS. These By-Laws or any of them may be altered,
amended or repealed, or new By-Laws may be adopted, by the Board at any regular
or special meeting thereof by vote of a majority of the Directors then in
office.
EXHIBIT 7
REPORT OF CONDITION
Consolidating domestic and foreign subsidiaries of the The Chase Manhattan
Bank, N.A. of New York in the State of New York, at the close of business on
March 31, 1996, published in response to call made by Comptroller of the
Currency, under title 12, United States Code, Section 161.
CHARTER NUMBER 2370 COMPTROLLER OF THE CURRENCY
STATEMENT OF RESOURCES AND LIABILITIES NORTHEASTERN DISTRICT
<TABLE>
<CAPTION>
ASSETS THOUSANDS
OF DOLLARS
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin $ 5,026,000
Interest-bearing balances 4,135,000
Held to maturity securities 0
Available-for-sale securities 5,632,000
</TABLE>
<PAGE> 12
<TABLE>
<S> <C>
Federal funds sold and securities purchased under
agreements to resell in domestic offices of the bank
and of its Edge and Agreement subsidiaries, and in IBFs:
Federal funds sold 1,254,000
Securities purchased under agreements to resell 880,000
Loans and lease financing receivable:
Loans and leases, net of unearned income $ 60,869,000
LESS: Allowance for loan and lease losses 1,113,000
LESS: Allocated transfer risk reserve 0
------------
Loans and leases, net of unearned income,
allowance, and reserve 59,756,000
Assets held in trading accounts 13,203,000
Premises and fixed assets (including capitalized leases) 1,690,000
Other real estate owned 268,000
Investments in unconsolidated subsidiaries and
associated companies 29,000
Customers' liability to this bank on acceptances outstanding 1,170,000
Intangible assets 1,330,000
Other assets 9,398,000
------------
TOTAL ASSETS $103,771,000
============
LIABILITIES
Deposits:
In domestic offices $ 30,681,000
Noninterest-bearing $ 11,913,000
Interest-bearing 18,768,000
------------
In foreign offices, Edge and Agreement subsidiaries, and IBFs 38,923,000
Noninterest-bearing $ 3,696,000
Interest-bearing 35,227,000
------------
Federal funds purchased and securities sold under agreements to
repurchase in domestic offices of the bank and of its Edge
and Agreement subsidiaries, and in IBFs:
Federal funds purchased 3,143,000
Securities sold under agreements to repurchase 100,000
Demand notes issued to the U.S. Treasury 25,000
Trading liabilities 8,453,000
Other borrowed money:
With original maturity of one year or less 3,064,000
With original maturity of more than one year 365,000
Mortgage indebtedness and obligations under capitalized leases 39,000
Bank's liability on acceptances executed and outstanding 1,173,000
Subordinated notes and debentures 1,960,000
Other liabilities 8,482,000
------------
TOTAL LIABILITIES 96,408,000
Limited-life preferred stock and related surplus 0
</TABLE>
<PAGE> 13
EQUITY CAPITAL
<TABLE>
<S> <C>
Perpetual preferred stock and related surplus 0
Common stock 921,000
Surplus 5,354,000
Undivided profits and capital reserves 1,092,000
Net unrealized holding gains (losses) on
available-for-sale securities 15,000
Cumulative foreign currency translation adjustments 11,000
------------
TOTAL EQUITY CAPITAL 7,363,000
------------
TOTAL LIABILITIES, LIMITED-LIFE PREFERRED STOCK,
AND EQUITY CAPITAL $103,771,000
============
</TABLE>
<PAGE> 14
I, Lester J. Stephens, Jr., Senior Vice President and Controller of the above
named bank do hereby declare that this Report of Condition is true and correct
to the best of my knowledge and belief. (Signed) Lester J. Stephens, Jr.
We the undersigned directors, attest to the correctness of this statement of
resources and liabilities. We declare that it has been examined by us, and to
the best of our knowledge and belief has been prepared in conformance with the
instructions and is true and correct.
(Signed) Thomas G. Labrecque
(Signed) Donald Trautlein Directors
(Signed) Richard J. Boyle
