<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1997
or
Transition Report Pursuant to Section
13 or 15(d) of the Securities Exchange Act of
1934 For the transition period from ______
to ______
Commission File Number 0-19604
AAMES FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4340340
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3731 WILSHIRE BOULEVARD, 10TH FLOOR,
LOS ANGELES, CALIFORNIA 90010
(Address of Registrant's principal executive offices including ZIP Code)
(213) 351-6100
------------------------------
(Registrant's telephone number,
including area code)
NO CHANGE
---------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
At May 6, 1997, the Registrant had 27,740,386 shares of
common stock outstanding.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
NO. NO.
- --- ----
<S> <C> <C>
PART I FINANCIAL INFORMATION
1. Financial Statements 1 - 5
2. Management's Discussion and Analysis of Financial Condition 5 - 19
and Results of Operations
PART II OTHER INFORMATION
1. Legal Proceedings 20
2. Changes in Securities 20
3. Defaults Upon Senior Securities 20
4. Submission of Matters to a Vote of Security Holders 20
5. Other Information 20
6. Exhibits and Reports on Form 8-K 20
Signature Page 21
</TABLE>
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AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
1996 1997
------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 23,941,000 $150,151,000
Loans held for sale, at cost which approximates market 186,189,000 106,846,000
Accounts receivable, less allowance for
doubtful accounts of $473,000 and $664,000 9,685,000 38,219,000
Interest-only strip, at fair market value 129,113,000 281,965,000
Mortgage servicing rights 10,902,000 19,559,000
Residual assets 44,676,000 93,140,000
Equipment and improvements, net 6,674,000 10,673,000
Prepaid and other 10,295,000 19,063,000
============ ============
Total assets $421,475,000 $719,616,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings $138,045,000 $288,000,000
Revolving warehouse facility 112,363,000 75,000,000
Accounts payable and accrued expenses 11,380,000 22,518,000
Accrued compensation and related expenses 4,427,000 6,793,000
Income taxes payable 21,831,000 45,180,000
------------ ------------
Total liabilities 288,046,000 437,491,000
------------ ------------
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 shares authorized;
23,845,300 and 27,677,300 shares outstanding 24,000 28,000
Additional paid-in capital 88,134,000 208,107,000
Retained earnings 45,271,000 73,990,000
------------ ------------
Total stockholders' equity 133,429,000 282,125,000
------------ ------------
Total liabilities and stockholders' equity $421,475,000 $719,616,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
------------------------------ --------------------------------
1996 1997 1996 1997
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Gain on sale of loans $ 26,589,000 $ 53,052,000 $ 60,528,000 $166,212,000
Net unrealized gain on valuation
of interest-only strip - 5,103,000 - 5,103,000
Commissions 4,939,000 7,586,000 15,668,000 23,173,000
Loan service 5,372,000 8,769,000 13,172,000 18,831,000
Fees and other 3,703,000 9,570,000 9,234,000 26,430,000
------------ ------------ ------------ ------------
Total revenue 40,603,000 84,080,000 98,602,000 239,749,000
------------ ------------ ------------ ------------
Expenses:
Compensation and related expenses 10,676,000 22,250,000 27,254,000 61,283,000
Sales and advertising costs 5,171,000 6,566,000 12,789,000 20,800,000
General and administrative expenses 4,778,000 8,082,000 10,532,000 22,799,000
Interest expense 3,014,000 8,364,000 6,298,000 23,551,000
Provision for loan losses 2,141,000 8,509,000 4,959,000 25,441,000
Nonrecurring charges - - - 28,108,000
------------ ------------ ------------ ------------
Total expenses 25,780,000 53,771,000 61,832,000 181,982,000
------------ ------------ ------------ ------------
Income before income taxes 14,823,000 30,309,000 36,770,000 57,767,000
Provision for income taxes 6,259,000 12,734,000 15,259,000 26,542,000
============ ============ ============ ============
Net income $ 8,564,000 $ 17,575,000 $ 21,511,000 $ 31,225,000
============ ============ ============ ============
Net income per share
Primary $ 0.34 $ 0.58 $ 0.86 $ 1.03
============ ============ ============ ============
Fully diluted $ 0.33 $ 0.51 $ 0.85 $ 0.93
============ ============ ============ ============
Dividends $ 0.03 $ 0.03 $ 0.10 $ 0.10
============ ============ ============ ============
Weighted average number
of shares outstanding
Primary 25,108,000 30,337,000 24,962,000 30,405,000
============ ============ ============ ============
Fully Diluted 27,162,000 36,498,000 25,648,000 36,565,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31
1996 1997
--------------- ---------------
<S> <C> <C>
Operating activities:
Net income $ 21,511,000 $ 31,225,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 4,959,000 25,441,000
Depreciation and amortization 773,000 1,945,000
Deferred income taxes 10,938,000 38,625,000
Gain on sale of loans (67,583,000) (218,152,000)
Net unrealized gain on valuation of interest-only strip - (5,103,000)
Amortization of interest-only strip 9,546,000 44,962,000
Mortgage servicing rights originated (7,295,000) (12,452,000)
Mortgage servicing rights amortization 395,000 3,795,000
Changes in assets and liabilities:
Loans originated or purchased (737,969,000) (1,709,287,000)
Proceeds from sale of loans 651,551,000 1,788,629,000
(Increase) in:
Accounts receivable (205,000) (28,534,000)
Prepaid and other (5,631,000) (8,768,000)
Residual assets (17,731,000) (48,464,000)
Increase (decrease) in:
Accounts payable and accrued expenses 2,486,000 11,138,000
Accrued compensation and related expenses 1,784,000 2,366,000
Income taxes payable (471,000) (15,276,000)
--------------- ---------------
Net cash used in operating activities (132,942,000) (97,910,000)
--------------- ---------------
Investing activities:
Purchases of property and equipment (3,867,000) (5,953,000)
--------------- ---------------
Net cash used in investing activities (3,867,000) (5,953,000)
--------------- ---------------
Financing activities:
Proceeds from sale of stock or exercise of options 1,965,000 119,977,000
Proceeds from borrowing 114,927,000 149,955,000
Amounts outstanding under warehouse facilities 47,560,000 (37,363,000)
Dividends paid (2,015,000) (2,496,000)
--------------- ---------------
Net cash provided by financing activities 162,437,000 230,073,000
--------------- ---------------
Net increase in cash 25,628,000 126,210,000
Cash and cash equivalents at beginning of period 20,359,000 23,941,000
=============== ===============
Cash and cash equivalents at end of period $ 45,987,000 $ 150,151,000
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
AAMES FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The consolidated financial statements of Aames Financial Corporation, a
Delaware corporation, and its subsidiaries (collectively, the "Company")
included herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted.
The consolidated financial statements include the accounts of Aames
Financial Corporation and all of its subsidiaries after eliminating all
significant intercompany transactions and reflect all normal, recurring
adjustments which are, in the opinion of management, necessary to present a fair
statement of the results of operations of the Company for the interim periods
reported. The results of operations for the Company for the three months and
nine months ended March 31, 1997 are not necessarily indicative of the results
expected for the full fiscal year.
NOTE 2: STOCK SPLIT
On January 28, 1997, the Company declared a three-for-two split of the
Company's common stock effected in the form of a stock dividend, payable
February 21, 1997 to stockholders of record February 10, 1997.
NOTE 3: RECLASSIFICATIONS
Certain amounts related to 1996 have been reclassified to conform to
the 1997 presentation.
NOTE 4: SUBSIDIARY GUARANTORS
In October 1996, the Company completed an offering of its 9.125% Senior
Notes due 2003 which were guaranteed by all of the Company's subsidiaries, all
of which are wholly owned. The guarantees are joint and several, full, complete
and unconditional. There are no restrictions on the ability of such subsidiaries
to transfer funds to the Company in the form of cash dividends, loans or
advances. The Company is a holding company with limited assets or operations
other than its investments in its subsidiaries. Separate financial statements of
the guarantors are not presented because the aggregate total assets, net
earnings and net equity of such subsidiaries are substantially equivalent to the
total assets, net earnings and net equity of the Company on a consolidated
basis.
4
<PAGE> 7
NOTE 5: NEW ACCOUNTING STANDARD
The Company adopted Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (FAS 125 effective January 1, 1997). The
adoption of FAS 125 did not have a material effect on the Company's results of
operations for the quarter ended March 31, 1997. As a result of the adoption of
FAS 125, the Company records amounts previously categorized as "Excess servicing
gains" in the Consolidated Statements of Income as "Gain on sale of loans."
Additionally, the Company now records the right to future interest income that
exceeds contractually specified servicing fees and previously recorded as
"Excess servicing receivable" as an investment security called "Interest-only
strips." The Company has classified this asset as a trading security and, at
March 31, 1997, recorded a mark-to-market gain of $5.1 million on this security.
FAS 125 requires that this mark-to-market gain be reported separately from "Gain
on sale of loans" and the adjustment has been labeled "Net unrealized gain on
valuation of interest-only strips" in the Consolidated Statements of Income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
Company's Consolidated Financial Statements included in Item 1 of this Form
10-Q.
GENERAL
The Company engages in the business of originating, purchasing, selling
and servicing home equity mortgages secured by single family residences. The
Company currently offers a variety of loan products, including fixed and
adjustable rate mortgage loans primarily for debt consolidation or the financing
of other consumer needs. The Company originates and purchases loans on a
nationwide basis through three production channels. The Company historically
originated its loans solely 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 on a flow basis 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. See "Recent Developments." The Company's acquisition of One Stop
Mortgage, Inc. ("One Stop") in August 1996 further diversified the Company's
production channels to include the origination and purchase of mortgage loans
from a network of independent mortgage brokers. Commencing in December 1996, the
Company expanded its retail production to include the "virtual office," giving
the Company an outbound telemarketing loan production capability. The Company's
anticipated expansion into the United Kingdom has been deferred in order to
consider alternative entrance strategies.
5
<PAGE> 8
The following table presents the volume of loans originated and
purchased by the Company through each of the three production channels and the
portfolio serviced by the Company during the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------- ---------
1996 1997 1996 1997
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Loans originated and purchased:
Wholesale correspondent $ 170,700 $ 297,600 $ 388,300 $ 885,900
Broker network(1) 118,300 177,600 201,100 508,200
Retail 48,300 121,600 148,600 315,200
---------- ---------- ---------- ----------
Total $ 337,300 $ 596,800 $ 738,000 $1,709,300
========== ========== ========== ==========
Servicing portfolio at period end $1,060,500 $2,721,900
========== ==========
</TABLE>
(1) One Stop commenced operations in October 1995.
Recent Developments
During the nine month period ended March 31, 1997, the pricing for
wholesale correspondent purchases of mortgage 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 product,
primarily bulk purchases, which may reduce the volume of loans purchased.
Although, as disclosed in the Company's Form 10-K for the fiscal year ended June
30, 1996, this change may have an adverse impact on earnings, management
believes it will strengthen the Company in the long run by improving the
Company's cash flow and overall financial position.
The Company frequently reviews its loan offerings and introduces new
loan products to attempt to meet the needs of its customers. In furtherance of
this strategy, during the fourth quarter of fiscal 1997, the Company anticipates
offering loans with higher loan-to-value ratios to borrowers with higher credit
quality which it intends to include in its securitizations. In addition, the
Company plans to offer 125% loan-to-value home improvement loans and home equity
lines of credit ("new products") to qualified borrowers. It is the Company's
intention to sell the new products on a whole loan basis servicing released. The
Company believes the new products will enhance cash flow as a result of the
origination fees charged and the cash gain on sale received and may slow down
prepayment rates by employing more of the borrower's available equity. The new
products will also permit the Company to leverage its existing loan production
infrastructure.
6
<PAGE> 9
CERTAIN ACCOUNTING CONSIDERATIONS AND RISK FACTORS
Accounting Considerations. As a fundamental part of its business and
financing strategy, the Company sells substantially all of its loans to third
party investors in securitization transactions. 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
normal 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 particular 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 the weighted average
coupon rate of the loans included in the securitization which is indicative of
the rates prevalent in the market, subject to adjustment for credit risk
retained by the Company and recorded as a reserve. The weighted average rate
used to discount the cash flows was 15.3% for the nine months ended March 31,
1997.
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.
See "Prepayment Risk." 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 $4.2 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.
See "Revenue." 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
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<PAGE> 10
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 long-term 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. See "Revenue."
RESULTS OF OPERATIONS--THREE AND NINE MONTHS ENDED MARCH 31, 1996 AND 1997
For the three months ended March 31, 1997, the Company's total revenue
increased to $84.1 million, up 107% when compared to the corresponding period in
the prior year. As a result, the Company's net income increased 105% to $17.6
million for the three months ended March 31, 1997 when compared to the
corresponding period in the prior year. For the nine months ended March 31,
1997, the Company's total revenues increased to $240 million, up 143% when
compared to the corresponding period in the prior year. Total expenses in the
nine month period increased as a percentage of revenue primarily due to a
nonrecurring, pretax charge of $28.1 million resulting primarily from the
acquisition of One Stop and an increase in the
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<PAGE> 11
provision for loan losses due to larger securitization transactions. Net income
for the nine months ended March 31, 1997 increased 45% to $31.2 million, when
compared to the corresponding period in the prior year.
For the three months ended March 31, 1997, fully diluted net income per
share was $.51, up from $.33 in the corresponding prior year period, reflecting
an increase of 55% on 34% more shares outstanding. For the nine months ended
March 31, 1997, fully diluted net income per share was $.93 per share ($1.44
prior to nonrecurring charges) compared with $.85 per share for the
corresponding prior year period on 43% more shares outstanding.
The following table sets forth information regarding the components of
the Company's revenue and expenses for the three and nine months ended March 31:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------- ---------
1996 1997 1996 1997
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Revenue:
Gain on sale of loans $ 26,589 $ 53,052 $ 60,528 $166,212
Net unrealized gain on valuation of interest-only strip -- 5,103 -- 5,103
Commissions 4,939 7,586 15,668 23,173
Loan service:
Servicing spread 3,959 5,898 9,382 12,445
Prepayment fees 798 1,678 2,138 3,898
Late charges and other servicing fees 615 1,193 1,652 2,488
Fees and other:
Closing 516 613 1,733 2,149
Appraisal 274 477 791 1,406
Underwriting 308 211 1,120 1,159
Interest income 2,443 8,105 4,993 21,149
Other 162 164 597 567
-------- -------- -------- --------
Total revenue $ 40,603 $ 84,080 $ 98,602 $239,749
-------- -------- -------- --------
Expenses:
Compensation and related expenses $ 10,676 $ 22,250 $ 27,254 $ 61,283
Sales and advertising costs 5,171 6,566 12,789 20,800
General and administrative expenses 4,778 8,082 10,532 22,799
Interest expense 3,014 8,364 6,298 23,551
Provision for loan losses 2,141 8,509 4,959 25,441
Nonrecurring charges -- -- -- 28,108
-------- -------- -------- --------
Total expenses $ 25,780 $ 53,771 $ 61,832 $181,982
Income before income taxes $ 14,823 $ 30,309 $ 36,770 $ 57,767
Provision for income taxes 6,259 12,734 15,259 26,542
-------- -------- -------- --------
Net income $ 8,564 $ 17,575 $ 21,511 $ 31,225
======== ======== ======== ========
</TABLE>
9
<PAGE> 12
REVENUE
Total revenue for the three and nine months ended March 31, 1997
increased to $84.1 million and $240 million, up 107% and 143%, respectively,
over total revenue for the same periods last year. This increase in total
revenue was primarily due to the higher gain on sale of loans resulting from the
increased volume of mortgage loans that the Company securitized and sold.
Gain on sale of loans for the three and nine months ended March 31,
1997 increased to $53.1 million and $166 million, up 100% and 175%,
respectively, when compared to the corresponding periods in the prior year. In
addition, the Company recorded $5.1 million for the three months ended March 31,
1997 in net unrealized gain on valuation of interest-only strip in accordance
with FAS 125. These increases resulted primarily from the greater size of
mortgage loan pools securitized and sold by the Company in the secondary market.
During the three and nine months ended March 31, 1997, the Company securitized
and sold in the secondary market $633 million and $1.76 billion of loans,
respectively, compared to $201 million and $488 million for the corresponding
periods in the prior year. The increases in the amount of loans securitized and
sold in the secondary market during the nine month period were attributable to
the higher volume of loans originated and securitized through the Company's
three production channels. Loan origination volume of $597 million in the third
fiscal quarter, however, represented a slight decline from origination volume of
$616 million in the immediately preceding quarter due to what management
believes are seasonal variations in loan production, primarily through the
Company's wholesale correspondent and broker production channels. See "Recent
Developments."
The weighted average servicing spread (the weighted average interest
rate on the pool of loans sold over the sum of the investor pass-through rate
and the monoline insurance fee) on all loans securitized and sold by the Company
during the nine months ended March 31, 1997 was 4.2% compared to 4.9% for the
corresponding period in the prior year. The lower weighted average servicing
spread in 1997 reflected a decrease in weighted average interest rates on pooled
loans due primarily to the larger percentage of higher credit grade loans
included in the loans securitized during the quarter, and to a lesser degree to
increased pass through rates due to the current interest rate environment. The
larger percentage of higher credit grade loans included in the loans securitized
during the quarter reflect the Company's plan to diversify its loan originations
and purchases to include more A-, B and C credit grade loans.
Commissions earned on loan originations continue to be an important
component of total revenue, although to a lesser degree than in prior years,
comprising 9.0% and 9.7% of total revenue for the three and nine months ended
March 31, 1997, compared to 12% and 16% for the same periods last year.
Commissions for the three and nine months ended March 31, 1997 increased to
$7.59 million and $23.2 million, up 54% and 48%, respectively, when compared to
the corresponding periods in the prior year. Commission revenue is primarily a
function of the volume of mortgage loans originated by the Company through its
retail loan office network and the weighted average commission rate charged on
such loans. Retail loan originations for the three and nine months ended March
31, 1997 totaled $122 million and $315 million, up 152% and 112%, respectively,
from $48.3 million and $149 million for the corresponding periods in
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<PAGE> 13
the prior year. See "Expenses." During the three and nine months ended March 31,
1997, the weighted average commission rate charged on retail loans decreased
from 7.1% to 4.5% and 8.3% to 5.0%, respectively, when compared to the same
periods in the prior year. The decrease in the weighted average commission rate
reflected competitive factors and the increase of higher credit grade loans
originated through the Company's retail loan office network, which generally
carry lower commission rates.
Loan service revenue for the three and nine months ended March 31, 1997
increased to $8.77 million and $18.8 million, up 63% and 43%, respectively, from
the corresponding periods in the prior year. Loan service revenue consists of
the servicing spread earned on the principal balances of the loans in the
Company's loan servicing portfolio, prepayment fees, late charges and other fees
retained by the Company in connection with the servicing of loans reduced by the
amortization of the interest-only strip. The increase in loan service revenue
was due primarily to the greater size of the portfolio of loans serviced in this
period offset by increased amortization of the interest-only strip due to faster
prepayment rate assumptions made to reflect the anticipated increases in
competition. The Company's loan servicing portfolio increased to $2.72 billion
at March 31, 1997, up 157% from the March 31, 1996 balance of $1.06 billion.
Management believes that the business of loan servicing provides a more
consistent revenue stream and is less cyclical than the business of loan
origination and purchasing.
As of March 31, 1997, the Company services loans in seven western
states, including California. Loans secured by properties in other states are
serviced through one or more subservicers. In November 1996, the Company
implemented a new servicing system which will enable the Company 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 has historically experienced delinquency rates that are
higher than those prevailing in its industry due to the Company's focus on lower
credit grade loans. Management believes, however, 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. In the fall of 1996, the Company made a
strategic decision to diversify the loans it originates and purchases to include
more of the higher credit grade (A-, B and C) loans. The decision was based in
part on the Company's expansion into certain states (primarily in the east)
where compliance with applicable laws results in a lengthy foreclosure process
and redemption period. During the three and nine months ended March 31, 1997,
the Company originated 87% and 79% of A-, B and C loans compared to 60% and 64%,
respectively, during the same periods last year. This diversification was
accomplished through the acquisition of One Stop which had traditionally focused
on the higher credit grade spectrum and by adopting more competitive pricing
structures in the wholesale correspondent and retail divisions. Generally,
higher credit grade loans have higher
11
<PAGE> 14
average combined loan-to-value ratios than the lower credit grade loans.
Therefore, the Company anticipates that loan losses may increase over the
historical levels. On the other hand, the higher credit grade loans generally
perform with lower levels of delinquency than the lower credit grade loans. The
following table sets forth delinquency, foreclosure, loss and reserve
information of the Company's servicing portfolio for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JUNE 30, MARCH 31,
---------------------------------------- --------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Percentage of dollar amount of delinquent
loans to loans serviced (period end)(1)(2)(3)
One month 3.8% 3.9% 4.9% 4.9% 2.8%
Two months 1.6% 1.6% 1.8% 1.8% 1.5%
Three or more months:
Not foreclosed(4) 6.7% 5.0% 8.0% 8.1% 8.1%
Foreclosed(5) 3.6% 1.5% 1.0% 0.9% 0.9%
--------- --------- ---------- --------- ----------
Total 15.7% 12.0% 15.7% 15.7% 13.3%
Percentage of dollar amount of loans foreclosed
to loans serviced(2) 3.0% 1.2% 1.1% 0.40% 1.1%
Number of loans foreclosed 215 159 221 102 356
Principal amount at time of foreclosure of
foreclosed loans $ 11,528 $ 6,675 $ 14,349 $ 4,157 $ 30,817
Net losses (gains)(6) $ (56) $ 127 $ 931 $ 640 $ 3,229
Percentage of losses to average servicing
portfolio NM .03% .09% .10% .21%
Liquidation loss reserve(7) $ 959 $ 3,371 $ 10,300 $ 7,729 $ 32,827
</TABLE>
- --------
(1) Delinquent loans are loans for which more than one payment is past due.
(2) The delinquency and foreclosure percentages are calculated on the basis of
the total dollar amount of mortgage loans originated or purchased by the
Company and, in each case, serviced by the Company and any subservicers as
of the end of the periods indicated.
(3) At March 31, 1997, the dollar volume of loans delinquent more than 90 days
in the Company's seven securitization trusts formed during the period from
December 1994 to June 1996 exceeded the permitted limit in the related
pooling and servicing agreements. See "Capital Resources."
(4) Represents loans which are in foreclosure but as to which foreclosure
proceedings have not concluded.
(5) Represents properties acquired following a foreclosure sale and still
serviced by the Company.
(6) Represents losses net of gains on foreclosed properties sold during the
periods indicated.
(7) Represents period end reserves for future liquidation losses.
12
<PAGE> 15
Fees and other revenue for the three and nine months ended March 31,
1997 increased to $9.57 million and $26.4 million, up 158% and 186%,
respectively, from the corresponding periods in the prior year. Fees and other
revenue consist primarily of interest income and fees received by the Company
through its retail loan office network in the form of closing, appraisal,
underwriting and other fees. Interest income increased to $8.11 million and
$21.1 million for the three and nine months ended March 31, 1997, respectively,
due to interest earned on larger amounts of loans held by the Company during the
period from origination or purchase of the loans until the date sold by the
Company. The dollar amount of other fees increased due to the larger number of
mortgage loans originated through the Company's retail loan office network
during the respective periods.
EXPENSES
Compensation and related expenses for the three and nine months ended
March 31, 1997 increased to $22.3 million and $61.3 million, up 108% and 125%,
respectively, when compared to the corresponding periods in the prior year.
These increases reflected compensation paid to new personnel and increased
commissions and bonuses paid to certain employees. Compensation and related
expenses as a percentage of total revenues remained at 26% for the three months
ended March 31, 1997, consistent with the corresponding period in the prior
year, and decreased for the nine month period from 28% to 26%.
Sales and advertising costs for the three and nine months ended March
31, 1997 increased to $6.57 million and $20.8 million, up 27% and 63%,
respectively, when compared to the corresponding periods in the prior year.
Increased advertising costs were due primarily to the Company's nationwide
expansion of its retail loan office network. The Company operated 55 retail loan
offices in 23 states throughout the United States at March 31, 1997 compared to
39 offices in 12 states at March 31, 1996. One Stop operated 33 offices in 24
states at March 31, 1997 compared to 19 offices in 14 states at March 31, 1996.
Sales and advertising costs as a percentage of total revenue decreased to 8% and
9%, respectively, for the three and nine months ended March 31, 1997, from 13%
for the corresponding periods in the prior year.
General and administrative expenses for the three and nine months ended
March 31, 1997 increased to $8.08 million and $22.8 million, up 69% and 116%,
respectively, when compared to the corresponding periods in the prior year.
These increases resulted primarily from occupancy and communications costs
related to the Company's growth. As a percentage of revenue, general and
administrative expenses for the three and nine months ended March 31, 1997
decreased to 10% when compared to 12% and 11%, respectively, for the same
periods last year.
Interest expense for the three and nine months ended March 31, 1997
increased to $8.36 million and $23.6 million, up 178% and 274%, respectively,
when compared to the corresponding periods in the prior year. The increase was
primarily the result of increased borrowings under various financing
arrangements used to fund the origination and purchase of mortgage loans prior
to their securitization and sale in the secondary market and as a result of the
Company's sale in the third quarter of fiscal 1996 of $115 million of its 5.5%
Convertible Subordinated Debentures due 2006, and the sale in the second quarter
of fiscal 1997 of $150
13
<PAGE> 16
million of its 9.125% Senior Notes due 2003. Interest expense is expected to
increase in future periods due to the Company's continued reliance on credit
facilities to fund increased originations and purchases of loans pending their
securitization.
The provision for loan losses for the three and nine months ended March
31, 1997 increased to $8.5 million and $25.4 million, up 297% and 413%,
respectively, when compared to the corresponding periods in the prior year. The
provision for loan losses represents 1.44% of the loans securitized during the
nine months ended March 31, 1997 compared to 1.02% of the loans securitized
during the corresponding prior year periods. This increase reflects the greater
amount of higher credit grade loans originated during 1997.
INCOME TAXES
The Company's provision for income taxes increased from $15.3 million
for the nine months ended March 31, 1996 to $26.5 million for the nine months
ended March 31, 1997.
FINANCIAL CONDITION
Loans held for sale. Prior to securitization, the Company holds
mortgage loans in its portfolio. Balances are dependent on the volume of loans
originated and the size of the securitization in the current period. The
Company's portfolio of loans held for sale decreased from $186 million at June
30, 1996 to $107 million at March 31, 1997.
Accounts receivable. Accounts receivable, representing servicing fees
and advances and other receivables, increased from $9.7 million at June 30, 1996
to $38.2 million at March 31, 1997. This increase is primarily the result of
larger pools serviced and increases in related advances and receivables.
Interest-only strip. Interest-only strip increased from $129 million at
June 30, 1996 to $282 million at March 31, 1997 reflecting the increased size of
the Company's first nine months' securitizations.
Mortgage servicing rights. The March 31, 1997 balance represents
mortgage servicing rights capitalized in accordance with FAS 125. This balance
reflects the capitalization under FAS 125 of $12.5 million of servicing rights
partially offset by amortization of $3.8 million for the nine months ended March
31, 1997.
Residual assets. Residual assets represent the reserve accounts and
overcollateralization amounts required to be maintained in connection with the
securitization of loans. Residual assets include cash and mortgage loans in
excess of the principal amounts of the senior certificates or bonds of the
securitization trusts. Residual assets increased from $44.7 million at June 30,
1996 to $93.1 million at March 31, 1997 due to the size of the Company's recent
securitizations.
14
<PAGE> 17
Equipment and improvements. Primarily as a result of the expansion of
the Company's retail loan office network and the associated investment in
technology, equipment and improvements, net increased from $6.7 million at June
30, 1996 to $10.7 million at March 31, 1997.
Prepaid and other assets. Prepaid and other assets increased from $10.3
million at June 30, 1996 to $19.1 million at March 31, 1997 primarily as a
result of the capitalization, net of amortization, of debt issuance costs
related to the issuance of the Company's 9.125% Senior Notes due 2003.
Borrowings. Borrowings increased from $138 million at June 30, 1996 to
$288 million at March 31, 1997. This increase was the result of the Company's
sale in October 1996 of $150 million of its 9.125% Senior Notes due 2003.
Revolving warehouse facilities. Amounts outstanding under warehouse
facilities decreased from $112 million at June 30, 1996 to $75.0 million at
March 31, 1997. Proceeds from the Company's securitizations are used to pay down
the Company's warehouse facilities. Although the Company closed a $633 million
securitization in March 1997, a $75.0 million balance remained outstanding under
the warehouse facilities. This was primarily a result of the amount of
restricted cash held by the Company related to the pre-funding of the
securitization completed during the three months ended March 31, 1997.
Restricted cash cannot be used to repay amounts outstanding under warehouse
facilities pending final monoline insurance due diligence on the loans included
in the pre-funding. (See "Risk Management.") The restricted cash was released in
April 1997 and used to pay down warehouse facilities.
LIQUIDITY
The Company's operations require continued access to short-term and
long-term sources of cash. The Company's operating cash requirements include the
funding of: (i) mortgage loan originations and purchases prior to their
securitization and sale (but see "Recent Developments"), (ii) fees and expenses
incurred in connection with the securitization and sale of loans, (iii) cash
reserve account or overcollateralization requirements in connection with the
securitization and sale of mortgage loans, (iv) tax payments due on recognition
of gain on sale other than in securitizations using the debt-for-tax structure
(see below), and (v) ongoing administrative and other operating expenses.
The Company has operated on a negative operating cash flow basis and
expects to continue to do so for as long as the Company's cash requirements
necessitated by the growth in volume of its securitization program continue to
grow at rates in excess of the cash generated by the Company from its
operations, including its servicing activities. To increase the cash generated
from operations, the Company may increase the volume of whole loans sold in bulk
to other mortgage lenders. Unlike a securitization, a whole loan sale generates
cash at the closing of the sale; however, such sales may generate less profit
than a securitization.
Historically, the Company has funded, and expects to continue to fund,
its negative operating cash flows, subject to limitations under the Company's
existing credit facilities,
15
<PAGE> 18
principally through borrowings from financial institutions, sales of equity
securities and sales of senior and subordinated notes, among other sources.
There can be no assurance that the Company will have access to the capital
markets in the future or that financing will be available to satisfy the
Company's operating and debt service requirements or to fund its future growth.
The Company anticipates that its sources of liquidity will be sufficient to fund
the Company's liquidity requirements for the next 12 months, if the Company's
future operations are consistent with management's current growth expectations.
There can be no assurance that the Company will be successful in consummating
any such financing transaction in the future on terms the Company would consider
to be favorable.
New loan originations and purchases represent the Company's most
significant cash flow requirement. The Company pays a premium on loans purchased
through its wholesale correspondent program and on loans purchased from
independent mortgage brokers. The amount of cash used to pay premiums
approximated $20.4 million and $51.7 million for the three and nine months ended
March 31, 1997 compared to $9.8 million and $19.6 million for the prior year
periods. This increase is primarily related to the increase in the amount of
loans purchased in bulk through the loan correspondent program and, to a lesser
extent, the higher premiums paid per loan. See "Recent Developments."
The Company securitized and sold in the secondary market $633 million
and $1.76 billion of loans for the three and nine months ended March 31, 1997
compared to $201 million and $488 million during the same periods of the prior
year. In connection with securitization transactions completed during these
periods, the Company was required to provide credit enhancements in the form of
overcollateralization amounts. In addition, during the life of the related
securitization trusts, the Company subordinates a portion of the excess cash
flow otherwise due it to the rights of holders of senior interests as a credit
enhancement to support the sale of the senior interests. The terms of the
securitization trusts generally require that all excess cash flow otherwise
payable to the Company during the early months of the trusts be used to repay
the senior interests in order to increase overcollateralization to specified
maximums.
In addition, the increasing use of securitization transactions as a
funding source by the Company has resulted in a significant increase in the
amount of gain on sale of loans recognized by the Company. During the three
months and nine months ended March 31, 1997, the Company recognized gain on sale
of loans in the amounts of $53.1 million and $166 million, respectively,
compared with $26.6 million and $60.5 million during the same periods of the
prior year. In addition, the Company recognized $5.1 million in net unrealized
gain on valuation of interest-only strip in accordance with FAS 125 implemented
in the quarter ended March 31, 1997. In the securitization structure used by the
Company for its past securitizations, the recognition of gain on sale has had a
negative impact on the cash flow of the Company since the Company was required
to pay federal and state taxes on a portion of these amounts in the period
recognized although the cash representing the gain is not received until later
periods as the related servicing fees are collected and applicable
overcollateralization requirements are met. In March 1997, the Company completed
its first securitization using the debt-for-tax structure which allowed the
Company to defer the payment of taxes until income is distributed or received by
the trust. This had a positive effect on the Company's cash flows without
materially changing the reported earnings.
16
<PAGE> 19
The Company also incurs certain expenses in connection with
securitizations, including underwriting fees, credit enhancement fees, trustee
fees and other costs which, for the pools sold during the nine months ended
March 31, 1997, approximated .50% of the principal amount of the securitized
mortgage loans.
CAPITAL RESOURCES
The Company finances its operating cash requirements primarily through
(i) warehouse and other credit facilities, (ii) the securitization and sale of
mortgage loans, and (iii) the issuance of debt and equity securities.
Warehouse and Other Credit Facilities. The Company currently has two
warehouse facilities in place. On January 15, 1997, the Company amended and
restated its warehouse and working capital line of credit with a syndicate of
eight commercial banks. The facility provides for a maximum borrowing amount of
$350 million, is secured by loans originated and purchased by the Company as
well as certain servicing receivables, and bears interest at the rate of 0.80%
over one-month LIBOR. This line is currently scheduled to expire on January 13,
1998 and is subject to renewal. There is an additional warehouse line of credit
from an investment bank that is secured by loans originated and purchased by the
Company. This line of $250 million (which decreases to $125 million at June 30,
1997) bears interest at a rate of 0.70% over one-month LIBOR and expires on
September 30, 1997. Management expects, although there can be no assurance, that
the Company will be able to maintain these or similar facilities in the future.
In addition, the Company is currently negotiating with a number of financial
institutions for additional warehouse facilities and has a commitment from an
investment bank for a facility with a maximum borrowing amount of $400 million.
Securitization Program. The Company's most important capital resource
has been its ability to sell loans originated and purchased by it in the
secondary market in order to generate cash proceeds to pay down its warehouse
facilities and fund new originations and purchases. The value of and market for
the Company's loans are dependent upon a number of factors, including general
economic conditions, interest rates and governmental regulations. Adverse
changes in such factors may affect the Company's ability to securitize and sell
loans for acceptable prices within a reasonable period of time. The ability of
the Company to sell loans in the secondary market on acceptable terms is
essential for the continuation of the Company's loan origination and purchase
operations. A reduction in the size of the secondary market for loans of the
types originated or purchased by the Company may adversely affect the Company's
ability to sell loans in the secondary market with a consequent adverse impact
on the Company's profitability and ability to fund future originations and
purchases.
In addition, in order to gain access to the secondary market, the
Company has relied on monoline insurance companies to provide financial
guarantee insurance on senior interests in the securitization trusts established
by the Company. Although the Company is exploring the possibility of structuring
a pool for securitization and sale in the secondary market based solely on the
internal credit enhancements of the pool or the Company's guarantees, the
Company expects to rely on monoline insurance companies for at least a portion
of its future securitizations. 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
17
<PAGE> 20
the senior interests in the securitization trusts could have a material adverse
effect on the Company's financial position and results of operations. At March
31, 1997, the dollar volume of loans delinquent more than 90 days on the
Company's seven securitization trusts formed during the period from December
1994 to June 1996 exceeded the permitted limit in the related pooling and
servicing agreements. The higher delinquency rates could negatively affect the
Company's cash flows and adversely influence the Company's assumptions
underlying the gain on sale. Additionally, the higher delinquency rates permit
the monoline insurance company to terminate the Company's servicing rights with
respect to the affected trust. To date, no servicing rights have been
terminated, and the Company believes that the likelihood of such an event is
remote. The Company has implemented various plans to lower the delinquency rates
in its future trusts, including diversifying the loans it originates and
purchases to include higher credit grade loans. Further, the monoline insurance
companies agreed to higher permitted delinquency limits in the four
securitizations completed in the nine month period ended March 31, 1997. (See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Risk Factors--Delinquencies; Negative Impact on Cash Flow; Right
to Terminate Normal Servicing" in the Company's Form 10-K for the fiscal year
ended June 30, 1996.)
Other Capital Resources. The Company has funded negative cash flows
primarily from the sale of its equity and debt securities. In December 1991,
July 1993, June 1995, and October 1996, the Company effected offerings of its
Common Stock with net proceeds to the Company aggregating $179.1 million. In
March 1995, the Company completed an offering of its 10.5% Senior Notes due 2002
with net proceeds to the Company of $22.2 million. In February 1996, the Company
completed an offering of its 5.5% Convertible Subordinated Debentures due 2006
with net proceeds to the Company of $112 million. In October 1996, the Company
completed an offering of its 9.125% Senior Notes due 2003 with net proceeds to
the Company of $145 million. The Company had cash and cash equivalents of
approximately $150 million (of which $134 million was restricted) at March 31,
1997.
RISK MANAGEMENT
The Company employs a variety of strategies in order to manage the risk
that mortgage loans held for sale pending securitization will fluctuate in value
as a result of changing interest rates prevailing in the market. The Company
hedges against interest rate fluctuations on its fixed rate product by entering
into swap agreements with third parties that sell United States Treasury
securities not yet purchased and by purchasing Treasury put options. The amount
and timing of hedging transactions are determined by members of the Company's
senior management. Management assesses factors including the interest rate
environment, loan production levels and open positions of current hedge
positions. The Company has also mitigated its interest rate exposure by
effecting securitizations each quarter resulting in a holding period for most of
the mortgage loans originated and purchased by it of less than one quarter.
The Company also mitigates its exposure to interest rate risk through a
pre-funding strategy in which it agrees to sell loans to the securitization
trust in the future at an agreed-upon price. The pre-funding locks in the price
agreed upon with investors on the pricing date (typically five business days
prior to the closing date of the securitization) for a period of generally 30
days.
18
<PAGE> 21
In a pre-funding arrangement, the Company typically delivers approximately 75%
of the loans sold at the closing and the remainder generally within 30 days
after the closing.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS 128. In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 establishes standards for computing and presenting
earnings per share ("EPS") by replacing the presentation of primary EPS with a
presentation of basic EPS. Primary EPS included common stock equivalents while
basic EPS excludes them. This change simplifies the computation of EPS, while
making the United States computation more compatible to the standards of other
countries. It also requires dual presentation of basic and fully diluted EPS on
the face of the income statement for all entities with complex capital
structures.
The Company will adopt SFAS 128 effective December 31, 1997 and does
not expect the adoption of SFAS 128 to have a material impact on its financial
statements.
SFAS 129. In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"). SFAS 129 establishes
disclosure requirements regarding pertinent rights and privileges of outstanding
securities. Examples of disclosure items regarding securities include, though
are not limited to, items such as dividend and liquidation preferences,
participation rights, call prices and dates, conversion or exercise prices or
rates. The number of shares issued upon conversion, exercise or satisfaction of
required conditions during at least the most recent annual fiscal period and any
subsequent interim period must also be disclosed.
Disclosure of liquidation preferences of preferred stock in the equity
section of the statement of financial condition is also required.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance and results of the Company's business include the
following: negative cash flows and capital needs, delinquencies, risks of
contracted servicing, dependence on funding sources, capitalized interest-only
strip, recent addition of wholesale correspondent program, recent acquisition of
One Stop, concentration of wholesale correspondent program, competition,
concentration of operations, timing of loan sales, economic conditions,
contingent risks, prepayment and credit risks and government regulation. For a
more complete discussion of these risks and uncertainties, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors" in the Company's Form 10-K for the fiscal year ended
June 30, 1996 and "Certain Accounting Considerations and Risk Factors" herein.
19
<PAGE> 22
AAMES FINANCIAL CORPORATION
OTHER INFORMATION
PART II
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) Reports on Form 8-K: The Company filed a
Current Report on Form 8-K dated April 1,
1997 reporting the completion of its two
securitizations during the quarter ended
March 31, 1997.
20
<PAGE> 23
AAMES FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report on Form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized.
AAMES FINANCIAL CORPORATION
Date: May 13, 1997 By: /s/ Gregory J. Witherspoon
---------------------------
Gregory J. Witherspoon
Executive Vice President - Finance and
Chief Financial Officer
By: /s/ Mark E. Elbaum
-----------------------
Mark E. Elbaum
Senior Vice President - Finance and
Principal Accounting Officer
21
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
------
<S> <C>
11 Computation of Per Share Earnings
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
AAMES FINANCIAL CORPORATION
Earnings Per Share
For the three and nine months ended March 31, 1996 and 1997
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
March 31, March 31,
-------------------------- --------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Shares outstanding 23,705,000 27,677,000 23,564,000 27,677,000
Common equivalent shares:
Options and warrants 1,403,000 2,660,000 1,399,000 2,727,000
Convertible subordinated notes 2,054,000 6,161,000 685,000 6,161,000
---------- ---------- ---------- ----------
Fully diluted shares outstanding 27,162,000 36,498,000 25,648,000 36,565,000
========== ========== ========== ==========
Net income $ 8,564,000 $17,575,000 $21,511,000 $31,225,000
Adjustment to add back interest on
Convertible subordinated notes 306,000 927,000 306,000 2,802,000
----------- ---------- ---------- ----------
Adjusted net income $ 8,870,000 $18,502,000 $21,817,000 $34,027,000
=========== =========== =========== ===========
Fully diluted earnings per share $ 0.33 $ 0.51 $ 0.85 $ 0.93
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 150,151,000
<SECURITIES> 0
<RECEIVABLES> 452,610,000
<ALLOWANCES> 664,000
<INVENTORY> 106,846,000
<CURRENT-ASSETS> 708,943,000
<PP&E> 15,936,000
<DEPRECIATION> 5,263,000
<TOTAL-ASSETS> 719,616,000
<CURRENT-LIABILITIES> 149,491,000
<BONDS> 288,000,000
0
0
<COMMON> 28,000
<OTHER-SE> 282,097,000
<TOTAL-LIABILITY-AND-EQUITY> 719,616,000
<SALES> 239,749,000
<TOTAL-REVENUES> 239,749,000
<CGS> 20,800,000
<TOTAL-COSTS> 20,800,000
<OTHER-EXPENSES> 112,190,000
<LOSS-PROVISION> 25,441,000
<INTEREST-EXPENSE> 23,551,000
<INCOME-PRETAX> 57,767,000
<INCOME-TAX> 26,542,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
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