<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) August 28, 1996
AAMES FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 0-19604 95-4340340
(State or other jurisdiction (Commission (I.R.S. employer
of incorporation) file number) identification number)
3731 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90010
(Address of principal executive offices) (Zip code)
(213) 351-6100
(Registrant's telephone number, including area code)
<PAGE> 2
ITEM 7: FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(b) Pro Forma Financial Information:
(1) Report of Independent Accountants.
(2) Supplementary Financial Statements containing
information required pursuant to Article 11
of Regulation S-X.
(c) Exhibits.
2.1 Agreement and Plan of Reorganization, dated as of
August 12, 1996, as amended by Amendment No. 1, dated
August 28, 1996 (as amended, the "Agreement"), by and
among Aames Financial Corporation, a Delaware
corporation ("Aames"), Aames Acquisition Corporation, a
Delaware corporation and a wholly owned subsidiary of
Aames ("Merger Sub"), One Stop Mortgage, Inc., a
Wyoming corporation ("One Stop") and
Neil B. Kornswiet.*
23.1 Consent of KPMG Peat Marwick LLP*
23.2 Consent of Price Waterhouse LLP
99.1 Press Release issued August 12, 1996 with respect to
the merger of Merger Sub with and into One Stop.*
__________
* Previously filed.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
AAMES FINANCIAL CORPORATION
(REGISTRANT)
Dated: September 13, 1996 By: /s/ BARBARA S. POLSKY
________________________________________
Barbara S. Polsky, Esq.
Senior Vice President and General Counsel
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Aames Financial Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity and of cash flows
present 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.
As described in Note 1 on August 28, 1996, the Company merged with One Stop
Mortgage Inc. in a transaction accounted for as a pooling of interests. The
accompanying supplementary consolidated financial statements give retroactive
effect of the merger.
In our opinion, based upon our audits and the report of other auditors, the
accompanying supplementary consolidated balance sheet and the related
supplementary consolidated statements of income, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Aames Financial Corporation and its subsidiaries (the "Company") at June 30,
1996 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 did not audit the
financial statements of One Stop Mortgage, Inc., which statements reflect total
assets of $127 million at June 30, 1996, and total revenues of $7 million for
the year ended June 30, 1996. Those statements were audited by other auditors
whose report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for One Stop Mortgage, Inc., is
based solely on the report of the other auditors. 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 and the report of
other auditors provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Los Angeles, California
August 28, 1996
<PAGE> 4
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 JUNE 30,
1996 1995
------------------- --------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 23,941,000 $ 20,359,000
Loans held for sale, at cost which approximates market 186,189,000 24,132,000
Accounts receivable, less allowance for
doubtful accounts of $473,000 and $360,000 9,685,000 6,090,000
Excess servicing receivable 129,113,000 42,078,000
Mortgage servicing rights 10,902,000
Residual assets 44,676,000 14,882,000
Equipment and improvements, net 6,674,000 2,063,000
Prepaid and other 10,295,000 5,019,000
------------------- --------------------
Total assets $421,475,000 $114,623,000
=================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings $138,045,000 $ 23,144,000
Revolving warehouse facilities 112,363,000
Accounts payable and accrued expenses 11,859,000 6,141,000
Accrued compensation and related expenses 3,948,000 1,703,000
Income taxes payable 21,831,000 3,588,000
------------------- --------------------
Total liabilities 288,046,000 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; 15,896,900,
and 13,221,000 shares outstanding 16,000 14,000
Additional paid-in capital 88,142,000 61,864,000
Retained earnings 45,271,000 18,169,000
------------------- --------------------
Total stockholders' equity 133,429,000 80,047,000
------------------- --------------------
Total liabilities and stockholders' equity $421,475,000 $114,623,000
=================== ====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30
-----------------------------------------------
1996 1995 1994
----------- ------------------ ------------
<S> <C> <C> <C>
Revenue:
Excess servicing gain $ 85,465,000 $ 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 15,345,000 7,940,000 5,595,000
------------ ---------------- ----------------
Total revenue 138,875,000 54,939,000 36,227,000
------------ ---------------- ----------------
Expenses:
Compensation and related expenses 38,052,000 17,610,000 13,616,000
Sales and advertising costs 18,362,000 9,906,000 7,891,000
General and administrative expenses 17,791,000 7,067,000 5,415,000
Interest expense 12,371,000 3,205,000 322,000
------------ ---------------- ----------------
Total expenses 86,576,000 37,788,000 27,244,000
------------ ---------------- ----------------
Income before income taxes 52,299,000 17,151,000 8,983,000
Provision for income taxes 22,508,000 7,117,000 3,684,000
------------ ---------------- ----------------
Net income $ 29,791,000 $ 10,034,000 $ 5,299,000
============ ================ ================
Net income per share
Primary $ 1.78 $ 1.11 $ 0.61
============ ================ ================
Fully Diluted 1.71 1.11 0.61
============ ================ ================
Weighted average number
of shares outstanding
Primary 16,766,000 9,021,000 8,751,000
============ ================ ================
Fully Diluted 18,135,000 9,021,000 8,751,000
============ ================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
SUPPLEMENTARY 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 2,064,000 2,064,000
Shares issued in merger
transaction 2,000 (2,000)
Dividends $ (2,689,000) $ (2,689,000)
Issuance of common
stock warrants 24,216,000 24,216,000
Net income 29,791,000 29,791,000
AS OF JUNE 30, 1996 $16,000 $84,142,000 $45,271,000 $133,429,000
</TABLE>
<PAGE> 7
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
-------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 29,791,000 $ 10,034,000 $ 5,299,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,275,000 606,000 466,000
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 (1,215,596,000) (387,600,000) (190,200,000)
Proceeds from sale of loans 1,052,580,000 373,609,000 180,235,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (3,595,000) (2,663,000) (1,415,000)
Prepaid and other (5,276,000) (2,217,000) (900,000)
Residual assets (29,794,000) (8,691,000) (4,228,000)
Increase (decrease) in:
Accounts payable and accrued expenses 5,718,000 534,000 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 (241,634,000) (43,375,000) (13,857,000)
------------- ------------- -------------
Investing activities:
Purchases of property and equipment (4,611,000) (988,000) (870,000)
------------- ------------- -------------
Net cash used in investing activities (4,611,000) (988,000) (870,000)
------------- ------------- -------------
Financing activities:
Proceeds from sale of stock or exercise of options 26,278,000 40,087,000 12,263,000
Proceeds from borrowing 115,000,000 23,000,000 2,900,000
Amounts outstanding under warehouse facilities 112,363,000 (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 250,538,000 48,209,000 22,855,000
------------- ------------- -------------
Net increase (decrease) in cash 3,582,000 3,846,000 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 $ 23,941,000 $ 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>
The accompanying notes are an integral part of these financial statements.
<PAGE> 8
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT
Aames Financial Corporation and Subsidiaries
Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MERGER AND BASIS OF PRESENTATION
On August 28, 1996, Aames Financial Corporation, a Delaware
corporation ("Aames") acquired One Stop Mortgage, Inc., a
Wyoming corporation ("One Stop"), in a merger transaction.
Aames exchanged 2.3 million shares of its common stock for all
of the outstanding common stock of One Stop and assumed the
outstanding employee stock options covering 375,000 shares of
Aames common stock. The merger transaction has been accounted
for as a pooling of interests. On or about November 15, 1996,
Aames will restate its historical financial statements to
reflect the pooling-of-interests transaction. These restated
financial statements will resemble the supplementary combined
financial statements in all material respects. These
supplementary consolidated financial statements are presented
to provide the reader with an understanding of the combined
historical results of Aames and One Stop.
OPERATIONS
Aames and its subsidiaries (collectively, the "Company")
engage in the consumer finance business by offering or
purchasing mortgage loans for homeowners throughout the United
States. 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 (i.e., one- to four-family) residences. Loans
originated or purchased 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 $1.37 billion and $609 million at June 30, 1996
and June 30,1995, respectively (which include $456 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 a reasonable period 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.
<PAGE> 9
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT
Aames Financial Corporation and Subsidiaries
PRINCIPLES OF CONSOLIDATION
The supplementary combined financial statements include the
accounts of the Company. All significant intercompany
accounts and transactions have been eliminated in
consolidation. As previously discussed, these supplemental
combined financial statements reflect how Aames'
consolidated financial statements will look following the
restatement to reflect the merger with One Stop.
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> <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> 10
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT
Aames Financial Corporation and Subsidiaries
REVENUE RECOGNITION
The Company derives its revenue principally from servicing
spreads, premiums on sales, 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, investment
banks or brokers are funded by the Company for pooling and
sale in the secondary market, brokered to other financial
institutions on a servicing released basis or placed with
private investors. Revenue from loans pooled and sold in the
secondary market is recognized when such loans are sold.
Revenue from loans funded by private investors is recognized
as income when escrow closes on the loan and the funds are
disbursed. Revenue from loans brokered and financial
institutions is recognized at the date of settlement and is
based upon the difference between the selling price and the
carrying value of the related loans sold. The Company retains
the right to service all loans securitized by the Company,
held 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 made by the 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.
Included in excess servicing gain for June 30, 1996 is $4.6
million of gains on whole loan sales on a servicing released
basis.
<PAGE> 11
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT
Aames Financial Corporation and Subsidiaries
During the loan origination process, the Company, its brokers
and correspondents negotiate 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 retail 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
Statements 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 gain on sale included in the
Consolidated Statements of Income includes these amounts
reduced by direct transaction costs. For loans sold in the
secondary market, the gain on sale of receivables 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 year 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.
<PAGE> 12
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT
Aames Financial Corporation and Subsidiaries
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 $.31 per
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.
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 securitizes the majority of 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 $70.0
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 loan securitization transactions, the
Company initially deposits with a trustee, cash or the
required overcollateralization 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.
<PAGE> 13
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT
Aames Financial Corporation and Subsidiaries
DEBT ISSUANCE COSTS
At June 30, 1996, the Company had a unamortized balance of
debt issuance costs of $3.8 million related to the issuance of
$23 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 assets and other"
on the Consolidated Balance Sheets and is amortized into
interest expense over the life of the related debt. See note 4
regarding One Stop debt issue costs.
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 shares of
common stock issued in connection with the merger 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 $0.001 par value common stock was
split 3 for 2. 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> 14
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 and $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.
<PAGE> 15
NOTE 3 Equipment and Improvements
Equipment and Improvements comprise the following:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
1996 1995
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Furniture and fixtures $ 4,007,000 $ 1,460,00
Data processing equipment 4,727,000 1,654,000
Leasehold improvements 241,000 133,000
Equipment under capital leases 806,000 796,000
Automobiles 256,000 195,000
----------- ----------
TOTAL 10,037,000 4,238,000
Accumulated depreciation and
amortization (3,363,000) (2,175,000)
----------------------------------------------------------------------------------------------------
Net $ 6,674,000 $ 2,063,000
</TABLE>
Note 4 Borrowings
The Subordinated Convertible Debentures are Subordinated to all
existing and future senior debt of the Company (as defined in the
Debenture Agreement).
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 common stock of the Company 115,000,000
at a conversion price of $28 per share.
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
----------------------------------------------------------------------------------------------------
$138,045,000 $ 23,144,000
Warehouse Agreements consist of the following:
Warehouse agreement with investment bank collateralized by $ 11,026,000
mortgages/deeds of trust; expires January 1, 1997 with interest
at 0.875% over applicable LIBOR rate; total credit available
$150,000,000. Applicable LIBOR rate was 5 1/2% at June, 1996.
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
----------------------------------------------------------------------------------------------------
$ 11,026,000
</TABLE>
<PAGE> 16
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------------------------------------------------------------------------------------------------
<S> <C> <C>
$250,000,000 revolving warehouse line of credit with an investment
bank secured by the loans held for sale, Interest accrues based on
LIBOR, which varies based on the outstanding balance of the line
of credit. Matures September 1996. $122,765,000
$5,000,000 unsecured working capital note with an investment
bank due September 1996. Interest accrues at 12% and paid monthly.
Principal due at maturity. 2,000,000
$50,000,000 residual line of credit with an investment bank
secured by residual interests in securitizations of the
Company loans. Interest accrues on LIBOR, which varies based
on the outstanding line of credit. Matures September 1996.
Prepaid commitment fee related to issuance of common stock
warrants to investment bank, net of amortization of $788,000 (23,428,000)
----------------------------------------------------------------------------------------------------
One Stop credit facilities $101,337,000
------------
Total warehouse lines of credit $112,364,000
============
</TABLE>
In June 1996, concurrent with the completion of three new financing
agreements, One Stop issued warrants for the purchase of the number
of shares of common stock equivalent to 25% of the then outstanding
shares of One Stop. These warrants have a 10-year term and are
immediately exercisable at a price of $1.00 per share. The excess of
the fair market value of the warrant on the data of grant over the
exercise price ($24,216,000) has been recorded as a prepaid
commitment fee and included as a reduction to the related debt
amounts with a corresponding credit to additional paid-in capital.
Such commitment fee is being amortized to expenses using the
straight-line method over the remaining terms (30 to 36 months) to
maturity of the related debt. The Company has received notification
that the investment banker intends to terminate all the One Stop
financing arrangements as a result of, and subsequent to, the merger
with Aames. Upon termination of the financing agreements, the
remaining unamortized prepaid commitment fee of $23.4 million would
be fully expensed.
<PAGE> 17
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
Maturities on long-term liabilities are as follows:
<TABLE>
<CAPTION>
Obligations
Obligations Under
Under Capital
Capital Leases - Net Notes
Fiscal Years Ended June 30, Leases of Interest Payable 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
----------------------------------------------------------------------------------------------------
$ 47,000 $ 45,000 $138,000,000 $138,092,000
</TABLE>
Equipment Under Capital Leases
Equipment under capital leases is comprised of computer, office and
telephone equipment. 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:
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
1996 1995 1994
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
State $ 2,212,000 $992,000 $ 814,000
Federal 6,344,000 2,154,000 2,939,000
-----------------------------------------------------------------------------
8,556,000 3,146,000 3,753,000
Deferred:
State 3,740,000 1,080,000 17,000
Federal 10,212,000 2,891,000 (86,000)
-----------------------------------------------------------------------------
13,952,000 3,971,000 (69,000)
-----------------------------------------------------------------------------
$22,508,000 $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.
The financial statement balances at June 30, 1996 and 1995 are as follows:
Current taxes payable (receivable)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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 5,005,000 1,265,000
----------- -----------
Total $18,456,000 $ 4,505,000
----------- -----------
Total tax liabilities $21,830,000 $ 3,588,000
=========== ===========
</TABLE>
<PAGE> 18
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
Deferred tax liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Excess servicing $ 16,850,000 $ 5,891,000
Depreciation 412,000 216,000
Mortgage Servicing Rights 5,015,000
------------ ------------
Total deferred tax liabilities 22,277,000 6,107,000
------------ ------------
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 $ 18,456,000 $ 4,505,000
============ ============
</TABLE>
<PAGE> 19
NOTE 6 Commitments and Contingencies
OPERATING LEASES
The Company leases office space under operating leases expiring at
various dates through July 2000. 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 $3,152,000, $1,516,000, and $1,411,000, 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 Ending June 30,
------------------------------------------------
<S> <C>
1997 $ 4,112,000
1998 3,442,000
1999 2,908,000
2000 2,658,000
2001 1,427,000
Thereafter 4,157,000
------------------------------------------------
$18,704,000
</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
compensation 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. 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,
than 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. 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.
The Chief Executive Officer of One Stop has an employment agreement
with the Company expiring on August 2001, subject to extension which
provides for a base salary and a performance bonus equal to 7.5% of
One Stop's adjusted pretax income. 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 three years base
salary plus an amount equal to his performance bonus over the
previous twelve quarters.
<PAGE> 20
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
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>
Carrying Amount Estimated Fair Value
------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 23,941,000 $ 23,941,000
Loans held for sale 186,189,000 198,507,000
Excess Servicing receivable 129,113,000 129,113,000
Mortgage servicing rights 10,902,000 10,902,000
Amounts outstanding under warehouse
facilities 135,791,000 135,791,000
Notes payable 138,045,000 139,035,000
</TABLE>
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 warehouse agreements and notes payable are short
term in nature and/or 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.
<PAGE> 21
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTE 9 STOCKHOLDERS' EQUITY
Under the Company's 1991 Stock Incentive Plan (the "Plan") a total of
750,000 shares have been reserved for issuance. At June 30, 1996,
options to exercise 694,499 shares 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.
Under the Company's 1995 stock incentive plan, a total of 1.1 million
shares have been reserved for issuance. At June 30, 1996, options to
exercise 979,451 have been granted at prices ranging from $11.92 to
$41.87 per share. 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
per share. 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.
Under the terms of the Merger Agreement, the Company agreed to assume
the obligations for outstanding employee stock options of One Stop
for 375,000 shares with prices ranging from $.29 to $32.13.
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, 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
The Company's bank agreements generally limit the Company's ability
to pay dividends to an amount equal to its net income. 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.
<PAGE> 22
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
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.
<PAGE> 1
EXHIBIT 23.2
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 28, 1996 appearing in this Form 8-K/A.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Los Angeles, California
September 13, 1996
