<PAGE> 1
As filed with the Securities and Exchange Commission on September 16, 1996.
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO __________
COMMISSION FILE NUMBER 0-19604
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
(Address of principal executive offices, including ZIP Code)
(213) 351-6100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
COMMON STOCK, PAR VALUE $0.001
PREFERRED STOCK PURCHASE RIGHTS
10.50% SENIOR NOTES DUE 2002
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class
None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicated by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.[ ]
At August 30, 1996, there were outstanding 15,829,824 shares of
the Common Stock of Registrant, and the aggregate market value of the shares
held on that date by non-affiliates of the Registrant, based on the closing
price ($47.25 per share) of the Registrant's Common Stock on the New York Stock
Exchange was $747,959,184. For purposes of this computation, it has been assumed
that the shares beneficially held by directors and officers of Registrant were
"held by affiliates"; this assumption is not to be deemed to be an admission by
such persons that they are affiliates of Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement relating to its
1996 Annual Meeting of Stockholders are incorporated by
reference in Items 10, 11, 12 and 13 of Part III of this
Annual Report.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
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.
See "-- Mortgage Loan Production -- Underwriting."
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
2
<PAGE> 3
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 the capability to service in
house all loans originated or purchased by it regardless of the state in which
the mortgaged property is located. See "-- Loan Servicing."
BUSINESS STRATEGY
The Company's strategy is to continue to build on its position as
a leading lender to credit-impaired borrowers. The expansion of the Company's
business over the last three years has been driven by the growth in the volume
of loans originated and purchased by the Company and by the Company's ability to
continue to access the capital markets to facilitate the sale of these loans
through securitizations. The Company intends to pursue its growth strategy by
(i) continuing to expand its retail loan office network, wholesale correspondent
program, and independent broker network, (ii) increasing its servicing portfolio
and servicing capabilities; (iii) continuing to enhance its corporate and
operating infrastructure and (iv) diversifying its funding sources. An important
long-term goal of the Company's business strategy is to continue to build its
excess servicing receivable, mortgage servicing rights and residual assets
("Excess Spread Receivables"). The Company believes that its investments in
these assets yield attractive cash on cash returns. In addition, the Company
believes its cash flow profile will change over time as the rate of loan
production growth moderates and as the size of its servicing portfolio and its
Excess Spread Receivables increases. In particular, the Company intends to
employ the following strategies:
Geographic Diversification. The Company plans to continue the
geographic expansion of its loan production. During fiscal 1996, the Company
expanded its retail loan office network into the Midwest and East and continued
to expand its wholesale correspondent network. The Company intends to continue
focusing on its expansion in the Midwest and East and to expand its loan
purchasing capabilities by building new relationships with loan correspondents
and, with the acquisition of One Stop, independent mortgage brokers nationwide
with the goal of increasing market share in these areas.
Diversification of Loan Production Channels. At the beginning of
fiscal 1994, the Company originated virtually all of its mortgage loans through
its retail loan office network. Since that time, the Company has been pursuing a
strategy of diversifying its loan production. The Company has developed a
wholesale correspondent program and has recently added a network of independent
brokers as a production source when it acquired One Stop. The Company intends to
increase production through each of these channels and to diversify the loans it
originates and purchases to include more "A-," "B" and "C" credit grade loans.
Increase Servicing Portfolio; Increase Margins and Develop
Subservicing Capabilities. The Company plans to build the size of its servicing
portfolio to provide a stable, and ultimately a significant, source of recurring
revenue. On June 30, 1996, the Company's servicing portfolio was $1.25 billion,
up 105% from $609 million at the end of the prior year. The Company expects to
increase the size of its loan servicing portfolio by continuing to increase loan
originations and purchases and completing new securitizations. To service this
greater volume and to provide the Company with the capability of servicing its
entire portfolio, the Company is investing in a new servicing system which is
expected to be on line prior to the end of fiscal 1997. This new operation is
expected to increase margins in the Company's servicing operations and to
provide the Company with the capability of subservicing for other mortgage
bankers, a potential new revenue source.
Continue to Enhance Corporate and Operational Management and
Infrastructure. From June 30, 1994 to June 30, 1996, the Company's revenues and
net income grew 255% and 485%, respectively, and its employee base grew from 303
employees at June 30, 1994 to 672 employees at June 30, 1996. To support this
significantly larger operation, the Company has invested in additional corporate
and operating management and infrastructure. The Company has also expanded its
telemarketing operations, including a predictive dialer system which is expected
to be fully operational in fall 1996.
3
<PAGE> 4
Continue to Diversify Funding Sources. The Company intends to
continue to expand and diversify its funding sources by adding additional
warehouse and residual financing facilities and seeking to increase the advance
rates on existing and new facilities. In addition, the Company intends to obtain
higher credit ratings by improving its financial condition and operating
results. The Company believes that higher credit ratings, as well as obtaining
higher advance rates on warehouse and residual facilities, should improve the
Company's cash flow over time. In particular, higher credit ratings could
facilitate the Company's use of letters of credit in lieu of cash in
overcollateralization accounts, and the Company's obtaining debt financing at a
lower cost. In addition, the Company intends to improve its liquidity by
exploring alternatives, including: (i) whole loan sales, (ii) monetization of
the excess servicing receivable asset (including sale of interest-only strips),
and (iii) use of senior/subordinated securitization structures which may be more
cash flow efficient than buying monoline insurance. The Company also believes it
will improve its cash flow by improving the efficiency of its servicing
operations and realizing overall operating leverage over time as cash expenses
grow at a slower rate than cash receipts.
RECENT DEVELOPMENTS
One Stop Acquisition. On August 28, 1996, the Company acquired
One Stop, a residential mortgage lender specializing in originating and
purchasing home equity mortgage loans made to credit-impaired borrowers from a
network of independent mortgage brokers. At August 31, 1996, One Stop operated
in 26 states out of 24 offices. The acquisition is part of the Company's
strategy to diversify its mortgage loan production sources and to expand the
geographic scope of its operations. The acquisition was accomplished through the
merger of a wholly-owned subsidiary of the Company into One Stop, in a tax-free
exchange accounted for as a pooling-of-interests.
Under the terms of the acquisition, each outstanding share of One
Stop Common Stock was converted into the right to receive 16,479.4 shares of the
Company's Common Stock. The Company issued 2.3 million shares of its Common
Stock, representing approximately 14.7% of its issued and outstanding shares
(after giving effect to the acquisition), 102,750 shares of which have been
placed in escrow pursuant to an escrow agreement as security for the
indemnification obligations of One Stop and its principal stockholder, to be
released on August 28, 1997. The Company has agreed to use its best efforts to
file certain registration statements under the Securities Act covering
approximately 1.0 million of the shares of its Common Stock issued in connection
with the acquisition. Additionally, the Company assumed options granted to key
employees to purchase approximately 375,000 shares.
For the three month period ended July 31, 1996, One Stop's loan
originations and purchases totaled approximately $126 million. Neil Kornswiet,
the founder of One Stop, will continue as President, Chief Executive Officer and
Chairman of the Board of Directors of One Stop (which will be operated as a
separate subsidiary under the name, "One Stop Mortgage, Inc.") under a five year
employment contract. Mr. Kornswiet will also serve as Executive Vice President
of the Company and will serve on its Board of Directors.
Recent Financings. Since June 30, 1996, the Company has entered
into or renewed warehouse financing facilities, bringing its aggregate
warehousing capacity under all of its warehouse credit facilities at September
10, 1996 to $675 million, and has entered into a $50.0 million credit facility
secured by certain excess servicing receivables.
MORTGAGE LOAN PRODUCTION
The Company's principal loan product is a non-conforming home
equity loan with a fixed principal amount and term to maturity which is
typically secured by a first mortgage on the borrower's residence with either a
fixed or adjustable rate. Non-conforming home equity loans are loans made to
homeowners whose borrowing needs may not be met by traditional financial
institutions due to credit exceptions or other factors and that cannot be
marketed to agencies such as Ginnie Mae, Fannie Mae and Freddie Mac. In
addition, the Company offers junior mortgages and other products in order to
meet a wide variety of borrower needs. In fiscal 1996, the Company obtained its
loans through two primary channels: its retail loan office network, through
which loans are originated by the Company out of its 50 retail loan offices
located in 17 states, and its wholesale correspondent program, through which
loans are purchased from mortgage bankers and other financial institutions. With
the acquisition of One Stop
4
<PAGE> 5
on August 28, 1996, the Company expanded its loan production channels to include
a network of independent mortgage brokers, from which loans are submitted to One
Stop for funding or purchase.
The following table illustrates the sources of the Company's loan
production, excluding loans originated or purchased by One Stop during fiscal
1996 in the aggregate amount of $320 million:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
------------------------------------------
1994 1995 1996
--------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Retail loans:
Total dollar amount $130,200 $148,200 $220,900
Number of loans 3,373 3,734 4,792
Average loan amount $ 36.6 $ 39.7 $ 46.0
Average initial combined loan to value 52% 55% 60%
Weighted average interest rate 10.3% 11.8% 11.0%
Wholesale correspondent program:
Total dollar amount $ 19,700 $206,800 $628,200
Number of loans 265 2,314 7,166
Average loan amount $ 74.3 $ 89.4 $ 87.7
Average initial combined loan to value NM 65% 66%
Weighted average interest rate NM 11.4% 11.7%
Total loans:
Total dollar amount $149,900 $355,000 $849,100
Number of loans 3,638 6,048 11,958
Average loan amount $ 41.2 $ 58.7 $ 71.0
Average initial combined loan to value 52% 61% 64%
Weighted average interest rate 10.3% 11.6% 11.5%
</TABLE>
Retail Loan Office Network. The Company originates home equity
mortgage loans through its network of retail loan offices which, at August 31,
1996, consisted of 50 retail loan offices located in 17 states. The Company is
aggressively pursuing a strategy of expanding its retail loan office network
beyond the 36 offices located in California and the other Western states. Of the
Company's 50 retail loan offices, seven are located in the Midwest and seven are
located along the East Coast. The Company believes that it has significant
additional expansion opportunities in these and other areas.
The Company selects areas in which to introduce or expand its
retail presence on the basis of selected demographic statistics, marketing
analyses and other criteria developed by the Company. Typically, new office
locations have become profitable within 90 days of opening.
The Company's expansion of its retail loan office network has
resulted in significant increases in retail loan production over the last three
fiscal years. The Company originated $130 million, $148 million and $221 million
of mortgage loans through this network in fiscal 1994, 1995 and 1996,
respectively.
The Company generates applications for loans through its retail
loan office network principally through a multimedia advertising program, which
includes the use of direct mailings to homeowners, radio and television
advertising, yellow-page listings, and telemarketing. The Company believes that
its advertising campaigns establish
5
<PAGE> 6
name recognition and serve to distinguish the Company from its competitors. The
Company continually monitors the sources of its applications to determine the
most effective methods and manner of advertising.
The Company's advertising invites prospective borrowers to call
its headquarters office through the Company's toll-free telephone numbers. On
the basis of an initial screening conducted at the time of the call, the
Company's customer service representative makes a preliminary determination of
whether the customer and the property meet the Company's lending criteria,
schedules an appointment with an appraiser and refers the customer to the most
conveniently located retail loan office.
The Company's loan officer at the local retail loan office
assists the applicant in completing the loan application, orders a credit report
from an independent, nationally recognized credit reporting agency and performs
various other tasks in connection with the completion of the loan package. The
loan package is then forwarded to the Company's headquarters office for review
by underwriters and for loan approval. If the loan package is approved, the loan
is funded by the Company. The Company's loan officers are trained to structure
loans that meet the applicant's needs, while satisfying the Company's lending
guidelines. If an applicant does not meet the guidelines for the loan applied
for, a different loan that may also serve the applicant's needs is usually
suggested.
Through its retail loan office network, the Company also takes
applications from prospective borrowers who respond to the Company's advertising
but fall outside the Company's target market. These loans may be brokered to
other institutional lenders or to private investors. In these cases, the Company
receives brokerage commissions on loans actually funded.
Wholesale Correspondent Program. The Company purchases closed
loans from mortgage bankers and other financial institutions on a continuous or
"flow" basis, and through bulk purchases. In fiscal 1996, 74% of the Company's
loan production came from these sources. The Company believes that its wholesale
correspondent program represents a cost effective means to increasing loan
production. Although the Company purchases mortgage loans from a variety of
sources, one correspondent represented approximately 32% of total mortgage loans
purchased in fiscal 1996.
Independent Broker Network. On August 28, 1996, the Company
acquired One Stop, and thereby expanded its mortgage loan production sources to
include a network of independent mortgage brokers. Under this program, the
independent mortgage broker identifies the potential applicant, assists the
applicant in completing the loan application and submits the application with
the other documents constituting the completed loan package to One Stop for
underwriting and loan approval. 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 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.
Consistent underwriting, quick response times and personal
service are critical to successfully producing loans through independent
mortgage brokers. To meet these requirements, One Stop operates out of 24
offices to service the needs of the independent brokers and loan applicants. One
Stop strives to provide quick response time to the loan application (generally
within 24 hours). In addition, loan consultants and loan processors are
available in the offices to answer questions, assist in the loan application
process and facilitate ultimate funding of the loan.
Underwriting. The Company underwrites every loan it originates
and re-underwrites each loan it purchases, in each case, either utilizing its
staff consisting at August 31, 1996 of 157 full-time appraisers, or a Company-
qualified contract appraiser. The Company's underwriting guidelines are designed
to assess the adequacy of the real property as collateral for the loan and the
borrower's creditworthiness. An assessment of the adequacy of the real property
as collateral for the loan is primarily based upon an appraisal of the property
and a calculation of the ratio (the "combined loan-to-value ratio") of all
mortgages existing on the property (including the loan applied for) bear to the
appraised value of the property at the time of origination. As a lender that
specializes in loans made to credit-impaired borrowers, the Company ordinarily
makes home equity mortgage loans to borrowers with credit histories
6
<PAGE> 7
or other factors that would typically disqualify them from consideration for a
loan from traditional financial institutions. Consequently, the Company's
underwriting guidelines generally require substantially lower combined
loan-to-value ratios than would typically be the case if the borrower could
qualify for a loan from a traditional financial institution. Creditworthiness is
assessed by examination of a number of factors, including calculation of
debt-to-income ratios, which is the sum of the borrower's normal monthly
expenses divided by the borrowers's monthly income before taxes and other
payroll deductions, an examination of the borrower's credit history through
standard credit reporting bureaus, and by evaluating the borrower's payment
history with respect to existing mortgages, if any, on the property.
The underwriting of a mortgage loan to be originated or purchased
by the Company includes a review of the completed loan package, which includes
the loan application, a current appraisal, a preliminary title report and a
credit report. All loan applications and all closed loans offered to the Company
for purchase must be approved by the Company in accordance with its underwriting
criteria. On an exception basis, and approval of the Company's underwriters,
home equity mortgage loans may be made that do not conform to the Company's
guidelines but only with the approval of a senior underwriter or by an executive
officer of the Company. The Company regularly reviews its underwriting
guidelines and makes changes when appropriate to respond to market conditions,
because of the poor performance of loans representing a particular loan product
or to respond to changes in laws or regulations. In September 1996, the Company
changed its underwriting guidelines to eliminate one loan purchase product known
as the "no documentation - salaried employee" loan product in the "C-" and "D"
credit grades because of what management believed to be the higher than average
delinquency rates experienced on such loans, raised the combined loan-to-value
ratios of its "A-" credit grade loans to conform to market conditions and
lowered the combined loan-to-value ratios for its "C-" and "D" credit grade
loans made in certain judicial foreclosure states in recognition of the greater
length of time it takes in such states to complete the foreclosure process.
All appraisals in connection with loans originated by the Company
through its retail loan office network are performed by Company appraisers. The
Company's appraisers determine a property's value by reference to the sales
prices of comparable properties recently sold, adjusted to reflect the condition
of the property as determined through inspection. Loans purchased as part of the
Company's wholesale correspondent program are reviewed by Company appraisers or
Company-qualified contract appraisers, to assure that they meet the Company's
standards. All of the Company's appraisers are full-time employees of the
Company and compensated by salary and a bonus that is not dependent on
completion of loan transactions.
The Company requires title insurance coverage issued on an ALTA
form of title insurance on all properties securing mortgage loans it originates
or purchases. The loan originator and its assignees are generally named as the
insured. Title insurance policies indicate the lien position of the mortgage
loan and protect the Company against loss if the title or lien position is not
as indicated. The applicant is also required to maintain hazard and, in certain
instances, flood insurance, in an amount sufficient to cover the new loan and
any senior mortgage, subject to the maximum amount available under the National
Flood Insurance Program.
Quality Control. The Company's quality control program is
intended to (i) monitor and improve the overall quality of loan production
generated by the Company's retail loan office network and its wholesale
correspondent program or loans presented or purchased from its independent
broker network and (ii) identify and communicate to management existing or
potential underwriting and loan packaging problems or areas of concern. The
quality control file review examines compliance with the Company's underwriting
guidelines and federal and state regulations. This is accomplished by focusing
on: (i) the accuracy of all credit and legal information; (ii) a collateral
analysis which may include a desk or field re-appraisal of the property and
review of the original appraisal; (iii) employment and/or income verification;
and (iv) legal document review to ensure that the necessary documents are in
place.
Credit Grades. The Company believes that it originates a greater
proportion of lower credit quality loans ("C-" and "D" loans) than other lenders
who lend to credit-impaired borrowers and as a result has historically
experienced delinquency rates that are higher than those generally prevailing in
its industry. However, the Company has not historically experienced significant
loan losses because its loan portfolio has been characterized by relatively low
7
<PAGE> 8
combined loan-to-value ratios. The weighted average initial combined
loan-to-value ratio of loans in its servicing portfolio at June 30, 1994, 1995
and 1996 was 56%, 59% and 63%, respectively. The increase in weighted average
combined loan-to-value ratios at June 30, 1996 reflected a changing mix in the
mortgage loans in the servicing portfolio to include a greater proportion of
first mortgages and higher credit grade loans.
The following chart generally outlines certain parameters of the
credit grades of the Company's underwriting guidelines at September 10, 1996:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
"A-" CREDIT "B" CREDIT "C" CREDIT "C-" CREDIT "D" CREDIT
GRADE GRADE GRADE GRADE GRADE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GENERAL Has good Pays the Marginal credit Marginal credit Designed to
REPAYMENT credit but majority of history which history not provide a
might have accounts on is offset by offset by other borrower with
some minor time but has other positive positive poor credit
delinquency. some 30- attributes. attributes. history an
and/or 60-day opportunity to
delinquency. correct past
credit
problems
through lower
monthly
payments.
- ----------------------------------------------------------------------------------------------------------------------------------
EXISTING Current at Current at Cannot exceed Must be paid Must be paid
MORTGAGE application application four 30-day in full from from loan
LOANS time and a time and a delinquencies loan proceeds proceeds.
maximum of maximum of or one 60-day and no more Rating not a
two 30-day four 30-day or multiple 30- than 119 days factor.
delinquencies delinquencies day delinquent.
in the past 12 in the past 12 delinquencies
months. months. in the past 12
months.
- ----------------------------------------------------------------------------------------------------------------------------------
NON-MORTGAGE Major credit Major credit Major credit Major and Major credit
CREDIT and installment and installment and installment minor credit delinquency is
debt should be debt can debt can delinquency is acceptable.
current but exhibit some exhibit some acceptable, but
may exhibit minor 30- minor 60- must
some minor and/or 60-day and/or 90-day demonstrate
30-day delinquency. delinquency. some payment
delinquency. regularity.
Minor credit Minor credit
Minor credit may exhibit up may exhibit
may exhibit to 90-day more serious
some minor delinquency. delinquency.
delinquency.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BANKRUPTCY Charge-offs, Discharged Discharged Discharged Current
FILINGS judgments, more than two more than two prior to bankruptcy
liens, and years with years with closing. must be paid
former reestablished reestablished through loan.
bankruptcies credit. credit.
are
unacceptable.
- ----------------------------------------------------------------------------------------------------------------------------------
DEBT SERVICE- Generally not Generally not Generally not Generally not Generally not
TO-INCOME to exceed to exceed to exceed to exceed to exceed
RATIO 45%. 50%. 50%. 55%. 60%.
- ----------------------------------------------------------------------------------------------------------------------------------
MAXIMUM Generally 85% Generally 80% Generally 70% Generally 65% Generally 65%
LOAN-TO- for a 1 to 4 for a 1 to 4 for a 1 to 4 for a 1 to 4 for a 1 to 4
VALUE RATIO: family family family family family
dwelling dwelling dwelling dwelling. dwelling.
NON- residence; 70% residence; 65% residence; 65%
OWNER for a for a for a
OCCUPIED condominium. condominium. condominium.
- ----------------------------------------------------------------------------------------------------------------------------------
NON- Generally 70% Generally 65% Generally 65% N/A N/A
OWNER for a 1 to 2 for a 1 to 2 for a 1 to 2
OCCUPIED family family family
dwelling; 65% dwelling; 60% dwelling; 60%
for a 3 to 4 for a 3 to 4 for a 3 to 4
family. family. family.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
The following tables present certain information on the Company's
loan originations through its retail loan office network and loan purchases
through its wholesale correspondent program during fiscal 1995 and fiscal 1996:
Loan Originations and Purchases in Fiscal 1995
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted
Average
Dollar Amount of % of Weighted Average Interest
Credit Grade Loan Total Loan-to-Value Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A- 111,808,000 31% 63% 10.6%
B 55,338,000 16% 65% 11.1%
C 70,515,000 20% 59% 11.7%
C- 53,635,000 15% 62% 12.2%
D 63,629,000 18% 58% 13.3%
------------------------------------ --------------
TOTAL $ 354,925,000 100%
- ----------------------------------------------------------------------------------------------------------------------------------
Loan Originations and Purchases in Fiscal 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted
Average
Dollar Amount of % of Weighted Average Interest
Credit Grade Loan Total Loan-to-Value Rate
- ----------------------------------------------------------------------------------------------------------------------------------
A- $ 224,943,000 26% 68% 10.2%
B 143,700,000 17% 68% 10.6%
C 139,329,000 16% 63% 11.5%
C- 106,067,000 12% 63% 12.1%
D 235,018,000 27% 61% 13.1%
------------------------------------ --------------
TOTAL $ 849,057,000 100%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SECURITIZATION OF LOANS
The primary funding strategy of the Company is to securitize and
sell mortgage loans originated or purchased by the Company. Securitization is a
cost competitive source of capital compared to other debt financing sources
available to the Company. Through June 30, 1996, the Company had completed 17
securitizations totaling $1.3 billion. The Company's operations have been
restructured in recent years specifically for the purpose of efficiently
originating, purchasing, underwriting and servicing loans for securitization in
order to meet the requirements of rating agencies, credit enhancers and
investors. The Company generally seeks to complete a securitization once each
quarter. The Company applies the net proceeds of the securitization to pay down
its warehouse facilities in order to make these facilities available for future
funding of mortgage loans.
In a securitization, the Company sells the loans that it has
purchased or originated to a real estate mortgage investment conduit ("REMIC")
for a cash purchase price and an interest in the loans securitized (in the form
of "excess servicing"). The cash purchase price is raised through an offering of
senior pass-through certificates by the trust. Following the securitization, the
purchasers of the senior certificates receive the principal collected and the
investor pass-through interest rate on the certificate balance, while the
Company receives the excess servicing. The excess servicing is typically a
certificated security in the form of a residual certificate, which generally
10
<PAGE> 11
represents the excess servicing on the loans. 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 purchasers of the senior certificates receive a
credit-enhanced security. The Company's securitizations have been enhanced
generally through two sources: (i) subordination of an amount of excess
servicing retained by the Company and (ii) an insurance policy provided by an
AAA/Aaa-rated monoline insurance company. As a result, each offering of senior
certificates receives ratings of AAA from Standard & Poor's and Aaa from Moody's
Investors Service.
Each pooling and servicing agreement that the Company has entered
into in connection with its securitizations requires either the establishment of
a reserve account that may initially be funded by cash deposited by the Company
or the overcollateralization of the REMIC trust. The Company's interest in each
overcollateralization amount and reserve account is reflected on the Company's
Consolidated Financial Statements as "residual assets." If payment defaults
exceed the amount of the overcollateralization or the reserve account, as
applicable, the monoline insurance company policy will pay any further losses
experienced by holders of the senior interests in the related REMIC trust. To
date, there have been no claims on any monoline insurance company policy
obtained in any of the Company's securitizations.
In connection with its securitizations, the Company typically
enters into an agreement pursuant to which it agrees to sell loans to the trust
in the future at an agreed-upon price (the "pre-funding"). The pre-funding locks
in the price agreed upon with investors on the pricing date (typically five
business days prior to the closing date of the securitization) for a period of
generally 30 days. In a pre-funding arrangement, the Company typically delivers
approximately 75% of the loans sold at the closing and the remainder generally
within 30 days after the closing.
LOAN SERVICING
Servicing includes collecting and remitting loan payments,
accounting for principal and interest, contacting delinquent borrowers, handling
borrower defaults and liquidating foreclosed properties. The Company retains the
servicing rights to substantially all of the loans it originates or purchases.
The following table sets forth certain information regarding the Company's
servicing portfolio for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
----------------------------------------------------------------------
1994 1995 1996
--------------------- -------------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans added to the servicing portfolio........... $ 213,900 $ 354,900 $ 849,100
Servicing portfolio (period end)................. 381,800 608,700 1,250,400
Loan service revenue (1)......................... 6,099 8,246 18,185
</TABLE>
- -------------------------
(1) For a description of loan service revenue, see Note 1 of Notes to
Consolidated Financial Statements.
In fiscal 1996 the Company directly serviced 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 is in the process of implementing a new
servicing system which will provide the Company the capability to service
in-house all loans originated or purchased by it regardless of the state in
which the mortgaged property is located. This new servicing system is expected
to be implemented in fiscal 1997. The Company's new servicing system will also
provide the Company the capability of subservicing on behalf of other mortgage
lenders. The Company intends to offer this service in fiscal 1998. The Company
believes that the successful implementation of its new servicing system will
provide it with improved margins on its servicing and potentially a new source
of servicing revenue.
11
<PAGE> 12
The pooling and servicing agreements between the Company and the
REMIC trusts established in connection with securitizations typically require
the Company advance interest (but not principal) on delinquent loans to the
holders of the senior interests in the related REMIC trust to the extent the
Company deems such advances of interest to be ultimately recoverable. No
advances are made for interest if the Company deems that the advances are not
ultimately recoverable and no advances are made for payments of principal.
Realized losses on the loans are paid out of the related reserve account or paid
out of principal and interest payments on overcollateralized amounts as
applicable, and if necessary, from the related monoline insurance company
policy.
The pooling and servicing agreements also typically provide that
the Company may be terminated as servicer by the monoline insurance company
which insures the senior interests in the related REMIC trust (or by the trustee
with the consent of the monoline insurance company) upon certain events of
default, including the Company's failure to perform its obligations under the
pooling and servicing agreement, the rate of over 90-day delinquency (including
properties acquired on foreclosure and not sold) exceeding specified limits,
losses on foreclosure exceeding certain limits, any payment being made by the
monoline insurance company under its policy, and certain events of bankruptcy or
insolvency. Serviced loans subject to such agreements represented approximately
84% (by dollar volume) of the Company's servicing portfolio at June 30, 1996. At
June 30, 1996, four REMIC trusts representing approximately 23% (by dollar
volume) of the Company's servicing portfolio exceeded the foregoing delinquency
rate, although the servicing rights of the Company have not been terminated. See
"Item 7. Management's Discussion and Analysis of Financial Condition -- Risk
Factors -- Delinquencies; Negative Impact on Cash Flow; Right to Terminate
Normal Servicing."
The Company receives a servicing fee based on a percentage of the
declining principal balance of each loan serviced. Servicing fees are collected
by the Company out of the borrower's monthly payments. In addition, the Company,
as servicer, generally receives all late and assumption charges paid by the
borrower, as well as other miscellaneous fees for performing various loan
servicing functions. The Company also generally receives any prepayment fees
paid by borrowers.
The Company's servicing portfolio is subject to reduction by
normal monthly payments, by prepayment and by foreclosure. It is the Company's
strategy to build and retain its servicing portfolio. In general, revenue from
the Company's loan servicing portfolio may be adversely affected as interest
rates decline and loan prepayments increase. This effect has historically been
partially offset by increases in prepayment fee income received from borrowers.
In some states in which the Company currently operates, prepayment fees may be
limited or prohibited by applicable law. In addition, the Company's ability to
collect prepayment fees under certain circumstances will be restricted in future
periods under federal regulations which went into effect in 1995. See
"--Regulation."
12
<PAGE> 13
The following table illustrates the mix of credit grades in the
Company's servicing portfolio as of June 30, 1996:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Dollar Amount of Average Average
Credit Grade Loan % of Total Loan-to-Value Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A- $ 308,901,000 25 % 66 % 10.4 %
B 185,892,000 15 % 67 % 10.8 %
C 192,051,000 15 % 62 % 11.6 %
C- 144,565,000 12 % 62 % 12.1 %
D 291,592,000 23 % 60 % 12.9 %
Other 127,406,000 10 % 55 % 12.2 %
-----
---------------------------
Total $ 1,250,407,000 100 %
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
COLLECTIONS, DELINQUENCIES AND FORECLOSURES
The Company sends borrowers a monthly billing statement ten days
prior to the monthly payment due date. Although borrowers generally make loan
payments within ten to fifteen days after the due date (the "grace period"), if
a borrower fails to pay the monthly payment within the grace period, the Company
commences collection efforts by notifying the borrower of the delinquency. (In
the case of borrowers in the "C-" and "D" credit grades, collection efforts
begin approximately six days after the due date.) If the loan remains unpaid,
the Company will contact the borrower to determine the cause of the delinquency
and to obtain a commitment to cure the delinquency at the earliest possible
time.
As a general matter, if efforts to obtain payment have not been
successful, a pre-foreclosure notice will be sent to the borrower shortly after
the due date of the next subsequently scheduled installment, providing 30 days'
notice of impending foreclosure action. During the 30-day notice period,
collection efforts continue. However, if no substantial progress has been made
in collecting delinquent payments from the borrower, foreclosure proceedings
will begin. Generally, the Company will have commenced foreclosure proceedings
when a loan is 45 to 60 days delinquent.
Servicing and collection practices change over time in accordance
with, among other things, the Company's business judgment, changes in portfolio
performance and applicable laws and regulations.
Loans originated or purchased by the Company are secured by
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice in the state in which the property securing the
loan is located. Depending on local law, foreclosure is effected by judicial
action or nonjudicial sale, and is subject to various notice and filing
requirements. In general, the borrower, or any person having a junior
encumbrance on the real estate, may cure a monetary default by paying the entire
amount in arrears plus other designated costs and expenses incurred in enforcing
the obligation during a statutorily prescribed reinstatement period. Generally,
state law controls the amount of foreclosure expenses and costs, including
attorneys' fees, which may be recovered by a lender. After the reinstatement
period has expired without the default having been cured, the borrower or junior
lienholder no longer has the right to reinstate the loan and must pay the loan
in full to prevent the scheduled foreclosure sale.
Although foreclosure sales are typically public sales, frequently
no third-party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible
13
<PAGE> 14
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the Company often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding under
the loan, accrued and unpaid interest and the expenses of foreclosure. Depending
upon market conditions, the ultimate proceeds of the sale may not equal the
Company's investment in the property.
The following table sets forth delinquency and foreclosure
experience of loans originated and/or purchased included in the Company's
servicing portfolio for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
------------------------------------------------------
1994 1995 1996
---------------- ---------------- --------------
<S> <C> <C> <C>
Percentage of dollar amount of delinquent loans to loans
serviced (period end) (1) (2) (3)
One Month................................................... 3.8% 3.9% 4.9%
Two Months.................................................. 1.6% 1.5% 1.8%
Three or More Months:
Not foreclosed (3) (4).................................... 6.7% 5.0% 8.0%
Foreclosed ............................................... 3.6% 1.5% 1.0%
---------------- ---------------- --------------
Total............................................. 15.7% 11.9% 15.7%
================ ================ ==============
</TABLE>
<TABLE>
<S> <C> <C> <C>
Percentage of dollar amount of loans foreclosed to loans
serviced (period end) (2)........................................................ 3.0% 1.2% 1.2%
Number of loans foreclosed......................................................... 215 159 221
Principal amount at time of foreclosure of foreclosed loans (in thousands)......... $ 11,528 $ 6,675 $ 14,349
Net losses on foreclosed loans included in pools (in thousands).................... $ 0 $ 92 $ 922
</TABLE>
- ----------------------
(1) Delinquent loans are loans for which more than one payment is due.
(2) The delinquency and foreclosure percentages are calculated on the basis
of the total dollar amount of mortgage loans originated or purchased by
the Company and, in each case, serviced by the Company, or the Company
and any subservicers, as applicable, as of the end of the periods
indicated.
(3) At June 30, 1996, the dollar volume of loans delinquent more than 90
days in the Company's four REMIC trusts formed during the period from
December 1994 to September 1995 exceeded the permitted limit in the
related pooling and servicing agreements. The higher delinquency rates
could result in the termination of the Company's normal servicing
rights with respect to the loans in these trusts, although to date no
servicing rights have been terminated, negatively affect the Company's
cash flows and adversely influence the Company's assumptions underlying
the excess servicing gain (see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Risk
Factors -- Delinquencies; Negative Impact on Cash Flow; Right to
Terminate Normal Servicing").
(4) Represents loans which are in foreclosure but as to which foreclosure
proceedings have not concluded.
The Company's servicing portfolio has grown over the periods
presented. However, because foreclosures and losses typically occur months or
years after a loan is originated, data relating to delinquencies, foreclosures
and losses as a percentage of the current portfolio can understate the risk of
future delinquencies, losses or foreclosures.
COMPETITION
In addition to competing with other consumer finance lenders,
mortgage bankers and mortgage brokers, the Company competes with financial
institutions that have substantially greater financial resources than the
Company. Although some traditional financial institutions are aggressively
promoting and pricing home equity loans and attempting to increase the
percentage of their portfolios consisting of consumer real estate loans, the
Company does not believe that these trends have had a material impact on its
competitive position. The Company competes by emphasizing customer service on a
timely basis to attract borrowers whose needs are not generally met by
traditional financial institutions and by placing a greater emphasis on the
equity value of the property securing the loan. Nevertheless, there can be no
assurance that the Company will not face increased competition from such
institutions.
14
<PAGE> 15
Further, a number of the Company's competitors have recently increased their
access to the capital markets, which helps foster their growth and therefore
increases competition.
REGULATION
The operations of the Company are subject to extensive
regulation, supervision and licensing by federal, state and local government
authorities. Regulated matters include, without limitation, loan origination,
credit activities, maximum interest rates and finance and other charges,
disclosure to customers, the terms of secured transactions, the collection,
repossession and claims-handling procedures utilized by the Company, multiple
qualification and licensing requirements for doing business in various
jurisdictions and other trade practices.
The Company's loan origination activities are subject to the laws
and regulations in each of the states in which those activities are conducted.
The Company's activities as a lender are also subject to various federal laws
including, among others, the Truth in Lending Act ("TILA"), the Real Estate
Settlement Procedures Act, the Equal Credit Opportunity Act of 1974, as amended
("ECOA"), the Home Mortgage Disclosure Act and the Fair Credit Reporting Act of
1970, as amended ("FCRA").
The TILA and Regulation Z promulgated thereunder contain
disclosure requirements designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loans and
credit transactions in order to give them the ability to compare credit terms.
TILA also guarantees consumers a three-day right to cancel certain credit
transactions including loans of the type originated by the Company. Management
of the Company believes that it is in compliance with TILA in all material
respects.
In September 1994, the Riegle Community Development and
Regulatory Improvement Act of 1994 (the "Riegle Act") was enacted. Among other
things, the Riegle Act made certain amendments to TILA. The TILA Amendments,
which became effective in October 1995, generally apply to mortgage loans with
(i) total points and fees upon origination in excess of the greater of eight
percent of the loan amount or $400 or (ii) an annual percentage rate of more
than ten percentage points higher than comparably maturing U.S. treasury
securities. Loans covered by the TILA Amendments are known as "Section 32
loans."
The TILA Amendments impose additional disclosure requirements on
lenders originating Section 32 loans and prohibit lenders from originating
Section 32 loans that are underwritten solely on the basis of the borrower's
home equity without regard to the borrower's ability to repay the loan. In
accordance with TILA Amendments, the Company applies underwriting criteria that
take into consideration the borrower's ability to repay to all Section 32 loans.
The TILA Amendments also prohibit lenders from including
prepayment fee clauses in Section 32 loans to borrowers with 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. The Company reported $1.9
million, $2.0 million and $3.2 million in prepayment fee revenue in fiscal 1994,
1995 and 1996, respectively. The Company will continue to collect prepayment
fees on loans originated prior to the effectiveness of the TILA Amendments and
on non-Section 32 loans as well as on Section 32 loans in permitted
circumstances following the effectiveness of the TILA Amendments. The TILA
Amendments impose other restrictions on Section 32 loans, including restrictions
on balloon payments and negative amortization features, which the Company does
not believe will have a material impact on its operations.
The Company is also required to comply with the ECOA, which
prohibits creditors from discriminating against applicants on the basis of race,
color, sex, age or marital status. Regulation B promulgated under ECOA restricts
creditors from obtaining certain types of information from loan applicants. It
also requires certain disclosures by the lender regarding consumer rights and
requires lenders to advise applicants of the reasons for any credit denial. In
instances where the applicant is denied credit or the rate or charge for a loan
increases as a result of information obtained from a consumer credit agency,
another statute, the FRCA requires the lender to supply the applicant with a
name and address of the reporting agency. The Company is also subject to the
Real Estate
15
<PAGE> 16
Settlement Procedures Act and is required to file an annual report with the
Department of Housing and Urban Development pursuant to the Home Mortgage
Disclosure Act.
In the course of its business, the Company may acquire properties
as a result of foreclosure. There is a risk that hazardous or toxic waste could
be found on such properties. In such event, the Company could be held
responsible for the cost of cleaning up or removing such waste, and such cost
could exceed the value of the underlying properties.
The Company is also subject to various other federal and state
laws regulating the issuance and sale of securities, relationships with entities
regulated by the Employee Retirement Income Security Act of 1974, as amended,
and other aspects of its business.
The laws, rules and regulations applicable to the Company are
subject to regular modification and change. There are currently proposed various
laws, rules and regulations which, if adopted, could impact the Company. There
can be no assurance that these proposed laws, rules and regulations, or other
such laws, rules or regulations, will not be adopted in the future which could
make compliance much more difficult or expensive, restrict the Company's ability
to originate, purchase, broker or sell loans, further limit or restrict the
amount of commissions, interest and other charges earned on loans originated or
sold by the Company, or otherwise adversely affect the business or prospects of
the Company.
EMPLOYEES
At June 30, 1996, the Company employed 672 persons. The Company
has satisfactory relations with its employees.
ITEM 2. PROPERTIES
The executive and administrative offices of the Company are
located at 3731 Wilshire Boulevard, Los Angeles, California, and consist of
approximately 101,000 square feet. The lease on these premises extends through
July 31, 2000. The Company intends to relocate its corporate executive offices
to Downtown Los Angeles in May 1997 under a lease that will expire in May 2007
and intends to sublease its current facility for the remainder of the term of
its lease. The executive and administrative offices of One Stop are located at
200 Baker Street, Costa Mesa, California, and consist of approximately 19,544
square feet. The lease on these premises extends through November 8, 1998.
The Company and One Stop also lease space for their loan offices.
These facilities aggregate approximately 135,000 square feet and are leased
under terms which vary as to duration. In general, the leases expire between
1996 and 2001, and provide for rent escalations tied to either increases in the
lessor's operating expenses or fluctuations in the consumer price index in the
relevant geographical area.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation arising in the normal
course of business. The Company believes that any liability with respect to such
legal actions, individually or in the aggregate, is not likely to be material to
the Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of fiscal 1996
to a vote of the security holders of the Company.
16
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In November 1995, the Company's Common Stock began trading under
the symbol "AAM" on the New York Stock Exchange (NYSE). Prior to that time, the
Company's Common Stock was quoted on the NASDAQ National Market System. The
following table sets forth the range of high and low sale prices per share for
the periods indicated.
<TABLE>
<CAPTION>
CASH
HIGH LOW DIVIDEND
------------------- ----------------- -------------------
<S> <C> <C> <C>
FISCAL 1996
Fourth Quarter 37 24 1/8 $ .05
Third Quarter 25 1/8 16 1/4 .05
Second Quarter 24 1/2 16 1/8 .05
First Quarter 19 1/2 11 1/2 .05
FISCAL 1995
Fourth Quarter 12.5 7.25 $ .05
Third Quarter 8.75 5.25 .05
Second Quarter 6 5.25 .05
First Quarter $ 6.25 $ 5.25 .05
</TABLE>
At September 15, 1996, the Company had 68 stockholders of record,
and the Company believes that it had in excess of 2,000 beneficial owners of its
Common Stock. Since its initial public offering on December 3, 1991, the Company
has consistently paid quarterly cash dividends on its Common Stock. The Company
declared and subsequently paid an aggregate of $.20 per share in dividends for
the year ended June 30, 1996, representing approximately 8.7% of its net income
for the period. The Board of Directors of the Company periodically reviews the
Company's dividend policy in light of the earnings, cash position and capital
needs of the Company, general business conditions and other relevant factors. In
addition, the Company's ability to pay dividends is limited under various bank
and other credit agreements.
17
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data for the Company for the
five year period ended June 30, 1996 have been derived from the Consolidated
Financial Statements of the Company which have been audited by Price Waterhouse
LLP, independent accountants. The selected consolidated financial data should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
and other financial information included herein. Results of operations of the
Company for the year ended June 30, 1996, reflect the Company's adoption of SFAS
No. 122. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected consolidated financial data
for the Company for the year ended June 30, 1996 does not give pro forma effect
to the acquisition of One Stop. See "Item 1. Business--Recent Developments."
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
Excess servicing gain ................................. $ 1,583 $ 3,486 $ 8,101 $ 22,954 $ 78,274
Commissions ........................................... 13,166 18,686 16,432 15,799 19,880
Loan service .......................................... 3,346 4,377 6,099 8,246 18,185
Fees and other ........................................ 3,397 4,762 5,595 7,940 12,069
----------- ----------- ----------- ----------- -----------
Total revenue ....................................... 21,492 31,311 36,227 54,939 128,408
Total expenses ........................................ 17,466 22,955 27,244 37,788 74,877
----------- ----------- ----------- ----------- -----------
Income before income taxes ............................ 4,026 8,356 8,983 17,151 53,531
Provision for income taxes (1) ........................ 1,112 3,353 3,684 7,117 22,483
----------- ----------- ----------- ----------- -----------
Net income ............................................ $ 2,914 $ 5,003 $ 5,299 $ 10,034 $ 31,048
=========== =========== =========== =========== ===========
Net income per share (fully diluted) .................. $ 0.51 $ 0.75 $ 0.61 $ 1.11 $ 2.09
=========== =========== =========== =========== ===========
Weighted average number of shares outstanding
(in thousands) (fully diluted) ...................... 5,717 6,623 8,751 9,021 15,465
CASH FLOW DATA:
(Used in) provided by operating activities ............ $ 3,115 $ (1,490) $ (13,857) $ (43,375) $ (122,233)
(Used in) investing activities ........................ (568) (489) (870) (988 (4,597)
Provided by (used in) financing activities ............ 7,515 (1,522) 22,855 48,209 124,687
Net increase (decrease) in cash and cash equivalents .. 10,062 (3,501) 8,128 3,846 (2,143)
RATIOS AND OTHER DATA:
Return on average common equity ....................... NM 36% 18% 27% 33%
Return on average managed receivables (2) ............. 1.5% 2.1% 1.6% 2.0% 3.3%
Loans originated or purchased:
Retail loans ...................................... $ 90,600 $ 122,200 $ 130,200 $ 148,200 $ 220,900
Wholesale loan correspondent ...................... 0 0 19,700 206,800 628,200
----------- ----------- ----------- ----------- -----------
Total (3) ..................................... 90,600 122,200 149,900 355,000 849,100
=========== =========== =========== =========== ===========
Loans pooled and sold in the secondary market ......... $ 11,000 $ 52,500 $ 106,800 $ 316,600 $ 791,300
Loans serviced (period end) ........................... $ 204,600 $ 262,100 $ 381,800 $ 608,700 1,250,400
Weighted average commission rate on retail loan
origination (4) ..................................... 13.0% 14.0% 12.0% 9.4% 7.7%
Weighted average interest rate (4) .................... 12.7% 11.2% 10.2% 11.6% 11.0%
Weighted average initial combined loan-to-value
ratio (4)(5):
Retail loans ........................................ 53% 51% 52% 55% 60%
Wholesale loan correspondents ....................... NM NM NM 65.0% 66.0%
Number of retail loan offices (period end) ............ 21 24 27 32 48
ASSET QUALITY DATA:
Delinquent loans to loans serviced
(period end) (6)(7) ................................... 18% 16% 16% 12% 16%
Number of loans foreclosed ............................ 69 137 215 159 221
Dollar amount of loans foreclosed as a percentage of
average loans serviced .............................. 1.2% 2.4% 3.0% 1.2% 1.2%
Net losses as a percentage of average amount
outstanding ......................................... NM NM NM .02% .10%
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------
1992 1993 1994 1995 1996
--------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...............................$ 11,886 $ 8,385 $ 16,513 $ 20,359 $ 18,216
Excess Spread Receivable (8)............................ 2,544 7,555 18,780 56,960 184,691
Total assets............................................ 18,927 21,307 53,344 114,623 293,997
--------- ---------- ---------- ---------- ---------
10.5% Senior Notes due 2002............................. -- -- -- 23,000 23,000
5.5% Convertible Subordinated Debentures due 2006....... -- -- -- -- 115,000
Other long-term debt.................................... 1,177 944 1,104 144 45
Total long-term debt................................ 1,177 944 1,104 23,144 138,045
Stockholders' equity.................................... 12,136 15,850 31,669 80,047 110,170
</TABLE>
(1) Prior to December 1991, the Company was operated as an S
Corporation for federal tax purposes and consequently was not
responsible for federal income taxes.
(2) Represents net income divided by the average servicing
portfolio for the fiscal year.
(3) Does not include loans originated or purchased by One Stop during
fiscal 1996 in the aggregate amount of $320 million.
(4) Computed on loans originated or purchased, as the case may be,
during the period.
(5) The weighted average combined loan-to-value ratio of a loan
secured by a first mortgage is determined by dividing the amount
of the loan by the appraised value of the mortgaged property at
origination. The weighted average combined loan-to-value ratio of
loans secured by a junior mortgage is determined by taking the
sum of the loans secured by the junior and all senior mortgages
and dividing by the appraised value of the mortgaged property at
origination.
(6) Does not include loans for which only the servicing rights were
purchased by the Company. Delinquent loans are loans for which
more than one payment is past due.
(7) At June 30, 1996, the dollar volume of loans delinquent more than
90 days in the Company's four real estate mortgage investment
conduit ("REMIC") trusts formed during the period from December
1994 to September 1995 exceeded the permitted limit in the
related pooling and servicing agreements. The higher delinquency
rates could result in the termination of the Company's normal
servicing rights with respect to the loans in these trusts,
although to date no servicing rights have been terminated,
negatively affects the Company's cash flows and influence the
Company's assumptions underlying the excess servicing gain (see
"Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors --
Delinquencies; Negative Impact on Cash Flow; Termination of
Normal Servicing").
(8) Represents the sum of excess servicing receivable and residual
assets, and at June 30, 1996, mortgage servicing rights. See Note
1 of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with
Item 6. Selected Financial Data and Item 8. Financial Statements and
Supplementary Data.
OVERVIEW
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 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 the 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.
19
<PAGE> 20
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 mortgage
bankers and other financial institutions. On August 28, 1996, the Company
acquired 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 loan originations 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. See "Item 1. Business - - Mortgage Loan
Production -- Underwriting."
The Company has experienced significant growth in the last
three years. Management believes that this growth is primarily attributable to
(i) the Company's geographic expansion of its retail loan office network from 21
offices in California at July 1, 1993 to 50 offices located in 17 states at
August 31, 1996, (ii) the commencement of the Company's wholesale correspondent
program in fiscal 1994, which was expanded in fiscal 1996 to include purchases
of loans in bulk, (iii) the Company's ability to complete increasingly large
mortgage loan securitizations on a quarterly basis, (iv) the Company's increased
access to warehouse and other credit facilities over this period, and (v) the
Company's ability to effect additional debt and equity financings over this
period, which in the aggregate raised net proceeds of approximately $134 million
and $52.4 million, respectively. The Company has managed its growth by employing
experienced senior management, regularly monitoring its underwriting guidelines
and strengthening quality control procedures.
The acquisition of One Stop was accomplished through the
merger of a wholly-owned subsidiary of the Company into One Stop, in a tax-free
exchange accounted for as a pooling-of-interests, in which the Company issued
approximately 2.3 million shares of its Common Stock and assumed options granted
to key employees to purchase approximately 375,000 shares of its Common Stock.
Under the pooling rules, the historical financial results of the Company will be
restated to reflect the combination and will 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. See "-- One-time Charges."
ONE-TIME CHARGES
Because of several one-time charges, the Company expects to
incur a net loss for the quarter ended September 30, 1996. As a result of, and
subsequent to, the acquisition of One Stop, One Stop's credit facilities with an
investment bank were terminated and, as a consequence, the Company will accrue a
pre-tax write-off of approximately $23 million (approximately $15 million on an
after-tax basis) in prepaid financing costs capitalized by One Stop,
representing the fair market value of a warrant for 25% of the equity of One
Stop granted to an investment bank in connection with entering into those credit
facilities. However, the $15 million charge will be less than the additions to
the Company's consolidated stockholders' equity of $23.3 million resulting from
the acquisition of One Stop. Further, because the acquisition of One Stop is to
be accounted for as a pooling-of-interests, all merger costs, which are expected
to aggregate approximately $2 million, will be expensed in the first quarter of
fiscal 1997. In addition, in August 1996, the Company entered into a lease for
new corporate offices, prior to the expiration of the lease for its existing
headquarters. As a consequence, the Company will incur a pre-tax charge of
approximately $2 million in the first quarter of fiscal 1997.
20
<PAGE> 21
RESULTS OF OPERATIONS -- FISCAL YEARS 1994, 1995, AND 1996
The following table sets forth information regarding the
components of the Company's revenue in fiscal 1994, 1995 and 1996:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
1994 1995 1996
----------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Excess servicing gain $ 8,101 22.3% $ 22,954 41.7% $ 78,274 61.0%
Commissions 16,432 45.3% 15,799 28.8% 19,880 15.4%
Loan Service:
Servicing spread 2,778 7.7% 4,399 8.0% 12,666 9.9%
Prepayment fees 1,866 5.2% 1,974 3.6% 3,228 2.5%
Late charges and other servicing fees 1,455 4.0% 1,873 3.4% 2,291 1.8%
Fees and other:
Closing 1,626 4.5% 2,077 3.8% 2,512 2.0%
Appraisal 893 2.5% 988 1.8% 1,167 0.9%
Underwriting 833 2.3% 1,091 2.0% 1,600 1.2%
Interest income 771 2.1% 2,339 4.3% 5,850 4.6%
Other 1,472 4.1% 1,445 2.6% 940 0.7%
-------- ----- -------- ----- -------- -----
Total revenue $ 36,227 100% $ 54,939 100% $128,408 100%
======== ===== ======== ===== ======== =====
Expenses:
Compensation and related expenses 13,616 37.5% 17,610 32.2% 33,241 25.8%
Sales and advertising costs 7,891 21.7% 9,906 18.1% 18,362 14.2%
General and administrative expenses 5,415 14.9% 7,067 12.9% 13,926 10.7%
Interest expense 322 0.9% 3,205 5.8% 9,348 7.3%
-------- ----- -------- ----- -------- -----
Total expenses 27,244 75% 37,788 69% 74,877 58%
-------- ----- -------- ----- -------- -----
Income before income taxes 8,983 24.8% 17,151 31.2% 53,531 41.7%
Income taxes 3,684 10.2% 7,117 12.9% 22,483 17.5%
-------- ----- -------- ----- -------- -----
Net income $ 5,299 14.6% $ 10,034 18.3% $ 31,048 24.2%
======== ===== ======== ===== ======== =====
</TABLE>
21
<PAGE> 22
REVENUE
Total revenue for fiscal 1996 increased $73.5 million, or
134%, over total revenue for fiscal 1995 which, in turn, increased $18.7
million, or 52%, over total revenue in fiscal 1994. These increases in total
revenue were primarily the result of higher excess servicing gain and loan
service revenue resulting from increased volumes of mortgage loans originated
and purchased by the Company and securitized and sold. The Company originated
and purchased $150 million, $355 million and $849 million of mortgage loans
during fiscal 1994, 1995 and 1996, respectively.
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. Excess servicing gain increased by $55.3 million, or 241%, in
fiscal 1996 compared to fiscal 1995 and $14.9 million, or 183%, in fiscal 1995
compared to fiscal 1994. These increases resulted primarily from the greater
size of the mortgage loan pools securitized and sold by the Company in the
secondary market and, in fiscal 1996, increased servicing spreads and the
recognition of mortgage servicing rights pursuant to SFAS 122 in the amount of
$11.8 million (see "--Certain Accounting Considerations"). The Company
securitized and sold $107 million, $317 million and $791 million of loans in the
secondary market during fiscal 1994, 1995, and 1996, respectively. The weighted
average servicing spread on loans securitized and sold during these periods was
3.91%, 3.91% and 4.93% for fiscal 1994, 1995 and 1996, respectively. The higher
weighted average servicing spread in 1996 reflected a decrease in pass-through
rates to investors and a change in product mix. In the future, the Company
expects to realize a lower percentage of excess servicing gain on the sale of
loans as a result of changes in assumptions to reflect the changing composition
of the Company's loan product mix and other factors.
Commissions earned on loan originations continue to be a
significant component of total revenue, although to a lesser degree than in
prior years, comprising 45%, 29% and 15% of total revenue in fiscal 1994, 1995
and 1996 respectively. Commissions increased $4.1 million, or 26%, in fiscal
1996 compared to fiscal 1995, and decreased $633,000, or 3.9%, in fiscal year
1995 compared to fiscal 1994. Commission revenue is primarily a function of the
volume of mortgage loans originated by the Company through its retail loan
office network and the weighted average commission rate charged on such loans.
The increase in commissions in fiscal year 1996 was a result of increased
origination volume, offsetting a decline in weighted average commission rate.
The decrease in commissions in fiscal year 1995 was due to a reduction in the
weighted average commission rate, partially offset by an increase in the dollar
amount of loans originated. The weighted average commission rate was 11.6 %,
9.4% and 7.7% during fiscal 1994, 1995 and 1996, respectively. The lower
weighted average commission rate in 1996 reflected competitive factors, and
the increase of higher credit grade loans originated through the Company's
retail loan office network. Commissions do not include $722,000 and $1.0
million of commissions on loans which were held for sale as of June 30, 1995
and 1996, respectively.
Loan service revenue increased $9.9 million, or 121%, in
fiscal 1996 compared to fiscal 1995 and $2.1 million, or 35%, in fiscal 1995
compared to fiscal 1994. Loan service revenue consists of net servicing spread
earned on the principal balances of the loans in the Company's loan servicing
portfolio, prepayment fees, late charges and other fees retained by the Company
in connection with the servicing of loans. The increases in fiscal 1996 and 1995
were due primarily to the greater size of the portfolio of loans serviced in
each of these periods. The Company's loan servicing portfolio increased to $1.25
billion at June 30, 1996, up 105% from the June 30, 1995 balance of $609 million
which, in turn, increased 59% over the June 30, 1994 balance.
Fees and other revenue increased by $4.1 million, or 52%, in
fiscal 1996 compared to fiscal 1995 and increased $2.3 million, or 42%, in
fiscal 1995 compared to fiscal 1994. Fees and other revenue consist of fees
received by the Company through its retail loan office network in the form of
closing, appraisal, underwriting and other fees, plus interest income. The
dollar amount of these fees increased in each of the years presented due to the
22
<PAGE> 23
larger number of mortgage loans originated through the Company's retail loan
office network during the respective periods. Interest income increased in
fiscal 1996 and 1995 due to interest earned on larger amounts of loans held by
the Company during the period from origination or purchase of the loans until
the date sold by the Company.
EXPENSES
Compensation and related expenses increased $15.6 million, or
89%, in fiscal 1996 compared to fiscal 1995 as a result of increased
compensation paid to senior management ($4.2 million) as well as the addition of
new personnel. For primarily the same reasons, compensation and related expenses
increased by $4.0 million, or 29%, in fiscal 1995 as compared to fiscal 1994.
Compensation and related expenses as a percentage of total revenues were 38%,
32% and 26% for fiscal 1994, 1995 and 1996, respectively. The Company
anticipates that compensation expense will increase in fiscal 1997 as a result
of a full year's compensation to be paid to members of senior management who
joined the Company in the latter half of fiscal 1996, as well as the addition in
fiscal 1997 of One Stop's senior management and other personnel.
Sales and advertising costs increased $8.5 million, or 85%, in
fiscal 1996 compared to fiscal 1995 and $2.0 million, or 26%, in fiscal 1995
compared to fiscal 1994, due primarily to the Company's nationwide expansion of
its retail loan office network. Sales and advertising costs as a percentage of
total revenue were 22%, 18% and 14% for fiscal 1994, 1995, and 1996,
respectively.
General and administrative expenses increased $6.9 million, or
97%, in fiscal 1996 compared to fiscal 1995 and decreased to 11% from 13% of
revenue for the same periods. General and administrative expenses increased by
$1.7 million, or 31%, in fiscal 1995 compared to fiscal 1994, a decrease to 13%
from 15% of revenue for the same periods. The dollar increases were primarily
the result of occupancy and communications costs related to the expansion of the
Company's retail loan office network (an increase of $3.7 million in 1996 when
compared to 1995 and $592,000 in 1995 when compared with 1994), and equipment
rental expense (an increase of $956,000 in 1996 when compared to 1995 and
$10,000 in 1995 when compared with 1994). The increase in equipment rental
expense in 1996 was primarily attributable to an airplane lease entered into in
February 1996.
Interest expense increased to $9.3 million in fiscal 1996
compared to $3.2 million in fiscal 1995 and $322,000 in fiscal 1994 primarily as
a result of increased borrowings under various financing arrangements used to
fund the origination and purchase of mortgage loans prior to their
securitization and sale in the secondary market. Interest expense is expected to
increase in future periods due to the Company's continued reliance on
warehousing arrangements to fund increased originations and purchases of loans
pending their securitization, and as a result of the Company's sale in the third
quarter of fiscal 1996 of $115 million of its 5.5% Convertible Subordinated
Debentures due 2006.
INCOME TAXES
The Company's provision for income taxes increased to $22.5
million in fiscal 1996 from $7.1 million in fiscal 1995 and $3.7 million in
fiscal 1994 primarily as a result of increased pre-tax income.
FINANCIAL CONDITION
Loans held for sale. Prior to securitization, the Company
holds mortgage loans in its portfolio. Due to the increased volume of loan
originations and purchases, the Company's portfolio of loans held for sale
increased to $67.3 million at June 30, 1996 from $24.1 million at June 30, 1995.
Accounts receivable. Accounts receivable representing
servicing fees and advances, increased by $2.5 million from $6.1 million at June
30, 1995 to $8.6 million at June 30, 1996. This increase was primarily due to
the increased size of the servicing portfolio.
23
<PAGE> 24
Excess servicing receivable. Excess servicing receivable,
increased $87.0 million from $42.0 million at June 30, 1995 to $129 million at
June 30, 1996 reflecting the increased size of the Company's securitizations
during 1996.
Mortgage servicing rights. The June 30, 1996 balance includes
$10.9 million of mortgage servicing rights capitalized in accordance with SFAS
No. 122. This balance reflects the capitalization under SFAS No. 122 of $11.8
million of servicing rights partially offset by amortization of $857,000 during
fiscal 1996. See "--Certain Accounting Considerations."
Residual assets. Residual assets represent the reserve
accounts and overcollateralization amounts required to be maintained in
connection with the securitization of loans. Residual assets include cash and
mortgage loans in excess of the principal amounts of the senior certificates of
the REMIC trusts. Residual assets increased $29.8 million from $14.9 million at
June 30, 1995 to $44.7 million at June 30, 1996.
Equipment and improvements. Primarily as a result of the
expansion of the Company's retail loan office network and the associated
investment in technology, equipment and improvements, net increased $3.5 million
from $2.1 million at June 30, 1995 to $5.6 million at June 30, 1996.
Prepaid and other assets. Prepaid and other assets increased
$4.6 million from $5.0 million at June 30, 1995 to $9.6 million at June 30,
1996. The increase was primarily related to prepaid financing costs incurred in
connection with the issuance of $115 million of 5.5% Convertible Subordinated
Debentures due 2006 in the third quarter of fiscal 1996 and, to a lesser extent,
to prepaid advertising costs.
Revolving warehouse arrangements. Amounts outstanding under
warehouse arrangements increased by $11.0 million from a zero balance at
June 30, 1995 to an $11.0 million balance at June 30, 1996 primarily as a
result of the larger amount of loans held for sale at such dates.
Borrowings. Notes payable increased by $115 million from $23.1
million at June 30, 1995 to $138 million at June 30, 1996 primarily as a result
of the issuance in the third quarter of fiscal 1996 of $115 million of 5.5%
Convertible Subordinated Debentures due 2006.
24
<PAGE> 25
LIQUIDITY
The table below summarizes cash flow generated by operating
activities:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
-----------------------------------------------
1994 1995 1996
-------------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING CASH INCOME:
Excess cash flows generated by securitization trusts.................. $ 3,482 $ 7,984 $ 29,932
Less cash required to be invested in residual assets (1).......... (4,228) (8,691) (29,794)
-------------- ------------ -------------
Net excess cash flow from securitization trusts................... (746) (707) 138
Other servicing fees.............................................. 5,310 4,664 6,049
Interest received................................................. 771 2,339 6,397
Commission income................................................. 16,432 15,799 19,880
Other cash income................................................. 4,825 5,601 5,372
-------------- ------------ -------------
Total Operating Cash Income....................................... 26,592 27,696 37,836
OPERATING CASH EXPENSES:
Securitization and loan acquisition costs......................... (1,589) (10,937) (37,317)
Cash operating expenses........................................... (26,779) (36,377) (69,304)
Taxes paid........................................................ (2,991) (5,196) (4,240)
Interest paid..................................................... 0 (805) (2,415)
Total Operating Cash Expenses..................................... (31,359) (53,315) (113,276)
Net Operating Cash Flow........................................... (4,767) (25,619) (75,440)
Cash (used in) provided by other payables and receivables......... 875 (3,765) (3,598)
Cash used in loans held for sale.................................. (9,965) (13,991) (43,195)
-------------- ------------ -------------
Net Cash used in Operating Activities............................. ($13,857) ($43,375) ($122,233)
============== ============ =============
CHANGE IN EXCESS SPREAD RECEIVABLES (2)............................... $ 11,225 $ 38,180 $ 127,731
NET CASH PROVIDED BY FINANCING ACTIVITIES............................. $ 22,855 $ 48,209 $ 124,687
</TABLE>
- --------------------
(1) Cash required to fund initial and required overcollateralization
account balances.
(2) Represents the sum of excess servicing receivables and residual
assets, and at June 30, 1996, mortgage servicing rights. See
Note 1 to Notes to Consolidated Financial Statements.
The Company's operations require continued access to short-term
and long-term sources of cash. The Company's operating cash requirements include
the funding of: (i) mortgage loan originations and purchases prior to their
securitization and sale, (ii) fees and expenses incurred in connection with the
securitization and sale of loans, (iii) cash reserve account or
overcollateralization requirements in connection with the securitization and
sale of mortgage loans, (iv) tax payments due on recognition of excess servicing
gain, and (v) ongoing administrative and other operating expenses.
The Company has operated on a negative operating cash flow basis
and expects to continue to do so for as long as the Company's cash requirements
necessitated by the growth in volume of its securitization program continue to
grow at rates in excess of the cash generated by the Company from its
operations, including its servicing activities. Historically, the Company has
funded, and expects to continue to fund, these negative operating cash flows,
subject to limitations under the Company's existing credit facilities,
principally through borrowings from financial institutions, sales of equity
securities and sales of senior and subordinated notes, among other sources.
There can be no assurance that the Company will have access to the capital
markets in the future or that financing will be available to satisfy the
Company's operating and debt service requirements or to fund its future growth.
See "--Capital Resources" and "Item 1. Business--Business Strategy."
25
<PAGE> 26
New loan originations and purchases represent the Company's most
significant cash flow requirement. The Company pays a premium on loans purchased
through its wholesale correspondent program and on loans purchased from
independent mortgage brokers. The amount of cash used to pay premiums
approximated $33.7 million in 1996.
The Company securitized and sold in the secondary market $107 million, $317
million and $791 million of loans in fiscal 1994, 1995 and 1996, respectively.
In connection with securitization transactions completed during these periods,
the Company was required to provide credit enhancements in the form of reserve
accounts or overcollateralization amounts. In addition, during the life of the
related REMIC trusts, the Company subordinates a portion of the excess servicing
otherwise due it to the rights of holders of senior interests as a credit
enhancement to support the sale of the senior interests. In connection with
securitizations effected in fiscal 1994, 1995, and 1996, initial reserve
accounts or overcollateralization requirements were set at $2.2 million, $3.5
million, and $7.5 million, respectively. The terms of the REMIC trusts generally
require that all excess servicing otherwise payable to the Company during the
early months of the trusts be used to increase the cash reserve accounts, or to
repay the senior interests in order to increase overcollateralization to
specified maximums. The accumulated amounts of such cash reserve accounts and
overcollateralization amounts are reflected on the Company's balance sheet as
"residual assets." At June 30, 1996, the residual assets balance was $44.7
million.
In addition, the increasing use of securitization transactions as a funding
source by the Company has resulted in a significant increase in the amount of
excess servicing gain recognized by the Company. During fiscal 1994, 1995, and
1996, the Company recognized excess servicing gain in the amounts of $8.1
million, $23.0 million, and $78.3 million, respectively. The recognition of
excess servicing gain has a negative impact on the cash flow of the Company
since the Company is required to pay federal and state taxes on a portion of
these amounts in the period recognized although it does not receive the cash
representing the gain until later periods as the related service fees are
collected and applicable reserve or overcollateralization requirements are met.
The Company also incurs certain expenses in connection with
securitizations, including underwriting fees, credit enhancement fees, trustee
fees, hedging and other costs, which in fiscal 1996 approximated 1.0% of the
principal amount of the securitized mortgage loans.
CAPITAL RESOURCES
The Company finances it operating cash requirements primarily through (i)
warehouse and other credit facilities, (ii) the securitization and sale of
mortgage loans, and (iii) the issuance of debt and equity securities.
Warehouse and Other Credit Facilities. At August 31, 1996, the Company had
four warehouse and one other credit facility in place. There is a $150 million
warehouse and working capital line of credit from a syndicate of six commercial
banks that is secured by loans originated and purchased by the Company as well
as certain servicing receivables, which bears interest at the rate of 0.875%
over one-month LIBOR. This line currently expires on December 26, 1996 and is
subject to renewal. There are two additional warehouse lines of credit from two
investment banks that are secured by loans originated and purchased by the
Company. These lines of $150 million and $125 million bear interest at the rate
of 0.875% over one-month LIBOR and are subject to renewal periodically. The $150
million line expires on January 1, 1997 and the $125 million line expires on
September 30, 1996. The Company also has a $250 million warehouse line of credit
with another investment bank that is secured by loans originated and purchased
by One Stop. This line bears interest at the rate of 1.1% over one-month LIBOR
and expires on September 27, 1996. Finally, the Company has a $50.0 million
credit facility from an investment bank that is secured by certain excess
servicing receivables in certificated form. Until February 1997 this is a
revolving facility that bears interest at the rate of 2.5% over one-month LIBOR;
during the amortizing term thereafter until August 1999, it bears interest at
the rate of 4.5% over one-month LIBOR. Management expects, although there can be
no assurance, that the Company will be able to maintain these or similar
facilities in the future. See "-- Risk Factors -- Dependence on Funding Sources
- -- Dependence on Warehouse and Other Credit Facilities."
26
<PAGE> 27
Securitization Program. The Company's most important capital resource has
been its ability to sell loans originated and purchased by it in the secondary
market in order to generate cash proceeds to pay down its warehouse facilities
and fund new originations and purchases. The value of and market for the
Company's loans are dependent upon a number of factors, including general
economic conditions, interest rates and governmental regulations. Adverse
changes in such factors may affect the Company's ability to securitize and sell
loans for acceptable prices within a reasonable period of time. The ability of
the Company to sell loans in the secondary market on acceptable terms is
essential for the continuation of the Company's loan origination and purchase
operations. A reduction in the size of the secondary market for loans of the
types originated or purchased by the Company may adversely affect the Company's
ability to sell loans in the secondary market with a consequent adverse impact
on the Company's profitability and ability to fund future originations and
purchases. See "-- Risk Factors--Dependence on Funding Sources--Dependence on
Securitization Program."
In addition, in order to gain access to the secondary market, the Company
has relied on monoline insurance companies to provide financial guarantee
insurance on senior interests in the REMIC trusts established by the Company.
The Company has not structured a pool for securitization and sale in the
secondary market based solely on the internal credit enhancements of the pool or
the Company's guarantees. Any substantial reduction in the size or availability
of the secondary market for the Company's loans or the unwillingness of monoline
insurance companies to provide financial guarantee insurance for the senior
interests in the REMIC trusts could have a material adverse effect on the
Company's financial position and results of operations. At June 30, 1996, the
dollar volume of loans delinquent more than 90 days on the Company's four REMIC
trusts formed during the period from December 1994 to September 1995 exceeded
the permitted limit in the related pooling and servicing agreements. The higher
delinquency rates could result in the termination of the Company's normal
servicing rights with respect to the loans in these trusts, although to date no
servicing rights have been terminated, negatively affect the Company's cash
flows and adversely influence the Company's assumptions underlying the excess
servicing gain. See "-- Risk Factors - Delinquencies; Negative Impact on Cash
Flow; Right to Terminate Normal Servicing."
Other Capital Resources. The Company has funded negative cash flows
primarily from the sale of its equity and debt securities. In December 1991,
July 1993, and June 1995, the Company effected offerings of its Common Stock
with net proceeds to the Company aggregating $61.1 million. In March 1995, the
Company completed an offering of its 10.5% Senior Notes due 2002 with net
proceeds to the Company of $22.2 million. In February 1996, the Company
completed an offering of its 5.5% Convertible Subordinated Debentures due 2006
with net proceeds to the Company of $112 million.
The Company had cash and cash equivalents of approximately $18.2 million
(of which $2.2 million was restricted) at June 30, 1996. However, the Company
expects to continue its growth strategies. Consequently, the Company anticipates
that it will need to arrange for additional cash resources prior to the third
quarter of fiscal 1997 through additional debt or equity financing, additional
bank borrowings or restructuring its securitization program. The Company has no
commitments for additional bank borrowings or additional debt or equity
financing and there can be no assurance that the Company will be successful in
consummating any such financing transaction in the future on terms the Company
would consider to be favorable. See "-- Risk Factors - Negative Cash Flows and
Capital Needs."
RISK MANAGEMENT
The Company employs a variety of strategies in order to manage the risk
that mortgage loans held for sale pending securitization will fluctuate in value
as a result of changing interest rates prevailing in the market. The Company
hedges against interest rate fluctuations by selling United States Treasury
securities not yet purchased. The amount and timing of hedging
transactions are determined by members of the Company's senior management.
Management assesses factors including the interest rate environment, loan
production levels and open positions of current hedging positions. The Company
has also mitigated its interest rate exposure by effecting securitizations once
each quarter resulting in a holding period for most of the mortgage loans
originated and purchased by it of less than one quarter.
27
<PAGE> 28
The Company also mitigates its exposure to interest rate risk through a
pre-funding strategy in which it agrees to sell loans to the REMIC trust in the
future at an agreed-upon price. The pre-funding locks in the price agreed upon
with investors on the pricing date (typically five business days prior to the
closing date of the securitization) for a period of generally 30 days. In a
pre-funding arrangement, the Company typically delivers approximately 75% of the
loans sold at the closing and the remainder generally within 30 days after the
closing.
CERTAIN ACCOUNTING CONSIDERATIONS
As a fundamental part of its business and financing strategy, the Company
sells substantially all of its mortgage loans through securitizations. 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 cash
representing such gain until it receives the excess servicing, which is payable
over the actual life of the loans securitized. The cash purchase price is raised
through an offering of pass-through certificates by the trust. Following the
securitization, the purchasers of the pass-through certificates receive the
principal collected. The excess servicing represents, over the estimated life of
the loans, the excess of the weighted average interest rate on each pool of
loans sold over the sum of the pass-through interest rate, a normal servicing
fee and the fees of the monoline insurance carrier. The net present value of
that excess (based on certain prepayment and loss assumptions) less transaction
expenses is recorded as excess servicing gain or loss when the loan is
securitized and sold. The excess servicing receivable included in the
Consolidated Financial Statements represents these amounts reduced by direct
transaction costs. The excess servicing receivable is amortized in proportion to
and over the expected lives of the related loans.
The Company's excess servicing receivable is amortized over the estimated
remaining life of the underlying loans as an offset against the excess servicing
component of servicing income actually received in connection with such loans.
If actual prepayments with respect to sold loans occur faster or credit
experience is worse than projected at the time such loans were sold, the
carrying value of the excess servicing receivable may have to be written down
through a charge to earnings in the period of adjustment. For the three years
ended June 30, 1996, there were no material adjustments to the Company's
carrying value of the excess servicing receivable as a result of actual
prepayment experience. However, there can be no assurance of the accuracy of
management's prepayment estimates. If actual prepayments with respect to sold
loans in the secondary market or funded by private investors were to exceed
management's estimates materially, the carrying value of the excess servicing
receivable would be written down through a charge to earnings in the period of
adjustment.
Effective fiscal 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing
Rights" ("SFAS 122") which requires that upon sale or securitization of
servicing retained mortgages, companies capitalize the cost associated with the
right to service mortgage loans based on their relative fair value. The Company
determines fair value based on the present value of estimated net future cash
flows related to servicing income. The cost allocated to the servicing rights is
amortized in proportion to and over the period of estimated net future servicing
fee income. The Company periodically reviews capitalized servicing fees
receivable for valuation impairment. This review is performed on a disaggregated
basis for the predominant risk characteristics of the underlying loans which are
loan type, term and credit quality. The Company generally makes loans to
credit-impaired borrowers whose borrowing needs may not be met by traditional
financial institutions due to credit exceptions and other factors. Impairment is
recognized in valuation allowance for each disaggregated stratum in the period
of impairment. The effect of adopting SFAS 122 was to increase the net income of
the Company as reported in the Company's Consolidated Financial Statements for
fiscal 1996 by $5.7 million or $0.37 per weighted average share.
In May 1993, the FASB released SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan" ("SFAS 114"). SFAS 114 was amended by SFAS No. 118
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures," ("SFAS 118") released in October 1994. The Company adopted SFAS
114 in fiscal 1996. As the Company generally sells its loans within a relatively
short period, the adoption of SFAS 114, as amended by SFAS 118, did not have a
material impact on the Company's financial position or results of operations.
28
<PAGE> 29
In October 1995, the FASB released SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). This statement establishes methods of
accounting for stock-based compensation plans. SFAS 123 is effective for fiscal
years beginning after December 15, 1995. The Company expects to continue to
apply Accounting Principles Board Opinion 25 for measurement of stock
compensation and will provide the disclosure required by SFAS 123 beginning in
fiscal year 1997. The adoption of SFAS 123 is not expected to have a material
effect on the financial position of the Company.
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. See "--Liquidity" and "--Capital Resources."
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
29
<PAGE> 30
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.
30
<PAGE> 31
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.
31
<PAGE> 32
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.
32
<PAGE> 33
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. One Stop had total stockholders equity of $23.2
million as of 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
33
<PAGE> 34
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.
34
<PAGE> 35
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
35
<PAGE> 36
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.
36
<PAGE> 37
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.
37
<PAGE> 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are attached to this
report:
Report of Independent Accountants
Consolidated Balance Sheets at June 30, 1995 and 1996
Consolidated Statements of Income for Fiscal Years Ended
June 30, 1994, 1995 and 1996
Consolidated Statements of Stockholders' Equity for Fiscal
Years Ended June 30, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for Fiscal Years Ended
June 30, 1994, 1995 and 1996
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information regarding Directors and Executive Officers of
Registrant will appear in the proxy statement for the 1996 Annual Meeting of
Stockholders, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will appear in
the proxy statement for the 1996 Annual Meeting of Stockholders, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding executive compensation will appear in the
proxy statement for the 1996 Annual Meeting of Stockholders, and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related
transactions will appear in the proxy statement for the 1996 Annual Meeting of
Stockholders, and is incorporated by this reference.
38
<PAGE> 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements:
See Financial Statements listed as part of Item 8.
Financial Statements and Supplementary Data.
(b) Financial Statement Schedules:
Schedule 6 Property, Plant and Equipment.
Schedule 7 Accumulated Depreciation, Depletion
and Amortization of Property, Plant
and Equipment.
(c) Exhibits - Management Contracts and Compensatory
Plans:
10.1 Form of Director and Officer
Indemnification Agreement.(1)
10.2 Amended and Restated Employment
Agreement between Registrant and
Gary K. Judis.
10.3 Amended and Restated Employment
Agreement between Registrant and
Cary H. Thompson.
10.4 Stock Option Agreement between the
Registrant and Cary H. Thompson.
10.5 1991 Stock Incentive Plan, as
amended.(2)
10.6 1995 Stock Incentive Plan.
10.7 1995 Employee Stock Purchase
Plan(3)
(d) Other Exhibits:
3.1 Certificate of Incorporation of
Registrant, as amended.
3.3 Bylaws of Registrant as currently in
effect.(1)
4.1 Specimen certificate evidencing
Common Stock of Registrant.
4.2 Form of Representative Warrant.(1)
4.3 Form of Rights Agreement, dated as
of June 21, 1996, between Registrant
and Wells Fargo Bank, as rights
agent.(4)
10.8 Office Lease, dated December 13,
1989, between State Street Bank and
Trust Company of California, N.A.
and Registrant's wholly owned
subsidiary, Aames Home Loan, for the
premises located at 3731 at Wilshire
Boulevard, Los Angeles, California
90010.(1)
10.9 Amendments dated August 1,1991,
March 15, 1992, June 30, 1993 and
September 7, 1993 to Office Lease
filed as Exhibit 10.2.(5)
10.10 Indenture of Trust, dated February
1, 1995, between Registrant and
Bankers Trust Company of California,
N.A., relating to Registrant's
10.50% Senior Notes due 2002.(5)
10.11 Supplemental Indenture of Trust,
dated as of April 25, 1995 to
Exhibit 10.8.(6)
10.12 Indenture, dated as of February 26,
1996, between Registrant and The
Chase Manhattan Bank, N.A., relating
to Registrant's $115,000,000 of 5.5%
Convertible Subordinated Debentures
due 2006.(7)
10.13 Interim Loan and Security Agreement,
dated as of April 21, 1995, between
National Westminster Bank Plc, New
York Branch and Registrant's wholly
owned subsidiary, Aames Capital
Corporation.(8)
39
<PAGE> 40
10.14 Notice of Extension Agreement No. 5,
dated as of June 28, 1996, with
respect to Exhibit 10.13
10.15 Amendment No. 4, dated as of June
28, 1996, with respect to Exhibit
10.13
10.16 Guarantee by Registrant with respect
to Exhibit 10.13.(8)
10.17 Mortgage Loan Warehousing Agreement,
dated as of December 27, 1995, among
Registrant's wholly owned
subsidiary, Aames Capital
Corporation; Registrant; the lenders
from time to time a party thereto;
Nations Bank of Texas, N.A., as
administrative agent for the lenders
and a lender; and First Interstate
Bank of California, as co-agent for
the lenders and a lender.(9)
10.18 First Amendment to Mortgage Loan
Warehousing Agreement, dated as of
February 20, 1996, with respect to
Exhibit 10.17
10.19 Second Amendment to Mortgage Loan
Warehousing Agreement and Related
Documents, dated June 28, 1996, with
respect to Exhibit 10.(17)
10.20 Aircraft Lease Agreement, dated as
of March 8, 1996, between C.I.T.
Leasing Corporation, as lessor, and
Registrant's wholly owned
subsidiary, Oxford Aviation
Corporation, Inc., as lessee.(7)
10.21 Corporate Guaranty Agreement, dated
as of March 8, 1996, between
Registrant, as guarantor, and C.I.T.
Leasing Corporation with respect to
Exhibit 10.20(7)
11.1 Statement Re. Computation of Per
Share Earnings.
21.0 Subsidiaries of the Registrant
23.1 Consent of Price Waterhouse LLP
27.0 Financial Data Schedule
- ---------------------
1 Incorporated by reference from Registrant's Registration Statement on
Form S-1, File No. 33-43237.
2 Incorporated by reference from Registrant's Registration Statement on
Form S-1, File No. 33-62400.
3 Incorporated by reference from Registrant's Registration Statement, File
No. 333-01312.
4 Incorporated by reference from Registrant's Registration Statement on
Form 8-A, File No. 33-13660.
5 Incorporated by reference from Registrant's Registration Statement on
Form S-2, File No. 33-88516.
6 Incorporated by reference from Registrant's Annual Report on Form 10-K
for the Year Ended June 30, 1995.
7 Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the Three Months Ended March 31, 1996.
8 Incorporated by reference from Registrant's Registration Statement on
Form S-2, File No. 33-91640.
9 Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the Three Months Ended December 31, 1995.
(e) Reports on Form 8-K:
Current Report on Form 8-K dated April 23, 1996 --
Item 5.
40
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AAMES FINANCIAL CORPORATION
(Registrant)
By: /s/ Gary K. Judis
------------------------------------
Gary K. Judis
Chairman of the Board and
Chief Executive Officer
September 12, 1996
------------------
Date
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gary K. Judis Chairman, Chief Executive Officer, September 12, 1996
- --------------------------------------- President
Gary K. Judis
/s/ Cary H. Thompson Chief Operating Officer, Director September 12, 1996
- ---------------------------------------
Cary H. Thompson
/s/ Gregory J. Witherspoon Executive Vice President - Finance, September 12, 1996
- --------------------------------------- Chief Financial Officer, Director
Gregory J. Witherspoon
/s/ Bobbie J. Burroughs Executive Vice President - Administration, September 12, 1996
- --------------------------------------- Secretary, Director
Bobbie J. Burroughs
/s/ Neil B. Kornswiet Executive Vice President, Director September 12, 1996
- ---------------------------------------
Neil B. Kornswiet
/s/ Mark E. Elbaum Senior Vice President - Finance, September 12, 1996
- --------------------------------------- Principal Accounting Officer
Mark E. Elbaum
/s/ Joseph R. Cerrell Director September 12, 1996
- ---------------------------------------
Joseph R. Cerrell
/s/ Dennis F. Holt Director September 12, 1996
- ---------------------------------------
Dennis F. Holt
/s/ Melvyn Kinder Director September 12, 1996
- ---------------------------------------
Melvyn Kinder
</TABLE>
41
<PAGE> 42
AAMES FINANCIAL
CORPORATION
RULE12-06 Property, Plant and Equipment
Fiscal Years 1994, 1995 and 1996
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- -------- -------- -------- -------- -------- --------
Classification Balance at Additions Retirements Other changes- Balance
beginning at cost add (deduct)- at end of
of period period
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994
Automobile 191,000 34,000 23,000 202,000
Furniture &
Fixtures 841,000 396,000 1,237,000
Leasehold
Improvements
Data
Processing Eq 679,000 437,000 1,116,000
Capital Leases 797,000 797,000
-------------------------------------------------------------------------------
Total 2,618,000 870,000 23,000 3,465,000
===============================================================================
1995
Automobile 202,000 69,000 76,000 195,000
Furniture &
Fixtures 1,237,000 349,000 125,000 1,461,000
Leasehold
Improvements
Data
Processing Eq 1,116,000 538,000 1,654,000
Capital Leases 797,000 797,000
-------------------------------------------------------------------------------
Total 3,456,000 976,000 201,000 4,240,000
===============================================================================
1996
Automobile 195,000 154,000 93,000 256,000
Furniture &
Fixtures 1,461,000 1,400,000 70,000 2,791,000
Leasehold
Improvements 133,000 35,000 168,000
Data
Processing Eq 1,654,000 2,933,000 58,000 4,529,000
Data
Processing SFTW
Capital Leases 797,000 9,000 806,000
-------------------------------------------------------------------------------
Total 4,240,000 4,729,000 221,000 8,748,000
===============================================================================
</TABLE>
<PAGE> 43
AAMES FINANCIAL
CORPORATION
RULE12-07 Accumulated Depreciation,
Depletion and Amortization of Property
Plant and Equipment
Fiscal Years 1994, 1995 and 1996
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- -------- -------- -------- -------- -------- --------
Description Balance at Additions Retirements Other changes- Balance
beginning Charged to add (deduct)- at end of
of period Costs describe period
& Expenses
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994
Automobile 70,000 25,000 7,000 88,000
Furniture &
Fixtures 534,000 112,000 646,000
Leasehold
Improvements 92,000 8,000 100,000
Data
Processing Eq. 220,000 175,000 395,000
Capital Leases 424,000 131,000 555,000
-----------------------------------------------------------------
Total 1,340,000 451,000 7,000 1,784,000
=================================================================
1995
Automobile 88,000 9,000 76,000 21,000
Furniture &
Fixtures 646,000 175,000 125,000 696,000
Leasehold
Improvements 100,000 12,000 112,000
Data
Processing Eq. 395,000 263,000 658,000
Capital Leases 555,000 130,000 685,000
-----------------------------------------------------------------
Total 1,784,000 589,000 201,000 2,172,000
=================================================================
1996
Automobile 21,000 102,000 72,000 51,000
Furniture &
Fixtures 696,000 292,000 988,000
Leasehold
Improvements 112,000 10,000 122,000
Data
Processing Eq. 658,000 548,000 1,206,000
Data
Processing SFTW. 685,000 73,000 758,000
Capital Leases 797,000 9,000 806,000
-----------------------------------------------------------------
Total 2,172,000 1,037,000 72,000 3,137,000
=================================================================
</TABLE>
<PAGE> 44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Aames Financial Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
represent fairly, in all material respects, the financial position of Aames
Financial Corporation and its Subsidiaries (the "Company") at June 30, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the Consolidated Financial Statements, the Company
adopted an accounting standard that changed its method of accounting for
mortgage servicing rights for the year ended June 30, 1996.
The audits referred to above also included an audit of the financial statement
schedules listed in Item 14. In our opinion, these financial statement
schedules present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
Price Waterhouse LLP
Los Angeles, California
August 12, 1996
<PAGE> 45
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
-------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 18,216,000 $ 20,359,000
Loans held for sale, at cost
which approximates market 67,327,000 24,132,000
Accounts receivable, less allowance for doubtful
accounts of $473,000 and $360,000 8,600,000 6,090,000
Excess servicing receivable (Note 2) 129,113,000 42,078,000
Mortgage servicing rights 10,902,000
Residual assets 44,676,000 14,882,000
Equipment and improvements, net (Note 3) 5,612,000 2,063,000
Prepaid and other 9,551,000 5,019,000
-------------------------------
TOTAL ASSETS $293,997,000 $114,623,000
===============================
Liabilities and Stockholders' Equity
Borrowings (Note 4) $138,045,000 $ 23,144,000
Revolving warehouse facilities (Note 4) 11,026,000
Accounts payable and accrued exprenses 8,976,000 6,141,000
Accrued compensation and related expenses 3,949,000 1,703,000
Income taxes payable (Note 5) 21,831,000 3,588,000
-------------------------------
TOTAL LIABILITIES 183,827,000 34,576,000
Commitments and Contingencies (Note 6)
Stockholders' equity
Preferred stock, par value $.001 per share 1,000,000 shares
authorized; none outstanding
Common Stock, par value $.001 per share 50,000,000 and
10,000,000 shares authorized; 13,501,900 and
13,221,000 shares outstanding (Note 9) 14,000 14,000
Additional paid-in capital 63,628,000 61,864,000
Retained earnings 46,528,000 18,169,000
-------------------------------
Total Stockholders' equity 110,170,000 80,047,000
-------------------------------
Total liabilities and stockholders' equity $293,997,000 $114,623,000
===============================
</TABLE>
<PAGE> 46
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
REVENUE:
Excess servicing gain (Note 2) $ 78,274,000 $ 22,954,000 $ 8,101,000
Commissions 19,880,000 15,799,000 16,432,000
Loan Service 18,185,000 8,246,000 6,099,000
Fees and other 12,069,000 7,940,000 5,595,000
---------------------------------------------
TOTAL REVENUE 128,408,000 54,939,000 36,227,000
---------------------------------------------
EXPENSES:
Compensation and related expenses (Note 6) 33,241,000 17,610,000 13,616,000
Sales and advertising costs 18,362,000 9,906,000 7,891,000
General and administrative expenses 13,926,000 7,067,000 5,415,000
Interest expense (Note 4) 9,348,000 3,205,000 322,000
---------------------------------------------
TOTAL EXPENSES 74,877,000 37,788,000 27,244,000
---------------------------------------------
INCOME BEFORE INCOME TAXES 53,531,000 17,151,000 8,983,000
PROVISION FOR INCOME TAXES (NOTE 5) 22,483,000 7,117,000 3,684,000
---------------------------------------------
NET INCOME $ 31,048,000 $ 10,034,000 $ 5,299,000
---------------------------------------------
NET INCOME PER SHARE
Primary $ 2.20 $ 1.11 $ 0.61
---------------------------------------------
Fully diluted 2.09 1.11 0.61
---------------------------------------------
WEIGHTED AVERAGE NUMBER
OF OUTSTANDING SHARES
Primary 14,096,000 9,021,000 8,751,000
---------------------------------------------
Fully diluted 15,465,000 9,021,000 8,751,000
---------------------------------------------
</TABLE>
<PAGE> 47
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
1996 1995 1994
-------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income 31,048,000 10,034,000 5,299,000
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,048,000 606,000 466,000
Deferred income taxes 15,369,000 3,972,000 (69,000)
Excess servicing gain (103,975,000) (33,891,000) (9,690,000)
Excess servicing amortization 16,940,000 4,402,000 2,693,000
Mortgage servicing rights originated (11,759,000)
Mortgage servicing rights amortization 857,000
Loans originated or purchased (895,834,000) (387,600,000) (190,200,000)
Proceeds from sale of loans 852,639,000 373,609,000 180,235,000
Changes in assets, and liabilities:
(increase) decrease in:
Accounts receivable (2,510,000) (2,663,000) (1,415,000)
Prepaid and other (4,532,000) (2,217,000) (900,000)
Residual assets (29,794,000) (8,691,000) (4,228,000)
Increase (decrease) in:
Accounts payable and
accrued expenses 3,150,000 534,000 2,755,000
Accrued compensation and
related expenses 2,246,000 581,000 435,000
Income taxes payable 2,874,000 (2,051,000) 762,000
Net cash used in operating activities (122,233,000) (43,375,000) (13,857,000)
Investing activities:
Purchases of property and equipment (4,597,000) (988,000) (870,000)
Net cash used in investing activities (4,597,000) (988,000) (870,000)
Financing activities
Proceeds from sale of stock
or exercise of options 1,764,000 40,087,000 12,263,000
Proceeds from borrowing 115,000,000 23,000,000 2,900,000
Amounts outstanding under
warehouse arrangements 11,026,000 (9,675,000) 9,675,000
Dividends paid (2,689,000) (1,743,000) (1,743,000)
Payments on bank notes and long-term debt (414,000) (3,460,000) (240,000)
Net cash provided by financing activities 124,687,000 48,209,000 22,855,000
Net increase (decrease) in cash (2,143,000) 38,460,000 8,128,000
Cash and cash equivalents at beginning of period 20,359,000 16,513,000 8,385,000
Cash and cash equivalents at end of period $ 18,216,000 20,359,000 16,513,000
Supplemental disclosures:
Interest paid $ 6,633,000 3,225,000 333,000
Taxes paid 4,354,000 4,843,000 2,991,000
</TABLE>
<PAGE> 48
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL PAID-IN RETAINED TOTAL
CAPITAL EARNINGS
<S> <C> <C> <C> <C>
AS OF JUNE 30, 1993 $ 6,000 $ 9,522,00 $ 6,322,000 $ 15,850,000
Issuance of common stock 3,000 12,260,000 12,263,000
Dividends $ (1,743,000) $ (1,743,000)
Net income 5,299,000 5,299,000
AS OF JUNE 30, 1994 9,000 21,782,000 9,878,000 31,669,000
Issuance of common stock 5,000 40,082,000 40,087,000
Dividends $ (1,743,000) $(1,743,000)
Net income 10,034,000 10,034,000
AS OF JUNE 30, 1995 14,000 61,864,000 18,169,000 80,047,000
Proceeds from sale of stock
or exercise of options 1,764,000 1,764,000
Dividends $ (2,689,000) $ (2,689,000)
Net income 31,048,000 31,048,000
AS OF JUNE 30, 1996 $14,000 $63,628,000 $46,528,000 $110,170,000
</TABLE>
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of Significant Accounting Policies
OPERATIONS
Aames Financial Corporation, a Delaware corporation ("Aames"), and its
subsidiaries (collectively, the "Company") engage in the consumer finance
business by offering mortgage loans to homeowners through 47 offices located in
16 states at year end. The Company also functions as an insurance agent and
mortgage trustee through certain of its subsidiaries. The Company's market is
borrowers who have significant equity in their homes but whose borrowing needs
are not being met by traditional financial institutions. The Company's business
includes originating (funding and brokering), purchasing, selling and servicing
mortgage loans primarily secured by single family residences (i.e., one-to
four-family). Loans originated by the Company are primarily extended on the
basis of the equity in the borrower's property and, to a lesser extent, the
creditworthiness of the borrower. The aggregate outstanding balances of loans
serviced by the Company was $1.25 billion and $609 million at June 30, 1996 and
June 30, 1995, respectively (which include $337 million and $152 million of
loans at June 30, 1996 and June 30, 1995, respectively, serviced for the
Company by unaffiliated subservicers under subservicing agreements).
The Company's ability to continue to originate and purchase loans is dependent,
in part, upon its ability to securitize and sell loans in the secondary market
in order to generate cash proceeds for new originations and purchases. The
value of and market for the Company's loans are dependent upon a number of
factors, including general economic conditions, interest rates and governmental
regulations. Adverse changes in such factors may affect the Company's ability
to purchase or sell loans for acceptable prices within reasonable periods of
time.
A prolonged, substantial reduction in the size of the secondary market for
loans of the types originated and purchased by the Company may adversely affect
the Company's ability to securitize and sell loans with a consequent adverse
impact on the Company's profitability and ability to fund future originations
and purchases which could have a material adverse effect on the Company's
financial position and results of operations.
In addition, in order to gain access to the secondary market, the Company has
relied on monoline insurance companies to provide financial guarantee insurance
on the senior interests in the real estate mortgage investment conduit
("REMIC") trusts established by the Company. Any substantial reduction in the
size or availability of the secondary market for the Company's loans or the
unwillingness of monoline insurance companies to provide financial guarantee
insurance for the senior interests in REMIC trusts could have a material
adverse effect on the Company's financial position and results of operations.
PRINCIPLES OF ACCOUNTING AND CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
Aames and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH IN TRUST
The Company services loans on behalf of customers. In such capacity, certain
monies are collected and placed in segregated trust accounts, which totaled
$26.8 million and $10.9 million at June 30, 1996 and June 30, 1995,
respectively. These accounts and corresponding liabilities are not included in
the accompanying balance sheet.
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are being recorded utilizing
straight-line and accelerated methods over the following estimated useful
lives:
<TABLE>
<S> <C>
FURNITURE Five to seven years
LEASEHOLD IMPROVEMENTS Shorter of five years or lease term
EQUIPMENT UNDER CAPITAL LEASES Five years
AUTOMOBILES Five years
DATA PROCESSING EQUIPMENT Five years
</TABLE>
<PAGE> 50
REVENUE RECOGNITION
The Company derives its revenue principally from servicing spreads, commissions
from the origination of the loans, insurance commissions, closing fees,
prepayment fees and fees charged for services such as appraisals and
underwriting. Loans originated through the Company's retail branch network or
purchased from correspondents are funded by the Company for pooling and sale in
the secondary market and placed with private investors or brokered to other
financial institutions. Revenue from loans pooled and sold in the secondary
market is recognized when such loan pools are sold. Revenue from loans funded
by private investors is recognized as income when escrow closes on the loan and
the funds are disbursed. The Company retains the right to service all loans
funded by the Company or placed with private investors. The Company receives a
fee for servicing such loans based on a fixed percentage of the declining
principal balance. A servicing spread is retained by the Company from the
monthly payments received from borrowers, a portion of which is accounted for
as a normal servicing fee. Loans brokered to other financial institutions are
sold on a servicing-released basis.
During the loan origination process, the Company negotiates fees, commissions
and payment terms to accommodate the borrower's immediate and long-term cash
flow needs. To the extent negotiation of the commission rate leads to a higher
or lower interest rate on the loan, this will generally have an inverse effect
on the servicing spread retained by the Company. Such negotiations result in a
wide range of loan servicing spreads retained by the Company.
Commission revenue on loan originations and related direct origination costs
are deferred until the related loan is sold. Upon sale of the loan, the
deferred commissions are recognized as commission revenue in the Consolidated
Statement of Income and deferred origination costs are recognized in the
applicable expense classification.
The accounting practice employed by the Company, whereby it accounts for a
portion of the servicing spread as a normal servicing fee, has the effect of
normalizing the loan servicing revenues recognized by the Company derived from
the long-term servicing of loans originated or purchased by the Company and
pooled and sold in the secondary market on a servicing-retained basis, or
placed with private investors. An excess loan servicing gain or loss is
recorded to account for the difference between the servicing spread retained by
the Company and the normal servicing fee that is determined by the Company
taking into account several factors including industry practices. The net
present value of that difference (based on certain prepayment and other
assumptions to determine an expected life of the loan) is recorded as an excess
servicing gain or loss when the loan is sold in a pool or funded by private
investors. The excess servicing gain included in the Consolidated Statements of
Income includes these amounts reduced by direct transaction costs. For loans
sold in the secondary market, the excess servicing gain includes provisions for
credit risk obligations retained by the Company. The excess servicing
receivable included in the Consolidated Balance Sheets results from the
recordation of such initial gains on an aggregate basis adjusted for
amortization.
As the Company receives cash in the form of the servicing spread it retains
(including the normal servicing fee), the excess servicing receivable is
reduced in proportion to and over the expected lives of the related loans
giving effect to the prepayment assumption utilized in its determination. On a
quarterly basis, the Company reviews its prepayment and other assumptions in
relation to its actual experience and current rates of prepayment prevalent in
the industry. The excess servicing receivable is written down when a shortfall
in the net present value of the estimated remaining future excess servicing fee
revenue becomes apparent. The excess servicing receivable is not increased as a
result of slower than estimated prepayment experience. The Company receives
prepayment fees on certain loans if they are paid off before maturity.
MORTGAGE SERVICING RIGHTS
The Company elected to adopt Statement of Financial Accounting Standard No.
122, "Accounting for Mortgage Servicing Rights" ("SFAS No. 122"), which amends
the prior mortgage banking standard for fiscal 1996. SFAS No. 122 prohibits
retroactive application to fiscal years prior to adoption. Accordingly, certain
information appearing in the Company's financial statements for fiscal 1995 and
before are based on the prior standard and such results are not directly
comparable to the results for fiscal 1996. Under SFAS No. 122 the Company
recognizes mortgage servicing rights ("MSR's") as assets separate from the
mortgage loans to which the MSR's relate based on their respective fair values.
In the past, the Company had allocated the entire cost of originating or
purchasing a mortgage loan to the carrying value of such mortgage loans. MSR's
are amortized over the lives of the loans to which the MSR's relate, reducing
servicing income in future periods.
To the extent that a portion of the total cost of originating or purchasing
mortgage loans has been allocated to the MSR's, relatively greater gains were
recognized on the securitization and sale of mortgage loans because of the
reduction of the Company's basis in such loans. The effect of adopting SFAS No.
122 was to increase the net income of the Company for the fiscal year ended
June 30, 1996 by $5.7 million or $.37 per fully diluted weighted average share.
In order to determine the fair value of the MSR's, the Company estimates the
expected future net servicing revenue based on common industry assumptions
(since market prices for MSR's under comparable servicing sales contracts are
not available to the Company), as well as on the Company's historical
experience.
<PAGE> 51
INCOME TAXES
Taxes are provided on substantially all income and expense items included in
earnings, regardless of the period in which such items are recognized for tax
purposes. The Company uses an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than enactments of changes
in the tax law or rates.
RISK MANAGEMENT
The Company employs certain risk management strategies to minimize its risk
from interest rate fluctuations during the period between the time it
originates or purchases loans and the time such loans are sold in the secondary
market. The Company sells its loans in the secondary market on a quarterly
basis, thus limiting the period of its interest rate risk exposure. These
securitzations are structured to allow the Company to sell a specified amount
of certain loans for a limited time in the future at an agreed upon price. In
addition, the Company regularly reviews the interest rates on its loan products
and makes adjustments to rates to reflect market conditions. Additionally, the
Company employs a hedging strategy whereby it enters into agreements to sell
securities not yet purchased that correlate to securities that are used to
index sales of the Company's loans in the secondary market. Gains or losses on
these transactions are included in the excess servicing gain at the time the
underlying loans are sold. At June 30, 1996, the Company had open hedging
positions with a notional balance of $40.0 million.
CASH AND CASH EQUIVALENTS
Cash equivalents, consisting primarily of short-term investments, are
considered cash equivalents if they were purchased with an original maturity of
three months or less. At June 30, 1996, the Company had $2.2 million held in a
restricted account in connection with the sale of a loan pool. These funds were
released to the Company in July 1996.
LOANS HELD FOR SALE
Loans held for sale are carried at the lower of aggregate cost or market value.
Market value is determined by current investor yield requirements.
RESIDUAL ASSETS
In connection with its securitization transactions, the Company initially
deposits with a trustee cash or the required over collateralization amount of
loans, and subsequently deposits a portion of the servicing spread collected on
the related loans. The amounts set aside ($44.7 million at June 30, 1996 and
$14.9 million at June 30, 1995) are available for distribution to investors in
the event of certain shortfalls in amounts due to investors. These amounts are
subject to increase up to maximum subordination amounts as specified in the
related securitization documents. Cash amounts on deposit are invested in
certain instruments as permitted by the related securitization documents. To
the extent amounts on deposit exceed specified levels, distributions are made
to the Company and, at the termination of the related REMIC trust, any
remaining amounts on deposit are distributed to the Company.
DEBT ISSUANCE
At June 30, 1996, the Company had an unamortized balance of debt issuance costs
of $3.8 million related to the issuance of $23.0 million of 10.5% Senior Notes
due 2002 and the issuance of $115 million of 5.5% Convertible Subordinated
Debentures due 2006. This balance is included in "Prepaid and other" on the
Consolidated Balance Sheets and is amortized into interest expense over the
life of the related debt.
EARNINGS PER SHARE
Earnings per share of common stock is computed using the weighted average
number of shares of common stock outstanding during each period, after giving
effect to the assumed exercise of certain stock options and warrants, and in
addition, for fully diluted earnings per share, the conversion of shares
related to the Company's 5.5% Convertible Subordinated Debentures due 2006.
In May 1996, the Company's $.001 par value common stock was split
three-for-two. All references in the accompanying Consolidated Balance Sheets,
Consolidated Statements of Earnings and Notes to Consolidated Financial
Statements to the number of common shares and share amounts have been restated
to reflect the stock split.
RECLASSIFICATIONS
Certain amounts related to 1994 and 1995 have been reclassified to conform to
the 1996 presentation.
<PAGE> 52
Note 2 Excess Servicing Receivable
The excess servicing receivable represents the net present value of the
difference between the servicing spread retained by the Company and the normal
servicing fee determined by the Company taking into account several factors
including industry practices. The amount is amortized over the estimated lives
of the loans to which the excess servicing receivable relates.
The activity in the excess servicing receivable is summarized as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Balance, beginning of year $ 42,078,000 $12,589,000 $ 5,592,000
Excess servicing gain 103,975,000 33,891,000 9,690,000
Amortization of receivable (16,940,000) (4,402,000) (2,693,000)
============ =========== ===========
Balance, end of year $129,113,000 $42,078,000 $12,589,000
</TABLE>
The Company discounts the cash flows on the related loans sold based upon the
rates charged to borrowers on such loans adjusted for credit risk obligations
retained by the Company. The Company had reserves of $10.2 million, $3.4
million and $959,000 at June 30, 1996, 1995 and 1994, respectively, related to
these credit risk obligations, which are netted against the excess servicing
receivable. The weighted average rates used to discount the cash flows were
14.7%, 14.5% and 13.7% for the years ended June 30, 1996, 1995 and 1994,
respectively. The excess servicing receivable is amortized using the same
discount rate used to determine the original excess servicing gain recorded.
On a quarterly basis, the Company analyzes its prepayment assumptions in
relation to actual prepayment experience on a disaggregated basis, based on
loan origination date and type of loan (fixed or adjustable), to determine
whether actual prepayment experience has had any impact on the carrying value
of the excess servicing receivable.
Note 3 Equipment and Improvements
Equipment and improvements comprise the following:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
1996 1995
------------ -----------
<S> <C> <C>
Data processing equipment 4,727,000 1,654,000
Furniture and fixtures 2,791,000 1,460,000
Leashold improvements 169,000 133,000
Equipment under capital leases 806,000 796,000
Automobiles 256,000 195,000
---------- ----------
Total 8,749,000 4,238,000
Accumulated depreciation and amortization (6,137,000) (2,175,000)
========== ==========
Net $5,612,000 $2,063,000
</TABLE>
<PAGE> 53
Note 4 Borrowing and Revolving Warehouse Facilities
Borrowings consist of the following:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
1996 1995
------------ -----------
<S> <C> <C>
5.5% Subordinated Convertible Debentures
due 2006 convertible to 4.1 million
shares of $.001 par value common stock
at $28 per share. The Subordinated
Convertible Debentures are subordinated
to all existing and future senior debt
of the Company (as defined in the
indenture Agreement). $115,000,000
10.5% Senior Notes due 2002,
collateralized by certain residual
certificates. Principal payments of
$5,750,000 in each of calendar years
1999 through 2002 23,000,000 23,000,000
Obligations under capital leases 45,000 144,000
============ ===========
TOTAL BORROWINGS $138,045,000 $23,144,000
</TABLE>
Amounts outstanding under revolving warehouse facilities:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
1996 1995
------------ -----------
<S> <C> <C>
Warehouse facility with investment bank
collateralized by mortgages/deeds of
trust; expires January 1, 1997 with
interest at 0.0875% over applicable
LIBOR rate; total credit available
$150 million. Applicable LIBOR rate
was 5.5% at June 30, 1996 $11,026,000
Revolving warehouse facility with
commercial banks collateralized by
mortgages/deeds of trust; due in
December 1996 with interest at .875%
over applicable LIBOR rate; total
credit available $100 million.
Applicable LIBOR rate was 5.5% at
June 30, 1996.
============ ===========
Total amounts outstanding under
revolving warehouse facilities $11,026,000
</TABLE>
<PAGE> 54
Maturities on borrowings are as follows:
<TABLE>
<CAPTION>
OBLIGATIONS
OBLIGATIONS UNDER CAPITAL
UNDER CAPITAL LEASES - NET
Fiscal Years Ended June 30, LEASES OF INTEREST BORROWINGS TOTAL - NET
<S> <C> <C> <C> <C>
1997 $47,000 $45,000 $ 45,000
1998
1999 $ 5,750,000 5,750,000
------------ ------------
2000 5,750,000 5,750,000
------------ -----------
2001 5,750,000 5,750,000
------------ -----------
Thereafter 120,750,000 120,750,000
------- ------- ------------ ------------
TOTAL $47,000 $45,000 $138,000,000 $138,045,000
</TABLE>
EQUIPMENT UNDER LEASES
Equipment under capital leases is comprised of various computer and equipment
items. Accumulated amortization of $758,000 and $685,000 relating to this
equipment has been recorded as of June 30, 1996 and 1995, respectively.
Note 5 Income Taxes
The provision for income taxes consisted of the following:
For 1996, 1995 and 1994, the Company's effective income tax rate is computed
using the appropriate statutory rates with no significant differences.
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
CURRENT:
Federal $6,344,000 $2,154,000 $2,939,000
State 2,187,000 992,000 814,000
----------- ---------- ----------
8,531,000 3,146,000 3,753,000
DEFERRED:
Federal 10,212,000 2,891,000 (86,000)
State 3,740,000 ,1,080,000 17,000
----------- ---------- ----------
Total 13,952,000 ,3,971,000 (69,000)
=========== ========== ==========
$22,483,000 $7,117,000 $3,684,000
</TABLE>
For 1996, 1995 and 1994, the Company's effective income tax rate is computed
using the appropriate statutory rates with no significant differences.
<PAGE> 55
The financial statement balances at June 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
1996 1995
----------- ----------
<S> <C> <C>
Current taxes payable (receivable)
Federal $2,668,000 $ (596,000)
State 706,000 (321,000)
----------- ----------
Total 3,374,000 (917,000)
=========== ==========
Deferred taxes payable
Federal 13,451,000 3,240,000
State 5,006,000 1,265,000
----------- ----------
Total 18,457,000 4,505,000
----------- ----------
Total tax liabilities $21,831,000 $3,588,000
=========== ==========
</TABLE>
Deferred tax liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Excess servicing $16,851,000 $5,891,000
Depreciation 412,000 216,000
Mortgage servicing rights 5,015,000
----------- ----------
Total deferred tax liabilities 22,278,000 6,107,000
----------- ----------
Deferred tax assets:
State taxes (2,471,000) (790,000)
Vacation accrual (298,000) (233,000)
Allowance for doubtful accounts (218,000) (212,000)
Other accruals (834,000) (367,000)
----------- ----------
Total deferred tax assets (3,821,000) (1,602,000)
----------- ----------
Valuation allowance
Net deferred tax liabilities $18,457,000 $4,505,000
=========== ==========
</TABLE>
<PAGE> 56
Note 6 Commitments and Contingencies
The Company leases office space under operating leases expiring at various
dates through July 2001. In addition, in February 1996, the Company entered
into an operating lease for an airplane, which expires February 2006. Total
rent expense related to operating leases amounted to $2.8 million, $1.5 million
and $1.4 million, for the years ended June 30, 1996, 1995 and 1994,
respectively. Certain leases have provisions for renewal options and/or rental
increases at specified increments or in relation to increases in the Consumer
Price Index (as defined). As of June 30, 1996, listed below are future minimum
rental payments required under non-cancelable operating leases that have
initial or remaining terms in excess of one year:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
<S> <C>
1997 $ 3,560,000
1998 3,144,000
1999 2,893,000
2000 2,658,000
2001 1,427,000
Thereafter 4,158,000
$17,840,000
</TABLE>
LITIGATION
The Company is involved in certain litigation arising in the normal course of
its business. The Company believes that any liability with respect to such
legal actions, individually or in the aggregate, is not likely to be material
to the Company's consolidated financial position or results of operations.
EMPLOYMENT AGREEMENTS
The Chief Executive Officer has an employment agreement with the Company
expiring on December 31, 1996, which provides for a base salary plus a bonus
equal to 7.5% of the Company's adjusted pre-tax income. The Chief Executive
Officer entered into a new employment agreement with the Company which expires
on June 30, 2001. The new agreement provides for, commencing January 1, 1997, a
base salary, a performance bonus measured against a target return on equity and
a discretionary bonus. In addition, certain options were granted thereunder.
(See "Note 9 -- Notes to Consolidated Financial Statements.") Under the new
agreement, in the event of a termination without cause or in the event of
certain changes in control, the Company shall pay three years base salary, plus
an amount equal to his performance bonuses over the preceding twelve quarters
provided, however, if the termination occurs after January 1, 2000, then he
shall receive three years base salary plus an amount equal to his performance
bonus over the previous eight quarters.
The Chief Operating Officer has an employment agreement with the Company
expiring on June 30, 2001, which provides for a base salary and a performance
bonus measured against a target return on equity. In addition, certain options
were granted thereunder. (See "Note 9 -- Notes to Consolidated Financial
Statements.") The agreement also provides that, in the event of a termination
without cause or in the event of certain changes in control, the Company shall
pay two years base salary plus an amount equal to his performance bonus over
the previous eight quarters.
Note 7 Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments
as of June 30, 1996 is made by the Company using available market information
and appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
Estimated
Carrying Amount Fair Value
--------------- ------------
<S> <C> <C>
Cash and cash equivalents $ 18,216,000 $ 18,216,000
Loans held for sale 67,327,000 71,434,000
Excess servicing receivable 129,113,000 129,113,000
Mortgage servicing rights 10,902,000 10,902,000
Amounts outstanding under
revolving warehouse facilities 11,026,000 11,026,000
Borrowings 138,045,000 139,035,000
</TABLE>
<PAGE> 57
The fair value estimates as of June 30, 1996 are based on pertinent information
available to management as of the respective dates. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since those dates and, therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
The following describes the methods and assumptions used by the Company in
estimating fair values:
Cash and cash equivalents are based on the carrying amount which is a
reasonable estimate of the fair value.
Loans held for sale are based on current investor yield requirements.
Amounts outstanding under revolving warehouse facilities and borrowings
are short-term in nature and generally bear market rates of interest.
Excess servicing receivable and mortgage servicing rights are based on the
expected future cashflows using common industry assumptions as well as the
Company's historical experience.
The fair value of the Company's borrowings are estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
Note 8 401 (k) Retirement Savings Plan
The Company sponsors a 401 (k) Retirement Savings Plan, a defined contribution
plan. Substantially all employees are eligible to participate in the plan after
reaching the age of 21 and completion of six months of service. Contributions
are made from employees' elected salary deferrals. Employer contributions are
determined at the beginning of the plan year at the option of the employer. For
fiscal years 1996, 1995 and 1994, the Company's contribution to the plan
aggregated $252,000, $46,000 and $39,000, respectively.
Note 9 Stockholders' Equity
Under the Company's 1991 Stock Incentive Plan (the 1991 Plan) a total of 750,000
shares have been reserved for issuance. At June 30, 1996, options to exercise
694,499 have been granted at prices ranging from $4.50 to $11.92 per share;
303,550 of these shares have been granted to the Company's Chief Executive
Officer at prices ranging from $5.50 to $11.92 per share. Additionally, the
Chief Operating Officer was granted a non-qualifying stock option of 10,000
shares at $5.50.
Under the Company's 1995 Stock Incentive Plan (the 1995 Plan), a total of 1.1
million shares have been reserved for issuance. At June 30, 1996, options to
exercise 979,451 shares have been granted at prices ranging from $11.92 to
$41.87 per share. Of these shares, 141,188 have been granted to the Company's
Chief Executive Officer at $30.00 per share and 767,250 have been granted to the
Company's Chief Operating Officer at prices ranging from $11.92 to $21.50 per
share. Additionally, the Chief Operating Officer was granted a non-qualified
stock option of 447,300 shares at $30.00. These 447,300 shares are not
exercisable while he is an officer of the Company.
During the fiscal year ended June 30, 1996, 159,730 shares have been exercised
at prices ranging from $5.00 to $11.92 per share.
Options to exercise 40,084 shares were granted to outside directors at prices
ranging from $5.50 to $21.50 per share. The Company has outstanding 20,055
warrants to purchase common stock at $6.00 per share. These are exercisable and
have certain registration rights. During the fiscal year ended June 30, 1996, a
total of 4,333 shares granted to a director were exercised at a price of $5.50
per share. In addition, 129,945 warrants were exercised during the fiscal year
ended June 30, 1996 at a price of $6.00 per share.
On May 6, 1996 the Company declared a three-for-two split of the Company's
common stock, payable May 17, 1996 to stockholders of record on May 6, 1996.
The split was affected as a dividend of one share of common stock on every
three shares of common stock. After giving effect to this stock split, the
Company has 13.5 million shares outstanding at June 30, 1996. All share and
per share data in the accompanying financial statements are presented to give
retroactive effect to the stock split.
On June 13, 1995, the Company completed the sale of 3.0 million shares of
common stock in a public offering. The proceeds to the Company from the
offering, net of expenses, were $40.0 million. On July 1, 1993, the Company
completed the sale of 1.7 million shares of common stock (including 325,000
shares owned by the Chief Executive Officer) in a public offering. The proceeds
to the Company from the offering, net of expenses, were $12.3 million.
<PAGE> 58
The Company's bank agreements generally limit the Company's ability to pay
dividends. In addition, the Company's $23.0 million of 10.5% Senior Notes due
2002 places certain restrictions on additional indebtedness based on the
Company's net worth.
RIGHTS AGREEMENT
In June 1996, the Board of Directors of the Company declared a dividend
distribution of one preferred stock purchase right ("Right") on each share of
the Company's common stock outstanding on July 12, 1996. Each Right, when
exercisable, entitles the holder to purchase from the Company one one-hundredth
of a share of Preferred Stock, par value $0.001 per share, of the Company at a
price of $100.00, subject to adjustments in certain cases to prevent dilution.
The Rights will become exercisable (with certain limited exceptions provided in
the Rights agreement) following the 10th day after (a) a person or group
announces acquisition of 15 percent or more of the Company's Common Stock, (b)
a person or group announces commencement of a tender offer, the consummation of
which would result in ownership by the person or group of 15 percent or more of
the Company's common stock, (c) the filing of a registration statement for any
such exchange offer under the Securities Act of 1933, as amended, or (d) the
Company's board of continuing directors determines that a person is an "adverse
person," as defined in the Rights agreement.
Note 10 Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
(In thousands, except per share amounts)
Sep-30 Dec-31 Mar-31 Jun-30
<S> <C> <C> <C> <C>
FISCAL 1996
Revenue $22,832 $28,263 $33,215 $44,098
Income before income taxes 9,758 11,623 13,667 18,483
Net Income 5,658 6,741 7,935 10,714
Earnings per share - Fully diluted $0.41 $0.49 $0.53 $0.63
FISCAL 1995
Revenue 12,427 12,654 143,633 15,495
Income before income taxes 3,686 3,957 4,130 5,378
Net income 2,172 2,315 2,400 3,147
Earnings per share - fully diluted 0.25 0.27 0.27 0.32
</TABLE>
Note 11 Subsequent Event
On August 12, 1996, the Company entered into an agreement to acquire One Stop
Mortgage, Inc., in a transaction to be accounted for as a pooling of interests.
Aames will issue 2.3 million shares of its common stock in exchange for all of
the outstanding common stock of One Stop Mortgage, Inc. and will assume stock
options granted to key employees of One Stop Mortgage, Inc. covering 375,000
shares of One Stop Mortgage, Inc. At June 30, 1996, One Stop Mortgage, Inc. had
total assets of approximately $127 million and an accumulated deficit of
approximately $1.3 million. The transaction is projected to close on August 28,
1996.
<PAGE> 59
Stock Price and Dividend Information (unaudited)
In November 1995, the Company's common stock began trading under the symbol
"AAM" on the New York Stock Exchange (NYSE). The following table sets forth the
range of high and low sale prices and per share for the periods indicated.
<TABLE>
<CAPTION>
Cash
High Low Dividend**
------- ------- ----------
<S> <C> <C> <C>
FISCAL 1996*
First Quarter $19 1/2 $11 1/2 $.05
Second Quarter 24 1/2 16 1/8 .05
Third Quarter 25 1/8 16 1/4 .05
Fourth Quarter 37 24 1/8 .05
FISCAL 1995 $ 9 1/2 $ 7 3/4 $.05
First Quarter 9 7 3/4 .05
Second Quarter 13 1/4 7 7/8 .05
Third Quarter 18 1/8 11 3/4 .05
</TABLE>
* Quarterly Financial Data as reported by Bloomberg.
As of September 15, 1996, the Company had 68 stockholders of record, and the
Company believes that it had in excess of 2,000 beneficial owners of its common
stock. Since its initial public offering on December 3, 1991, the Company has
consistently paid quarterly cash dividends on its common stock. The Company
declared and subsequently paid an aggregate of $.20 per share in dividends for
the year ended June 30, 1996, representing approximately 17.4% of its net income
for the period. The Board of Directors of the Company reviews the Company's
dividend policy at least annually in light of the earnings, cash position and
capital needs of the Company, general business conditions and other relevant
factors. In addition, the Company's ability to pay dividends is limited to an
amount equal to its net income in any given calendar quarter.
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
AAMES FINANCIAL CORPORATION
FIRST: The name of this corporation is Aames Financial Corporation
(the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, City of Wilmington, County of New
Castle. The name of its registered agent at that address is The Corporation
Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may now or hereafter be organized under the
General Corporation Law of the State of Delaware as set forth in Title 8 to the
Delaware Code (the "GCL").
FOURTH: The total number of shares which the Corporation shall have
authority to issue is 8,000,000 consisting of 7,000,000 shares of common
stock, par value $0.001 per share (the "Common Stock"), and 1,000,000 shares of
preferred stock, par value $0.001 per share (the "Preferred Stock").
Shares of the Preferred Stock of the Corporation may be issued from
time to time in one or more classes or series, each of which class or series
shall have such distinctive designation or title as shall be fixed by the Board
of Directors of the Corporation (the "Board of Directors") prior to the
issuance of any shares thereof. Each such class or series of Preferred Stock
shall have such voting powers, full or limited, or no voting powers, and such
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof, as shall be stated in
such resolution or resolutions providing for the issue of such class or series
of Preferred Stock as may be adopted from time to time by the Board of
Directors prior to the issuance of any shares thereof pursuant to the authority
hereby expressly vested in it, all in accordance with the laws of the State of
Delaware.
FIFTH: All rights to vote and all voting power shall be vested in the
Common Stock and the holders thereof shall be entitled at all elections of
directors to one (1) vote per share. Special meetings of the stockholders for
any purpose or purposes may be called at any time only by the Board of
Directors, the Chairman of the Board or by the Chief Executive Officer or
President of the Corporation.
SIXTH: The directors of the Corporation shall be divided into three
classes, designated Class I, Class II and Class III. The term of the initial
Class I directors shall terminate on the date of the 1994 annual meeting of
stockholders; the term of the initial Class II directors shall terminate on the
date of the 1993 annual meeting of stockholders and the term of the initial
Class III directors shall terminate on the date of the 1992 annual meeting of
stockholders. At each annual meeting of stockholders beginning in 1992,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. If the number of directors is changed,
any increase or decrease shall be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal as reasonably
possible, and any additional directors of any class elected to fill a vacancy
resulting from an increase in such class shall hold office for a term that shall
coincide with the remaining term of that class, but in no case will a decrease
in the number of directors shorten the term of any incumbent directors. A
director shall hold office until the annual meeting for the year in which his
term expires and until his successor shall be elected and shall qualify,
subject, however, to prior death, resignation, retirement, disqualification or
removal from office. Any vacancy on the Board of Directors, howsoever resulting,
shall be filled only by a majority of the directors then in office, even if less
than a quorum, or by a sole remaining director and not by the stockholders. Any
director elected to fill a vacancy shall hold office for a term that shall
coincide with the terms of the class to which such director shall have been
elected.
<PAGE> 2
Subject to the rights, if any, of the holders of shares of Preferred
Stock then outstanding, any or all of the directors of the Corporation may be
removed from office at any time, for cause only, by the affirmative vote of the
holders of a majority of the outstanding shares of the Corporation then
entitled to vote generally in the election of directors, considered for
purposes of this Article SIXTH as one class.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock issued by the Corporation shall have the
right, voting separately by class or series, to elect directors at an annual or
special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Certificate of Incorporation or the resolution or resolutions
adopted by the Board of Directors pursuant to the second paragraph of Article
FOURTH applicable thereto, and such directors so elected shall not be divided
into classes pursuant to this Article SIXTH unless expressly provided by such
terms.
SEVENTH: Elections of directors at an annual or special meeting of
stockholders need not be by written ballot unless the Bylaws of the Corporation
shall otherwise provide.
Any action required or permitted to be taken at any annual or special
meeting of stockholders may be taken only upon the vote of the stockholders at
an annual or special meeting duly noticed and called, as provided in the
Bylaws of the Corporation, and may not be taken by written consent of the
stockholders pursuant to the GCL.
EIGHTH: the officers of the Corporation shall be chosen in such a
manner, shall hold their offices for such terms and shall carry out such duties
as are determined solely by the Board of Directors, subject to the right of the
Board of Directors to remove any officer or officers at any time with or
without cause.
NINTH: (A) The Corporation shall indemnify to the full extent
authorised or permitted by law (as now or hereafter in effect) any person made,
or threatened to be made, a defendant or witness to any action, suit or
proceeding (whether civil or criminal or otherwise) by reason of the fact that
he, his testator or intestate, is or was a director or officer of the
Corporation or by reason of the fact that such director or officer, at the
request of the Corporation, is or was serving any other corporation,
partnership, joint venture, trust, employee benefit plan or enterprise, in any
capacity. Nothing contained herein shall affect any rights to indemnification
to which employees other than directors and officers may be entitled by law. No
amendment or repeal of this Section A of Article NINTH shall apply to or have
any effect on any right to indemnification provided hereunder with respect to
any acts or omissions occurring prior to such amendment or repeal.
2
<PAGE> 3
(B) No director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty by such a director as a director. Notwithstanding the foregoing
sentence, a director shall be liable to the extent provided by applicable law
(i) for any breach of the Director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) pursuant to Section
174 of the GCL, or (iv) for any transaction from which such director derived an
improper personal benefit. No amendment to or repeal of this Section B of
Article NINTH shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal.
(C) In furtherance and not in limitation of the powers
conferred by statute:
(i) the Corporation may purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or is serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status as such, whether or not the Corporation would have the power to
indemnify against such liability under the provisions of law; and
(ii) the Corporation may create a trust fund, grant
a security interest and/or use other means (including, without limitation,
letters of credit, surety bonds and/or other similar arrangements), as well as
enter into contracts providing indemnification to the full extent authorized or
permitted by law and including as part thereof provisions with respect to any
or all of the foregoing to ensure the payment of such amounts as may become
necessary to effect indemnification as provided therein, or elsewhere.
TENTH: In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized to adopt,
repeal, alter, amend or rescind the Bylaws of the Corporation.
ELEVENTH: The Corporation reserves the right to repeal, alter, amend
or rescind any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred on
stockholders herein are granted subject to this reservation.
TWELFTH: The name and mailing address for the Incorporator of
the Corporation is as follows: Barbara J. Gillin, 10940 Wilshire Boulevard,
Suite 600, Los Angeles, California 90024-3902.
IN WITNESS WHEREOF, the undersigned has executed the Certificate of
Incorporation this 2nd day of October, 1991.
/s/ Barbara J. Gillin
----------------------
Barbara J. Gillin
Incorporator
3
<PAGE> 4
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
AAMES FINANCIAL CORPORATION, a corporation organized and existing
under the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of Aames
Financial Corporation (the "Corporation"), resolutions were duly adopted setting
forth a proposed amendment of the Certificate of Incorporation of the
Corporation, declaring the amendment to be advisable and calling a meeting of
the stockholders of the Corporation for consideration thereof. The resolution
setting forth the proposed amendment is as follows:
RESOLVED, that the Certificate of Incorporation
of the Corporation be amended by changing Article
FOURTH to provide that the authorized number of
shares of the Corporation's Common Stock be
increased from 7,000,000 shares to 10,000,000 shares.
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, the annual meeting of the stockholders of the Corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
THIRD: That the amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporate Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by Gary K. Judis, its Chief Executive Officer, and Bobbie J. Burroughs,
its Secretary, this 25th day of April, 1994.
BY: /s/ GARY K. JUDIS
-----------------------------------
Gary K. Judis
Chief Executive Officer
ATTEST: /s/ BOBBIE J. BURROUGHS
------------------------------------
Bobbie J. Burroughs
Secretary
<PAGE> 5
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
AAMES FINANCIAL CORPORATION
(A DELAWARE CORPORATION)
The undersigned GARY JUDIS and BOBBIE BURROUGHS, the President and
Secretary, respectively, of Aames Financial Corporation (the "Corporation"), a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware (the "DGCL"), do hereby certify
pursuant to Section 103 of the DGCL:
The text of Article FOURTH of the Certificate of Incorporation of the
Corporation is hereby amended and restated to read in full as follows:
FOURTH: The total number of shares which the Corporation shall have
authority to issue is 51,000,000, consisting of 50,000,000 shares of
common stock, par value $0.001 per share (the "Common Stock") and
1,000,000 shares of preferred stock, par value $0.001 per share (the
"Preferred Stock").
IN WITNESS WHEREOF, the undersigned have executed this Certificate of
Amendment to the Certificate of Incorporation of the Corporation as of this 17th
day of January, 1996.
By: /s/ Gary K. Judis
---------------------------------
Gary K. Judis, President
Attest: /s/ Bobbie J. Burroughs
---------------------------------
Bobbie J. Burroughs, Secretary
<PAGE> 1
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
PAR VALUE $.001 PER SHARE PAR VALUE $.001 PER SHARE
THIS CERTIFICATE IS TRANSFERABLE
IN THE CITIES OF LOS ANGELES
OR NEW YORK
SD
INCORPORATED UNDER THE CUSIP 00253A 10 1
LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS
AAMES FINANCIAL CORPORATION
This certifies that
is the record holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
Aames Financial Corporation transferable on the books of the Corporation by the
holder hereof in person or by duly authorized attorney upon the surrender of
this Certificate properly endorsed.
This Certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
COUNTERSIGNED AND REGISTERED:
FIRST INTERSTATE BANK OF CALIFORNIA
TRANSFER AGENT AND REGISTRAR
<PAGE> 2
BY:
---------------------------------
/s/ Bobbie J. Burroughs /s/ Gary K. Judis
- ------------------------- --------------------
SECRETARY CHAIRMAN AUTHORIZED SIGNATURE
-----------------------------
[ SEAL ]
[ AAMES FINANCIAL CORPORATION ]
[ CORPORATE DELAWARE SEAL ]
[ 1991 ]
-----------------------------
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GiFT MIN ACT --
TEN ENT -- as tenants by the ........Custodian............
entireties (Cust) (Minor)
JT TEN -- as joint tenants with under Uniform Gifts to Minors
right of survivorship and Act..........................
not as tenants in common (State)
UNIF TRF MIN ACT --
......Custodian (until age....)
(Cust)
<PAGE> 3
........ under Uniform Transfers
(Minor)
to Minors Act ................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------
[ ]
[ ]
[ ]
--------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------Attorney
to transfer the said stock on the books of the within named Corporation with
<PAGE> 4
full power of substitution in the premises.
Dated:
-----------------------------
X
---------------------------------
X
---------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By:
-------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM). PURSUANT TO S.E.C. RULE 17Ad-15.
This Certificate also evidences and entitles the holder hereof to certain
Rights as set forth in a Rights Agreement between Aames Financial Corporation
(the "Company") and Wells Fargo Bank, as Rights Agent, dated as June 21, 1996,
as it may from time to time be supplemented or amended pursuant to its terms
(the "Rights Agreement"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal executive offices of
the Company. Under certain circumstances, as set forth in the Rights Agreement,
such Rights may be redeemed, may expire, or may be evidenced by separate
certificates and no longer be evidenced by this certificate. The Company will
mail to the holder of record of this certificate a copy of the Rights Agreement
without charge within ten business days after receipt of a written request
<PAGE> 5
therefor. Under certain circumstances, as set forth in the Rights Agreement,
Rights issued to, or held by, any Person who is, was or becomes an Acquiring
Person or an Affiliate or Associate thereof (as such terms are defined in the
Rights Agreement), whether currently held by or on behalf of such Person or by
any subsequent holder, may become null and void.
<PAGE> 1
EXHIBIT 10.2
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement (this "Agreement") is
made and entered into as of September 12, 1996 by and between AAMES FINANCIAL
CORPORATION, a Delaware corporation (the "Company'), and Gary K. Judis, an
individual ("Executive").
W I T N E S S E T H:
WHEREAS, Executive and the Company entered into an Employment
Agreement as of November 30, 1995 (the "Original Agreement");
WHEREAS, a review of the terms of the Original Agreement has resulted
in a determination that, as drafted, the Original Agreement did not clearly
state the intent of the parties; and
WHEREAS, Executive and the Company desire to amend and restate the
Original Agreement for the purpose of more clearly defining intent of the
parties and to affect certain other amendments, effective as of November 30,
1995, the date of the Original Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and
Executive agree as set forth below.
1. PRIOR EMPLOYMENT AGREEMENT. The Company and Executive are parties
to that certain Executive Employment Agreement, dated as of December
<PAGE> 2
22, 1991, (the "Prior Agreement"). Paragraph 3 of the Prior Agreement shall
govern the compensation and benefits payable to Executive through December 31,
1996 (the term under the Prior Agreement). Sections 4 and 5 of this Agreement
shall become effective on January 1, 1997; provided, however, Sections 4(c),
4(d), 5(f) and 5(g) shall be effective from and after the date hereof. All other
sections of this Agreement shall be effective from and after the date hereof.
2. EMPLOYMENT AND DUTIES. The Company hereby employs Executive to
serve as Chief Executive Officer, President and Chairman of the Board of the
Company, with the powers and duties customarily accorded to such positions,
including those powers and duties set forth in the Bylaws of the Company for
such office and such other duties consistent therewith as may be assigned to
Executive from time to time by the Board of Directors of the Company (the
"Board"). Executive shall report to the Board. Executive shall endeavor in good
faith to perform his duties in an efficient, faithful and business-like manner.
During the term of his employment, it is intended that Executive also serve as a
Director on the Board of Directors of the Company (the "Board") and the Company
will take action within its powers to include Executive among the slate of
directors proposed to be nominated by the Board at any applicable stockholders
meeting.
3. TERM. The initial term of this Agreement shall begin on the date of
the Original Agreement and shall expire on June 30, 2001 unless terminated
earlier as set forth in Section 7 hereof or by mutual agreement of the parties
hereto (the "Initial Term"). At the expiration of the Initial Term and each
anniversary thereafter, the term of this Agreement shall automatically be
extended for an additional year (the "Extension Term") unless either party
<PAGE> 3
shall have given written notice to the other party at least ninety days prior to
the end of the Initial Term or the Extension Term, as the case may be, that it
does not desire to extend the term of this Agreement. If Executive's employment
under this Agreement is extended for an Extension Term, it shall thereafter or
during any Extension Term be terminable (other than upon expiration) only as
provided in Section 7 or by mutual agreement of the parties hereto.
4. COMPENSATION.
(a) BASE SALARY. During the term of this Agreement, Executive
shall be paid a base salary (the "Base Salary"), payable in accordance with the
Company's normal payroll practices. During the Company's 1997 fiscal year,
Executive's Base Salary shall be $850,000. The annual Base Salary payable to
Executive shall be reviewed at least annually; provided, however, that
Executive's Base Salary shall not be reduced below $850,000 per annum during the
term of this Agreement.
(b) PERFORMANCE BONUS. Commencing with the Company's 1997 fiscal
year, Executive shall be entitled to participate in the Company's performance
bonus plan for executive officers. Under such plan, executives of the Company
are currently paid on a quarterly basis a performance bonus (the "Performance
Bonus") measured by return on average equity during the relevant period. For the
last two fiscal quarters of fiscal 1997, Executive shall be entitled to an
annual Performance Bonus in the amount of $120,000 (the "Payment Amount") for
every percentage point for which return on average equity exceeds 15% for the
fiscal year (the "Target ROE"). The Performance Bonus will be paid quarterly
based on each quarter's results with an adjustment at the end of the fiscal year
based upon the audited financial statements of the Company. The annual
Performance Bonus for fiscal 1997 as computed above shall be reduced by
<PAGE> 4
one-half for the 1997 fiscal year as a whole, reflecting the effective date of
this provision occurring one-half way through the 1997 fiscal year. The
computations and payment of the Performance Bonus shall be as provided in the
Company's performance bonus plan. The Payment Amount and Target ROE for fiscal
years following fiscal 1997 shall be as determined by the Board's compensation
committee prior to the commencement of any fiscal year.
(c) DISCRETIONARY BONUS. Commencing with the Company's 1997
fiscal year, Executive shall be entitled to a discretionary bonus in an amount
(if any) determined by the Compensation Committee of the Board, but in any case
which shall not exceed $150,000.
(d) STOCK BONUS. Executive shall be entitled to continue to
receive stock options under the Company's stock option plans with annual awards
to be determined by the Compensation Committee of the Board, but in any case in
amounts consistent with awards granted prior to the date hereof.
(e) OPTIONS IN LIEU OF TAX BONUS. To assist Executive in
providing for federal and state income taxes payable as a result of the exercise
of the Options previously granted to him, and in recognition of the fact that
the Company may benefit from federal and state tax deductions as a result
therefrom, and in lieu of any cash bonus to provide for such taxes, the Company
shall, on the date of this Amended and Restated Employment Agreement, grant
Executive non-qualified options to purchase 189,854 shares of the Company's
Common Stock (the "Tax Bonus Options"). Of such Tax Bonus Options, 37,971 shall
vest on the first anniversary of the date of this Amended and Restated
Employment Agreement and the remaining Tax Bonus Options shall vest in 12 equal
installments on the first day of each calendar month thereafter
<PAGE> 5
commencing on July 1, 1997. The Tax Bonus Options will be exercisable at an
exercise price equal to $30.00 (the Closing Price of the Company's Common
Stock on the New York Stock Exchange on June 20, 1996). Once vested, the Tax
Bonus Options will remain exercisable by Executive, whether or not Executive
remains employed by the Company, until the tenth anniversary of the date of the
initial grant (subject to the effect, if any, of Section 6(a)(x) below). The
Company shall register the shares of Common Stock issuable upon exercise of the
Tax Bonus Options and shall use its best efforts to maintain a current
registration statement under the Securities Act of 1933, as amended, in respect
of such shares. The Tax Bonus Options shall be issued pursuant to the
Company's stock incentive plans maintained for its executives and shall contain
standard anti-dilution mechanisms to adjust for stock dividends, stock splits,
reverse stock splits, recapitalizations, consolidations and mergers, as are
provided therein. All references to number of shares of Common Stock and
exercise prices contained in this Section 4(e) refer to the Common Stock of the
Company as constituted on June 21, 1996 and the antidilution provisions
referred to in the preceding sentence shall apply to any event covered thereby
occurring after such date. The Tax Bonus Options and all other options granted
to Executive by the Company after the date hereof in connection with the
Executive's employment are hereinafter referred to collectively as the
"Options."
5. OTHER EXECUTIVE BENEFITS. During the term of this Agreement,
the Company shall provide to Executive benefits commensurate with his position,
including each of the following benefits:
(a) MEDICAL AND DENTAL COVERAGE. During the term hereof, the
Company shall pay all medical and dental expenses incurred by Executive on
behalf of Executive and his immediate family, regardless of whether such
<PAGE> 6
expenses are in excess of those converted under any medical or dental plans
maintained b the Company.
(b) VACATION. Executive shall be entitled to five (5) weeks
during each year of employment with the Company thereafter for the term of this
Agreement.
(c) BUSINESS EXPENSES. The Company will pay or reimburse
Executive for any out-of-pocket expenses incurred by Executive in the course of
providing his services hereunder, which comply with the Company's travel and
expense policies adopted from time to time by the Board for the executive
officers. In the case of out-of-town travel, Executive shall be entitled to be
reimbursed for first class air fare, transfers, accommodations and restaurants
for himself and his spouse when she accompanies him. Such reimbursement shall
be made by the Company in the same manner and within the same time period as
applicable to the other executive officers of the Company.
(d) AUTOMOBILE. The Company shall provide Executive with the
use of a luxury automobile of his choice. On the earlier of significant damage
or destruction or attaining two years of age, the Company shall replace such
automobile with a new automobile selected by Executive. The Company shall pay
all costs of insurance, repair, maintenance and operation of such automobile.
(e) BENEFIT PLANS. Executive shall be entitled to participate
in any pension, profit-sharing, stock option, stock purchase or other benefit
plan of the Company now existing or hereafter adopted for the benefit of
employees generally or the senior executives of the Company.
(f) LIFE INSURANCE. Provided the following policies may be
obtained at a reasonable cost, the Company shall continue to provide Executive
<PAGE> 7
with the life insurance policy in place at the date hereof and a $1,000,000
standard term accidental death policy.
(g) DISABILITY. Provided the following policy may be obtained
at a reasonable cost, the Company shall provide Executive with a long-term
disability policy which provides for an annual disability payment in an amount
equal to 125% of Executive's Base Salary.
6. CONFIDENTIAL INFORMATION.
(a) NON-DISCLOSURE. Executive hereby agrees, during the term
of this Agreement, he will not disclose to any person or otherwise use or
exploit any proprietary or confidential information, including, without
limitation, trade secrets, processes, records of research, proposals, reports,
methods, processes, techniques, computer software or programming, or budgets or
other financial information, regarding the Company, its business, properties,
customers or affairs (collectively, "Confidential Information") obtained by him
at any time during the term, except to the extent required by Executive's
performance of assigned duties for the Company. Notwithstanding anything
herein to the contrary, the term "Confidential Information" shall not include
information which (i) is or becomes generally available to the public other
than as a result of disclosure by Executive in violation of this Agreement,
(ii) is or becomes available to Executive on a non-confidential basis from a
source other than the Company, provided that such source is not known by
Executive to be furnishing such information in violation of a confidentiality
agreement with or other obligation of secrecy to the Company, (iii) has been
made available, or is made available, on an unrestricted basis to a third party
by the Company, by an individual authorized to do so or (iv) is known by
Executive prior to its disclosure to Executive. Executive may use and disclose
Confidential Information to the extent necessary to assert any right or defend
<PAGE> 8
against any claim arising under this Agreement or pertaining to Confidential
Information or its use, to the extent necessary to comply with any applicable
statute, constitution, treaty, rule, regulation, ordinance or order, whether of
the United States, any state thereof, or any other jurisdiction applicable to
Executive, or if Executive receives a request to disclose all or any part of
the information contained in the Confidential Information under the terms of a
subpoena, order, civil investigative demand or similar process issued by a
court of competent jurisdiction or by a governmental body or agency, whether of
the United States or any state thereof, or any other jurisdiction applicable to
Executive.
(b) INJUNCTIVE RELIEF. Executive agrees that the remedy at law
for any breach by him of the covenants and agreements set forth in this Section
5 may be inadequate and that in the event of any such breach, the Company may,
in addition to the other remedies that may be available to it at law, seek
injunctive relief prohibiting him (together with all those persons associated
with him) from the breach of such covenants and agreements.
7. TERMINATION.
(a) TERMINATION BY COMPANY FOR "CAUSE OR VOLUNTARILY BY
EXECUTIVE. The Company may terminate this Agreement for "Cause" effective
immediately upon written notice thereof to Executive. For purposes of this
Agreement, "Cause" shall mean and be limited to the following events: (i) an
act of fraud, embezzlement or similar conduct by Executive involving the
Company; (ii) any action by Executive involving the arrest of Executive for
violation of any criminal statute constituting a felony if the Board reasonably
determines that the continuation of Executive's employment after such event
would have a adverse impact on the operations or reputation of the Company in
<PAGE> 9
the financial community; or (iii) a continuing, repeated willful failure or
refusal by Executive to perform his duties; provided, however, that this
Agreement may not be terminated under this subclause (iii) unless Executive
shall have first received written notice from the Board advising Executive of
the specific acts or omissions alleged to constitute a failure or refusal to
perform and such failure or refusal to perform continues after Executive shall
have had a reasonable opportunity to correct the acts or omissions cited in
such notice.
In the event of termination for "Cause" or voluntarily by Executive
other than as permitted in Sections 7(b)(i) and (ii) and 7(c), (x) Executive
shall be entitled to receive that portion of the Base Salary and all benefits
accrued through the date of termination and (y) all Options that have become
exercisable as of the date of termination shall remain so for a period of 90
days.
(b) TERMINATION BY COMPANY OTHER THAN FOR "CAUSE."
i) DEATH. Provided that notice of termination has not
previously been given under any Section hereof, if Executive shall die during
the term of this Agreement, this Agreement and all of the Company's obligations
hereunder shall terminate, except that Executive's estate or designated
beneficiaries shall be entitled to receive (A) all earned and unpaid Base Salary
through the date of termination; (B) the Base Salary and Performance Bonus and
all benefits with respect to the then current contract year which would have
been payable or provided to Executive had the term ended two years following the
last day of the month in which Executive's death occurred; and (C) all other
benefits that may be due to Executive or Executive's estate or beneficiaries
under the general provisions of any benefit plan, stock incentive plan or other
plan in
<PAGE> 10
which Executive is then a participant, which benefits shall continue to be
provided for a period of two years following the date of death. In addition, all
Options that have become exercisable as of the date of death shall remain so for
a period of twelve (12) months.
ii) DISABILITY. Provided that notice of termination has not
previously been given under any Section hereof, if Executive becomes ill or is
injured or disabled during the term such that Executive fails to perform all or
substantially all of the duties to be rendered hereunder and such failure
continues for a period in excess of 26 consecutive weeks (a "Disability"), the
Company shall continue to employ Executive under this Agreement for two years
from the date of the Disability (which one year period shall commence at the
beginning of the 26 week period referred to herein) and shall continue to pay
Executive the Base Salary in effect on the date of the Disability (determined at
the beginning of the 26 week period referred to herein), the Performance Bonus
and all benefits then in effect; provided, that (A) the Company may relieve
Executive of his duties and responsibilities hereunder to the extent permitted
by law and (B) any long-term disability payments received by Executive under any
disability insurance plan made available to Executive by the Company if the
premiums were paid by the Company shall be deducted from the salary and bonus
payments otherwise required to be paid to Executive hereunder. If during the
term and subsequent to the Disability commencement date (which shall be at any
time following the end of the 26 week period referred to herein) Executive shall
fully recover, the Company shall have the right (exercisable within 60 days
after receipt of notice from Executive of such recovery), but not the
obligation, to restore Executive to full-time
<PAGE> 11
service at full compensation. If the Company elects not to restore Executive to
full-time service, Executive shall be entitled to obtain other employment. If
Executive is not restored to full-time employment with the Company, all Options
that have become exercisable as of the date of Disability (determined at the end
of the 26 week period referred to herein) shall remain so for a period of 12
months.
iii) WITHOUT CAUSE. If the Company elects to terminate
Executive for any reason whatsoever other than as provided in Section 7(a) or if
the Company causes a Defacto Termination of Executive (as defined below) (each a
"Severance Termination"), Executive shall receive the "Separation Package." As
used herein, the "Separation Package" shall consist of three years' Base Salary
(at the annual rate in effect at the date of the Severance Termination) plus an
amount equal to the Performance Bonus actually paid to Executive with respect to
the eight fiscal quarters preceding the date of the Severance Termination (or if
the date of the Severance Termination occurs before January 1, 2000, the total
amount payable with respect to Base Salary and Performance Bonus shall be the
actual amount paid to Executive (base salary and bonus) over the three year
period prior to the date of Severance Termination). In addition, all Options
which are scheduled to vest during the 12 months following the date of the
Severance Termination shall vest as of such date. Further, all Options which
have become exercisable as of the date of the Severance Termination (including
those which do so as a result of the provisions of the preceding sentence) shall
remain so for a period of 12 months. In the event of a Severance Termination,
Executive will also be provided with reasonable office space and secretarial
support as well as the same mailing address and telephone number which Executive
had during the term
<PAGE> 12
for up to six months, and the Company shall pay the costs of out placement
services with a provider of its choice at a level appropriate to Executive's
title and position as requested by Executive. For purposes of this paragraph, a
"Defacto Termination" shall include any of the following events: (i) the Company
shall fail to pay or shall reduce the Base Salary, Performance Bonus or other
benefits provided herein, except as permitted hereunder, or shall otherwise
breach any material provision hereof which breach is not cured within 10 days
after receipt of notice thereof from Executive; (ii) the Company shall fail to
cause Executive to remain the Chief Executive Officer of the Company; (iii)
Executive shall not be continuously afforded the authority, powers,
responsibilities and privileges contemplated in Section 1 above (whether or not
accompanied by a change in title); (iv) the Company shall require Executive's
primary services to be rendered in an area other than the Company's principal
offices in the Los Angeles metropolitan area; or (v) after a Change in Control
(as defined below), the Company increases the base salary for senior executives
of the Company generally without similarly increasing the Base Salary of
Executive. For purposes of clause (iii), Executive shall be deemed not to have
been continuously afforded the authority, powers, responsibilities and
privileges contemplated in Section 1 above if there shall occur any reduction in
the scope, level or nature of Executive's employment hereunder, or any demotion,
any phasing out or assignment to others, of the duties contemplated herein.
(c) CHANGE IN CONTROL.
i) Following a Change in Control, this Agreement shall
continue to be binding upon the Company and Executive shall be entitled to the
<PAGE> 13
payments provided for in this Section 7 in the event of termination resulting
from death, disability, cause, or a Separation Termination, all as provided for
in Section 7(a) and 7(b).
ii) Executive may (but shall not be obligated to) terminate
this Agreement effective 30 days after the giving of such notice given at any
time within two years following a Change in Control. In the event that
Executive elects to terminate this Agreement pursuant to this Section 7(c)(ii),
Executive shall be entitled to the following payments:
(A) If the Change in Control is effected to an Adverse
Person (as defined below), then Executive shall be entitled to and receive the
Severance Package. In addition, all Options then held by Executive which are
not yet vested shall vest as of the date of such termination. Further, all
Options that have become exercisable as of the date of such termination
(including those which do so as a result of the provisions of the preceding
sentence) shall remain so for the entire remaining term of the Options.
(B) If the Change in Control is effected to a person
other than an Adverse Person, Executive shall be entitled to receive the
Severance Package. In addition, all Options which are scheduled to vest during
the 12 months following the termination date shall vest as of the date of such
termination. Further, all Options that have become exercisable as of the date
of such termination (including those which do so as a result of the provisions
of the preceding sentence) shall remain so for a period of 12 months.
(d) PAYMENT OF TERMINATION AMOUNTS. Executive may elect to have
all amounts to be paid to Executive pursuant to this Section 7 payable (i) over
the remaining term of this Agreement or for such shorter period as expressly
provided for herein, as applicable, or (ii) in a lump sum within 30 days
<PAGE> 14
following termination; provided, however, in the case of death or disability,
the Performance Bonus component shall be payable at such time as performance-
based bonuses are paid to similarly situated employees of the Company and only
if the specified Target ROE for the applicable periods are actually met. In
the event Executive elects to be paid pursuant to clause (i), Executive agrees
promptly to notify the Company in writing of Executive's acceptance of full-
time employment; within 15 days after receipt of such notice, the Company shall
pay Executive in a lump sum any amounts which remain otherwise due to Executive
hereunder.
(e) STOCK AND SIMILAR RIGHTS. Except with regard to the vesting
and exercise dates of Options as set forth in this Section 7, Executive's
rights under any other agreement or plan under which stock options, restricted
stock or similar awards are granted shall be determined in accordance with the
terms and provisions of such plans or agreements.
(f) NO MITIGATION OR OFFSET. Payment of any sum under this
Section 7 shall not be subject to any claim of mitigation nor shall the Company
be entitled to any right of offset with respect thereto.
(g) OTHER INSURANCE POLICIES. Upon any termination of Executive's
employment, and upon reimbursement of the Company of all amounts paid by the
Company in connection with such policies, Executive shall have the right to
purchase or otherwise direct the disposition or assignment of any disability
insurance policy on him held by the Company (excluding only group disability
insurance policies) upon the payment of One Dollar ($1.00) as the total
consideration for each such policy.
8. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in
Control" shall mean the occurrence of any of the following events which occur
<PAGE> 15
after the date of the Original Agreement:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934)
(a "Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act ("Rule 13d-3")) of 20% or more of the
combined voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Outstanding
Voting Securities"); provided, however, that neither of the following
acquisitions shall constitute a Change in Control; (i) any acquisition by the
Company or (ii) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by the
Company; or
(b) Individuals who, as of the date of the Original Agreement
constitute the Board (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date of the Original Agreement whose
election, or nomination for election by the stockholders of the Company, shall
be approved by a vote of a least a majority of the directors then compromising
the Incumbent Board shall be considered as though such individual were a member
of the Incumbent Board; or
(c) Approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case, unless, following such
reorganization, merger or consolidation: (i) more than 60% of the combined
voting power of the then outstanding voting securities of the corporation
resulting from such reorganization, merger, or consolidation, which may be the
Company (the "Resulting Corporation") entitled to vote generally in the
election of directors (the "Resulting Corporation Voting Securities") shall
<PAGE> 16
then be owned beneficially, directly or indirectly, by all or substantially all
of the Persons who were the beneficial owners of Outstanding Voting Securities
immediately prior to such reorganization, merger or consolidation, in
substantially the same proportions as their respective ownerships of
Outstanding Voting Securities immediately prior to such reorganization, merger,
or consolidation; (ii) no Person (excluding the Company, any employee benefit
plan (or related trust) of the Company, the Resulting Corporation, and any
Person beneficially owning, immediately prior to such reorganization, merger or
consolidation, directly or indirectly, 20% or more of the combined voting power
of Outstanding Voting Securities) shall own beneficially, directly or
indirectly 20% or more of the combined voting power of the Resulting
Corporation Voting Securities; and (iii) at least a majority of the members of
the Board shall have been members of the Incumbent Board at the time of the
execution of the initial agreement providing for such reorganization, merger or
consolidation; or
(d) Approval by the stockholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all of the assets of the Company, other than to a
corporation (the "Buyer") with respect to which (x) following such sale or
other disposition, more than 60% of the combined voting power of securities of
Buyer entitled to vote generally in the election of directors ("Buyer Voting
Securities"), shall be owned beneficially, directly or indirectly, by all or
substantially all of the Persons who were the beneficial owners of the
Outstanding Voting Securities immediately prior to such sale or other
disposition, in substantially the same proportion as their respective ownership
of Outstanding Voting Securities, immediately prior to such sale or other
<PAGE> 17
disposition; (y) no Person (excluding the Company and any employee benefit plan
(or related trust) of the Company or Buyer and any Person that shall
immediately prior to such sale or other disposition own beneficially, directly
or indirectly, 20% or more of the combined voting power of Outstanding Voting
Securities), shall own beneficially, directly or indirectly, 20% or more of the
combined voting power or, Buyer Voting Securities; and (z) at least a majority
of the members of the board of directors of Buyer shall have been members of
the Incumbent Board at the time of the execution of the initial agreement or
action of the Board providing for such sale or other disposition or assets of
the Company.
For purposes of this Agreement, an Adverse Person shall mean any person
which acquires control of the Company in a transaction involving a Change in
Control other than a transaction which, before the time of the transaction, has
been approved by the Board of Directors of the Company.
9. INSURANCE. During the term, the Company shall maintain, at no cost to
Executive, officers and directors liability insurance that would cover
Executive in an amount of no less than $45,000,000.
10. GENERAL PROVISIONS.
(a) NOTICES. All notices, requirements, requests, demands, claims
or other communications hereunder shall be in writing. Any notice,
requirement, request, demand, claim or other communication hereunder shall be
deemed duly given (i) if personally delivered, when so delivered, (ii) if
mailed, two (2) business days after having been set by registered or certified
mail, return-receipt requested, postage prepaid and addressed to the intended
recipient as set forth below, (iii) if given by telecopier, once such notice or
other communication is transmitted to the telecopier number specified below,
and the appropriate telephonic confirmation is received, provided that such
<PAGE> 18
notice or other communication is promptly thereafter mailed in accordance with
the provisions of clause (ii) above or (iv) if sent through an overnight
delivery service under circumstances by which such service guarantees next day
delivery, the date following the date so sent:
IF TO THE COMPANY, TO:
AAMES FINANCIAL CORPORATION
3731 Wilshire Boulevard
Los Angeles, California 90010
Attn: Chief Operating Officer
IF TO EXECUTIVE TO:
Gary K. Judis
------------------------------
------------------------------
------------------------------
------------------------------
Any party may change the address to which notices, requests, demands, claims
and other communications hereunder are to be delivered by giving the other
party notice in the manner herein set forth.
(b) ASSIGNMENT. This Agreement and the benefits hereunder are
personal to the Company and are not assignable or transferable, nor may be the
services to be performed hereunder be assigned by the Company to any person,
firm or corporation; provided however, that this Agreement and the benefits
hereunder may be assigned by the Company to any corporation into which the
Company may be merged or consolidated, and this Agreement and the benefits
hereunder will automatically be deemed assigned to any such corporation,
subject, however, to Executive's right to terminate this Agreement to the
extent provided in Section 7. In the event of any assignment of this Agreement
to any corporation acquiring all or substantially all of the assets of the
<PAGE> 19
Company or to any other corporation into which the Company may be merged or
consolidated, the responsibilities and duties assigned to Executive by such
successor corporation shall be the responsibilities and duties of, and
compatible with the status of, a senior executive officer of such successor
corporation. The Company may delegate any of its obligations hereunder to any
subsidiary of the Company, provided that such delegation shall not relieve the
Company of any of its obligations hereunder. Executive may not assign its
rights hereunder or delegate his duties hereunder to any Person.
(c) AFTRA\SAG COMPENSATION. Executive has from time to time
provided the voice for certain radio and television advertisements of the
Company in the past and may continue to do so in the future. In this
connection, Executive is a member of American Federation of Television and
Radio Actors and the Screen Actors Guild. In addition to the other
compensation provided to Executive hereunder, Executive shall be paid a one-
time fee of $1,500 per advertisement for which he provides the voice over
during the term hereunder.
(d) COMPLETE AGREEMENT. This Agreement contains the entire
agreement among the parties hereto with respect to the subject matter hereof
and supersedes and cancels any and all previous written or oral negotiations,
commitments, understandings, agreements and any other writings or
communications in respect of such subject matter.
(e) AMENDMENTS. This Agreement may be modified, amended,
superseded or terminated only by a writing duly signed by both parties.
(f) SEVERABILITY. Any provision of this Agreement which is
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality or
<PAGE> 20
unenforceability, without affecting in any way the remaining provisions hereof
in such jurisdiction or rendering that or any other provision of this Agreement
invalid, illegal or unenforceable in any other jurisdiction.
(g) NO WAIVER. Any waiver by either party of a breach of any
provisions of this Agreement shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Agreement. The failure of either party to insist upon strict
adherence to any term of this Agreement on one or more occasions shall be
considered a waiver or to deprive such party of the right thereafter to insist
upon strict adherence to that term or any other term of this Agreement.
(h) BINDING EFFECT. This Agreement shall be binding on, and
shall inure to the benefit of, the parties hereto and their permitted assigns,
successors and legal representatives.
(i) COUNTERPARTS. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed shall
be deemed to be an original and all of which when taken together shall
constitute one and the same document.
(j) GOVERNING LAW. This Agreement has been negotiated and
entered into in the State of California and shall be construed in accordance
with the laws of the State of California.
(k) ARBITRATION. The parties hereby expressly agree that any
controversy or claim relating to this Agreement, including the construction,
enforcement or application of the terms hereof, shall be submitted to
arbitration in Los Angeles, California by the American Arbitration Association
in accordance with the Commercial Arbitration Rules of such association. The
arbitrator shall be a retired judge of the Los Angeles Superior Court or other
<PAGE> 21
party acceptable to the parties and the rules of evidence shall apply. The
costs of the arbitrator shall be borne equally. Each party shall be
responsible for its own attorneys' fees and costs. However, the arbitrator
shall have the right to award costs and expenses (including actual attorneys'
fees) to the prevailing party as well as equitable relief. The award of the
arbitrator shall be final and binding and shall be enforceable in any court of
competent jurisdiction. Nothing in this paragraph shall preclude the parties
from seeking an injunction or other equitable relief from a court of competent
jurisdiction under appropriate circumstances.
(l) HEADINGS. The headings included in this Agreement are for
the convenience of the parties only and shall not affect the construction or
interpretation of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its duly authorized officer and Executive has
executed the same as of the day and year first above written.
AAMES FINANCIAL CORPORATION
By: /s/ Gregory J. Witherspoon
---------------------------------
Its: Chief Financial Officer
--------------------------------
/s/ Gary K. Judis
--------------------------------
GARY K. JUDIS
<PAGE> 1
EXHIBIT 10.3
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement (this "Agreement") is
made and entered into as of June 21, 1996 by and between AAMES FINANCIAL
CORPORATION, a Delaware corporation (the "Company'), and CARY H. THOMPSON, an
individual ("Executive").
W I T N E S S E T H:
WHEREAS, Executive and the Company entered into an Employment
Agreement as of March 11, 1996 (the "Original Agreement") as a material
inducement to Executive to accept employment with the Company;
WHEREAS, a review of the terms of the Original Agreement has resulted
in a determination that, as drafted, the Original Agreement did not clearly
state the intent of the parties; and
WHEREAS, Executive and the Company desire to amend and restate the
Original Agreement for the purpose of more clearly defining intent of the
parties and to affect certain other amendments, effective as of March 11, 1996,
the date of the Original Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and
Executive agree as set forth below.
1. EMPLOYMENT AND DUTIES. The Company hereby employs Executive to
<PAGE> 2
serve as Chief Operating Officer of the Company, with the powers and duties
customarily accorded to such position, including those powers and duties set
forth in the Bylaws of the Company for such office and such other duties
consistent therewith as may be assigned to Executive from time to time by the
Chief Executive Officer (the "CEO") of the Company. Initially, Executive's
managerial and supervisorial duties shall be limited to those departments and
operations as determined by the CEO and subsequently expanded to include other
departments and operations as directed by the CEO. Executive shall report to
the CEO; provided, however, so long as Gary Judis is employed by the Company in
any capacity, Executive shall report only to Gary Judis. Executive shall
endeavor in good faith to perform his duties in an efficient, faithful and
business-like manner. During the term of his employment, it is intended that
Executive also serve as a Director on the Board of Directors of the Company
(the "Board") and the Company will take action within its powers to include
Executive among the slate of directors proposed to be nominated by the Board at
any applicable stockholders meeting.
2. TERM. The initial term of this Agreement shall begin on March
15, 1996. The initial term shall expire on June 30, 2001 unless terminated
earlier as set forth in Section 6 hereof or by mutual agreement of the parties
hereto (the "Initial Term"). At the expiration of the Initial Term and each
anniversary thereafter, the term of this Agreement shall automatically be
extended for an additional year (the "Extension Term") unless either party
shall have given written notice to the other party at least ninety days prior
to the end of the Initial Term or the Extension Term, as the case may be, that
it does not desire to extend the term of this Agreement. If Executive's
employment under this Agreement is extended for an Extension Term, it shall
<PAGE> 3
thereafter or during any Extension Term be terminable (other than upon
expiration) only as provided in Section 6 or by mutual agreement of the parties
hereto.
3. COMPENSATION.
(a) BASE SALARY. During the term of this Agreement, Executive
shall be paid a base salary (the "Base Salary"), payable in accordance with the
Company's normal payroll practices. During the first year of the term of this
Agreement, Executive's Base Salary shall be $500,000. The annual Base Salary
payable to Executive shall be reviewed at least annually; provided, however,
that Executive's Base Salary shall not be reduced below $500,000 per annum
during the term of this Agreement.
(b) PERFORMANCE BONUS. Executive shall be entitled to
participate in the Company's performance bonus plan for executive officers.
Under such plan, executives of the Company are currently paid on a quarterly
basis a performance bonus (the "Performance Bonus") measured by return on
average equity during the relevant period. For fiscal 1996, Executive shall be
entitled to an annual Performance Bonus in the amount of $45,000 (the "Payment
Amount") for every percentage point for which return on average equity exceeds
15% for the fiscal year (the "Target ROE"). The Performance Bonus will be paid
quarterly based on each quarter's results with an adjustment at the end of the
fiscal year based upon the audited financial statements of the Company. If the
Executive is employed for less than the full fiscal year, his Performance Bonus
will be adjusted pro rata based upon the actual period of employment. The
computations and payment of the Performance Bonus shall be as provided in the
Company's performance bonus plan. The Payment Amount and Target ROE for fiscal
years following fiscal 1996 shall be as determined by the Board's compensation
committee prior to the commencement of any fiscal year.
<PAGE> 4
(c) STOCK BONUS. On the commencement of the Initial Term, the
Company shall grant Executive non-qualified options to purchase 500,000 shares
of the Company's Common Stock (the "Bonus Options"). Of such Bonus Options,
100,000 shall vest immediately upon grant and an additional 100,000 shall vest
on each anniversary of the commencement of the Initial Term. The Bonus Options
will be exercisable at an exercise price equal to $25-7/8 (the Closing Price of
the Company's Common Stock on the New York Stock Exchange on January 17, 1996,
the date the Board of Directors of the Company approved this offer of
employment be made to Executive). Once vested, the Bonus Options will remain
exercisable by Executive, whether or not Executive remains employed by the
Company, until the tenth anniversary of the date of the initial grant (subject
to the effect, if any, of Section 6(a)(x) below). The Company shall register
the shares of Common Stock issuable upon exercise of the Bonus Options and
shall use its best efforts to maintain a current registration statement under
the Securities Act of 1933, as amended, in respect of such shares. The Bonus
Options shall be issued under the Company's stock incentive plans maintained
for its executives and shall contain standard anti-dilution mechanisms to
adjust for stock dividends, stock splits, reverse stock splits,
recapitalizations, consolidations and mergers as are provided for therein. All
references to number of shares of Common Stock and exercise prices contained in
this Section 3(c) refer to the Common Stock of the Company as constituted on
March 11, 1996 and the antidilution provisions referred to in the preceding
sentence shall apply to any event covered thereby (including, but not limited
to, the stock split (effected as a stock dividend) in May 1996) occurring after
such date.
(d) OPTIONS IN LIEU OF TAX BONUS. To assist Executive in
<PAGE> 5
providing for federal and state income taxes payable as a result of the
exercise of the Bonus Options, and in recognition of the fact that the Company
may benefit from federal and state tax deductions as a result therefrom, and in
lieu of any cash bonus to provide for such taxes, the Company shall, on the
date of this Amended and Restated Employment Agreement, grant Executive non-
qualified options to purchase 447,300 shares of the Company's Common Stock
(the "Tax Bonus Options"). Of such Tax Bonus Options, 89,460 shall vest
immediately upon grant and an 89,460 shall vest on each anniversary of the
commencement of the Initial Term. The Tax Bonus Options will be exercisable at
an exercise price equal to $30.00 (the Closing Price of the Company's Common
Stock on the New York Stock Exchange on June 20, 1996). Once vested, the Tax
Bonus Options will remain exercisable by Executive, whether or not Executive
remains employed by the Company, until the tenth anniversary of the date of the
initial grant (subject to the effect, if any, of Section 6(a)(x) below);
provided, however, this Option shall not be exercisable in any tax year of the
Company, to the extent that the deduction of any portion of the compensation
paid to the Executive during such year would be limited by Section 162(m) of
the Internal Revenue Code of 1986 as in effect as of the date of this
Agreement. The Company shall register the shares of Common Stock issuable upon
exercise of the Tax Bonus Options and shall use its best efforts to maintain a
current registration statement under the Securities Act of 1933, as amended, in
respect of such shares. The Tax Bonus Options shall be issued outside the
Company's stock incentive plans maintained for its executives but shall be in a
form substantially similar to, and contain standard anti-dilution mechanisms to
adjust for stock dividends, stock splits, reverse stock splits,
recapitalizations, consolidations and mergers, as are provided in, the
Company's 1995 Stock Incentive Plan. All references to number of shares of
<PAGE> 6
Common Stock and exercise prices contained in this Section 3(d) refer to the
Common Stock of the Company as constituted on June 21, 1996 and the
antidilution provisions referred to in the preceding sentence shall apply to
any event covered thereby occurring after such date. The Bonus Options and
the Tax Bonus Options are sometimes referred to collectively in this Agreement
as the "Options."
4. OTHER EXECUTIVE BENEFITS. During the term of this Agreement,
the Company shall provide to Executive benefits commensurate with his position,
including each of the following benefits:
(a) MEDICAL AND DENTAL COVERAGE. The Company agrees to provide
coverage to Executive and dependent members of his family under the same
medical and dental plans as may be maintained from time to time in the
discretion of the Company's Board for the benefit of the CEO and the dependent
members of his family.
(b) VACATION. Executive shall be entitled to four (4) weeks of
paid vacation during Executive's first year of employment with the Company and
shall be entitled to five (5) weeks during each year of employment with the
Company thereafter for the term of this Agreement. In each case, such
entitlement shall accrue pro rata over the contract year and shall be taken at
such time or times as shall not unreasonably interfere with the operations of
the Company.
(c) BUSINESS EXPENSES. The Company will pay or reimburse
Executive for any out-of-pocket expenses incurred by Executive in the course of
providing his services hereunder, which comply with the Company's travel and
expense policies adopted from time to time by the Board for the CEO. Such
reimbursement shall be made by the Company in the same manner and within the
<PAGE> 7
same time period as applicable to the other executive officers of the Company.
(d) AUTOMOBILE. The Company shall provide Executive with the
use of a luxury automobile that is selected by Executive and approved by the
CEO. On the earlier of significant damage or destruction or attaining three
years of age, the Company shall replace such automobile with a new automobile
selected by Executive and approved by the CEO. The Company shall pay all costs
of insurance, repair, maintenance and operation of such automobile.
(e) BENEFIT PLANS. Executive shall be entitled to participate
in any pension, profit-sharing, stock option, stock purchase or other benefit
plan of the Company now existing or hereafter adopted for the benefit of
employees generally or the senior executives of the Company.
(f) LIFE INSURANCE. Provided the following policies may be
obtained at a reasonable cost, the Company shall provide Executive with a
$1,000,000 standard term life insurance policy and a $1,000,000 standard term
accidental death policy.
(g) DISABILITY. Provided the following policy may be obtained
at a reasonable cost, the Company shall provide Executive with a long-term
disability policy which provides for an annual disability payment in an amount
equal to 125% of Executive's Base Salary.
5. CONFIDENTIAL INFORMATION.
(a) NON-DISCLOSURE. Executive hereby agrees, during the term
of this Agreement, he will not disclose to any person or otherwise use or
exploit any proprietary or confidential information, including, without
limitation, trade secrets, processes, records of research, proposals, reports,
methods, processes, techniques, computer software or programming, or budgets or
other financial information, regarding the Company, its business, properties,
<PAGE> 8
customers or affairs (collectively, "Confidential Information") obtained by him
at any time during the term, except to the extent required by Executive's
performance of assigned duties for the Company. Notwithstanding anything
herein to the contrary, the term "Confidential Information" shall not include
information which (i) is or becomes generally available to the public other
than as a result of disclosure by Executive in violation of this Agreement,
(ii) is or becomes available to Executive on a non-confidential basis from a
source other than the Company, provided that such source is not known by
Executive to be furnishing such information in violation of a confidentiality
agreement with or other obligation of secrecy to the Company, (iii) has been
made available, or is made available, on an unrestricted basis to a third party
by the Company, by an individual authorized to do so or (iv) is known by
Executive prior to its disclosure to Executive. Executive may use and disclose
Confidential Information to the extent necessary to assert any right or defend
against any claim arising under this Agreement or pertaining to Confidential
Information or its use, to the extent necessary to comply with any applicable
statute, constitution, treaty, rule, regulation, ordinance or order, whether of
the United States, any state thereof, or any other jurisdiction applicable to
Executive, or if Executive receives a request to disclose all or any part of
the information contained in the Confidential Information under the terms of a
subpoena, order, civil investigative demand or similar process issued by a
court of competent jurisdiction or by a governmental body or agency, whether of
the United States or any state thereof, or any other jurisdiction applicable to
Executive.
(b) INJUNCTIVE RELIEF. Executive agrees that the remedy at law
for any breach by him of the covenants and agreements set forth in this Section
<PAGE> 9
5 may be inadequate and that in the event of any such breach, the Company may,
in addition to the other remedies that may be available to it at law, seek
injunctive relief prohibiting him (together with all those persons associated
with him) from the breach of such covenants and agreements.
6. TERMINATION.
(a) TERMINATION BY COMPANY FOR "CAUSE" OR VOLUNTARILY BY
EXECUTIVE. The Company may terminate this Agreement for "Cause" effective
immediately upon written notice thereof to Executive. For purposes of this
Agreement, "Cause" shall mean and be limited to the following events: (i) an
act of fraud, embezzlement or similar conduct by Executive involving the
Company; (ii) any action by Executive involving the arrest of Executive for
violation of any criminal statute constituting a felony if the Board reasonably
determines that the continuation of Executive's employment after such event
would have a adverse impact on the operations or reputation of the Company in
the financial community; or (iii) a continuing, repeated willful failure or
refusal by Executive to perform his duties; provided, however, that this
Agreement may not be terminated under this subclause (iii) unless Executive
shall have first received written notice from the Board advising Executive of
the specific acts or omissions alleged to constitute a failure or refusal to
perform and such failure or refusal to perform continues after Executive shall
have had a reasonable opportunity to correct the acts or omissions cited in
such notice.
In the event of termination for "Cause," or voluntarily by Executive
other than as permitted in Sections 6(b)(i) and 6(b(ii) and 6(c), (x) Executive
shall be entitled to receive that portion of the Base Salary and all benefits
accrued through the date of termination and (y) all Options that have become
exercisable as of the date of termination shall remain so for a period of 90
<PAGE> 10
days.
(b) TERMINATION BY COMPANY OTHER THAN FOR "CAUSE."
i) Death. Provided that notice of termination has not
previously been given under any Section hereof, if Executive shall die during
the term of this Agreement, this Agreement and all of the Company's obligations
hereunder shall terminate, except that Executive's estate or designated
beneficiaries shall be entitled to receive (A) all earned and unpaid Base Salary
through the date of termination; (B) the Base Salary, Performance Bonus, and all
benefits with respect to the then current contract year which would have been
payable or provided to Executive had the term ended one year following the last
day of the month in which Executive's death occurred; and (C) all other benefits
that may be due to Executive or Executive's estate or beneficiaries under the
general provisions of any benefit plan, stock incentive plan or other plan in
which Executive is then a participant, which benefits shall continue to be
provided for a period of one year following the date of death. In addition, of
the Options which are scheduled to vest on the next anniversary of the
commencement of the Initial Term, a percentage of such number of Options shall
vest at the date of death determined by dividing the number of days which have
elapsed since the last such anniversary by the number 365 and multiplying the
result by 100. Further, all Options that have become exercisable as of the date
of death (including those
<PAGE> 11
which do so as a result of the provisions of the preceding sentence) shall
remain so for a period of twelve (12) months.
ii) DISABILITY. Provided that notice of termination has not
previously been given under any Section hereof, if Executive becomes ill or is
injured or disabled during the term such that Executive fails to perform all or
substantially all of the duties to be rendered hereunder and such failure
continues for a period in excess of 26 consecutive weeks (a "Disability"), the
Company shall continue to employ Executive under this Agreement for one year
from the date of the Disability (which one year period shall commence at the
beginning of the 26 week period referred to herein) and shall continue to pay
Executive the Base Salary in effect on the date of the Disability (determined at
the beginning of the 26 week period referred to herein), the Performance Bonus
and all benefits then in effect; provided, that (A) the Company may relieve
Executive of his duties and responsibilities hereunder to the extent permitted
by law and (B) any long-term disability payments received by Executive under any
disability insurance plan made available to Executive by the Company if the
premiums were paid by the Company shall be deducted from the salary and bonus
payments otherwise required to be paid to Executive hereunder. If during the
term and subsequent to the Disability commencement date (which shall be at any
time following the end of the 26 week period referred to herein) Executive shall
fully recover, the Company shall have the right (exercisable within 60
<PAGE> 12
days after receipt of notice from Executive of such recovery), but not the
obligation, to restore Executive to full-time service at full compensation. If
the Company elects not to restore Executive to full-time service, Executive
shall be entitled to obtain other employment. If Executive is not restored to
full-time employment with the Company, all Options that have become exercisable
as of the date of Disability (determined at the end of the 26 week period
referred to herein) shall remain so for a period of 12 months.
iii) WITHOUT CAUSE. If the Company elects to terminate
Executive for any reason whatsoever other than as provided in Section 6(a) or if
the Company causes a Defacto Termination of Executive (as defined below) (each a
"Severance Termination"), Executive shall receive the "Separation Package."
As used herein, the "Separation Package" shall consist of two years' Base Salary
(at the annual rate in effect at the date of the Severance Termination) plus an
amount equal to the Performance Bonus actually paid to Executive with respect to
the eight fiscal quarters preceding the date of the Severance Termination (or if
Executive has been employed for less than two years, the amount of Performance
Bonus paid to Executive for the entire period of employment multiplied by a
fraction, the numerator of which is the number eight and the denominator of
which is the actual number of fiscal quarters for which Executive was employed
by the Company). In addition, all
<PAGE> 13
Options which are scheduled to vest on the next anniversary of the commencement
of the Initial Term shall vest as of the date of the Severance Termination.
Further, all Options that have become exercisable as of the date of such
termination (including those which do so as a result of the provisions of the
preceding sentence) shall remain so for a period of 12 months. In the event of a
Severance Termination, Executive will also be provided with reasonable office
space and secretarial support as well as the same mailing address and telephone
number which Executive had during the term for up to six months, and the Company
shall pay the costs of out placement services with a provider of its choice at a
level appropriate to Executive's title and position as requested by Executive.
For purposes of this paragraph, a "Defacto Termination" shall include any of the
following events: (i) the Company shall fail to pay or shall reduce the Base
Salary, Performance Bonus or other benefits provided herein, except as permitted
hereunder, or shall otherwise breach any material provision hereof which breach
is not cured within 10 days after receipt of notice thereof from Executive; (ii)
the Company shall fail to cause Executive to remain the Chief Operating Officer
of the Company; (iii) Executive shall not be continuously afforded the
authority, powers, responsibilities and privileges contemplated in Section 1
above (whether or not accompanied by a change in title); (iv) the Company shall
require Executive's primary services to be rendered in an area other than the
Company's principal offices in the Los Angeles metropolitan area; or (v) after a
Change in
<PAGE> 14
Control (as defined below), the Company increases the base salary for senior
executives of the Company generally without similarly increasing the Base Salary
of Executive. For purposes of clause (iii), Executive shall be deemed not to
have been continuously afforded the authority, powers, responsibilities and
privileges contemplated in Section 1 above if there shall occur any reduction in
the scope, level or nature of Executive's employment hereunder, or any demotion,
any phasing out or assignment to others, of the duties contemplated herein.
(c) CHANGE IN CONTROL.
i) Following a Change in Control, this Agreement shall
continue to be binding upon the Company and Executive shall be entitled to the
payments provided for in this Section 6 in the event of termination resulting
from death, disability, cause, or a Separation Termination, all as provided for
in Section 6(a) and 6(b).
ii) Executive may (but shall not be obligated to) terminate
this Agreement effective 30 days after the giving of such notice given at any
time within two years following a Change in Control. In the event that Executive
elects to terminate this Agreement pursuant to this Section 6(c)(ii), Executive
shall be entitled to the following payments:
(A) If the Change in Control is effected to an
Adverse Person (as defined below), then Executive shall be entitled to and
receive the Severance Package. In
<PAGE> 15
addition, all Options then held by Executive which are not yet vested shall vest
as of the date of such termination. Further, all Options that have become
exercisable as of the date of such termination (including those which do so as a
result of the provisions of the preceding sentence) shall remain so for the
entire remaining term of the Options.
(B) If the Change in Control is effected to a person
other than an Adverse Person, Executive shall be entitled to receive the
Severance Package. In addition, all Options which are scheduled to vest on the
next scheduled vesting date during the 12 months following the termination date
shall vest as of the date of such termination. Further, all Options that have
become exercisable as of the date of such termination (including those which do
so as a result of the provisions of the preceding sentence) shall remain so for
a period of 12 months.
(d) PAYMENT OF TERMINATION AMOUNTS. Executive may elect to have
all amounts to be paid to Executive pursuant to this Section 6 payable (i) over
the remaining term of this Agreement or for such shorter period as expressly
provided for herein, as applicable, or (ii) in a lump sum within 30 days
following termination. provided, however, in the case of death or disability the
Performance Bonus component shall be payable at such time as performance-based
bonuses are paid to similarly situated employees of the Company and only if the
specified Target ROE for the applicable periods are actually met. In the event
Executive elects to be paid pursuant to clause (i),
<PAGE> 16
Executive agrees promptly to notify the Company in writing of Executive's
acceptance of full-time employment; within 15 days after receipt of such notice,
the Company shall pay Executive in a lump sum any amounts which remain otherwise
due to Executive hereunder.
(e) STOCK AND SIMILAR RIGHTS. Except with regard to the vesting
and exercise dates of Options as set forth in this Section 6, Executive's rights
under any other agreement or plan under which stock options, restricted stock or
similar awards are granted shall be determined in accordance with the terms and
provisions of such plans or agreements.
(f) NO MITIGATION OR OFFSET. Payment of any sum under this
Section 6 shall not be subject to any claim of mitigation nor shall the Company
be entitled to any right of offset with respect thereto.
(g) OTHER INSURANCE POLICIES. Upon any termination of
Executive's employment, and upon reimbursement of the Company of all amounts
paid by the Company in connection with such policies, Executive shall have the
right to purchase or otherwise direct the disposition or assignment of any
disability insurance policy on him held by the Company (excluding only group
disability insurance policies) upon the payment of One Dollar ($1.00) as the
total consideration for each such policy.
7. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in
Control" shall mean the occurrence of any of the following events which occur
<PAGE> 17
after the date of the Original Agreement:
(a) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act ("Rule 13d-3")) of 20% or more of the
combined voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Outstanding
Voting Securities"); provided, however, that neither of the following
acquisitions shall constitute a Change in Control; (i) any acquisition by the
Company or (ii) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by the
Company; or
(b) Individuals who, as of the date of the Original Agreement,
constitute the Board (the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date of the Original Agreement whose
election, or nomination for election by the stockholders of the Company, shall
be approved by a vote of a least a majority of the directors then compromising
the Incumbent Board shall be considered as though such individual were a member
of the Incumbent Board; or
(c) Approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case, unless, following such
reorganization, merger or consolidation: (i) more than 60% of the combined
voting power of the then outstanding voting securities of the corporation
resulting from such reorganization, merger, or consolidation, which may be the
Company (the "Resulting Corporation") entitled to vote generally in the
election of directors (the "Resulting Corporation Voting Securities") shall
<PAGE> 18
then be owned beneficially, directly or indirectly, by all or substantially all
of the Persons who were the beneficial owners of Outstanding Voting Securities
immediately prior to such reorganization, merger or consolidation, in
substantially the same proportions as their respective ownerships of
Outstanding Voting Securities immediately prior to such reorganization, merger,
or consolidation; (ii) no Person (excluding the Company, any employee benefit
plan (or related trust) of the Company, the Resulting Corporation, and any
Person beneficially owning, immediately prior to such reorganization, merger or
consolidation, directly or indirectly, 20% or more of the combined voting power
of Outstanding Voting Securities) shall own beneficially, directly or
indirectly 20% or more of the combined voting power of the Resulting
Corporation Voting Securities; and (iii) at least a majority of the members of
the Board shall have been members of the Incumbent Board at the time of the
execution of the initial agreement providing for such reorganization, merger or
consolidation; or
(d) Approval by the stockholders of the Company of (x) a
complete liquidation or dissolution of the Company or (y) the sale or other
disposition of all or substantially all of the assets of the Company, other
than to a corporation (the "Buyer") with respect to which (i) following such
sale or other disposition, more than 60% of the combined voting power of
securities of Buyer entitled to vote generally in the election of directors
("Buyer Voting Securities"), shall be owned beneficially, directly or
indirectly, by all or substantially all of the Persons who were the beneficial
owners of the Outstanding Voting Securities immediately prior to such sale or
other disposition, in substantially the same proportion as their respective
ownership of Outstanding Voting Securities, immediately prior to such sale or
<PAGE> 19
other disposition; (ii) no Person (excluding the Company and any employee
benefit plan (or related trust) of the Company or Buyer and any Person that
shall immediately prior to such sale or other disposition own beneficially,
directly or indirectly, 20% or more of the combined voting power of Outstanding
Voting Securities), shall own beneficially, directly or indirectly, 20% or more
of the combined voting power or, Buyer Voting Securities; and (z) at least a
majority of the members of the board of directors of Buyer shall have been
members of the Incumbent Board at the time of the execution of the initial
agreement or action of the Board providing for such sale or other disposition
or assets of the Company.
For purposes of this Agreement, an Adverse Person shall mean any
person which acquires control of the Company in a transaction involving a
Change in Control other than a transaction which, before the time of the
transaction, has been approved by the Board of Directors of the Company.
8. INSURANCE. During the term, the Company shall maintain, at no
cost to Executive, officers and directors liability insurance that would cover
Executive in an amount of no less than $45,000,000.
9. GENERAL PROVISIONS.
(a) NOTICES. All notices, requirements, requests, demands,
claims or other communications hereunder shall be in writing. Any notice,
requirement, request, demand, claim or other communication hereunder shall be
deemed duly given (i) if personally delivered, when so delivered, (ii) if
mailed, two (2) business days after having been set by registered or certified
mail, return-receipt requested, postage prepaid and addressed to the intended
recipient as set forth below, (iii) if given by telecopier, once such notice or
other communication is transmitted to the telecopier number specified below,
<PAGE> 20
and the appropriate telephonic confirmation is received, provided that such
notice or other communication is promptly thereafter mailed in accordance with
the provisions of clause (ii) above or (iv) if sent through an overnight
delivery service under circumstances by which such service guarantees next day
delivery, the date following the date so sent:
IF TO THE COMPANY, TO:
AAMES FINANCIAL CORPORATION
3731 Wilshire Boulevard
Los Angeles, California 90010
Attn: Chief Executive Officer
IF TO EXECUTIVE TO:
Cary H. Thompson
1944 Fairburn Avenue
Los Angeles, California 90025
Any party may change the address to which notices, requests, demands, claims
and other communications hereunder are to be delivered by giving the other
party notice in the manner herein set forth.
(b) ASSIGNMENT. This Agreement and the benefits hereunder are
personal to the Company and are not assignable or transferable, nor may be the
services to be performed hereunder be assigned by the Company to any person,
firm or corporation; provided however, that this Agreement and the benefits
hereunder may be assigned by the Company to any corporation into which the
Company may be merged or consolidated, and this Agreement and the benefits
hereunder will automatically be deemed assigned to any such corporation,
subject, however, to Executive's right to terminate this Agreement to the
extent provided in Section 6. In the event of any assignment of this Agreement
to any corporation acquiring all or substantially all of the assets of the
<PAGE> 21
Company or to any other corporation into which the Company may be merged or
consolidated, the responsibilities and duties assigned to Executive by such
successor corporation shall be the responsibilities and duties of, and
compatible with the status of, a senior executive officer of such successor
corporation. The Company may delegate any of its obligations hereunder to any
subsidiary of the Company, provided that such delegation shall not relieve the
Company of any of its obligations hereunder. Executive may not assign its
rights hereunder or delegate his duties hereunder to any Person.
(c) COMPLETE AGREEMENT. This Agreement contains the entire
agreement among the parties hereto with respect to the subject matter hereof
and supersedes and cancels any and all previous written or oral negotiations,
commitments, understandings, agreements and any other writings or
communications in respect of such subject matter.
(d) AMENDMENTS. This Agreement may be modified, amended,
superseded or terminated only by a writing duly signed by both parties.
(e) SEVERABILITY. Any provision of this Agreement which is
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability, without affecting in any way the remaining provisions hereof
in such jurisdiction or rendering that or any other provision of this Agreement
invalid, illegal or unenforceable in any other jurisdiction.
(f) NO WAIVER. Any waiver by either party of a breach of any
provisions of this Agreement shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Agreement. The failure of either party to insist upon strict
adherence to any term of this Agreement on one or more occasions shall be
<PAGE> 22
considered a waiver or to deprive such party of the right thereafter to insist
upon strict adherence to that term or any other term of this Agreement.
(g) BINDING EFFECT. This Agreement shall be binding on, and
shall inure to the benefit of, the parties hereto and their permitted assigns,
successors and legal representatives.
(h) COUNTERPARTS. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed shall
be deemed to be an original and all of which when taken together shall
constitute one and the same document.
(i) GOVERNING LAW. This Agreement has been negotiated and
entered into in the State of California and shall be construed in accordance
with the laws of the State of California.
(j) ARBITRATION. The parties hereby expressly agree that any
controversy or claim relating to this Agreement, including the construction,
enforcement or application of the terms hereof, shall be submitted to
arbitration in Los Angeles, California by the American Arbitration Association
in accordance with the Commercial Arbitration Rules of such association. The
arbitrator shall be a retired judge of the Los Angeles Superior Court or other
party acceptable to the parties and the rules of evidence shall apply. The
costs of the arbitrator shall be borne equally. Each party shall be
responsible for its own attorneys' fees and costs. However, the arbitrator
shall have the right to award costs and expenses (including actual attorneys'
fees) to the prevailing party as well as equitable relief. The award of the
arbitrator shall be final and binding and shall be enforceable in any court of
competent jurisdiction. Nothing in this paragraph shall preclude the parties
from seeking an injunction or other equitable relief from a court of competent
jurisdiction under appropriate circumstances.
<PAGE> 23
(k) HEADINGS. The headings included in this Agreement are for
the convenience of the parties only and shall not affect the construction or
interpretation of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its duly authorized officer and Executive has
executed the same as of the day and year first above written.
AAMES FINANCIAL CORPORATION
By: /s/ Gary K. Judis
-----------------------
Gary K. Judis
Its: Chief Executive Officer
/s/ Cary H. Thompson
-----------------------
CARY H. THOMPSON
<PAGE> 1
EXHIBIT 10.4
OPTION CERTIFICATE
(NON-QUALIFIED STOCK OPTION)
THIS IS TO CERTIFY that Aames Financial Corporation, a Delaware
corporation (the "Company"), has granted to the employee named below (the
"Executive") a non-qualified stock option (the "Option") to purchase shares of
the Corporation's Common Stock, par value $0.001 per share (the "Shares"), as
follows:
Name of Executive: Cary H. Thompson
Address of Executive: c/o Aames Financial Corporation
3731 Wilshire Boulevard, 10th Floor
Los Angeles, California 90010
Number of Shares: 447,300
Option Exercise Price: $30.00 per share
Option Expiration Date: March 10, 2006
EXERCISE SCHEDULE: The Option shall become exercisable ("vest") as
follows: with respect to 89,460 Shares underlying the Option, the Option shall
become immediately exercisable; with respect to an additional 89,460 Shares
underlying the Option, the Option shall become exercisable on March 11, 1997;
with respect to an additional 89,460 Shares underlying the Option, the Option
shall become exercisable on March 11, 1998; with respect to an additional 89,460
Shares underlying the Option, the Option shall become exercisable on March 11,
1999; and with respect to an additional 89,460 Shares underlying the Option, the
Option shall become exercisable on March 11, 2000 (each a "VESTING DATE");
provided, however, this Option shall not be exercisable in any tax year of the
Company, to the extent that the deduction of any portion of the compensation
paid to Executive during such year would be limited by section 162(m) of the
Internal Revenue Code of 1986 as in effect as of June 21, 1996.
SUMMARY OF OTHER TERMS: This Option is defined in the Stock Option
Agreement (Non-Qualified Option) (the "Option Agreement") which is attached to
this Option Certificate (the "Certificate") as Annex I. This Certificate
summarizes certain of the provisions of the Option Agreement for your
information, but is not complete. Your rights are governed by the Option
Agreement, not by this Summary. The Company strongly suggests that you carefully
review the full Option Agreement prior to signing this Certificate or exercising
the Option.
1
<PAGE> 2
Among the terms of the Option Agreement are the following:
TERMINATION OF EMPLOYMENT: While the Option terminates on the Option
Expiration Date, it may terminate earlier if you cease to be employed by the
Company. In addition, in certain cases, vesting of all or a portion of your
Option may accelerate depending upon the circumstances of your termination of
employment with the Company. See Paragraph 5 of the Option Agreement.
TRANSFER: The Option is personal to you, and cannot be sold,
transferred, assigned or otherwise disposed of to any other person, except (i)
on your death, and (ii) without payment of consideration, to immediate family
members of the Option Holder or to trusts or partnerships for such family
members or persons who, at the time of such transfer, are current or former
officers of the Company. (All persons or entities described in this clause (ii)
are hereinafter referred to as "Permitted Transferees"). All Permitted
Transferees are subject to the same terms as the Option Holder. See Paragraph
14(d) of the Option Agreement.
EXERCISE: You can exercise the Option (once it is exercisable), in
whole or in part, by delivering to the Company a Notice of Exercise identical to
Exhibit "A" attached to the Option Agreement, accompanied by payment of the
Exercise Price for the Shares to be purchased. The Company will then issue a
certificate to you for the Shares you have purchased. You are under no
obligation to exercise the Option. See Paragraph 4 of the Option Agreement.
ANTI-DILUTION PROVISIONS: The Option contains provisions which adjust
your Option to reflect stock splits, stock dividends, mergers and other major
corporate reorganizations which would change the nature of the Shares underlying
your Option. See Paragraph 7 of the Option Agreement.
WITHHOLDING: The Company may require you to make any arrangements
necessary to insure the proper withholding of any amount of tax, if any,
required to be withheld by the Company as a result of the exercise of the
Option. See Paragraph 12 of the Option Agreement.
2
<PAGE> 3
AGREEMENT
Aames Financial Corporation, a Delaware corporation (the "COMPANY"),
and the above-named person (the "OPTIONEE") each hereby agrees to be bound by
all of the terms and conditions of the Stock Option Agreement (Non-Qualified
Stock Option) which is attached hereto as Annex I and incorporated herein by
this reference as if set forth in full in this document.
DATED: June 21, 1996
______________
AAMES FINANCIAL CORPORATION
By: /s/ Gary K. Judis
________________________________
Its: Chairman of the Board and
_______________________________
Chief Executive Officer
_______________________________
OPTIONEE AND EXECUTIVE
/s/ Cary H. Thompson
___________________________________
(Signature)
Cary H. Thompson
___________________________________
(Please print your name
exactly as you wish it to
appear on any stock
certificates issued to you
upon exercise of the
Option)
<PAGE> 4
STOCK OPTION AGREEMENT
(NON-QUALIFIED STOCK OPTION)
This Stock Option Agreement (this "Option Agreement") is made
and entered into on the execution date of the Option Certificate to which it is
attached (the "Certificate"), by and between Aames Financial Corporation, a
Delaware corporation (the "Company"), and Cary Thompson (the "Executive").
In connection with the options granted pursuant to that
certain amended and restated employment agreement between Cary Thompson and the
Company entered into as of June 21, 1996 (the "Employment Agreement"), the
Compensation Committee (the "Committee") of the Board of Directors of the
Company (the "Board") has authorized the grant to Executive of a Non-Qualified
Stock Option to purchase shares of the Company's Common Stock, par value $0.001
per share (the "Common Stock"), upon the terms and subject to the conditions set
forth in this Option Agreement.
The Company and Executive agree as follows:
1. GRANT OF OPTION.
The Company hereby grants to Executive the right and option
(the "Option"), upon the terms and subject to the conditions set forth in this
Option Agreement, to purchase all or any portion of that number of shares of the
Common Stock (the "Shares") set forth in the Certificate, at the Option exercise
price set forth in the Certificate (the "Exercise Price").
2. TERM OF OPTION.
The Option shall terminate and expire on the Option Expiration
Date set forth in the Certificate, unless sooner terminated as provided herein.
3. EXERCISE PERIOD.
(a) Subject to the provisions of Paragraphs 3(b) and 5 of this
Option Agreement, the Option shall become exer cisable (in whole or in part)
upon and after the dates set forth under the caption "Exercise Schedule" in the
Certificate; provided, however, this Option shall not be exercisable in any tax
year of the Company, to the extent that the deduction of any portion of the
compensation paid to the Option Holder during such year would be limited by
section 162(m) of the Internal Revenue Code of 1986 as in effect as of the date
of this Agreement. The installments shall be cumulative; i.e., the Option may be
exercised, as to any or all Shares covered by an installment, at any time or
times after the installment first becomes exercisable and until the expiration
or termination of the Option.
1
<PAGE> 5
(b) Notwithstanding anything to the contrary con tained in
this Option Agreement, the Option may not be exercised, in whole or in part,
unless and until any then-applicable requirements of all state and federal laws
and regulatory agencies shall have been fully complied with to the satisfaction
of the Company and its counsel.
4. EXERCISE OF OPTION.
There is no obligation to exercise the Option, in whole or in
part. The Option may be exercised, in whole or in part, only by delivery to the
Company of:
(a) written notice of exercise in form and sub stance
identical to Exhibit "A" attached to this Option Agreement stating the number of
shares of Common Stock then being purchased (the "Purchased Shares"); and
(b) payment of the Exercise Price of the Purchased Shares,
either in cash, by check, by cancellation of any indebtedness of the Company to
Executive for accrued and unpaid salary or, with the consent of the Committee,
by transfer to the Company of issued and outstanding shares of Common Stock, or
by any combination of the above methods of payment. If payment is made, in whole
or in part, by transfer to the Company of issued and outstanding shares of
Common Stock, the value of such shares shall be determined as follows: (i) if
the Stock is listed on an exchange or exchanges, or admitted for trading in a
market system which provides last sale data under Rule 11Aa3-1 of the General
Rules and Regulations of the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended (a "Market System"), the last
reported sales price per share on the last business day prior to such date on
the principal exchange on which it is traded, or in such a Market System, as
applicable, or if no sale was made on such day on such principal exchange or in
such a Market System, as applicable, the last reported sales price per share on
the most recent day prior to such date on which a sale was reported on such
exchange or such Market System, as applicable; or (ii) if the Common Stock is
not then traded on an exchange or in such a Market System, the average of the
closing bid and asked prices per share for the Common Stock in the
over-the-counter market as quoted on NASDAQ on the day prior to such date; or
(iii) if the Common Stock is not listed on an exchange or quoted on NASDAQ, an
amount determined in good faith by the Committee.
Following receipt of the notice and payment re ferred to
above, the Company shall issue and deliver to Executive a stock certificate or
stock certificates evidencing the Pur chased Shares; provided, however, that the
Company shall not be obligated to issue a fraction or fractions of a share of
its Common Stock, and may pay to Executive, in cash or by check, the fair market
value of any fraction or fractions of a share exercised by Executive, which fair
market value shall be determined as set forth in the preceding paragraph.
2
<PAGE> 6
5. TERMINATION OF EMPLOYMENT.
(a) If Executive shall cease to be in the employ of the
Company, any present or future corporation which would be a "subsidiary
corporation" ("Subsidiary") as that term is defined in Section 424 of the
Internal Revenue Code of 1986, as amended from time to time, or any successor
thereto (the "Code"), or any present or future corporation which would be a
"parent corporation" as that term is defined in Section 424 of the Code
("Parent"), as a result of his voluntary resignation or his termination for
Cause pursuant to Section 6 (a) of the Employment Agreement, subject to the
proviso in Paragraph 3(a), Executive shall have the right to exercise the Option
at any time within twelve months after the date Executive ceased to be employed
by the Company, and prior to the date of termination of the Option under
Paragraph 2 of this Option Agreement with respect to all shares with respect to
which the Option was exercisable at the date Executive's employment terminated
as to which the Option had not previously been exercised (without regard to the
proviso in Paragraph 3(a)); and to the extent unexercised at the end of this
period, the Option shall terminate.
(b) If Executive shall cease to be in the employ of the
Company, any Subsidiary or any Parent, as a result of his death as provided in
Section 6(b)(i) of the Employment Agreement, (i) the Option shall become
exercisable at the date of death with respect to a percentage of the Shares (if
any) for which the Option is scheduled to become exercisable on the next
scheduled Vesting Date provided in the Exercise Schedule in the Certificate
(without regard to the proviso in Paragraph 3(a)), which percentage shall be
determined by dividing the number of days which have elapsed since the last such
scheduled vesting date by the number 365 and multiplying the result by 89.5, and
(ii) subject to the proviso in Paragraph 3(a), Executive's estate shall have the
right to exercise the Option at any time within twelve months after the date of
Executive's death, and prior to the date of termination of the Option under
Paragraph 2 of this Option Agreement with respect to all Shares with respect to
which the Option was exercisable at the date of Executive's death (including the
Shares with respect to which the Option becomes exercisable pursuant to the
provisions of clause (i) above) without regard to the proviso in Paragraph 3(a);
and to the extent unexercised at the end of this period, the Option shall
terminate.
(c) If Executive shall cease to be in the employ of the
Company, any Subsidiary or any Parent as a result of his Disability pursuant to
Section 6(b)(ii) of the Employment Agreement, subject to the proviso in
Paragraph 3(a), Executive shall have the right to exercise the Option at any
time within twelve months after the date Executive ceased to be employed by the
Company, and prior to the date of termination of the Option under Paragraph 2 of
this Option Agreement with respect to all Shares with respect to which the
Option was exercisable at the date Executive's employment terminated as to which
the Option had not previously been exercised (without regard to the proviso in
Paragraph 3(a)); and to the extent unexercised at the end of this period, the
Option shall terminate.
(d) If Executive shall cease to be in the employ
of the Company, any Subsidiary or any Parent as a result of a Severance
Termination pursuant to Section 6(b)(iii) of
3
<PAGE> 7
the Employment Agreement, (i) the Option shall become exercisable at the date
Employee shall cease to be so employed with respect to all of the Shares (if
any) for which the Option is scheduled to become exercisable on the next
scheduled Vesting Date provided in the Exercise Schedule in the Certificate
(without regard to the proviso in Paragraph 3(a)), and (ii) subject to the
proviso in Paragraph 3(a), Executive shall have the right to exercise the Option
at any time within twelve months after the date of Executive's termination, and
prior to the date of termination of the Option under Paragraph 2 of this Option
Agreement with respect to all shares with respect to which the Option was
exercisable at the date of Executive's termination (including the Options which
become exercisable pursuant to the provisions of clause (i) above) without
regard to the proviso in Paragraph 3(a); and to the extent unexercised at the
end of this period, the Option shall terminate.
(e) If Executive shall cease to be in the employ of the
Company, any Subsidiary or any Parent as a result of his election to terminate
the Employment Agreement pursuant to section 6(c)(ii) thereof as a result of a
Change in Control effected to an Adverse Person (as provided in Section
6(c)(ii)(A) of the Employment Agreement, (i) the Option shall become exercisable
at the date of termination with respect to all of the Shares (if any) for which
the Option is not exercisable at the date Executive ceases to be so employed,
and (ii) subject to the proviso in Paragraph 3(a), Executive shall have the
right to exercise the Option at any time prior to the date of termination of the
Option under Paragraph 2 of this Option Agreement with respect to all shares
with respect to which the Option was exercisable at the date of Executive's
termination (including the Options which become exercisable pursuant to the
provisions of clause (i) above) without regard to the proviso in Paragraph 3(a);
and to the extent unexercised at the end of this period, the Option shall
terminate.
(f) If Executive shall cease to be in the employ of the
Company, any Subsidiary or any Parent as a result of his election to terminate
the Employment Agreement pursuant to Section 6(c)(ii) thereof as a result of a
Change in Control effected to a person other than an Adverse Person (as provided
in Section 6(c)(ii)(B) of the Employment Agreement) (i) the Option shall become
exercisable at the date Executive shall cease to be so employed with respect to
all of the Shares (if any) for which the Option is scheduled to become
exercisable on the next scheduled Vesting Date provided in the Exercise Schedule
in the Certificate (without regard to the proviso in Paragraph 3(a)), and (ii)
subject to the proviso in Paragraph 3(a), Executive shall have the right to
exercise the Option at any time prior to the date of termination of the Option
under Paragraph 2 of this Option Agreement with respect to all shares with
respect to which the Option was exercisable at the date of Executive's
termination (including the Options which become exercisable pursuant to the
provisions of clause (i) above) without regard to the proviso in Paragraph 3(a);
and to the extent unexercised at the end of this period, the Option shall
terminate.
6. RESTRICTIONS ON PURCHASED SHARES.
None of the Purchased Shares shall be transferred (with or
without consideration), sold, offered for sale, assigned, pledged, hypothecated
or otherwise disposed
4
<PAGE> 8
of (each a "Transfer") and the Company shall not be required to register any
such Transfer and the Company may instruct its transfer agent not to register
any such Transfer, unless and until all of the following events shall have
occurred:
(a) the Purchased Shares are Transferred pursuant to and in
conformity with (i) (x) an effective registration statement filed with the
Securities and Exchange Commission (the "Commission") pursuant to the Securities
Act of 1933, as amended (the "Act"), or (y) an exemption from registration under
the Act, and (ii) the securities laws of any state of the United States; and
(b) Executive has, prior to the Transfer of such Purchased
Shares, and if requested by the Company, provided all relevant information to
Company's counsel so that upon Company's request, Company's counsel is able to,
and actually prepares and delivers to the Company a written opinion that the
proposed Transfer (i) (x) is pursuant to a registration statement which has been
filed with the Commission and is then effective, or (y) is exempt from
registration under the Act as then in effect, and the Rules and Regulations of
the Commission thereunder, and (ii) is either qualified or registered under any
applicable state securities laws, or exempt from such qualification or
registration. The Company shall bear all reasonable costs of preparing such
opinion.
Any attempted Transfer which is not in full compliance with
this Paragraph 6 shall be null and void ab initio, and of no force or effect.
7. ADJUSTMENTS UPON RECAPITALIZATION.
Subject to any required action by the stockholders of the
Company:
a) If the outstanding shares of the Common Stock shall be
subdivided into a greater number of shares of the Common Stock, or a dividend in
shares of Common Stock or other securities of the Company convertible into or
exchangeable for shares of the Common Stock (in which latter event the number of
shares of Common Stock issuable upon the conversion or exchange of such
securities shall be deemed to have been distributed) shall be paid in respect of
the shares of Common Stock, the Exercise Price in effect immediately prior to
such subdivision or at the record date of such dividend shall, simultaneously
with the effectiveness of such subdivision or immediately after the record date
of such dividend, be proportionately reduced, and conversely, if the outstanding
shares of Common Stock shall be combined into a smaller number of shares of
Common Stock, the Exercise Price in effect immediately prior to such combination
shall, simultaneously with the effectiveness of such combination, be
proportionately increased.
b) When any adjustment is required to be made in the Exercise
Price, the number of Shares purchasable upon the exercise of the Option shall be
adjusted to that number of Shares determined by (i) multiplying an amount equal
to the number of Shares purchasable on the exercise of the Option immediately
prior to such adjustment by the
5
<PAGE> 9
Exercise Price in effect imme diately prior to such adjustment, and then (ii)
dividing that product by the Exercise Price in effect immediately after such
adjustment.
c) To the extent that the foregoing adjustments relate to
stock or securities of the Company, such adjustments shall be made by the
Committee, and its determination shall be final, binding and conclusive.
(d) The provisions of this Paragraph 7 are in tended to be
exclusive, and Executive shall have no other rights upon the occurrence of any
of the events described in this Para graph 7.
(e) The grant of the Option shall not affect in any way the
right or power of the Company to make adjustments, reclassifications,
reorganizations or changes in its capital or business structure, or to merge,
consolidate, dissolve or liqui date, or to sell or transfer all or any part of
its business or assets.
8. INVESTMENT INTENT.
Executive represents and agrees that if he or she exercises
the Option in whole or in part and if at the time of such exercise the Purchased
Shares have not been registered under the Act, he or she will acquire the Shares
upon such exercise for the purpose of investment and not with a view to the
distribution of such Shares, and that upon each exercise of the Option he or she
will furnish to the Company a written statement to such effect.
9. LEGEND ON STOCK CERTIFICATES.
Executive agrees that all certificates representing the
Purchased Shares will be subject to such stop transfer orders and other
restrictions (if any) as the Company may deem advisable under the rules,
regulations and other requirements of the Commission, any stock exchange upon
which the Common Stock is then listed and any applicable federal or state
securities laws, and the Company may cause a legend or legends to be put on such
certificates to make appropriate reference to such restrictions.
10. NO RIGHTS AS SHAREHOLDER.
Executive shall have no rights as a stockholder with respect
to the Shares until the date of the issuance to Executive of a stock certificate
or stock certificates evidencing such Shares. Except as may be provided in
Paragraph 7 of this Option Agreement, no adjustment shall be made for dividends
(ordinary or extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the date
such stock certificate is issued.
6
<PAGE> 10
11. MODIFICATION.
The Board (or a committee thereof) may modify, extend or renew
the Option or accept the surrender of, and authorize the grant of a new option
in substitution for, the Option (to the extent not previously exercised).
12. WITHHOLDING.
(a) The Company shall be entitled to require as a condition of
delivery of any Purchased Shares upon exercise of any Option that the Executive
agree to remit, at the time of such delivery or at such later date as the
Company may determine, an amount sufficient to satisfy all federal, state and
local withholding tax requirements relating thereto, and Executive agrees to
take such other action required by the Company to satisfy such withholding
requirements.
(b) With the consent of the Committee, and in accordance with
any rules and procedures from time to time adopted by the Committee, Executive
may elect to satisfy his or her obligations under Paragraph 12(a) above by (i)
directing the Company to withhold a portion of the Shares otherwise deliverable
(or to tender back to the Company a portion of the Shares issued where the
Executive (a "Section 16(b) Recipient") is required to report the ownership of
the Shares pursuant to Section 16(a) of the Securities Exchange Act of 1934, as
amended, and has not made an election under Section 83(b) of the Code (a
"Withholding Right")); or (ii) tendering other shares of the Common Stock of the
Company which are already owned by Executive which in all cases have a fair
market value (as determined in accordance with the provisions of Paragraph 4(b)
hereof) on the date as of which the amount of tax to be withheld is determined
(the "Tax Date") equal to the amount of taxes to be paid by such method.
(c) To exercise a Withholding Right, the Executive must follow
the election procedures set forth below, together with such additional
procedures and conditions set forth in this Option Agreement or otherwise
adopted by the Committee:
(i) the Executive must deliver to the Company his or her
written notice of election (the "Election") and specify whether all or a stated
percentage of the applicable taxes will be paid in accordance with Paragraph
12(b) above and whether the amount so paid shall be made in accordance with the
"flat" withholding rates for supplemental wages or as determined in accordance
with Executive's form W-4 (or comparable state or local form);
(ii) unless disapproved by the Committee as provided in
Subsection (iii) below, the Election once made will be irrevocable; and
7
<PAGE> 11
(iii) no Election is valid unless the Committee has
the right and power, in its sole discretion, with or without cause or reason
therefor, to consent to the Election, to refuse to consent to the Election, or
to disapprove the Election; and if the Committee has not consented to the
Election on or prior to the Tax Date, the Election will be deemed approved.
(iv) If the Executive on the date of delivery of the
Election to the Company is a Section 16(b) Recipient, the following additional
provisions will apply:
(A) the Election cannot be made during the
six calendar month period commencing with the date of grant of the Withholding
Right (even if the Option to which such Withholding Right relates has been
granted prior to such date); and
(B) the Election (and the exercise of the
related Option) must be made either during the period beginning on the third
business day following the date of release for publication of the quarterly or
annual summary statements of sales and earnings of the Company and ending on the
12th business day following such date or at least six calendar months or more
prior to the Tax Date.
13. CHARACTER OF OPTION.
The Option is not intended to qualify as an "incentive stock
option" as that term is defined in Section 422 of the Code.
14. GENERAL PROVISIONS.
(a) FURTHER ASSURANCES. Executive shall promptly take all
actions and execute all documents requested by the Company which the Company
deems to be reasonably necessary to effectuate the terms and intent of this
Option Agreement.
(b) NOTICES. All notices, requests, demands and other
communications under this Option Agreement shall be in writing and shall be
given to the parties hereto as follows:
(i) If to the Company, to:
Aames Financial Corporation
3731 Wilshire Boulevard, 10th Floor
Los Angeles, California 90010
(ii) If to Executive, to the address set forth in
the records of the Company,
8
<PAGE> 12
or at such other address or addresses as may have been furnished by such party
in writing to the other party hereto. Any such notice, request, demand or other
communication shall be effective (i) if given by mail, 72 hours after such
communication is deposited in the mail by first-class certified mail, return
receipt requested, postage prepaid, addressed as aforesaid, or (ii) if given by
any other means, when delivered at the address specified in this subparagraph
(b).
(c) TRANSFER OF RIGHTS UNDER THIS OPTION AGREEMENT. The
Company may at any time transfer and assign its rights and delegate its
obligations under this Option Agreement to any other person, corporation, firm
or entity, including its officers, directors and stockholders, with or without
consideration.
(d) OPTION TRANSFERABLE. Executive may not sell, transfer,
assign or otherwise dispose of the Option except (i) by will or the laws of
descent and distribution, and (ii) without payment of consideration, to
immediate family members of the Option Holder or to trusts or partnerships for
such family members or persons who, at the time of such transfer, are current or
former officers of the Company, any Subsidiary or any Parent. (All persons or
entities described in clause (ii) are hereinafter referred to as "Permitted
Transferees"). All Permitted Transferees are subject to the same terms as the
Option Holder, including the proviso set forth in Paragraph 3(a) and the
provisions of this Paragraph 14(d). Stock Options may be exercised, during the
lifetime of the Option Holder only by the Option Holder, by his or her guardian
or legal representative or by a Permitted Transferee.
(e) SUCCESSORS AND ASSIGNS. Except to the extent specifically
limited by the terms and provisions of this Option Agreement, this Option
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors, assigns, heirs and personal representatives.
(f) GOVERNING LAW. THIS OPTION AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE
TO CONTRACTS MADE IN, AND TO BE PERFORMED WITHIN, THAT STATE.
(g) MISCELLANEOUS. Titles and captions contained in this
Option Agreement are inserted for convenience of reference only and do not
constitute a part of this Option Agreement for any other purpose. Except as
specifically provided herein, neither this Option Agreement nor any right
pursuant hereto or interest herein shall be assignable by any of the parties
hereto without the prior written consent of the other party hereto.
The Signature Page to this Option Agreement consists of the last page
of the Certificate.
9
<PAGE> 13
Exhibit "A"
NOTICE OF EXERCISE
(To be signed only upon exercise of the Option)
TO: Aames Financial Corporation
The undersigned, the holder of the enclosed Stock Option Agreement
(Non-Qualified Stock Option), hereby irrevocably elects to exercise the purchase
rights represented by the Option and to purchase thereunder _________ * shares
of Common Stock of Aames Financial Corporation (the "Company"), and herewith
encloses payment of $_______ and/or _________ shares of the Company's Common
Stock in full payment of the purchase price of such shares being purchased.
Dated: _______________
______________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Option)
______________________________
(Please Print Name)
______________________________
(Address)
* Insert here the number of shares called for on the face of the Option
(or, in the case of a partial exercise, the number of shares being exercised),
in either case without making any adjustment for additional Common Stock of the
Company, other securities or property which, pursuant to the adjustment
provisions of the Option, may be deliverable upon exercise.
10
<PAGE> 1
EXHIBIT 10.6
AAMES FINANCIAL CORPORATION
1995 STOCK INCENTIVE PLAN
ARTICLE 1
GENERAL PURPOSE OF PLAN
The name of this plan is the Aames Financial Corporation 1995 Stock
Incentive Plan (the "Plan"). The purpose of the Plan is to enable Aames
Financial Corporation, a Delaware corporation (the "Company"), and any Parent or
any Subsidiary to obtain and retain the services of the types of employees,
consultants, officers and Directors who will contribute to the Company's long
range success and to provide incentives which are linked directly to increases
in share value which will inure to the benefit of all shareholders of the
Company.
ARTICLE 2
DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set forth
below:
"Board " means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time, or any successor thereto.
"Committee" means a committee of the Board designated by the Board to
administer the Plan and composed of not less than the minimum number of
persons from time to time required both by the Rule and Section 162(m) of
the Code, each of whom is a Disinterested Person and an Outside Director.
"Company" means Aames Financial Corporation, a corporation organized
under the laws of the State of Delaware (or any successor corporation).
"Date of Grant" means the date on which the Committee adopts a
resolution expressly granting Stock Options to a Participant, or if a
different date is set forth in such resolution as the Date of Grant, then
such date as is set forth in such resolution.
"Director" means a member of the Board.
"Disability" means permanent and total disability as defined by the
Committee.
"Disinterested Person" shall have the meaning set forth in Rule
16b-3(c)(2)(i) under the Exchange Act, or any successor definition adopted
by the SEC.
"Election" shall have the meaning set forth in Section 10.3(d)(i) of
the Plan.
"Eligible Person" means an employee, officer, consultant or, subject
to the limitations set forth in Article 5 of the Plan, Director of the
Company, any Parent or any Subsidiary.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exercise Price" shall have the meaning set forth in Section 6.2(c) of
the Plan.
"Fair Market Value" per share at any date shall mean (i) if the Stock
is listed on an exchange or exchanges, or admitted for trading in a market
system which provides last sale data under Rule 11Aa3-1 of the General
Rules and Regulations of the SEC under the Exchange Act (a "Market
System"), the last reported sales price per share on the last business day
prior to such date on the principal exchange on which it is traded, or in a
Market System, as applicable, or if no sale was made on such day on such
principal exchange or in such a Market System, as applicable, the last
reported sales price per share on the most recent day prior to such date on
which a sale was reported on such exchange or such Market
1
<PAGE> 2
System, as applicable; or (ii) if the Stock is not then traded on an
exchange or in a Market System, the average of the closing bid and asked
prices per share for the Stock in the over-the-counter market as quoted on
NASDAQ on the day prior to such date; or (iii) if the Stock is not listed
on an exchange or quoted on NASDAQ, an amount determined in good faith by
the Committee.
"Liquidating Event" shall have the meaning set forth in Section 8.1(b)
of the Plan.
"Liquidity Event" means any Reorganization Event which the Committee
determines, in its sole and absolute discretion, to treat as such an event.
"Incentive Stock Option" means a Stock Option intended to qualify as
an "incentive stock option" as that term is defined in Section 422 of the
Code.
"Non-Statutory Stock Option" means a Stock Option intended to not
qualify as an Incentive Stock Option.
"Optionee" means a Participant who is granted a Stock Option pursuant
to the Plan.
"Outside Director" means a Director who is not (a) a current employee
of the Company (or any related entity), (b) a former employee of the
Company (or any related entity) who is receiving compensation for prior
services (other than benefits under a tax-qualified retirement plan), (c) a
former officer of the Company (or any related entity), or (d) a consultant
or person otherwise receiving compensation or other remuneration, either
directly or indirectly, in any capacity other than as a Director.
"Parent" means any present or future corporation which would be a
"parent corporation" as that term is defined in Section 424 of the Code.
"Participant" means any Eligible Person selected by the Committee,
pursuant to the Committee's authority set forth in Article 3 of the Plan,
to receive grants of Stock Options.
"Plan" means this Aames Financial Corporation 1995 Stock Incentive
Plan, as the same may be amended or supplemented from time to time.
"Reorganization Event" shall have the meaning set forth in Section
8.1(c) of the Plan.
"Retirement" means retirement from active employment with the Company
or any Parent or Subsidiary as defined by the Committee.
"Rule" means Rule 16b-3 and any future rules promulgated in
substitution therefor under the Exchange Act.
"SEC " means the Securities and Exchange Commission.
"Section 16(b) Person" means a person subject to Section 16(b) of the
Exchange Act.
"Stock" means the Common Stock, par value $.001 per share, of the
Company.
"Stock Option" means an option to purchase shares of Stock granted
pursuant to Article 6 of the Plan.
"Stock Option Agreement" shall have the meaning set forth in Section
6.2 of the Plan.
"Subsidiary" means any present or future corporation which would be a
"subsidiary corporation" as that term is defined in Section 424 of the
Code.
"Tax Date" shall have the meaning set forth in Section 10.3(d)(iii) of
the Plan.
"Ten Percent Shareholder" means a person who on the Date of Grant
owns, either directly or through attribution as provided in Section 424(d)
of the Code, Stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or of any Parent or
Subsidiary.
"Withholding Right" shall have the meaning set forth in Section
10.3(c) of the Plan.
2
<PAGE> 3
ARTICLE 3
ADMINISTRATION
SECTION 3.1 Committee. The Plan shall be administered by the Committee.
SECTION 3.2 Powers in General. The Committee shall have the power and
authority to grant Stock Options to Eligible Persons, pursuant to the terms of
the Plan.
SECTION 3.3 Specific Powers. In particular, the Committee shall have the
authority: (i) to construe and interpret the Plan and apply its provisions; (ii)
to promulgate, amend and rescind rules and regulations relating to the
administration of the Plan; (iii) to authorize any person to execute, on behalf
of the Company, any instrument required to carry out the purposes of the Plan;
(iv) to determine when Stock Options are to be granted under the Plan; (v) from
time to time to select, subject to the limitations set forth in this Plan, those
Eligible Persons to whom Stock Options shall be granted; (vi) to determine the
number of shares of Stock to be made subject to each Stock Option; (vii) to
prescribe the terms and conditions of each Stock Option, including, without
limitation, the Exercise Price and medium of payment and vesting provisions, to
determine whether the Stock Option is to be an Incentive Stock Option or a
Non-Statutory Stock Option and to specify the provisions of the Stock Option
Agreement relating to such Stock Option; (viii) to amend any outstanding Stock
Options for the purpose of modifying the time or manner of vesting, the Exercise
Price, thereunder or otherwise, subject to applicable legal restrictions and to
the consent of the other party to such agreement; (ix) to determine when a
consultant's relationship with the Company is sufficient to constitute the
equivalent of employment with the Company for purposes of the Plan; (x) to
determine the duration and purpose of leaves of absences which may be granted to
a Participant without constituting termination of his or her employment for
purposes of the Plan; and (xi) to make any and all other determinations which it
determines to be necessary or advisable for administration of the Plan.
SECTION 3.4 Decisions Final. All decisions made by the Committee pursuant
to the provisions of the Plan shall be final and binding on the Company and the
Participants.
SECTION 3.5 The Committee. The Board may, in its sole and absolute
discretion, from time to time delegate any or all of its duties and authority
with respect to the Plan to the Committee whose members are to be appointed by
and to serve at the pleasure of the Board. Once appointed, the Committee shall
continue to serve until otherwise directed by the Board. From time to time, the
Board may increase or decrease (to not less than the minimum number of persons
from time to time required by both the Rule and Section 162(m) of the Code) the
size of the Committee, add additional members to, remove members (with or
without cause) from, appoint new members in substitution therefor, and fill
vacancies, however caused, in the Committee. The Committee shall act pursuant to
a vote of the majority of its members or, in the case of a committee comprised
of only two members, the unanimous consent of its members, whether present or
not, or by the written consent of the majority of its members or, in the case of
a committee comprised of only two members, the unanimous written consent of its
members, and minutes shall be kept of all of its meetings and copies thereof
shall be provided to the Board. Subject to the limitations prescribed by the
Plan and the Board, the Committee may establish and follow such rules and
regulations for the conduct of its business as it may determine to be advisable.
ARTICLE 4
STOCK SUBJECT TO PLAN
SECTION 4.1 Stock Subject to the Plan. Subject to adjustment as provided
in Article 8, the total number of shares of Stock reserved and available for
issuance under the Plan shall be 700,000 shares.
SECTION 4.2 Unexercised Stock Options; Reacquired Shares. To the extent
that any Stock Options expire or are otherwise terminated without being
exercised, the shares of Stock underlying such Stock Options (and shares related
thereto) shall again be available for issuances in connection with future Stock
Options under the Plan. If and to the extent that the Company receives shares of
Stock in payment of all or a portion of
3
<PAGE> 4
the purchase price for any Stock, or in payment of any tax liabilities, the
receipt of such shares will not increase the number of shares available for
issuance under the Plan.
ARTICLE 5
ELIGIBILITY
Outside Directors who are designated as Eligible Persons by the Board of
Directors, Outside Directors who are not so designated as Eligible Persons (but
only to the extent provided by Article 7 hereof), officers, employees and
consultants of the Company, any Parent or any Subsidiary, shall be eligible to
be granted Stock Options hereunder, subject to limitations set forth in this
Plan; provided, however, that only officers and employees shall be eligible to
be granted Incentive Stock Options hereunder.
ARTICLE 6
STOCK OPTIONS
SECTION 6.1 General. Each Stock Option granted under the Plan shall be in
such form and under such terms and conditions as the Committee may from time to
time approve; provided, that such terms and conditions are not inconsistent with
the Plan. The provisions of Stock Option Agreements entered into under the Plan
need not be identical with respect to each Optionee. Stock Options granted under
the Plan may be either Incentive Stock Options or Non-Statutory Stock Options.
SECTION 6.2 Terms and Conditions of Stock Options. Each Stock Option
granted pursuant to the Plan shall be evidenced by a written option agreement
between the Company and the Optionee (the "Stock Option Agreement"), which shall
comply with and be subject to the following terms and conditions.
(a) Number of Shares. Each Stock Option Agreement shall state the
number of shares of Stock to which the Stock Option relates.
(b) Type of Option. Each Stock Option Agreement shall identify the
portion (if any) of the Stock Option which constitutes an Incentive Stock
Option.
(c) Exercise Price. Each Stock Option Agreement shall state the price
at which shares subject to the Stock Option may be purchased (the "Exercise
Price"), which, with respect to Incentive Stock Options, shall not be less
than 100% of the Fair Market Value of the shares of Stock on the Date of
Grant; provided, however, that in the case of an Incentive Stock Option
granted to a Ten Percent Shareholder, the Exercise Price shall not be less
than 110% of such Fair Market Value.
(d) Value of Shares. The Fair Market Value of the shares of Stock
(determined as of the Date of Grant) with respect to which Incentive Stock
Options are first exercisable by an Optionee under this Plan and all other
incentive option plans of the Company and any Parent or Subsidiary in any
calendar year shall not, for such year, in the aggregate, exceed $100,000;
provided, however, that if the aggregate Fair Market Value of such shares
exceeds $100,000, then the incremental portion in excess of $100,000 shall
be treated as Non-Statutory Stock Options (and not as Incentive Stock
Options); provided, further, that this Section 6.2(d) shall not affect the
right of the Committee to accelerate or otherwise alter the time of vesting
of any Stock Options granted as Incentive Stock Options, even if, as a
result thereof, some of such Stock Options cease being Incentive Stock
Options.
(e) Medium and Time of Payment. The Exercise Price shall be paid in
full, at the time of exercise, (i) in cash or cash equivalents, (ii) with
the approval of the Committee, in shares of Stock which have been held by
the Optionee for a period of at least six calendar months preceding the
date of surrender and which have a Fair Market Value equal to the Exercise
Price, (iii) in a combination of cash, cash equivalents and Stock, or (iv)
in any other form of legal consideration acceptable to the Committee, and
may be effected in whole or in part (x) with monies received from the
Company at the time of exercise as a compensatory cash payment or (y) with
monies borrowed from the Company in accordance with Section 10.5.
4
<PAGE> 5
(f) Term and Exercise of Stock Options. Stock Options shall vest or
become exercisable over the exercise period at the times the Committee may
determine, as reflected in the related Stock Option Agreements; provided,
however, that the Optionees shall have the right to exercise the Stock
Options at the rate of at least 20% per year over five years from the Date
of Grant of such Stock Options. The exercise period of any Stock Option
shall be determined by the Committee, but shall not exceed ten years from
the Date of Grant of the Stock Option. In the case of an Incentive Stock
Option granted to a Ten Percent Shareholder, the exercise period shall be
determined by the Committee, but shall not exceed five years from the Date
of Grant of the Stock Option. A Stock Option may be exercised, as to any or
all full shares of Stock as to which the Stock Option has become
exercisable, by giving written notice of such exercise to the Company.
ARTICLE 7
MANDATORY GRANTS TO OUTSIDE DIRECTORS
SECTION 7.1 Mandatory Grants to Outside Directors. Notwithstanding any
other provision of this Plan, the grant of Stock Options to Outside Directors
shall be subject to the following limitations of this Article 7.
(a) Upon the initial election or appointment of an Outside Director,
the Committee shall grant to such member, at the first meeting of the
Committee following the date of such election or appointment, a ten year
Non-Statutory Stock Option to purchase 10,000 shares of Stock.
(b) The Committee shall grant to each Outside Director, effective as
of each annual meeting of the Company's stockholders at the conclusion of
which the Outside Director still serves as a Director of the Company, a ten
year Non-Statutory Stock Option to purchase 1,500 shares of Stock.
(c) All Stock Options granted to Outside Directors under this Article
7 shall be exercisable at an Exercise Price equal to 100% of the Fair
Market Value of a share of Stock on the Date of Grant.
(d) All Stock Options granted to Outside Directors under this Article
7 will vest or become exercisable as follows: 33% of the Stock Options
(rounded up to the nearest whole share) shall vest on the first anniversary
of the Date of Grant of the Stock Options, and 33% of the Stock Options
(rounded up to the nearest whole share) shall vest on the second
anniversary of the Date of Grant of the Stock Options, and the remaining
Stock Options shall vest on the third anniversary of the Date of Grant of
the Stock Options.
(e) Unless otherwise provided in the Plan, all provisions regarding
the terms of Non-Statutory Stock Options, other than those pertaining to
the Date of Grant, the number of shares covered by such grant, term and
Exercise Price shall be applicable to the Stock Options granted to Outside
Directors under this Article 7.
SECTION 7.2 Prohibition of Other Grants to Outside
Directors. Notwithstanding any other provisions in this Plan, the mandatory
grants described in this Article 7 shall constitute the only grants under the
Plan permitted to be made to Outside Directors unless such persons are
designated Eligible Persons by the Board of Directors.
SECTION 7.3 Prohibition Against Certain Amendments. Notwithstanding any
other provisions of this Plan, the provisions of this Article 7 shall not be
amended more than once every six months, other than to comport with changes in
the Code, the Employee Retirement Income Security Act, or the rules thereunder.
5
<PAGE> 6
ARTICLE 8
ADJUSTMENTS
SECTION 8.1 Effect of Certain Changes.
(a) Stock Dividends, Splits, etc. If there is any change in the number of
outstanding shares of Stock through the declaration of Stock dividends or
through a recapitalization resulting in Stock splits, or combinations or
exchanges of the outstanding shares, (i) the number of shares of Stock available
for Stock Options, (ii) the number of shares covered by outstanding Stock
Options, (iii) the number of shares set forth under Section 10.1(a) and (iv) the
Exercise Price of any Stock Option, in effect prior to such change, shall be
proportionately adjusted by the Committee to reflect any increase or decrease in
the number of issued shares of Stock; provided, however, that any fractional
shares resulting from the adjustment shall be eliminated.
(b) Liquidating Event. In the event of the proposed dissolution or
liquidation of the Company, or in the event of any corporate separation or
division, including, but not limited to, a split-up, split-off or spin-off
(each, a "Liquidating Event"), the Committee may provide that the holder of any
Stock Options then exercisable shall have the right to exercise such Stock
Options (at the price provided in the agreement evidencing the Stock Options)
subsequent to the Liquidating Event, and for the balance of its term, solely for
the kind and amount of shares of Stock and other securities, property, cash or
any combination thereof receivable upon such Liquidating Event by a holder of
the number of shares of Stock for or with respect to which such Stock Options
might have been exercised immediately prior to such Liquidating Event; or the
Committee may provide, in the alternative, that each Stock Option granted under
the Plan shall terminate as of a date to be fixed by the Board; provided,
however, that not less than 30 days written notice of the date so fixed shall be
given to each Stock Option holder and if such notice is given, each Stock Option
holder shall have the right, during the period of 30 days preceding such
termination, to exercise his or her Stock Options as to all or any part of the
shares of Stock covered thereby, without regard to any installment or vesting
provisions in his or her Stock Options agreement, on the condition, however,
that the Liquidating Event actually occurs; and if the Liquidating Event
actually occurs, such exercise shall be deemed effective (and, if applicable,
the Stock Option holder shall be deemed a shareholder with respect to the Stock
Options exercised) immediately preceding the occurrence of the Liquidating Event
(or the date of record for shareholders entitled to share in such Liquidating
Event, if a record date is set).
(c) Merger or Consolidation. In the case of any capital reorganization, any
reclassification of the Stock (other than a change in par value or
recapitalization described in Section 8.1(a) of the Plan), or the consolidation
of the Company with, or a sale of substantially all of the assets of the Company
to (which sale is followed by a liquidation or dissolution of the Company), or
merger of the Company with another person (a "Reorganization Event"), the
Committee may provide in the Stock Option Agreement, or if not provided in the
Stock Option Agreement, may determine, in its sole and absolute discretion, to
accelerate the vesting of outstanding Stock Options (a "Liquidity Event") in
which case the Company shall deliver to the Stock Option holders at least 15
days prior to such Reorganization Event (or at least 15 days prior to the date
of record for shareholders entitled to share in the securities or property
distributed in the Reorganization Event, if a record date is set) a notice which
shall (i) indicate whether the Reorganization Event shall be considered a
Liquidity Event and (ii) advise the Stock Option holder of his or her rights
pursuant to the agreement evidencing such Stock Options. If the Reorganization
Event is determined to be a Liquidity Event, (i) the Surviving Corporation may,
but shall not be obligated to, tender stock options or stock appreciation rights
to the Stock Option holder with respect to the Surviving Corporation, and such
new options and rights shall contain terms and provisions that substantially
preserve the rights and benefits of the applicable Stock Options then
outstanding under the Plan, or (ii) in the event that no stock options or stock
appreciation rights have been tendered by the Surviving Corporation pursuant to
the terms of item (i) immediately above, the Stock Option holder shall have the
right, exercisable during a 10 day period ending on the fifth day prior to the
Reorganization Event (or ending on the fifth day prior to the date of record for
shareholders entitled to share in the securities or property distributed in the
Reorganization Event, if a record date is set), to exercise his or her rights as
to all or any part of the shares of Stock covered thereby, without regard to any
installment or vesting provisions in his or her Stock Options agreement, on the
condition, however, that the Reorganization
6
<PAGE> 7
Event is actually effected; and if the Reorganization Event is actually
effected, such exercise shall be deemed effective (and, if applicable, the Stock
Option holder shall be deemed a shareholder with respect to the Stock Options
exercised) immediately preceding the effective time of the Reorganization Event
(or on the date of record for shareholders entitled to share in the securities
or property distributed in the Reorganization Event, if a record date is set).
If the Reorganization Event is not determined to be a Liquidity Event, the Stock
Option holder shall thereafter be entitled upon exercise of the Stock Options to
purchase the kind and number of shares of stock or other securities or property
of the Surviving Corporation receivable upon such event by a holder of the
number of shares of the Stock which the Stock Options would have entitled the
Stock Option holder to purchase from the Company if the Reorganization Event had
not occurred, and in any such case, appropriate adjustment shall be made in the
application of the provisions set forth in this Plan with respect to the Stock
Option holder's rights and interests thereafter, to the end that the provisions
set forth in the agreement applicable to such Stock Options (including the
specified changes and other adjustments to the Exercise Price) shall thereafter
be applicable in relation to any shares or other property thereafter purchasable
upon exercise of the Stock Options.
(d) Par Value Changes. In the event of a change in the Stock of the Company
as presently constituted which is limited to a change of all of its authorized
shares with par value, into the same number of shares without par value, or any
subsequent change in the par value, the shares resulting from any such change
shall be "Stock" within the meaning of the Plan.
SECTION 8.2 Decision of Committee Final. To the extent that the foregoing
adjustments relate to stock or securities of the Company, such adjustments shall
be made by the Committee, whose determination in that respect shall be final,
binding and conclusive; provided, however, that each Incentive Stock Option
granted pursuant to the Plan shall not be adjusted without the prior consent of
the holder thereof in a manner that causes such Stock Option to fail to continue
to qualify as an Incentive Stock Option.
SECTION 8.3 No Other Rights. Except as expressly provided in this Article
8, no Stock Option holder shall have any rights by reason of any subdivision or
consolidation of shares of Stock or the payment of any dividend or any other
increase or decrease in the number of shares of Stock of any class or by reason
of any Liquidating Event, merger, or consolidation of assets or stock of another
corporation, or any other issue by the Company of shares of stock of any class,
or securities convertible into shares of stock of any class; and except as
provided in this Article 8, none of the foregoing events shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Stock subject to Stock Options. The grant of Stock Options pursuant
to the Plan shall not affect in any way the right or power of the Company to
make adjustments, reclassification, reorganizations or changes of its capital or
business structures or to merge or to consolidate or to dissolve, liquidate or
sell, or transfer all or part of its business or assets.
SECTION 8.4 No Rights as Shareholder. Except as specifically provided in
this Article 8, a Stock Option holder or a transferee of Stock Options shall
have no rights as a shareholder with respect to any shares covered by the Stock
Options until the date of the issuance of a Stock certificate to him or her for
such shares, and no adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distributions
of other rights for which the record date is prior to the date such Stock
certificate is issued, except as provided in Section 8.1.
ARTICLE 9
AMENDMENT AND TERMINATION
The Board may amend, alter or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would impair the rights of a
Participant under any Stock Options theretofore granted without such
Participant's consent, or which without the approval of the shareholders would:
(a) except as provided in Article 8, materially increase the total
number of shares of Stock reserved for the purposes of the Plan;
7
<PAGE> 8
(b) materially increase the benefits accruing to Participants or
Eligible Persons under the Plan; or
(c) materially modify the requirements for eligibility under the Plan.
The Committee may amend the terms of any award theretofore granted,
prospectively or retroactively, but, subject to Article 3, no such amendment
shall impair the rights of any holder without his or her consent.
ARTICLE 10
GENERAL PROVISIONS
SECTION 10.1 General Restrictions.
(a) Limitation on Granting of Stock Options. Subject to adjustment as
provided in Article 8, no Participant shall be granted Stock Options with
respect to 500,000 shares of Stock.
(b) No View to Distribute. The Committee may require each person acquiring
shares of Stock pursuant to the Plan to represent to and agree with the Company
in writing that such person is acquiring the shares without a view towards
distribution thereof. The certificates for such shares may include any legend
which the Committee deems appropriate to reflect any restrictions on transfer.
(c) Legends. All certificates for shares of Stock delivered under the Plan
shall be subject to such stop transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations and other requirements
of the SEC, any stock exchange upon which the Stock is then listed and any
applicable federal or state securities laws, and the Committee may cause a
legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
SECTION 10.2 Other Compensation Arrangements. Nothing contained in this
Plan shall prevent the Board from adopting other or additional compensation
arrangements, subject to shareholder approval if such approval is required; and
such arrangements may be either generally applicable or applicable only in
specific cases.
SECTION 10.3 Disqualifying Dispositions; Withholding Taxes.
(a) Disqualifying Disposition. The Stock Option Agreements shall require
Optionees who make a "disposition" (as defined in the Code) of all or any of the
Stock acquired through the exercise of Stock Options within two years from the
date of grant of the Stock Option, or within one year after the issuance of
Stock relating thereto, to immediately advise the Company in writing as to the
occurrence of the sale and the price realized upon the sale of such Stock; and
each Optionee shall agree that he or she shall maintain all such Stock in his or
her name so long as he or she maintains beneficial ownership of such Stock.
(b) Withholding Required. Each Participant shall, no later than the date as
of which the value derived from Stock Options first becomes includable in the
gross income of the Participant for income tax purposes, pay to the Company, or
make arrangements satisfactory to the Committee regarding payment of, any
federal, state or local taxes of any kind required by law to be withheld with
respect to the Stock Options or their exercise. The obligations of the Company
under the Plan shall be conditioned upon such payment or arrangements and the
Participant shall, to the extent permitted by law, have the right to request
that the Company deduct any such taxes from any payment of any kind otherwise
due to the Participant.
(c) Withholding Right. The Committee may, in its discretion, grant to a
Stock Option holder the right (a "Withholding Right") to elect to make such
payment by irrevocably requiring the Company to withhold from shares issuable
upon exercise of the Stock Options that number of full shares of Stock having a
Fair Market Value on the Tax Date (as defined below) equal to the amount (or
portion of the amount) required to be withheld. The Withholding Right may be
granted with respect to all or any portion of the Stock Options.
8
<PAGE> 9
(d) Exercise of Withholding Right. To exercise a Withholding Right, the
Stock Option holder must follow the election procedures set forth below,
together with such additional procedures and conditions as may be set forth in
the related Stock Option Agreement or otherwise adopted by the Committee.
(i) The Stock Option holder must deliver to the Company his or her
written notice of election (the "Election") to have the Withholding Right
apply to all (or a designated portion) of his or her Stock Options prior to
the date of exercise of the Right to which it relates.
(ii) Unless disapproved by the Committee as provided in Subsection
(iii) below, the Election once made will be irrevocable.
(iii) No Election is valid unless the Committee consents to the
Election; the Committee has the right and power, in its sole discretion,
with or without cause or reason therefor, to consent to the Election, to
refuse to consent to the Election, or to disapprove the Election; and if
the Committee has not consented to the Election on or prior to the date
that the amount of tax to be withheld is, under applicable federal income
tax laws, fixed and determined by the Company (the "Tax Date"), the
Election will be deemed approved.
(iv) If the Stock Option holder on the date of delivery of the
Election to the Company is a Section 16(b) Person, the following additional
provisions will apply:
(A) the Election cannot be made during the six calendar month
period commencing with the date of the grant of the Withholding Right
(even if the Stock Options to which such Withholding Right relates have
been granted prior to such date); provided, that this Subsection (A) is
not applicable to any Stock Option holder at any time subsequent to the
death, Disability or Retirement of the Stock Option holder;
(B) the Election (and the exercise of the related Stock Option) can
only be made during the Window Period; and
(C) notwithstanding any other provision of this Section 10.3, no
Section 16(b) Person shall have the right to make any Election unless
the Company has been subject to the reporting requirements of Section
13(a) of the Exchange Act for at least a year prior to the transaction
and has filed all reports and statements required to be filed pursuant
to that Section for that year.
(e) Effect. If the Committee consents to an Election of a Withholding
Right:
(i) upon the exercise of the Stock Options (or any portion thereof) to
which the Withholding Right relates, the Company will withhold from the
shares otherwise issuable that number of full shares of Stock having an
actual Fair Market Value equal to the amount (or portion of the amount, as
applicable) required to be withheld under applicable federal, state and/or
local income tax laws as a result of the exercise; and
(ii) if the Stock Option holder is then a Section 16(b) Person who has
made an Election, the related Stock Options may not be exercised, nor may
any shares of Stock issued pursuant thereto be sold, exchanged or otherwise
transferred, unless such exercise, or such transaction, complies with an
exemption from Section 16(b) provided under Rule 16b-3.
(f) Cash Reimbursements. The Company may make cash bonus payments to
Non-Statutory Stock Option holders to reimburse such Non-Statutory Stock Option
holders for all or part of federal and state taxes payable with respect to the
exercise of Non-Statutory Stock Options.
SECTION 10.4 Indemnification. In addition to such other rights of
indemnification as they may have as Directors or Outside Directors, and to the
extent allowed by applicable law, the Committee shall be indemnified by the
Company against the reasonable expenses, including attorney's fees, actually
incurred in connection with any action, suit or proceeding or in connection with
any appeal therein, to which they or any one of them may be party by reason of
any action taken or failure to act under or in connection with the Plan or any
Stock Option granted under the Plan, and against all amounts paid by them in
settlement thereof (provided that the settlement has been approved by the
Company, which approval shall not be unreasonably
9
<PAGE> 10
withheld) or paid by them in satisfaction of a judgment in any such action, suit
or proceeding, except in relation to matters as to which it shall be adjudged in
such action, suit or proceeding that such Committee did not act in good faith
and in a manner which such person reasonably believed to be in the best
interests of the Company, and in the case of a criminal proceeding, had no
reason to believe that the conduct complained of was unlawful; provided,
however, that within 60 days after institution of any such action, suit or
proceeding, such Committee shall, in writing, offer the Company the opportunity
at its own expense to handle and defend such action, suit or proceeding.
SECTION 10.5 Loans. The Company may make loans to Optionees (other than
Directors who are not also employees or officers of the Company or any Parent or
any Subsidiary) as the Committee, in its discretion, may determine in connection
with the exercise of outstanding Stock Options granted under the Plan. Such
loans shall (i) be evidenced by promissory notes entered into by the holders in
favor of the Company; (ii) be subject to the terms and conditions set forth in
this Section 10.5 and such other terms and conditions, not inconsistent with the
Plan, as the Committee shall determine; and (iii) bear interest, if any, at such
rate as the Committee shall determine. In no event may the principal amount of
any such loan exceed the Exercise Price less the par value, if any, of the
shares of Stock covered by the Stock Option, or portion thereof, exercised by
the Optionee. The initial term of the loan, the schedule of payments of
principal and interest under the loan, the extent to which the loan is to be
with or without recourse against the holder with respect to principal and
applicable interest and the conditions upon which the loan will become payable
in the event of the holder's termination of employment shall be determined by
the Committee; provided, however, that the term of the loan, including
extensions, shall not exceed 10 years. Unless the Committee determines
otherwise, when a loan shall have been made, shares of Stock having a Fair
Market Value at least equal to the principal amount of the loan shall be pledged
by the holder to the Company as security for payment of the unpaid balance of
the loan and such pledge shall be evidenced by a security agreement, the terms
of which shall be determined by the Committee, in its discretion; provided,
however, that each loan shall comply with all applicable laws, regulations and
rules of the Board of Governors of the Federal Reserve System and any other
governmental agency having jurisdiction.
SECTION 10.6 Non-Transferability of Stock Options. Each Stock Option
Agreement shall provide that the Stock Options granted under the Plan shall not
be transferable otherwise than by will or by the laws of descent and
distribution, and the Stock Options may be exercised, during the lifetime of the
Stock Option holder, only by the Stock Option holder or by his or her guardian
or legal representative.
SECTION 10.7 Regulatory Matters. Each Stock Option Agreement shall provide
that no shares shall be purchased or sold thereunder unless and until (i) any
then applicable requirements of state or federal laws and regulatory agencies
shall have been fully complied with to the satisfaction of the Company and its
counsel; and (ii) if required to do so by the Company, the Optionee shall have
executed and delivered to the Company a letter of investment intent in such form
and containing such provisions as the Committee may require.
SECTION 10.8 Recapitalizations. Each Stock Option Agreement and Stock
Purchase Agreement shall contain provisions required to reflect the provisions
of Article 8.
SECTION 10.9 Delivery. Upon exercise of Stock Options granted under this
Plan, the Company shall issue Stock or pay any amounts due within a reasonable
period of time thereafter. Subject to any statutory obligations the Company may
otherwise have, for purposes of this Plan, 30 days shall be considered a
reasonable period of time.
SECTION 10.10 Rule 16b-3. With respect to persons subject to Section 16 of
the Exchange Act, transactions under this Plan are intended to comply with all
applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To
the extent any provision of the Plan or action by the Committee fails to so
comply, it shall be deemed null and void to the extent permitted by law and
deemed advisable by the Committee.
SECTION 10.11 Other Provisions. The Stock Option Agreements authorized
under the Plan may contain such other provisions not inconsistent with this
Plan, including, without limitation, restrictions upon the exercise of the Stock
Options, as the Committee may deem advisable.
10
<PAGE> 11
ARTICLE 11
EFFECTIVE DATE OF PLAN
The Plan shall become effective on July 24, 1995, subject to approval by
the Company's stockholders, which approval must be obtained within one year from
the date the Plan is adopted by the Board.
ARTICLE 12
TERM OF PLAN
No Stock Options shall be granted pursuant to the Plan on or after July 23,
2005 but Stock Options theretofore granted may extend beyond that date.
ARTICLE 13
INFORMATION TO STOCK OPTION HOLDERS
The Company will cause a report to be sent to each Stock Option holder not
later than 120 days after the end of each fiscal year. Such report shall consist
of the financial statements of the Company for such fiscal year and shall
include such other information as is provided by the Company to its
shareholders.
11
<PAGE> 1
EXHIBIT 10.14
June 28, 1996
National Westminster Bank Plc
175 Water Street, 20th Floor
New York, New York 10038
Attention: Mortgage and Asset-Backed
Securities Group
Telecopy: (212) 602-5726
Confirmation: (212) 602-5705
Re: NOTICE OF EXTENSION OF AGREEMENT NO. 5
Ladies and Gentlemen:
1. Pursuant to the Interim Loan and Security Agreement, dated as of
April 21, 1995 (as amended from time to time, the "AGREEMENT"), between you and
Aames Capital Corporation (the "BORROWER"), the undersigned Borrower hereby
requests:
(i) that the Funding Period be extended to the period from June 28,
1996 to but excluding January 1, 1997 (the "FUNDING TERMINATION DATE");
(ii) that the Maximum Funding Amount, for the Funding Period as so
extended, be $150,000,000;
(iii) that, for purposes of calculating interest on Advances, the
amount to be added to Adjusted LIBOR remain 0.875%;
(iv) that the Designated Trusts in respect of the Advances to be made
during the Funding Period as so extended be Aames Mortgage Trust 1996-C (the
"1996-C TRUST") and Aames Mortgage Trust 1996-D (the "1996-D TRUST");
<PAGE> 2
(v) that the 1996-C Trust close not later than September 30, 1996 and
that the 1996-D Trust close not later than the Funding Termination Date; and
(vi) that, notwithstanding Section 2(d) of the Agreement, not less
than 90% of Advances (by principal balance plus accrued interest) made in
respect of the 1996-C Trust shall mature and shall be due on the related
Maturity Date therefor (as provided for in Section 2(d) of the Agreement) and
the Maturity Date for the portion of such Advances not repaid on such date shall
be the Maturity Date for the 1996-D Trust.
The undersigned Borrower agrees that, upon acceptance by the Lender of this
Notice of Extension of Agreement No. 5 by signing and dating the same below, the
Borrower will be bound by the terms of the Agreement as amended by this Notice
of Extension of Agreement No. 4 in the manner set forth in this paragraph 1.
2. The undersigned Borrower hereby certifies that the following
statements are true and correct on the date hereof and shall be true and correct
on the date of the extension of the Funding Termination Date requested herein,
before and after giving effect thereto:
A. Each of the representations and warranties contained in the
Agreement, the Custodial Agreement and the Guarantee are true and correct
in all material respects; provided that the reference to December 31, 1994
in Section 5(a)(iv) of the Agreement shall be deemed to be a reference to
March 31, 1996; and
B. No Default or Event of Default has occurred and is
continuing.
3. Unless otherwise defined in this Notice of Extension of
Agreement No. 5, terms defined in the Agreement shall have their defined
<PAGE> 3
meanings when used herein.
4. Except as expressly modified by this Notice of Extension of
Agreement No. 5, the Agreement shall be in full force and effect.
5. This Notice of Extension of Agreement No. 5 and the rights and
obligations of the parties hereunder and under the Agreement as amended hereby
shall be governed by, and construed and interpreted in accordance with, the
laws of the State of New York.
6. The undersigned Borrower is delivering herewith to the Lender an
opinion of counsel to the Borrower, substantially in the form of Exhibit B-2 to
the Agreement.
IN WITNESS WHEREOF, the undersigned Borrower has caused this Notice of
Extension of Agreement No. 5 to be executed and delivered by its proper and duly
authorized officers as of the day and year first above written.
AAMES CAPITAL CORPORATION
By: /s/ Mark E. Elbaum
----------------------------------
Mark E. Elbaum
Senior Vice President - Finance
AGREED TO AND ACCEPTED:
NATIONAL WESTMINSTER BANK PLC,
NEW YORK BRANCH AND NASSAU BRANCH
By: /s/ Joseph N. Walsh III
----------------------------
Name: Joseph N. Walsh III
Title: Managing Director
Date: June 28, 1996
-------------------------
<PAGE> 1
EXHIBIT 10.15
AMENDMENT NO. 4
INTERIM LOAN AND SECURITY AGREEMENT
Amendment No. 4 (the "Amendment"), dated and effective as of June 28, 1996,
between National Westminster Bank Plc, New York Branch, a Branch duly licensed
under the laws of the State of New York or a public limited company organized
under the laws of the United Kingdom (the "Lender"), and Aames Capital
Corporation (the "Borrower").
PRELIMINARY STATEMENT
The Lender and the Borrower entered into that certain Interim Loan and
Security Agreement, dated as of April 21, 1995, as amended by Amendment No. 1
thereto, dated as of January 5, 1996, Amendment No. 2 thereto, dated as of
February 16, 1996, Amendment No. 3 thereto, dated as of May 24, 1996, Notice of
Extension No. 1, dated as of June 15, 1995, Notice of Extension No. 3, dated as
of December 14, 1995, Notice of Extension No. 4, dated as of June 14, 1996 and
Notice of Extension No. 5, dated as of June 28, 1996 (as so amended, the
"Agreement"), pursuant to which the Lender agreed to provide to the Borrower
interim funding from time to time to finance the origination or acquisition of
mortgage loans. Notice of Extension No. 5 extended the "Funding Period" and
established January 1, 1997 as the "Funding Termination Date".
The Lender and the Borrower desire to amend the Agreement in the manner
described below and for good and valuable consideration do hereby agree as
follows:
Section 1. MAXIMUM FUNDING AMOUNT.
The "Maximum Funding Amount", for purposes of the Agreement, shall
hereinafter be equal to $150,000,000.
Section 2. OTHER PROVISIONS OF AGREEMENT TO REMAIN IN EFFECT. Except as
otherwise specifically provided in this Amendment, all provisions of the
<PAGE> 2
Agreement shall remain in full force and effect and unmodified hereby.
Section 3. GOVERNING LAW. This Amendment shall be construed in accordance
with the law of the State of New York and the obligations, rights and remedies
of the parties hereunder shall be determined in accordance with the laws of the
State of New York.
Section 4. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which counterparts shall be deemed to be an original, and
such counterparts shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the Lender and the Borrower have caused their names to
be signed hereto by their respective officers thereunto duly authorized as of
the date first above written.
NATIONAL WESTMINSTER BANK PLC,
NEW YORK BRANCH AND NASSAU BRANCH
By: /s/ Bhavana Desai
----------------------------
Name: Bhavana Desai
Title: Vice President
AAMES CAPITAL CORPORATION
By: /s/ Gregory J. Witherspoon
----------------------------
Name: Gregory J. Witherspoon
Title: Executive Vice President -
Finance
<PAGE> 1
EXHIBIT 10.18
FIRST AMENDMENT TO
MORTGAGE LOAN WAREHOUSING AGREEMENT
THIS FIRST AMENDMENT TO MORTGAGE LOAN WAREHOUSING AGREEMENT (the
"Amendment") is made and dated as of the 20th day of February, 1996, by and
among NATIONSBANK OF TEXAS, N.A., a national banking association
("NationsBank"); FIRST INTERSTATE BANK OF CALIFORNIA, a banking corporation
organized under the laws of the State of California; THE BANK OF NEW YORK, a New
York banking corporation; FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a
national banking association; GUARANTY FEDERAL BANK FSB, a federal savings bank;
NBD BANK, a Michigan banking corporation; SANWA BANK CALIFORNIA, a California
banking corporation (each of the above individually a "Lender" and collectively
the "Lenders"); NationsBank, as administrative agent for the Lenders (in such
capacity, the "Administrative Agent"); AAMES CAPITAL CORPORATION, a California
corporation (the "Company"); and AAMES FINANCIAL CORPORATION, a Delaware
corporation and the sole shareholder of the Company (the "Guarantor").
RECITALS
A. Pursuant to that certain Mortgage Loan Warehousing Agreement dated
as of December 27, 1995, by and among the Administrative Agent, the Lenders, the
Company and the Guarantor (as amended from time to time, the "Warehousing
Agreement"), the Lenders agreed to extend credit to the Company on the terms and
subject to the conditions set forth therein. All capitalized terms not otherwise
defined herein shall have the meanings given to such terms in the Warehousing
Agreement.
B. The Company, the Guarantor and the Lenders desire to amend certain
provisions of the Warehousing Agreement as more particularly described below.
<PAGE> 2
C. As a condition precedent to the making of Loans under the
Warehousing Agreement, the Guarantor was required to execute and deliver that
certain Guaranty dated as of December 27, 1995 in favor of the Lenders (the
"Guaranty"). The Guarantor has agreed to reaffirm the Guaranty in connection
with this Amendment.
NOW, THEREFORE, in consideration of the foregoing Recitals and for
other valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. ADDITIONAL PERMITTED SECURED DEBT. In order to reflect the agreement of
the Lenders to allow the Company to incur additional Permitted Secured Debt in
the form of a secured letter of credit to be issued by NationsBank, EXHIBIT O to
the Warehousing Agreement is hereby replaced with a new EXHIBIT O in the form of
that attached to this Amendment.
2. REAFFIRMATION OF SECURITY AGREEMENT. The Company hereby affirms and
agrees that (a) the execution and delivery by the Company of and the performance
of its obligations under this Amendment shall not in any way amend, impair,
invalidate or otherwise affect any of the obligations of the Company or the
rights of the Secured Parties under the Security Agreement or any other document
or instrument made or given by the Company in connection therewith, (b) the term
"Obligations" as used in the Security Agreement includes, without limitation,
the Obligations of the Company under the Warehousing Agreement and this
Amendment and (c) the Security Agreement remains in full force and effect in
that such agreement constitutes a continuing first priority security interest in
and lien upon the Collateral.
<PAGE> 3
3. REAFFIRMATION OF GUARANTY. Guarantor hereby acknowledges the terms and
conditions agreed to by the Company, the Administrative Agent and the Lenders
under this Amendment, and affirms and agrees that (a) the execution and delivery
by the Company and the performance of its obligations under this Amendment shall
not in any way amend, impair, invalidate or otherwise affect any of the
obligations of Guarantor or the rights of the Administrative Agent or the
Lenders under the Guaranty or any other document or instrument made or given by
Guarantor in connection therewith, (b) the term "Obligations" as used in the
Guaranty includes, without limitation, the Obligations of the Company under this
Amendment, and (c) the Guaranty remains in full force and effect.
4. EFFECTIVE DATE. This Amendment shall be effective as of the date that
the Administrative Agent receives duly executed signature pages for this
Amendment from each party hereto.
5. REPRESENTATIONS AND WARRANTIES.
(a) The Company hereby represents and warrants to the Administrative
Agent and the Lenders as follows:
(1) The Company has the corporate power and authority and the legal
right to execute, deliver and perform this Amendment and the other documents and
instruments executed in connection herewith (collectively, the "Amendment
Documents") and has taken all necessary corporate action to authorize the
execution, delivery and performance of the Amendment Documents. The Amendment
Documents have been duly executed and delivered on behalf of the Company and
constitute legal, valid and binding obligations of the Company, enforceable
against the Company in accordance with their respective terms.
(2) At and as of the date of execution hereof and at and as of the
effective date of this Amendment and both prior to and after giving effect
<PAGE> 4
to the Amendment Documents: (i) the representations and warranties of the
Company contained in the Warehousing Agreement and the other Loan Documents are
accurate and complete in all respects, and (ii) there has not occurred an Event
of Default or Potential Default.
(b) Guarantor hereby represents and warrants to the Administrative
Agent and the Lenders as follows:
(1) Guarantor has the corporate power and authority and legal
right to execute, deliver and perform the terms of this Amendment and has
reviewed and approved this Amendment. This Amendment has been duly executed and
delivered on behalf of Guarantor and constitutes the legal, valid and binding
obligation of Guarantor, enforceable against Guarantor in accordance with its
terms.
(2) At and as of the date of execution hereof and at and as of
the effective date of this Amendment and both prior to and after giving effect
to the Amendment Documents: (i) the representations and warranties of
Guarantor contained in the Warehousing Agreement and the Guaranty are accurate
and complete in all respects, and (ii) there has not occurred any default under
the Guaranty.
6. NO OTHER AMENDMENT. Except as expressly amended hereby, the Loan
Documents shall remain in full force and effect as written and amended to date.
7. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
agreement.
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first above written.
AAMES CAPITAL CORPORATION,
a California corporation
By /s/ Michelle R. Rose
--------------------------------
Name Michelle R. Rose
Title Assistant Vice President - Finance
AAMES FINANCIAL CORPORATION,
a Delaware corporation, as Parent and Guarantor
By /s/ Michelle R. Rose
--------------------------------
Name Michelle R. Rose
Title Assistant Vice President - Finance
NATIONSBANK OF TEXAS, N.A., a national banking
association, as the Administrative Agent and a
Lender
By /s/ Elizabeth S. Kurilecz
-------------------------------
Name Elizabeth S. Kurilecz
Title Senior Vice President
FIRST INTERSTATE BANK OF CALIFORNIA, a banking
corporation organized under the laws of the State
of California, as a Lender
By /s/ M. P. McMahon
---------------------------------
Name M. P. McMahon
Title Vice President
<PAGE> 6
THE BANK OF NEW YORK, a New York banking
corporation, as a Lender
By /s/ Cynthia E. Crites
Name Cynthia E. Crites
Title Assistant Vice President
FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a
national banking association, as a Lender
By /s/ Carolyn Estridge
Name Carolyn Estridge
Title Senior Vice President
GUARANTY FEDERAL BANK FSB,
as a Lender
By /s/ Abbie Y. Tidmore
Name Abbie Y. Tidmore
Title Vice President
NBD BANK, as a Lender
By /s/ Richard J. Johnsen
Name Richard J. Johnsen
Title Vice President
SANWA BANK CALIFORNIA, as a Lender
By /s/ John Linder
Name John Linder
Title Vice President
<PAGE> 7
EXHIBIT O
TO AGREEMENT
PERMITTED SECURED DEBT
1. Other warehouse lines of credit secured by Mortgage Loans owned by the
Company provided that an Intercreditor And Joint Shipment Agreement has been
executed and delivered to the Administrative Agent by the lenders under such
other warehouse lines of credit; provided, however, that an Intercreditor and
Joint Shipment Agreement shall not be required from National Westminster Bank
PLC in connection with Indebtedness described in item 2 below.
2. Indebtedness secured by Mortgage Loans owned by the Company pursuant to
that certain Interim Loan and Security Agreement dated as of April 21, 1995
between the Company and National Westminster Bank PLC, New York Branch and
Nassua Branch.
3. Indebtedness secured by the Company's residual interest certificates in
REMIC trusts in an aggregate amount not to exceed $50,000,000.00.
4. Secured Indebtedness in an amount not to exceed $2,500,000.00 under that
certain Application and Agreement for Standby Letter of Credit between the
Company and NationsBank of Texas, N.A.
<PAGE> 1
EXHIBIT 10.19
SECOND AMENDMENT TO
MORTGAGE LOAN WAREHOUSING AGREEMENT AND RELATED DOCUMENTS
THIS SECOND AMENDMENT TO MORTGAGE LOAN WAREHOUSING AGREEMENT
AND RELATED DOCUMENTS (the "Amendment") is made and dated as of the 28th day of
June, 1996, by and among NATIONSBANK OF TEXAS, N.A., a national banking
association ("NationsBank"); THE BANK OF NEW YORK, a New York banking
corporation; FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking
association; GUARANTY FEDERAL BANK FSB, a federal savings bank; THE FIRST
NATIONAL BANK OF CHICAGO, a national banking association ("FNBC"); SANWA BANK
CALIFORNIA, a California banking corporation (each of the above individually a
"Lender" and collectively the "Lenders"); NationsBank, as administrative agent
for the Lenders (in such capacity, the "Administrative Agent"); AAMES CAPITAL
CORPORATION, a California corporation (the "Company"); and AAMES FINANCIAL
CORPORATION, a Delaware corporation and the sole shareholder of the Company (the
"Guarantor"), and NBD BANK, a Michigan banking corporation, as the "Exiting
Lender".
RECITALS
A. Pursuant to that certain Mortgage Loan Warehousing
Agreement dated as of December 27, 1995, by and among the Administrative Agent,
the Lenders (other than FNBC), the Exiting Lender, the Company and the Guarantor
(as amended from time to time, the "Warehousing Agreement"), the Lenders
(including the Exiting Lender but excluding FNBC) agreed to extend credit to the
Company on the terms and subject to the conditions set forth therein. All
capitalized terms not otherwise defined herein shall have the meanings given to
such terms in the Warehousing Agreement.
B. The Company, the Guarantor and the Lenders desire to amend
certain provisions of the Warehousing Agreement as more particularly described
below.
NOW, THEREFORE, in consideration of the foregoing Recitals and
for other valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. Assignment from Exiting Lender to FNBC. The parties hereto
acknowledge and agree that on and as of the Effective Date (as defined in
Paragraph 14 below) of this Amendment the Exiting Lender shall sell and assign
to FNBC, and FNBC shall purchase and take from the Exiting Lender, all
Obligations held by and owed to the Exiting Lender under the Warehousing
Agreement. On and after the effective date of this Amendment: (a) FNBC shall
have the rights and obligations of a Lender under this Agreement and the other
Loan Documents, (b) FNBC shall assume the Maximum Commitment previously held by
the Exiting Lender consistent with the terms of the Commitment Schedule attached
hereto as Schedule I, and (c) the Exiting Lender
1
<PAGE> 2
shall cease to be a "Lender" under the Warehousing Agreement, and shall have no
rights or corresponding obligations under the Warehousing Agreement and the
other Loan Documents.
2. Addition of Letter of Credit Facility. To reflect the agreement of
NationsBank and the other Lenders to permit NationsBank to issue a letter of
credit for the account of the Company under the Warehousing Agreement and of the
Lenders to participate therein to the extent of their respective Percentage
Shares:
(a) A new Paragraph 1A is hereby added to the Warehousing
Agreement to read in its entirety as follows:
"1A. Letter of Credit Facility.
1A(a) Issuance of Letter of Credit. On the terms and
subject to the conditions set forth herein, on the L/C Issuance Date NationsBank
shall issue its letter of credit (as amended, extended and replaced from time to
time, the "Letter of Credit") for the account of the Company in favor of Pacific
Thrift and Loan Company, a California corporation, in an amount equal to the
least of:
(1) $2,500,000.00;
(2) the Aggregate Credit Limit minus the
aggregate dollar amount of Loans outstanding (including all Loans to be
funded on the L/C Issuance Date but excluding all Loans which will be
repaid by Loans requested to be funded on the L/C Issuance Date); and
(3) the Collateral Value of the Warehouse
Borrowing Base minus the aggregate dollar amount of all Tranche A Loans
and Tranche C Loans outstanding (including all such Loans to be funded
on the L/C Issuance Date but excluding all such Loans which will be
repaid by Loans requested to be funded on the L/C Issuance Date);
provided, however, that if the Collateral Value of the Warehouse
Borrowing Base is insufficient to support the issuance of the Letter of
Credit pursuant to this subparagraph (3) on the L/C Issuance Date, the
Company may deliver to NationsBank Supplemental Cash Collateral in such
amount which when added to the Collateral Value of the Warehouse
Borrowing Base will be sufficient to support such issuance.
As a condition to the issuance by NationsBank of the Letter of Credit, the
Company shall execute and deliver to NationsBank not less than two (2) Business
Days prior to the date of requested issuance of the Letter of Credit a duly
executed Letter of Credit Application, accompanied by all other documents,
instruments and agreements as NationsBank may require (the "L/C Documents"). The
Letter of Credit shall have a stated expiration date no later than the current
regularly scheduled Maturity Date and may not be extended to a date beyond such
date without the prior written consent of one hundred percent (100%) of the
Lenders.
2
<PAGE> 3
1A(b) Purchase of Participation Interests. Upon the
issuance of the Letter of Credit, the Lenders shall be automatically deemed to
have purchased an undivided participation interest therein and in all rights and
obligations relating thereto pro rata in accordance with their respective
Percentage Shares.
1A(c) Repayment of L/C Drawings. Any drawing under
the Letter of Credit (a "L/C Drawing") shall be payable in full by the Company:
(1) prior to the occurrence of an Event of Default and acceleration of the
Obligations, on the date NationsBank notifies the Administrative Agent and the
Company (which notice may be telephonic) of such L/C Drawing if such notice is
given prior to 11:30 a.m. (Los Angeles time), or on the next succeeding Business
Day if given after 11:30 a.m. (Los Angeles time), or (2) following the
occurrence of an Event of Default and acceleration of the Obligations, without
demand upon or notice to the Company, on the date of such L/C Drawing. Any L/C
Drawing not paid on the date when due shall accrue interest as provided in
Paragraph 4(k) below, from and including such date to but not including the date
paid in full. The Lenders hereby absolutely and unconditionally (including,
without limitation, following the occurrence of an Event of Default) agree to
purchase and sell among themselves the dollar amount of any L/C Drawing which is
not paid on the date when due by the Company, so that each unrepaid L/C Drawing
shall be held and participated in by the Lenders pro rata in accordance with
their respective Percentage Shares.
1A(d) Absolute Obligation to Repay. The Company's
obligation to repay L/C Drawings shall be absolute, irrevocable and
unconditional under any and all circumstances whatsoever and irrespective of any
set-off, counterclaim or defense to payment which the Company may have or have
had, against NationsBank, the Administrative Agent, any Lender or any other
Person, including, without limitation, any set-off, counterclaim or defense
based upon or arising out of:
(1) Any lack of validity or enforceability
of this Agreement or any of the other Loan Documents;
(2) Any amendment or waiver of or any
consent to departure from the terms of the Letter of Credit;
(3) The existence of any claim, setoff,
defense or other right which the Company or any other Person may have
at any time against any beneficiary or any transferee of the Letter of
Credit (or any Person for whom any such beneficiary or any such
transferee may be acting);
(4) Any allegation that any demand,
statement or any other document presented under the Letter of Credit is
forged, fraudulent, invalid or insufficient in any respect, or that any
statement therein is untrue or inaccurate in any respect whatsoever or
that variations in punctuation, capitalization, spelling or format were
contained in the drafts or any statements presented in connection with
any L/C Drawing;
(5) Any payment by NationsBank under the
Letter of Credit against presentation of a draft or certificate that
does not strictly comply with the terms of
3
<PAGE> 4
the Letter of Credit, or any payment made by NationsBank under the
Letter of Credit to any Person purporting to be a trustee in
bankruptcy, debtor-in-possession, assignee for the benefit of
creditors, liquidator, receiver or other representative of or successor
to any beneficiary or any transferee of the Letter of Credit, including
any arising in connection with any insolvency proceeding;
(6) Any exchange, release or non-perfection
of any Collateral; or
(7) Any other circumstance or happening
whatsoever, whether or not similar to any of the foregoing, including
any other circumstance that might otherwise constitute a defense
available to, or a discharge of the Company.
Nothing contained herein shall constitute a waiver of any rights of the Company
against NationsBank arising out of the gross negligence or willful misconduct of
NationsBank in connection with any Letter of Credit issued hereunder.
1A(e) Uniform Customs and Practice. The Uniform
Customs and Practice for Documentary Credits as published by the International
Chamber of Commerce most recently at the time of issuance of the Letter of
Credit shall (unless otherwise expressly provided in the Letter of Credit) apply
to the Letter of Credit.
1A(f) Relationship to Letter of Credit Application.
In the event of any inconsistency between the terms and provisions of this
Agreement and the terms and provisions of the Letter of Credit Application, the
terms and provisions of this Agreement shall supersede and govern."
(b) Paragraph 1(a) of the Warehousing Agreement is
hereby amended to insert the phrase "and minus the L/C Available Amount and any
unrepaid L/C Drawings as of such date" immediately preceding the semi-colon in
subparagraph (1) thereof and immediately preceding the period in subparagraph
(2) thereof and to insert the phrase "plus any Supplemental Cash Collateral held
by NationsBank" immediately following the reference to "Collateral Value of the
Warehouse Borrowing Base" in subparagraph (2) thereof.
(c) Paragraph 2(a) of the Warehousing Agreement is
hereby amended to insert the phrase "and minus the L/C Available Amount and any
unrepaid L/C Drawings as of such date" immediately preceding the period in
subparagraph (3) thereof.
(d) Paragraph 3(a) of the Warehousing Agreement is
hereby amended to insert the phrase "and minus the L/C Available Amount and any
unrepaid L/C Drawings as of such date" immediately preceding the semi-colon in
subparagraph (2) thereof and immediately preceding the period in subparagraph
(3) thereof and to insert the phrase "plus any Supplemental Cash Collateral held
by NationsBank" immediately following the reference to "Collateral Value of the
Warehouse Borrowing Base" in subparagraph (2) thereof.
4
<PAGE> 5
(e) Paragraph 5(d) of the Warehousing Agreement is
hereby amended: (1) to insert the phrase ", plus the L/C Available Amount and
any unrepaid L/C Drawings as of such date" immediately preceding the period in
subparagraph (1) thereof and immediately following the reference to "outstanding
Tranche A Loans and Tranche C Loans" in the fourth line of subparagraph (3)
thereof, (2) to insert the phrase "plus any Supplemental Cash Collateral held by
NationsBank" immediately following the reference to "Collateral Value of the
Warehouse Borrowing Base" in subparagraphs (1) and (3) thereof, and (3) to
insert the phrase "or to NationsBank Supplemental Cash Collateral" following the
reference to "Collateral Value" in the second to last line of Paragraph 5(d)(4).
(f) Paragraph 5(g) of the Warehousing Agreement is
hereby amended as follows:
(1) Subparagraph (2) is hereby amended to
read in its entirety as follows:
"(2) Then, to the Lenders, pro rata in accordance
with their respective Percentage Shares, until all outstanding
Loans and unrepaid L/C Drawings and interest accrued thereon
and all other Obligations have been paid in full, said amounts
to be allocated first to interest and then, but only after all
accrued interest has been paid in full, to principal of Loans
and unrepaid L/C Drawings;"
(2) A new subparagraph (3) is hereby added
to read in its entirety as follows:
"(3) Then, and if but only if the Letter of Credit
remains outstanding, to the Administrative Agent to hold as
cash collateral for the obligation of the Company to reimburse
any future L/C Drawings as the same may occur; and"
(3) Current subparagraph (3) is hereby
redesignated as subparagraph "(4)".
(g) The language immediately following subparagraph
(3) of the "THEN" clause set forth in Paragraph 11 of the Warehousing
Agreement is hereby amended and restated to read in its entirety as follows:
"each Lender's obligation to make Loans hereunder shall terminate
and/or the principal balance of outstanding Loans and interest accrued
thereon and the aggregate contingent liability of the Company to
reimburse NationsBank and the Lenders for future L/C Drawings with
respect to the Letter of Credit and all other Obligations shall become
immediately due and payable, without demand upon or presentment to the
Company, which are hereby expressly waived by the Company."
(h) The definition of "Loan Documents" appearing in
Paragraph 15 of the Warehousing Agreement is hereby amended to insert the phrase
", the Letter of Credit, the
5
<PAGE> 6
Letter of Credit Application, the L/C Documents" following the reference to "the
Guaranty" in the second line thereof.
(i) Paragraph 15 of the Warehousing Agreement is
hereby amended to insert the following new definitions, in correct alphabetical
order, to read in their entirety as follows:
"`L/C Available Amount' shall mean at any date the dollar
amount available for drawing under the Letter of Credit at such date.
"`L/C Documents' shall have the meaning given such term in
Paragraph 1A(a) above.
"`L/C Drawing' shall have the meaning given such term in
Paragraph 1A(c) above.
"`L/C Fee Percentage' shall mean that percentage determined
based upon the Leverage Ratio as reported in the most recent financial
statements delivered by the Parent prior to the date of calculation of
the monthly letter of credit facility fee payable pursuant to Paragraph
4(j)(5) above in accordance with the following schedule:
<TABLE>
<CAPTION>
Leverage Ratio L/C Fee Percentage
-------------- ------------------
<S> <C>
Less than or equal to 1.75:1.00 0.875%
Greater than 1.75:1.00 but less
than or equal to 3.50:1.00 1.00%
Greater than 3.50:1.00 1.20%
</TABLE>
"`L/C Issuance Date' shall mean the date upon which
NationsBank shall issue the Letter of Credit.
"`Letter of Credit' shall have the meaning given such term in
Paragraph 1A(a) above.
"`Letter of Credit Application' shall mean the standard form
written application for the issuance of a letter of credit utilized by
NationsBank in connection with the issuance of letters of credit in the
nature of the Letter of Credit.
"`Supplemental Cash Collateral' shall mean cash delivered to
and held by NationsBank for the pro rata, pari passu benefit of the
Lenders as additional collateral
6
<PAGE> 7
security for the Obligations and in which NationsBank for the pro rata
pari passu benefit of the Lenders has been granted and has a first
priority, perfected security interest."
(j) Paragraph 4(j) of the Warehousing Agreement is
hereby amended to insert new subparagraphs (5) and (6) to read in their entirety
as follows:
"(5) To the Administrative Agent for the account of each
Lender, a monthly non-refundable letter of credit facility fee, in
advance (with the initial such fee to be payable on the L/C Issuance
Date and to be pro rated if the L/C Issuance Date is not the first
Business Day of a month), equal to the product of: (i) one-twelfth
(1/12) of the L/C Facility Fee Percentage multiplied by (ii) such
Lender's Percentage Share of the L/C Available Amount on the date of
calculation of the monthly letter of credit facility fee, such monthly
amount to be billed and payable in accordance with the provisions of
Paragraph 4(b) above.
"(6) To NationsBank, in advance, an annual, non-refundable
letter of credit issuance fee in an amount equal to 0.125% of the L/C
Available Amount on the applicable payment date, with the initial such
fee to be payable on the L/C Issuance Date (for the period from such
date to the then currently scheduled Maturity Date) and such annual fee
to be payable on each anniversary of such currently scheduled Maturity
Date thereafter.
(k) Paragraph 5(a) of the Warehousing Agreement is
hereby amended to insert the phrase "and L/C Drawings" immediately following
"Tranche C Loans" at the end of the first sentence thereof.
3. Commitment Schedule. As of the Effective Date (as defined in
Paragraph 14 below), the Commitment Schedule shall be as set forth on Schedule I
attached hereto.
4. Increase in Advance Rate. To reflect the agreement of the Lenders to
increase the advance rate, subparagraph (a) of the definition of "Collateral
Value of the Warehouse Borrowing Base" set forth in Paragraph 15 of the
Warehousing Agreement is hereby amended to delete the percentage "ninety five
percent (95%)" appearing in line two thereof and to replace the same with the
percentage "ninety-eight percent (98%)".
5. Modifications to Eligibility Requirements. To reflect the agreement
of the Lenders to modify certain eligibility requirements for Mortgage Loans to
be included in the Warehouse Borrowing Base, the definition of "Eligible
Mortgage Loan" set forth in Paragraph 15 of the Warehousing Agreement is hereby
amended as follows:
(a) Subparagraph (d) is hereby amended to delete the reference
to "thirty (30) days" set forth therein and to replace the same with the phrase
"sixty (60) days" and to add the following proviso immediately preceding the
period at the end thereof: "provided, however, that in the event any payment
under said Mortgage Loan is more than thirty (30) days past due the payment due
date set forth in the underlying promissory note, the Collateral Value of said
7
<PAGE> 8
Mortgage Loan when added to the Collateral Value of all other Mortgage Loans
included in the Warehouse Borrowing Base which are similarly delinquent does not
exceed twenty percent (20%) of the Aggregate Credit Limit".
(b) Subparagraph (n) is hereby amended to delete the first
reference to "five (5) Business Days" appearing therein and to replace the same
with the phrase "seven (7) Business Days" and to delete the references to
"thirty percent (30%)" and "twenty percent (20%)" appearing therein and to
replace the same with the phrases "forty percent (40%)" and "thirty percent
(30%)" respectively.
(c) Subparagraph (l) is hereby amended to delete the reference
to "fifteen percent (15%)" appearing therein and to replace the same with the
phrase "fifty percent (50%)".
6. Waiver Authority of Administrative Agent. To reflect the agreement
of the Lenders to permit the Administrative Agent to exercise limited discretion
in determining whether to waive requirements for an "Eligible Mortgage Loan,"
the definition of "Eligible Mortgage Loan" is hereby amended to incorporate the
following language following subparagraphs (a) through (u) thereof:
"In determining the eligibility of any Mortgage Loan any of the
requirements for eligibility (other than the requirements contained in
subparagraphs (h), (i) and (m) above) may be waived by the
Administrative Agent; provided, however, that any Mortgage Loan which
is accepted by the Administrative Agent pursuant to such a waiver (an
"Eligible Waiver Mortgage Loan") shall cease to be an Eligible Mortgage
Loan upon notice of the retraction of such waiver given to the Company
by the Administrative Agent unless at the time of giving such notice
the deficiency which originally required such waiver has been cured;
and, provided further, that the Collateral Value of such Mortgage Loan
when added to the Collateral Value of all other Mortgage Loans included
in the Warehouse Borrowing Base as Eligible Mortgage Loans pursuant to
a waiver hereunder shall not exceed $5,000,000.00 at any date."
7. Leverage Test. To reflect the agreement of the Lenders to permit the
Parent to exclude certain subordinated Indebtedness of the Parent from the
calculation of the Leverage Ratio and to otherwise modify the calculation
thereof, effective as of the Effective Date but retroactive to February 26,
1996:
(a) The definition of "Average Total Liabilities" set forth in
Paragraph 15 of the Warehousing Agreement is amended to insert the following
proviso immediately prior to the period at the end of such definition:
"provided, however, that for purposes of this definition of `Average Total
Liabilities,' the terms "Indebtedness" and "liabilities" shall in no event
include Subordinated Debt so long as there does not exist a default with respect
thereto".
(b) The definition of "Adjusted Net Worth" set forth in
Paragraph 15 of the Warehousing Agreement is amended to delete the reference to
"thirty-five percent" in subparagraph (c) thereof and to replace the same with
the phrase "seventy-five percent (75%)"
8
<PAGE> 9
and to delete the reference to "two and one-half times" in subparagraph (d)
thereof and to replace the same with the phrase "four times".
8. Additional Permitted Secured Debt. To reflect the agreement of the
Lenders to allow the Company to incur additional Permitted Secured Debt in the
form of arbitrage lines of credit and subordinated debt, Exhibit O to the
Warehousing Agreement is hereby amended and replaced with a new Exhibit O in the
form of that attached hereto as "Replacement Exhibit O".
9. Funding Account. To reflect the agreement of the Lenders and the
Company to maintain the Funding Account at Sanwa Bank California, the definition
of "Funding Account" set forth in Paragraph 15 of the Warehousing Agreement is
hereby amended to read in its entirety as follows:
"`Funding Account' shall mean Account No. 049918969 maintained
in the Company's name with Sanwa Bank California.
10. Financial Reporting Requirements. The parties hereby acknowledge
and agree that all financial reports of the Company and the Parent required to
be delivered under Paragraphs 9(a)(2) and 9(a)(3) of the Warehousing Agreement
may be certified by the Chief Financial Officer of the Company and the Parent,
respectively, or by any officer of the Company or the Parent authorized by such
Chief Financial Officer to certify such financial reports .
11. Supplement to Schedule II. To reflect the addition of FNBC as a
Lender on Schedule II to the Warehousing Agreement, Schedule II to the
Warehousing Agreement shall be deemed amended to add thereto the notice and
other information concerning FNBC, as set forth on the Supplement to Schedule II
attached hereto.
12. Reaffirmation of Security Agreement. The Company hereby affirms and
agrees that (a) the execution and delivery by the Company of and the performance
of its obligations under this Amendment shall not in any way amend, impair,
invalidate or otherwise affect any of the obligations of the Company or the
rights of the Secured Parties under the Security Agreement or any other document
or instrument made or given by the Company in connection therewith, (b) the term
"Obligations" as used in the Security Agreement includes, without limitation,
the Obligations of the Company under the Warehousing Agreement and this
Amendment and (c) the Security Agreement remains in full force and effect in
that such agreement constitutes a continuing first priority security interest in
and lien upon the Collateral.
13. Reaffirmation of Guaranty. Guarantor hereby acknowledges the terms
and conditions agreed to by the Company, the Administrative Agent and the
Lenders under this Amendment, and affirms and agrees that (a) the execution and
delivery by the Company and the performance of its obligations under this
Amendment shall not in any way amend, impair, invalidate or otherwise affect any
of the obligations of Guarantor or the rights of the Administrative Agent or the
Lenders under the Guaranty or any other document or instrument made or given by
Guarantor in connection therewith, (b) the term "Obligations" as used in the
9
<PAGE> 10
Guaranty includes, without limitation, the Obligations of the Company under this
Amendment, and (c) the Guaranty remains in full force and effect.
14. Effective Date. This Amendment shall be effective as of the date
(the "Effective Date") that the Administrative Agent receives (a) duly executed
signature pages for this Amendment from each party hereto, and (b) duly executed
signature pages from each party to that certain First Amendment to Security and
Custodial Agreement in the form of that attached hereto as Exhibit 1.
15. Modification of Related Documents. All reports and other forms
utilized in connection with the day-to-day operations of the credit facility
evidenced by the Warehousing Agreement shall be deemed modified consistent with
the provisions of this Amendment.
16. Representations and Warranties.
(a) The Company hereby represents and warrants to the
Administrative Agent and the Lenders as follows:
(1) The Company has the corporate power and authority
and the legal right to execute, deliver and perform this Amendment and the other
documents and instruments executed in connection herewith (collectively, the
"Amendment Documents") and has taken all necessary corporate action to authorize
the execution, delivery and performance of the Amendment Documents. The
Amendment Documents have been duly executed and delivered on behalf of the
Company and constitute legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective terms.
(2) At and as of the date of execution hereof and at
and as of the Effective Date and both prior to and after giving effect to the
Amendment Documents: (i) the representations and warranties of the Company
contained in the Warehousing Agreement and the other Loan Documents are accurate
and complete in all respects, and (ii) there has not occurred an Event of
Default or Potential Default.
(b) Guarantor hereby represents and warrants to the
Administrative Agent and the Lenders as follows:
(1) Guarantor has the corporate power and authority
and legal right to execute, deliver and perform the terms of this Amendment and
has reviewed and approved this Amendment. This Amendment has been duly executed
and delivered on behalf of Guarantor and constitutes the legal, valid and
binding obligation of Guarantor, enforceable against Guarantor in accordance
with its terms.
(2) At and as of the date of execution hereof and at
and as of the Effective Date and both prior to and after giving effect to the
Amendment Documents: (i) the representations and warranties of Guarantor
contained in the Warehousing Agreement and the
10
<PAGE> 11
Guaranty are accurate and complete in all respects, and (ii) there has not
occurred any default under the Guaranty.
17. No Other Amendment. Except as expressly amended hereby, the Loan
Documents shall remain in full force and effect as written and amended to date.
18. Counterparts. This Amendment may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first above written.
AAMES CAPITAL CORPORATION,
a California corporation
By /s/ Gregory J. Witherspoon
-------------------------------------------
Name Gregory J. Witherspoon
-------------------------------------------
Title Executive Vice President-Finance
-------------------------------------------
AAMES FINANCIAL CORPORATION,
a Delaware corporation, as Parent and Guarantor
By /s/ Gregory J. Witherspoon
-------------------------------------------
Name Gregory J. Witherspoon
-------------------------------------------
Title Executive Vice President-Finance
-------------------------------------------
NATIONSBANK OF TEXAS, N.A., a national
banking association, as the Administrative Agent
and a Lender
By /s/ Elizabeth Kurilecz
-------------------------------------------
Name Elizabeth Kurilecz
-------------------------------------------
Title Senior Vice President
-------------------------------------------
11
<PAGE> 12
THE BANK OF NEW YORK, a New York banking
corporation, as a Lender
By /s/ Marci H. Shapiro
_______________________________________________
Name Marci H. Shapiro
_____________________________________________
Title Senior Vice President
____________________________________________
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA, a national banking association, as a
Lender
By /s/ Carolyn Eskridge
_______________________________________________
Name Carolyn Eskridge
_____________________________________________
Title Senior Vice President
____________________________________________
THE FIRST NATIONAL BANK OF CHICAGO,
as a Lender
By /s/ Anne H. Chudacoff
_______________________________________________
Name Anne H. Chudacoff
_____________________________________________
Title Vice President
____________________________________________
GUARANTY FEDERAL BANK FSB,
as a Lender
By /s/ Abbie Y. Tidmore
_______________________________________________
Name Abbie Y. Tidmore
_____________________________________________
Title Vice President
____________________________________________
12
<PAGE> 13
SANWA BANK CALIFORNIA, as a Lender
By /s/ John C. Hyche
__________________________________
Name John C. Hyche
________________________________
Title Vice President
_______________________________
NBD Bank, as the Exiting Lender
By /s/ Anne H. Chudacoff
__________________________________
Name Anne H. Chudacoff
________________________________
Title Vice President
_______________________________
13
<PAGE> 14
Schedule I
Commitment Schedule
(as of June 28, 1996)
<TABLE>
<CAPTION>
Lender Maximum Commitment Percentage Share
- ------ ------------------ ----------------
<S> <C> <C>
NationsBank of Texas, N.A. $ 22,000,000 22.00
The Bank of New York $ 15,600,000 15.60
First Union National Bank of $ 15,600,000 15.60
North Carolina
Guaranty Federal Bank $ 15,600,000 15.60
The First National Bank of Chicago $ 15,600,000 15.60
Sanwa Bank California $ 15,600,000 15.60
------------ -----
Facility Total $100,000,000 100%
</TABLE>
14
<PAGE> 15
Supplement to Schedule II
THE FIRST NATIONAL BANK OF CHICAGO
Primary Contact Denise Lee Backup Contact Kathy Lansky
Telephone 312-732-6455 Telephone 312-732-6982
Fax 312-732-3852 Fax 312-732-3852
Wiring Instructions: The First National Bank of Chicago
Chicago, Illinois
ABA # 071000013
Credit: Incoming Clearing DES #247-165
Re: Aames Corporation
Attn: Denise Lee
15
<PAGE> 16
REPLACEMENT EXHIBIT O
PERMITTED SECURED DEBT
1. Other warehouse lines of credit secured by Mortgage Loans owned by the
Company provided that an Intercreditor And Joint Shipment Agreement has
been executed and delivered to the Administrative Agent by the lenders
under such other warehouse lines of credit; provided, however, that an
Intercreditor and Joint Shipment Agreement shall not be required from
National Westminster Bank PLC in connection with Indebtedness described in
item 2 below.
2. Indebtedness secured by Mortgage Loans owned by the Company pursuant to
that certain Interim Loan and Security Agreement dated as of April 21,
1995 between the Company and National Westminster Bank PLC, New York
Branch and Nassua Branch.
3. Indebtedness secured by the Company's residual interest certificates in
REMIC trusts in an aggregate amount not to exceed $50,000,000.00.
4. Indebtedness under arbitrage lines of credit secured by readily marketable
investment securities purchased with the proceeds of advances thereunder
in an aggregate amount not to exceed $60,000,000.
16
<PAGE> 1
EXHIBIT 11.1
AAMES FINANCIAL CORPORATION
Earnings Per Share
For the years ended June 30, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Weighted average shares outstanding................. 8,707,500 8,935,500 13,502,000
Common equivalent shares:
Options and warrants.............................. 43,500 85,500 594,000
Convertible subordinated notes.................... -- -- 1,369,000
--------------- --------------- --------------
8,751,000 9,021,000 15,465,000
=============== =============== ==============
Net income.......................................... $ 5,299,000 $ 10,034,000 $ 31,048,000
Adjustment to add back interest on
Convertible subordinated notes.................... -- -- 1,223,000
--------------- --------------- --------------
Adjusted net income................................. 5,299,000 10,034,000 32,271,000
=============== =============== ==============
Fully diluted earnings per share.................... $ 0.61 $ 1.11 $ 2.09
=============== =============== ==============
</TABLE>
<PAGE> 1
EXHIBIT 21.0
LIST OF SUBSIDIARIES OF AAMES FINANCIAL CORPORATION AS OF AUGUST 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
NAME OF SUBSIDIARY STATE OF ADDITIONAL NAMES
INCORPORATION UNDER WHICH IT CONDUCTS BUSINESS
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Aames Capital Corporation California None
- ------------------------------------------------------------------------------------------------------------------
Aames Capital Corporation of Minnesota Minnesota Aames Home Loan / Aames Capital Corporation
- ------------------------------------------------------------------------------------------------------------------
Aames Funding Corporation California Aames Home Loan / Aames Capital Corporation
- ------------------------------------------------------------------------------------------------------------------
Aames Home Loan California None
- ------------------------------------------------------------------------------------------------------------------
Aames Home Loan of America California Aames Home Loan
- ------------------------------------------------------------------------------------------------------------------
Aames Home Loan of Colorado, Inc. Colorado Aames Home Loan
- ------------------------------------------------------------------------------------------------------------------
Aames Home Loan of Nevada, Inc. Nevada Aames Home Loan
- ------------------------------------------------------------------------------------------------------------------
One Stop Mortgage, Inc. Wyoming One Stop Funding
- ------------------------------------------------------------------------------------------------------------------
Oxford Aviation Corporation, Inc. California None
- ------------------------------------------------------------------------------------------------------------------
Oxford Escrow Co. California None
- ------------------------------------------------------------------------------------------------------------------
Rossmore Financial, Inc. California None
- ------------------------------------------------------------------------------------------------------------------
Serrano Insurance Services Nevada None
- ------------------------------------------------------------------------------------------------------------------
Windsor Management Co. California None
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Forms S-3 and S-8
(Nos. 33-44606, 33-93826, 33-95120 and 333-01312) of Aames Financial
Corporation of our report dated August 12, 1996 appearing in this Form 10-K.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Los Angeles, California
September 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 18,216,000
<SECURITIES> 0
<RECEIVABLES> 203,315,000
<ALLOWANCES> 473,000
<INVENTORY> 67,327,000
<CURRENT-ASSETS> 288,385,000
<PP&E> 8,749,000
<DEPRECIATION> 3,137,000
<TOTAL-ASSETS> 293,997,000
<CURRENT-LIABILITIES> 45,827,000
<BONDS> 138,000,000
0
0
<COMMON> 14,000
<OTHER-SE> 110,156,000
<TOTAL-LIABILITY-AND-EQUITY> 293,997,000
<SALES> 128,408,000
<TOTAL-REVENUES> 128,408,000
<CGS> 18,362,000
<TOTAL-COSTS> 18,362,000
<OTHER-EXPENSES> 47,167,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,348,000
<INCOME-PRETAX> 53,531,000
<INCOME-TAX> 22,483,000
<INCOME-CONTINUING> 31,048,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,048,000
<EPS-PRIMARY> 2.20
<EPS-DILUTED> 2.09
</TABLE>
