<PAGE> 1
As filed with the Securities and Exchange Registration No. 333-______
Commission on October 10, 1996
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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. JACK M. COSTELLO, JR., ESQ.
TROOP MEISINGER STEUBER & PASICH, LLP BROWN & WOOD, LLP
10940 WILSHIRE BOULEVARD ONE WORLD TRADE CENTER
LOS ANGELES, CALIFORNIA 90024 58TH FLOOR
(310) 824-7000 NEW YORK, NEW YORK 10048
(212) 839-5300
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 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: [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Amount to Be Proposed Maximum Offering Proposed Maximum Amount of
TITLE OF SHARES TO BE REGISTERED Registered Price Per Share (1) Aggregate Offering Price(1) Registration Fee
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock(2) 813,029 $53.125 $43,192,165.62 $13,089
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of Regulation C under the Securities Act of
1933.
(2) Includes certain Preferred Stock Purchase Rights of Registrant,
exercisable upon the occurrence of certain events. See "Description
of Capital Stock -- Anti- takeover Provisions" in the Prospectus
which constitutes a part of this Registration Statement.
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.
===============================================================================
<PAGE> 2
Subject to Completion, Dated September __, 1996
PROSPECTUS
AAMES FINANCIAL CORPORATION
813,029 SHARES OF COMMON STOCK
(par value $0.001 per share)
This Prospectus relates to the public offering by the Selling
Stockholders (see "Selling Stockholders") of up to 813,029 shares of the Common
Stock, par value $0.001 per share (the "Common Stock") of Aames Financial
Corporation, a Delaware corporation (the "Company"). The Common Stock offered by
the Selling Stockholders was acquired by the Selling Stockholders in connection
with the merger of a wholly owned subsidiary of the Company with and into One
Stop Mortgage, Inc., a Wyoming corporation ("One Stop"). See "Selling
Stockholders." 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 October 9, 1996 was $52.875 per share. See "Description
of Capital Stock."
The Company will not receive any proceeds from this offering. The
aggregate proceeds to the Selling Stockholders from the sale of the Common Stock
will be the offering price of the Common Stock sold, less applicable agents'
commissions and underwriters' discounts, if any. The Company will pay all
expenses incident to the preparation and filing of a registration statement for
the Common Stock under federal securities laws. The Selling Stockholders or
certain other persons may sell the Common Stock 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 number of shares of the Common Stock to be sold, the
offering price thereof, the name of each Selling Stockholder and each agent,
dealer and underwriter, if any, and any other required information with respect
to a particular offering will be set forth in an accompanying Prospectus
Supplement. See "Plan of Distribution."
---------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 HEREOF FOR A DISCUSSION OF
CERTAIN INFORMATION THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SECURITIES.
---------------
THE SHARES OF THE 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.
---------------
The date of this Prospectus is ______, 1996
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-3 (the "Registration Statement) under the Securities Act of 1933 (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.
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, September 12, 1996 (including the Report on
Form 8-K/A dated September 16, 1996) and September 26, 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.
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<PAGE> 4
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 origination 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 during fiscal 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
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<PAGE> 5
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
This Report contains certain forward looking statements. Actual results
could differ materially from those projected in the forward-looking statements
as a result of the risk factors set forth below.
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
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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 13.5% to
22.4%. 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 weighted average of 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 delinquency rates will in
fact be positively impacted. Further, delinquency rates and losses on the
Company's existing REMIC trusts and future REMIC trusts could increase. 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 and to 17% with respect to the September 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 has 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 (two and one-half times in the case of the
September 1996 REMIC trust) 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.
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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 27, 1996 and
August 1999. 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 for 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 on a servicing retained basis 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.
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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 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 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 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.
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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 included in its September 1996 securitization and intends
to continue to include One Stop's loans in the Company's future 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 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.
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<PAGE> 10
All loans originated by One Stop are 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 was 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 and 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 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.
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<PAGE> 11
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
$490,000 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 his bonus and prior to
certain other charges). Commencing in January 1997, the Chief Executive Officer
of the Company will receive a base salary of $850,000 and 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
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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.
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<PAGE> 13
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.
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USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Common
Stock offered by the Selling Stockholders hereunder.
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 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.
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<PAGE> 15
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.
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.
TRANSFER AGENT
The Company's transfer agent and registrar for its Common Stock is
Wells Fargo Bank, N.A.
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SELLING STOCKHOLDERS
All shares of the Common Stock offered hereby are owned by the Selling
Stockholders, who acquired such shares in connection with the merger of a wholly
owned subsidiary of the Company with and into One Stop. Effective as of
September 3, 1996, Neil B. Kornswiet, one of the Selling Stockholders, was
appointed to the Board of Directors of the Company and was engaged to serve as
an Executive Vice President of the Company. Mr. Kornswiet also serves as the
Chairman and President of One Stop. Lehman Commercial Paper Inc. ("LCPI"), one
of the Selling Stockholders, acquired shares in the merger upon the surrender of
a warrant for an equity interest in One Stop, which warrant was granted by One
Stop to LCPI in connection with LCPI providing certain credit facilities to One
Stop. At September 12, 1996, Neil B. Kornswiet and Debra Kornswiet owned
1,647,940 shares of the Company's Common Stock (1) and LCPI owned 675,000 shares
of the Company's Common Stock (2).
<TABLE>
<CAPTION>
Number of Shares Percentage of
of Common Stock Outstanding
Name That May Be Sold Common Stock
- ------------------------------- ------------------- ----------------
<S> <C> <C>
Neil B. Kornswiet and 576,779 3%
Debra K. Kornswiet
200 Baker Street
Costa Mesa, CA 92626
Lehman Commercial Paper 236,250 1%
Inc.
3 World Financial Center
New York, NY 10285
</TABLE>
- -----------------
(1) Includes 77,062 shares of the Common Stock which have been deposited
into an escrow account from which they will not be released to the
Selling Stockholder until August 28, 1997.
(2) Includes 25,688 shares of the Common Stock which have been deposited
into an escrow account from which they will not be released to the
Selling Stockholder until August 28, 1997. The Company has assumed
certain registration and piggy-back registration rights relating to
the 675,000 shares of the Company's Common Stock held by LCPI, which
rights were originally granted to LCPI pursuant to the above referenced
Warrant.
Additional information concerning the Selling Stockholders may be set
forth in Prospectus Supplements from time to time.
Other than as described above, none of the Selling Stockholders has had
any material relationship with the Company within the past three years.
Additionally, Lehman Brothers, an affiliate of LCPI, has provided investment
banking services to the Company from time to time and may provide such services
to the Company in the future.
Because the Selling Stockholders may offer all or only some of the
Common Stock that they now hold in the offering contemplated by this Prospectus
and because there are presently no agreements, arrangements or understandings
concerning the sale of any of the Common Stock issuable, no estimate can be
given about the number of shares of the Common Stock that will be held by the
Selling Stockholders 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 Stockholders or pledgees, donees, transferees or other successors
in interest may sell all or a portion of the shares of the Common Stock
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 shares of the Common Stock are sold may receive compensation in the form of
underwriting discounts, commissions or concessions from the Selling Stockholders
and/or the purchasers or pledgees, donees, transferees or other successors in
interest of the shares of the Common Stock for whom they act as agent. To
the extent required, the number of shares of the Common Stock to be sold,
the offering price thereof, the name of each Selling Stockholder and each
agent, dealer and underwriter, if any, and any applicable discounts or
commissions concerning a particular
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<PAGE> 17
offering will be set forth in an accompanying Prospectus Supplement. The
aggregate proceeds to the Selling Stockholders from the shares of the Common
Stock offered by the Selling Stockholders hereby will be the offering price of
such shares of the Common Stock less applicable commissions or discounts.
In connection with the distribution of the shares of the Common Stock
offered hereby, the Selling Stockholders may enter into hedging transactions
with broker-dealers. LCPI also may sell shares of the Common Stock short and
redeliver the shares of the Common Stock offered hereby to close out the short
positions. The Selling Stockholders also may enter into options or other
transactions with broker-dealers which require the delivery to the broker-dealer
of the shares of the Common Stock offered hereby, which the broker-dealers may
resell or otherwise transfer pursuant to this Prospectus. The Selling
Stockholders also may loan or pledge the shares of the Common Stock offered
hereby to a broker-dealer and the broker-dealer may sell such shares so loaned
or upon a default the broker-dealer may affect sales of the pledged shares
pursuant to this Prospectus.
There is no assurance that the Selling Stockholders will sell any of
the shares of the Common Stock offered hereby.
In order to comply with the securities laws of certain States or other
jurisdictions, if applicable, the shares of the 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 shares of the 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.
The Selling Stockholders and any broker-dealers, agents or underwriters
that participate with the Selling Stockholders in the distribution of the shares
of the 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 shares of the 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 shares of the Common Stock offered
hereby may not simultaneously engage in market making activities for the Common
Stock for a period of two business days prior to the commencement of such
distribution. In addition, each Selling Stockholder and any other person who
participates in a distribution of the shares of the 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 shares of the Common Stock by the Selling
Stockholders. The applicable provisions of the Exchange Act and the rules and
regulations thereunder may effect the marketability of the shares of the Common
Stock and the ability of any person to engage in market making activities for
the shares of the Common Stock.
Pursuant to an agreement with the Selling Stockholders, the Company
will pay all expenses incident to the preparation and filing of the Registration
Statement. Pursuant to the same agreement, the Company has agreed to indemnify
the Selling Stockholders against certain liabilities, including liabilities
under the Securities Act.
16
<PAGE> 18
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Barbara S. Polsky, Esq., Senior Vice President and General
Counsel of the Registrant.
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.
17
<PAGE> 19
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..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
The Company............................................................... 3
Risk Factors.............................................................. 4
Use of Proceeds........................................................... 13
Description of Capital Stock.............................................. 13
Selling Stockholders...................................................... 15
Plan of Distribution...................................................... 15
Legal Matters............................................................. 17
Experts................................................................... 17
------------
AAMES FINANCIAL CORPORATION
813,029 SHARES OF COMMON STOCK
------------
PROSPECTUS
------------
18
<PAGE> 20
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....................................... $ 13,089.00
NASD Filing Fee..................................................................... $ *
Blue Sky Fees and Expenses.......................................................... $ *
Printing and Engraving Certificates................................................. $ *
Legal Fees and Expenses............................................................. $ 3,000.00
Accounting Fees and Expense......................................................... $ *
Registrar and Transfer Agent Fees................................................... $ *
Miscellaneous Expenses.............................................................. $ 3,911.00
TOTAL...................................................................... $ 20,000.00
================
</TABLE>
- -----------------
* Not applicable or none.
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
19
<PAGE> 21
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.
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.
20
<PAGE> 22
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 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Los Angeles, State of California, on October 8, 1996.
AAMES FINANCIAL CORPORATION
(Registrant)
By: /s/ Gary K. Judis
-------------------------------
Gary K. Judis
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Gary K. Judis and Gregory J. Witherspoon and each
of them, his attorney-in-fact and agent, with full power of substitution, for
him in any and all capacities, to sign any amendments to this Registration
Statement, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title
Date
<S> <C> <C>
/s/ Gary K. Judis Chairman, Chief Executive Officer, October 8, 1996
- --------------------------------------- President
Gary K. Judis
/s/ Cary H. Thompson Chief Operating Officer, Director October 8, 1996
- ---------------------------------------
Cary H. Thompson
/s/ Gregory J. Witherspoon Executive Vice President - Finance, October 8, 1996
- --------------------------------------- Chief Financial Officer, Director
Gregory J. Witherspoon
/s/ Bobbie J. Burroughs Executive Vice President - Administration, October 8, 1996
- --------------------------------------- Secretary, Director
Bobbie J. Burroughs
/s/ Neil B. Kornswiet Director October 8, 1996
- ---------------------------------------
Neil B. Kornswiet
</TABLE>
21
<PAGE> 23
<TABLE>
<S> <C> <C>
/s/ Mark E. Elbaum Senior Vice President - Finance, October 8, 1996
- --------------------------------------- Principal Accounting Officer
Mark E. Elbaum
/s/ Joseph R. Cerrell Director October 8, 1996
- ---------------------------------------
Joseph R. Cerrell
/s/ Dennis F. Holt Director October 8, 1996
- ---------------------------------------
Dennis F. Holt
/s/ Melvyn Kinder Director October 8, 1996
- ---------------------------------------
Melvyn Kinder
</TABLE>
22
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
No. Item Page
- --- ---- ----
<C> <C>
4.3 Form of Specimen Common Stock Certificate.(1)
5.1 Opinion of Barbara S. Polsky, Esq., Senior Vice President, General Counsel
of the Registrant
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
of the Registrant (included in Exhibit 5.1).
</TABLE>
- -----------------------------
1. Incorporated by reference from Registrant's Report on Form 10-K filed
with the Commission on September 16, 1996.
<PAGE> 1
EXHIBIT 5.1
October 8, 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, as
amended, up to 813,029 shares of Common Stock, par value $.001 per share, of the
Company (the "Shares"), which may be sold by the "Selling Stockholders" therein
identified.
I have examined the Certificate of Incorporation of the Company, and
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, I am of the opinion that the Shares have been
duly authorized and are validly issued, fully paid and non-assessable.
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, ESQ.
--------------------------------
Barbara S. Polsky, Esq.
Senior Vice President
and General Counsel
Aames Financial Corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 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 dated September 16, 1996. We also consent to the reference
to us under the heading "Experts" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Los Angeles, California
October 9, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
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
October 9, 1996
