<PAGE> 1
As filed with the Securities and Exchange Registration No. 333-______
Commission on May 21, 1997
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AAMES FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4340340
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3731 WILSHIRE BOULEVARD, 10TH FLOOR,
LOS ANGELES, CALIFORNIA 90010 (213) 351-6100
(Address, including ZIP code, and telephone number,
including area code, of Registrant's principal executive offices)
BARBARA S. POLSKY, ESQ.
AAMES FINANCIAL CORPORATION
3731 WILSHIRE BOULEVARD, 10TH FLOOR
LOS ANGELES, CALIFORNIA 90010
(213) 351-6100
(Name, address, including ZIP code, and
telephone number, including area
code, of agent for service)
----------------------
Copies to:
JACK M. COSTELLO, JR., ESQ.
BROWN & WOOD, LLP
ONE WORLD TRADE CENTER
58TH FLOOR
NEW YORK, NEW YORK 10048
(212) 839-5300
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement. If the
only securities on this form are being offered pursuant to dividend or
interest reinvestment plans, please check the following box: [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box: [X]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Amount to Be Proposed Maximum Offering Proposed Maximum Amount of
TITLE OF SHARES TO BE REGISTERED Registered Price Per Share (2) Aggregate Offering Price(2) Registration Fee(3)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock(4) 1,877,669 $13.56 $8,924,175 $2,705
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 216,119 shares of Common Stock previously registered under
the Registrant's Registration Statement on Form S-3 (Registration No.
333-13835) that remain unsold as of the date hereof. As permitted
by Rule 429 under the Securities Act of 1933, as amended, the
Prospectus filed as part of this Registration Statement on Form S-3
will be used in connection with the offering of such previously
registered and unsold securities and the securities covered hereby.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of Regulation C under the Securities Act of
1933.
(3) The registration fee specified in the table has been computed on the
basis of the 658,125 shares covered hereby, prior to including the
previously registered and unsold securities referred to in footnote
(1), for which the Registrant paid a fee of $3,479.19.
(4) Includes certain Preferred Stock Purchase Rights of Registrant,
exercisable upon the occurrence of certain events. See "Description
of Capital Stock -- Anti- takeover Provisions" in the Prospectus
which constitutes a part of this Registration Statement.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE> 2
Subject to Completion, Dated May __, 1997
PROSPECTUS
AAMES FINANCIAL CORPORATION
1,877,669 SHARES OF COMMON STOCK
(par value $0.001 per share)
This Prospectus relates to the public offering by the Selling
Stockholders (see "Selling Stockholders") of up to 1,877,669 shares of the
Common Stock, par value $0.001 per share (the "Common Stock") of Aames Financial
Corporation, a Delaware corporation (the "Company"). The Common Stock offered by
the Selling Stockholders was acquired by the Selling Stockholders in connection
with the merger of a wholly owned subsidiary of the Company with and into One
Stop Mortgage, Inc., a Wyoming corporation ("One Stop"). See "Selling
Stockholders." The Common Stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "AAM." The last reported sales price of the Common
Stock on the NYSE on May 19, 1997 was $13.625 per share. See "Description of
Capital Stock."
The Company will not receive any proceeds from this offering. The
aggregate proceeds to the Selling Stockholders from the sale of the Common Stock
will be the offering price of the Common Stock sold, less applicable agents'
commissions and underwriters' discounts, if any. The Company will pay all
expenses incident to the preparation and filing of a registration statement for
the Common Stock under federal securities laws. The Selling Stockholders or
certain other persons may sell the Common Stock from time to time on the NYSE,
on any other national securities exchange on which the Common Stock may be
listed or traded, in negotiated transactions or otherwise, at prices then
prevailing or related to the then current market price or at negotiated prices.
The shares of the Common Stock offered hereby may be sold directly or through
brokers or dealers. See "Plan of Distribution."
---------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 HEREOF FOR A DISCUSSION OF
CERTAIN INFORMATION THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SECURITIES.
---------------
THE SHARES OF THE COMMON STOCK HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
REVIEWED OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
The date of this Prospectus is ______, 1997
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (the "Registration
Statement") under the Securities Act of 1933 (the "Securities Act") with respect
to the Common Stock offered hereby. This Prospectus, which constitutes part of
the Registration Statement does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to such Registration Statement, and the exhibits and
schedules thereto which may be obtained from the Commission's principal office
in Washington, D.C., upon payment of the fees prescribed by the Commission.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files periodic reports and other information with the Commission. For
further information with respect to the Company, reference is hereby made to
such reports and other information which can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1025, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies may also be obtained at prescribed rates from the Public Reference
Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, reports, proxy statements and other information concerning
the Company can also be inspected at the offices of the New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005, on which exchange the Company's
Common Stock is listed.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the
Commission pursuant to the Exchange Act are incorporated by reference into this
Prospectus:
(1) the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996;
(2) the Company's Quarterly Reports on Form 10-Q for the quarters
ended September 30, 1996, December 31, 1996 and March 31, 1997; and
(3) the Company's Current Reports on Form 8-K dated July 10, 1996,
August 7, 1996, August 13, 1996, September 12, 1996 (including the Report on
Form 8-K/A dated September 16, 1996), September 26, 1996, October 22, 1996,
April 1, 1997 and May 12, 1997.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the securities covered by this Prospectus shall
be deemed to be incorporated by reference herein and to be part hereof from the
date of filing of such documents. Any statement contained herein or in a
document, all or a portion of which is incorporated or deemed to be incorporated
by reference herein, shall be deemed to be modified or superseded for purposes
of this Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person
to whom a copy of this Prospectus has been delivered, upon the oral or written
request of any such person, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents, unless such exhibits
are expressly incorporated by reference into such documents). Written requests
for such copies should be directed to the Company's Secretary at 3731 Wilshire
Boulevard, 10th Floor, Los Angeles, California 90010, or made by telephone at
(213) 351-6100.
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<PAGE> 4
THE COMPANY
Aames Financial Corporation (the "Company"), founded in 1954, is a
consumer finance company engaged in the business of originating, purchasing,
selling and servicing home equity mortgage loans secured by single family
residences. The Company's principal market is credit-impaired borrowers who have
significant equity in their homes but whose borrowing needs are not being met by
traditional financial institutions due to credit exceptions or other factors.
The Company focuses its efforts on collateral lending and believes that it
originates and purchases a greater proportion of lower credit grade loans ("C-"
and "D" loans) than most other lenders to credit-impaired borrowers. These lower
credit grade loans are characterized by lower combined loan-to-value ratios and
higher average interest rates than higher credit grade loans ("A-," "B" and "C"
loans). The Company believes lower credit-quality borrowers represent an
underserved niche of the home equity loan market and present an opportunity to
earn a superior return for the risks assumed. Although the Company has
historically experienced delinquency rates that are higher than those prevailing
in its industry, management believes the Company's historical loan losses are
generally lower than those experienced by most other lenders to credit-impaired
borrowers because of the lower combined loan-to-value ratios on the Company's
lower credit grade loans. The mortgage loans originated and purchased by the
Company, which include fixed and adjustable rate loans, 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 on a nationwide basis
through three production channels. The Company has historically originated its
loans through its retail loan office network. In 1994, the Company diversified
its production channels to include a wholesale correspondent program which
consisted initially of purchasing loans from other mortgage bankers and
financial institutions underwritten in accordance with the Company's guidelines.
In fiscal 1996, this program was expanded to include the purchase of loans in
bulk from other mortgage bankers and financial institutions. On August 28, 1996,
the Company acquired One Stop Mortgage, Inc. ("One Stop"), which further
diversified the Company's production channels to include the origination and
purchase of mortgage loans from a network of independent mortgage brokers. While
the Company intends to continue focusing on its traditional niche in the "C-"
and "D" credit grade loans, the Company also intends to continue to diversify
the loans it originates and purchases through its three production channels to
include more "A-," "B" and "C" credit grade loans. The Company underwrites every
loan it originates and generally re-underwrites and reviews appraisals on all
loans it purchases.
Substantially all of the mortgage loans originated and purchased by the
Company are sold in the secondary market through public securitizations in order
to enhance profitability, maximize liquidity and reduce the Company's exposure
to fluctuations in interest rates. In a securitization, the Company conveys
loans that it has originated or purchased to a separate entity (such as a trust
or trust estate) in exchange for cash proceeds and an interest in the loans
securitized representing the gain on sale of loans. The cash proceeds are raised
through an offering of the certificates or bonds evidencing the right to receive
certain payments on the securitized loans. The gain on sale represents, over the
estimated life of the loans, the excess of the weighted average coupon on each
pool of loans sold over the sum of the pass-through interest rate, the mortgage
servicing fee (currently .50%) and a monoline insurance fee, if any. The Company
determines the present value of this anticipated revenue stream at the time each
securitization transaction closes using prepayment and other assumptions
appropriate for each transaction and recognizes it as gain on sale. As part of
the sale, the Company records an asset called the interest only strip. In order
to determine the present value of this excess cash flow, the Company discounts
the cash flows based upon rates prevalent in the market, subject to adjustment
for credit risk retained by the Company and recorded as a reserve.
The Company securitized and sold in the secondary market $107
million, $317 million, $791 million and $1.76 billion of loans during fiscal
1994, 1995 and 1996, and the nine months ended March 31, 1997, 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, however, is
considering alternative securitization structures that may be credit-enhanced
other than by monoline insurance, such as a senior subordinated structure.
The Company retains the servicing rights (collecting loan payments and
handling borrower defaults) to substantially all of the loans it originates or
purchases. At March 31, 1997, the Company had a servicing portfolio of $2.72
billion, 54% of which was serviced by subservicers. As of March 31, 1997, the
Company serviced loans in seven western states, including California. Loans
secured by properties located in other states are serviced through one or more
subservicers which are paid a fee per loan and a participation in certain other
fees paid by the borrowers. In November 1996, the Company implemented a new
servicing system which will enable the Company
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to service loans in all 50 states and the District of Columbia, and is in the
process of obtaining the licenses required to service loans nationwide.
Commencing in the fourth fiscal quarter of 1997, the Company intends to add to
the states in which it will be servicing loans. As of May 1, 1997, the Company
began servicing loans originated through its retail network in eight additional
states and through its broker network in four of those states. During fiscal
1998, the Company intends to review its subservicing arrangements and service
directly all newly originated or purchased loans which are securitized by it.
The Company is a Delaware corporation with its principal executive offices
located at 3731 Wilshire Boulevard, 10th floor, Los Angeles, California 90010,
telephone number (213) 351-6100.
RISK FACTORS
This Report contains certain forward looking statements. Actual results
could differ materially from those projected in the forward-looking statements
as a result of the risk factors set forth below.
NEGATIVE CASH FLOWS AND CAPITAL NEEDS
In a securitization, the Company recognizes a gain on sale of the loans
securitized upon the closing of the securitization, but does not receive the
cash representing such gain until it receives the excess cash flow from the
interest only strip, 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 and for the nine months ended March 31, 1997 was $13.9 million, $43.4
million, $122 million and $97.9 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 gain on sale, other
than in a debt-for-tax securitization structure; (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, sales of mortgage loans on a whole
loan basis and further issuances of debt or equity.
The Company's primary sources of liquidity as described in the paragraph
above are expected to be sufficient to fund the Company's liquidity requirements
through at least the next 12 months 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 may need to effect additional debt or
equity financings. 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 or owner trusts. Generally,
the form of 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 trust. If, at any measuring date, the 90-day delinquency
rate with respect to any trust were to exceed the specified limit applicable to
such trust, provisions of the servicing agreements permit the monoline insurance
company to terminate the
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Company's servicing rights to the pool as more fully described below. In
addition, high delinquency rates have a negative impact on cash flow.
At March 31, 1997, seven of the Company's REMIC trusts (representing 26% of
the dollar volume of the Company's servicing portfolio) exceeded the applicable
90-day delinquency standard. These seven trusts were formed during the period
from December 1994 to June 1996. At March 31, 1997, the 90-day delinquency rate
on these seven trusts ranged from 14.6% to 34.2%. 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 March 31, 1997, the weighted average initial combined loan-to-value ratios
on loans in the seven REMIC trusts was 65%.
The Company implemented a variety of measures designed to reduce
delinquency rates on loans included in securitizations in future periods,
including the implementation of 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 has increased. The Company expects that the combined effect of
these developments will have a positive impact on 90-day delinquency rates
experienced in trusts formed by the Company in future periods, although average
combined loan-to-value ratios are likely to increase. However, there can be no
assurance that delinquency rates will in fact be positively impacted. Further,
delinquency rates and losses on the Company's existing trusts and future trusts
could increase. Although the trust formed by the Company in September 1996 had
delinquency rates at March 31, 1997 within expectations and below the applicable
90-day delinquency standard (which was raised to 13% with respect to the June
1996 trust and to 17% with respect to the trusts formed since that date), the
loans included in this trust were originated or purchased prior to these
developments and have been outstanding for a relatively short period of time.
There can be no assurance that delinquency rates on this trust will not increase
in future periods.
Under the form of servicing agreement entered into in connection with the
Company's securitizations, the monoline insurance company insuring the senior
interests in the related trust may terminate the Company's mortgage 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 seven trusts referred to above, no servicing rights have
been terminated. There can be no assurance that the Company's servicing rights
with respect to the mortgage loans in such trusts, or any other trust which
exceeds the specified limits in future periods, will not be terminated. The
monoline insurance company has other rights to terminate servicing if the
Company were to breach its obligations under the agreement, losses on
foreclosure were to exceed specified limits, the insurance company were required
to make payments under its policy or certain bankruptcy or insolvency events
were to occur. None of these events has occurred with respect to any of the
trusts formed by the Company.
The Company's cash flow is also adversely impacted by high delinquency
rates in its trusts. Generally, provisions in the servicing agreement have the
effect of requiring the overcollateralization account, which is funded primarily
by the excess spread on the loans held in the trust, to be increased up to about
twice (two and one-half times in the case of the September and December 1996 and
March 1997 trusts) the level otherwise required when the delinquency rates
exceed the specified limit. As of March 31, 1997, the Company was required to
maintain an additional $20.4 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 March 31, 1997, $9.8 million remains to be
added to the overcollateralization accounts from future spread income on the
loans held by these trusts.
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Delinquency and loss rates also affect the assumptions used by the Company
in computing gain on sale 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 a
substantial portion of the loans it originates or purchases. 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. The
Company intends to service all loans it originates or purchases commencing in
fiscal 1998 (regardless of the location of the mortgaged property). See "The
Company."
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. At
April 30, 1997, the Company had warehouse and other credit facilities with
certain financial institutions with aggregate commitment of $600 million (which
decreases to $475 million at June 30, 1997). The Company's warehouse and other
credit facilities expire between September 1997 and January 1998. In addition,
the Company's growth strategies will require significant increases in the amount
of the Company's warehouse and other credit facilities. The Company is currently
negotiating with various investment banks to obtain additional warehouse
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, although the Company is contemplating doing so with a
portion of the loans it securitizes in future pools. Any substantial reduction
in the size or availability of the secondary market for the Company's loans, or
the unwillingness of the monoline insurance companies to provide financial
guarantee insurance for the senior interests in loans sold in the secondary
market, or other accounting, tax or regulatory changes adversely affecting the
Company's securitization program, could have a material adverse effect on the
Company's financial position and results of operations.
CAPITALIZED INTEREST ONLY STRIP; MORTGAGE SERVICING RIGHTS
The majority of the Company's revenue is recognized as gain on sale, which
represents the present value of the interest only strip, less transaction
expenses, on mortgage loans sold on a servicing retained basis by the Company.
The Company recognizes gain on sale in the fiscal year in which such loans are
sold, although cash (representing the interest only strip and mortgage servicing
fees) is received by the Company over the life of the loans.
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Concurrent with recognizing gain on sale, the Company records an interest only
strip as an asset on its consolidated balance sheet.
The estimated life of the securitized loans depends on the assumed
annual prepayment rate which is a function of full and partial prepayments and
defaults. In the calculation of its gain on sale, the Company makes an
assumption of the prepayment rate based on prior and expected performance, the
presence or absence of prepayment penalties, the loan-to-value ratios of the
loans, the credit grades included in a particular pool and industry analyses.
Generally, the presence of prepayment penalties slows the rate of prepayment;
the lower loan-to-value ratio loans exhibit a higher prepayment rate due to
refinancing potential; and the higher credit grade loans are assumed to be more
interest rate sensitive than the lower credit grade loans since the higher
credit grade borrowers are assumed to have more options for obtaining credit.
In determining the adjustment for credit risk for a particular
securitization, the Company utilizes assumptions that it believes are
reasonable based on the information on its prior securitizations and the
loan-to-value ratios of the loans included in the current securitizations. At
March 31, 1997, the Company had reserves of $32.8 million related to these
credit risks, or 1.31% of the outstanding balance of loans securitized as of
that date. Cumulative losses to date from the Company's securitization
transactions dating back to June 1992, have totaled $4.3 million, or .14% of
the total balance of loans securitized through March 31, 1997. The weighted
average loan-to-value ratio of the loans serviced by the Company was 67% as of
March 31, 1997. Accordingly, the Company believes its allowance for credit
losses is adequate to cover anticipated losses on previously securitized pools
determined on a pool-by-pool basis.
The interest only strip is amortized over the expected lives of the
related loans and a corresponding reduction in servicing fee income is recorded.
On a quarterly basis, the Company reviews the fair value of the interest only
strip by analyzing its prepayment and other assumptions in relation to its
actual experience and current rates of prepayment prevalent in the industry. See
"Prepayment and Credit Risk." The interest only strip is marked to market
through a charge to earnings. If a permanent shortfall in the net present value
of the estimated remaining future excess cash flow becomes apparent due to
either accelerated prepayments or larger than expected loss experience, a
permanent impairment adjustment must be recorded. To date, the Company has not
been required to record a material adjustment to its interest only strip.
PREPAYMENT AND CREDIT RISK
Gain on sale is the most significant component of the Company's reported
revenues. Gain on sale represents the recognition of the present value of the
excess cash flow, which is based on certain estimates made by management at the
time loans are sold, including estimates regarding prepayment rates. The rate of
prepayment of loans may be affected by a variety of economic and other factors,
as discussed above. The effects of these factors may vary depending on the
particular type of loan. Estimates of prepayment rates are made based on
management's expectations of future prepayment rates, which are based, in part,
on the historic performance of the Company's loans and other considerations.
There can be no assurance of the accuracy of management's estimates. If actual
prepayments occur more quickly than was projected at the time loans were sold,
the carrying value of the interest only strip may have to be written down
through a charge to earnings in the period of adjustment.
Loans made to borrowers who are unable or unwilling to obtain mortgage
financing from conventional mortgage sources may entail a higher risk of
delinquency and higher losses than loans made to borrowers who utilize
conventional mortgage sources. While the Company believes that the underwriting
criteria and collection methods it employs enable it to mitigate the higher
risks inherent in loans made to these borrowers, no assurance can be given that
such criteria or methods will afford adequate protection against such risks. In
the event that loans originated and purchased by the Company experience higher
delinquencies, foreclosures or losses than anticipated, the Company's results
of operations or financial condition could be adversely affected.
Generally, the Company's higher credit grade loans have higher
loan-to-value ratios than its lower credit grade loans. In such cases, the
collateral of such loans often will not be sufficient to cover the principal
amount of the loans in the event of default. Losses not covered by the
underlying properties, if in excess of the Company's provision for such losses,
could have a material adverse effect on the Company's results of operations and
financial condition.
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<PAGE> 9
RECENT ACQUISITION OF ONE STOP
On August 28, 1996, the Company acquired One Stop in a merger transaction.
One Stop is 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. Since commencement of operations
in October 1995, One Stop's rate of growth in originating and purchasing loans
has been significant. Further, One Stop had generally sold its loans on a whole
loan basis or retained them in its portfolio. The Company included in its
September 1996, December 31, 1996 and March 31, 1997 securitizations and intends
to continue to include One Stop's loans in the Company's future securitizations.
In light of One Stop's growth and the changes in its operations necessitated by
the merger, the historical financial performance of One Stop is of limited
relevance in predicting future performance. Also, the loans originated and
purchased by One Stop included in the Company's securitizations in September and
December 1996 and March 1997 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, One
Stop originates and purchases loans through a network of independent mortgage
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.
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<PAGE> 10
CONCENTRATION OF WHOLESALE CORRESPONDENT PROGRAM
The Company has implemented a wholesale correspondent 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 52% of
all mortgage loans originated or purchased by the Company during the nine months
ended March 31, 1997. 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.
During the nine month period ended March 31, 1997, the pricing for
wholesale correspondent purchases of loans in the subprime mortgage market
increased over the same period last year. The average price paid by the Company
for wholesale correspondent purchases during the first nine months of 1997 was
6.4% compared to 4.8% for the first nine months of 1996. In response to these
pricing changes and the general uncertainties in the capital markets (in which
the Company has historically funded its negative cash flow), the Company is
reviewing its pricing levels for all third party originated products, primarily
bulk purchases, which may reduce the volume of loans purchased. This change
may have an adverse impact on short-term performance and earnings.
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. 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.
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<PAGE> 11
CONCENTRATION OF OPERATIONS IN CALIFORNIA
At March 31, 1997, a significant portion 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 experienced a slowdown or
recession over the last several years which was 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 gain on sale related
to such loans until their sale and would likely result in losses for such
quarter being reported by the Company.
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, foreclosures, losses or increased costs could adversely affect
the
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<PAGE> 12
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.
See "Prepayment and Credit Risk."
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 interest only strip 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 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
cash flow distributions in such accounts or application of excess servicing
distributions to reduce the principal balances of the senior interests issued by
the related trust, respectively. Such amounts serve as credit enhancement for
the related 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 cash flow 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 trust
and are a condition to obtaining the requisite rating thereon. In addition,
documents governing the Company's securitization program require the Company to
commit to repurchase or replace loans which do not conform to the
representations and warranties made by the Company at the time of sale.
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<PAGE> 13
When borrowers are delinquent in making monthly payments on loans included in a
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. As the Company
increases the number of higher credit grade loans it originates and purchases,
the Company expects that the number of Section 32 Loans will decrease.
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<PAGE> 14
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Common
Stock offered by the Selling Stockholders hereunder.
DESCRIPTION OF CAPITAL STOCK
The total number of shares that the Company is authorized to issue is
51,000,000, consisting of 50,000,000 shares of Common Stock, par value $0.001
per share, and 1,000,000 shares of Preferred Stock, par value $0.001 per share.
The following statements are brief summaries of certain provisions relating to
the Company's capital stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by the stockholders. The holders of
Common Stock are entitled to receive ratably dividends when, as and if declared
by the Board of Directors out of funds legally available therefor. In the event
of a liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled, subject to the rights of holders of Preferred Stock
issued by the Company, if any, to share ratably in all assets remaining
available for distribution to them after payment of liabilities and after
provision is made for each class of stock, if any, having preference over the
Common Stock.
The holders of Common Stock, as such, have no conversion, preemptive or
other subscription rights and there are no redemption provisions applicable to
the Common Stock. All the outstanding shares of Common Stock are validly issued,
fully paid and nonassessable.
The Company distributes periodic reports and other information,
including notices of annual meetings and special meetings of the stockholders of
the Company, to recordholders of Common Stock to the addresses indicated on the
Company's stock records.
PREFERRED STOCK
The Board of Directors has the authority to issue the authorized and
unissued Preferred Stock in one series with such designations, rights and
preferences as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder approval,
to issue Preferred Stock with dividend, liquidation, conversion, voting or other
rights which adversely affect the voting power or other rights of the holders of
the Common Stock. In the event of issuance, the Preferred Stock could be
utilized under certain circumstances as a way of discouraging, delaying or
preventing an acquisition or change in control of the Company.
The Company does not currently intend to issue any shares of its Preferred
Stock.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws include a number
of provisions which may have the effect of discouraging persons from pursuing
non-negotiated takeover attempts. These provisions include a classified Board
of Directors, the inability of stockholders to take action by written consent
without a meeting, the inability of stockholders to call for a special meeting
of stockholders under certain circumstances without the approval of the Board
and the inability of stockholders to remove directors without cause.
The Company's employment arrangements with its Chief Executive Officer,
President and certain other senior executives provide for the payment of
multiple years of compensation and acceleration of stock options in the event of
certain changes in control.
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<PAGE> 15
Each share of the Company's outstanding Common Stock also evidences one
stock purchase right (a "Right") pursuant to the terms and conditions of a
Stockholders' Rights Plan adopted by the Company in June 1996 (the "Rights
Plan"). In general, the Rights will not be exercisable, or transferable, apart
from the Common Stock, until the tenth day after a person or group (other than
an "Exempt Person" as defined in the Rights Plan) either: (i) acquires
beneficial ownership of 15% or more of the outstanding Common Stock; or (ii)
commences a tender offer or an exchange offer, to acquire beneficial ownership
of 15% or more of the outstanding Common Stock; or (iii) who previously acquired
15% or more of the Common Stock in a transaction approved by the Board of
Directors increases its ownership of Common Stock by more than 1%; or (iv) files
a registration statement with the SEC with respect to an exchange offer to
acquire 15% or more of the Common Stock; or (v) who beneficially owns 10% or
more of the outstanding Common Stock is declared an "Adverse Person" by the
Board of Directors
Following an event described above, each Right will be converted into a
right to purchase from the Company, for the Exercise Price (as defined in the
Rights Plan), that number of one one-hundredth (1/100th) of a share of Preferred
Stock (or, in certain circumstances, Common Stock, cash, property, or other
securities of the Company) having a market value of twice the Exercise Price.
Further, if after the Rights become exercisable, the Company or a majority of
its assets or earning power is acquired by merger, consolidation, transfer, sale
or otherwise, each Right will be converted into the right to purchase that
number of shares of common stock of the surviving entity or (in certain
circumstances) its parent corporation, having a market value of twice the
Exercise Price. In general, no Adverse Person, nor the person or group whose
purchase transaction or tender or exchange offer triggers the exercisability of
the Rights, nor any of that person's or group's transferees, may exercise Rights
held by them.
Each Right, at the option of the holder of the Right, also may be
exercised without the payment of cash. In such case, the Right's holder will
receive securities having a value equal to the difference between the value of
the securities that would have been issuable upon payment of the exercise price
and the exercise price.
At any time prior to the tenth day following an event described in (i)
through (v), above, the Board of Directors may redeem all outstanding Rights at
a price of $0.001 per Right, and may amend the Rights Agreement and the Rights
in any and all respects. The Rights will expire on the earlier of the date of
their redemption or June 20, 2006.
SECTION 203 OF THE DELAWARE LAW
The Company is a Delaware corporation and is subject to Section 203 of
the Delaware General Corporation Law ("DGCL"). Section 203 of the DGCL prevents
an "interested stockholder" (defined generally as a person owning 15% or more of
a corporation's outstanding voting stock or an affiliate of such person) from
engaging in a "business combination" (as defined) with a Delaware corporation
for three years following the date such person became an interested stockholder
unless (i) before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation outstanding
at the time the transaction commenced (excluding stock held by directors who are
also officers of the corporation and employee stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer); or (iii) following
the transaction in which such person became an interested stockholder, the
business combination is approved by the board of directors of the corporation
and authorized at a meeting of stockholders by vote of the holders of two-thirds
of the outstanding voting stock of the corporation not owned by the interested
stockholder. Under Section 203 of the DGCL, the restrictions described above
also do not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who had not
been an interested stockholder during the previous three years or became an
interested stockholder with the approval of a majority of the corporation's
directors. The provisions of Section 203 of the DGCL requiring a supermajority
vote of disinterested shares to approve certain corporate transactions could
enable a minority of the Company's stockholders to exercise veto power over such
transactions.
TRANSFER AGENT
The Company's transfer agent and registrar for its Common Stock is
ChaseMellon Shareholder Services LLC.
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<PAGE> 16
SELLING STOCKHOLDERS
All shares of the Common Stock offered hereby are owned by the Selling
Stockholders, who acquired such shares in connection with the merger of a wholly
owned subsidiary of the Company with and into One Stop. Neil B. Kornswiet, one
of the Selling Stockholders, is the President and Vice Chairman of the Board of
Directors of the Company. From September 3, 1996 to May 7, 1997, Mr. Kornswiet
served as Executive Vice President of the Company. Mr. Kornswiet also serves as
the Chairman and President of One Stop. Lehman Commercial Paper Inc. ("LCPI"),
one of the Selling Stockholders, acquired shares in the merger upon the
surrender of a warrant for an equity interest in One Stop, which warrant was
granted by One Stop to LCPI in connection with LCPI providing certain credit
facilities to One Stop. At May 19, 1997, Neil B. Kornswiet and Debra Kornswiet
owned 1,822,860 shares of the Company's Common Stock (1) and LCPI owned 658,125
shares of the Company's Common Stock (2).
<TABLE>
<CAPTION>
Number of Shares of Percentage of Outstanding
Number of Shares Common Stock to be Common Stock Held
of Common Stock Held After Completion After Completion
Name That May Be Sold of Offering of Offering
- ------------------------------- ------------------- --------------------- -----------------------
<S> <C> <C> <C>
Neil B. Kornswiet and 216,119 1,606,741 5.8%
Debra K. Kornswiet
200 Baker Street
Costa Mesa, CA 92626
Lehman Commercial Paper
Inc. 658,125 -0- 0%
3 World Financial Center
New York, NY 10285
</TABLE>
- -----------------
(1) Includes 115,593 shares of the Common Stock which have been deposited
into an escrow account from which they will not be released to the
Selling Stockholder until August 28, 1997.
(2) Includes 38,532 shares of the Common Stock which have been deposited
into an escrow account from which they will not be released to the
Selling Stockholder until August 28, 1997. Lehman Brothers Capital
Partners III, L.P., an affiliate of LCPI, holds a 50% participation
interest in the shares owned by LCPI.
Additional information concerning the Selling Stockholders may be set
forth in Prospectus Supplements from time to time.
Other than as described above, none of the Selling Stockholders has had
any material relationship with the Company within the past three years.
Additionally, Lehman Brothers, an affiliate of LCPI, has provided investment
banking services to the Company from time to time and may provide such services
to the Company in the future.
Because the Selling Stockholders may offer all or only some of the
Common Stock that they now hold in the offering contemplated by this Prospectus
and because there are presently no agreements, arrangements or understandings
concerning the sale of any of the Common Stock issuable, no estimate can be
given about the number of shares of the Common Stock that will be held by the
Selling Stockholders after completion of this offering. See "Plan of
Distribution" herein.
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds from this offering.
The Selling Stockholders or pledgees, donees, transferees or other successors
in interest may sell all or a portion of the shares of the Common Stock
from time to time directly to purchasers or through agents, dealers (who
may act as principals for their own account) or underwriters on terms to be
determined at the times of such sales. Any agent, dealer or underwriter through
whom shares of the Common Stock are sold may receive compensation in the form of
underwriting discounts, commissions or concessions from the Selling Stockholders
and/or the purchasers or pledgees, donees, transferees or other successors in
interest of the shares of the Common Stock for whom they act as agent. To
the extent required, the number of shares of the Common Stock to be sold,
the offering price thereof, the name of each Selling Stockholder and each
agent, dealer and underwriter, if any, and any applicable discounts or
commissions concerning a particular
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<PAGE> 17
offering will be set forth in an accompanying Prospectus Supplement. The
aggregate proceeds to the Selling Stockholders from the shares of the Common
Stock offered by the Selling Stockholders hereby will be the offering price of
such shares of the Common Stock less applicable commissions or discounts.
In connection with the distribution of the shares of the Common Stock
offered hereby, the Selling Stockholders may enter into hedging transactions
with broker-dealers. In connection with such transactions, broker-dealers may
engage in short sales of shares of the Common Stock in the course of hedging the
positions they assume with LCPI. LCPI also may sell shares of the Common Stock
short and redeliver the shares of the Common Stock offered hereby to close out
the short positions. The Selling Stockholders also may enter into options or
other transactions with broker-dealers which require the delivery to the
broker-dealer of the shares of the Common Stock offered hereby, which the
broker-dealers may resell or otherwise transfer pursuant to this Prospectus. The
Selling Stockholders also may loan or pledge the shares of the Common Stock
offered hereby to a broker-dealer and the broker-dealer may sell such shares so
loaned or upon a default the broker-dealer may affect sales of the pledged
shares pursuant to this Prospectus.
There is no assurance that the Selling Stockholders will sell any of
the shares of the Common Stock offered hereby.
In order to comply with the securities laws of certain States or other
jurisdictions, if applicable, the shares of the Common Stock will be sold in
such jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain States or other jurisdictions the shares of the Common
Stock may not be sold unless they have been registered or qualified for sale
under the securities laws of such jurisdictions or an exemption from the
registration and qualification requirements of such laws is available and the
conditions of such exemption are satisfied.
The Selling Stockholders and any broker-dealers, agents or underwriters
that participate with the Selling Stockholders in the distribution of the shares
of the Common Stock may be deemed to be "underwriters" within the meaning of the
Securities Act, in which case any commissions received by such broker-dealers,
agents or underwriters and any profit on the resale of the shares of the Common
Stock purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the shares of the Common Stock offered
hereby may not simultaneously engage in market making activities for the Common
Stock during the applicable "cooling off" periods prior to the commencement of
such distribution. In addition, and without limiting the foregoing, each Selling
Stockholder and any other person who participates in a distribution of the
shares of the Common Stock will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which provisions may limit the timing of purchases and
sales of shares of the Common Stock by the Selling Stockholders. The applicable
provisions of the Exchange Act and the rules and regulations thereunder may
effect the marketability of the shares of the Common Stock and the ability of
any person to engage in market making activities for the shares of the Common
Stock.
Pursuant to an agreement with the Selling Stockholders, the Company
will pay all expenses incident to the preparation and filing of the Registration
Statement. Pursuant to the same agreement, the Company has agreed to indemnify
the Selling Stockholders against certain liabilities, including liabilities
under the Securities Act.
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<PAGE> 18
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Barbara S. Polsky, Esq., Executive Vice President and General
Counsel of the Registrant.
EXPERTS
The consolidated financial statements of Aames Financial Corporation
incorporated in this Prospectus by reference to the Annual Report on Form 10-K
for the year ended June 30, 1996, and the supplementary consolidated financial
statements of Aames Financial Corporation incorporated in this Prospectus by
reference to the Company's Current Report on Form 8-K/A dated September 16,
1996, have been so incorporated in reliance on the reports of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The audited financial statements of One Stop Mortgage, Inc.
incorporated in this Prospectus by reference to the Company's Current Report on
Form 8-K dated September 12, 1996, have been so incorporated in reliance on the
report of KPMG Peat Marwick LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
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NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS, OR ANY PROSPECTUS SUPPLEMENT, AND
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROSPECTUS AND ANY PROSPECTUS SUPPLEMENT DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
The Company............................................................... 3
Risk Factors.............................................................. 4
Use of Proceeds........................................................... 13
Description of Capital Stock.............................................. 13
Selling Stockholders...................................................... 15
Plan of Distribution...................................................... 15
Legal Matters............................................................. 17
Experts................................................................... 17
------------
AAMES FINANCIAL CORPORATION
1,877,669 SHARES OF COMMON STOCK
------------
PROSPECTUS
------------
18
<PAGE> 20
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the offering are as follows:
<TABLE>
<CAPTION>
Amount
---------
<S> <C>
Registration Fee Under Securities Act of 1933....................................... $ 2,705
NASD Filing Fee..................................................................... $ *
Blue Sky Fees and Expenses.......................................................... $ *
Printing and Engraving Certificates................................................. $ *
Legal Fees and Expenses............................................................. $ 3,000
Accounting Fees and Expense......................................................... $ 7,000
Registrar and Transfer Agent Fees................................................... $ *
Miscellaneous Expenses.............................................................. $ 1,295
=========
TOTAL...................................................................... $ 14,000
</TABLE>
- -----------------
* Not applicable or none.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company has adopted provisions in its Certificate of Incorporation
which limit the liability of directors. As permitted by applicable provisions of
the Delaware General Corporation law (the "Delaware Law"), directors will not be
liable to the Company for monetary damages arising from a breach of their
fiduciary duty as directors in certain circumstances. Such limitation does not
affect liability for any breach of a director's duty to the Company or its
stockholders (i) with respect to approval by the director of any transaction
from which he derives an improper personal benefit, (ii) with respect to acts or
omissions involving an absence of good faith, that he believes to be contrary to
the best interests of the Company or its stockholders, that involve intentional
misconduct or knowing and culpable violation of law, that constitute an
unexcused pattern of inattention that amounts to an abdication of his duty to
the Company or its stockholders, or that show a reckless disregard for his duty
to the Company or its stockholders in circumstances in which he was or should
have been aware, in the ordinary course of performing his duties, of a risk of
serious injury to the Company or its stockholders, or (iii) based on
transactions between the Company and its directors or other corporations with
interrelated directors or on improper distributions, loans or guarantees under
applicable sections of the Delaware Law. Such limitation of liability also does
not affect the availability of equitable remedies such as injunctive relief or
rescission.
The Company's Bylaws provide that the Company must indemnify its
directors and officers to the full extent permitted by the Delaware Law,
including circumstances in which indemnification is otherwise discretionary
under
19
<PAGE> 21
the Delaware Law, and the Company has entered into indemnification agreements
(the "Indemnification Agreements") with its directors providing such indemnity.
The Indemnification Agreements constitute binding agreements between the Company
and each of the other parties thereto, thus preventing the Company from
modifying its indemnification policy in a way that is adverse to any person who
is a party to an Indemnification Agreement.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
See the Exhibit Index of this Registration Statement.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to the appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to include any
material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement;
(2) That, for the purpose of determining liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
20
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Los Angeles, State of California, on May 19, 1997.
AAMES FINANCIAL CORPORATION
(Registrant)
By: /s/ Cary H. Thompson
-------------------------------
Cary H. Thompson
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Cary H. Thompson and Gregory J. Witherspoon and
each of them, his attorney-in-fact and agent, with full power of substitution,
for him in any and all capacities, to sign any amendments to this Registration
Statement, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title
Date
<S> <C> <C>
/s/ Gary K. Judis Chairman of the Board May 19, 1997
- ---------------------------------------
Gary K. Judis
/s/ Cary H. Thompson Chief Executive Officer, Director May 19, 1997
- --------------------------------------- (Principal Executive Officer)
Cary H. Thompson
/s/ Gregory J. Witherspoon Executive Vice President - Finance, May 19, 1997
- --------------------------------------- Chief Financial Officer, Director
Gregory J. Witherspoon
/s/ Bobbie J. Burroughs Executive Vice President - Administration, May 19, 1997
- --------------------------------------- Secretary, Director
Bobbie J. Burroughs
/s/ Neil B. Kornswiet Vice Chairman and President May 19, 1997
- ---------------------------------------
Neil B. Kornswiet
</TABLE>
21
<PAGE> 23
<TABLE>
<S> <C> <C>
/s/ Mark E. Elbaum Senior Vice President - Finance May 19, 1997
- --------------------------------------- (Principal Accounting Officer)
Mark E. Elbaum
/s/ Joseph R. Cerrell Director May 19, 1997
- ---------------------------------------
Joseph R. Cerrell
/s/ Dennis F. Holt Director May 19, 1997
- ---------------------------------------
Dennis F. Holt
/s/ Melvyn Kinder Director May 19, 1997
- ---------------------------------------
Melvyn Kinder
</TABLE>
22
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
No. Item Page
- --- ---- ----
<C> <C>
4.3 Form of Specimen Common Stock Certificate.(1)
5.1 Opinion of Barbara S. Polsky, Esq., Senior Vice President, General Counsel
of the Registrant
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Barbara S. Polsky, Esq., Senior Vice President, General Counsel
of the Registrant (included in Exhibit 5.1).
</TABLE>
- -----------------------------
1. Incorporated by reference from Registrant's Report on Form 10-K filed
with the Commission on September 16, 1996.
<PAGE> 1
EXHIBIT 5.1
May 19, 1997
Aames Financial Corporation
3731 Wilshire Boulevard
Los Angeles, California 90010
Ladies and Gentlemen:
At your request, the undersigned, Barbara S. Polsky, Esq. Senior Vice
President and General Counsel of Aames Financial Corporation, a Delaware
corporation (the "Company"), has examined the Registration Statement on Form S-3
(the "Registration Statement"), to which this letter is attached as Exhibit 5.1,
filed by the Company in order to register under the Securities Act of 1933, as
amended, up to 1,877,669 shares of Common Stock, par value $.001 per share, of
the Company (the "Shares"), which may be sold by the "Selling Stockholders"
therein identified.
I have examined the Certificate of Incorporation of the Company, and
its Bylaws, and such other corporate records, certificates, documents and
matters of law as I have deemed necessary to render this opinion.
Based on the foregoing and subject to compliance with applicable state
securities and "Blue Sky" laws, I am of the opinion that the Shares have been
duly authorized and are validly issued, fully paid and non-assessable.
I consent to the use of this opinion as an Exhibit to the Registration
Statement and to use of my name in the Prospectus constituting a part thereof.
Respectfully submitted,
/s/ BARBARA S. POLSKY, ESQ.
--------------------------------
Barbara S. Polsky, Esq.
Executive Vice President
and General Counsel
Aames Financial Corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of our report dated
August 12, 1996 appearing on page 45 of Aames Financial Corporation's Annual
Report on Form 10-K for the year ended June 30, 1996. We also consent to the
incorporation by reference of our report dated August 28, 1996 appearing on page
4 of the Current Report on Form 8-K/A dated September 16, 1996. We also consent
to the reference to us under the heading "Experts" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Los Angeles, California
May 19, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
on Form S-3 of Aames Financial Corporation ("AFC") of our report dated
August 16, 1996, relating to the balance sheets of One Stop Mortgage, Inc.
as of June 30, 1996 and December 31, 1995 and the related statements of
operations, changes in stockholders' equity and cash flows for the period
January 1, 1996 through June 30, 1996 and the period August 24, 1995
(inception) through December 31, 1995, which report appears in AFC's report on
Form 8-K filed with the United States Securities and Exchange Commission on
September 12, 1996, and to the reference to our firm under the heading
"Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Orange County, California
May 19, 1997
