<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the Fiscal Year Ended June 30, 1998
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)
<TABLE>
<S> <C>
DELAWARE 95-4340340
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
350 S. GRAND AVENUE, LOS ANGELES, CALIFORNIA 90071
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (213) 210-5000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Title of each Class Name of each exchange on which registered
COMMON STOCK, PAR VALUE $0.001 NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
10.50% SENIOR NOTES DUE 2002 NEW YORK STOCK EXCHANGE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[X]
At September 24, 1998, there were outstanding 31,015,763 shares of the
Common Stock of Registrant, and the aggregate market value of the shares held on
that date by non-affiliates of the Registrant, based on the closing price ($7.75
per share) of the Registrant's Common Stock on the New York Stock Exchange was
$225,578,304.50. For purposes of this computation, it has been assumed that the
shares beneficially held by directors and executive officers of Registrant were
"held by affiliates"; this assumption is not to be deemed to be an admission by
such persons that they are affiliates of Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement relating to its 1998 Annual
Meeting of Stockholders or an amendment to this Form 10-K are incorporated by
reference in Items 10, 11, 12 and 13 of Part III of this Annual Report.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Aames Financial Corporation (the "Company") is a consumer finance
company primarily engaged, through its subsidiaries, in the business of
originating, purchasing, selling and servicing home equity mortgage loans
secured by single family residences. Upon its formation in 1991, the Company
acquired Aames Home Loan, a home equity lender founded in 1954. In August 1996,
the Company acquired One Stop Mortgage, Inc. ("One Stop") which originates
mortgage loans primarily through a broker network. In late fiscal 1997, the
Company began originating small commercial loans on a limited basis that it
currently sells on a whole loan basis servicing released.
The Company's principal market is borrowers whose financing needs are
not being met by traditional mortgage lenders for a variety of reasons,
including the need for specialized loan products or credit histories that may
limit such borrowers' access to credit. The Company believes these borrowers
continue to represent an underserved niche of the home equity loan market and
present an opportunity to earn a superior return for the risk assumed. The
residential 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.
The Company originates and purchases loans nationally through three
production channels - retail, broker and correspondent. For the year ended June
30, 1998, the Company originated and purchased $2.38 billion of mortgage loans.
The Company underwrites and appraises every loan it originates and generally
reviews appraisals and re-underwrites all loans it purchases. In March 1998, the
Company augmented its retail production by establishing One Stop Retail Direct
("Retail Direct"). Unlike the Company's traditional retail network, which uses a
centralized marketing approach, Retail Direct uses a decentralized marketing
approach at the branch level. See "- Mortgage Loan Production."
The Company retains the servicing on the loans it originates or
purchases and securitizes. During fiscal 1998, the Company completed the
transfer-in-house of $1.47 billion of loans previously subserviced for the
Company by third parties. Of the Company's $4.15 billion servicing portfolio,
only 5.0% was subserviced by a third party at June 30, 1998. Of the Company's
$3.17 billion servicing portfolio at June 30, 1997, 53% was subserviced by a
third party at that date. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Expenses."
During fiscal 1998, the Company continued its shift up the credit
grade spectrum reflecting its previously announced strategic decision to
diversify the loans it originates and purchases to include more of the higher
credit grade loans. In fiscal 1998, of the total loans originated and purchased
by the Company, 93% were A, A-, B and C credit grade loans and 7% were C- and D
credit grade loans. In fiscal 1997, of the total loans originated and purchased
by the Company, 82% were A, A-, B and C credit grade loans and 18% were C- and D
credit grade loans, compared to 66% and 34%, respectively, in fiscal 1996. This
diversification was accomplished primarily through the acquisition of One Stop
in August 1996, which focuses on the higher credit grade spectrum, the decrease
in C- and D originations in certain non-judicial foreclosure states and the
adoption of different pricing structures by credit grade in the correspondent
and retail divisions. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Revenue."
As a fundamental part of its business and financing strategy, the
Company sells its loans to third party investors in the secondary market. The
Company maximizes opportunities in its loan disposition transactions by
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disposing of its loan production through a combination of securitizations and
whole loan sales, depending on market conditions, profitability and cash flows.
The Company sold $2.45 billion, $2.27 billion and $993 million of loans in the
fiscal years ended June 30, 1998, 1997 and 1996, respectively. See "- Loan
Disposition."
RECENT EVENTS
First Quarter Results. For the quarter ended September 30, 1998, the
Company expects that it will achieve record loan volume of approximately $725
million from all production channels. Offsetting this strong loan growth is the
negative impact of current conditions in the asset-backed mortgage and Treasury
markets that negatively impacted the Company's securitization execution.
Specifically, the Company's gain on sale resulting from its recent $650 million
securitization is expected to be lower than in the past due to a significant
loss on its hedge position which was not offset by enhanced securitization
execution. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Management." These and other factors
will have a significant negative impact on reported operating results for
September 30, 1998.
Equity Infusion. On April 27, 1998, the Company issued 2.78 million
shares of its common stock, or 9.9% of the Company's outstanding shares, to
private entities controlled by Ronald Perelman and Gerald Ford, at a purchase
price of $13.7625 per share, or approximately $38 million in the aggregate. Mr.
Ford is the Chairman of the Board and Chief Executive Officer of Golden State
Bancorp Inc. The purchase price represented the average of the closing sales
prices of the Company's common stock on the New York Stock Exchange during the
15-day period preceding the signing of the agreement (March 19, 1998). As part
of the agreement, the Company also issued warrants to these entities to purchase
an aggregate additional 9.9% of the Company's stock at an exercise price of
$17.2031 (125% of the purchase price of the stock), subject to customary
anti-dilution provisions. The warrants are exercisable only upon a change in
control of the Company and expire in three years. In addition, in April 1998 the
Company appointed Howard Gittis, as nominee for Mr. Perelman, and Mr. Ford to
the Company's Board of Directors. On September 24, 1998, Messrs. Gittis and Ford
resigned from the Board of Directors.
Strategic Alternatives. The Company continues to retain Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") as a financial advisor to
develop strategic alternatives for the Company. DLJ continues to evaluate
opportunities for the Company, including possible business combinations. The
Company is currently in discussions with several entities, including Golden
State Bancorp Inc., concerning various alternatives. No assurance can be given
that any such opportunities will be consummated.
BUSINESS STRATEGY
For the three years prior to fiscal 1998, the Company's significant
year-over-year growth was driven primarily by the increases in the volume of
loans purchased in the bulk correspondent business and the sale of the Company's
loan production in securitization transactions. These two business strategies
significantly contributed to the Company's operating on a negative cash flow
basis which was funded by the Company regularly accessing the public equity and
debt markets. In the fourth quarter of fiscal 1997, primarily as a reaction to
the uncertainties in those capital markets, the Company decided to reduce its
bulk loan purchases and focus on the less cash intensive core retail and broker
loan production units and its servicing divisions. Fiscal 1998's results reflect
these strategic decisions in the record levels of retail and broker loan
production, increased expenses for retail and broker loan office expansion and
increased expenses to accommodate the significant increase in the Company's
in-house servicing portfolio. The fiscal 1998 results also reflect the Company's
new loan disposition strategy which includes a combination of securitizations
and whole loan sales for cash. The Company intends to continue to pursue its
growth strategy by (i) continuing to focus on its core loan production units;
(ii) increasing its servicing portfolio and servicing capabilities; and (iii)
diversifying its funding sources to become self-financing (i.e., the ability to
obtain sufficient lines of credit to provide financing for assets created by the
Company and the elimination of reliance on the public equity and debt markets).
In particular, the Company intends to employ the following strategies:
Focus on Core Loan Production. During fiscal 1998, the Company expanded
its Aames retail loan office network by adding 42 new retail offices and its
broker network by adding 10 new broker offices. Further,
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Retail Direct opened 5 offices during the fiscal year. The Company intends to
continue to evaluate further expansion opportunities in its retail and broker
operations and to expand its loan purchasing capabilities by building new
relationships with independent mortgage brokers, with the goal of increasing
market share in these areas. The Company began lending operations in the United
Kingdom in April 1998 through a subsidiary of One Stop. The Company will
continue to evaluate additional international opportunities. The Company
regularly reviews its loan offerings and introduces new loan products to further
meet the needs of its customers and increase its core loan production volume.
During fiscal 1998, the Company began offering high loan-to-value ratio loans
which it sells on a whole loan basis, and the Company is currently reviewing the
feasibility of offering home equity lines of credit which would also be sold on
a whole loan basis.
Increase Servicing Portfolio; Increase Margins and Develop Subservicing
Capabilities. The Company plans to continue to build the size of its servicing
portfolio to provide a stable and significant source of recurring revenue. At
June 30, 1998, the Company's servicing portfolio was $4.15 billion, 5.0% of
which was subserviced by third parties. The servicing portfolio at June 30, 1998
was up 31% from $3.17 billion at the end of the 1997 fiscal year, 53% of which
was subserviced by third parties. By calendar year end, the Company intends to
directly service all of its servicing portfolio. The Company expects to increase
the size of its loan servicing portfolio by continuing to increase loan
originations and purchases, completing new securitizations and subservicing on
behalf of third parties. However, no assurance as to the Company's ability to
accomplish these goals can be given.
Continue to Diversify Funding Sources and Become Self-Financing. The
Company intends to continue to expand and diversify its funding sources by
adding additional warehouse facilities, disposing of a portion of its loan
production for cash in the whole loan market, and, subject to easing debt
covenants restricting the Company's ability to obtain financing secured by its
interest-only strips, adding credit facilities to finance the Company's
interest-only strips and residual assets. However, no assurance as to the
Company's ability to accomplish these goals can be given. The Company continues
to improve its cash flows through such mechanisms as new securitization
structures, as well as through decreasing bulk loan purchases which, while
resulting in lower production volume in its correspondent unit, improves the
Company's cash position. The Company also believes it will improve its cash flow
by improving the efficiency of its servicing operations. Under certain
circumstances, the Company would consider again accessing the public equity and
debt markets.
The strategies discussed above contain forward-looking statements. Such
statements are based on current expectations and are subject to risks,
uncertainties and assumptions, including those discussed under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors." Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated or projected. Thus, no
assurance can be given that the Company will be able to accomplish the above
strategies.
MORTGAGE LOAN PRODUCTION
The Company's principal loan product is a non-conforming home equity
loan with a fixed principal amount and term to maturity which is typically
secured by a first mortgage on the borrower's residence with either a fixed or
adjustable interest rate. Non-conforming home equity loans are loans made to
homeowners whose borrowing needs may not be met by traditional financial
institutions due to credit exceptions or other factors and that generally cannot
be marketed to agencies such as the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). In addition,
the Company offers junior mortgages and other products in order to meet a wide
variety of borrower needs. In fiscal 1998, the Company obtained its residential
loans through three primary channels: retail, broker and correspondent. In late
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fiscal 1997, the Company established a commercial loan division. In March 1998,
the Company augmented its retail production channel by establishing Retail
Direct.
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The following table illustrates the sources of the Company's loan
production during the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Retail loans:
Total dollar amount............................ $ 636,100 $ 436,900 $ 220,900
Number of loans................................ 11,531 8,565 4,792
Average loan amount............................ 55 51 46
Average initial combined loan to value 70% 67% 60%
Weighted average interest rate(1).............. 10.3% 10.5% 11.0%
Broker loans(2):
Total dollar amount............................ $1,101,200 $ 741,000 $ 319,800
Number of loans................................ 12,763 8,985 4,182
Average loan amount............................ 86 83 77
Average initial combined loan to value 75% 71% 68%
Weighted average interest rate(1)............... 9.8% 10.0% 10.6%
Correspondent program:
Total dollar amount............................ $ 646,300 $1,170,000 $ 628,200
Number of loans................................ 6,252 12,500 7,166
Average loan amount............................ 103 94 88
Average initial combined loan to value 79% 71% 66%
Weighted average interest rate(1).............. 10.2% 11.0% 11.7%
Total loans:
Total dollar amount............................ $2,383,600 $2,347,900 $1,168,900
Number of loans................................ 30,546 30,050 16,140
Average loan amount............................ 78 78 72
Average initial combined loan to value 75% 70% 65%
Weighted average interest rate(1).............. 10.1% 10.6% 11.3%
</TABLE>
- ----------------
(1) Calculated with respect to the interest rate at the time the loan is
originated or purchased by the Company.
(2) Includes commercial loans.
Aames Retail Loan Office Network. The Company originates home equity
mortgage loans through its network of retail loan offices which, at June 30,
1998, consisted of 98 retail loan offices located in 32 states. Prior to fiscal
year 1994, the Company's retail offices were located only in California. Since
that time, the Company has aggressively pursued a strategy of expanding its
retail loan office network nationwide. During the current fiscal year, the
Company will continue to evaluate opportunities for further retail office
expansion.
The Company selects areas in which to introduce or expand its retail
presence on the basis of selected demographic statistics, marketing analyses and
other criteria developed by the Company.
The Company's expansion of its retail loan office network has resulted
in significant increases in retail loan production over the last three fiscal
years. The Company originated $636 million, $437 million and $221 million of
mortgage loans through this network in fiscal 1998, 1997 and 1996, respectively.
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The Company generates applications for loans through its retail loan
office network principally through a centralized multimedia advertising program,
which relies primarily on the use of direct mailings to homeowners, television
advertising, yellow-page listings and telemarketing. The Company believes that
its advertising campaigns establish name recognition and serve to distinguish
the Company from its competitors. The Company continually monitors the sources
of its applications to determine the most effective methods and manner of
advertising.
The Company's advertising invites prospective borrowers to call its
headquarters office through the Company's toll-free telephone numbers. On the
basis of an initial screening conducted at the time of the call, the Company's
customer service representative makes a preliminary determination of whether the
customer and the property meet the Company's lending criteria, and schedules an
appointment with a loan officer in the retail loan office most conveniently
located to the customer or in the customer's home. If the customer cannot
schedule an appointment or is located in an area without a retail office, the
representative refers the customer to a loan officer in a nearby retail loan
office who takes the loan application by telephone.
The Company's loan officer at the local retail loan office assists the
applicant in completing the loan application, arranges for an appraisal, orders
a credit report from an independent, nationally recognized credit reporting
agency and performs various other tasks in connection with the completion of the
loan package. The loan package is then forwarded to the Company's headquarters
office for review by underwriters and for loan approval. If the loan package is
approved, the loan is funded by the Company. The Company's loan officers are
trained to structure loans that meet the applicant's needs, while satisfying the
Company's lending guidelines.
Retail Direct. In March 1998, the Company established a separate retail
production unit, Retail Direct, to enable the Company to further penetrate the
non-conforming home equity loan market. Unlike the Company's existing retail
office network, which uses a centralized marketing approach, Retail Direct uses
a decentralized marketing effort at the branch level. During the year ended June
30, 1998, $1.48 million in loans were originated through Retail Direct.
Currently, Retail Direct is operating 7 offices in 5 states and expects to
expand nationwide in the future.
Independent Mortgage Broker Network. Through its independent mortgage
broker network, One Stop funded $1.05 billion, $741 million and $320 million in
residential loans during the fiscal years ended June 30, 1998, 1997 and 1996,
respectively. At June 30, 1998, One Stop operated 47 broker offices in 45 states
and the United Kingdom and had approximately 4,600 approved mortgage brokers.
During fiscal 1998, One Stop originated loans through approximately 2,100
brokers, no one of which accounted for more than 10% of One Stop's total
originations. All loans originated by One Stop are underwritten in accordance
with the Company's underwriting guidelines. Once approved, the loan is funded or
purchased by One Stop directly.
The broker's role is to identify the applicant, assist in completing
the loan application form, gather necessary information and documents and serve
as One Stop's liaison with the borrower through the lending process. One Stop
reviews and underwrites the applications submitted by the broker, approves or
denies the application, sets the interest rate and other terms of the loan and,
upon acceptance by the borrower and satisfaction of all conditions imposed by
One Stop, funds the loan. Because brokers conduct their own marketing and employ
their own personnel to complete loan applications and maintain contact with
borrowers, originating loans through its broker network allows One Stop to
increase its loan volume without incurring the higher marketing costs associated
with increased retail originations.
Because mortgage brokers generally submit loan files to several
prospective lenders simultaneously, consistent underwriting, quick response
times and personal service are critical to successfully producing loans through
independent mortgage brokers. To meet these requirements, One Stop strives to
provide quick response
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time to the loan application (generally within 24 hours). In addition, loan
consultants and loan processors, including underwriters, are available in One
Stop's branch offices to answer questions, assist in the loan application
process and facilitate ultimate funding of the loan.
Correspondent Channel. The Company purchases closed loans from mortgage
bankers and other financial institutions on a continuous or "flow" basis, and
through bulk and mini-bulk purchases. During the fiscal years ended June 30,
1998, 1997 and 1996, $646 million, $1.17 billion and $628 million in loans were
purchased through this correspondent channel. The Company believes that its flow
and mini-bulk correspondent program represents a cost effective means of
increasing loan production. In the fourth quarter of fiscal 1997, primarily as a
reaction to the uncertainties in the public equity and debt markets, the Company
decided to reduce its bulk loan purchases. This strategic decision decreased the
amount of bulk loans purchased in fiscal 1998 compared to fiscal 1997.
Commercial Loans. In late fiscal 1997, One Stop established a
commercial loan division through which it originates small commercial loans. The
Company portfolios these loans until sufficient volume is accumulated to
maximize the execution of whole loan sales on a servicing released basis.
Generally, the size of the commercial loans range from $250,000 to $2.0 million
in size and are secured by liens on commercial properties such as multifamily
residences, retail establishments, office buildings, light industrial warehouse
facilities and mobile home parks. The Company originated $53.9 million and $6.9
million of commercial loans during the fiscal years ended June 30, 1998 and
1997, respectively.
Underwriting. The Company underwrites every residential loan it
originates and generally re-underwrites each loan it purchases. The Company's
underwriting guidelines are designed to assess the adequacy of the real property
as collateral for the loan and the borrower's creditworthiness. An assessment of
the adequacy of the real property as collateral for the loan is primarily based
upon an appraisal of the property and a calculation of the ratio (the "combined
loan-to-value ratio") of all mortgages existing on the property (including the
loan applied for) to the appraised value of the property at the time of
origination. As a lender that specializes in loans made to credit impaired
borrowers, the Company ordinarily makes home equity mortgage loans to borrowers
with credit histories or other factors that would typically disqualify them from
consideration for a loan from traditional financial institutions. Consequently,
the Company's underwriting guidelines generally require lower combined
loan-to-value ratios than would typically be the case if the borrower could
qualify for a loan from a traditional financial institution. Creditworthiness is
assessed by examination of a number of factors, including calculation of
debt-to-income ratios, which is the sum of the borrower's monthly debt payments
divided by the borrowers's monthly income before taxes and other payroll
deductions, an examination of the borrower's credit history through standard
credit reporting bureaus, and by evaluating the borrower's payment history with
respect to existing mortgages, if any, on the property.
The underwriting of a mortgage loan to be originated or purchased by
the Company includes a review of the completed loan package, which includes the
loan application, a current appraisal, a preliminary title report and a credit
report. All loan applications and all closed loans offered to the Company for
purchase must be approved by the Company in accordance with its underwriting
criteria. The Company regularly reviews its underwriting guidelines and makes
changes when appropriate to respond to market conditions, the performance of
loans representing a particular loan product or changes in laws or regulations.
Appraisers determine a property's value by reference to the sales
prices of comparable properties recently sold, adjusted to reflect the condition
of the property as determined through inspection. Appraisals on loans purchased
as part of the Company's correspondent program are reviewed by Company
appraisers or Company-qualified contract appraisers to assure that they meet the
Company's standards.
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The Company requires title insurance coverage issued on an American
Land Title Association (or similar) form of title insurance on all residential
properties securing mortgage loans it originates or purchases. The loan
originator and its assignees are generally named as the insured. Title insurance
policies indicate the lien position of the mortgage loan and protect the Company
against loss if the title or lien position is not as indicated. The applicant is
also required to maintain hazard and, in certain instances, flood insurance, in
an amount sufficient to cover the new loan and any senior mortgage, subject to
the maximum amount available under the National Flood Insurance Program.
Quality Control. The Company's quality control program is intended to
(i) monitor and improve the overall quality of loan production generated by the
Company's retail loan office network, independent mortgage broker network and
correspondent program and (ii) identify and communicate to management existing
or potential underwriting and loan packaging problems or areas of concern. The
quality control file review examines compliance with the Company's underwriting
guidelines and federal and state regulations. This is accomplished by focusing
on: (i) the accuracy of all credit and legal information; (ii) a collateral
analysis which may include a desk or field re-appraisal of the property and
review of the original appraisal; (iii) employment and/or income verification;
and (iv) legal document review to ensure that the necessary documents are in
place.
Credit Grades.
The Company assigns a credit grade (A, A-, B, C, C- and D) to each loan
it originates or purchases depending on the risk profile of the loan, with the
higher credit grades exhibiting a lower risk profile and the lower credit grades
exhibiting increasingly higher risk profiles. Generally, the higher credit grade
loans have higher loan-to-value ratios and carry a lower interest rate. The
following chart generally outlines certain parameters of the credit grades of
the Company's underwriting guidelines for its residential loans at August 12,
1998:
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<TABLE>
<CAPTION>
"A" CREDIT "A-" CREDIT "B" CREDIT "C" CREDIT "C-" CREDIT "D" CREDIT
GRADE GRADE GRADE GRADE GRADE GRADE
---------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
GENERAL Has good Has good credit Generally good Marginal credit Marginal credit Designed to
REPAYMENT credit. but might have mortgage pay history which is history not offset provide a
some minor history but may offset by other by other positive borrower with
delinquency. have marginal positive attributes. poor credit history
consumer credit attributes. an opportunity to
history. correct past credit
problems.
EXISTING No lates in No more than 59 No more than 89 Can have No more than Greater than
MORTGAGE past 12 months. days late at days late at multiple 30-day 149 days 150 days
LOANS closing and a closing and a lates and two delinquent in delinquent in
maximum of maximum of 60-day lates the past 12 months. the past 12
two 30-day lates four 30-day lates or one 90-day Can have multiple months.
in the past 12 in the past 12 late in the past 90-day lates
months. months or one 12 months; or one 120 day
60-day late currently not late in the past
and two 30-day more than 119 12 months.
lates. days late at
closing.
CONSUMER Consumer credit Consumer credit Consumer credit Consumer credit Consumer credit Consumer credit
CREDIT is good in the is good in the must be is fair in the last is poor in the is poor in the
last 12 months. last 12 months. satisfactory in 12 months. The last 12 months last 12 months.
Less than 25% Less than 35% the last 12 majority of the with currently The majority of
of credit report of credit report months. Less credit is not delinquent the credit is
items derogatory items derogatory than 40% of currently accounts. Less derogatory (more
with no 60-day with no 90-day credit report of delinquent. Less than 60% of than 60%).
or more lates. or more lates. items derogatory. than 50% of credit report Percentage of
credit report items derogatory. derogatory items
items derogatory. not a factor.
BANKRUPTCY 2 years since 2 years since 1 year since Bankruptcy Bankruptcy filed Current
discharge or discharge or discharge with filing 12 months within last 12 bankruptcy
dismissal with dismissal with reestablished old, discharged months and must be paid
reestablished reestablished "B" credit or 18 or dismissed discharged or through loan.
"A" credit. "A-" credit. months since prior to dismissed prior
discharge without application. to application.
reestablished
credit.
DEBT SERVICE- Generally not to Generally not to Generally not to Generally not to Generally not to Generally not to
TO-INCOME exceed 42%. exceed 45%. exceed 50%. exceed 55%. exceed 60%. exceed 60%.
RATIO
MAXIMUM
LOAN-TO-VALUE
RATIO:
OWNER
OCCUPIED Generally 90% Generally 90% Generally 80% Generally 75% Generally 70% Generally 65%
for a 1 to 4 for a 1 to 4 for a 1 to 4 for a 1 to 4 for a 1 to 4 for a 1 to 4
family dwelling. family dwelling. family dwelling. family dwelling. family dwelling. family dwelling.
</TABLE>
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<TABLE>
<CAPTION>
"A" CREDIT "A-" CREDIT "B" CREDIT "C" CREDIT "C-" CREDIT "D" CREDIT
GRADE GRADE GRADE GRADE GRADE GRADE
---------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
NON-OWNER Generally 80% Generally 75% Generally 70% Generally 65% Generally 65% Generally 60%
OCCUPIED for a 1 to 4 for a 1 to 2 for a 1 to 2 for a 1 to 4 for a 1 to 4 for a 1 to 2
family dwelling. family dwelling. family dwelling. family dwelling. family dwelling. family dwelling.
</TABLE>
The following tables present certain information about the Company's
loan production through its retail loan office network, independent mortgage
broker network and correspondent program during fiscal 1998, 1997 and 1996:
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LOAN ORIGINATIONS AND PURCHASES IN FISCAL 1998
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE AVERAGE
DOLLAR AMOUNT % OF COMBINED INTEREST
CREDIT GRADE OF LOAN TOTAL LOAN-TO-VALUE RATE(1)
------------ ------- ----- ------------- -------
<S> <C> <C> <C> <C>
A $ 651,303,000 27% 77% 9.3%
A- 835,834,000 35 78 9.7
B 560,710,000 24 74 10.2
C 159,652,000 7 67 11.2
C- 45,378,000 2 65 12.2
D 130,761,000 5 61 13.2
-------------- --- --- ----
Total $2,383,638,000 100% 75% 10.1%
============== === === ====
</TABLE>
LOAN ORIGINATIONS AND PURCHASES IN FISCAL 1997
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE AVERAGE
DOLLAR AMOUNT % OF COMBINED INTEREST
CREDIT GRADE OF LOAN TOTAL LOAN-TO-VALUE RATE(1)
------------ ------- ----- ------------- -------
<S> <C> <C> <C> <C>
A $ 327,574,000 14% 72% 9.2%
A- 758,842,000 32 73 9.8
B 573,125,000 24 72 10.3
C 277,002,000 12 67 11.2
C- 112,209,000 5 65 12.0
D 299,186,000 13 62 13.4
-------------- --- --- ----
Total $2,347,938,000 100% 70% 10.6%
============== === == ====
</TABLE>
LOAN ORIGINATIONS AND PURCHASES IN FISCAL 1996
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE AVERAGE
DOLLAR AMOUNT % OF COMBINED INTEREST
CREDIT GRADE OF LOAN TOTAL LOAN-TO-VALUE RATE(1)
------------ ------- ----- ------------- -------
<S> <C> <C> <C> <C>
A $ 126,790,000 11% 70% 9.4%
A- 224,943,000 19 68 10.2
B 227,117,000 19 69 10.5
C 197,389,000 17 65 11.6
C- 107,039,000 9 63 12.1
D 285,668,000 25 61 13.0
-------------- --- --- ----
Total $1,168,946,000 100% 66% 11.3%
============== === == ====
</TABLE>
- --------------
(1) Calculated with respect to the interest rate at the time the loan is
originated or purchased by the Company, as applicable.
12
<PAGE> 13
LOAN DISPOSITION
The Company disposes of its loan production through a combination of
securitizations and whole loan sales, although the Company currently anticipates
that securitization will be its primary disposition strategy for the near
future. Securitization is a cost competitive source of capital compared to other
debt financing sources available to the Company. The Company generally seeks to
dispose of substantially all of its quarterly loan production each quarter. The
Company applies the net proceeds of the loan dispositions, whether through
securitizations or whole loan sales, to pay down its warehouse facilities in
order to make these facilities available for future funding of mortgage loans.
The Company securitized or sold in the secondary market $2.45 billion,
$2.27 billion and $993 million of loans in the fiscal years ended June 30, 1998,
1997 and 1996, respectively. Of the Company's 26 securitization transactions
totaling $5.57 billion completed through June 30, 1998, $4.09 billion has been
credit-enhanced by monoline insurance to receive ratings of "Aaa" by Moody's
Investors Service, Inc. ("Moody's") and "AAA" by Standard & Poor's Ratings
Group, a Division of The McGraw-Hill Companies ("S&P") and, in some cases, "AAA"
by Fitch IBCA, Inc. ("Fitch"). The remaining $1.48 billion of securitization
transactions utilized a senior/subordinated structure in which the senior
tranches received ratings of "Aaa" by Moody's, "AAA" by S&P and "AAA" by Fitch.
In a senior/subordinated structure, the senior certificate holders are protected
from losses by outstanding subordinated certificates and overcollateralization,
rather than a monoline insurance policy.
Each agreement that the Company has entered into in connection with its
securitizations requires either the overcollateralization of the trust or the
establishment of a reserve account that may initially be funded by cash
deposited by the Company. The Company's interest in each overcollateralization
amount and reserve account is reflected on the Company's Consolidated Financial
Statements as "residual assets" and is recorded as of the time such amounts are
received by the trust. If losses exceed the amount of the overcollateralization
or the reserve account, as applicable, the credit-enhancement aspects of the
trust are triggered. In a securitization credit-enhanced by a monoline insurance
policy, any further losses experienced by holders of the senior interests in the
related trust will be paid under such policy. To date, there have been no claims
on any monoline insurance policy obtained in any of the Company's
securitizations. In a senior/subordinated structure, losses in excess of the
overcollateralization amount generally are allocated first to the holders of the
subordinated interests and then to the holders of the senior interests of the
trust. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Capital Resources -- Loan Sales" and "- Risk Factors
- -- Delinquencies and Losses in Securitization Trusts; Right to Terminate
Mortgage Servicing; Negative Impact on Cash Flow."
In a whole loan sale for cash, the Company generally enters into an
agreement to sell the loans for cash on a servicing released basis. After the
sale, the Company retains no interest in the underlying loans.
LOAN SERVICING
Servicing includes collecting and remitting loan payments, accounting
for principal and interest, contacting delinquent borrowers, managing borrower
defaults and liquidating foreclosed properties. The Company retains the
servicing rights to the residential loans it originates or purchases and
securitizes. In its whole loan sale strategy, the Company evaluates the
feasibility of selling loans on a servicing retained or servicing released
basis. To date, all of the Company's whole loan sales have been done on a
servicing released basis. The following table sets forth certain information
regarding the Company's servicing portfolio for the periods indicated:
13
<PAGE> 14
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
-----------------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Servicing portfolio (period end) $4,147,000(1) $3,174,000 $1,370,000
Serviced in house .............. $3,941,000(1) $1,506,000 $ 914,000
Loan service revenue ........... $ 42,677 $ 25,804 $ 18,186
</TABLE>
- ----------------
(1) Includes $82 million in loans serviced on an interim basis.
The Company directly services substantially all newly originated or
purchased loans. As a result of the recent transfer in-house of loans previously
serviced by a third party, the Company currently directly services substantially
all of its servicing portfolio. The Company believes that continued technology
and processing enhancements will provide it with improved margins on its
servicing. The Company anticipates that during fiscal 1999 it will begin
subservicing for third parties which will provide a new source of servicing
revenue. However, no assurance can be given that the Company will be successful
in its attempts to generate subservicing business.
The agreements between the Company and the real estate mortgage
investment conduit ("REMIC") or owner trusts established in connection with
securitizations typically require the Company to advance interest (but not
principal) on delinquent loans to the holders of the senior interests in the
related trust. The agreements also require the Company to make certain servicing
advances (e.g., for property taxes or hazard insurance) unless the Company
determines that such advances would not be recoverable. Realized losses on the
loans are paid out of the related loss reserves established by the Company at
the time of securitization or paid out of principal and interest payments on
overcollateralized amounts as applicable, and if necessary, from the related
monoline insurance policy or the subordinated interests.
In the case of securitizations credit-enhanced by monoline insurance,
the agreements also typically provide that the Company may be terminated as
servicer by the monoline insurance company (or by the trustee with the consent
of the monoline insurance company) upon certain events of default, including the
Company's failure to perform its obligations under the servicing agreement, the
rate of over 90-day delinquency (including properties acquired by foreclosure
and not sold) exceeding specified limits, losses on liquidation of collateral
exceeding certain limits, any payment being made by the monoline insurance
company under its policy, and certain events of bankruptcy or insolvency. At
June 30, 1998, 12 trusts representing approximately 25.0% (by dollar volume) of
the Company's servicing portfolio exceeded the specified delinquency rate,
although the servicing rights of the Company have not been terminated. Seven of
the 12 trusts plus one additional trust representing approximately 10% (by
dollar volume) of the Company's servicing portfolio exceeded specified loss
limits at June 30, 1998. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors -- Delinquencies
and Losses in Securitization Trusts; Right to Terminate Mortgage Servicing;
Negative Impact on Cash Flow." In the case of the Company's senior/subordinated
securitization transactions, holders of 51% of the certificates may terminate
the servicer upon certain events of default generally relating to certain levels
of loss experience, but not delinquency rates. No such events of default have
occurred to date in the Company's senior/subordinated securitizations.
The Company receives a servicing fee based on a percentage of the
declining principal balance of each loan serviced. Servicing fees are collected
by the Company out of the borrower's monthly payments. In addition, the Company,
as servicer, generally receives all late fees and assumption charges paid by the
borrower on loans serviced directly by the Company, as well as other
miscellaneous fees for performing
14
<PAGE> 15
various loan servicing functions. The Company also generally receives any
prepayment fees paid by borrowers.
The Company's servicing portfolio is subject to reduction by normal
monthly principal amortization, by prepayment and by foreclosure. It is the
Company's strategy to build and retain its core servicing portfolio. In July
1998, the Company sold its subsidiary that serviced $55.7 million in loans for
private investors for consideration that was immaterial to the Company. The
Company had discontinued originating private investor loans in August 1997.
In general, revenue from the Company's loan servicing portfolio may be
adversely affected by competitive market conditions that result in lower
mortgage interest rates or accelerated prepayment activity, subject to the
receipt by the Company of prepayment fee income. In some states in which the
Company currently operates, prepayment fees may be limited or prohibited by
applicable law.
The following table illustrates the mix of credit grades in the
Company's servicing portfolio as of June 30, 1998:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
COMBINED ORIGINAL
DOLLAR AMOUNT INITIAL INTEREST
CREDIT GRADE OF LOAN % OF TOTAL LOAN-TO-VALUE RATE
------------ ------- ---------- ------------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
A $ 566,500 14% 76% 9.4%
A- 1,600,000 39 75 10.0
B 965,400 23 73 10.6
C 386,800 9 66 11.6
C- 153,800 4 64 12.5
D 414,600 10 62 12.0
Other 60,100 1 54 13.5
----------- --- -- ----
Total $ 4,147,200 100% 72% 11.0%
=========== === == ====
</TABLE>
COLLECTIONS, DELINQUENCIES AND FORECLOSURES
The Company sends borrowers a monthly billing statement approximately
ten days prior to the monthly payment due date. Although borrowers generally
make loan payments within ten to fifteen days after the due date (the "grace
period"), if a borrower fails to pay the monthly payment within the grace
period, the Company commences collection efforts by notifying the borrower of
the delinquency. In the case of borrowers in the "B," "C," "C-" and "D" credit
grades, collection efforts begin immediately after the due date. The Company
continues contact with the borrower to determine the cause of the delinquency
and to obtain a commitment to cure the delinquency at the earliest possible
time.
As a general matter, if efforts to obtain payment have not been
successful, a pre-foreclosure notice will be sent to the borrower immediately
after the due date of the next subsequently scheduled installment (five days
after the initial due date for C- and D credit grades), providing 30 days'
notice of impending foreclosure action. During the 30-day notice period,
collection efforts continue and the Company evaluates various legal
15
<PAGE> 16
options and remedies to protect the value of the loan, including arranging for
extended prepayment terms, accepting a deed-in-lieu of foreclosure, entering
into a short sale (a sale for less than the outstanding principal amount) or
commencing foreclosure proceedings. If no substantial progress has been made in
collecting delinquent payments from the borrower, foreclosure proceedings will
begin. Generally, the Company will have commenced foreclosure proceedings when
a loan is 45 to 100 days delinquent, depending upon credit grade, other credit
considerations or borrower bankruptcy status.
Servicing and collection practices change over time in accordance with,
among other things, the Company's business judgment, changes in portfolio
performance and applicable laws and regulations.
Loans originated or purchased by the Company are secured by mortgages,
deeds of trust, security deeds or deeds to secure debt, depending upon the
prevailing practice in the state in which the property securing the loan is
located. Depending on local law, foreclosure is effected by judicial action or
nonjudicial sale, and is subject to various notice and filing requirements. In
general, the borrower, or any person having a junior encumbrance on the real
estate, may cure a monetary default by paying the entire amount in arrears plus
other designated costs and expenses incurred in enforcing the obligation during
a statutorily prescribed reinstatement period. Generally, state law controls
the amount of foreclosure expenses and costs, including attorneys' fees, which
may be recovered by a lender, the minimum time required to foreclose and the
reinstatement or redemption rights of the borrower.
Although foreclosure sales are typically public sales, frequently no
third-party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the Company often purchases the property from the trustee or
referee through a credit bid in an amount up to the principal amount
outstanding under the loan, accrued and unpaid interest, servicing advances and
the expenses of foreclosure. Depending upon market conditions, the ultimate
proceeds of the sale may not equal the Company's investment in the property.
The following table sets forth delinquency, foreclosure, loss and
reserve information relating to the Company's servicing portfolio for the
periods indicated:
16
<PAGE> 17
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
---------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Percentage of dollar amount of delinquent
loans to loans serviced (period end) (1)(2)(3)(4)
One Month .......................................... 3.8% 4.3% 4.9%
Two Months ......................................... 1.3 1.9 1.8
Three or More Months
Not foreclosed (5) ............................... 9.0 8.1 8.0
Foreclosed (6) ................................... 1.5 1.0 1.0
------- ------- -------
Total ........................................ 15.6% 15.3% 15.7%
======= ======= =======
Percentage of dollar amount of loans foreclosed
during period to loans serviced (period end)(2)(4) .. 2.0% 1.5% 1.1%
Number of loans foreclosed (7) ....................... 1,125 560 221
Principal amount of foreclosed loans(7) .............. $84,613 $48,029 $14,349
Net losses on liquidations (8) ....................... $26,488 $ 5,470 $ 931
One-time charge against loan loss reserves (9) ....... 6,000 -- --
Percentage of losses to average servicing
portfolio (4)(10) .................................. .72% .24% .09%
Liquidation loss reserve (11) ........................ $50,262 $43,586 $10,300
</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. Percentages for
fiscal year 1996 have not been restated to include delinquencies of
loans originated by One Stop. The Company believes any such adjustment
would not be material.
(3) At June 30, 1998, the dollar volume of loans delinquent more than 90
days in the Company's 12 REMIC trusts formed in November 1992, December
1992 and June 1993 and during the period from December 1994 to December
1996 exceeded the permitted limit in the related pooling and servicing
agreements. Seven of those trusts plus one additional trust exceeded
certain loss limits. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Capital Resources;"
and "- Risk Factors -- Delinquencies and Losses in Securitization
Trusts; Right to Terminate Mortgage Servicing; Negative Impact on Cash
Flow".
(4) The servicing portfolio used in percentage calculations includes
$82 million of loans subserviced by the Company on an interim basis at
June 30, 1998.
(5) Represents loans which are in foreclosure but as to which foreclosure
proceedings have not concluded.
(6) Represents properties acquired following a foreclosure sale and still
serviced by the Company.
(7) The increase in the number of loans foreclosed and principal amount of
loans foreclosed in 1997 and 1998 relative to 1996 is due to the larger
and more seasoned servicing portfolio.
(8) Represents losses net of gains on foreclosed properties sold during
the periods indicated excluding the one-time charge referred to in
footnote (9) below.
(9) Represents a one-time reversal of $6.0 million to the loss reserve
recorded in March 1998 resulting from the Company's delay in recording
information transferred from a third party servicer regarding loan
payoffs. The amount was not sufficiently material to require adjustment
of previously reported receivables or the reserve.
(10) Does not include the one-time charge referred to in footnote (9) above.
(11) Represents period end reserves for future liquidation losses.
17
<PAGE> 18
The Company's servicing portfolio has grown over the periods presented.
However, because foreclosures and losses typically occur months or years after
a loan is originated, data relating to delinquencies, foreclosures and losses
as a percentage of the current portfolio can understate the risk of future
delinquencies, losses or foreclosures.
COMPETITION
The Company faces intense competition in the business of originating,
purchasing and selling mortgage loans. The Company's competitors in the
industry include other consumer finance companies, mortgage banking companies,
investment banks, commercial banks, credit unions, thrift institutions, credit
card issuers and insurance companies. Many of these competitors are
substantially larger and have considerably greater financial, technical and
marketing resources than the Company. In addition, many financial services
organizations that are much larger than the Company have formed national loan
origination networks or purchased home equity lenders offering loan products
directed at the target market of the Company. Competition among industry
participants can take many forms, including convenience in obtaining a loan,
customer service, marketing and distribution channels, amount and term of the
loan, loan origination fees and interest rates. In addition, the current level
of gains realized by the Company and its competitors on the sale of
non-conforming loans could attract additional competitors into this market.
Additional competition may lower the rates the Company can charge borrowers and
increase the price paid for purchased loans, thereby potentially lowering gain
on future loan sales and securitizations. To the extent any of these
competitors significantly expand their activities in the Company's market, the
Company could be materially adversely affected. Fluctuations in interest rates
and general economic conditions may also affect the Company's competition.
During periods of rising rates, competitors that have locked in lower rates to
potential borrowers may have a competitive advantage. During periods of
declining rates, competitors may solicit the Company's customers to refinance
their loans.
The Company believes its competitive strengths include: (i) emphasizing
customer service to attract borrowers; (ii) providing a high level of service
to brokers and their customers; (iii) offering competitive loan programs for
borrowers whose needs are not met by conventional mortgage lenders; (iv)
providing convenient locations for its retail, Retail Direct and broker offices
and national geographic coverage in origination channels; and emphasizing
customer service in its loan servicing division.
REGULATION
The Company's operations are subject to extensive regulation,
supervision and licensing by federal, state and local governmental authorities
and are subject to various laws and judicial and administrative decisions
imposing requirements and restrictions on part or all of its operations. The
Company's consumer lending activities are subject to the Federal
Truth-in-Lending Act and Regulation Z (including the Home Ownership and Equity
Protection Act of 1994), the Federal Equal Credit Opportunity Act, as amended,
and Regulation B, the Fair Credit Reporting Act of 1970, as amended, the
Federal Real Estate Settlement Procedures Act and Regulation X, the Home
Mortgage Disclosure Act, the Federal Debt Collection Practices Act and the
National Housing Act of 1934, as well as other federal and state statutes and
regulations affecting the Company's activities. The Company is also subject to
the rules and regulations of, and examinations by, state regulatory authorities
with respect to originating, processing, underwriting, selling, securitizing
and servicing loans. These rules and regulations, among other things, impose
licensing obligations on the Company, establish eligibility criteria for
mortgage loans, prohibit discrimination, govern inspections and appraisals of
properties and credit reports on loan applicants, regulate assessment,
collection, foreclosure and claims handling, investment and interest payments
on escrow balances and payment features, mandate certain disclosures and
notices to borrowers and, in some cases, fix maximum interest rates, fees and
mortgage loan
18
<PAGE> 19
amounts. Failure to comply with these requirements can lead to loss of approved
status, certain rights of rescission for mortgage loans, class action lawsuits
and administrative enforcement action. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors --
Government Regulation."
In the course of its business, the Company may acquire properties as a
result of foreclosure. There is a risk that hazardous or toxic waste could be
found on such properties. In such event, the Company could be held responsible
for the cost of cleaning up or removing such waste, and such cost could exceed
the value of the underlying properties.
The Company is also subject to various other federal and state laws
regulating the issuance and sale of securities, relationships with entities
regulated by the Employee Retirement Income Security Act of 1974, as amended,
and other aspects of its business.
EMPLOYEES
At June 30, 1998, the Company employed 1,642 persons. The Company has
satisfactory relations with its employees.
ITEM 2. PROPERTIES
The executive and administrative offices of the Company are located at
350 S. Grand Avenue, Los Angeles, California, and consist of approximately
178,000 square feet. The lease on these premises extends through February 2012.
The Company also continues to lease space at its former headquarters location at
3731 Wilshire Boulevard, Los Angeles, California, which it will use for its
telemarketing operations and future expansion of production related operations.
This lease expires in October 2008. The executive and administrative offices of
One Stop are located at 3347 Michaelson Drive, Irvine, California, and consist
of approximately 46,911 square feet. The lease on these premises extends through
July 31, 2003.
The Company and One Stop also lease space for their branch offices.
These facilities aggregate approximately 339,000 square feet and are leased
under terms which vary as to duration. In general, the leases expire between
1998 and 2002, and provide for rent escalations tied to either increases in the
lessor's operating expenses or fluctuations in the consumer price index in the
relevant geographical area.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain of its present and former officers have been
named in consolidated class actions filed in the United States District Court,
Marc Dauber, et al. v. Aames Financial Corporation et al., Case No. 97-6714
(JMI) consolidated with Case Nos. 97-8095 (JMI) and 97-6814 (JMI), alleging
violations of federal securities laws and in a parallel class action filed in
Los Angeles County Superior Court of the State of California, Polin, et al. v.
Aames Financial Corporation, et al., Case No. BC 177236, alleging violations of
California securities laws. In the state action, plaintiffs represent a
certified class of persons who purchased the Company's stock between January 29,
1997 and April 30, 1997. In the federal actions, the complaints on file identify
a class period from January 23, 1996 through April 30, 1997, but in the as yet
unfiled consolidated amended federal complaint the class period alleged has been
shortened to match the state action.
The Company and the plaintiffs have entered into an agreement in
principle for the settlement of the claims asserted in these parallel federal
and state court actions. This settlement is subject to approval of the parties
of the documentation required to evidence the settlement, which documentation
will be filed with the
19
<PAGE> 20
courts, and is further conditioned upon receiving preliminary and final approval
by the appropriate courts. The Company believes that the settlement is in its
best interests and will not have a material adverse impact on the Company's
consolidated financial position or results of operations. By entering into this
settlement in principle, the Company and its present and former officers and
directors do not admit any wrongdoing and, in fact, deny any wrongdoing.
The Company is involved in litigation arising in the normal course of
business. The Company believes that any liability with respect to such legal
actions, individually or in the aggregate, is not likely to be material to the
Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of fiscal 1998 to a
vote of the security holders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In November 1995, the Company's common stock began trading under the
symbol AAM on the New York Stock Exchange (NYSE). Prior to that time, the
Company's common stock traded on the NASDAQ National Market under the symbol
AAMS. The following table sets forth the range of high and low sale prices and
per share cash dividends declared for the periods indicated. All share prices
and cash dividends through February 21, 1997 have been adjusted to reflect the
three-for-two stock split in the form of a stock dividend effected on that date
and the three-for-two stock split in the form of a stock dividend effected on
May 17, 1996.
<TABLE>
<CAPTION>
CASH
HIGH LOW DIVIDEND
------- ------- --------
<S> <C> <C> <C>
FISCAL 1998*
First Quarter $23.250 $15.875 $.033
Second Quarter 17.125 10.625 .033
Third Quarter 15.250 11.438 .033
Fourth Quarter 15.562 13.625 .033
FISCAL 1997*
First Quarter $37.922 $20.750 $.033
Second Quarter 39.328 22.500 .033
Third Quarter 32.375 20.250 .033
Fourth Quarter 20.500 10.750 .033
</TABLE>
- ------------------------
* As reported by Bloomberg
As of August 12, 1998, the Company had 205 stockholders of record. Since
its initial public offering on December 3, 1991, the Company has consistently
paid quarterly cash dividends on its common stock. The Company declared and
subsequently paid an aggregate of $0.13 per share in dividends for the fiscal
year ended June 30, 1998, representing approximately 9.4% of its net income for
the period. The Board of Directors of the Company reviews the Company's dividend
policy at least annually in light of the earnings, cash position and capital
needs of the Company, general business conditions and other relevant factors.
Bank agreements generally limit the Company's ability to pay dividends if such
payment would result in an event
20
<PAGE> 21
of default under the agreements. The Company's Indenture relating to its 9.125%
Senior Notes due 2003 prohibits the payment of dividends if the aggregate amount
of such dividends since October 26, 1996 exceeds the sum of (a) 25% of the
Company's net income during that period; (b) net cash proceeds from any
securities issuances; and (c) proceeds from the sale of certain investments. The
Company's Indenture of Trust relating to its 10.50% Senior Notes due 2002
restricts the payment of dividends to an amount which does not exceed (i) $2.0
million, plus (ii) 50% of the Company's aggregate net income for each fiscal
year after the year ended June 30, 1994, plus (iii) 100% of the net proceeds
received by the Company on offerings of its equity securities after December 31,
1994.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data for the Company for the five
year period ended June 30, 1998 have been derived from the audited Consolidated
Financial Statements. The selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
other financial information included herein. The selected consolidated financial
data gives pro forma effect to the acquisition of One Stop in August 1996.
21
<PAGE> 22
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
Gain on sale of loans.................... $ 188,578 $ 198,736 $ 95,299 $ 25,438 $ 8,705
Net unrealized gain or (loss) on valuation
of interest-only strips................ 19,495 (18,950)
Commissions.............................. 27,664 29,250 21,564 15,799 16,432
Loan service............................. 42,677 25,804 18,186 8,246 6,099
Fees and other........................... 46,860 37,679 15,215 7,940 5,595
--------- --------- ----------- ---------- -----------
Total revenue........................ 325,274 272,519 150,264 57,423 36,831
Total expenses........................... 252,847 239,012 97,965 40,272 27,848
--------- --------- ----------- --------- ----------
Income before income taxes............... 72,427 33,507 52,299 17,151 8,983
Provision for income taxes............... 32,110 16,398 22,508 7,117 3,684
--------- --------- ----------- ---------- ----------
Net income............................... $ 40,317 $ 17,109 $ 29,791 $ 10,034 $ 5,299
========= ========= ========== ========= ==========
Net income per share (diluted)........... $ 1.23 $ 0.60 $ 1.14 $ 0.74 $ 0.41
========= ========= ========== ========= ==========
Weighted average number of shares
outstanding (in thousands) (diluted)... 35,749 34,516 27,248 13,532 13,127
========= ========= ========== ========= ==========
Cash dividends declared per share....... $ .13 $ .13 $ .13 $ .13 $ .13
========= ========= ========== ========= ==========
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
CASH FLOW DATA:
(Used in) operating activities........... $ (49,661) $ (280,073) $ (241,073) $ (43,375) $(13,857)
(Used in) investing activities........... (5,163) (8,864) (5,885) (988) (870)
Provided by financing activities......... 40,244 291,899 250,540 48,209 22,855
Net increase (decrease) in cash and
cash equivalents....................... (14,580) 2,961 3,582 3,846 8,128
RATIOS AND OTHER DATA:
Return on average common equity(5)....... 12% 23% 28% 27% 18%
Return on average managed receivables (1) 1.1% .8% 3.0% 2.0% 1.6%
Loans originated or purchased:
Broker network....................... $1,101,200 $ 741,000 $ 319,800 -- --
Retail loans......................... 636,100 436,900 220,900 148,200 130,200
Correspondent loans.................. 646,300 1,170,000 628,200 206,800 19,700
---------- ---------- ---------- -------- --------
Total ............................. $2,383,600 $2,347,900 $1,168,900 $355,000 $149,900
========== ========== ========== ======== --------
Whole loans sold......................... $ 416,390 $ 7,500 $ 202,200 -- --
Loans pooled and sold in the secondary
market................................. $2,034,300 $2,262,700 $ 791,300 $316,600 $106,800
Loans serviced (period end).............. $4,147,100 $3,174,000 $1,370,000 $608,700 $381,800
Weighted average commission rate on
retail loan originations (2)........... 4.3% 4.9% 7.7% 9.4% 12.0%
Weighted average interest rate (2)....... 10.1% 10.6% 11.3% 11.6% 10.3%
Weighted average initial combined
loan-to-value ratio (2)(3):
Retail loans........................... 70% 67% 60% 55% 52%
Broker network......................... 75% 71% 68% -- --
Correspondent loan..................... 79% 71% 66% 65% NM
Number of retail loan offices
(period end)........................... 98 56 48 32 27
Number of One Stop branch offices
(period end)........................... 52 37 25 -- --
Number of Retail Direct branch offices
(period end)........................... 5 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
-----------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 12,322 $ 26,902 $ 23,941 $ 20,359 $16,513
Servicing assets(4)....................... 586,251 404,890 184,691 56,960 18,780
Total assets.............................. 878,806 761,593 421,475 114,623 53,344
-------- -------- -------- -------- -------
10.5% Senior Notes due 2002............... 23,000 23,000 23,000 23,000 --
9.125% Senior Notes due 2003.............. 150,000 150,000 -- -- --
5.5% Convertible Subordinated Debentures
due 2006................................. 113,990 113,990 115,000 -- --
Other long-term debt...................... -- -- 45 144 1,104
-------- -------- -------- -------- -------
Total long-term debt................. 286,990 286,990 138,045 23,144 1,104
Stockholders' equity...................... $345,403 $268,354 $133,429 $ 80,047 $31,669
</TABLE>
------------
(1) Represents net income divided by the average servicing portfolio for
the fiscal year presented.
(2) Computed on loans originated or purchased during the period.
(3) The weighted average initial combined loan-to-value ratio is determined
by dividing the sum of all loans secured by the junior or senior
mortgages on the property by the appraised value at origination.
(4) Represents the sum of interest-only strips, residual assets and
mortgage servicing rights. See Note 1 of Notes to Consolidated Financial
Statements.
(5) Excludes nonrecurring charges; $32 million (pre-tax) for fiscal 1997.
23
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Item 6.
Selected Financial Data and Item 8. Financial Statements and Supplementary Data.
This Report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements are indicated by words or
phrases such as "anticipate," "estimate," "project," "management believes," "the
Company believes" and similar words or phrases. Such statements are based on
current expectations and are subject to risks, uncertainties and assumptions,
including those discussed under "- Risk Factors." Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected.
OVERVIEW
For the three years prior to fiscal 1998, the Company's significant year
over year growth was driven primarily by the increases in the volume of loans
purchased in the bulk correspondent business and the sale of the Company's loan
production in securitization transactions. The combination of these two business
strategies significantly contributed to the Company's operating on a negative
cash flow basis which was funded by the Company regularly accessing the public
equity and debt markets. In the fourth quarter of fiscal 1997, primarily as a
reaction to the uncertainties in those capital markets, the Company decided to
reduce its bulk loan purchases and focus on the less cash intensive core retail
and broker loan production units and its servicing division. Fiscal 1998's
results reflect these strategic decisions in the record levels of retail and
broker loan production, increased expenses due to expedited retail and broker
loan office expansion and increased expenses to accommodate the significant
increase in the Company's in-house servicing portfolio. The fiscal 1998 results
also reflect the Company's new loan disposition strategy which relies on a
combination of securitizations and whole loan sales for cash depending on market
conditions, profitability and cash flows.
CERTAIN ACCOUNTING CONSIDERATIONS
Although the Company's loan disposition strategy relies on a combination
of securitization transactions and whole loan sales, the Company expects to
continue to sell a significant portion of its loan production 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
represented by the non-cash gain on sale of loans. The cash proceeds are raised
through an offering of the pass-through certificates or bonds evidencing the
right to receive principal payments on the securitized loans and the interest
rate on the certificate balance or on the bonds. The gain on sale of loans
represents the difference between the proceeds (including premiums) from the
sale, net of related transaction costs, and the allocated carrying amount of the
loans sold. The allocated carrying amount is determined by allocating the
original amount of loan (including premiums paid on loans purchased) between the
portion sold and any retained interests (interest-only strip), based on their
relative fair values at the date of transfer. The interest-only strip
represents, over the estimated life of the loans, the present value of the
excess of the weighted average coupon on each pool of loans sold over the sum of
the interest rate paid to investors, the contractual servicing fee (currently
.50%) and a monoline insurance fee, if any, adjusted for the reserve for loan
losses. Unrealized gains or losses include the recognition of an unrealized gain
or loss which represents the initial difference between the allocated carrying
amount and the fair market value of the interest-only strip at the date of sale.
Each agreement that the Company has entered into in connection with its
securitizations requires either the overcollateralization
24
<PAGE> 25
of the trust or the establishment of a reserve account that may initially be
funded by cash deposited by the Company. The Company's interest in each
overcollateralization amount and reserve account is reflected on the Company's
Consolidated Financial Statements as "residual assets" and is recorded as of the
time such amounts are received by the trust.
The Company determines the present value of the cash flows at the time
each securitization transaction closes using certain estimates made by
management at the time the loans are sold. These estimates include: (i) future
rate of prepayment; (ii) discount rate used to calculate present value; and
(iii) the provision for credit losses on loans sold. There can be no assurance
of the accuracy of management's estimates.
Rate of Prepayment. The estimated life of the securitized loans depends
on the assumed annual prepayment rate which is a function of estimated voluntary
(full and partial) and involuntary (liquidations) prepayments. The prepayment
rate represents management's expectations of future prepayment rates based on
prior and expected loan performance, the type of loans in the relevant pool
(fixed or adjustable rate), the production channel which produced the loan,
prevailing interest rates, the presence of prepayment penalties, the
loan-to-value ratios and the credit grades of the loans included in the
securitization and other industry data. The rate of prepayment may be affected
by a variety of economic and other factors. Generally, a declining interest rate
environment will result in prepayments on higher credit grade loans. For fiscal
1998 and 1997, prepayment rates held constant over the life of the pool used in
the valuation of the interest-only strips ranged from 26% to 30.5% and 23.5% to
38.3%, respectively. These rates represent a weighted average loan life of
approximately 2.6 to 3.8 years and 2.6 to 3.9 years for fiscal 1998 and 1997,
respectively. See "- Revenue" and "- Risk Factors -- Prepayment Risk."
Discount Rate. In order to determine the fair value of the cash flow
from the interest-only strips, the Company discounts the cash flows based upon
rates prevalent in the market. Currently, the Company uses the weighted average
interest rates of the loans included in the pool as the best estimate available
of an appropriate discount rate to determine fair value.
Provision for Credit Losses on Loans Sold. In determining the provision
for credit losses on loans securitized, the Company uses assumptions that it
believes are reasonable based on information from its prior securitizations and
the loan-to-value ratios and credit grades of the loans included in the current
securitizations. At June 30, 1998, the Company had reserves of $50.3 million
related to these credit risks, or 1.33% of the outstanding balance of loans
securitized as of that date. Losses ranged from 0.09% to .72% of the average
servicing portfolio for the fiscal years ended June 1996, 1997 and 1998. The
weighted average loan-to-value ratio of the loans serviced by the Company was
72% as of June 30, 1998.
The interest-only strips are amortized over the expected lives of the
related loans and a corresponding reduction in servicing fee income is recorded.
The interest-only strips are recorded at estimated fair value and are marked to
market through a charge (or credit) to earnings. On a quarterly basis, the
Company reviews the fair value of the interest-only strips by analyzing its
prepayment and other assumptions in relation to its actual experience and
current rates of prepayment prevalent in the industry and may adjust its rate of
amortization or take a charge to earnings through an adjustment to net
unrealized gain or loss on valuation of interest-only strips. In its regular
quarterly review of its interest-only strip, the Company considered the
historical performance of its securitized loan pools, the recent prepayment
experience of those pools and the rate of amortization and determined that the
pools were performing in line with management's expectations and that no
adjustment was warranted at June 30, 1998. See "- Risk Factors -- Credit Risk."
See "- Revenue."
Additionally, upon sale or securitization of servicing retained
mortgages, the Company capitalizes the fair value of originated mortgage
servicing rights ("OMSRs") assets separate from the loan. The Company
25
<PAGE> 26
determines fair value based on the present value of estimated net future cash
flows related to servicing income. The cost allocated to the servicing rights is
amortized over the period of estimated net future servicing fee income. The
Company periodically reviews the valuation of capitalized servicing fees
receivable. This review is performed on a disaggregated basis for the
predominant risk characteristics of the underlying loans which are loan type and
origination date.
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. SFAS 129 is effective for fiscal periods
ending after December 15, 1997. The Company will adopt SFAS 129 effective July
1, 1998.
In June 1997, FASB issued SFAS 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes disclosure standards for reporting
comprehensive income in a full set of general purpose financial statements. SFAS
130 is effective for fiscal years beginning after December 15, 1997. The
adoption of this standard is not expected to have an impact on the Company's
financial position or results of operations.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131") which is effective for
periods beginning after December 15, 1997. SFAS 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of this standard is not expected to have an impact on the Company's
financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning after
June 15, 1999. SFAS No. 133 requires companies to record derivatives on the
balance sheet as assets and liabilities, measured at fair value.
26
<PAGE> 27
RESULTS OF OPERATIONS -- FISCAL YEARS 1998, 1997 AND 1996
The following table sets forth information regarding the components of
the Company's revenue and expenses in fiscal 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ----------------------- ---------------------
(Dollars in thousands)
Dollars Percentage Dollars Percentage Dollars Percentage
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Gain on sale of loans............... $ 188,578 58.0% $198,736 72.9% $ 95,299 63.4%
Net unrealized gain/(loss) on
valuation of interest-only strips 19,495 6.0% (18,950) (6.9) -- --
Commissions......................... 27,664 8.5% 29,250 10.7 21,564 14.4%
Loan Service:
Servicing spread.................. 23,427 7.2% 16,265 6.0 12,667 8.4%
Prepayment fees................... 11,761 3.6% 5,815 2.1 3,229 2.1%
Late charges and
other servicing fees............. 7,489 2.3% 3,724 1.4 2,290 1.5%
Fees and other:
Closing........................... 2,668 0.8% 2,723 1.0 2,512 1.7%
Appraisal......................... 2,617 0.8% 1,854 0.7 1,167 0.8%
Underwriting...................... 1,085 0.3% 1,382 0.5 1,600 1.1%
Interest income................... 40,110 12.3% 31,160 11.4 9,127 6.1%
Other............................. 380 0.2% 560 0.2 809 0.5%
-------- ----- -------- ----- -------- ------
Total revenue................. $325,274 100.0% $272,519 100.0% $150,264 100.0%
======== ===== ======== ===== ======== ======
Expenses:
Compensation and
related expenses................ $ 94,820 29.2% $ 81,021 29.7% $ 40,758 27.1%
Production expenses............... 34,195 10.5% 27,229 10.0 19,036 12.7%
General and
administrative expenses......... 40,686 12.5% 31,716 11.6 17,377 11.6%
Interest expense.................. 43,982 13.5% 33,105 12.2 12,370 8.2%
Provision for loan losses......... 39,164 12.0% 33,941 12.5 8,424 5.6%
Nonrecurring charges.............. -- -- 32,000 11.7 -- --
-------- ---- -------- ---- -------- ----
Total expenses................ $252,847 77.7% $239,012 87.7% $ 97,965 65.2%
======== ==== ======== ==== ======== ====
Income before income taxes............ 72,427 22.3% 33,507 12.3 52,299 34.8%
Income taxes.......................... 32,110 9.9% 16,398 6.0 22,508 15.0%
-------- ---- -------- ---- -------- ----
Net income.................... $ 40,317 12.4% $ 17,109 6.3% $ 29,791 19.8%
======== ==== ======== ==== ======== ====
</TABLE>
REVENUE
Total revenue for fiscal 1998 increased $52.8 million, or 19%, from
total revenue for fiscal 1997, which, in turn, increased $122 million, or 81%,
over total revenue in fiscal 1996. Total revenues include a
27
<PAGE> 28
$19.5 million net unrealized gain and a $19.0 million net unrealized loss (see
below) on valuation of the Company's interest-only strips for the fiscal years
ended June 30, 1998 and 1997, respectively.
The increase in total revenue from fiscal 1997 to fiscal 1998 was
primarily due to the increase in gain on sale, net of unrealized gain or loss on
valuation of interest-only strips and the increase in loan service revenue. The
increased gain on sale, net of unrealized gain or loss on valuation of
interest-only strips, was due primarily to the $28.0 million net unrealized loss
on its interest-only strips recorded by the Company in the fourth quarter of
fiscal 1997. This unrealized loss was due primarily to an increase in prepayment
rates in certain of the Company's adjustable rate loans in some of its earlier
pools. Increased loan service revenues in fiscal 1998 are a result of the
continued growth in the Company's servicing portfolio and the successful
transfer in-house of $1.47 billion of mortgage loans previously subserviced by
others.
Increases in total revenue for 1997 compared to 1996 were primarily the
result of increased gain on sale, net of unrealized gain or loss on valuation of
interest-only strips, increased interest income and increased loan service
revenue. These increases resulted from the significantly higher volumes of
mortgage loans originated and purchased by the Company and securitized and sold
in fiscal 1997 which more than offset the effects of the net unrealized loss
recorded in that year. The Company originated and purchased $2.35 billion of
mortgage loans during fiscal 1997 versus $1.17 billion of mortgage loans during
fiscal 1996. The substantial loan volume increase in 1997 over 1996 was due
primarily to the increase in loans purchased through the Company's correspondent
loan division, loans originated through the independent mortgage broker network
and, to a lesser extent, the expansion of the retail network.
Gain on sale, net of unrealized gain or loss on valuation of
interest-only strips, increased by $28.3 million, or 16% in fiscal 1998 compared
to fiscal 1997 and $84.5 million, or 89%, in fiscal 1997 compared to fiscal
1996. The increase in fiscal 1998 over fiscal 1997 was primarily due to the net
unrealized loss on valuation on interest-only strips recorded in fiscal 1997.
Fiscal 1998's gain on sale, net of unrealized gain or loss on valuation of
interest-only strips, as compared to fiscal 1997's, reflects gains recorded on
substantially the same total volumes of loan production but with a larger
percentage of the volume comprised of more profitable retail and broker loan
production as opposed to less profitable bulk correspondent loan production.
Premiums paid on the purchase of correspondent loans are recorded as an offset
to gain on sale. Total loan production for fiscal 1998 was $2.38 billion. See
"Item 1. Business - Mortgage Loan Production." However, the 1998 gains reflect
the lower premiums earned on whole loan sales closed during the 1998 fiscal
year. Generally, the gain recorded in a whole loan sale is less than that
recorded in a securitization. During fiscal 1998, the Company sold a total of
$2.45 billion of loans, $2.03 billion of which was sold in securitization
transactions and $416 million of which was sold in whole loan sales for cash.
During fiscal 1997, the Company sold a total of $2.27 billion of loans,
substantially all of which were sold in securitization transactions. Further,
gains recorded on loans securitized in fiscal 1998 were negatively affected by
reduced spreads and increased prepayment rate assumptions established in the
fourth fiscal quarter of 1997. The weighted average servicing spread (the
weighted average interest rate on the pool of loans sold over the sum of the
investor pass-through or bond rate and the monoline insurance fee, if any) on
loans securitized and sold during these periods was 3.91%, 4.16% and 4.93% for
fiscal 1998, 1997 and 1996, respectively. The decreased weighted average
servicing spread reflects a decrease in weighted average interest rates on
pooled loans due primarily to the higher percentage of higher credit grade loans
included in the loans securitized during the year and the current interest rate
environment. The larger percentage of higher credit grade loans included in the
loans securitized during fiscal 1998 and 1997 reflects the Company's previously
announced diversification of its loan originations and purchases to include more
A, A-, B and C credit grade loans.
28
<PAGE> 29
Commissions earned on loan originations continue to be an important
component of total revenue, although to a lesser degree than in prior years,
comprising 8.5%, 11% and 14% of total revenue in fiscal 1998, 1997 and 1996,
respectively. Commissions decreased $1.59 million, or 5.4%, in fiscal year 1998
compared to fiscal 1997 and increased $7.69 million, or 36%, in fiscal 1997
compared to fiscal 1996. Commission revenue is primarily a function of the
volume of mortgage loans originated by the Company through its retail loan
office network, the credit grade of the loans originated and the weighted
average commission rate charged on such loans. The decrease in fiscal 1998
reflects the lower weighted average commission rate charged. The increase in
commissions in fiscal 1997 was a result of increased origination volume,
offsetting a decline in weighted average commission rate. The weighted average
commission rate was 4.3%, 4.9% and 7.7% during fiscal 1998, 1997 and 1996,
respectively. The lower weighted average commission rate in fiscal 1998 and
fiscal 1997 reflected the increase of higher credit grade loans originated
through the Company's retail loan office network, which generally carry lower
commission rates, and competitive factors. Commissions do not include $2.66
million and $1.18 million of commissions on loans which were held for sale as of
June 30, 1998 and 1997, respectively and deferred in accordance with GAAP.
Loan service revenue increased $16.9 million, or 65% in fiscal 1998
compared to fiscal 1997 and $7.62 million, or 42%, in fiscal 1997 compared to
fiscal 1996. Loan service revenue consists of net servicing spread earned on the
principal balances of the loans in the Company's loan servicing portfolio,
prepayment fees, late charges and other fees retained by the Company in
connection with the servicing of loans reduced by amortization of the
interest-only strips. See "- Certain Accounting Considerations." The increase in
loan service revenue in fiscal 1998 primarily reflects the successful transfer
of $1.47 billion of loans previously subserviced by third parties and, to a
lesser extent, the increase in the Company's servicing portfolio offset by $106
million in amortization of the interest-only strips and $9.1 million in
amortization of the Company's OMSRs. During fiscal 1997, loan service revenue
was reduced by $68.6 million in amortization of interest-only strips and $5.5
million in amortization of OMSRs. These improvements were offset by a reduction
in the weighted average servicing spread on the portfolio due to prepayment of
higher interest rate mortgages. As of June 30, 1998, of the Company's $4.15
billion servicing portfolio, 95% was serviced in-house. At June 30, 1997, 47% of
the Company's servicing portfolio was serviced in house. The Company's loan
servicing portfolio increased to $4.15 billion at June 30, 1998, up 31% from the
June 30, 1997 balance of $3.17 billion which, in turn, increased 131% from the
June 30, 1996 balance of $1.37 billion. By calendar year end, the Company
expects to eliminate the use of third party subservicers and by fiscal year-end
begin subservicing for others. 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.
Fees and other revenue increased by $9.18 million, or 24%, in fiscal
1998 compared to fiscal 1997 and increased $22.5 million, or 148%, in fiscal
1997 compared to fiscal 1996. Fees and other revenue consist of fees received by
the Company through its retail loan office network in the form of closing,
appraisal, underwriting and other fees, plus interest income. The dollar amount
of these fees increased in each of the years presented due to the larger number
of mortgage loans originated through the Company's retail loan office network
during the respective periods. Interest income increased during the period 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, offset by declining weighted average interest rates on loans held.
EXPENSES
Compensation and related expenses increased $13.8 million, or 17%, in
fiscal 1998 compared to fiscal 1997 and $40.3 million or 99% in fiscal 1997
compared to fiscal 1996. The increases were primarily due to the continued
effort to accommodate increased origination volumes, core origination channel
expansion and
29
<PAGE> 30
increased in-house servicing. Compensation and related expenses as a percentage
of total loan originations and purchases were 4.0% for fiscal 1998 and 3.5% for
fiscal 1996 and 1997.
Production expenses increased $6.97 million, or 26%, in fiscal 1998
compared to fiscal 1997 and $8.19 million, or 43%, in fiscal 1997 compared to
fiscal 1996. These increases were primarily due to increased origination volume
and continued expansion into new geographical areas requiring concentrated
marketing efforts. Production costs as a percentage of total origination volume
were 1.4%, 1.2% and 1.6% for fiscal 1998, 1997 and 1996, respectively.
General and administrative expenses increased $8.97 million, or 28%, in
fiscal 1998 compared to fiscal 1997 and $14.3 million, or 83%, in fiscal 1997
compared to fiscal 1996. These increases were primarily the result of increased
occupancy and communication costs related to the Company's core origination
channel expansion and increased origination volumes.
Interest expense increased to $44.0 million in fiscal 1998 from $33.1
million in fiscal 1997 and $12.4 million in fiscal 1996. These increases were
primarily the result of increased borrowings under various financing
arrangements used to fund the origination and purchase of mortgage loans prior
to their securitization or sale in the secondary market and as a result of the
Company's sale of $115 million of its 5.5% Convertible Subordinated Debentures
due 2006 in the third quarter of fiscal 1996 and $150 million of its 9.125%
Senior Notes due 2003 in the second quarter of fiscal 1997. Interest expense is
expected to increase in future periods due to the Company's continued reliance
on external financing to fund operations.
The provision for loan losses increased to $39.2 million in fiscal 1998
from $33.9 million in fiscal 1997 and $8.4 million in fiscal 1996. The Company
recorded average provisions for loan losses of 1.93%, 1.54% and 1.06% of the
loans securitized during fiscal 1998, fiscal 1997 and fiscal 1996, respectively.
This increase reflects the greater amount of higher credit grade loans with
generally higher loan-to-value ratios originated during these periods, as well
as the Company's assessment of provision requirements in conjunction with its
review of the adequacy of the reserve for loan losses.
In fiscal 1997, the Company incurred $32.0 million of nonrecurring
charges. Approximately $25 million of these charges were recognized in August
1996 directly related to the acquisition of One Stop. The remaining amount
relates to a reserve for relocating corporate headquarters recorded in the first
quarter and to severance and other strategic decisions made in the fourth
quarter.
INCOME TAXES
The Company's provision for income taxes increased to $32.1 million in
fiscal 1998 from $16.4 million in fiscal 1997 and $22.5 million in fiscal 1996,
primarily as a result of the fluctuation in pre-tax income after consideration
of tax impact of nonrecurring charges. The effective tax rate declined to 44.3%
in fiscal 1998 from 48.9% in fiscal 1997 as a result of an adjustment in the
Company's tax reserve to more accurately reflect the risk of assessments on
previously filed tax returns.
FINANCIAL CONDITION
Loans Held for Sale. The Company's portfolio of loans held for sale
decreased to $198 million at June 30, 1998 from $243 million at June 30, 1997.
This decrease is directly related to production volume and the size of the
Company's securitizations and sales in the secondary market during the period.
30
<PAGE> 31
Accounts Receivable. Accounts receivable representing servicing fees and
advances and other receivables, decreased to $51.1 million at June 30, 1998 from
$59.2 million at June 30, 1997. This decrease reflects improved cash flows
related to the transfer in-house of mortgage loans previously serviced by third
parties offset by higher advances related to the delinquencies in the Company's
servicing portfolio.
Interest-Only Strips. Interest-only strips increased to $360 million at
June 30, 1998 from $270 million at June 30, 1997 reflecting the gain recognized
on the Company's securitizations, offset by $106 million in amortization,
during 1998. See "- Certain Accounting Considerations."
Mortgage Servicing Rights. Mortgage servicing rights increased to $32.1
million at June 30, 1998 from $21.6 million at June 30, 1997 reflecting the
capitalization of mortgage servicing rights, offset by $9.1 million in
amortization, on the Company's securitizations during 1998. See "- Certain
Accounting Considerations."
Residual Assets. Residual assets represent the overcollateralization
amounts and reserve accounts required to be maintained in connection with the
Company's securitizations and recorded as of the time such amounts are received
by the trust. Residual assets include cash and mortgage loans in excess of the
principal amounts of the senior and subordinated certificates or bonds of the
securitization trusts. Residual assets increased to $195 million at June 30,
1998 from $113 million at June 30, 1997 due to the additional reserves or
overcollateralization required on the Company's recent securitizations and
increased levels required on existing pools that exceeded certain delinquency
levels during the year. See "- Risk Factors -- Delinquencies and Losses in
Securitization Trusts; Right to Terminate Mortgage Servicing; Negative Impact on
Cash Flow."
Equipment and Improvements, Net. Primarily as a result of the Company's
expansion and the associated investment in technology, equipment and
improvements, net, increased to $13.9 million at June 30, 1998 from $12.7
million at June 30, 1997.
Prepaid and Other Assets. Prepaid and other assets increased to $17.0
million at June 30, 1998 from $14.9 million at June 30, 1997 primarily as a
result of the Company's growth.
Borrowings. Borrowings remained consistent at $287 million at June 30,
1998 and 1997.
Revolving Warehouse Facilities. Amounts outstanding under warehouse
facilities increased to $141 million at June 30, 1998 from $138 million at June
30, 1997. Although the Company's loans held for sale decreased at June 30, 1998,
outstanding amounts on warehouse facilities increased slightly. This resulted
from the negative cash flow from operations during the fiscal year 1998 and the
resulting decrease in equity capital.
LIQUIDITY
The Company's operations require continued access to short-term and
long-term sources of cash. The Company's primary operating cash requirements
include the funding of: (i) mortgage loan originations and purchases prior to
their securitization or sale, (ii) fees, expenses and hedging costs, if any,
incurred in connection with the securitization and sale of loans, (iii) cash
reserve accounts or overcollateralization requirements in connection with the
securitization and sale of mortgage loans, (iv) tax payments due on recognition
of non-cash gain on sale other than in a debt-for-tax securitization structure,
(v) ongoing administrative and other operating expenses, (vi) interest and
principal payments under the Company's warehouse credit facilities and other
existing indebtedness, (vii) advances in connection with the Company's servicing
portfolio, and (viii) costs associated with expanding the Company's core
production units.
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Historically, the Company funded its negative operating cash flow
principally through borrowings from financial institutions, sales of equity
securities and sales of senior and subordinated notes, among other sources. The
Company expects to improve operating and financing cash flow and reduce the need
to access the public equity and debt markets by selling a portion of its loan
production in the whole loan market for cash and establishing or, subject to
easing debt covenants restricting the Company's ability to obtain financing
secured by its interest-only strips, adding credit facilities to finance
interest-only strips and residual assets. In addition, the completion of the $38
million capital infusion in April 1998 provided the Company with a significant
source of cash for expanding operations and additional flexibility in loan
disposition strategy. See "Item 1. Business - Recent Events" and "- Capital
Resources."
The Company currently expects to fund its negative operating cash flows,
subject to limitations under the Company's existing credit facilities,
principally from borrowings from financial institutions. The Company anticipates
that its sources of liquidity, assuming additional access to residual financing,
will be sufficient to fund the Company's liquidity requirements for the next 12
months. There can be no assurance that the Company will be successful in
consummating any such financing transaction or easing restrictions on the level
of permitted indebtedness secured by interest-only strips, or in executing whole
loan sales, in the future on terms the Company would consider to be favorable.
See "- Risk Factors -- Dependance on Funding Sources."
Under the terms of the Company's Indenture, dated October 21, 1996, with
respect to its 9.125% Senior Notes due 2003, the Company's ability to incur
certain additional indebtedness, including residual financing, is limited to
approximately two times stockholders' equity. Warehouse indebtedness is not
included in the indebtedness limitations. Further, until the Company receives
investment grade ratings for the notes issued under the Indenture, the amount of
residual financing the Company may incur on its residuals and interest-only
strips allocable to post-September 1996 securitizations is limited to 75% of the
difference between such post-September 1996 residuals and interest-only strips
and $225 million. Under one of the Company's warehouse lines, the Company is
currently limited to $50 million of indebtedness secured by its interest-only
strips. The Company is seeking to ease such restrictions. However, no assurance
can be given that the Company will be successful in its attempts to do so.
Although the Company's loan disposition strategy consists of a
combination of securitizations and whole loan sales, securitization continues to
be the primary disposition method. During fiscal 1998, 1997 and 1996, the
Company securitized $2.03 billion, $2.26 billion and $791 million of loans,
respectively. In connection with securitization transactions completed during
these periods, the Company was required to provide credit enhancements in the
form of overcollateralization amounts or reserve accounts. 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 increase the cash reserve accounts or to repay the senior
interests in order to increase overcollateralization to specified maximums.
Overcollateralization requirements increase up to approximately twice the level
otherwise required when the delinquency rates exceed the specified limit. As of
June 30, 1998, the Company was required to maintain an additional $89.9 million
in overcollateralization amounts as a result of the level of its delinquency
rates above that which would have been required to be maintained if the
applicable delinquency rates had been below the specified limit. Of this amount,
at June 30, 1998, $69.3 million remains to be added to the overcollateralization
amounts from future spread income on the loans held by these trusts.
In the Company's securitizations structured as a REMIC, the recognition
of non-cash gain on sale has a negative impact on the cash flow of the Company
since the Company is required to pay federal and state
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taxes on a portion of these amounts in the period recognized although it does
not receive the cash representing the gain until later periods as the related
service fees are collected and applicable reserve or overcollateralization
requirements are met.
The Company also incurs certain expenses in connection with
securitizations, including underwriting fees, credit enhancement fees, trustee
fees, hedging and other costs, which in fiscal 1998 approximated .60% of the
principal amount of the securitized mortgage loans.
CAPITAL RESOURCES
The Company has historically financed its operating cash requirements
primarily through (i) warehouse facilities and working capital lines of credit,
(ii) the securitization or sale of mortgage loans, and (iii) the issuance of
debt and equity securities. The Company's new loan disposition strategy of
combining securitizations and whole loan sales for cash and establishing new
credit facilities to finance interest-only strips and residual assets is
expected to reduce reliance on the public equity and debt market.
Warehouse and Other Facilities. At June 30, 1998, the Company had three
warehouse facilities in place. One facility is a warehouse line and working
capital line of credit with a syndicate of ten commercial banks. The facility
provides for a maximum borrowing amount of $400 million, is secured by loans
originated and purchased by the Company as well as certain servicing
receivables. The warehouse line bears an interest rate of either 1.05% over the
federal funds rate or .80% over the one-month LIBOR and the working capital line
bears an interest rate of either 1.60% over the federal funds rate or 1.35% over
the one month LIBOR. These rates are subject to increase based on the Company's
consolidated leverage, and there can be no assurances that rates will remain
stable in the near future. This line is currently scheduled to expire on April
8, 1999 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 $300 million bears interest at a rate of 0.65% over
one-month LIBOR and expires on March 11, 1999. The third line is also from an
investment bank with a maximum borrowing capacity of $250 million at a rate of
0.65% over LIBOR which expires upon the earlier of the closing of the Company's
September 1998 securitization (except for $25 million which must be repaid
within three business days of such closing) and September 30, 1998. On August
19, 1998, the Company obtained a fourth warehouse facility from a financial
institution providing for a maximum borrowing capacity of $300 million at a rate
of 0.25% over LIBOR subject to quarterly revisions which expires on February 15,
1999. Management expects, although there can be no assurance, that the Company
will be able to maintain these or similar facilities in the future. The Company
will continue to require short term warehouse facilities. The levels of
short-term warehouse facilities required is dependent on production volume
levels and the timing of loan sales in the secondary market. See "- Risk Factors
- -- Dependence on Funding Sources."
In September 1998, the Company entered into a revolving line of credit
with a maximum borrowing capacity of $50 million secured by certain of the
Company's interest-only strips. The collateral is subject to mark-to-market
valuation, or may otherwise be deemed unacceptable, in the sole discretion of
the lender. To the extent such provisions result in a shortfall, the line
provides for the term out of the loan or the delivery of additional collateral
to bring the line back into compliance. This line expires on September 3, 1999.
Additionally, in September 1998, the Company entered into a repurchase
facility secured by multifamily residential and commercial mortgage loans. The
repurchase facility provides for a maximum borrowing amount of $50 million. The
repurchase facility bears an interest rate for each transaction mutually agreed
upon by the Company and the financial institution at the time of the
transaction. The repurchase facility expires on September 9, 1999.
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Loan Sales. The Company's ability to sell loans originated and
purchased by it in the secondary market is necessary to generate cash proceeds
to pay down its warehouse facilities and fund new originations and purchases.
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. See "- Risk Factors -- Dependence on Funding Sources."
Capital Resources. The Company has historically funded negative cash
flow primarily from the sale of its equity and debt securities. In December
1991, July 1993, June 1995, October 1996 and April 1998, the Company effected
offerings of its common stock with net proceeds to the Company aggregating $217
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. Under the agreements relating to
these debt issuances, the Company is required to comply with various operating
and financial covenants including covenants which may restrict the Company's
ability to pay certain distributions, including dividends. At June 30, 1998, the
Company had available $52.5 million for the payment of such distributions under
the most restrictive of such covenants.
On April 27, 1998, the Company issued 2.78 million shares of its common
stock, or 9.9% of the Company's outstanding shares, to private entities
controlled by Ronald Perelman and Gerald Ford, at an aggregate purchase price of
approximately $38 million. The Company also issued warrants to these entities to
purchase an aggregate additional 9.9% of the Company's stock at an exercise
price of $17.2031 (125% of the purchase price of the stock), subject to
customary anti-dilution provisions. The warrants are exercisable only upon a
change in control of the Company and expire in three years. See "Item 1.
Business - Recent Events."
The Company had cash and cash equivalents of approximately $12.3 million
(of which $1.6 million was restricted) at June 30, 1998. See "- Risk Factors --
Negative Cash Flow and Capital Needs."
YEAR 2000 COMPLIANCE AND TECHNOLOGICAL ENHANCEMENTS
The Company's year 2000 compliance program consists of four phases--
inventory, risk assessment process, corrective action and testing. The Company
has completed the inventory phase which included the identification of all
computer hardware and software, electronic data exchanges, operating systems,
communications systems and non-information items. As a corollary to the
inventory phase, the Company is making inquiries of its significant vendors as
to their year 2000 readiness.
The Company has also completed the risk assessment process of assigning
risk factors to each system used by the Company to determine the priority and
resource allocation of its year 2000 efforts. The Company expects to complete
the corrective action and testing phases with respect to mission critical
systems by June 1999. The Company will complete any remaining testing and
compliance by the end of 1999.
Costs to Address the Company's Year 2000 Issues. The Company anticipates
that costs relating to year 2000 issues are not expected to be material since
the Company primarily relies on third party software for its primary information
technology systems and does not require significant internal reprogramming
resources to change program codes. The Company is in the process of converting
or is scheduled to convert its major computer systems, including the loan
origination system and the financial system from in-house to vendor-
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supported systems. These conversions were planned to upgrade and improve
functionality rather than as a result of year 2000 issues.
Risks of the Company's Year 2000 Issues. The most significant risk
associated with the Company's year 2000 compliance would result from the loss of
the Company's vendor supported servicing system and the inability to maintain
the ongoing loan service operations, including payment processing, collections
and investor remittance processing. The Company's servicing platform uses
software supplied by a subsidiary of Fiserv, Inc. To reduce the risk of
non-compliance, the Company intends to rely on the vendor's representations
regarding year 2000 compliance, the Company's testing efforts, as well as the
testing results of other companies that use the same software. The testing and
other costs relating to the Company's year 2000 compliance program are not
expected to be material.
Another year 2000 risk relates to the Company's vendor supported loan
origination system. In the event of year 2000 issues with respect to the
software used with such system (also supplied by a subsidiary of Fiserv, Inc.),
the Company's ability to originate loans would be diminished and may result in
reduced loan production until the problem is resolved. The Company intends to
rely on the vendor's assurances and Company testing to minimize the risk of
non-compliance of this system.
Contingency Plans. The Company has no reason to believe that its most
significant systems will not be year 2000 compliant. If testing indicates any of
the systems are not compliant, the Company will develop appropriate contingency
plans.
RISK MANAGEMENT
The Company's earnings may be directly affected by the level of and
fluctuation in interest rates and the level of prepayment in the Company's
securitizations. The Company currently hedges its fixed rate pipeline and some
LIBOR-based tranches in its fixed rate securitizations, and continues to explore
other avenues of risk mitigation, although none have been employed to date. The
current fixed rate hedge products utilized are swap agreements with third
parties that sell United States Treasury securities not yet purchased and the
purchase of Treasury put options. The hedge instrument used on the existing
LIBOR-based tranches secured by fixed rate mortgages is an interest rate
contract with a specified LIBOR rate cap. The amount and timing of hedging
transactions are determined by members of the Company's senior management.
During the first quarter ending September 30, 1998, market conditions became
extremely unsettled resulting in a break down in the historical relationship
between U.S. Treasury securities and the pass-through rates on asset-backed
securitizations. Historically, the use of an interest rate hedge against
Treasuries has been a more conservative method of limiting interest rate risk.
Changes in Treasury rates were generally reflected in the pass-through rates of
the fixed rate portion of the Company's securitizations. However, during the
first quarter ending September 30, 1998, current market conditions have resulted
in a loss on the Company's Treasury hedge without receiving an equivalent
benefit from reductions in the pass- through rates paid on the certificates sold
on the fixed rate portion of the Company's first quarter 1998 securitization.
This weak asset-backed market will result in a significantly lower gain on sale
and significantly larger negative cash flow for the first quarter ending
September 30, 1998. The Company is currently re-evaluating its current hedging
policy. While the Company monitors the interest rate environment and employs
fixed rate hedging strategies, 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 or prepayment rates.
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FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITIES
Securitizations - Hedging Interest Rate Risk. The most significant
variable in the determination of gain on sale in a securitization is the spread
between the weighted average coupon on the securitized loans and the
pass-through interest rate. In the interim period between loan origination or
purchase and securitization of such loans, the Company is exposed to interest
rate risk. The majority of loans are securitized within 90 days of origination
or purchase. However, a portion of the loans are held for sale or securitization
for as long as 12 months (or longer, in very limited circumstances) prior to
securitization. If interest rates rise during the period that the mortgage loans
are held, the spread between the weighted average interest rate on the loans to
be securitized and the pass-through interest rates on the securities to be sold
(the latter having increased as a result of market rate movements) would narrow.
Upon securitization, this would result in a reduction of the Company's related
gain on sale. The Company mitigates this exposure through swap agreements with
third parties that sell United States Treasury securities not yet purchased and
the purchase of Treasury Put Options. Hedge gains or losses are initially
deferred and subsequently included in gain on sale upon completion of the
securitization. With respect to the Company's securitizations, gain on sale
included hedge losses of $1.30 million and $3.04 million in fiscal 1998 and
1997, respectively. These hedging activities help mitigate the risk of absolute
movements in interest rates but they do not mitigate the risk of a widening in
the spreads between pass-through certificates and U.S. Treasury securities with
comparable maturities.
The Company enters into swap agreements with third parties that sell
United States Treasury Securities not yet purchased. At June 30, 1998 the
Company had outstanding notional balances of such Treasury swap agreements in
the amount of $250 million. This position expired on September 30, 1998 and had
a market value at June 30, 1998 of $248 million. The Company had a similar
position at June 30, 1997 in the notional amount of $135 million. This position
expired on September 30, 1997 and had a market value at June 30, 1997 of $135
million. These transactions are subject to Treasury interest rate fluctuation
and require cash settlement at expiration or voluntary termination.
The Company also had LIBOR cap contracts outstanding at June 30, 1998
and 1997 in the notional amount of $17.5 million and $106 million, respectively.
These positions were valued at par at both fiscal year ends as their contractual
cap (strike price) exceeded the LIBOR market rate at June 30, 1998 and 1997. The
June 30, 1998 position expires December 23, 1998 and the June 30, 1997 position
had expiration dates from March 30, 1998 to December 23, 1998. These instruments
have no negative risk above the original premiums paid in cash. However, if the
LIBOR market rate exceeds the contractual cap, the Company will receive cash in
settlement.
Interest-Only Strips and OMSRs - The Company had interest-only strips of
$360 million and $270 million outstanding at June 30, 1998 and 1997,
respectively. The Company also had OMSRs outstanding at June 30, 1998 and 1997
in the amount of $32.1 million and $21.6 million, respectively. Both of these
instruments are valued at market at June 30, 1998 and 1997. The Company values
these assets based on the present value of future revenue streams net of
expenses and related loan loss reserves using various assumptions. The discount
rate used to calculate the present value of the interest-only strips and OMSRs
was 10.8% and 11.4% at June 30, 1998 and 1997. The weighted average life used
for valuation at June 30, 1998 was 2.6 to 3.8 years and at June 30, 1997 was 2.6
to 3.9 years.
These assets are subject to risk in accelerated mortgage prepayment or
losses in excess of assumptions used in valuation. Ultimate cash flows realized
from these assets would be reduced should prepayments or losses exceed
assumptions used in the valuation. Conversely, cash flows realized would be
greater should prepayments or losses be below expectations.
Fair Value of Financial Instruments. The Company's financial instruments
recorded at contractual amounts that approximate market or fair value primarily
consist of trade receivables, accounts payable and trade receivables sold under
agreements to repurchase. As these amounts are short term in nature and/or
generally bear market rates of interest, the carrying amounts of these
instruments are reasonable estimates of their fair values. The carrying amount
of the Company's long-term debt approximates fair value when valued using
available quoted market prices.
Credit Risk. The Company is exposed to on-balance sheet credit risk
related to its receivables and interest-only strips and residual certificates.
The Company is exposed to off-balance sheet credit risk related to loans which
the Company has committed to originate or purchase.
The Company is a party to financial instruments with off-balance sheet
credit risk in the normal course of business. These financial instruments
include commitments to extend credit to borrowers and commitments to purchase
loans from correspondents. The Company has a first or second lien position on
all of its loans, and the combined loan-to-value ratio ("CLTV") permitted by the
Company's mortgage underwriting guidelines generally may not exceed 90%. The
CLTV represents the combined first and second mortgage balances as a percentage
of the appraised value of the mortgaged property, with the appraised value
determined by an appraiser with appropriate professional designations. A title
insurance policy is required for all loans.
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Warehousing Exposure. The Company utilizes warehouse financing
facilities to facilitate the holding of mortgage loans prior to securitization.
As of June 30, 1998 and 1997, the Company had total warehouse facilities
available in the amount of $600 million and $950 million, respectively; the
total outstanding related to these facilities was $141 million and $137 million
at June 30, 1998 and 1997, respectively. Warehouse facilities are typically for
a term of one year or less and are designated to fund mortgages originated
within specified underwriting guidelines. The majority of the assets remain in
the facilities for a period of up to 90 days at which point they are securitized
and sold to institutional investors. As these amounts are short term in nature
and/or generally bear market rates of interest, the contractual amounts of these
instruments are reasonable estimates of their fair values.
RISK FACTORS
Forward Looking Statements. This Report contains 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 flow and capital needs; delinquencies and
losses in securitization trusts; right to terminate mortgage servicing and
negative impact on cash flow; risk of changes in interest rate environment;
year 2000 compliance and technology enhancements; prepayment risk, credit risk;
basis risk; dependence on funding sources; risk of adverse changes in the
secondary market for mortgage loans; dependence on broker network; risks
involved in commercial mortgage lending; strategic alternatives; competition;
concentration of operations in California; timing of loan sales; economic
conditions; contingent risks; and government regulation. These risk factors are
set forth below.
Negative Cash Flow and Capital Needs. The Company has historically
operated, and expects to continue to operate, on a negative cash flow basis.
This negative cash flow arises primarily from the Company's reliance on
securitization as its primary loan disposition strategy. In a securitization,
the Company recognizes a non-cash 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, which in general is payable over
the actual life of the loans securitized after overcollateralization
requirements are met. The Company incurs significant expense in connection with
a securitization and generally incurs both current and deferred tax liabilities
as a result of the gain on sale. The Company's primary cash requirements include
the funding of: (i) mortgage loan originations and purchases pending their
securitization and sale; (ii) fees, expenses and hedging costs, if any, incurred
in connection with the securitization of loans; (iii) cash reserve accounts or
overcollateralization requirements in connection with the securitization and
sale of the loans; (iv) tax payments due on recognition of non-cash gain on
sale, other than in a debt-for-tax securitization structure; (v) ongoing
administrative and other operating expenses; (vi) interest and principal
payments under the Company's warehouse credit facilities and other existing
indebtedness; (vii) advances in connection with the Company's servicing
portfolio; and (viii) costs associated with expanding the Company's core
production units. Net cash used in operating activities for fiscal 1998, 1997
and 1996 was $49.7 million, $280 million and $241 million, respectively.
Therefore, the Company requires continued access to short- and long-term
external sources of cash to fund its operations.
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In the past, the Company relied on the public equity and debt markets to
meet its capital needs. The two principal business strategies adopted since the
fourth quarter of 1997: reducing the amount of loans purchased in bulk and
disposing of significant portions of its loans in whole loan sales for cash,
have permitted the Company to reduce its reliance on those markets. The
Company's primary sources of liquidity in the future are expected to be existing
cash, fundings under warehouse facilities, access to additional financing on
residuals and alternative mortgage products and sales of mortgage loans through
securitizations and whole loan sales.
The Company's primary sources of liquidity as described in the paragraph
above (assuming access to residual financing and easing restrictions on the
level of permitted indebtedness secured by interest-only strips), 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, limitations under debt
covenants 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 that favorable terms will be available or that restrictions currently in
place will be eased. As a result of the limitations described above, the Company
may be restricted in the amount and type of future debt it may issue and the
amount of loans that it will be able to dispose of through securitization
transactions.
Delinquencies and Losses in Securitization Trusts; Right to Terminate
Mortgage Servicing; Negative Impact on Cash Flow. A substantial majority of the
Company's servicing portfolio consists of loans securitized by the Company and
sold to REMIC or owner trusts in securitization transactions. Generally, the
form of agreement entered into in connection with these securitizations contains
specified limits on delinquencies (i.e., loans past due 90 days or more) and
losses that may be incurred in each trust. Losses occur when the liquidation
proceeds from disposal of foreclosed properties, less liquidation expenses, are
less than the principal balances of the loans previously secured by such
properties and related interest and servicing advances (see below). If, at any
measuring date, the delinquencies or losses with respect to any trust credit-
enhanced by monoline insurance were to exceed the limits applicable to such
trust, provisions of the agreements permit the monoline insurance company to
terminate the Company's servicing rights to the affected trust.
At June 30, 1998, the dollar volume of loans delinquent more than 90
days in the Company's 12 securitization trusts formed in November 1992, December
1992 and June 1993 and during the period from December 1994 to December 1996
exceeded the permitted limit in the related pooling and servicing agreements.
The higher delinquency rates negatively affect the Company's cash flows by
increasing the required overcollateralization levels, thereby deferring the
Company's receipt of cash and by obligating the Company, as servicer, to advance
past due interest. Higher delinquency levels leading to higher loss levels also
adversely influence the Company's assumptions underlying the gain on sale in a
securitization transaction. Additionally, the higher delinquency rates permit
the monoline insurance company to terminate the Company's servicing rights with
respect to the affected trusts. 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.
Management believes that the disruption of servicing associated with the recent
transfer of servicing in-house from third parties contributed to the increase in
the delinquency rate from June 30, 1997 to June 30, 1998 although there can be
no assurance that the delinquency rates will decline in the future. The
delinquency rate for June 30, 1998 was 15.6% compared to 15.3% at June 30, 1997.
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Seven of the 12 trusts referred to above plus one additional trust
(representing in the aggregate 10% of the dollar volume of the Company's
servicing portfolio) exceeded one of two loss limits at June 30, 1998. The limit
that has been exceeded provides that losses may not exceed a certain threshold
(which ranges from .38% to .56% of the original pool balances in the relevant
securitization trusts) on a rolling 12 month basis. The other limit, which was
not exceeded, provides that losses may not exceed a certain cumulative threshold
(which ranges from 1.3% to 2.0% of the original pool balances in the relevant
securitization trusts) since the inception of the trust.
Management believes that current loss levels have increased in part due
to a loss mitigation strategy of minimizing the real estate owned ("REO")
holding period, thereby reducing carrying costs, which accelerated the volume of
liquidated properties in the recent period. It is the Company's goal to reduce
the REO holding period to maximize the economics of liquidation transactions.
Current loss levels have also increased due to the seasoning of the lower credit
grade loans purchased in bulk and included in the Company's earlier trusts. The
Company has reduced significantly purchases in bulk of lower credit grade loans.
While the accelerated efforts to sell properties is expected to have a
short-term impact on loss levels, the seasoning of the lower credit grade bulk
portfolio and the current origination of higher credit grade loans may
contribute to an increase in losses over time.
Although the monoline insurance company has the right to terminate
servicing with respect to the trusts referred to above, no servicing rights have
been terminated and the Company believes that the likelihood of such an event is
remote. There can be no assurance, however, that the Company's servicing rights
with respect to the mortgage loans in such trusts, or any other trusts which
exceeds the specified delinquency or loss limits in future periods, will not be
terminated.
The Company's cash flow is also adversely impacted by high delinquency
rates in its trusts. Generally, provisions in the agreements 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 when the
delinquency rates exceed the specified limit up to approximately twice the level
otherwise required when the delinquency rates do not exceed the specified limit.
As of June 30, 1998, the Company was required to maintain an additional $89.9
million in overcollateralization accounts as a result of the level of its
delinquency rates above that which would have been required to be maintained if
the applicable delinquency rates had been below the specified limit. Of this
amount, at June 30, 1998, $69.3 million remains to be added to the
overcollateralization amounts from future spread income on the loans held by
these trusts.
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Risk of Changes in Interest Rate Environment. A substantial and
sustained increase in long-term interest rates could, among other things: (i)
decrease the demand for consumer credit; (ii) adversely affect the ability of
the Company to originate or purchase loans; and (iii) reduce the average size of
loans underwritten by the Company. A significant decline in long-term 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
reducing the value of the Company's interest-only strips and also reduce the
gains on loan dispositions. A substantial and sustained increase in short-term
interest rates could, among other things, (i) increase the Company's borrowing
cost and (ii) reduce the gains recognized by the Company upon their
securitization and sale of loans. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Management."
Year 2000 Compliance and Technology Enhancements. As part of the
Company's overall systems enhancement program, the Company is utilizing both
internal and external resources to identify, correct, reprogram or replace, and
test its systems for year 2000 compliance. It is anticipated that all of the
Company's year 2000 compliance efforts will be completed on time. There can be
no assurance, however, that the systems of other companies on which the
Company's systems rely will be timely reprogrammed for year 2000 compliance.
The Company has recently committed to purchase a year 2000 compliant
loan origination system that is expected to add approximately $2.0 million per
year to the Company's technology costs over the next three years. Other
technology enhancements are being reviewed but, to date, the costs for such
enhancements have not been determined.
Prepayment Risk. If actual prepayments occur more quickly than was
projected at the time loans were sold, the carrying value of the interest-only
strips may have to be adjusted through a charge to earnings in the period of
adjustment or through increased amortization. Non-cash gain on sale on
securitizations has historically been 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 on securitized loans, 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.
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. See "- Certain Accounting
Considerations." There can be no assurance of the accuracy of management's
estimates.
Credit Risk. Loans made to borrowers in the lower credit grades have
historically resulted in a higher risk of delinquency and loss 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.
Collateral securing the Company's loans may not be sufficient to cover
the principal amount of the loans in the event of liquidation. 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. In addition, historical loss rates affect
the assumptions used by the Company in computing its non-cash gain on sale.
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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 and credit grades of the loans included in the current securitizations.
At June 30, 1998, the Company had reserves of $50.3 million related to these
credit risks, or 1.33% of the outstanding balance of loans securitized as of
that date. Losses ranged from .72% to .09% of the average servicing portfolio
for the fiscal years ended June 30, 1998, 1997 and 1996. Accordingly, the
Company believes its allowance for credit losses is adequate to cover
anticipated losses on previously securitized pools. However, with the Company's
recent migration to higher credit grade loans, the average loan-to-value ratio
of its servicing portfolio has increased. At June 30, 1998, 1997 and 1996, the
average initial combined loan-to-value ratio of the Company's servicing
portfolio was 72%, 68% and 64%, respectively. Therefore, the Company's low
historical loan loss rates may not be an accurate indication of anticipated
future losses.
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 indexed rate as of the first adjustment
date, credit-impaired borrowers may encounter financial difficulties as a result
of increases in the interest rate over the life of the loan.
Basis Risk. The value of the Company's interest-only strips created as a
result of the securitization of adjustable rate mortgage ("ARM") loans is
subject to so-called basis risk. Basis risk arises when the ARM (including fixed
initial rate mortgage) loans in a securitization trust bear interest based on an
index or adjustment period that is different from the mortgage-backed securities
issued by the trust. Accordingly, in the absence of effective hedging
strategies, in a period of increasing interest rates, the value of the
interest-only strips would be adversely affected because the interest rates on
the mortgage-backed securities issued by a securitization trust could adjust
faster than the interest rates on the Company's ARMs in the trust. Moreover,
ARMs are typically subject to periodic and lifetime interest rate caps, which
limit the amount an ARM's interest rate can change during any given period.
Hence, in a period of rapidly increasing interest rates, the value of the
interest-only strips could be adversely affected in the absence of effective
hedging strategies because the interest rates on the mortgage-backed securities
issued by a securitization trust could increase without limitation by caps,
while the interest rates on the Company's ARMs would be so limited.
Dependence on Funding Sources. 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 or sale. At June 30, 1998,
the Company had warehouse facilities with certain financial institutions and
investment banks with aggregate borrowing capacity of $950 million. The Company
added an additional warehouse line of $300 million in August 1998. The Company's
warehouse facilities expire between September 1998 and April 1999. In addition,
the Company's growth strategies will require significant increases in the amount
of the Company's warehouse and other credit facilities. In September 1998, the
Company entered into a $50 million revolving line of credit secured by its
interest-only strips which expires on September 3, 1999. Additionally, in
September 1998, the Company entered into a repurchase facility secured by
multifamily residential and commercial mortgage loans. The repurchase facility
provides for a maximum borrowing amount of $50 million. The repurchase facility
bears an interest rate for each transaction mutually agreed upon by the Company
and the financial institution at the time of the transaction. The repurchase
facility expires on September 9, 1999. The Company is currently negotiating with
various financial institutions and investment banks to obtain additional credit
facilities. There can be no assurance that the Company will be able to secure
such financing. 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
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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.
Risk of Adverse Changes in the Secondary Market for Mortgage Loans. The
Company's ability to sell loans originated and purchased by it in the secondary
market is necessary to generate cash proceeds to pay down its warehouse
facilities and fund new originations and purchases. 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. 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 or sell whole loans for acceptable prices within a reasonable period
of time.
The Company sells a substantial portion of its loans through
securitizations. In order to gain access to the secondary market in
securitization transactions, the Company has utilized 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. Although the Company has used the senior/subordinated structure,
which relies on the internal credit enhancements of the pool rather than
monoline insurance, the Company expects to utilize 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 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.
With its strategy of selling a portion of its loans on a whole loan
basis in the secondary market, the Company will rely on institutional
purchasers, such as investment banks, financial institutions and other mortgage
lenders, to purchase loans directly from the Company. There can be no assurance
that such purchasers will be willing to purchase loans on terms satisfactory to
the Company or that the market for such loans will continue. To the extent the
Company cannot successfully identify whole loan purchasers or negotiate
favorable terms for loan purchases, the Company's results of operations and
financial condition could be materially adversely affected.
Dependence on Broker Network. The Company depends on independent
mortgage brokers for the origination and purchase of its broker loans, which
constitute a significant portion of the Company's loan production. These
independent mortgage brokers negotiate with multiple lenders for each
prospective borrower. The Company competes with these lenders for the
independent brokers' business on pricing, service, loan fees, costs and other
factors. The Company's competitors also seek to establish relationships with
such brokers, who are not obligated by contract or otherwise to do business with
the Company. The Company's future results of operations and financial condition
may be vulnerable to changes in the volume and cost of its broker loans
resulting from, among other things, competition from other lenders and
purchasers of such loans.
Risks Involved in Commercial Mortgage Lending. The Company offers
commercial mortgage loans on a limited basis in amounts ranging from $250,000 to
$2.0 million secured by commercial properties, such as multifamily residences,
retail establishments, office buildings, light industrial/ warehouse facilities
and mobile home parks. During the 1998 fiscal year, the Company sold $51.4
million of commercial loans to third
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parties, servicing released. Although the Company intends to continue to sell
these loans on a whole loan, servicing released basis, the Company bears certain
risks during the time it holds the loans pending their sale. Commercial mortgage
lending is generally viewed as exposing the lender to a greater risk of loss
than residential mortgage lending, in part, because it typically involves larger
loans to single borrowers or groups of related borrowers than residential
mortgage loans. Further, the repayment of commercial mortgages secured by
income-producing properties is typically dependent upon the tenant's ability to
meet its obligations under the lease relating to such property, which in turn
depends upon profitable operations of the related property. In the event of a
default on any commercial mortgage held by the Company, the Company bears the
risk of loss of principal to the extent of any deficiency between the value of
the related mortgage property, plus any payments from an insurer or guarantor,
and the amount owed on the commercial mortgage.
Commercial mortgages generally are non-recourse to the borrower. In the
event of foreclosure on a commercial mortgage, the value of the property and
other collateral securing the commercial mortgage may be less than the principal
amount outstanding on the commercial mortgage and the accrued but unpaid
interest. Also, under the terms of leases with respect to commercial properties,
there may be costs and delays involved in enforcing rights of a property owner
against tenants in default who may seek the protection of the bankruptcy laws
which can result in termination of lease contracts all of which may adversely
affect the timing and amount of payment received by the Company with respect to
such commercial mortgages.
Strategic Alternatives. The Company continues to retain Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") as a financial advisor to
develop strategic alternatives for the Company. DLJ continues to evaluate
opportunities for the Company, including possible business combinations. The
Company is currently in discussions with several entities concerning various
alternatives. No assurance can be given that any such opportunities will be
consummated.
Competition. The Company faces intense competition in the business of
originating, purchasing and selling mortgage loans. Competition among industry
participants can take many forms, including convenience in obtaining a loan,
customer service, marketing and distribution channels, amount and term of the
loan, loan origination fees and interest rates. Many of the Company's
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than the Company. The Company's competitors in
the industry include other consumer finance companies, mortgage banking
companies, commercial banks, investment banks, credit unions, thrift
institutions, credit card issuers and insurance companies. In the future, the
Company may also face competition from government-sponsored entities, such as
FNMA and FHLMC. These government-sponsored entities may enter the subprime
mortgage market and target potential customers in the Company's highest credit
grades, who constitute a significant portion of the Company's customer base.
The current level of gains realized by the Company and its competitors
on the sale of non conforming mortgage loans could attract additional
competitors into this market. Certain large finance companies and conforming
mortgage originators have announced their intention to originate, or have
purchased companies that originate and purchase, non-conforming mortgage loans,
and some of these large mortgage companies, thrifts and commercial banks have
begun offering non-conforming loan products to customers similar to the
borrowers targeted by the Company. In addition, establishing a broker-sourced
loan business requires a substantially smaller commitment of capital and human
resources than a direct-sourced loan business. This relatively low barrier to
entry permits new competitors to enter this market quickly and compete with the
Company's wholesale lending business.
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Additional competition may lower the rates the Company can charge
borrowers and increase the cost to purchase loans, thereby potentially lowering
the gain on future loan sales or securitizations. Increased competition may also
reduce the volume of the Company's loan origination and loan sales and increase
the demand for the Company's experienced personnel and the potential that such
personnel will leave the Company for the Company's competitors.
Competitors with lower costs of capital have a competitive advantage
over the Company. During periods of declining rates, competitors may solicit the
Company's customers to refinance their loans. In addition, during periods of
economic slowdown or recession, the Company's borrowers may face financial
difficulties and be more receptive to the offers of the Company's competitors to
refinance their loans.
The Company's correspondent and broker programs depend largely on
independent mortgage bankers and brokers and other financial institutions for
the purchases of new loans. The Company's competitors also seek to establish
relationships with the same sources. The Company's future results may become
more exposed to fluctuations in the volume and cost of the Company's purchases
resulting from competition from other purchasers of such loans, market
conditions and other factors.
Concentration of Operations in California. At June 30, 1998, 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.
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 the Company's ability to recover losses on properties
affected by such disasters and adversely impact the Company's results of
operations.
Timing of Loan Sales. The Company's loan disposition strategy calls for
substantially all of its production to be sold in the secondary market 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 significant
portion of the Company's loan production 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. 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 liquidation. Further, delinquencies,
foreclosures and losses generally increase during economic slowdowns or
recessions. Because of the Company's focus on credit-impaired borrowers, the
actual rates of delinquencies, foreclosures and losses on such loans could be
higher than those generally experienced in the mortgage lending industry. In
addition, in an economic slowdown or recession, the Company's servicing costs
may increase. Any sustained period of increased delinquencies, foreclosure,
losses or increased costs could adversely affect the Company's ability
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to securitize or sell loans in the secondary market and could increase the cost
of these transactions. See "-- Credit Risk" and "-- Risk of Adverse Changes in
the Secondary Market for Mortgage Loans."
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 on a servicing retained basis.
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 cash flow 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 a condition to obtaining the
requisite rating on the related interests in each trust. In addition, documents
governing the Company's securitization program and whole loan sales 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.
When borrowers are delinquent in making monthly payments on loans
included in a securitization trust, the Company is required to advance interest
payments with respect to such delinquent loans. 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, 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.
The Company currently hedges its fixed rate pipeline and some
LIBOR-based tranches in its fixed rate securitizations, and continues to explore
other avenues of risk mitigation, although none have been employed to date. The
amount and timing of hedging transactions are determined by members of the
Company's senior management. During the first quarter ending September 30, 1998,
market conditions became extremely unsettled resulting in a break down in the
historical relationship between U.S. Treasury securities and the pass-through
rates on asset-backed securitizations. Historically, the use of an interest rate
hedge against Treasuries has been a more conservative method of limiting
interest rate risk. Changes in Treasury rates were generally reflected in the
pass-through rates of the fixed rate portion of the Company's securitizations.
However, during the first quarter ending September 30, 1998, current market
conditions have resulted in a loss on the Company's Treasury hedge without
receiving an equivalent benefit from reductions in the pass-through rates paid
on the certificates sold on the fixed rate portion of the Company's first
quarter 1998 securitization. This weak asset-backed market will result in a
significantly lower gain on sale and significantly larger negative cash flow for
the first quarter ending September 30, 1998. The Company is currently
re-evaluating its current hedging policy. While the Company monitors the
interest rate environment and employs fixed rate hedging
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strategies, 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
or prepayment rates.
Government Regulation. The Company's operations are subject to extensive
regulation, supervision and licensing by federal, state and local governmental
authorities and are subject to various laws and judicial and administrative
decisions imposing requirements and restrictions on part or all of its
operations. The Company's consumer lending activities are subject to the Federal
Truth-in-Lending Act and Regulation Z (including the Home Ownership and Equity
Protection Act of 1994), the Federal Equal Credit Opportunity Act, as amended,
and Regulation B, the Fair Credit Reporting Act of 1970, as amended, the Federal
Real Estate Settlement Procedures Act and Regulation X, the Home Mortgage
Disclosure Act, the Federal Debt Collection Practices Act and the National
Housing Act of 1934, as well as other federal and state statutes and regulations
affecting the Company's activities. The Company is also subject to the rules and
regulations of, and examinations by, state regulatory authorities with respect
to originating, processing, underwriting, selling, securitizing and servicing
loans. These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, govern inspections and appraisals of properties and
credit reports on loan applicants, regulate assessment, collection, foreclosure
and claims handling, investment and interest payments on escrow balances and
payment features, mandate certain disclosures and notices to borrowers and, in
some cases, fix maximum interest rates, fees and mortgage loan amounts. Failure
to comply with these requirements can lead to loss of approved status, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement action.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are attached to this report:
Reports of Independent Accountants
Consolidated Balance Sheets at June 30, 1998 and 1997
Consolidated Statements of Income for Fiscal Years Ended June 30, 1998,
1997 and 1996
Consolidated Statements of Stockholders' Equity for Fiscal Years Ended
June 30, 1998, 1997 and 1996
Consolidated Statements of
Cash Flows for Fiscal Years Ended June 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information regarding directors and executive officers of the Registrant
will appear in the proxy statement for the 1998 Annual Meeting of Stockholders
or an amendment to this Form 10-K, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will appear in the proxy
statement for the 1998 Annual Meeting of Stockholders or an amendment to this
Form 10-K, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management will appear in the proxy statement for the 1998 Annual Meeting of
Stockholders or an amendment to this Form 10-K, and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
will appear in the proxy statement for the 1998 Annual Meeting of Stockholders
or an amendment to this Form 10-K, and is incorporated by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements:
See Financial Statements listed as part of Item 8. Financial
Statements and Supplementary Data.
(b) Financial Statement Schedules:
Schedule 6 Property, Plant and Equipment.
Schedule 7 Accumulated Depreciation, Depletion and
Amortization of Property, Plant and Equipment.
See pages F-29 and F-30 attached to this report.
(c) Exhibits - Management Contracts and Compensatory Plans:
<TABLE>
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10.1 Form of Director and Officer Indemnification
Agreement(15)
10.2(a) Amended and Restated Employment Agreement between
Registrant and Gary K. Judis(10)
10.2(b) Severance Agreement between Registrant and Gary
K. Judis(15)
10.2(c) Consulting Agreement between Registrant and Gary
K. Judis(15)
</TABLE>
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<TABLE>
<S> <C>
10.3(a) Second Amended and Restated Employment between
Registrant and Cary H. Thompson(15)
10.3(b) Stock Option Agreement between Registrant and Cary H.
Thompson(10)
10.4(a) Employment Agreement between Registrant and Neil
Kornswiet(15)
10.4(b) Amendment No. 1 to Exhibit 10.4(a)(15)
10.5(a) Amended and Restated Employment Agreement between
Registrant and Joseph Magnus
10.5(b) Performance Bonus Plan for Joseph Magnus
10.6 Second Amended and Restated Employment Agreement
between Registrant and Barbara Polsky(15)
10.7(a) Employment Agreement between Registrant and Mark
Costello(15)
10.7(b) Performance Bonus Plan for Mark Costello
10.8 1991 Stock Incentive Plan, as amended(2)
10.9 1995 Stock Incentive Plan(10)
10.10(a) 1996 Stock Incentive Plan(12)
10.10(b) Amendment No. 1 to Exhibit 10.10(a)(15)
10.10(c) 1997 Stock Option Plan(16)
10.10(d) 1997 Non-Qualified Stock Option Plan (amended and
restated effective May 22, 1998)(16)
10.13 1995 Employee Stock Purchase Plan(3)
10.20 Variable Deferred Compensation Plan(15)
(d) Other Exhibits:
2.1 Agreement and Plan of Reorganization, dated as of
August 12, 1996, as amended by Amendment No. 1, dated
August 28, 1996 by and among Registrant, Aames
Acquisition Corporation, One Stop Mortgage, Inc. and
Neil B. Kornswiet(14)
2.2 Stock Purchase Agreement, dated as of March 19, 1998,
between Registrant and Thirty-Five East Investments
LLC(17)
2.3 Stock Purchase Agreement, dated as of March 19, 1998,
between Registrant and Turtle Creek Revocable
Trust(17)
3.1 Certificate of Incorporation of Registrant, as
amended(15)
3.2 Bylaws of Registrant, as amended(15)
4.1 Specimen certificate evidencing Common Stock of
Registrant(15)
4.2(a) Rights Agreement, dated as of June 21, 1996 between
Registrant and Wells Fargo Bank, as rights agent(4)
4.2(b) Amendment to Rights Agreement, dated as of April 27,
1998(18)
4.3 Warrant Agreement dated as of March 19, 1998 between
Registrant and Thirty-Five East Investments LLC(17)
4.4 Warrant Agreement dated as of March 19, 1998 between
Registrant and Turtle Creek Revocable Trust(17)
4.5 Registration Rights Agreement dated as of March 19,
1998, between Registrant and Thirty-Five East
Investments LLC(17)
4.6 Registration Rights Agreement, dated as of March 19,
1998 between Registrant and Turtle Creek Revocable
Trust(17)
10.12(a) Office Lease, dated December 13, 1989, between State
Street Bank and Trust Company of California, N.A.
and Aames Home Loan, Registrant's wholly
</TABLE>
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<TABLE>
<S> <C>
owned subsidiary, for the premises located at 3731
Wilshire Boulevard, Los Angeles, California(1)
10.12(b) Amendments dated August 1, 1991, March 15, 1992,
June 30, 1993 and September 7, 1993 to Exhibit
10.12(b)(5)
10.13(a) Office Building Lease, dated as of August 7, 1996,
between Registrant and California Plaza IIA, LLC,
for the premises located at 350 S. Grand Avenue,
Los Angeles, California(15)
10.13(b) First Amendment, dated as of August 15, 1997, to
Exhibit 10.13(a)(15)
10.14(a) Indenture of Trust, dated February 1, 1995, between
Registrant and Bankers Trust Company of California,
N.A., relating to Registrant's 10.50% Senior
Notes due 2002(5)
10.14(b) Supplemental Indenture of Trust, dated as of
April 25, 1995 to Exhibit 10.14(a)(6)
10.15 Indenture, dated as of February 26, 1996, between
Registrant and The Chase Manhattan Bank, N.A.,
relating to Registrant's 5.5% Convertible
Subordinated Debentures due 2006(7)
10.16 First Supplemental Indenture, dated as of October 21,
1996, between Registrant, The Chase Manhattan Bank
and certain wholly owned subsidiaries of Registrant,
relating to Registrant's 9.125% Senior Notes
due 2003(11)
10.17(a) Interim Loan and Security Agreement, dated as of
November 22, 1996, between Aames Capital Corporation,
Registrant's wholly owned subsidiary ("ACC") and
Prudential Securities Credit Corporation(15)
10.17(b) Notice of Extension of Agreement No. 1, dated as of
May 15, 1997, with effect as of March 31, 1997, to
Exhibit 10.17(a)(15)
10.17(c) Amendment, dated as of August 19, 1997, to Exhibit
10.17(a)(15)
10.17(d) Notice of Extension of Agreement No. 2, dated as of
September 26, 1997, to Exhibit 10-17(a)
10.17(e) Notice of Extension of Agreement No. 3, dated as of
December 29, 1997, to Exhibit 10.17(a)
10.17(f) Letter of Amendment, dated as of December 12, 1997,
to Exhibit 10.17(a)
10.17(g) Amendment, dated as of December 29, 1997, to
Exhibit 10.17(a)
10.17(h) Letter of Amendment and Notice of Extension No. 4,
dated as of March 23, 1998, to Exhibit 10.17(a)
10.17(i) Letter of Amendment and Notice of Extension No. 5,
dated as of June 30, 1998, to Exhibit 10.17(a).
10.18 Second Amended and Restated Mortgage Loan Warehousing
Agreement, dated as of April 10, 1998, among
Registrant, ACC, the lenders from time to time a
party thereto, and NationsBank of Texas, N.A., as
administrative agent for the lenders(13)
10.19(a) Aircraft Lease Agreement, dated as of March 8, 1996,
between C.I.T. Leasing Corporation and Oxford
Aviation Corporation, Inc., Registrant's wholly owned
subsidiary(7)
10.19(b) Corporate Guaranty Agreement, dated as of March 8,
1996, between Registrant and C.I.T. Leasing
Corporation, with respect to Exhibit 10.19(a)(7)
10.20 Master Repurchase Agreement Governing Purchases and
Sales of Mortgage Loans, dated as of March 11, 1998,
between ACC and Lehman Commercial Paper Inc.(19)
10.21 Master Repurchase Agreement dated as of August 19,
1998, between ACC and First Union National Bank
</TABLE>
49
<PAGE> 50
<TABLE>
<S> <C>
11 Statement re computation of per share earnings
21 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
</TABLE>
-----------------
(1) Incorporated by reference from Registrant's Registration Statement on
Form S-1, File No. 33-43237.
(2) Incorporated by reference from Registrant's Registration Statement on Form
S-1, File No. 33-62400.
(3) Incorporated by reference from Registrant's Registration Statement, File
No. 333-01312.
(4) Incorporated by reference from Registrant's Registration Statement on Form
8-A, File No. 33-13660.
(5) Incorporated by reference from Registrant's Registration Statement on Form
S-2, File No. 33-88516.
(6) Incorporated by reference from Registrant's Annual Report on Form 10-K for
the year ended June 30, 1995.
(7) Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
(8) Incorporated by reference from Registrant's Registration Statement on Form
S-2, File No. 33-91640.
(9) Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1995.
(10) Incorporated by reference from Registrant's Annual Report on Form 10-K
for the year ended June 30, 1996, filed with the Commission on
September 16, 1996.
(11) Incorporated by reference from Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996.
(12) Incorporated by reference from Registrant's Registration Statement on Form
S-8 dated January 6, 1997.
(13) Incorporated by reference from Registrant's Current Report on Form 8-K
dated April 24, 1998.
(14) Incorporated by reference from Registrant's Current Report on Form 8-K
dated September 11, 1996.
(15) Incorporated by reference from Registrant's Annual Report on Form 10-K for
the year ended June 30, 1997.
(16) Incorporated by reference from Registrant's Registration Statement on Form
S-8 dated July 24, 1998.
(17) Incorporated by reference from Registrant's Current Report on Form 8-K
dated April 27, 1998.
(18) Incorporated by reference from Registrant's Registration Statement on Form
8-A/A dated April 27, 1998.
(19) Incorporated by reference from Registrant's Current Report on Form 8-K
dated March 25, 1998.
50
<PAGE> 51
(e) Reports on Form 8-K:
During the last quarter of the fiscal year ended June 30, 1998, the
Company filed (i) a Current Report on Form 8-K dated April 24, 1998
(earliest event reported April 10, 1998), reporting information under
Item 5 with respect to the execution of the Second Amended and Restated
Mortgage Loan Warehousing Agreement by and among the Company, ACC,
NationsBank of Texas, N.A. and the lenders from time to time party
thereto; and (ii) a Current Report on Form 8-K dated April 27, 1998
(earliest event reported April 27, 1998), reporting information under
Item 5 with respect to the acquisition of shares of the Company's common
stock and warrants to purchase the common stock by Thirty-Five East
Investments LLC and Turtle Creek Revocable Trust.
51
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AAMES FINANCIAL CORPORATION
(Registrant)
Dated: By: /s/ Cary H. Thompson
----------------------- -----------------------------
Cary H. Thompson
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Cary H. Thompson Chief Executive Officer, , 1998
------------------------------- Director (Principal Executive Officer) -----------------
Cary H. Thompson
/s/ Neil B. Kornswiet Co-Chairman of the Board and President , 1998
------------------------------- -----------------
Neil B. Kornswiet
/s/ David A. Sklar Executive Vice President-- , 1998
------------------------------- Finance and Chief Financial -----------------
David A. Sklar Officer (Principal Financial and
Accounting Officer)
Director , 1998
------------------------------- -----------------
George W. Coombe, Jr.
/s/ John C. Getzelman Director , 1998
------------------------------- -----------------
John C. Getzelman
/s/ Melvyn Kinder Director , 1998
------------------------------- -----------------
Melvyn Kinder
/s/ Lee Masters Director , 1998
------------------------------- -----------------
Lee Masters
/s/ George C. St. Laurent, Jr. Co-Chairman of the Board , 1998
------------------------------ -----------------
George C. St. Laurent, Jr.
</TABLE>
52
<PAGE> 53
EXHIBIT INDEX
Management Contracts and Compensatory Plans:
<TABLE>
<S> <C>
10.1 Form of Director and Officer Indemnification Agreement(15)
10.2(a) Amended and Restated Employment Agreement between Registrant and
Gary K. Judis(10)
10.2(b) Severance Agreement between Registrant and Gary K. Judis(15)
10.2(c) Consulting Agreement between Registrant and Gary K. Judis(15)
10.3(a) Second Amended and Restated Employment between Registrant and
Cary H. Thompson(15)
10.3(b) Stock Option Agreement between Registrant and Cary H.
Thompson(10)
10.4(a) Employment Agreement between Registrant and Neil Kornswiet(15)
10.4(b) Amendment No. 1 to Exhibit 10.4(a)(15)
10.5(a) Amended and Restated Employment Agreement between Registrant and
Joseph Magnus
10.5(b) Performance Bonus Plan for Joseph Magnus
10.6 Second Amended and Restated Employment Agreement between
Registrant and Barbara Polsky(15)
10.7(a) Employment Agreement between Registrant and Mark Costello(15)
10.7(b) Performance Bonus Plan for Mark Costello
10.8 1991 Stock Incentive Plan, as amended(2)
10.9 1995 Stock Incentive Plan(10)
10.10(a) 1996 Stock Incentive Plan(12)
10.10(b) Amendment No. 1 to Exhibit 10.10(a)(15)
10.10(c) 1997 Stock Option Plan(16)
10.10(d) 1997 Non-Qualified Stock Option Plan (amended and restated
effective May 22, 1998)(16)
10.13 1995 Employee Stock Purchase Plan(3)
10.20 Variable Deferred Compensation Plan(15)
Other Exhibits:
2.1 Agreement and Plan of Reorganization, dated as of August 12, 1996, as
amended by Amendment No. 1, dated August 28, 1996 by and among Registrant,
Aames Acquisition Corporation, One Stop Mortgage, Inc. and Neil B.
Kornswiet(14)
2.2 Stock Purchase Agreement, dated as of March 19, 1998, between Registrant
and Thirty-Five East Investments LLC(17)
2.3 Stock Purchase Agreement, dated as of March 19, 1998, between Registrant
and Turtle Creek Revocable Trust(17)
3.1 Certificate of Incorporation of Registrant, as amended(15)
3.2 Bylaws of Registrant, as amended(15)
4.1 Specimen certificate evidencing Common Stock of Registrant(15)
4.2(a) Rights Agreement, dated as of June 21, 1996 between Registrant
and Wells Fargo Bank, as rights agent(4)
4.2(b) Amendment to Rights Agreement, dated as of April 27, 1998(18)
4.3 Warrant Agreement dated as of March 19, 1998 between Registrant and
Thirty-Five East Investments LLC(17)
</TABLE>
53
<PAGE> 54
<TABLE>
<S> <C>
4.4 Warrant Agreement dated as of March 19, 1998 between Registrant and
Turtle Creek Revocable Trust(17)
4.5 Registration Rights Agreement dated as of March 19, 1998,
between Registrant and Thirty-Five East Investments LLC(17)
4.6 Registration Rights Agreement, dated as of March 19, 1998 between
Registrant and Turtle Creek Revocable Trust(17)
10.12(a) Office Lease, dated December 13, 1989, between State Street
Bank and Trust Company of California, N.A. and Aames Home Loan,
Registrant's wholly owned subsidiary, for the premises located
at 3731 Wilshire Boulevard, Los Angeles, California(1)
10.12(b) Amendments dated August 1, 1991, March 15, 1992, June 30, 1993
and September 7, 1993 to Exhibit 10.12(b)(5)
10.13(a) Office Building Lease, dated as of August 7, 1996, between
Registrant and California Plaza IIA, LLC, for the premises
located at 350 S. Grand Avenue, Los Angeles, California(15)
10.13(b) First Amendment, dated as of August 15, 1997, to Exhibit
10.13(a)(15)
10.14(a) Indenture of Trust, dated February 1, 1995, between Registrant
and Bankers Trust Company of California, N.A., relating to
Registrant's 10.50% Senior Notes due 2002(5)
10.14(b) Supplemental Indenture of Trust, dated as of April 25, 1995 to
Exhibit 10.14(a)(6)
10.15 Indenture, dated as of February 26, 1996, between Registrant and The
Chase Manhattan Bank, N.A., relating to Registrant's 5.5%
Convertible Subordinated Debentures due 2006(7)
10.16 First Supplemental Indenture, dated as of October 21, 1996,
between Registrant, The Chase Manhattan Bank and certain wholly
owned subsidiaries of Registrant, relating to Registrant's
9.125% Senior Notes due 2003(11)
10.17(a) Interim Loan and Security Agreement, dated as of November 22,
1996, between Aames Capital Corporation, Registrant's wholly
owned subsidiary ("ACC") and Prudential Securities Credit
Corporation(15)
10.17(b) Notice of Extension of Agreement No. 1, dated as of May 15,
1997, with effect as of March 31, 1997, to Exhibit 10.17(a)(15)
10.17(c) Amendment, dated as of August 19, 1997, to Exhibit 10.17(a)(15)
10.17(d) Notice of Extension of Agreement No. 2, dated as of September 26,
1997, to Exhibit 10-17(a)
10.17(e) Notice of Extension of Agreement No. 3, dated as of December 29,
1997, to Exhibit 10.17(a)
10.17(f) Letter of Amendment, dated as of December 12, 1997, to Exhibit 10.17(a)
10.17(g) Amendment, dated as of December 29, 1997, to Exhibit 10.17(a)
10.17(h) Letter of Amendment and Notice of Extension No. 4, dated as of
March 23, 1998, to Exhibit 10.17(a)
10.17(i) Letter of Amendment and Notice of Extension No. 5, dated as of
June 30, 1998, to Exhibit 10.17(a).
10.18 Second Amended and Restated Mortgage Loan Warehousing Agreement,
dated as of April 10, 1998, among Registrant, ACC, the
lenders from time to time a party thereto, and NationsBank of
Texas, N.A., as administrative agent for the lenders(13)
10.19(a) Aircraft Lease Agreement, dated as of March 8, 1996, between
C.I.T. Leasing Corporation and Oxford Aviation Corporation, Inc.,
Registrant's wholly owned subsidiary(7)
10.19(b) Corporate Guaranty Agreement, dated as of March 8, 1996, between Registrant and
C.I.T. Leasing Corporation, with respect to Exhibit 10.19(a)(7)
</TABLE>
54
<PAGE> 55
<TABLE>
<S> <C>
10.20 Master Repurchase Agreement Governing Purchases and Sales of Mortgage
Loans, dated as of March 11, 1998, between ACC and Lehman Commercial
Paper Inc.(19)
10.21 Master Repurchase Agreement dated as of August 19, 1998, between ACC
and First Union National Bank
11 Statement re computation of per share earnings
21 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
</TABLE>
- -------------------
(1) Incorporated by reference from Registrant's Registration Statement on Form
S-1, File No. 33-43237.
(2) Incorporated by reference from Registrant's Registration Statement on Form
S-1, File No. 33-62400.
(3) Incorporated by reference from Registrant's Registration Statement, File
No. 333-01312.
(4) Incorporated by reference from Registrant's Registration Statement on Form
8-A, File No. 33-13660.
(5) Incorporated by reference from Registrant's Registration Statement on Form
S-2, File No. 33-88516.
(6) Incorporated by reference from Registrant's Annual Report on Form 10-K for
the year ended June 30, 1995.
(7) Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
(8) Incorporated by reference from Registrant's Registration Statement on Form
S-2, File No. 33-91640.
(9) Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1995.
(10) Incorporated by reference from Registrant's Annual Report on Form 10-K for
the year ended June 30, 1996, filed with the Commission on September 16,
1996.
(11) Incorporated by reference from Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996.
(12) Incorporated by reference from Registrant's Registration Statement on Form
S-8 dated January 6, 1997.
(13) Incorporated by reference from Registrant's Current Report on Form 8-K
dated April 24, 1998.
(14) Incorporated by reference from Registrant's Current Report on Form 8-K
dated September 11, 1996.
(15) Incorporated by reference from Registrant's Annual Report on Form 10-K for
the year ended June 30, 1997.
(16) Incorporated by reference from Registrant's Registration Statement on Form
S-8 dated July 24, 1998.
55
<PAGE> 56
(17) Incorporated by reference from Registrant's Current Report on Form 8-K
dated April 27, 1998.
(18) Incorporated by reference from Registrant's Registration Statement on Form
8-A/A dated April 27, 1998.
(19) Incorporated by reference from Registrant's Current Report on Form 8-K
dated March 25, 1998.
56
<PAGE> 57
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Aames Financial Corporation
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Aames Financial Corporation and its
subsidiaries (the "Company") at June 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of One Stop Mortgage,
Inc., a wholly-owned subsidiary, which statements reflect total revenues of $7
million for the period from August 24, 1995 (inception) through June 30, 1996.
Those statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for One Stop Mortgage, Inc. is based solely on the report of
the other auditors. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted accounting standards that changed its method of accounting for transfers
and servicing of financial assets during the year ended June 30, 1997 and its
method of accounting for mortgage servicing rights for the year ended June 30,
1996.
The audits referred to above also included an audit of the financial statement
schedules listed in Item 14. In our opinion, these financial statement schedules
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
August 6, 1998
F-1
<PAGE> 58
INDEPENDENT AUDITORS' REPORT
The Board of Directors
One Stop Mortgage, Inc.
We have audited the statements of operations, changes in stockholders' equity
and cash flows of One Stop Mortgage, Inc. (the Company) for the period January
1, 1996 through June 30, 1996 and the period August 24, 1995 (inception) through
December 31, 1995. These financial statements, which are not separately
presented herein, are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations of One Stop Mortgage, Inc. and
its cash flows for the period January 1, 1996 through June 30, 1996 and the
period August 24, 1995 (inception) through December 31, 1995 in conformity with
generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Orange County, California
August 16, 1996
F-2
<PAGE> 59
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 12,322,000 $ 26,902,000
Loans held for sale, at lower of cost or market 198,202,000 242,987,000
Accounts receivable 51,072,000 59,180,000
Interest-only strips, estimated at fair market value (Note 3) 359,600,000 270,422,000
Mortgage servicing rights (Note 3) 32,090,000 21,641,000
Residual assets 194,561,000 112,827,000
Equipment and improvements, net (Note 4) 13,939,000 12,685,000
Prepaid and other 17,020,000 14,949,000
------------ ------------
Total assets $878,806,000 $761,593,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings (Note 5) $286,990,000 $286,990,000
Revolving warehouse facilities (Note 5) 141,012,000 137,500,000
Accounts payable and accrued expenses 49,964,000 29,297,000
Income taxes payable (Note 6) 55,437,000 39,452,000
------------ ------------
Total liabilities 533,403,000 493,239,000
------------ ------------
Commitments and contingencies (Note 7)
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;
30,962,600, and 27,758,800 shares outstanding (Note 10) 31,000 28,000
Additional paid-in capital 249,851,000 209,358,000
Retained earnings 95,521,000 58,968,000
------------ ------------
Total stockholder's equity 345,403,000 268,354,000
------------ ------------
Total liabilities and stockholders' equity $878,806,000 $761,593,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE> 60
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30
----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Gain on sale of loans (Note 3) $188,578,000 $198,736,000 $95,299,000
Net unrealized gain or (loss)
on valuation of
interest-only strips (Note 3) 19,495,000 (18,950,000) --
Commissions 27,664,000 29,250,000 21,564,000
Loan service 42,677,000 25,804,000 18,186,000
Fees and other 46,860,000 37,679,000 15,215,000
------------ ------------ -----------
Total revenue 325,274,000 272,519,000 150,264,000
------------ ------------ -----------
Expenses
Compensation and related expenses 94,820,000 81,021,000 40,758,000
Production expenses 34,195,000 27,229,000 19,036,000
General and administrative expenses 40,686,000 31,716,000 17,377,000
Interest expense (Note 5) 43,982,000 33,105,000 12,370,000
Provision for loan losses 39,164,000 33,941,000 8,424,000
Nonrecurring charges (Note 2) -- 32,000,000 --
------------ ------------ -----------
Total expenses 252,847,000 239,012,000 97,965,000
------------ ------------ -----------
Income before income taxes 72,427,000 33,507,000 52,299,000
Provision for income taxes 32,110,000 16,398,000 22,508,000
------------ ------------ -----------
Net income $40,317,000 $17,109,000 $29,791,000
============ ============ ===========
Net income per share
Basic $1.41 $0.65 $1.37
============ ============ ===========
Diluted $1.23 $0.60 $1.14
============ ============ ===========
Dividends per share $0.13 $0.13 $0.13
============ ============ ===========
Weighted average number
of shares outstanding
Basic 28,548,000 26,400,000 21,681,000
============ ============ ===========
Diluted 35,749,000 34,516,000 27,248,000
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE> 61
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30
-------------------------------------------------------------
1998 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
Operating activities:
Net Income $ 40,317,000 $ 17,109,000 $ 29,791,000
Adjustments to reconcile net income to net cash
(Used in) operating activities:
Provision for loan losses 39,164,000 33,941,000 8,424,000
Net charge-offs for loans (26,488,000) (5,470,000) (931,000)
Depreciation and amortization 3,909,000 2,853,000 1,275,000
Deferred income taxes 15,336,000 17,915,000 15,369,000
Gain on sale of loans (188,848,000) (257,341,000) (111,468,000)
Net unrealized (gain) or loss on valuation
of interest-only strips (19,495,000) 18,950,000 --
Amortization of interest-only strips 106,489,000 63,611,000 16,940,000
Mortgage servicing rights originated (19,513,000) (16,251,000) (11,759,000)
Amortization of mortgage servicing rights 9,064,000 5,512,000 857,000
Changes in assets and liabilities:
Loans originated or purchased (2,383,638,000) (2,347,938,000) (1,168,945,000)
Proceeds from sale of loans 2,428,423,000 2,291,139,000 1,006,887,000
Decrease (increase) in:
Accounts receivable 8,108,000 (49,495,000) (3,595,000)
Prepaid and other (2,071,000) (4,654,000) (5,276,000)
Residual assets (81,734,000) (68,151,000) (29,794,000)
Increase (decrease) in:
Accounts payable and accrued expenses 20,667,000 13,490,000 8,278,000
Income taxes payable 649,000 (293,000) 2,874,000
---------------- --------------- ---------------
Net cash (used in) operating activities (49,661,000) (280,073,000) (241,073,000)
---------------- --------------- ---------------
Investing activities:
Purchases of property and equipment (5,163,000) (8,864,000) (5,885,000)
---------------- --------------- ---------------
Net cash (used in) investing activities (5,163,000) (8,864,000) (5,885,000)
---------------- --------------- ---------------
Financing activities:
Proceeds from sale of stock or exercise of options 40,505,000 121,228,000 26,280,000
Proceeds from borrowings -- 148,945,000 114,901,000
Increase in amounts outstanding under warehouse facilities 3,512,000 25,137,000 112,048,000
Dividends paid (3,773,000) (3,412,000) (2,689,000)
---------------- --------------- ---------------
Net cash provided by financing activities 40,244,000 291,898,000 250,540,000
---------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents (14,580,000) 2,961,000 3,582,000
Cash and cash equivalents at beginning of period 26,902,000 23,941,000 20,359,000
---------------- --------------- ---------------
Cash and cash equivalents at end of period $ 12,322,000 $ 26,902,000 $ 23,941,000
================ =============== ===============
Supplemental disclosures
Interest paid 44,501,000 30,207,000 6,633,000
Taxes paid (refunded) 16,125,000 (1,197,000) 4,354,000
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE> 62
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
As of June 30, 1995 $21,000 $ 61,857,000 $ 18,169,000 $ 80,047,000
Issuance of common stock 2,064,000 2,064,000
Shares issued in merger
transaction 3,000 (3,000)
Dividends (2,689,000) (2,689,000)
Issuance of common stock
warrants 24,216,000 24,216,000
Net income 29,791,000 29,791,000
--------------------------------------------------------------------
As of June 30, 1996 $24,000 $ 88,134,000 $ 45,271,000 $133,429,000
Issuance of common stock 4,000 121,224,000 121,228,000
Dividends (3,412,000) (3,412,000)
Net income 17,109,000 17,109,000
--------------------------------------------------------------------
As of June 30, 1997 $28,000 $209,358,000 $ 58,968,000 $268,354,000
Issuance of common stock 3,000 40,493,000 9,000 40,505,000
Dividends (3,773,000) (3,773,000)
Net income 40,317,000 40,317,000
-------------------------------------------------------------------
AS OF JUNE 30, 1998 $31,000 $249,851,000 $ 95,521,000 $345,403,000
===================================================================
</TABLE>
F-6
<PAGE> 63
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Aames Financial Corporation (the "Company" or "Aames") is a consumer
finance company primarily engaged, through its subsidiaries, in the business of
originating, purchasing, selling, and servicing home equity mortgages secured by
single family residences. At June 30, 1998, Aames operated 98 retail loan
offices serving 32 states. At June 30, 1998, 12 of the 98 branches were located
in California. Its wholly-owned subsidiary, One Stop Mortgage, Inc. ("One Stop")
operated 46 offices located in 45 states and one international office located in
England. At June 30, 1998, 4 of the 46 domestic branches were located in
California. The Company originates and purchases loans on a nationwide basis
through three production channels--retail, broker and correspondent. For the
years ended June 30, 1998 and 1997, the Company originated and purchased $2.38
billion and $2.35 billion of mortgage loans, respectively. The Company's
principal market is borrowers whose financing needs are not being met by
traditional mortgage lenders for a variety of reasons, including the need for
specialized loan products or credit histories that may limit such borrowers'
access to credit. Loans originated by the Company are extended on the basis of
the equity in the borrower's property and the creditworthiness of the borrower.
The aggregate outstanding balance of loans serviced by the Company was $4.15
billion and $3.17 billion at June 30, 1998 and June 30, 1997, respectively
(which include $206 million and $1.67 billion of loans at June 30, 1998 and June
30, 1997, respectively, serviced for the Company by unaffiliated subservicers
under subservicing agreements).
LOAN SALES
The Company's ability to sell loans originated and purchased by it in
the secondary market is necessary to generate cash proceeds to pay down its
warehouse facilities and fund new originations and purchases. 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.
ACQUISITION OF ONE STOP
On August 28, 1996, the Company acquired One Stop, through the merger of
a wholly-owned subsidiary of the Company into One Stop, in a tax-free exchange
accounted for as a pooling of interests, in which the Company issued
approximately 3.49 million shares (adjusted for the three-for-two stock split in
the form of a stock dividend in February 1997) of its common stock, par value
$.001 per share ("common stock"), and assumed options granted to key employees
to purchase approximately 563,000 shares (adjusted for the three-for-two stock
split in the form of a stock dividend in February 1997) of common stock. Under
the pooling rules, the costs incurred by the Company and One Stop in
consummating the merger were expensed in the first quarter of fiscal 1997. All
prior years financial statements have been restated to include One Stop.
The following table shows the pro-forma effect of the merger:
F-7
<PAGE> 64
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Fiscal Year Ended June 30, 1996
----------------------------------------------
<S> <C>
Net income by entity
Aames as previously reported $31,048
One Stop (1,257)
----------------------------------------------------------------
Restated June 30, 1996 net income $29,791
----------------------------------------------------------------
Net income per fully diluted share
Previously reported (2/97 split adj.) $ 1.39
Restated $ 1.14
</TABLE>
One Stop's operations, from the period July 1, 1996 through August 28,
1996, were immaterial to restate separately.
F-8
<PAGE> 65
PRINCIPLES OF ACCOUNTING AND CONSOLIDATION
The consolidated financial statements of the Company include the
accounts of Aames and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH IN TRUST
The Company services loans on behalf of customers. In such capacity,
certain monies are collected and placed in segregated trust accounts, which
totaled $57.8 million and $28.3 million at June 30, 1998 and June 30, 1997,
respectively. These accounts and corresponding liabilities are not included in
the accompanying balance sheet.
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are being recorded
utilizing straight-line and accelerated methods over the following estimated
useful lives:
<TABLE>
<S> <C>
DATA PROCESSING EQUIPMENT Five years
FURNITURE Five to seven years
DATA PROCESSING SOFTWARE Three years
LEASEHOLD IMPROVEMENT Lower of life of lease or asset
AUTOMOBILES Five years
</TABLE>
F-9
<PAGE> 66
REVENUE RECOGNITION
The Company adopted Statement of Financial Accounting Standards ("SFAS")
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125") effective January 1, 1997. The
adoption of SFAS 125 did not have a material effect on the Company's results of
operations for the year ended June 30, 1997. As a result of the adoption of SFAS
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 during
the year ended June 30, 1998, recorded a net unrealized gain of $19.5 million on
the valuation of this security. SFAS 125 requires that this mark-to-market
adjustment be reported separately from "Gain on sale of loans."
In fiscal year 1996, the Company adopted SFAS 122. Under SFAS 122, the
Company recognized originated mortgage servicing rights ("OMSRs") as assets
separate from the mortgage loans to which the OMSRs relate based on their
respective fair values. Prior to SFAS 122, the Company allocated the entire cost
of originating or purchasing mortgage loans to the carrying value of such
mortgage loans. The effect of adopting SFAS 122 was to increase the net income
of the Company for the fiscal year ended June 30,1996, by $5.7 million, or $0.21
per fully diluted weighted average share.
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 represented by the
non-cash gain on sale of loans. The cash proceeds are raised through an offering
of the pass-through certificates or bonds evidencing the right to receive
principal payments on the securitized loans and the interest rate on the
certificate balance or on the bonds. The gain on sale of loans represents the
difference between the proceeds (including premiums) from the sale, net of
related transaction costs, and the allocated carrying amount of the loans sold.
The allocated carrying amount is determined by allocating the original amount of
the loan (including premiums paid on loans purchased) between the portion sold
and any retained interests (interest-only strip), based on their relative fair
values at the date of transfer. The interest-only strip represents, over the
estimated life of the loans, the present value of the excess of the weighted
average coupon on each pool of loans sold over the sum of the interest rate paid
to investors, the contractual servicing fee (currently .50%) and a monoline
insurance fee, if any, adjusted for the reserve for loan losses. Unrealized
gains or losses include the recognition of an unrealized gain or loss which
represents the initial difference between the allocated carrying amount and the
fair market value of the interest-only strip at the date of sale. Each agreement
that the Company has entered into in connection with its securitizations
requires either the overcollateralization of the trust or the establishment of a
reserve account that may initially be funded by cash deposited by the Company.
The Company's interest in each overcollateralization amount and reserve account
is reflected on the Company's Consolidated Financial Statements as "residual
assets" and is recorded as of the time such amounts are received by the trust.
F-10
<PAGE> 67
The Company determines the present value of the cash flows at the time
each securitization transaction closes using certain estimates made by
management at the time the loans are sold. These estimates include: (i) future
rate of prepayment; (ii) discount rate used to calculate present value; and
(iii) the provision for credit losses on loans sold. There can be no assurance
of the accuracy of management's estimates.
Additionally, upon sale or securitization of servicing retained
mortgages, the Company capitalizes mortgage servicing rights separate from the
loan. The Company determines fair value based on the present value of estimated
net future cash flows related to servicing income. The cost allocated to the
servicing rights is amortized in proportion to and over the period of estimated
net future servicing fee income. The Company periodically reviews capitalized
servicing rights for valuation impairment. This review is performed on a
disaggregated basis for the predominant risk characteristics of the underlying
loans which are loan type and origination date. At June 30, 1998 and 1997, there
were no valuation allowances on mortgage servicing rights.
INCOME TAXES
Taxes are provided on substantially all income and expense items
included in earnings, regardless of the period in which such items are
recognized for tax purposes. The Company uses an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than the enactment of changes in the tax law or rates.
RISK MANAGEMENT
The Company's earnings may be directly affected by the level of and
fluctuation in interest rates and the level of prepayment in the Company's
securitizations. The Company currently hedges its fixed rate pipeline and some
LIBOR-based tranches in its fixed rate securitizations, and continues to explore
other avenues of risk mitigation, although none have been employed to date. The
current fixed rate hedge products utilized are swap agreements with third
parties that sell United States Treasury securities not yet purchased and the
purchase of Treasury put options. The hedge instrument used on the existing
LIBOR-based tranches secured by fixed rate mortgages is an interest rate
contract with a specified LIBOR rate cap. The amount and timing of hedging
transactions are determined by members of the Company's senior management. The
Company is currently reevaluating its current hedging policy.
F-11
<PAGE> 68
CASH AND CASH EQUIVALENTS
At June 30, 1998, the Company had $12.3 million in cash, of which $1.6
million was held in a restricted account in connection with the securitization
closed in June 1998. These funds were released to the Company in July 1998.
LOANS HELD FOR SALE
Loans held for sale are carried at the lower of aggregate cost or market
value. Market value is determined by current investor yield requirements.
ACCOUNTS RECEIVABLE
Accounts receivable primarily consisted of pool related advances,
accrued interest receivable and various servicing advances.
RESIDUAL ASSETS
In connection with its securitization transactions, the Company
initially deposits with a trustee cash or the required overcollateralization
amount, and subsequently deposits a portion of the servicing spread collected on
the related loans. The amounts set aside ($195 million at June 30, 1998 and $113
million at June 30, 1997) are available for distribution to investors in the
event of certain shortfalls in amounts due to investors. These amounts are
subject to increase up to maximum subordination amounts as specified in the
related securitization documents. Cash amounts on deposit are invested in
certain instruments as permitted by the related securitization documents. To the
extent amounts on deposit exceed specified levels, distributions are made to the
Company and, at the termination of the related trust, any remaining amounts on
deposit are distributed to the Company.
DEBT ISSUANCE COSTS
At June 30, 1998 and 1997, the Company had an unamortized balance of
debt issuance costs of $7.2 million and $8.41 million, respectively, related to
the issuance of $23.0 million of 10.5% Senior Notes due 2002, the issuance of
$115 million of 5.5% Convertible Subordinated Debentures due 2006 and the
issuance of $150 million of 9.125% Senior Notes due 2003. This balance is
included in "Prepaid and other" on the Consolidated Balance Sheets and is
amortized into expense over the life of the related debt.
EARNINGS PER SHARE
Basic earnings per share of common stock is computed using the weighted
average number of shares of common stock outstanding during each period. For
fully diluted earnings per share, the conversion of shares related to the
Company's 5.5% Convertible Subordinated Debentures due 2006 is included as well
as the average number of stock options outstanding.
All references in the accompanying Consolidated Balance Sheets,
Consolidated Statements of Earnings and Notes to Consolidated Financial
Statements to the number of common shares and share amounts have been restated
to reflect the three-for-two stock splits in the form of stock dividends
effected on February 21, 1997 and May 17, 1996, and the Company's presentation
of basic Earnings per Share ("EPS") under the adoption of FAS 128 in fiscal year
1998.
F-12
<PAGE> 69
RECLASSIFICATIONS
Certain amounts related to 1997 and 1996 have been reclassified to
conform to the 1998 presentation.
ADOPTION OF RECENT ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board ("FASB")
released SFAS 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This
statement establishes methods of accounting for stock-based compensation plans.
SFAS 123 is effective for fiscal years beginning after December 15, 1995. The
Company adopted SFAS 123 in fiscal year 1997. The adoption of SFAS 123 did not
have a material effect on the financial position of the Company. See Note 9.
In February 1997, the FASB issued SFAS 128, "Earnings Per Share" ("SFAS
128") which 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 includes common stock equivalents while basic EPS
excludes them. This change simplifies the computation of EPS. 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 adopted
SFAS 128 effective December 31, 1997.
In February 1997, the FASB issued SFAS 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 Balance Sheet is
also required. The Company adopted SFAS 129 for the fiscal year 1998.
In June 1997, FASB issued SFAS 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes disclosure standards for reporting
comprehensive income in a full set of general purpose financial statements. SFAS
130 is effective for fiscal years beginning after December 15, 1997. The
adoption of this standard is not expected to have an impact on the Company's
financial position or results of operations.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131") which is effective for
periods beginning after December 15, 1997. SFAS 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of this standard is not expected to have an impact on the Company's
financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning after
June 15, 1999. SFAS No. 133 requires companies to record derivatives on the
balance sheet as assets and liabilities, measured at fair value.
F-13
<PAGE> 70
Gains and losses resulting from changes in the values of those derivatives would
be accounted for as components of comprehensive income depending on the use of
the derivative and whether it qualifies for hedge accounting. The Company has
not determined the impact that adoption of this standard will have on its future
consolidated financial statements. The Company plans to adopt SFAS No. 133 by
July 1, 2000, as required.
NOTE 2 NONRECURRING CHARGES
In fiscal 1997, the Company incurred $32.0 million of nonrecurring
charges. Approximately $25.0 million of these charges were recognized in August
1996 directly related to the acquisition of One Stop. The remaining amount
relates to a reserve for relocating corporate headquarters recorded in the first
quarter and to severance and other strategic decisions made in the fourth
quarter.
F-14
<PAGE> 71
NOTE 3 INTEREST-ONLY STRIPS AND MORTGAGE SERVICING RIGHTS
The activity in the interest-only strips is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------
1998 1997
---- ----
<S> <C> <C>
Balance, beginning of year $ 270,422,000 $ 129,113,000
Gain on sale of loans 182,848,000 262,811,000
Provision for loan losses net of
charge offs (6,676,000) (33,941,000)
Amortization of receivable (106,489,000) (68,611,000)
Net unrealized gain (loss) on valuation
of interest-only strips 19,495,000 (18,950,000)
------------- -------------
Balance, end of year $ 359,600,000 $ 270,422,000
============= =============
</TABLE>
The activity in mortgage servicing rights is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
1998 1997
---- ----
<S> <C> <C>
Balance, beginning of year $ 21,641,000 $ 10,902,000
Gain on sale of loans 19,513,000 16,251,000
Amortization of receivable (9,064,000) (5,512,000)
------------ ------------
Balance, end of year $ 32,090,000 $ 21,641,000
============ ============
</TABLE>
The Company determines fair value for both the interest-only strips and
the mortgage servicing rights based on rates used to discount the future cash
flows, which were 10.8% and 11.4% for the years ended June 30, 1998 and 1997,
respectively. The Company retains a certain amount of credit risk on loans
securitized. The Company had reserves of $50.3 million and $43.6 million at June
30, 1998 and 1997, respectively, related to these credit risk obligations, which
are netted against the interest-only strips. The weighted average loss reserves
were 1.93% and 1.50% of the amount securitized for the years ended June 30, 1998
and 1997, respectively.
The interest-only strips and the mortgage servicing rights are amortized
over the estimated lives of the loans to which they relate. At June 30, 1998 and
1997, the unamortized balance of the interest-only strips was $360 million and
$270 million, respectively.
NOTE 4 EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
1998 1997
---- ----
<S> <C> <C>
Data processing equipment $ 10,421,000 $ 8,239,000
Furniture and fixtures 7,958,000 5,892,000
Data processing software 3,213,000 1,756,000
Leasehold improvements 2,032,000 1,666,000
Equipment under capital leases -- 806,000
Automobiles 395,000 497,000
------------ ------------
Total 24,019,000 18,856,000
Accumulated depreciation and amortization (10,080,000) (6,171,000)
------------ ------------
Net $ 13,939,000 $ 12,685,000
============ ============
</TABLE>
F-15
<PAGE> 72
NOTE 5 BORROWINGS AND REVOLVING WAREHOUSE FACILITIES
Borrowings consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1998 1997
---- ----
<S> <C> <C>
9.125% Senior Notes due 2003, guaranteed by each of the
Restricted Subsidiaries of the Company. $150,000,000 $150,000,000
5.5% Convertible Subordinated Debentures due 2006 convertible to
6.2 million shares of the common stock at $19 per share. The
Convertible Subordinated Debentures are subordinated to all
existing and future senior indebtedness of the Company
(as defined in the Indenture). 113,990,000 113,990,000
10.5% Senior Notes due 2002, collateralized by certain residual
certificates. Principal payments of $5,750,000 in each of
calendar years 1999 through 2002. 23,000,000 23,000,000
------------ ------------
Total borrowings $286,990,000 $286,990,000
============ ============
</TABLE>
Maturities on borrowings are as follows:
<TABLE>
<CAPTION>
Total
Borrowings
----------
<S> <C>
Fiscal Years Ended June 30,
1999 (current portion) $ 5,750,000
2000 5,750,000
2001 5,750,000
2002 5,750,000
2003 150,000,000
2004 --
Thereafter 113,990,000
-------------
Total Borrowings $ 286,990,000
=============
</TABLE>
Amounts outstanding under revolving warehouse facilities:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Warehouse facility with a syndicate of ten commercial banks
collateralized by loans originated and purchased by the Company
as well as certain servicing receivables; expires April 9, 1999
with interest at the option of the Company of either 1.05% over
Fed Funds rate, or .80% over one-month LIBOR rate. Total credit
available $400 million. Fed Funds rate was 7.1% and one-month
LIBOR was 5.7% at June 30, 1998. $135,500,000 $137,500,000
</TABLE>
F-16
<PAGE> 73
<TABLE>
<S> <C> <C>
Warehouse facility from an investment bank collateralized by
loans originated and purchased by the Company. This line of $300
million bears interest at a rate of .65% over one-month LIBOR and
expires on September 11, 1998.
One-month LIBOR rate was 5.7% at June 30, 1998 5,512,000 --
------------ ------------
Total amounts outstanding under
warehouse facilities $141,012,000 $137,500,000
============ ============
</TABLE>
NOTE 6 INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
CURRENT:
Federal $10,060,000 $ 203,000 $ 6,344,000
State 3,249,000 262,000 2,212,000
----------- ----------- -----------
13,309,000 465,000 8,556,000
DEFERRED:
Federal 13,681,000 13,081,000 10,212,000
State 5,120,000 2,852,000 3,740,000
----------- ----------- -----------
18,801,000 15,933,000 13,952,000
----------- ----------- -----------
Total $32,110,000 $16,398,000 $22,508,000
=========== =========== ===========
</TABLE>
F-17
<PAGE> 74
The financial statement balances at June 30, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
JUNE 30,
------------
1998 1997
------------ ------------
<S> <C> <C>
Current taxes payable (receivable):
Federal $ 3,190,000 4,431,000
State (967,000) (1,350,000)
------------ ------------
2,223,000 3,081,000
Deferred taxes payable:
Federal 39,396,000 26,930,000
State 13,818,000 9,441,000
------------ ------------
53,214,000 36,371,000
------------ ------------
Total $ 55,437,000 $ 39,452,000
============ ============
</TABLE>
Deferred tax liabilities (assets) consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Deferred tax liabilities
Interest-only strips $ 38,952,000 $ 35,505,000
Depreciation -- 440,000
Deferred loan fees 578,000 1,346,000
Mortgage servicing rights 16,770,000 9,116,000
Bad Debts 6,579,000 --
------------ ------------
Total deferred tax liabilities 62,879,000 46,407,000
------------ ------------
Deferred tax assets
Sec. 475 mark-to-market -- (2,870,000)
State taxes (4,836,000) (3,396,000)
Vacation accrual (801,000) (701,000)
Allowance for doubtful accounts -- (435,000)
Lease cancellation accrual (920,000) (920,000)
Excess Inclusion Income (1,539,000) --
Depreciation (98,000) --
Other accruals (1,471,000) (1,714,000)
------------ ------------
Total deferred tax assets (9,665,000) (10,036,000)
------------ ------------
Valuation allowance -- --
------------ ------------
Net deferred tax liabilities $ 53,214,000 $ 36,371,000
============ ============
</TABLE>
F-18
<PAGE> 75
Effective tax rate calculation for fiscal year ended June 30, 1998:
<TABLE>
<CAPTION>
Tax Affected Effective
Permanent Permanent Tax Rate
Differences Differences Calculation
----------- ------------ -----------
<S> <C> <C> <C>
Tax provision $32,110,000
Pretax income 72,427,000
Effective tax rate 44.33%
Federal statutory rate 35.00
State pre-tax after permanent difference 8,369,000 5,439,000 7.51%
Disallowed compensation 3,398,000 1,189,300 1.64%
Other, net 253,940 132,250 0.18%
-----
44.33%
</TABLE>
Effective tax rate calculation for fiscal year ended June 30, 1997:
<TABLE>
<CAPTION>
Tax Affected Effective
Permanent Permanent Tax Rate
Differences Differences Calculation
------------ ------------ -----------
<S> <C> <C> <C>
Tax provision $ 16,398,000
Pretax income 33,507,000
Effective tax rate 48.939%
Federal statutory rate 35.000%
State pre-tax after permanent difference $ 36,558,000 $ 2,654,000 7.921%
Pooling of interests 5,156,000 1,805,000 5.385%
Stock options (2,227,000) (779,000) (2.326%)
Other (net) 2.959%
------
48.939%
</TABLE>
For 1996 the Company's effective tax rate was computed using the
appropriate statutory rates with no significant differences.
F-19
<PAGE> 76
NOTE 7 COMMITMENTS AND CONTINGENCIES
The Company leases office space under operating leases expiring at
various dates through February 2012. In addition, in February 1996, the Company
entered into an operating lease for an airplane, which expires February 2006.
Total rent expense related to operating leases amounted to $9.1 million, $5.3
million and $3.2 million, for the years ended June 30, 1998, 1997 and 1996,
respectively. Certain leases have provisions for renewal options and/or rental
increases at specified increments or in relation to increases in the Consumer
Price Index (as defined). As of June 30, 1998, listed below are future minimum
rental payments required under non-cancelable operating leases that have initial
or remaining terms in excess of one year:
F-20
<PAGE> 77
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
- ---------------------------
<S> <C>
1999 $ 7,695,000
2000 8,370,000
2001 6,696,000
2002 5,662,000
2003 4,871,000
Thereafter 32,211,000
-----------
$65,505,000
===========
</TABLE>
LITIGATION
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, 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 action 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 which could have a material adverse effect
on the Company's financial position and results of operations.
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Chief Executive Officer has an employment agreement with the Company
expiring on June 30, 2001, which provides for a base salary and a performance
bonus measured against a target return on equity. In addition, certain options
were granted thereunder. (See "Note 9 - Notes to Consolidated Financial
Statements.") The agreement also provides that, in the event of a termination
without cause or in the event of certain changes in control, the Company shall
pay two years base salary plus an amount equal to his performance bonus over the
previous eight quarters.
The President has an employment agreement with the Company expiring on
August 26, 2003, which provides for a base salary and quarterly performance
bonuses of between $1.35 million and $1.65 million depending on broker and
retail loan production. The agreement also provides that, in the event of a
termination without cause, the Company will pay an amount equal to the base
salary for the remaining term of the agreement, plus $30 million minus the
performance bonuses paid prior to termination ("performance payment"). In the
event of a change in control, the Company will pay the performance payment.
Certain other members of management have employment or severance
agreements which provide for enhanced severance and other benefits upon a change
in control, as defined in the agreements.
NOTE 8 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair value of financial
instruments as of June 30, 1998 and 1997 are made by the Company using available
market information, historical data, and appropriate valuation methodologies.
However, considerable judgment is required to interpret market and historical
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies
may have a material
F-21
<PAGE> 78
effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE SHEET:
Cash and cash equivalents $ 12,322,000 $ 12,322,000 $ 26,902,000 $ 26,902,000
Loans held for sale 198,202,000 208,112,000 242,987,000 255,136,000
Interest-only strips at fair
market value 359,600,000 359,600,000 270,422,000 270,422,000
Mortgage servicing rights 32,090,000 32,090,000 21,641,000 21,641,000
Amounts outstanding under
revolving warehouse facilities 141,012,000 141,012,000 137,500,000 137,500,000
Borrowings 286,990,000 246,938,000 286,990,000 284,735,000
OFF BALANCE SHEET:
Hedge position notional
amount outstanding 250,000,000 248,455,000 135,000,000 135,246,000
</TABLE>
The fair value estimates as of June 30, 1998 and 1997 are based on
pertinent information available to management as of the respective dates.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been revalued for
purposes of these financial statements since those dates and, therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.
The following describes the methods and assumptions used by the Company
in estimating fair values:
Cash and cash equivalents are based on the carrying amount which is a
reasonable estimate of the fair value.
Loans held for sale are based on current investor yield requirements.
Interest-only strips and mortgage servicing rights are based on the
expected future cash flows using assumptions based on Company-specific
and industry information as well as the Company's historical experience.
Amounts outstanding under revolving warehouse facilities are short term
in nature and generally bear market rates of interest and therefore, are
based on the carrying amount which is a reasonable estimate of fair
value.
Borrowings are based on the quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the
same remaining maturities.
Hedge positions are based on quoted market prices.
NOTE 9 EMPLOYEE BENEFIT PLANS
401(K) RETIREMENT SAVINGS PLAN
The Company sponsors a 401(k) Retirement Savings Plan, a defined
contribution plan.
F-22
<PAGE> 79
Substantially all employees are eligible to participate in the plan after
reaching the age of 21 and completion of six months of service. Contributions
are made from employees' elected salary deferrals. Employer contributions are
determined at the beginning of the plan year at the option of the employer. For
fiscal years 1998, 1997 and 1996, the Company's contribution to the plan
aggregated $549,000, $432,000 and $252,000, respectively.
DEFERRED COMPENSATION PLAN
In April 1997, the Company implemented a Deferred Compensation Plan for
highly compensated employees and directors of the Company. The plan is unfunded
and non-qualified. Eligible participants may defer a portion of their
compensation and receive a Company matching amount up to 4% of their annual base
salary. The Company may also make discretionary contributions to the plan. For
the 1998 fiscal year, the Company made $203,700 of discretionary contributions
to the plan.
STOCK BASED COMPENSATION
The Company has reserved 5,450,000 shares of the common stock for
issuance under its 1991 Stock Incentive Plan, 1995 Stock Incentive Plan, 1996
Stock Incentive Plan, 1997 Stock Option Plan and 1997 Non-Qualified Stock Option
Plan. Under these plans, the Company may grant incentive and non-qualified
options to eligible participants that may vest immediately on the date of grant
or in accordance with a vesting schedule, as determined in the sole discretion
of the Compensation Committee of the Company's Board of Directors. The exercise
price is based on the closing price of the common stock on the day before the
date of grant. Each option plan provides for a term of 10 years. The Company has
also granted options outside of these plans, on terms established by the
Compensation Committee. A summary of the Company's stock option plans and
arrangements as of June 30, 1998, 1997 and 1996 and changes during the years
then ended are as follows:
F-23
<PAGE> 80
<TABLE>
<CAPTION>
Option Option
Shares Price Range
--------- -------------
<S> <C> <C>
1998
Outstanding at beginning of year 4,182,491 0.19 - 29.70
Granted 1,084,091 11.81 - 19.94
Exercised (419,414) 3.33 - 13.63
Forfeited (276,499) 0.20 - 28,92
--------- -------------
Outstanding at end of year 4,570,669 0.19 - 29.70
========= =============
1997
Outstanding at beginning of year 2,940,722 0.19 - 18.61
Granted 1,647,733 12.0 - 29.70
Exercised (325,049) 3.33 - 11.50
Forfeited (80,915) 3.89 - 28.92
--------- -------------
Outstanding at end of year 4,182,491 0.19 - 29.70
========= =============
1996
Outstanding at beginning of year 712,996 3.33 - 5.11
Granted 2,464,049 0.19 - 18.61(1)
Exercised (223,148) 3.33 - 7.95
Forfeited (13,175) 3.33 - 7.95
--------- -------------
Outstanding at end of year 2,940,722 0.19 - 18.61
========= =============
</TABLE>
(1) Includes options assumed in One Stop acquisition.
The number of options exercisable at June 30, 1998 and 1997, was
2,324,755 and 1,563,722, respectively. The weighted-average fair value of
options granted during 1998 and 1997 was $18.56 and $13.83, respectively.
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock-based compensation plans and arrangements. No
compensation cost has been recognized for its stock option plan. If compensation
cost for the stock option plan and arrangements had been determined based on the
fair value at the grant dates for awards under this plan consistent with the
method prescribed by SFAS 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
June 30,
--------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net income
As reported $40,317,000 $17,109,000
Pro forma 39,265,000 13,194,000
Basic earnings per share
As reported 1.41 .65
Pro forma 1.38 .50
Fully diluted earnings per share
As reported 1.23 .60
Pro forma 1.20 .49
</TABLE>
F-24
<PAGE> 81
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
June 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Dividend yield 1.20% .54%
Expected volatility 54.56% 47.98%
Risk-free interest rate 5.78% 6.30%
Expected life of option 5 years 6 years
</TABLE>
NOTE 10 STOCKHOLDERS' EQUITY
The Company issued a three-for-two stock split in the form of a stock
dividend on February 21, 1997 to stockholders of record on February 10, 1997.
The split was effected as a dividend of one share of common stock for every two
shares of common stock outstanding. After giving effect to this stock split, the
Company had 27.8 million shares outstanding at June 30, 1998.
The Company issued a three-for-two stock split in the form of a stock
dividend on May 17, 1996 to stockholders of record on May 6, 1996. The split was
effected as a dividend of one share of common stock on every two shares of
common stock outstanding. After giving effect to this stock split, the Company
had 23.8 million shares outstanding at June 30, 1997.
On October 10, 1996, the Company completed the sale of 3.62 million
shares of common stock in a public offering. The proceeds to the Company from
the offering, net of expenses, were $118 million.
The Company's bank agreements generally limit the Company's ability to
pay dividends to an amount equal to 85% of its net income. In addition, the
Company's indentures relating to its 10.5% Senior Notes due 2002 and 9.125%
Senior Notes due 2003 place certain restrictions on the payment of dividends and
the encumbrance of additional indebtedness based on the Company's net worth.
In June 1996, the Board of Directors of the Company declared a dividend
distribution of one preferred stock purchase right ("Right") on each share of
the Company's common stock outstanding on July 12, 1996. Each Right, when
exercisable, entitles the holder to purchase from the Company one one-hundredth
of a share of Preferred Stock, par value $0.001 per share, of the Company at a
price of $100.00, subject to adjustments in certain cases to prevent dilution.
The Rights will become exercisable (with certain limited exceptions
provided in the Rights agreement) following the 10th day after (a) a person or
group announces acquisition of 15 percent or more of the common stock, (b) a
person or group announces commencement of a tender offer, the consummation of
which would result in ownership by the person or group of 15 percent or more of
the common stock, (c) the filing of a registration statement for an exchange
offer of 15 percent or more of the common stock under the Securities Act of
1933, as amended, or (d) the Company's board of continuing directors determines
that a person is an "adverse person," as defined in the Rights agreement.
On April 27, 1998, the Company issued 2.78 million shares of its common
stock, or 9.9% of the Company's outstanding shares, to private entities
controlled by Ronald Perelman and Gerald Ford, at a purchase price of $13.7625
per share, or approximately $38 million. The purchase price represented the
average of the closing sales prices of the Company's common stock on the New
F-25
<PAGE> 82
York Stock Exchange during the 15-day period preceding the signing of the
agreement (March 19, 1998). As part of the agreement, the Company also issued
warrants to these entities to purchase an aggregate additional 9.9% of the
Company's stock at an exercise price of $17.2031 (125% of the purchase price of
the stock), subject to customary anti-dilution provisions. The warrants are
exercisable only upon a change in control of the Company and expire in three
years.
EPS BASIC TO FULLY DILUTED RECONCILIATION
<TABLE>
<CAPTION>
YEAR-ENDED JUNE 30,
----------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BASIC W/A SHARES 28,548 26,400 21,681
ADD: OPTIONS 1,094 1,971 3,513
ADD: CONVERT SHARES 6,107 6,145 2,054
------- ------- -------
FULLY DILUTED SHARES 35,749 34,516 27,248
======= ======= =======
BASIC NET INCOME $40,317 $17,109 $29,791
CONVERT INTEREST 3,645 3,710 1,223
------- ------- -------
FULLY DILUTED NET INCOME $43,962 $20,819 $31,014
======= ======= =======
BASIC EPS $ 1.41 $ 0.65 $ 1.37
FULLY DILUTED EPS $ 1.23 $ 0.60 $ 1.14
</TABLE>
NOTE 11 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.
NOTE 12 QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
SEPT 30 DEC 31 MAR 31 JUNE 30
------- ------ ------ -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Fiscal 1998
Revenue 77,912 87,654 68,472 91,235
Income before income taxes 23,603 24,260 7,171 17,393
Net income 13,081 13,343 4,120 9,773
Earnings per share - fully diluted .40 .41 .15 .29
Fiscal 1997
Revenue $ 75,641 $ 80,028 $ 84,080 $ 32,772
Income before income taxes (4,053) 31,510 30,309 (24,258)
Net income (4,624) 18,274 17,575 (14,115)
Earnings per share - fully diluted (.11) 0.53 0.51 (.37)
</TABLE>
NOTE 13 FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITIES
Securitizations - Hedging Interest Rate Risk
The most significant variable in the determination of gain on sale in a
securitization is the spread between the weighted average coupon on the
securitized loans and the pass-through interest rate. In the interim period
between loan origination or purchase and securitization of such loans, the
Company is exposed to interest rate risk. The majority of loans are securitized
within 90 days of origination or purchase. However, a portion of the loans are
held for sale or securitization for as long as twelve months (or longer, in very
limited circumstances) prior to securitization. If interest rates rise during
the period that the mortgage loans are held, the spread between the weighted
average interest rate on the loans to be securitized and the pass-through
interest rates on the securities to be sold (the latter having increased as a
result of market interest rate movements) would narrow. Upon securitization,
this would result in a reduction of the Company's
F-26
<PAGE> 83
related gain on sale. The Company mitigates this exposure through swap
agreements with third parties that sell United States Treasury securities not
yet purchased and the purchase of Treasury Put Options. Hedge gains or losses
are initially deferred and subsequently included in gain on sale upon completion
of the securitization. With respect to the Company's securitizations, gain on
sale included hedge losses of $1.30 million and $3.04 million in fiscal 1998 and
1997, respectively. These hedging activities help mitigate the risk of absolute
movements in interest rates but they do not mitigate the risk of a widening in
the spreads between pass-through certificates and U.S. Treasury securities with
comparable maturities.
Credit Risk
The Company is exposed to on-balance sheet credit risk related to its
receivables and interest-only strips and residual certificates. The Company is
exposed to off-balance sheet credit risk related to loans which the Company has
committed to originate or purchase.
The Company is a party to financial instruments with off-balance sheet
credit risk in the normal course of business. These financial instruments
include commitments to extend credit to borrowers and commitments to purchase
loans from correspondents. The Company has a first or second lien position on
all of its loans, and the combined loan-to-value ratio ("CLTV") permitted by the
Company's mortgage underwriting guidelines generally may not exceed 90%. The
CLTV represents the combined first and second mortgage balances as a percentage
of the appraised value of the mortgaged property, with the appraised value
determined by an appraiser with appropriate professional designations. A title
insurance policy is required for all loans.
F-27
<PAGE> 84
Warehousing Exposure
The Company utilizes warehouse financing facilities to facilitate the
holding of mortgage loans prior to securitization. As of June 30, 1998 and 1997,
the Company had total warehouse facilities available in the amount of $950
million and $600 million, respectively; the total outstanding related to these
facilities was $141 million and $137 million at June 30, 1998 and 1997,
respectively. Warehouse facilities are typically for a term of one year or less
and are designated to fund mortgages originated within specified underwriting
guidelines. The majority of the assets remain in the facilities for a period of
up to 90 days at which point they are securitized and sold to institutional
investors. As these amounts are short term in nature and/or generally bear
market rates of interest, the contractual amounts of these instruments are
reasonable estimates of their fair values.
F-28
<PAGE> 85
AAMES FINANCIAL CORPORATION
RULE 12-06 PROPERTY PLANT AND EQUIPMENT
FISCAL YEARS 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -------- -------- ----------- ----------- -------------- -------------
BALANCE AT OTHER CHANGES-
BEGINNING ADDITIONS ADD (DEDUCT)- BALANCE AT
CLASSIFICATION OF PERIOD AT COST RETIREMENTS DESCRIBE END OF PERIOD
- -------------- ----------- ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
1998
Automobile $ 497,000 $ 102,000 $ 395,000
Furniture & Fixtures 5,892,000 2,258,000 192,000 7,958,000
Leasehold
Improvements 1,666,000 366,000 2,032,000
Data Processing
Equipment 8,239,000 2,184,000 2,000 10,421,000
Data Processing
Software 1,756,000 1,457,000 3,213,000
Capital Leases 806,000 806,000
----------- ----------- ----------- ----------- ---------
Total $18,856,000 $ 6,265,000 $ 1,102,000 $24,019,000
=========== =========== =========== =========== ===========
1997
Automobile $ 256,000 $ 241,000 $ 497,000
Furniture & Fixtures 3,554,000 2,366,000 28,000 5,892,000
Leasehold
Improvements 242,000 1,424,000 1,666,000
Data Processing
Equipment 4,937,000 3,308,000 6,000 8,239,000
Data Processing
Software 242,000 1,514,000 1,756,000
Capital Leases 806,000 806,000
----------- ----------- ----------- ----------- ----------
Total $10,037,000 $ 8,853,000 $ 34,000 $18,856,000
=========== =========== =========== =========== ===========
1996
Automobile $ 195,000 $ 154,000 $ 93,000 $ 256,000
Furniture & Fixtures 1,461,000 2,163,000 70,000 3,554,000
Leasehold
Improvements 133,000 109,000 242,000
Data Processing
Equipment 1,654,000 3,341,000 58,000 4,937,000
Data Processing
Software 242,000 242,000
Capital Leases 797,000 9,000 806,000
----------- ----------- ----------- ----------- -----------
Total $ 4,240,000 $ 6,018,000 $ 221,000 $10,037,000
=========== =========== =========== =========== ===========
</TABLE>
F-29
<PAGE> 86
AAMES FINANCIAL CORPORATION
RULE 12-07 ACCUMULATED DEPRECIATION
DEPLETION AND AMORTIZATION OF PROPERTY
PLANT AND EQUIPMENT
FISCAL YEARS 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -------- -------- -------- -------- -------- --------
BALANCE AT OTHER CHANGES-
BEGINNING ADDITIONS ADD (DEDUCT)- BALANCE AT
CLASSIFICATION OF PERIOD AT COST RETIREMENTS DESCRIBE END OF PERIOD
- -------------- ---------- --------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
1998
Automobile $ 145,000 $ 89,000 $ 69,000 $ 165,000
Furniture & Fixtures 1,866,000 1,607,000 34,000 3,439,000
Leasehold
Improvements 196,000 171,000 367,000
Data Processing
Equipment 2,783,000 2,220,000 1,000 5,002,000
Data Processing
Software 375,000 732,000 1,107,000
Capital Leases 806,000 806,000
----------- ----------- ----------- ---------- -----------
Total $ 6,171,000 $ 4,819,000 $ 910,000 $10,080,000
=========== =========== =========== =========== ===========
1997
Automobile $ 51,000 $ 94,000 $ 145,000
Furniture & Fixtures 1,073,000 793,000 1,866,000
Leasehold
Improvements 133,000 63,000 196,000
Data Processing
Equipment 1,326,000 1,467,000 10,000 2,783,000
Data Processing
Software 22,000 353,000 375,000
Capital Leases 758,000 48,000 806,000
----------- ----------- ----------- ----------- -----------
Total $ 3,363,000 $ 2,818,000 $ 10,000 $ 6,171,000
=========== =========== =========== =========== ===========
1996
Automobile $ 21,000 $ 102,000 $ 72,000 $ 51,000
Furniture & Fixtures 696,000 377,000 1,073,000
Leasehold
Improvements 112,000 21,000 133,000
Data Processing
Equipment 658,000 668,000 1,326,000
Data Processing
Software 22,000 22,000
Capital Leases 685,000 73,000 758,000
----------- ----------- ----------- ----------- -----------
Total $ 2,172,000 $ 1,263,000 $ 72,000 $ 3,363,000
=========== =========== =========== =========== ===========
</TABLE>
F-30
<PAGE> 1
EXHIBIT 10.5(a)
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement (this "Agreement") is
made and entered into as of June 1, 1997 by and between AAMES FINANCIAL
CORPORATION, a Delaware corporation (the "Company"), and JOSEPH MAGNUS, an
individual ("Executive").
W I T N E S S E T H:
WHEREAS, effective as of January 15, 1997, Executive and the Company
entered into an Employment Agreement (the "Original Agreement") to provide for
the terms and conditions of Executive's employment as Senior Vice President --
Strategic Planning of the Company; and
WHEREAS, Executive and the Company desire to amend and restate the
Original Agreement for the primary purpose of reflecting Executive's position as
Executive Vice President -- Chief Credit Officer and revised executive
performance provisions.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and Executive agree as
set forth below.
1. EMPLOYMENT AND DUTIES. The Company hereby employs Executive to serve
as the Executive Vice President -- Chief Credit Officer of the Company, with the
powers and duties customarily accorded to such position, and such other duties
consistent therewith as may be assigned to Executive from time to time by the
Chief Executive Officer (the "CEO") of the Company.
2. TERM. The initial term of this Agreement shall begin as of January
15, 1997. The initial term shall expire on January 15, 2000, unless terminated
earlier as set forth in Section 6 hereof or by mutual agreement of the parties
hereto (the "Initial Term"). At the expiration of the Initial Term and each
anniversary thereafter, the term of this Agreement shall automatically be
extended for an additional year (the "Extension Term") unless either party shall
have given written notice to the other party at least ninety days prior to the
end of the Initial Term or the Extension Term, as the case may be, that it does
not desire to extend the term of this Agreement.
3. COMPENSATION
(a) Base Salary. During the term of this Agreement, Executive
shall be paid a base salary (the "Base Salary"), payable in accordance with the
Company's normal payroll practices. During the first year of the term of this
Agreement, Executive's Base Salary shall be $160,000. The annual Base Salary
payable to Executive shall be reviewed on an annual
<PAGE> 2
basis, provided, however, that Executive's Base Salary shall not be reduced
below $160,000 per annum during the term of this Agreement.
(b) Performance Bonus. Executive shall be entitled to
participate in the Company's performance bonus plan for executive officers.
Under such plan, (i) from the effective date of the Original Agreement through
and including the quarter ended March 31, 1997, Executive was paid on a
quarterly basis a performance bonus measured by return on average equity during
the relevant period; and (ii) for the quarters ended June 30 and September 30,
1997 and for each quarter thereafter until the compensation committee of the
Board of Directors adopts a new performance bonus plan for executive officers,
Executive shall be paid a quarterly bonus of $60,000. Amounts so paid and to be
paid shall be referred to as the "Performance Bonus." Upon adoption of a new
performance bonus plan, Executive shall be paid a quarterly bonus under the
provisions of such plan.
(c) Stock Bonus. At the first compensation committee meeting
(the "Committee Meeting") after the commencement of the Initial Term, the
Company shall grant Executive options to purchase 25,000 shares of the Company's
Common Stock (the "Options"). Of such Options, 5,000 shall vest immediately upon
grant and 5,000 shall vest on each anniversary of the commencement of the
Initial Term. The Options will be exercisable at an exercise price equal to the
closing price of the Company's Common Stock on the New York Stock Exchange on
the day prior to the Committee Meeting. The Options shall be issued under the
Company's stock incentive plans maintained for its executives and shall contain
standard anti-dilution mechanisms to adjust for stock dividends, stock splits,
reverse stock splits, recapitalizations, consolidations and mergers as are
provided for therein and shall provide for acceleration of vesting upon the
merger, consolidation, sale of all or substantially all of the assets of the
Company or similar reorganization.
4. Other Executive Benefits. During the term of this Agreement, the
Company shall provide to the Executive benefits commensurate with his position,
including each of the following benefits:
(a) Group Medical and Life Insurance Benefits. The Company
shall provide for Executive, at the Company's expense, participation in medical,
dental, accident, health, life and disability insurance benefits equivalent to
the normal customary benefits currently or from time to time provided by the
Company. Said coverage shall be in existence or shall take effect as of the
commencement of the Initial Term, subject to applicable waiting periods.
(b) Vacation. Executive shall be entitled to 15 days of paid
vacation during the first year of this Agreement and 20 days of paid vacation
during each subsequent year of the term of this Agreement. In each case, such
entitlement shall accrue pro rata over the contract year and shall be taken at
such time or times as shall not unreasonably interfere with the operations of
the Company.
(c) Business Expenses. The Company will pay or reimburse
Executive for any out-of-pocket expenses incurred by Executive in the course of
providing services hereunder, which comply with the Company's travel and expense
policies in effect generally
2
<PAGE> 3
from time to time for other officers of the Company. Such reimbursement shall be
made by the Company in the same manner and within the same time period as
applicable to the other executive officers of the Company.
(d) Benefit Plans. Executive shall be entitled to participate
in any pension, profit-sharing, stock option, stock purchase or other benefit
plan of the Company now existing or hereafter adopted for the benefit of
employees generally.
(e) Relocation. Executive shall be entitled to the following
relocation benefits in connection with his move from the New York City
Metropolitan area to the Los Angeles Metropolitan area:
(i) reimbursement of actual costs for moving and
packing of clothing and household effects upon the presentation of detailed
documentation substantiating such costs;
(ii) temporary living expenses, lodging and meals for
a period of 90 days from the commencement of Initial Term, in an amount not to
exceed $2,500 per month; and
(iii) reimbursement for either (x) six (6) night's
lodging, and reasonable gasoline costs associated with traveling from the New
York City Metropolitan area to the Los Angeles Metropolitan area by car; or (y)
four airfares plus shipping of dog from the New York Metropolitan area to the
Los Angeles Metropolitan area.
5. CONFIDENTIAL INFORMATION.
(a) Non-Disclosure. Executive hereby agrees, during the term
of this Agreement, he will not disclose to any person or otherwise use or
exploit any proprietary or confidential information, including, without
limitation, trade secrets, processes, records of research, proposals, reports,
methods, processes, techniques, computer software or programming, or budgets or
other financial information, regarding the Company, its business, properties,
customers or affairs (collectively, "Confidential Information") obtained by him
at any time during the term, except to the extent required by Executive's
performance of assigned duties for the Company. Notwithstanding anything herein
to the contrary, the term "Confidential Information" shall not include
information which is or becomes generally available to the public other than as
a result of disclosure by Executive in violation of this Agreement, is or
becomes available to Executive on a non-confidential basis from a source other
than the Company, provided that such source is not known by Executive to be
furnishing such information in violation of a confidentiality agreement with or
other obligation of secrecy to the Company, has been made available, or is made
available, on an unrestricted basis to a third party by the Company, by an
individual authorized to do so or is known by Executive prior to its disclosure
to Executive. Executive may use and disclose Confidential Information to the
extent necessary to assert any right or defend against any claim arising under
this Agreement or pertaining to Confidential Information or its use, to the
extent necessary to
3
<PAGE> 4
comply with any applicable statute, constitution, treaty, rule, regulation,
ordinance or order, whether of the United States, any state thereof, or any
other jurisdiction applicable to Executive, or if Executive receives a request
to disclose all or any part of the information contained in the Confidential
Information under the terms of a subpoena, order, civil investigative demand or
similar process issued by a court of competent jurisdiction or by a governmental
body or agency, whether of the United States or any state thereof, or any other
jurisdiction applicable to Executive.
(b) Injunctive Relief. Executive agrees that the remedy at law
for any breach by him of the covenants and agreements set forth in this Section
may be inadequate and that in the event of any such breach, the Company may, in
addition to the other remedies that may be available to it at law, seek
injunctive relief prohibiting him (together with all those persons associated
with him) from the breach of such covenants and agreements.
6. Termination.
(a) Termination by Company for "Cause" or Voluntarily by
Executive. The Company may terminate this Agreement for "Cause" effective
immediately upon written notice thereof to Executive. For purposes of this
Agreement, "Cause" shall mean and be limited to the following events: an act of
fraud, embezzlement, gross dishonesty or similar conduct by Executive involving
the Company; any action by Executive involving the arrest of Executive, for
violation of any criminal statute consisting of a felony if the Board reasonably
determines that the continuation of Executive's employment after such event
would have an adverse impact on the operations or reputation of the Company in
the financial community; or continued insubordination or a refusal by Executive
to perform his duties hereunder in a manner deemed to be reasonably satisfactory
to the CEO; provided, however, that this Agreement may not be terminated under
this subclause unless Executive shall have first received written notice from
the CEO advising Executive of the specific acts or omissions alleged to
constitute a refusal to perform and such refusal to perform continues after
Executive shall have had a reasonable opportunity to correct the acts or
omissions cited in such notice.
In the event of termination for "Cause," voluntarily or by
Executive other than as permitted in Sections 6(b)(i), 6(b)(ii) and 6(c), (x)
Executive shall be entitled to receive that portion of the Base Salary and all
benefits accrued through the date of termination and (y) all Options that have
become exercisable as of the date of termination shall become and shall remain
so for a period of 30 days.
4
<PAGE> 5
(b) Termination by Company Other Than For "Cause".
(i) Death. Provided that notice of termination has
not been previously given under any Section hereof, if Executive shall die
during the term of this Agreement, this Agreement and all of the Company's
obligations hereunder shall terminate, except that Executive's estate or
designated beneficiaries shall be entitled to receive (A) all earned and unpaid
Base Salary through the date of termination; (B) a pro-rated portion of the
Performance Bonus, if any, earned and paid for the year preceding the death of
Executive; and (C) all other benefits, if any, that may be due to Executive or
Executive's estate or general provisions of any benefit plan, stock incentive
plan or other plan in which Executive is then a participant. In addition, of the
Options which are scheduled to vest on the next anniversary of the commencement
of the Initial Term, a percentage of such number of Options shall vest at the
date of death determined by dividing the number of days which have elapsed since
the last such anniversary by the number 365 and multiplying the result by 5.
Further, all Options that have become exercisable as of the date of death
(including those which do so as a result of the provisions of the preceding
sentence) shall remain so for a period of 90 days.
(ii) Disability. If the Executive shall become disabled
or incapacitated to the extent
that in the reasonable judgment of the Board he is unable to perform the duties
of Executive Vice President -- Chief Credit Officer, he shall be entitled to
receive disability benefits of the type generally provided for other executive
employees of the Company. In such event, the rights of the Executive to receive
the salary provided in Section 3 of this Agreement shall be suspended until the
Executive is able to fully perform his duties.
(iii) Without Cause. Subject to the provisions of
Section 6(c) hereof, this Agreement may be terminated at any time upon sixty
(60) days' written notice of termination by Company or Executive. In the event
Company elects to terminate this Agreement during the term of this Agreement,
Executive shall be entitled to the Base Salary earned by Executive prior to the
date of termination computed pro rata up to and including that date plus
additional compensation equal to the then current Base Salary for six (6) months
or, if less, the months remaining in the term, less required withholding and
payroll taxes. All payments shall be paid in equal installments over a six- (6)
month or shorter period, as appropriate for the amount of the additional
compensation, in conformity with Company's normal payroll period. In the event
of termination of this Agreement by Company pursuant to this Section 6(b)(iii),
Executive shall be required to endeavor to reduce the amount of any payments
based on Executive's then current Base Salary provided for in this Section
6(b)(iii) by seeking other employment; provided, however, Executive will not be
required to accept employment that is not of comparable position (but not title)
or in a location which is greater than 50 miles from Executive's residence at
the time of such termination. The amount of any payment based on Executive's
then current Base Salary provided for in this Section 6(b)(iii) shall be
decreased by any salary or consulting fees earned by Executive as the result of
such employment by another employer after the date of Executive's termination of
employment at the Company.
5
<PAGE> 6
(c) Change in Control.
(i) Following a Change in Control, this Agreement
shall continue to be binding upon the Company and Executive shall be entitled to
the payments provided for in this Section 6 in the event of termination
resulting from death, disability, cause, or without cause, all as provided for
in Sections 6(a) and 6(b).
(ii) If a Change in Control of the Company shall
have occurred while the Executive is still an employee of the Company, or the
Board adopts a resolution to the effect that a potential Change in Control for
purposes of this Agreement has occurred, then the Executive shall be entitled to
receive the Separation Package upon the termination of the Executive's
employment by the Company or the Executive ("Severance Termination"), unless
such termination is as a result of: (i) the Executive's death; (ii) the
Executive's disability (as defined in Section 6(b)(ii)) (iii) the Executive's
termination by the Company for Cause (as defined in Section 6(a)); or (iv) the
Executive's decision to terminate employment other than for Good Reason (as
defined in Section 6(d) below). As used herein, the "Separation Package" shall
consist of two years' Base Salary (at the annual rate in effect at the date of
the Severance Termination) plus an amount equal to the Performance Bonus
actually paid to Executive with respect to the eight fiscal quarters preceding
the date of the Severance Termination (or if Executive has been employed for
less than two years, the amount of Performance Bonus paid to Executive for the
entire period of employment multiplied by a fraction, the numerator of which is
the number eight and the denominator of which is the actual number of fiscal
quarters for which Executive was employed by the Company). In addition, all of
the Options granted over the term shall become immediately exercisable as of the
date of such termination and shall remain so for a period of 12 months
thereafter. The option provided for in this Section 6(c)(ii) shall be applicable
with respect to each Change in Control notwithstanding Executive's failure to
exercise such option with respect to any prior Change in Control.
(d) Good Reason. The Executive may terminate his employment by
the Company for Good Reason at any time following a Change in Control during the
term of this Agreement. For purposes of this Agreement, "Good Reason" shall mean
any of the following:
(i) the assignment to the Executive of any duties
materially inconsistent with, or any substantial diminution of, the Executive's
positions, duties, responsibilities and status with the Company immediately
prior to a Change in Control, or a significant adverse alteration in the nature
of the Executive's reporting responsibilities, titles, or offices as in effect
immediately prior to a Change in Control, or any removal of the Executive from,
or any failure to reelect the Executive to, any such positions, except in
connection with a termination of the employment of the Executive for Cause,
disability, or as a result of the Executive's death or by the Executive other
than for Good Reason;
(ii) a reduction by the Company in the Executive's
base salary in effect immediately prior to a Change in Control;
6
<PAGE> 7
(iii) failure by the Company to continue in effect
(without substitution of a substantially equivalent plan) any compensation plan,
bonus or incentive plan, stock purchase plan, stock option plan, life insurance
plan, health plan, disability plan or other benefit plan or arrangement in which
the Executive is participating at the time of a Change in Control, or the taking
of any action by the Company which would adversely affect Executive's
participation in or materially reduce Executive's benefits under any of such
plans;
(iv) any material breach by the Company of any
provision of this Agreement;
(v) following a Change in Control, the Executive is
excluded (without substitution of a substantially equivalent plan) from
participation in any incentive, compensation, stock option, health, dental,
insurance, pension or other benefit plan generally made available to persons at
Executive's level of responsibility in the Company; or
(vi) without the Executive's express written consent,
the requirement by the Company that the Executive's principal place of
employment be relocated more than twenty-five (25) miles from his place of
employment prior to the Change in Control, or travel on the Company's business
to an extent materially greater than the Executive's customary business travel
obligations.
(e) Payment of Termination Amounts. Unless otherwise
specifically provided herein, Executive may elect to have all amounts to be paid
to Executive pursuant to this Section 6 payable (i) over the remaining term of
this Agreement or for such shorter period as expressly provided for herein, as
applicable, or (ii) in a lump sum within 30 days following termination. In the
event Executive elects to be paid pursuant to clause (i), Executive agrees
promptly to notify the Company in writing of Executive's acceptance of full-time
employment; within 15 days after receipt of such notice, the Company shall pay
Executive in a lump sum any amounts which remain otherwise due to Executive
hereunder.
(f) Stock and Similar Rights. Except with regard to the
vesting and exercise dates of Options as set forth in this Section 6,
Executive's rights under any other agreement or plan under which stock options,
restricted stock or similar awards are granted shall be determined in accordance
with the terms and provisions of such plans or agreements.
7. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in
Control" shall mean the occurrence of any of the following events which occur
after the date hereof.
(a) The acquisition of any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act ("Rule 13d-3")) of 20% or more of the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Voting Securities"); provided,
however, that neither of the following acquisitions shall constitute a Change of
Control; any acquisition by the Company or any acquisition by any employee
benefit plan (or
7
<PAGE> 8
related trust) sponsored or maintained by the Company or any corporation
controlled by the Company; or
(b) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election or nomination for election
by the stockholders of the Company, shall be approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board; or
(c) Approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case, unless in such
reorganization, merger or consolidation more than 60% of the combined voting
power of the then outstanding voting securities of the corporation resulting
from such reorganization, merger or consolidation, which may be the Company (the
"Resulting Corporation") entitled to vote generally in the election of directors
(the "Resulting Corporation Voting Securities") shall then be owned
beneficially, directly or indirectly, by all or substantially all of the Persons
who were the beneficial owners of Outstanding Voting Securities immediately
prior to such reorganization, merger or consolidation, in substantially the same
proportions as their respective ownership of Outstanding Voting Securities
immediately prior to such reorganization, merger or consolidation; no Person
(excluding the Company, any employee benefit plan (or related trust) of the
Company, the Resulting Corporation and any Person beneficially owning,
immediately prior to such reorganization, merger or consolidation, directly or
indirectly, 20% or more of the combined voting power of Outstanding Voting
Securities) shall own beneficially, directly or indirectly 20% or more of the
combined voting power of the Resulting Corporation Voting Securities; and at
least a majority of the members of the Board shall have been members of the
Incumbent Board at the time of the execution of the initial agreement providing
for such reorganization, merger or consolidation; or
(d) Approval by the stockholders of the Company of (x) a
complete liquidation or dissolution of the Company or (y) sale or other
disposition of all or substantially all of the assets of the Company, other than
to a corporation (the "Buyer") with respect to which following such sale or
other disposition, more than 60% of the combined voting power of securities of
Buyer entitled to vote generally in the election of directors ("Buyer Voting
Securities"), shall be owned beneficially, directly or indirectly, by all or
substantially all of the persons who were beneficial owners of the Outstanding
Voting Securities immediately prior to such sale or other disposition, in
substantially the same proportion as their respective ownership of Outstanding
Voting Securities, immediately prior to such sale or other disposition; no
Person (excluding the Company and any employee benefit plan (or related trust)
of the Company or Buyer and any Person that shall immediately prior to such sale
or other disposition own beneficially, directly or indirectly, 20% or more of
the combined voting power of Outstanding Voting Securities), shall own
beneficially, directly or indirectly, 20% or more of the combined voting power
or, Buyer Voting Securities; and (z) at least a majority of the members of the
board of directors of Buyer shall have been members of the Incumbent
8
<PAGE> 9
Board at the time of the execution of the initial agreement or action of the
board providing for such sale or other disposition or assets of the Company.
8. GENERAL PROVISIONS.
(a) Notices. All notices, requirements, requests, demands,
claims or other communications hereunder shall be in writing. Any notice,
requirement, request, demand, claim or other communication hereunder shall be
deemed duly given if personally delivered, when so delivered, if mailed, two (2)
business days after having been sent registered or certified mail,
return-receipt requested, postage-prepaid, and addressed to the intended
recipient as set forth below, if given by telecopier, once such notice or other
communication is transmitted to the telecopier number specified below, and the
appropriate telephonic confirmation is received, provided that such notice or
other communication is promptly thereafter mailed in accordance with the
provision of clause (ii) above or if sent through an overnight delivery service
under circumstances by which service guarantees next day delivery, the date
following the date so sent:
If to the Company to:
AAMES FINANCIAL CORPORATION
350 South Grand Avenue, 52nd Floor
Los Angeles, California 90071
Attn: Executive Vice President -- Human Resources
If to Executive:
Mr. Joseph Magnus
2695 La Cuesta Drive
Los Angeles, California 90046
Any changes to the address to which notices, requests, demands, claims and other
communications hereunder are to be delivered by giving the other party notice in
the manner herein set forth.
(b) Assignment. This Agreement and the benefits hereunder are
personal to the Company and are not assignable or transferable, nor may the
services to be performed hereunder be assigned by the Company or to any person,
firm or corporation; provided, however, that this Agreement and the benefits
hereunder may be assigned by the Company to any corporation into which the
Company may be merged or consolidated, and this Agreement and the benefits
hereunder will automatically be deemed assigned to any such corporation. The
Company may delegate any of its obligations hereunder to any subsidiary of the
Company, provided that such delegation shall not relieve the Company of any of
its obligations hereunder. Executive may not assign its rights hereunder or
delegate his duties to any Person.
9
<PAGE> 10
(c) Complete Agreement. This Agreement contains the entire
agreement among the parties hereto with respect to the subject matter hereof and
supersedes and cancels any and all previous written or oral negotiations,
commitments, understandings, agreements and any other writings or communications
in respect of such subject matter.
(d) Amendments. This Agreement may be modified, amended,
superseded or terminated only by a writing duly signed by both parties.
(e) Severability. Any provision of this Agreement which is
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability, without affecting in any way the remaining provisions hereof
in such jurisdiction, or rendering that or any other provision of this Agreement
invalid, illegal or unenforceable in any other jurisdiction.
(f) No Waiver. Any waiver by either party of a breach of any
provision of this Agreement shall not operate as or be construed to be a waiver
of any breach of such provision or of any breach of any other provision of this
Agreement. The failure of either party to insist upon strict adherence to any
term of this Agreement on one or more occasions shall not be considered a waiver
or deprive such party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement.
(g) Binding Effect. This Agreement shall be binding upon, and
shall inure to the benefit of, the parties hereto and their permitted assigns,
successors and legal representatives.
(h) Counterparts. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which when taken together shall constitute
one and the same document.
(i) Governing Law. This Agreement has been negotiated and
entered into in the State of California and shall be construed in accordance
with the laws of the State of California.
(j) Arbitration. The parties hereby expressly agree that any
controversy or claim relating to this Agreement, including the construction,
enforcement or application of the terms hereof, shall be submitted to
arbitration in Los Angeles, California by the American Arbitration Association
in accordance with Commercial Arbitration Rules of such association. The
arbitrator shall be a retired judge of the Los Angeles Superior Court or other
party acceptable to the parties and the rules of evidence shall apply. The costs
of the arbitrator shall be borne equally. Each party shall be responsible for
its own attorneys' fees and costs. However, the arbitrator shall have the right
to award costs and expenses (including actual attorneys' fees) to the prevailing
party as well as equitable relief. The award of the arbitrator shall be final
and binding and shall be enforceable in any court of competent jurisdiction.
Nothing in this paragraph shall preclude the parties from seeking an injunction
or other equitable relief from a court of competent jurisdiction under
appropriate circumstances.
10
<PAGE> 11
(k) Headings. The headings included in this Agreement are for
the convenience of the parties only and shall not affect the construction or
interpretation of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed on its behalf by its duly authorized officer and Executive has
executed the same as of the day and year first above-written.
AAMES FINANCIAL CORPORATION
By: /s/ Cary H. Thompson
--------------------------
Cary H. Thompson
Chief Executive Officer
EXECUTIVE
/s/ Joseph Magnus
--------------------------
Joseph Magnus
11
<PAGE> 1
EXHIBIT 10.5(b)
AAMES
FINANCIAL CORPORATION
JOSEPH MAGNUS
- --------------------------------------------------------------------------------
1998 -1999 EXECUTIVE INCENTIVE COMPENSATION PLAN
PLAN STRUCTURE
o The Plan will pay a cash bonus to participating executives, based on the
achievement of both the company performance objective and established
individual performance objectives.
o The Compensation Committee will ratify or approve performance objectives
annually for the five highest paid executives to the extent they
participate in the Plan, subject to amendments from time to time by the
CEO. The CEO will establish individual performance objectives for all
other Plan participants.
o Company performance objectives will be established based on the Company
budget.
o The CEO will distribute company and individual performance objectives to
each participating executive. Each individual performance objective will
be assigned a percentage weight, with the total of the individual
performance weight equaling 100%.
CALCULATIONS
o Your 1998-1999 base salary is $200,000.00.
o Your annualized target bonus for the 1998 -1999 fiscal year is
$200,000.00. Your bonus payout is calculated using this formula:
A = Your Target bonus amount
B = The achieved percent of the company performance objective
C = The Total achieved percent of your individual performance
objectives
A x B x C = Bonus payout
o When calculating the Total achieved percent of your individual performance
objectives, any performance objective not yet achieved will count as
"zero" until the objective has been completed.
AWARDS
o If you achieve less than 70% of your established individual performance
objectives, no bonus will be paid under the Plan. A bonus may be paid on a
discretionary basis, but in no event in an amount greater than the result
of A x B x C, where C is no greater than the achieved percent of your
individual performance objectives.
o If the company achieves less than 70% of its performance objective, no
bonus will be paid under the Plan. A bonus may be paid on a discretionary
basis.
o At its discretion the Compensation Committee of the Board of Directors may
choose to reward exceptional performance by increasing your target bonus
amount up to 25%.
o If you voluntarily terminate your employment or are terminated for cause
prior to the payout you will not be eligible for a bonus award (or as
required pursuant to any individual employment agreements).
- Continued -
- ----------
Initial
<PAGE> 2
JOSEPH MAGNUS
- --------------------------------------------------------------------------------
1998 -1999 EXECUTIVE INCENTIVE COMPENSATION PLAN - PAGE 2
YOUR PARTICIPATION IN THE PLAN
o The company's performance objective and your individual performance
objectives with their corresponding percentage weights are attached.
PAYMENT UNDER THE PLAN
o Payout under the Plan will be made quarterly, with an annual adjustment
made following the close of the fiscal year. Any payout will be paid on
the fifth business day following the filing of the company's quarterly or
annual report (Forms 10-Q or 10-K) with the SEC.
- Continued -
<PAGE> 3
JOSEPH MAGNUS
- --------------------------------------------------------------------------------
1998 -1999 EXECUTIVE INCENTIVE COMPENSATION PLAN - PAGE 3
COMPANY PERFORMANCE OBJECTIVE: QUARTERLY AND ANNUAL NET INCOME PER SHARE
(PER "BLUE BOOK")
-----------------------------------------
INDIVIDUAL PERFORMANCE OBJECTIVES
- --------------------------------------------------------------------------------
PROVIDE MONTHLY REPORTS ON LOAN PERFORMANCE BY CHANNEL OF ORIGINATION 10%
BY JULY 1, 1998.
- --------------------------------------------------------------------------------
ASSUME FULL RESPONSIBILITY FOR SUCCESSFUL COMPLETION OF QUARTERLY 10%
SECURITIZATIONS EFFECTIVE IMMEDIATELY.
- --------------------------------------------------------------------------------
DEVELOP, INSTALL AND MAINTAIN UNIFORM PRICING MODELS FOR ALL CHANNELS 10%
OF ORIGINATION BY JULY 1, 1998.
- --------------------------------------------------------------------------------
IDENTIFY HEDGE STRATEGY AND COSTS (INCLUDING PIPELINE AND I/O) 10%
BY SEPTEMBER 1, 1998.
- --------------------------------------------------------------------------------
DEVELOP, IMPLEMENT AND MAINTAIN WEEKLY PRICING AND PRODUCT SHEETS FOR 20%
CORRESPONDENT AND RETAIL DIVISIONS BY JULY 1, 1998.
- --------------------------------------------------------------------------------
DEVELOP AND MAINTAIN QUARTERLY ANALYSIS OF LOAN LOSSES (INCLUDING 10%
ADEQUACY OF RESERVE) BY SEPTEMBER 1, 1998.
- --------------------------------------------------------------------------------
REVIEW, CRITIQUE AND ASSIST SALES EXECUTIVES WITH NEW PRODUCT DEVELOPMENT. 10%
- --------------------------------------------------------------------------------
DEVELOP, INSTALL AND MAINTAIN LOAN LEVEL VALUATION MODEL CONCURRENT 10%
WITH LOS IMPLEMENTATION.
- --------------------------------------------------------------------------------
DEVELOP, INSTALL AND MAINTAIN AUTOMATED UNDERWRITING SYSTEM FOR RETAIL 10%
DIVISION BY MARCH 30, 1999.
- --------------------------------------------------------------------------------
TOTAL 100%
- --------------------------------------------------------------------------------
- -------------------------------------- ------------------------------------
SIGNATURE OF CHIEF EXECUTIVE OFFICER SIGNATURE OF EXECUTIVE
- -------------------------------------- ------------------------------------
DATE TITLE OF EXECUTIVE
------------------------------------
DATE
<PAGE> 1
EXHIBIT 10.7(b)
AAMES
FINANCIAL CORPORATION
MARK COSTELLO
- --------------------------------------------------------------------------------
1998 -1999 EXECUTIVE INCENTIVE COMPENSATION PLAN
PLAN STRUCTURE
o The Plan will pay a cash bonus to participating executives, based on the
achievement of both the company performance objective and established
individual performance objectives.
o The Compensation Committee will ratify or approve performance objectives
annually for the five highest paid executives to the extent they
participate in the Plan, subject to amendments from time to time by the
CEO. The CEO will establish individual performance objectives for all
other Plan participants.
o Company performance objectives will be established based on the Company
budget.
o The CEO will distribute company and individual performance objectives to
each participating executive. Each individual performance objective will
be assigned a percentage weight, with the total of the individual
performance weight equaling 100%.
CALCULATIONS
o Your 1998-1999 base salary is $225,000.00.
o Your annualized target bonus for the 1998 -1999 fiscal year is
$255,000.00. An additional $600,000.00 bonus may be payable based on bonus
accelerators.
o Your bonus payout is calculated using this formula:
A = Your Target bonus amount
B = The achieved percent of the company performance objective
C = The Total achieved percent of your individual performance
objectives
A x B x C = Bonus payout
o When calculating the Total achieved percent of your individual performance
objectives, any performance objective not yet achieved will count as
"zero" until the objective has been completed.
AWARDS
o If you achieve less than 70% of your established individual performance
objectives, no bonus will be paid under the Plan. A bonus may be paid on a
discretionary basis, but in no event in an amount greater than the result
of A x B x C, where C is no greater than the achieved percent of your
individual performance objectives.
o If the company achieves less than 70% of its performance objective, no
bonus will be paid under the Plan. A bonus may be paid on a discretionary
basis.
o At its discretion the Compensation Committee of the Board of Directors may
choose to reward exceptional performance by increasing your target bonus
amount up to 25%, excluding any bonus accelerator for increased
profitability (See Page Three "Bonus Accelerators").
- Continued -
<PAGE> 2
MARK COSTELLO
- --------------------------------------------------------------------------------
1998 -1999 EXECUTIVE INCENTIVE COMPENSATION PLAN - PAGE 2
o If you voluntarily terminate your employment or are terminated for cause
prior to the payout you will not be eligible for a bonus award (or as
required pursuant to any individual employment agreements).
YOUR PARTICIPATION IN THE PLAN
o The company's performance objective and your individual performance
objectives with their corresponding percentage weights are attached.
PAYMENT UNDER THE PLAN
o Payout under the Plan will be made quarterly, with an annual adjustment
made following the close of the fiscal year. Any payout will be paid on
the fifth business day following the filing of the company's quarterly or
annual report (Forms 10-Q or 10-K) with the SEC.
- Continued -
<PAGE> 3
MARK COSTELLO
- --------------------------------------------------------------------------------
1998 -1999 EXECUTIVE INCENTIVE COMPENSATION PLAN - PAGE 3
QUARTERLY AND ANNUAL NET INCOME PER SHARE
COMPANY PERFORMANCE OBJECTIVE: (PER "BLUE BOOK")
-----------------------------------------
INDIVIDUAL PERFORMANCE OBJECTIVES
- --------------------------------------------------------------------------------
CONSISTENTLY ACHIEVE AND MAINTAIN FORECASTED MONTHLY HEL AND HLTV 35%
VOLUME PROJECTIONS.
- --------------------------------------------------------------------------------
ACHIEVE AND MAINTAIN FORECASTED ANNUAL NET RETAIL ORIGINATION COSTS AS 20%
SET FORTH IN "BASE CASE" PLAN ATTACHED.
- --------------------------------------------------------------------------------
ESTABLISH AND MAINTAIN MONTHLY REGIONAL PRICING BY JULY 1, 1998. 5%
- --------------------------------------------------------------------------------
REDUCE AND MAINTAIN LOAN CLOSING TIMES TO 18 BUSINESS DAYS OR LESS 5%
(WITH CONSISTENT LOAN QUALITY) BY MARCH 30, 1999.
- --------------------------------------------------------------------------------
REDUCE TRAINING COSTS BY 15% AND DEVELOP TRAINING PROGRAM TO SUPPORT 5%
GROWTH PROJECTIONS BY DECEMBER 31, 1998.
- --------------------------------------------------------------------------------
DEVELOP AND MAINTAIN EFFECTIVE MARKETING PROGRAM AND REDUCE COST PER 5%
LEAD BY 5% BY JUNE 30, 1999.
- --------------------------------------------------------------------------------
SUCCESSFULLY INSTALL AND IMPLEMENT NEW LOS SYSTEM TO ALL BRANCHES BY 10%
DECEMBER 31, 1998.
- --------------------------------------------------------------------------------
OVERSEE AND MANAGE PROFITABILITY AND VOLUME OF CORRESPONDENT DIVISION 5%
INCLUDING QUARTERLY REVIEW OF CORRESPONDENTS.
- --------------------------------------------------------------------------------
SUCCESSFULLY INSTALL AND IMPLEMENT NEW CALL MANAGEMENT SYSTEM IN CALL 10%
CENTER BY MARCH 31, 1999.
- --------------------------------------------------------------------------------
BONUS ACCELERATORS FOR ACHIEVING IMPROVED PROFITABILITY (AS SET FORTH
IN "BASE CASE" PLAN ATTACHED): 50 BPS BELOW QUARTERLY "BASE CASE" NET
COST % = $25,000 ADDITIONAL* PER QUARTER ACHIEVED; 100 BPS BELOW
QUARTERLY "BASE CASE" NET COST % = $50,000 ADDITIONAL* PER QUARTER
ACHIEVED; 150 BPS BELOW QUARTERLY "BASE CASE" NET COST % = $75,000
ADDITIONAL* PER QUARTER ACHIEVED; 200 BPS BELOW QUARTERLY "BASE CASE"
NET COST % = $100,000 ADDITIONAL* PER QUARTER ACHIEVED; 250 BPS BELOW
QUARTERLY "BASE CASE" NET COST % = $125,000 ADDITIONAL* PER QUARTER
ACHIEVED; 300 BPS BELOW QUARTERLY "BASE CASE" NET COST % = $150,000
ADDITIONAL* PER QUARTER ACHIEVED. BONUS ACCELERATOR WILL BE PAID FOR
EACH QUARTER THAT IMPROVED PROFITABILITY IS ACHIEVED.
*ABOVE BASE INCENTIVE BONUS
- --------------------------------------------------------------------------------
TOTAL 100%
- --------------------------------------------------------------------------------
- -------------------------------------- ------------------------------------
SIGNATURE OF CHIEF EXECUTIVE OFFICER SIGNATURE OF EXECUTIVE
- -------------------------------------- ------------------------------------
DATE TITLE OF EXECUTIVE
------------------------------------
DATE
<PAGE> 1
EXHIBIT 10.17 (d)
NOTICE OF EXTENSION OF AGREEMENT NO. 2
September 26, 1997
Prudential Securities Credit Corporation
One New York Plaza, 12th Floor
Whole Loan Operations
New York, New York 10292-2012
Attention: Mr. Dan Lynch
Telecopy: 212-778-8876
Confirmation: 212-778-7462
1. Pursuant to the Interim Loan and Security Agreement, dated
as of November 22, 1996 (as amended from time to time, the "Agreement"), between
you and Aames Capital Corporation (the "Borrower"), the undersigned Borrower
hereby requests:
(i) that the Funding Period be extended to the period from
September 30, 1997 to but excluding December 31, 1997 (the "Termination
Date");
(ii) that the Maximum Funding Amount for the Funding Period as
so extended be increased to, for the period from September 30, 1997 to
but excluding the earlier of December 31, 1997 and the date that the
Certificates shall be issued by the Aames Mortgage Trust 1997-D, to
$250,000,000; and
(iii) that the Designated Trust in respect of the Advances to
be made during the Funding Period as so extended be until the
Certificates shall be issued for Aames Mortgage Trust 1997-D.
The undersigned Borrower agrees that, upon acceptance by the Lender of this
Notice of Extension of Agreement No. 2 by signing and dating the same below, the
Borrower will be bound by the terms of the Agreement as amended by this Notice
of Extension of Agreement in the manner set forth in this paragraph 1.
2. The undersigned Borrower hereby certifies that the
following statements are true and correct on the date hereof and shall be true
and correct on the date of the extension of the Funding Termination Date
requested herein, before and after giving effect thereto:
A. Each of the representations and warranties contained in the
Agreement, the Custodial Agreement and the Guarantee is true
and correct in all material respects; provided that the
reference to September 30, 1996 in Sections 5(a)(iv) and
5(a)(vii) of the Agreement shall be deemed to be a reference
to June 30, 1997; and
B. No Default or Event of Default has occurred and is continuing.
<PAGE> 2
3. Unless otherwise defined in this Notice of Extension of
Agreement No. 2, terms defined in the Agreement shall have their defined
meanings when used herein.
4. Except as expressly modified by this Notice of Extension of
Agreement No. 2, the Agreement shall be in full force and effect.
5. This Notice of Extension of Agreement No. 2 and the rights
and obligations of the parties hereunder and under the Agreement as amended
hereby shall be governed by, and construed and interpreted in accordance with,
the laws of the State of New York.
6. The undersigned Borrower is delivering to the Lender
herewith, or on or prior to October 10, 1997 an opinion of counsel to the
Borrower, substantially in the form of Exhibit B-1 to the Agreement. It is
expressly agreed by the Borrower that if the opinion of counsel referred to in
this paragraph 6 is not delivered to the Lender on or prior to October 10, 1997,
the extension provided for in this Notice of Extension of Agreement No. 2, and
the Lender's obligation to make Advances, shall automatically terminate and be
of no further force or effect.
IN WITNESS WHEREOF, the undersigned Borrower has caused this
Notice of Extension of Agreement No. 2 to be executed and delivered by its
proper and duly authorized officers as of the day and year first above written.
AAMES CAPITAL CORPORATION
By: /s/ Mark Elbaum
------------------------------------
Name: Mark Elbaum
Title: Senior Vice President-Finance
and Chief Accounting Officer
AGREED TO AND ACCEPTED:
PRUDENTIAL SECURITIES CREDIT
CORPORATION
By: /s/ Jeffrey K. French
-------------------------------
Name: Jeffrey K. French
Title: Vice President
Date: September 26, 1997
<PAGE> 3
[LETTERHEAD OF COUNSEL TO THE BORROWER AND THE GUARANTOR]
______________ ___, 1997
Prudential Securities Credit Corporation
One New York Plaza
New York, New York 10292-2012
Gentlemen:
I am counsel to Aames Capital Corporation, a California
corporation (the "Borrower"), and Aames Financial Corporation, a Delaware
corporation (the "Guarantor"), and have acted as such in connection with the
execution and delivery of the following documents:
(i) the Interim Loan and Security Agreement, dated as of
November 22, 1996 (the "Interim Loan Agreement"), between Prudential
Securities Credit Corporation (the "Lender") and the Borrower;
(ii) the Secured Note (the "Note") dated November 22, 1996,
made by the Borrower in favor of the Lender and the Endorsement, dated
March 31, 1997, to the Secured Note (the "Endorsement");
(iii) the Custodial Agreement, dated as of November 22, 1996,
(the "Custodial Agreement"), among the Borrower, the Lender and Bankers
Trust Company of California, N.A. (the "Custodian");
(iv) the Intercreditor and Joint Shipment Agreement, dated as
of November 22, 1996 (the "Intercreditor Agreement"), among NationsBank
of Texas, N.A. and the Custodian, as joint custodians, the Lender and
the Borrower;
(v) the Guarantee, dated as of November 22, 1996 (the
"Guarantee"), made by the Guarantor in favor of the Lender; and
(vi) the Notice of Extension of Agreement No. 2, dated
September 26, 1997 (the "Notice of Extension"), between the Borrower
and the Lender.
<PAGE> 4
This opinion is being delivered to you pursuant to Section
2(a) of the Interim Loan Agreement. Capitalized terms used herein and not
defined herein shall have the meanings assigned to them in the Interim Loan
Agreement.
I have examined executed copies of the Interim Loan Agreement,
the Note, the Intercreditor Agreement, the Custodial Agreement, the Guarantee
,the Endorsement and the Notice of Extension. I have also examined originals or
photostatic or certified copies of all such corporate records of the Borrower,
and such certificates of public officials, certificates of corporate officers,
and other documents, as I have deemed appropriate and necessary as a basis for
the opinions hereinafter expressed. In making my examination and rendering the
opinions hereinafter expressed I have assumed that each party to each of the
Interim Loan Agreement, the Intercreditor Agreement and the Custodial Agreement
(other than the Borrower) has the corporate power to enter into and perform all
of its obligations thereunder, (ii) the due authorization, execution and
delivery of each of the Interim Loan Agreement, the Intercreditor Agreement and
the Custodial Agreement by the parties thereto (other than the Borrower) and
(iii) the validity and binding effect on the parties thereto (other than the
Borrower) of each of the Interim Loan Agreement, the Intercreditor Agreement and
the Custodial Agreement.
The opinions expressed below with respect to enforceability
are subject to the following additional qualifications:
(a) The effect of bankruptcy, insolvency, reorganization,
moratorium, receivership, or other similar laws of general
applicability relating to or affecting creditors' rights generally in
the event of bankruptcy, insolvency, reorganization, moratorium or
receivership.
(b) The application of general principles of equity,
including, but not limited to, the right of specific performance
(regardless of whether enforceability is considered in a proceeding in
equity or at law).
Based upon the foregoing, I am of the opinion that:
1. The Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the State of California.
2. The Borrower has the corporate power and legal right to
execute and deliver the Endorsement and the Notice of Extension, to borrow under
the Interim Loan Agreement, as amended by the Notice of Extension, and the Note
as amended by the Endorsement, and to grant liens under the Interim Loan
Agreement, as amended by the Notice of Extension, and has taken all necessary
corporate action to authorize such borrowing and such granting of liens upon the
terms and conditions of the Interim Loan Agreement, as amended by the Notice of
Extension, and to authorize the execution and delivery of the Notice of
Extension. The Borrower is duly licensed as a licensee or is otherwise qualified
in each state in which its ownership of property or the conduct of its business
requires such licensure or qualification and where failure to be so licensed or
qualified would have a material adverse effect on the business of the Borrower,
on the Collateral, on the ability of the Borrower to pay
<PAGE> 5
or perform the Secured Obligations or on the rights and remedies of the Lender
under the Interim Loan Agreement, the Note, the Custodial Agreement, the
Intercreditor Agreement or the Guarantee, and the Borrower is, to our knowledge,
in compliance in all material respects with each such state's applicable
statutes, laws, rules and regulations. No consent of any other Person
(including, without limitation, stockholders of the Borrower), and no consent,
license, permit, approval or authorization of, or registration or declaration
with, any governmental authority, bureau of agency is required connection with
the execution and delivery of the Endorsement and the Notice of Extension or the
enforceability of each of the Interim Loan Agreement, as amended by the Notice
of Extension, and the Note as amended by the Endorsement.
3. Each of the Interim Loan Agreement, as amended by the
Notice of Extension, the Note as amended by the Endorsement, the Intercreditor
Agreement and the Custodial Agreement constitutes the legal, valid, and binding
obligation of the Borrower enforceable against the Borrower in accordance with
its respective terms.
4. The Guarantee constitutes the legal, valid, and binding
obligation of the Guarantor enforceable against the Guarantor in accordance with
its terms.
5. The execution and delivery of the Notice of Extension and
the performance of each of the Interim Loan Agreement, as amended by the Notice
of Extension, and the Note as amended by the Endorsement will not violate any
provision of any existing Federal laws or the laws of the State of California or
of the charter or by-laws of the Borrower or of any mortgage, indenture,
contract or other undertaking to which, to the best of my knowledge (after due
inquiry), the Borrower is a party or which is binding upon it or its assets,
and, to the best of my knowledge (after due inquiry), will not result in the
creation or imposition of any lien, charge or encumbrance on any of its assets
pursuant to the provisions of any of the foregoing.
6. No litigation or administrative proceeding of or before any
governmental authority or court is currently pending, or, to the best of my
knowledge (after due inquiry), threatened, against the Borrower or its assets,
the liability with respect to which is likely to be material to the financial
position or results of operations of the Borrower.
7. Assuming that the Lender acquired the promissory notes (the
"Mortgage Notes") evidencing the Mortgage Loans for value, the Interim Loan
Agreement, as amended by the Notice of Extension, creates in favor of the Lender
a security interest under the Uniform Commercial Code (the "UCC") as currently
in effect in New York in all rights of the Borrower in the Mortgage Notes.
Provided that on the date hereof (i) the Custodian has acquired and maintains
continuous possession of the Mortgage Notes within the State of California and
(ii) the Custodian is acting on behalf of the Lender in accordance with the
terms of the Custodial Agreement and no other agreements or understandings,
written or oral, govern the relationship between the Custodian and the Lender,
then, the security interest in the Mortgage Notes granted by the Borrower to the
Lender will be, on the date of possession of
<PAGE> 6
the Mortgage Notes by the Custodian, perfected and prior to any other security
interest which can be perfected under the Uniform Commercial Code as currently
in effect in California.
I am admitted to practice law in the State of California, and
the foregoing opinions are limited to the Federal laws of the United States, the
Delaware General Corporation Law and the laws of the State of California. I note
that the Interim Loan Agreement, the Note, the Custodial Agreement and the
Guarantee are governed by the law of the State of New York and, with your
consent, I have assumed for purposes of Paragraphs 3, 4 and the first sentence
of Paragraph 11 of this opinion that the law of the State of New York is
identical to the law of the State of California.
Sincerely yours,
<PAGE> 1
EXHIBIT 10.17(e)
NOTICE OF EXTENSION OF AGREEMENT NO. 3
December 29, 1997
Prudential Securities Credit Corporation
One New York Plaza, 12th Floor
Whole Loan Operations
New York, New York 10292-2012
Attention: Mr. Dan Lynch
Telecopy: 212-778-8876
Confirmation: 212-778-7462
1. Pursuant to the Interim Loan and Security Agreement, dated
as of November 22, 1996 (as amended from time to time, the "Agreement"), between
you and Aames Capital Corporation (the "Borrower"), the undersigned Borrower
hereby requests:
(i) that the Funding Period be extended to the period from
December 30, 1997 to but excluding March 31, 1998 (the "Termination
Date");
(ii) that the Maximum Funding Amount for the Funding Period as
so extended be decreased to, for the period from December 31, 1997 to
but excluding March 31, 1998, to $250,000,000; and
(iii) that the Designated Trust in respect of the Advances to
be made during the Funding Period as so extended be until the
Certificates shall be issued for Aames Mortgage Trust 1998-A.
The undersigned Borrower agrees that, upon acceptance by the Lender of this
Notice of Extension of Agreement No. 3 by signing and dating the same below, the
Borrower will be bound by the terms of the Agreement as amended by this Notice
of Extension of Agreement in the manner set forth in this paragraph 1.
2. The undersigned Borrower hereby certifies that the
following statements are true and correct on the date hereof and shall be true
and correct on the date of the extension of the Funding Termination Date
requested herein, before and after giving effect thereto:
A. Each of the representations and warranties contained in the
Agreement, the Custodial Agreement and the Guarantee is true and
correct in all material respects; and
B. No Default or Event of Default has occurred and is continuing.
3. Unless otherwise defined in this Notice of Extension of
Agreement No. 3, terms defined in the Agreement shall have their defined
meanings when used herein.
<PAGE> 2
4. Except as expressly modified by this Notice of Extension of
Agreement No. 3, the Agreement shall be in full force and effect.
5. This Notice of Extension of Agreement No. 3 and the rights
and obligations of the parties hereunder and under the Agreement as amended
hereby shall be governed by, and construed and interpreted in accordance with,
the laws of the State of New York.
6. The undersigned Borrower is delivering to the Lender
herewith, or on or prior to January 5, 1998 an opinion of counsel to the
Borrower, substantially in the form of Exhibit B-1 to the Agreement. It is
expressly agreed by the Borrower that if the opinion of counsel referred to in
this paragraph 6 is not delivered to the Lender on or prior to January 5, 1998,
the extension provided for in this Notice of Extension of Agreement No. 3, and
the Lender's obligation to make Advances, shall automatically terminate and be
of no further force or effect.
IN WITNESS WHEREOF, the undersigned Borrower has caused this
Notice of Extension of Agreement No. 3 to be executed and delivered by its
proper and duly authorized officers as of the day and year first above written.
AAMES CAPITAL CORPORATION
By: /s/ Mark E. Elbaum
--------------------------
Name:
Title:
AGREED TO AND ACCEPTED:
PRUDENTIAL SECURITIES CREDIT
CORPORATION
By: /s/ Jeffrey K. French
------------------------------
Name: Jeffrey K. French
Title: Vice President
Date: December 29, 1997
<PAGE> 3
[LETTERHEAD OF COUNSEL TO THE BORROWER AND THE GUARANTOR]
-------------- ---, --------
Prudential Securities Credit Corporation
One New York Plaza
New York, New York 10292-2012
Gentlemen:
I am counsel to Aames Capital Corporation, a California
corporation (the "Borrower"), and Aames Financial Corporation, a Delaware
corporation (the "Guarantor"), and have acted as such in connection with the
execution and delivery of the following documents:
(i) the Interim Loan and Security Agreement, dated as of
November 22, 1996 (the "Interim Loan Agreement"), between Prudential
Securities Credit Corporation (the "Lender") and the Borrower;
(ii) the Secured Note (the "Original Note") dated November 22,
1996, made by the Borrower in favor of the Lender, the Endorsement,
dated March 31, 1997, to the Secured Note ("Endorsement No. 1"); the
Endorsement, dated December 12, 1997, to the Secured Note (Endorsement
No. 2; the Original Note, as amended by Endorsement No. 1 and
Endorsement No. 2 is referred to as the "Note");
(iii) the Custodial Agreement, dated as of November 22, 1996,
(the "Custodial Agreement"), among the Borrower, the Lender and Bankers
Trust Company of California, N.A. (the "Custodian");
(iv) the Intercreditor and Joint Shipment Agreement, dated as
of November 22, 1996 (the "Intercreditor Agreement"), among NationsBank
of Texas, N.A. and the Custodian, as joint custodians, the Lender and
the Borrower;
(v) the Guarantee, dated as of November 22, 1996 (the
"Guarantee"), made by the Guarantor in favor of the Lender;
(vi) the Notice of Extension of Agreement No. 1, dated May 15,
1997 with effect as of March 31, 1997 ("Notice of Extension No. 1"),
between the Borrower and the Lender, the Notice of Extension of
Agreement No. 2, dated September 26,
<PAGE> 4
1997("Notice of Extension No. 2"), between the Borrower and the Lender
and the Notice of Extension of Agreement No. 3, dated as of December
___, 1997 ("Notice of Extension No. 3"; together with Notice of
Extension No. 1 and Notice of Extension No. 2, the "Notices of
Extension"), between the Borrower and the Lender; and
(vii) the Amendment, dated as of August 19, 1997 (the "First
Amendment"), between the Borrower and the Lender, the Letter of
Amendment, dated as of December 12, 1997 (the "Letter of Amendment"),
between the Borrower and the Lender, and the Amendment, dated as of
December ___, 1997 (the "Third Amendment" and, together with the First
Amendment and the Letter of Amendment, the "Amendments"; the Original
Interim Loan Agreement, as amended by the Notices of Extension and the
Amendments, is referred to as the "Interim Loan Agreement"), between
the Borrower and the Lender.
This opinion is being delivered to you pursuant to Section
2(a) of the Interim Loan Agreement. Capitalized terms used herein and not
defined herein shall have the meanings assigned to them in the Interim Loan
Agreement.
I have examined executed copies of the Interim Loan Agreement,
the Note, the Intercreditor Agreement, the Custodial Agreement, the Guarantee,
the Notices of Extension and the Amendments. I have also examined originals or
photostatic or certified copies of all such corporate records of the Borrower,
and such certificates of public officials, certificates of corporate officers,
and other documents, as I have deemed appropriate and necessary as a basis for
the opinions hereinafter expressed. In making my examination and rendering the
opinions hereinafter expressed I have assumed that each party to each of the
Interim Loan Agreement, the Intercreditor Agreement, and the Custodial Agreement
(other than the Borrower) has the corporate power to enter into and perform all
of its obligations thereunder, (ii) the due authorization, execution and
delivery of each of the Interim Loan Agreement, the Intercreditor Agreement and
the Custodial Agreement by the parties thereto (other than the Borrower) and
(iii) the validity and binding effect on the parties thereto (other than the
Borrower) of each of the Interim Loan Agreement, the Intercreditor Agreement and
the Custodial Agreement.
The opinions expressed below with respect to enforceability
are subject to the following additional qualifications:
(a) The effect of bankruptcy, insolvency, reorganization,
moratorium, receivership, or other similar laws of general
applicability relating to or affecting creditors' rights generally in
the event of bankruptcy, insolvency, reorganization, moratorium or
receivership.
(b) The application of general principles of equity,
including, but not limited to, the right of specific performance
(regardless of whether enforceability is considered in a proceeding in
equity or at law).
Based upon the foregoing, I am of the opinion that:
<PAGE> 5
1. The Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the State of California.
2. The Borrower has the corporate power and legal right to
execute and deliver the Endorsement and the Notice of Extension, to borrow under
the Interim Loan Agreement, as amended by the Notice of Extension, and the Note
as amended by the Endorsement, and to grant liens under the Interim Loan
Agreement, as amended by the Notice of Extension, and has taken all necessary
corporate action to authorize such borrowing and such granting of liens upon the
terms and conditions of the Interim Loan Agreement, as amended by the Notice of
Extension, and to authorize the execution and delivery of the Notice of
Extension. The Borrower is duly licensed as a licensee or is otherwise qualified
in each state in which its ownership of property or the conduct of its business
requires such licensure or qualification and where failure to be so licensed or
qualified would have a material adverse effect on the business of the Borrower,
on the Collateral, on the ability of the Borrower to pay or perform the Secured
Obligations or on the rights and remedies of the Lender under the Interim Loan
Agreement, the Note, the Custodial Agreement, the Intercreditor Agreement or the
Guarantee, and the Borrower is, to our knowledge, in compliance in all material
respects with each such state's applicable statutes, laws, rules and
regulations. No consent of any other Person (including, without limitation,
stockholders of the Borrower), and no consent, license, permit, approval or
authorization of, or registration or declaration with, any governmental
authority, bureau of agency is required connection with the execution and
delivery of the Endorsement and the Notice of Extension or the enforceability of
each of the Interim Loan Agreement, as amended by the Notice of Extension, and
the Note as amended by the Endorsement.
3. Each of the Interim Loan Agreement, the Note, the
Intercreditor Agreement and the Custodial Agreement constitutes the legal,
valid, and binding obligation of the Borrower enforceable against the Borrower
in accordance with its respective terms.
4. The Guarantee constitutes the legal, valid, and binding
obligation of the Guarantor enforceable against the Guarantor in accordance with
its terms.
5. The execution and delivery of Notice of Extension No. 3 and
the performance of each of the Interim Loan Agreement and the Note will not
violate any provision of any existing Federal laws or the laws of the State of
California or of the charter or by-laws of the Borrower or of any mortgage,
indenture, contract or other undertaking to which, to the best of my knowledge
(after due inquiry), the Borrower is a party or which is binding upon it or its
assets, and, to the best of my knowledge (after due inquiry), will not result in
the creation or imposition of any lien, charge or encumbrance on any of its
assets pursuant to the provisions of any of the foregoing.
6. No litigation or administrative proceeding of or before any
governmental authority or court is currently pending, or, to the best of my
knowledge (after due inquiry), threatened, against the Borrower or its assets,
the liability with respect to which is likely to be material to the financial
position or results of operations of the Borrower.
<PAGE> 6
7. Assuming that the Lender acquired the promissory notes (the
"Mortgage Notes") evidencing the Mortgage Loans for value, the Interim Loan
Agreement, as amended by the Notice of Extension, creates in favor of the Lender
a security interest under the Uniform Commercial Code (the "UCC") as currently
in effect in New York in all rights of the Borrower in the Mortgage Notes.
Provided that on the date hereof (i) the Custodian has acquired and maintains
continuous possession of the Mortgage Notes within the State of California and
(ii) the Custodian is acting on behalf of the Lender in accordance with the
terms of the Custodial Agreement and no other agreements or understandings,
written or oral, govern the relationship between the Custodian and the Lender,
then, the security interest in the Mortgage Notes granted by the Borrower to the
Lender will be, on the date of possession of the Mortgage Notes by the
Custodian, perfected and prior to any other security interest which can be
perfected under the Uniform Commercial Code as currently in effect in
California.
I am admitted to practice law in the State of California, and
the foregoing opinions are limited to the Federal laws of the United States, the
Delaware General Corporation Law and the laws of the State of California. I note
that the Interim Loan Agreement, the Note, the Custodial Agreement and the
Guarantee are governed by the law of the State of New York and, with your
consent, I have assumed for purposes of Paragraphs 3, 4 and the first sentence
of Paragraph 11 of this opinion that the law of the State of New York is
identical to the law of the State of California.
Sincerely yours,
<PAGE> 1
EXHIBIT 10.17(f)
LETTER OF AMENDMENT
December 12, 1997
Prudential Securities Credit Corporation
One New York Plaza, 12th Floor
Whole Loan Operations
New York, New York 10292-2012
Attention: Mr. Dan Lynch
Telecopy: 212-778-8876
Confirmation: 212-778-7462
1. Pursuant to the Interim Loan and Security Agreement, dated
as of November 22, 1996 (as amended from time to time, the "Agreement"), between
you and Aames Capital Corporation (the "Borrower"), the undersigned Borrower
hereby requests:
(i) subject to the condition set forth in paragraph 2, that
the Maximum Funding Amount for the Funding Period be increased to, for
the period from September 30, 1997 to but excluding the earlier of
December 31, 1997 and the date that the Certificates shall be issued by
the Aames Mortgage Trust 1997-D, to $325,000,000; provided that, if the
Aames Mortgage Trust 1997-D shall fail to issue the Certificates on or
prior to December 19, 1997, interest shall accrue on the $75,000,000 by
which the Maximum Funding Amount was increased at a rate of $2,500 per
day for each day of the Funding Period following December 19, 1997; and
(ii) that the Designated Trust in respect of the Advances to
be made during the Funding Period as so extended be Aames Mortgage
Trust 1997-D.
The undersigned Borrower agrees that, upon acceptance by the Lender of this
Letter of Amendment by signing and dating the same below, the Borrower will be
bound by the terms of the Agreement as amended by this Letter of Amendment in
the manner set forth in this paragraph 1.
2. The Lender agrees to make the above-referenced increase in
the Maximum Funding Amount, subject to the condition that Aames Financial
Corporation or a wholly-owned subsidiary thereof ("Aames") agrees to appoint the
Lender as lead manager for one of the anticipated securitizations of home equity
loan assets by Aames which occurs in the first or second calendar quarter of
1998.
<PAGE> 2
3. The undersigned Borrower hereby certifies that the
following statements are true and correct on the date hereof and shall be true
and correct on the date of the increase of the Maximum Funding Amount requested
herein, before and after giving effect thereto:
A. Each of the representations and warranties contained in the
Agreement, the Custodial Agreement and the Guarantee is true
and correct in all material respects; provided that the
reference to September 30, 1996 in Sections 5(a)(iv) and
5(a)(vii) of the Agreement shall be deemed to be a reference
to June 30, 1997; and
B. No Default or Event of Default has occurred and is continuing.
4. Unless otherwise defined in this Letter of Amendment, terms
defined in the Agreement shall have their defined meanings when used herein.
5. Except as expressly modified by this Letter of Amendment,
the Agreement shall be in full force and effect.
6. This Letter of Amendment and the rights and obligations of
the parties hereunder and under the Agreement as amended hereby shall be
governed by, and construed and interpreted in accordance with, the laws of the
State of New York.
7. The undersigned Borrower is delivering to the Lender
herewith, or on or prior to December 26, 1997 an opinion of counsel to the
Borrower, substantially in the form of Exhibit B-1 to the Agreement. It is
expressly agreed by the Borrower that if the opinion of counsel referred to in
this paragraph 6 is not delivered to the Lender on or prior to December 26,
1997, the extension provided for in this Letter of Amendment, and the Lender's
obligation to make Advances, shall automatically terminate and be of no further
force or effect.
SIGNATURE PAGE FOLLOWS
<PAGE> 3
IN WITNESS WHEREOF, the undersigned Borrower has caused this
Letter of Amendment to be executed and delivered by its proper and duly
authorized officers as of the day and year first above written.
AAMES CAPITAL CORPORATION
By: /s/ Mark E. Elbaum
--------------------------
Name: Mark E. Elbaum
Title: Senior Vice President-Finance
AGREED TO AND ACCEPTED:
PRUDENTIAL SECURITIES CREDIT
CORPORATION
By: /s/ Jeffrey K. French
-----------------------------
Name: Jeffrey K. French
Title: Vice President
Date: December 12, 1997
<PAGE> 4
SECURED NOTE
ENDORSEMENT NO. 2
December 12, 1997
The undersigned Borrower hereby agrees with Prudential
Securities Credit Corporation (the "Lender") that the Secured Note of the
Borrower, dated November 22, 1996, as it may have been previously amended by
endorsement, in the maximum principal amount of $250,000,000, to which this
Secured Note Endorsement No. 2 is attached, is hereby amended by changing the
maximum principal amount of the Secured Note to $325,000,000.
This Secured Note Endorsement No. 2 is given as a renewal,
rearrangement and extension of the obligations of the Borrower to the Lender
under the Secured Note and is not given in substitution therefor or
extinguishment thereof. The Borrower hereby authorizes the Lender to attach this
Secured Note Endorsement No. 2 to the Secured Note.
Borrower: AAMES CAPITAL CORPORATION
By:_____________________________
Name:
Title:
Lender: PRUDENTIAL SECURITIES CREDIT
CORPORATION
By:_____________________________
Name:
Title:
<PAGE> 5
[LETTERHEAD OF COUNSEL TO THE BORROWER AND THE GUARANTOR]
______________ ___, 1997
Prudential Securities Credit Corporation
One New York Plaza
New York, New York 10292-2012
Gentlemen:
I am counsel to Aames Capital Corporation, a California
corporation (the "Borrower"), and Aames Financial Corporation, a Delaware
corporation (the "Guarantor"), and have acted as such in connection with the
execution and delivery of the following documents:
(i) the Interim Loan and Security Agreement, dated as of
November 22, 1996, (the "Interim Loan Agreement"), between Prudential
Securities Credit Corporation (the "Lender") and the Borrower;
(ii) the Secured Note (the "Note") dated November 22, 1996,
made by the Borrower in favor of the Lender and the Endorsement, dated
December 12, 1997, to the Secured Note (the "Endorsement");
(iii) the Custodial Agreement, dated as of November 22, 1996,
(the "Custodial Agreement"), among the Borrower, the Lender and Bankers
Trust Company of California, N.A. (the "Custodian");
(iv) the Intercreditor and Joint Shipment Agreement, dated as
of November 22, 1996 (the "Intercreditor Agreement"), among NationsBank
of Texas, N.A. and the Custodian, as joint custodians, the Lender and
the Borrower;
(v) the Guarantee, dated as of November 22, 1996 (the
"Guarantee"), made by the Guarantor in favor of the Lender; and
(vi) the Letter of Amendment, dated December 12, 1997 (the
"Letter of Amendment"), between the Borrower and the Lender.
This opinion is being delivered to you pursuant to Section
2(a) of the Interim Loan Agreement. Capitalized terms used herein and not
defined herein shall have the meanings assigned to them in the Interim Loan
Agreement.
<PAGE> 6
I have examined executed copies of the Interim Loan Agreement,
the Note, the Intercreditor Agreement, the Custodial Agreement, the Guarantee,
the Endorsement and the Letter of Amendment. I have also examined originals or
photostatic or certified copies of all such corporate records of the Borrower,
and such certificates of public officials, certificates of corporate officers,
and other documents, as I have deemed appropriate and necessary as a basis for
the opinions hereinafter expressed. In making my examination and rendering the
opinions hereinafter expressed I have assumed that each party to each of the
Interim Loan Agreement, the Intercreditor Agreement and the Custodial Agreement
(other than the Borrower) has the corporate power to enter into and perform all
of its obligations thereunder, (ii) the due authorization, execution and
delivery of each of the Interim Loan Agreement, the Intercreditor Agreement and
the Custodial Agreement by the parties thereto (other than the Borrower) and
(iii) the validity and binding effect on the parties thereto (other than the
Borrower) of each of the Interim Loan Agreement, the Intercreditor Agreement and
the Custodial Agreement.
The opinions expressed below with respect to enforceability
are subject to the following additional qualifications:
(a) The effect of bankruptcy, insolvency, reorganization,
moratorium, receivership, or other similar laws of general
applicability relating to or affecting creditors' rights generally in
the event of bankruptcy, insolvency, reorganization, moratorium or
receivership.
(b) The application of general principles of equity,
including, but not limited to, the right of specific performance
(regardless of whether enforceability is considered in a proceeding in
equity or at law).
Based upon the foregoing, I am of the opinion that:
1. The Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the State of California.
2. The Borrower has the corporate power and legal right to
execute and deliver the Endorsement and the Letter of Amendment, to borrow under
the Interim Loan Agreement, as amended by the Letter of Amendment, and the Note
as amended by the Endorsement, and to grant liens under the Interim Loan
Agreement, as amended by the Letter of Amendment, and has taken all necessary
corporate action to authorize such borrowing and such granting of liens upon the
terms and conditions of the Interim Loan Agreement, as amended by the Letter of
Amendment, and to authorize the execution and delivery of the Letter of
Amendment. The Borrower is duly licensed as a licensee or is otherwise qualified
in each state in which its ownership of property or the conduct of its business
requires such licensure or qualification and where failure to be so licensed or
qualified would have a material adverse effect on the business of the Borrower,
on the Collateral, on the ability of the Borrower to pay or perform the Secured
Obligations or on the rights and remedies of the Lender under the Interim Loan
Agreement, the Note, the Custodial Agreement, the Intercreditor Agreement or the
Guarantee, and the Borrower is, to our knowledge, in compliance in all material
respects with each such state's applicable statutes, laws, rules and
regulations. No consent of any other
<PAGE> 7
Person (including, without limitation, stockholders of the Borrower), and no
consent, license, permit, approval or authorization of, or registration or
declaration with, any governmental authority, bureau of agency is required
connection with the execution and delivery of the Endorsement and the Letter of
Amendment or the enforceability of each of the Interim Loan Agreement, as
amended by the Letter of Amendment, and the Note, as amended by the Endorsement.
3. Each of the Interim Loan Agreement, as amended by the
Letter of Amendment, the Note, as amended by the Endorsement, the Intercreditor
Agreement and the Custodial Agreement constitutes the legal, valid, and binding
obligation of the Borrower enforceable against the Borrower in accordance with
its respective terms.
4. The Guarantee constitutes the legal, valid, and binding
obligation of the Guarantor enforceable against the Guarantor in accordance with
its terms.
5. The execution and delivery of the Letter of Amendment and
the performance of each of the Interim Loan Agreement, as amended by the Letter
of Amendment, and the Note, as amended by the Endorsement, will not violate any
provision of any existing Federal laws or the laws of the State of California or
of the charter or by-laws of the Borrower or of any mortgage, indenture,
contract or other undertaking to which, to the best of my knowledge (after due
inquiry), the Borrower is a party or which is binding upon it or its assets,
and, to the best of my knowledge (after due inquiry), will not result in the
creation or imposition of any lien, charge or encumbrance on any of its assets
pursuant to the provisions of any of the foregoing.
6. No litigation or administrative proceeding of or before any
governmental authority or court is currently pending, or, to the best of my
knowledge (after due inquiry), threatened, against the Borrower or its assets,
the liability with respect to which is likely to be material to the financial
position or results of operations of the Borrower.
7. Assuming that the Lender acquired the promissory notes (the
"Mortgage Notes") evidencing the Mortgage Loans for value, the Interim Loan
Agreement, as amended by the Letter of Amendment, creates in favor of the Lender
a security interest under the Uniform Commercial Code (the "UCC") as currently
in effect in New York in all rights of the Borrower in the Mortgage Notes.
Provided that on the date hereof (i) the Custodian has acquired and maintains
continuous possession of the Mortgage Notes within the State of California and
(ii) the Custodian is acting on behalf of the Lender in accordance with the
terms of the Custodial Agreement and no other agreements or understandings,
written or oral, govern the relationship between the Custodian and the Lender,
then, the security interest in the Mortgage Notes granted by the Borrower to the
Lender will be, on the date of possession of the Mortgage Notes by the
Custodian, perfected and prior to any other security interest which can be
perfected under the Uniform Commercial Code as currently in effect in
California.
I am admitted to practice law in the State of California, and
the foregoing opinions are limited to the Federal laws of the United States, the
Delaware General Corporation Law and the laws of the State of California. I note
that the Interim Loan
<PAGE> 8
Agreement, the Note, the Custodial Agreement and the Guarantee are governed by
the law of the State of New York and, with your consent, I have assumed for
purposes of Paragraphs 3, 4 and the first sentence of Paragraph 11 of this
opinion that the law of the State of New York is identical to the law of the
State of California.
Sincerely yours,
<PAGE> 1
EXHIBIT 10.17(g)
AMENDMENT
AMENDMENT, dated as of December 29, 1997 (this "Amendment"), between
AAMES CAPITAL CORPORATION, a California corporation (the "Borrower"), and
PRUDENTIAL SECURITIES CREDIT CORPORATION, a Delaware corporation (the "Lender")
to the Interim Loan and Security Agreement, dated as of November 22, 1996,
between the Borrower and the Lender (as amended by (i) that certain Amendment,
dated as of August 19, 1997, between the Borrower and the Lender, and (ii) that
certain Letter of Amendment, dated as of December 12, 1997, between the Borrower
and the Lender and as modified by that certain (i) Notice of Extension of
Agreement No. 1, dated May 15, 1997 with effect as of March 31, 1997, (ii)
Notice of Extension of Agreement No. 2, dated as of September 26, 1997, and
(iii) Notice of Extension of Agreement No. 3, dated as of December 29, 1997, and
as otherwise amended, supplemented or otherwise modified prior to the date
hereof, the "Agreement").
RECITALS
The Borrower has requested the Lender to agree to amend certain
provisions of the Agreement as set forth in this Amendment. The Lender is
willing to agree to such amendments, but only on the terms and subject to the
conditions set forth in this Amendment.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Borrower and the Lender hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in the
Agreement are used herein as therein defined.
2. Amendments. (a) Subsection 5(a)(iv) of the Agreement is hereby
amended by deleting the date "September 30, 1996" set forth therein and
substituting in lieu thereof the date "September 30, 1997";
(b) Subsection 5(a)(vii) of the Agreement is hereby amended by deleting
the date "September 30, 1996" set forth therein and substituting in lieu thereof
the date "June 30, 1997";
(c) The Agreement is hereby amended by deleting subsection 7(f) and
substituting in lieu thereof a new subsection 7(f) to read in its entirety as
follows:
"(f) Notices. The Borrower will notify the Lender promptly, in
reasonable detail and in accordance with Section 21 of this Agreement,
(i) of any lien or security interest (other than security interests
created hereby) on, or claim asserted against, any of the Collateral,
(ii) of the occurrence of any other event which could reasonably be
<PAGE> 2
expected to have a material adverse effect on the aggregate market
value of the Collateral or on the security interests created hereunder,
(iii) of the existence of circumstances requiring the Borrower, or
permitting the Lender to require the Borrower, to prepay the Advances
pursuant to Section 2(l), Section 8(b) or Section 12 hereof, (iv) of
any amendments or waivers to the covenants applicable to the Guarantor
under that certain Indenture of Trust, dated as of February 1, 1995 (as
amended from time to time, the "10.50% Senior Note Indenture"), between
the Guarantor and Bankers Trust Company of California, N.A., as
trustee, and relating to the issuance by the Guarantor of $23,000,000
of 10.50% Senior Notes due 2002 (the "10.50% Senior Notes"), and (v) of
any amendments or waivers to the covenants applicable to the Guarantor
under those certain Indenture and First Supplemental Indenture, each
dated as of October 21, 1996 (together with the 10.50% Senior Note
Indenture and as amended from time to time, the "Aames Note
Indentures"), between the Guarantor and The Chase Manhattan Bank, as
trustee, and relating to the issuance by the Guarantor of $150,000,000
of 9.125% Senior Notes due 2003 (together with the 10.50% Senior Notes,
the "Senior Notes").";
(d) The Agreement is hereby amended by deleting subsection
7(i) and substituting in lieu thereof a new subsection 7(i) to read in
its entirety as follows:
"(i) Line of Credit. The Borrower shall maintain in
full force and effect the Amended and Restated Mortgage Loan
Warehousing Agreement, dated as of January 15, 1997, among the
Borrower, the Guarantor, the lenders from time to time parties
thereto and NationsBank of Texas, N.A., as administrative
agent (the "NationsBank Credit Agreement"), providing for a
credit commitment of not less than $350,000,000 (or a
substitute bank credit line with such lenders, providing for a
credit commitment of not less than $350,000,000 and upon such
terms as shall be satisfactory to the Lender) (the NationsBank
Credit Agreement or such substitute credit agreement being
referred to herein as the "Bank Credit Agreement"), and the
Borrower shall not consent to any amendment, supplement or
modification to the Bank Credit Agreement which would have a
material adverse effect on the Lender's rights and remedies
hereunder or under the Intercreditor Agreement, without the
prior written consent of the Lender.";
(e) Section 12 of the Agreement is hereby amended by deleting
the number "five (5)" set forth therein and substituting in lieu
thereof the number "ten (10)";
(f) Subsection 13(j) of the Agreement is hereby amended by
deleting the words "Aames Note Indenture" set forth therein and
substituting in lieu thereof the words "Aames Note Indentures"; and
(g) Section 22 of the Agreement is hereby amended by deleting
the words "Aames Note Indenture" set forth therein and substituting in
lieu thereof the words "Aames Note Indentures".
-2-
<PAGE> 3
3. Effectiveness. This Amendment shall become effective upon receipt by
the Lender of evidence satisfactory to the Lender that this Amendment has been
executed and delivered by the Borrower and the Guarantor. In addition, it shall
be a condition subsequent to effectiveness of this Amendment that the Agent
shall have received, within 7 days following the date hereof, an opinion of
counsel to the Borrower, substantially in the form of Exhibit A hereto.
4. Representations and Warranties. To induce the Lender to enter into
this Amendment, the Borrower hereby represents and warrants to the Lender that,
after giving effect to the amendment provided for herein, the representations
and warranties contained in the Agreement, the Custodial Agreement and the
Guarantee will be true and correct in all material respects as if made on and as
of the date hereof and that no Default or Event of Default will have occurred
and be continuing.
5. No Other Amendments. Except as expressly amended hereby, the
Agreement, the Secured Note, the Custodial Agreement and the Guarantee shall
remain in full force and effect in accordance with their respective terms,
without any waiver, amendment or modification of any provision thereof.
6. Counterparts. This Amendment may be executed by one or more of the
parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
7. Expenses. The Borrower agrees to pay and reimburse the Lender for
all of the out-of-pocket costs and expenses incurred by the Lender in connection
with the preparation, execution and delivery of this Amendment, including,
without limitation, the reasonable fees and disbursements of Cadwalader,
Wickersham & Taft, counsel to the Lender.
8. Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGES FOLLOW]
-3-
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the day and year first above written.
AAMES CAPITAL CORPORATION
By: /s/ Mark E. Elbaum
--------------------------
Title:
PRUDENTIAL SECURITIES CREDIT CORPORATION
By: /s/ Jeffrey K. French
--------------------------
Title:
<PAGE> 5
The undersigned Guarantor hereby consents and agrees to the foregoing
Amendment:
AAMES FINANCIAL CORPORATION
By: /s/ Mark E. Elbaum
--------------------------
Title:
<PAGE> 6
EXHIBIT A
[LETTERHEAD OF COUNSEL TO THE BORROWER AND THE GUARANTOR]
December __, 1997
Prudential Securities Credit Corporation
One New York Plaza
New York, New York 10292-2012
Gentlemen:
I am counsel to Aames Capital Corporation, a California
corporation (the "Borrower"), and Aames Financial Corporation, a Delaware
corporation (the "Guarantor"), and have acted as such in connection with the
execution and delivery of the following documents:
(i) the Interim Loan and Security Agreement, dated as of
November 22, 1996 (the "Original Interim Loan Agreement"), between
Prudential Securities Credit Corporation (the "Lender") and the
Borrower;
(ii) the Secured Note (the "Original Note") dated November 22,
1996, made by the Borrower in favor of the Lender, the Endorsement,
dated March 31, 1997, to the Secured Note ("Endorsement No. 1"); the
Endorsement, dated December 12, 1997, to the Secured Note ("Endorsement
No. 2"; the Original Note, as amended by Endorsement No. 1 and
Endorsement No. 2 is referred to as the "Note");
(iii) the Custodial Agreement, dated as of November 22, 1996,
(the "Custodial Agreement"), among the Borrower, the Lender and Bankers
Trust Company of California, N.A. (the "Custodian");
(iv) the Intercreditor and Joint Shipment Agreement, dated as
of November 22, 1996 (the "Intercreditor Agreement"), among NationsBank
of Texas, N.A. and the Custodian, as joint custodians, the Lender and
the Borrower;
(v) the Guarantee, dated as of November 22, 1996 (the
"Guarantee"), made by the Guarantor in favor of the Lender;
(vi) the Notice of Extension of Agreement No. 1, dated May 15,
1997 with effect as of March 31, 1997 ("Notice of Extension No. 1"),
between the Borrower and the Lender, the Notice of Extension of
Agreement No. 2, dated September 26, 1997
<PAGE> 7
("Notice of Extension No. 2"), between the Borrower and the Lenderand
the Notice of Extension of Agreement No. 3, dated as of December ___,
1997 ("Notice of Extension No. 3"; together with Notice of Extension
No. 1 and Notice of Extension No. 2, the "Notices of Extension"),
between the Borrower and the Lender; and
(vii) the Amendment, dated as of August 19, 1997 (the "First
Amendment"), between the Borrower and the Lender, the Letter of
Amendment, dated as of December 12, 1997 (the "Letter of Amendment"),
between the Borrower and the Lender, and the Amendment, dated as of
December ___, 1997 (the "Third Amendment" and, together with the First
Amendment and the Letter of Amendment, the "Amendments"; the Original
Interim Loan Agreement, as amended by the Notices of Extension and the
Amendments, is referred to as the "Interim Loan Agreement"), between
the Borrower and the Lender.
This opinion is being delivered to you pursuant to Section
3(b) of the Third Amendment. Capitalized terms used herein and not defined
herein shall have the meanings assigned to them in the Interim Loan Agreement.
I have examined executed copies of the Interim Loan Agreement,
the Note, the Intercreditor Agreement, the Custodial Agreement, the Guarantee,
the Notices of Extension and the Amendments. I have also examined originals or
photostatic or certified copies of all such corporate records of the Borrower,
and such certificates of public officials, certificates of corporate officers,
and other documents, as I have deemed appropriate and necessary as a basis for
the opinions hereinafter expressed. In making my examination and rendering the
opinions hereinafter expressed I have assumed that each party to each of the
Interim Loan Agreement, the Intercreditor Agreement, and the Custodial Agreement
(other than the Borrower) has the corporate power to enter into and perform all
of its obligations thereunder, (ii) the due authorization, execution and
delivery of each of the Interim Loan Agreement, the Intercreditor Agreement and
the Custodial Agreement by the parties thereto (other than the Borrower) and
(iii) the validity and binding effect on the parties thereto (other than the
Borrower) of each of the Interim Loan Agreement, the Intercreditor Agreement and
the Custodial Agreement.
The opinions expressed below with respect to enforceability
are subject to the following additional qualifications:
(a) The effect of bankruptcy, insolvency, reorganization,
moratorium, receivership, or other similar laws of general
applicability relating to or affecting creditors' rights generally in
the event of bankruptcy, insolvency, reorganization, moratorium or
receivership.
(b) The application of general principles of equity,
including, but not limited to, the right of specific performance
(regardless of whether enforceability is considered in a proceeding in
equity or at law).
Based upon the foregoing, I am of the opinion that:
-2-
<PAGE> 8
1. The Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the State of California.
2. The Borrower has the corporate power and legal right to
execute and deliver the Third Amendment, to borrow under the Interim Loan
Agreement, as amended by the Amendments, and the Note, and to grant liens under
the Interim Loan Agreement, and has taken all necessary corporate action to
authorize such borrowing and such granting of liens upon the terms and
conditions of the Interim Loan Agreement, and to authorize the execution and
delivery of the Third Amendment. The Borrower is duly licensed as a licensee or
is otherwise qualified in each state in which its ownership of property or the
conduct of its business requires such licensure or qualification and where
failure to be so licensed or qualified would have a material adverse effect on
the business of the Borrower, on the Collateral, on the ability of the Borrower
to pay or perform the Secured Obligations or on the rights and remedies of the
Lender under the Interim Loan Agreement, the Note, the Custodial Agreement, the
Intercreditor Agreement or the Guarantee, and the Borrower is, to our knowledge,
in compliance in all material respects with each such state's applicable
statutes, laws, rules and regulations. No consent of any other Person
(including, without limitation, stockholders of the Borrower), and no consent,
license, permit, approval or authorization of, or registration or declaration
with, any governmental authority, bureau of agency is required connection with
the execution and delivery of the Third Amendment or the enforceability of each
of the Interim Loan Agreement, and the Note.
3. Each of the Interim Loan Agreement, the Note, the
Intercreditor Agreement and the Custodial Agreement constitutes the legal,
valid, and binding obligation of the Borrower enforceable against the Borrower
in accordance with its respective terms.
4. The Guarantee constitutes the legal, valid, and binding
obligation of the Guarantor enforceable against the Guarantor in accordance with
its terms.
5. The execution and delivery of the Third Amendment and the
performance of each of the Interim Loan Agreement, and the Note will not violate
any provision of any existing Federal laws or the laws of the State of
California or of the charter or by-laws of the Borrower or of any mortgage,
indenture, contract or other undertaking to which, to the best of my knowledge
(after due inquiry), the Borrower is a party or which is binding upon it or its
assets, and, to the best of my knowledge (after due inquiry), will not result in
the creation or imposition of any lien, charge or encumbrance on any of its
assets pursuant to the provisions of any of the foregoing.
6. No litigation or administrative proceeding of or before any
governmental authority or court is currently pending, or, to the best of my
knowledge (after due inquiry), threatened, against the Borrower or its assets,
the liability with respect to which is likely to be material to the financial
position or results of operations of the Borrower.
7. Assuming that the Lender acquired the promissory notes (the
"Mortgage Notes") evidencing the Mortgage Loans for value, the Interim Loan
Agreement creates in favor of the Lender a security interest under the Uniform
Commercial Code (the "UCC") as
-3-
<PAGE> 9
currently in effect in New York in all rights of the Borrower in the Mortgage
Notes. Provided that on the date hereof (i) the Custodian has acquired and
maintains continuous possession of the Mortgage Notes within the State of
California and (ii) the Custodian is acting on behalf of the Lender in
accordance with the terms of the Custodial Agreement and no other agreements or
understandings, written or oral, govern the relationship between the Custodian
and the Lender, then, the security interest in the Mortgage Notes granted by the
Borrower to the Lender will be, on the date of possession of the Mortgage Notes
by the Custodian, perfected and prior to any other security interest which can
be perfected under the Uniform Commercial Code as currently in effect in
California.
I am admitted to practice law in the State of California, and
the foregoing opinions are limited to the Federal laws of the United States, the
Delaware General Corporation Law and the laws of the State of California. I note
that the Interim Loan Agreement, the Note, the Custodial Agreement and the
Guarantee are governed by the law of the State of New York and, with your
consent, I have assumed for purposes of Paragraphs 3, 4 and the first sentence
of Paragraph 11 of this opinion that the law of the State of New York is
identical to the law of the State of California.
Sincerely yours,
-4-
<PAGE> 1
EXHIBIT 10.17(h)
LETTER OF AMENDMENT AND NOTICE OF EXTENSION
March 23, 1998
Prudential Securities Credit Corporation
One New York Plaza, 12th Floor
Whole Loan Operations
New York, New York 10292-2012
Attention: Ms. Katja Sverdlov
Telecopy: 212-778-7401
Confirmation: 212-778-8038
1. Pursuant to the Interim Loan and Security Agreement, dated
as of November 22, 1996 (as amended from time to time, the "Agreement"), between
you and Aames Capital Corporation (the "Borrower"), the undersigned Borrower
hereby requests:
(i) that the Funding Period be extended to the period from
March 31, 1998 to but excluding June 30, 1998 (the "Termination Date");
(ii) subject to the condition set forth in paragraph 2, that
the Maximum Funding Amount for the period from December 31, 1997 to but
excluding March 31, 1998 ("Funding Period I") be $325,000,000 and that
the Maximum Funding Amount for the period from March 31, 1998 to but
excluding June 30, 1998 ("Funding Period II") be $250,000,000; provided
that all Advances extended in Funding Period I must be repaid on or by
March 31, 1998
(iii) that the Designated Trust in respect of the Advances to
be made during Funding Period I as so increased be Aames Mortgage Trust
1998-A and that the Designated Trust in respect of the Advances to be
made during Funding Period II as so extended be Aames Mortgage Trust
1998-B.
The undersigned Borrower agrees that, upon acceptance by the Lender of this
Letter of Amendment by signing and dating the same below, the Borrower will be
bound by the terms of the Agreement as amended by this Letter of Amendment in
the manner set forth in this paragraph 1.
2. The Lender agrees to make the above-referenced increase in
the Maximum Funding Amount, subject to the following conditions:
(i) on or before March 31, 1998, (a) Aames Financial
Corporation or a wholly-owned subsidiary thereof ("Aames") appoints the
Lender or an affiliate thereof as the lead manager or a co-manager of
the Aames Mortgage Trust 1998-A securitization or any other
securitization involving Collateral financed under this facility
<PAGE> 2
for the period of Funding Period I or (b) Aames pays the Lender an
amount equal to .35% of all Advances in excess of $250,000,000 on or
before March 31, 1998;
(ii) on or before June 30, 1998, (a) as set forth in the
Letter Amendment to the Interim Loan and Security Agreement dated
December 12, 1997, Aames Financial Corporation or a wholly-owned
subsidiary thereof ("Aames") appoints the Lender or an affiliate
thereof as the lead manager of the Aames Mortgage Trust 1998-B
securitization or any other securitization involving Collateral
financed under this facility for the period of Funding Period II or (b)
Aames pays the Lender an amount equal to .35% of all Advances extended
in Funding Period II, up to the Maximum Funding Amount, on or before
June 30, 1998;
(iii) the aggregate principal amount of all Advances extended
in Funding Period I in excess of $250,000,000 under this Letter
Amendment shall not exceed the par amount of the Mortgage Loans held as
Collateral for such Advances; and
(iv) the aggregate principal amount of all Advances extended
in Funding Period II shall not exceed the par amount of the Mortgage
Loans held as Collateral for such Advances.
3. The undersigned Borrower hereby certifies that the
following statements are true and correct on the date hereof and shall be true
and correct on the date of the increase of the Maximum Funding Amount requested
herein, before and after giving effect thereto:
A. Each of the representations and warranties contained in the
Agreement, the Custodial Agreement and the Guarantee is true
and correct in all material respects; provided that the
reference to September 30, 1996 in Sections 5(a)(iv) and
5(a)(vii) of the Agreement shall be deemed to be a reference
to September 30, 1997; and
B. No Default or Event of Default has occurred and is continuing.
4. Unless otherwise defined in this Letter of Amendment, terms
defined in the Agreement shall have their defined meanings when used herein.
5. Except as expressly modified by this Letter of Amendment,
the Agreement shall be in full force and effect.
6. This Letter of Amendment and the rights and obligations of
the parties hereunder and under the Agreement as amended hereby shall be
governed by, and construed and interpreted in accordance with, the laws of the
State of New York.
7. The undersigned Borrower is delivering to the Lender
herewith, or on or prior to March 27, 1998 an opinion of counsel to the
Borrower, substantially in the form of Exhibit B-1 to the Agreement. It is
expressly agreed by the Borrower that if the opinion of counsel referred to in
this paragraph 6 is not delivered to the Lender on or prior to March 27,
<PAGE> 3
1998, the extension provided for in this Letter of Amendment, and the Lender's
obligation to make Advances, shall automatically terminate and be of no further
force or effect.
SIGNATURE PAGE FOLLOWS
<PAGE> 4
IN WITNESS WHEREOF, the undersigned Borrower has caused this
Letter of Amendment to be executed and delivered by its proper and duly
authorized officers as of the day and year first above written.
AAMES CAPITAL CORPORATION
By: /s/ Mark E. Elbaum
-------------------------------
Name: Mark E. Elbaum
Title: Senior Vice President-Finance
AGREED TO AND ACCEPTED:
PRUDENTIAL SECURITIES CREDIT
CORPORATION
By: /s/ Jeffrey K. French
---------------------------
Name:
Title:
Date: March 23, 1998
<PAGE> 5
[LETTERHEAD OF COUNSEL TO THE BORROWER AND THE GUARANTOR]
______________ ___, 1998
Prudential Securities Credit Corporation
One New York Plaza
New York, New York 10292-2012
Gentlemen:
I am counsel to Aames Capital Corporation, a California
corporation (the "Borrower"), and Aames Financial Corporation, a Delaware
corporation (the "Guarantor"), and have acted as such in connection with the
execution and delivery of the following documents:
(i) the Interim Loan and Security Agreement, dated as of
November 22, 1996, (the "Interim Loan Agreement"), between Prudential
Securities Credit Corporation (the "Lender") and the Borrower;
(ii) the Secured Note (the "Note") dated November 22, 1996,
made by the Borrower in favor of the Lender and the Endorsement, dated
December 12, 1997, to the Secured Note (the "Endorsement");
(iii) the Custodial Agreement, dated as of November 22, 1996,
(the "Custodial Agreement"), among the Borrower, the Lender and Bankers
Trust Company of California, N.A. (the "Custodian");
(iv) the Intercreditor and Joint Shipment Agreement, dated as
of November 22, 1996 (the "Intercreditor Agreement"), among NationsBank
of Texas, N.A. and the Custodian, as joint custodians, the Lender and
the Borrower;
(v) the Guarantee, dated as of November 22, 1996 (the
"Guarantee"), made by the Guarantor in favor of the Lender;
(vi) the Notice of Extension of Agreement No. 1, dated May 15,
1997 with effect as of March 31, 1997 ("Notice of Extension No. 1"),
between the Borrower and the Lender, the Notice of Extension of
Agreement No. 2, dated September 26, 1997("Notice of Extension No. 2"),
between the Borrower and the Lender and the Notice of Extension of
Agreement No. 3, dated as of December 12, 1997 ("Notice of
<PAGE> 6
Extension No. 3"; together with Notice of Extension No. 1 and Notice of
Extension No. 2, the "Notices of Extension"), between the Borrower and
the Lender; and
(vii) the Amendment, dated as of August 19, 1997 (the "First
Amendment"), between the Borrower and the Lender, the Letter of
Amendment, dated as of December 12, 1997 (the "Letter of Amendment"),
between the Borrower and the Lender, the Amendment, dated as of
December 29, 1997 (the "Third Amendment" and the Letter of Amendment,
dated as of March 13, 1998 (the "Fourth Amendment"), between the
Borrower and the Lender, together with the First Amendment, the Letter
of Amendment and the Third Amendment, the "Amendments"; the Original
Interim Loan Agreement, as amended by the Notices of Extension and the
Amendments, is referred to as the "Interim Loan Agreement"), between
the Borrower and the Lender.
This opinion is being delivered to you pursuant to Section
2(a) of the Interim Loan Agreement. Capitalized terms used herein and not
defined herein shall have the meanings assigned to them in the Interim Loan
Agreement.
I have examined executed copies of the Interim Loan Agreement,
the Note, the Intercreditor Agreement, the Custodial Agreement, the Guarantee,
the Endorsement, the Notices of Extension and the Amendments. I have also
examined originals or photostatic or certified copies of all such corporate
records of the Borrower, and such certificates of public officials, certificates
of corporate officers, and other documents, as I have deemed appropriate and
necessary as a basis for the opinions hereinafter expressed. In making my
examination and rendering the opinions hereinafter expressed I have assumed that
each party to each of the Interim Loan Agreement, the Intercreditor Agreement
and the Custodial Agreement (other than the Borrower) has the corporate power to
enter into and perform all of its obligations thereunder, (ii) the due
authorization, execution and delivery of each of the Interim Loan Agreement, the
Intercreditor Agreement and the Custodial Agreement by the parties thereto
(other than the Borrower) and (iii) the validity and binding effect on the
parties thereto (other than the Borrower) of each of the Interim Loan Agreement,
the Intercreditor Agreement and the Custodial Agreement.
The opinions expressed below with respect to enforceability
are subject to the following additional qualifications:
(a) The effect of bankruptcy, insolvency, reorganization,
moratorium, receivership, or other similar laws of general
applicability relating to or affecting creditors' rights generally in
the event of bankruptcy, insolvency, reorganization, moratorium or
receivership.
(b) The application of general principles of equity,
including, but not limited to, the right of specific performance
(regardless of whether enforceability is considered in a proceeding in
equity or at law).
Based upon the foregoing, I am of the opinion that:
<PAGE> 7
1. The Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the State of California.
2. The Borrower has the corporate power and legal right to
execute and deliver the Letter of Amendment, to borrow under the Interim Loan
Agreement, as amended by the Letter of Amendment and to grant liens under the
Interim Loan Agreement, as amended by the Letter of Amendment, and has taken all
necessary corporate action to authorize such borrowing and such granting of
liens upon the terms and conditions of the Interim Loan Agreement, as amended by
the Letter of Amendment, and to authorize the execution and delivery of the
Letter of Amendment. The Borrower is duly licensed as a licensee or is otherwise
qualified in each state in which its ownership of property or the conduct of its
business requires such licensure or qualification and where failure to be so
licensed or qualified would have a material adverse effect on the business of
the Borrower, on the Collateral, on the ability of the Borrower to pay or
perform the Secured Obligations or on the rights and remedies of the Lender
under the Interim Loan Agreement, the Note, the Custodial Agreement, the
Intercreditor Agreement or the Guarantee, and the Borrower is, to our knowledge,
in compliance in all material respects with each such state's applicable
statutes, laws, rules and regulations. No consent of any other Person
(including, without limitation, stockholders of the Borrower), and no consent,
license, permit, approval or authorization of, or registration or declaration
with, any governmental authority, bureau of agency is required connection with
the execution and delivery of the Letter of Amendment or the enforceability of
the Interim Loan Agreement, as amended by the Letter of Amendment.
3. Each of the Interim Loan Agreement, as amended by the
Letter of Amendment, the Note, as amended by the Endorsement, the Intercreditor
Agreement and the Custodial Agreement constitutes the legal, valid, and binding
obligation of the Borrower enforceable against the Borrower in accordance with
its respective terms.
4. The Guarantee constitutes the legal, valid, and binding
obligation of the Guarantor enforceable against the Guarantor in accordance with
its terms.
5. The execution and delivery of the Letter of Amendment and
the performance of each of the Interim Loan Agreement, as amended by the Letter
of Amendment, and the Note, as amended by the Endorsement, will not violate any
provision of any existing Federal laws or the laws of the State of California or
of the charter or by-laws of the Borrower or of any mortgage, indenture,
contract or other undertaking to which, to the best of my knowledge (after due
inquiry), the Borrower is a party or which is binding upon it or its assets,
and, to the best of my knowledge (after due inquiry), will not result in the
creation or imposition of any lien, charge or encumbrance on any of its assets
pursuant to the provisions of any of the foregoing.
6. No litigation or administrative proceeding of or before any
governmental authority or court is currently pending, or, to the best of my
knowledge (after due inquiry), threatened, against the Borrower or its assets,
the liability with respect to which is likely to be material to the financial
position or results of operations of the Borrower.
<PAGE> 8
7. Assuming that the Lender acquired the promissory notes (the
"Mortgage Notes") evidencing the Mortgage Loans for value, the Interim Loan
Agreement, as amended by the Letter of Amendment, creates in favor of the Lender
a security interest under the Uniform Commercial Code (the "UCC") as currently
in effect in New York in all rights of the Borrower in the Mortgage Notes.
Provided that on the date hereof (i) the Custodian has acquired and maintains
continuous possession of the Mortgage Notes within the State of California and
(ii) the Custodian is acting on behalf of the Lender in accordance with the
terms of the Custodial Agreement and no other agreements or understandings,
written or oral, govern the relationship between the Custodian and the Lender,
then, the security interest in the Mortgage Notes granted by the Borrower to the
Lender will be, on the date of possession of the Mortgage Notes by the
Custodian, perfected and prior to any other security interest which can be
perfected under the Uniform Commercial Code as currently in effect in
California.
I am admitted to practice law in the State of California, and
the foregoing opinions are limited to the Federal laws of the United States, the
Delaware General Corporation Law and the laws of the State of California. I note
that the Interim Loan Agreement, the Note, the Custodial Agreement and the
Guarantee are governed by the law of the State of New York and, with your
consent, I have assumed for purposes of Paragraphs 3, 4 and the first sentence
of Paragraph 11 of this opinion that the law of the State of New York is
identical to the law of the State of California.
Sincerely yours,
<PAGE> 1
EXHIBIT 10.17 (i)
LETTER OF AMENDMENT AND NOTICE OF EXTENSION NO. 5
As of June 30, 1998
Prudential Securities Credit Corporation
One New York Plaza, 12th Floor
Whole Loan Operations
New York, New York 10292-2012
Attention: Ms. Katja Sverdlov
Telecopy: 212-778-7401
Confirmation: 212-778-8038
1. Pursuant to the Interim Loan and Security Agreement, dated
as of November 22, 1996 (as amended from time to time, the "Agreement"), between
you and Aames Capital Corporation (the "Borrower"), the undersigned Borrower
hereby requests:
(i) that the Funding Period be extended to the period from
June 30, 1998 to but excluding the earlier of (A) (i) with respect to
$225,000,000 in Advances outstanding, the closing of the securitization
of Aames Mortgage Trust 1998-C, and (ii) with respect to the remaining
$25,000,000 in Advances outstanding, the third business day following
the closing of the securitization of Aames Mortgage Trust 1998-C and
(B) September 30, 1998 (the "Termination Date");
(ii) the Maximum Funding Amount for the period from June 20,
1998 to but excluding the Termination Date shall remain $250,000,000;
and
(iii) that the Designated Trust in respect of the Advances to
be made during the Funding Period as so extended be Aames Mortgage
Trust 1998-C.
The undersigned Borrower agrees that, upon acceptance by the Lender of this
Letter of Amendment by signing and dating the same below, the Borrower will be
bound by the terms of the Agreement as amended by this Letter of Amendment in
the manner set forth in this paragraph 1.
2. Concurrently with the extension referred to above, the
Borrower requests that:
(a) Section 2(c) of the Agreement be amended by deleting the
phrase "LIBOR plus 0.70%" from the first sentence and
substituting in lieu thereof the phrase "LIBOR plus 0.65%";
and
(b) Subsection 7(i) be be amended by deleting subsection 7(i)
and substituting a new subsection 7(i) in lieu thereof to read
in its entirety as follows:
<PAGE> 2
"(i) Line of Credit. The Borrower shall maintain in full force
and effect the Second Amended and Restated Mortgage Loan Warehousing
Agreement, dated as of April 10, 1997, among the Borrower, the
Guarantor, the lenders from time to time parties thereto and
NationsBank of Texas, N.A., as administrative agent (the "NationsBank
Credit Agreement"), providing for a credit commitment of not less than
$400,000,000 (or a substitute bank credit line with such lenders,
providing for a credit commitment of not less than $400,000,000 and
upon such terms as shall be satisfactory to the Lender) (the
NationsBank Credit Agreement or such substitute credit agreement being
referred to herein as the "Bank Credit Agreement"), and the Borrower
shall not consent to any amendment, supplement or modification to the
Bank Credit Agreement which would have a material adverse effect on the
Lender's rights and remedies hereunder or under the Intercreditor
Agreement, without the prior written consent of the Lender.";
3. The Lender agrees to make the above-referenced extension
and amendment, subject to the following conditions:
(i) on or before the Termination Date, (a) Aames Financial
Corporation or a wholly-owned subsidiary thereof ("Aames") appoints the
Lender or an affiliate thereof as the lead manager or co-manager of the
Aames Mortgage Trust 1998-C securitization or any other securitization
involving Collateral financed under this facility or (b) Aames pays the
Lender an amount equal to .35% of all Advances, up to the Maximum
Funding Amount, on or before the Termination Date; and
(ii) the aggregate principal amount of all Advances extended
shall not exceed the par amount of the Mortgage Loans held as
Collateral for such Advances.
4. The undersigned Borrower hereby certifies that the
following statements are true and correct on the date hereof and shall be true
and correct on the date of the increase of the Maximum Funding Amount requested
herein, before and after giving effect thereto:
A. Each of the representations and warranties contained in the Agreement,
the Custodial Agreement and the Guarantee is true and correct in all
material respects; provided that the reference to September 30, 1996 in
Sections 5(a)(iv) and 5(a)(vii) of the Agreement shall be deemed to be
a reference to March 31, 1998; and
B. No Default or Event of Default has occurred and is continuing.
5. Unless otherwise defined in this Letter of Amendment, terms
defined in the Agreement shall have their defined meanings when used herein.
<PAGE> 3
6. Except as expressly modified by this Letter of Amendment,
the Agreement shall be in full force and effect.
7. This Letter of Amendment and the rights and obligations of
the parties hereunder and under the Agreement as amended hereby shall be
governed by, and construed and interpreted in accordance with, the laws of the
State of New York.
8. The undersigned Borrower is delivering to the Lender
herewith, or on or prior to August 21, 1998 an opinion of counsel to the
Borrower, substantially in the form of Exhibit B-1 to the Agreement. It is
expressly agreed by the Borrower that if the opinion of counsel referred to in
this paragraph 8 is not delivered to the Lender on or prior to August 21, 1998,
the extension provided for in this Letter of Amendment, and the Lender's
obligation to make Advances, shall automatically terminate and be of no further
force or effect.
SIGNATURE PAGE FOLLOWS
<PAGE> 4
IN WITNESS WHEREOF, the undersigned Borrower has caused this
Letter of Amendment to be executed and delivered by its proper and duly
authorized officers as of the day and year first above written.
AAMES CAPITAL CORPORATION
By: /s/ Mark E. Elbaum
------------------------------------
Name: Mark E. Elbaum
Title: Senior Vice President-Finance
AGREED TO AND ACCEPTED:
PRUDENTIAL SECURITIES CREDIT
CORPORATION
By:
--------------------------------
Name:
Title:
Date: August 20, 1998
<PAGE> 5
[LETTERHEAD OF COUNSEL TO THE BORROWER AND THE GUARANTOR]
August ___, 1998
Prudential Securities Credit Corporation
One New York Plaza
New York, New York 10292-2012
Gentlemen:
I am counsel to Aames Capital Corporation, a California
corporation (the "Borrower"), and Aames Financial Corporation, a Delaware
corporation (the "Guarantor"), and have acted as such in connection with the
execution and delivery of the following documents:
(i) the Interim Loan and Security Agreement, dated as of
November 22, 1996, (the "Interim Loan Agreement"), between Prudential
Securities Credit Corporation (the "Lender") and the Borrower;
(ii) the Secured Note (the "Note") dated November 22, 1996,
made by the Borrower in favor of the Lender and the Endorsement, dated
December 12, 1997, to the Secured Note (the "Endorsement");
(iii) the Custodial Agreement, dated as of November 22, 1996,
(the "Custodial Agreement"), among the Borrower, the Lender and Bankers
Trust Company of California, N.A. (the "Custodian");
(iv) the Intercreditor and Joint Shipment Agreement, dated as
of November 22, 1996 (the "Intercreditor Agreement"), among NationsBank
of Texas, N.A. and the Custodian, as joint custodians, the Lender and
the Borrower;
(v) the Guarantee, dated as of November 22, 1996 (the
"Guarantee"), made by the Guarantor in favor of the Lender;
(vi) the Notice of Extension of Agreement No. 1, dated May 15,
1997 with effect as of March 31, 1997 ("Notice of Extension No. 1"),
between the Borrower and the Lender, the Notice of Extension of
Agreement No. 2, dated September 26, 1997("Notice of Extension No. 2"),
between the Borrower and the Lender, the Notice of Extension of
Agreement No. 3, dated as of December 12, 1997 ("Notice of Extension
No. 3"); the Notice of Extension of Agreement No. 4, dated as of March
23,
<PAGE> 6
1998 ("Notice of Extension No. 4"), between the Borrower and the
Lender; and the Letter of Amendment and Notice of Extension of
Agreement No. 5, dated as of June 30, 1998 ("Notice of Extension No.
5"; together with Notices of Extension Nos. 1, 2, 3 and 4, the "Notices
of Extension"); and
(vii) the Amendment, dated as of August 19, 1997 (the "First
Amendment"), between the Borrower and the Lender, the Letter of
Amendment, dated as of December 12, 1997 (the "Letter of Amendment"),
between the Borrower and the Lender, the Amendment, dated as of
December 29, 1997 (the "Third Amendment" and the Letter of Amendment,
dated as of March 13, 1998 (the "Fourth Amendment"), between the
Borrower and the Lender, together with the First Amendment, the Letter
of Amendment and the Third Amendment, the "Amendments"; the Original
Interim Loan Agreement, as amended by the Notices of Extension and the
Amendments, is referred to as the "Interim Loan Agreement"), between
the Borrower and the Lender.
This opinion is being delivered to you pursuant to Section
2(a) of the Interim Loan Agreement. Capitalized terms used herein and not
defined herein shall have the meanings assigned to them in the Interim Loan
Agreement.
I have examined executed copies of the Interim Loan Agreement,
the Note, the Intercreditor Agreement, the Custodial Agreement, the Guarantee,
the Endorsement, the Notices of Extension and the Amendments. I have also
examined originals or photostatic or certified copies of all such corporate
records of the Borrower, and such certificates of public officials, certificates
of corporate officers, and other documents, as I have deemed appropriate and
necessary as a basis for the opinions hereinafter expressed. In making my
examination and rendering the opinions hereinafter expressed I have assumed that
each party to each of the Interim Loan Agreement, the Intercreditor Agreement
and the Custodial Agreement (other than the Borrower) has the corporate power to
enter into and perform all of its obligations thereunder, (ii) the due
authorization, execution and delivery of each of the Interim Loan Agreement, the
Intercreditor Agreement and the Custodial Agreement by the parties thereto
(other than the Borrower) and (iii) the validity and binding effect on the
parties thereto (other than the Borrower) of each of the Interim Loan Agreement,
the Intercreditor Agreement and the Custodial Agreement.
The opinions expressed below with respect to enforceability
are subject to the following additional qualifications:
(a) The effect of bankruptcy, insolvency, reorganization,
moratorium, receivership, or other similar laws of general
applicability relating to or affecting creditors' rights generally in
the event of bankruptcy, insolvency, reorganization, moratorium or
receivership.
(b) The application of general principles of equity,
including, but not limited to, the right of specific performance
(regardless of whether enforceability is considered in a proceeding in
equity or at law).
<PAGE> 7
Based upon the foregoing, I am of the opinion that:
1. The Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the State of California.
2. The Borrower has the corporate power and legal right to
execute and deliver the Letter of Amendment, to borrow under the Interim Loan
Agreement, as amended by the Letter of Amendment and to grant liens under the
Interim Loan Agreement, as amended by the Letter of Amendment, and has taken all
necessary corporate action to authorize such borrowing and such granting of
liens upon the terms and conditions of the Interim Loan Agreement, as amended by
the Letter of Amendment, and to authorize the execution and delivery of the
Letter of Amendment. The Borrower is duly licensed as a licensee or is otherwise
qualified in each state in which its ownership of property or the conduct of its
business requires such licensure or qualification and where failure to be so
licensed or qualified would have a material adverse effect on the business of
the Borrower, on the Collateral, on the ability of the Borrower to pay or
perform the Secured Obligations or on the rights and remedies of the Lender
under the Interim Loan Agreement, the Note, the Custodial Agreement, the
Intercreditor Agreement or the Guarantee, and the Borrower is, to our knowledge,
in compliance in all material respects with each such state's applicable
statutes, laws, rules and regulations. No consent of any other Person
(including, without limitation, stockholders of the Borrower), and no consent,
license, permit, approval or authorization of, or registration or declaration
with, any governmental authority, bureau of agency is required connection with
the execution and delivery of the Letter of Amendment or the enforceability of
the Interim Loan Agreement, as amended by the Letter of Amendment.
3. Each of the Interim Loan Agreement, as amended by the
Letter of Amendment, the Note, as amended by the Endorsement, the Intercreditor
Agreement and the Custodial Agreement constitutes the legal, valid, and binding
obligation of the Borrower enforceable against the Borrower in accordance with
its respective terms.
4. The Guarantee constitutes the legal, valid, and binding
obligation of the Guarantor enforceable against the Guarantor in accordance with
its terms.
5. The execution and delivery of the Letter of Amendment and
the performance of each of the Interim Loan Agreement, as amended by the Letter
of Amendment, and the Note, as amended by the Endorsement, will not violate any
provision of any existing Federal laws or the laws of the State of California or
of the charter or by-laws of the Borrower or of any mortgage, indenture,
contract or other undertaking to which, to the best of my knowledge (after due
inquiry), the Borrower is a party or which is binding upon it or its assets,
and, to the best of my knowledge (after due inquiry), will not result in the
creation or imposition of any lien, charge or encumbrance on any of its assets
pursuant to the provisions of any of the foregoing.
6. No litigation or administrative proceeding of or before any
governmental authority or court is currently pending, or, to the best of my
knowledge (after due inquiry),
<PAGE> 8
threatened, against the Borrower or its assets, the liability with respect to
which is likely to be material to the financial position or results of
operations of the Borrower.
7. Assuming that the Lender acquired the promissory notes (the
"Mortgage Notes") evidencing the Mortgage Loans for value, the Interim Loan
Agreement, as amended by the Letter of Amendment, creates in favor of the Lender
a security interest under the Uniform Commercial Code (the "UCC") as currently
in effect in New York in all rights of the Borrower in the Mortgage Notes.
Provided that on the date hereof (i) the Custodian has acquired and maintains
continuous possession of the Mortgage Notes within the State of California and
(ii) the Custodian is acting on behalf of the Lender in accordance with the
terms of the Custodial Agreement and no other agreements or understandings,
written or oral, govern the relationship between the Custodian and the Lender,
then, the security interest in the Mortgage Notes granted by the Borrower to the
Lender will be, on the date of possession of the Mortgage Notes by the
Custodian, perfected and prior to any other security interest which can be
perfected under the Uniform Commercial Code as currently in effect in
California.
I am admitted to practice law in the State of California, and
the foregoing opinions are limited to the Federal laws of the United States, the
Delaware General Corporation Law and the laws of the State of California. I note
that the Interim Loan Agreement, the Note, the Custodial Agreement and the
Guarantee are governed by the law of the State of New York and, with your
consent, I have assumed for purposes of Paragraphs 3, 4 and the first sentence
of Paragraph 11 of this opinion that the law of the State of New York is
identical to the law of the State of California.
Sincerely yours,
<PAGE> 1
EXHIBIT 10.21
[EXECUTION COPY]
MASTER REPURCHASE AGREEMENT
Dated as of August 19, 1998
Between:
AAMES CAPITAL CORPORATION,
as Seller
and
FIRST UNION NATIONAL BANK,
as Buyer
1. APPLICABILITY
From time to time the parties hereto may enter into transactions in which the
Seller agrees to transfer to the Buyer mortgage loans or other assets (the
"Collateral") against the transfer of funds by the Buyer, with a simultaneous
agreement by the Buyer to transfer to the Seller such Collateral at a date
certain, against the transfer of funds by the Seller. Each such transaction
shall be referred to herein as a "Transaction" and, unless otherwise agreed in
writing, shall be governed by this Agreement.
2. DEFINITIONS
As used in this Agreement, and unless the context requires a different meaning,
the following terms shall have the meanings assigned to them below:
(a) "1934 Act" shall mean the Securities Exchange Act of 1934.
(b) "Act of Insolvency" shall mean, with respect to any party, (i)
the commencement by such party as debtor of any case or
proceeding under any bankruptcy, insolvency, reorganization,
liquidation, moratorium, dissolution, delinquency or similar
law, or such party seeking the appointment or election of a
receiver, conservator, trustee, custodian or similar official
for such party or any substantial part of its property, or the
convening of any meeting of creditors for purposes of commencing
any such case or proceeding or seeking such an appointment or
election, (ii) the commencement of any such case or proceeding
against such party, or another seeking such an appointment or
election, or the filing against a party of an application for a
protective decree under the provisions of SIPA, which (A) is
consented to or not timely contested by such party, (B) results
in the entry of an order for relief, such an appointment or
election, the issuance of such a protective decree or the entry
of an order having a similar effect, or (C) is not dismissed
within 15 days, (iii) the making by such party of a general
assignment for the benefit of creditors, or (iv) the admission
in writing by such party of such party's inability to pay such
party's debts as they become due.
(c) "Additional Collateral" shall mean Mortgage Loans and/or cash
provided by the Seller to the Buyer pursuant to Paragraph 5(b)
hereof.
(d) "Additional Required Documents" shall mean the following
documents with respect to any Mortgage Loan:
(i) original disclosure statements complying with Regulation Z
("Truth in Lending") of the Board of Governors of the
Federal Reserve System and all agreements relating
thereto, if applicable;
(ii) original Equal Credit Opportunity Act notice and
additional disclosure statements or agreements relating
thereto, if applicable;
<PAGE> 2
(iii) a certification as to whether or not the property securing
the Mortgage Loan falls into a flood zone as identified by
a HUD identified flood map and, if applicable, a survey of
such property;
(iv) an attorney's opinion of title and abstract of title or an
original or certified copy of a mortgagee's title
insurance policy insuring the lien of the Mortgage Loan
against the applicable property
(v) a property and casualty insurance policy on the property
securing the Mortgage Loan covering fire, hazard and
extended coverage, and if applicable, flood insurance,
all in amounts not less than the principal amount of the
promissory note relating to the Mortgage Loan (or the
maximum amount issuable for flood insurance) which
insurance has been endorsed to provide for payment
thereof to the Seller, as mortgagee, together with
written notice to the mortgagor of the fact, if true,
that mortgagor's property lies within a flood zone;
(vi) original or copy of executed application by the obligor on
such Mortgage Loan for such Mortgage Loan;
(vii) original or copy of credit bureau report on the obligor on
such Mortgage Loan;
(viii) original HUD-1 settlement statement duly executed by the
obligor on such Mortgage Loan;
(ix) original complete appraisal obtained with respect to the
applicable property obtained in connection with the
Mortgage Loan; and
(x) such other documents as the Buyer may reasonably request
from time to time including but not limited to
verification of employment of the obligor on such Mortgage
Loan (to the extent required by the Underwriting
Standards), verification of deposit by such obligor (if
applicable), and any inspection reports performed with
respect to such obligor or the property covered by such
Mortgage Loan.
(e) "Agreement" shall mean this Master Repurchase Agreement, together
with all exhibits, schedules or amendments hereto and all
Confirmations hereunder.
(f) "Aggregate Commitment" shall have the meaning assigned to such
term in Paragraph 6.
(g) "Bankruptcy Code" shall mean Title 11 of the United States Code,
as amended.
(h) "Business Day" shall mean any day excluding Saturday, Sunday and
any day on which banks located in the States of New York, North
Carolina or California are authorized or permitted to close for
business.
(i) "Buyer" shall mean First Union National Bank, a national banking
association having its principal place of business in Charlotte,
North Carolina.
(j) "Collateral" shall have the meaning assigned to such term in
Paragraph 1.
(k) "Confirmation" shall mean a confirmation for a Transaction as
required by Paragraph 4(a) hereof, substantially in the form of
Exhibit A hereto.
(l) "Current Margin" shall mean, with respect to any date, the
difference between (i) the aggregate Market Value of all
Purchased Loans held by the Buyer on such date and (ii) the
aggregate Purchase Price paid by the Buyer for all Purchased
Loans held by the Buyer on such date.
(m) "Custodial Agreement" shall mean the Repurchase Facility
Custodial Agreement, dated as of August 19, 1998, among the
Buyer, the Seller and the Custodian.
(n) "Custodian" shall mean Bankers Trust Company of California, N.A.,
a national banking association.
(o) "Default Rate" shall mean, for any day, the Pricing Rate for such
day plus 4.00%.
2
<PAGE> 3
(p) "Eligible Mortgage Loan" shall mean a Mortgage Loan with respect
to which each of the representations and warranties set out in
Exhibit B hereto is accurate and complete as of the date of the
related Confirmation (and the Seller by including any such
Mortgage Loan in any Transaction shall be deemed to so represent
and warrant to the Buyer at and as of the date of such
Transaction).
(q) "ERISA" shall mean the Employee Retirement Income Security Act of
1974.
(r) "Event of Default" shall have the meaning assigned to such term
in Paragraph 12.
(s) "FDIA" shall mean the Federal Deposit Insurance Act, as amended.
(t) "FDICIA" shall mean the Federal Deposit Insurance Corporation
Improvement Act of 1991.
(u) "GAAP" shall mean generally accepted accounting principles.
(v) "Guaranty" shall mean the guaranty agreement, dated as of August
19, 1998, executed by the Guarantor in favor of the Buyer.
(w) "Guarantor" shall mean Aames Financial Corporation, a Delaware
corporation.
(x) "Income" shall mean, with respect to any Mortgage Loan at any
time, any payments of principal thereof and all payments of
interest and dividends or other distributions thereon.
(y) "Indemnified Parties" shall have the meaning assigned to such
term in Paragraph 15.
(z) "LIBOR" shall mean the London Interbank Offered Rate obtained on
page 3750 of Telerate (or as otherwise obtained in a manner
reasonably selected by the Buyer) as being the rate at which
deposits in immediately available U.S. dollars having a maturity
of one month are offered to or by reference banks in the London
interbank market, as determined by the Buyer at the time of each
Transaction.
(aa) "Margin" shall mean, with respect to any Mortgage Loan or pool of
Mortgage Loans, the difference between the Market Value of such
loan or loans and the Purchase Price for such loan or loans.
(bb) "Margin Call" shall have the meaning assigned to such term in
Paragraph 5(b).
(cc) "Margin Deficit" shall have the meaning assigned to such term in
Paragraph 5(b).
(dd) "Market Value" shall mean, with respect to each Purchased Loan,
the market value of such Purchased Loan as determined by the
Buyer in its sole discretion.
(ee) "Mortgage Loan" shall mean a residential real estate secured
loan, including, without limitation: (i) a promissory note, any
reformation thereof and related deed of trust (or mortgage) and
security agreement; (ii) all guaranties and insurance policies,
including, without limitation, all mortgage and title insurance
policies and all fire and extended coverage insurance policies
and rights of the Seller to return premiums or payments with
respect thereto; and (iii) all right, title and interest of the
Seller in the property covered by such deed of trust (or
mortgage).
(ff) "Original Margin" shall mean, with respect to any date, the
difference between (i) the aggregate Market Value of all
Purchased Loans held by the Buyer on such date, determined as of
the most recent Purchase Date for each such Purchased Loan, and
(ii) the Purchase Price paid by the Buyer for all such Purchased
Loans on such Purchase Date(s).
(gg) "Person" shall mean a corporation, an association, a partnership,
an organization, a limited liability company, a business, a
trust, an individual, a government or political subdivision
thereof, any governmental agency or any other entity.
(hh) "Plan Party" shall have the meaning assigned to such term in
Paragraph 29(a).
(ii) "Price Differential" shall mean, with respect to any Transaction
as of any date, the difference between the Repurchase Price to
be paid by the Seller and the Purchase Price paid by the Buyer.
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The Price Differential will equal the aggregate amount obtained
by daily application of the Pricing Rate for such Transaction to
the Purchase Price for such Transaction on a 360-day-per-year
basis for the actual number of days during the period commencing
on (and including) the Purchase Date for such Transaction and
ending on (but excluding) the Repurchase Date.
(jj) "Pricing Rate" shall mean the per annum rate for determination of
the Price Differential, which rate shall be LIBOR plus 25 basis
points. This Pricing Rate shall be reviewed and mutually agreed
upon at the end of each calendar quarter.
(kk) "Purchase Date" shall mean the date on which Purchased Loans are
to be transferred by the Seller to the Buyer.
(ll) "Purchased Loans" shall mean the Mortgage Loans transferred by
the Seller to the Buyer in a Transaction hereunder. The term
"Purchased Loans" with respect to any Transaction at any time
also shall include Additional Collateral delivered pursuant to
Paragraph 5(b) hereof.
(mm) "Purchase Price" shall mean the price at which Purchased Loans
are transferred by the Seller to the Buyer.
(nn) "Replacement Mortgage Loans" shall have the meaning assigned to
such term in Paragraph 13(c).
(oo) "Repurchase Date" shall mean the date on which the Seller is
required to repurchase the Purchased Loans from the Buyer, which
shall be (i) the 15th day of the calendar month in which the
Purchase Date occurs or, if such Purchase Date falls on or after
the 15th day of such month, the 15th day of the following
calendar month (or, in each case, if such day is not a Business
Day, the next Business Day), (ii) such earlier date as may be
set forth in a Confirmation or (iii) such earlier date as may be
determined by application of the provisions of Paragraph 13
hereof.
(pp) "Repurchase Price" shall mean the price at which Purchased Loans
are to be transferred from the Buyer to the Seller upon
termination of a Transaction, which will be determined in each
case as the sum of the Purchase Price and the Price Differential
as of the date of such determination.
(qq) "Repurchase Term" shall mean, with respect to any Transaction,
the period beginning on the Purchase Date and continuing through
the Repurchase Date.
(rr) "Required Documents" shall mean the following documents with
respect to any Mortgage Loan:
(i) the original executed and fully completed promissory note
relating to the Mortgage Loan (properly endorsed to the
Seller if purchased by the Seller from another
originator), which promissory note shall be duly endorsed
in blank without recourse by an authorized officer of the
Seller;
(ii) the original executed and fully completed mortgage or
deed of trust relating to the Mortgage Loan in proper
form for recordation in the appropriate jurisdiction and
duly recorded in the appropriate jurisdiction; provided,
however, that a certified copy of the executed mortgage or
deed of trust relating to the Mortgage Loan may be
delivered to the Buyer in lieu of the original recorded
deed of trust or mortgage until such time as the original
recorded mortgage or deed of trust is received from the
recording jurisdiction and submitted to the Buyer; and
(iii) an original executed, fully completed and recordable but
unrecorded assignment of the mortgage or deed of trust
relating to the Mortgage Loan in proper form for
recordation in the appropriate jurisdiction (unless the
Buyer determines that under applicable state law the
assignment should be recorded in order to adequately
protect its interest, in which case the assignment shall
be recorded by the Seller and a certified true copy
thereof shall be provided to the Buyer), together with
the original or a duly certified copy of the fully
completed and proper assignment or assignments of the
mortgage or deed of trust from the original holder
through any subsequent transferees to the Seller in
proper form for recordation in the appropriate
jurisdiction, duly recorded if local requirements in the
jurisdiction in which the property is located required
the recordation of such assignment or assignments.
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(ss) "SEC" shall mean the Securities and Exchange Commission.
(tt) "Seller" shall mean Aames Capital Corporation, a California
corporation having its principal place of business in Los
Angeles, California.
(uu) "Subservicer" shall mean an independent third party subservicer
named by the Seller and reasonably acceptable to the Buyer.
(vv) "Subservicing Agreement" shall mean the subservicing agreement
between the Seller and the Subservicer.
(ww) "SIPA" shall mean the Securities Investor Protection Act of 1970.
(xx) "Transaction" shall mean each transaction between the Seller and
the Buyer that is undertaken pursuant to a Confirmation.
(yy) "Underwriting Standards" shall mean the underwriting policies of
the Seller set forth in Exhibit C hereto, as amended pursuant to
paragraph 11(l).
3. INITIATION AND TERMINATION OF TRANSACTIONS
(a) An agreement to enter into a Transaction may be made in writing
at the initiation of either the Buyer or the Seller and shall be
evidenced by a Confirmation delivered pursuant to Paragraph 4(a).
On the Purchase Date for the Transaction, the Purchased Loans
shall be transferred to the Buyer or its agent against the
transfer of the Purchase Price to an account of the Seller.
(b) The Buyer's obligation to purchase any Mortgage Loan shall be
subject to the following:
(i) The Buyer (or the Custodian, if so directed by the Buyer)
shall have possession of the Required Documents for each
Mortgage Loan to be purchased; provided that such
possession may have been released to a prospective
purchaser of a Mortgage Loan (or a custodian acting on its
behalf) if the Buyer or the Custodian, as applicable, has
received a bailment letter for the related Required
Documents.
(ii) The Buyer shall have determined that the Mortgage Loans to
be purchased in the requested Transaction satisfy the
requirements of this Agreement.
(iii) The Seller's representations and warranties contained in
this Agreement and reaffirmed in the Confirmation shall be
true and correct.
(iv) The Purchase Price for such Transaction shall be at least
$5,000,000.
(v) No Event of Default shall have occurred under this
Agreement.
(vi) The Buyer shall not be obligated to purchase Mortgage
Loans more often than once per calendar week.
(vii) The Guaranty shall be in full force and effect.
(c) On the Repurchase Date for each Transaction, termination of the
Transaction will be effected by transfer to the Seller or its
agent of the Purchased Loans and any Income in respect thereof
received by the Buyer (and not previously credited or transferred
to, or applied to the obligations of the Seller hereunder)
against the transfer of the Repurchase Price to an account of the
Buyer.
4. TRANSACTION CONFIRMATION
(a) Upon the parties' agreement to enter into a Transaction
hereunder, the Buyer shall prepare and deliver to the Seller, at
least one Business Day prior to the Purchase Date for the
Transaction, a Confirmation for such Transaction.
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(b) The Confirmation shall list the Purchased Loans and set forth (i)
the Purchase Date, (ii) the Purchase Price, (iii) the anticipated
Repurchase Date, (iv) the Pricing Rate or Repurchase Price
applicable to the Transaction, and (v) any additional terms or
conditions of the Transaction.
(c) The Confirmation, together with this Agreement, shall constitute
conclusive evidence of the terms agreed between the Buyer and the
Seller, and shall be binding upon the parties unless written
notice of objection is given by the objecting party prior to the
closing of the Transaction.
(d) In the event of any conflict between the terms of a Confirmation
and this Agreement, the Confirmation shall prevail.
5. MARGIN MAINTENANCE
(a) On Monday of each week during the Repurchase Term (or more often,
if the Buyer in its sole discretion so decides), the Buyer will
determine (i) the aggregate Market Value of all Purchased Loans
and other Collateral held by the Buyer and (ii) the Current
Margin for such date.
(b) If on any date during the term of this Agreement the Current
Margin for such date is less than the Original Margin for such
date (such shortfall, a "Margin Deficit"), the Buyer may by
notice to the Seller (such notice, a "Margin Call") require that
the Seller, at the Buyer's option, transfer to the Buyer cash or
additional Mortgage Loans reasonably acceptable to the Buyer
(collectively, "Additional Collateral"), so that the Current
Margin for such date will then equal or exceed the Original
Margin for such date; provided, however, that the Buyer may not
make a Margin Call unless (i) the Margin Deficit exceeds $100,000
and (ii) the Current Margin is less than five percent.
(c) If any notice is given under subparagraph (b) of this Paragraph
5 on any Business Day, then the Seller shall transfer cash or
Mortgage Loans as provided in such subparagraph no later than
the close of business on the second Business Day following the
date on which such notice is given. Any cash transferred to the
Buyer pursuant to this subparagraph (c) shall be held by the
Buyer for so long as any Transaction remains in effect and shall
be applied against the Repurchase Price for any terminated
Transaction on the applicable Repurchase Date.
6. AGGREGATE COMMITMENT AND TERM
(a) The aggregate Purchase Price for all Purchased Loans owned by the
Buyer on any date shall at no time exceed $300,000,000 (the
"Aggregate Commitment").
(b) This Agreement shall continue in effect for a period of 180 days
from the date of its execution by both parties.
7. PAYMENTS ON MORTGAGE LOANS; SERVICING
The Seller shall act as servicer for all Mortgage Loans, will service all
Mortgage Loans in accordance with industry standards for loans held by third
parties and shall not sell or transfer its rights to service such loans without
the Buyer's consent; provided that the Seller may engage a Subservicer to
service all Purchased Loans for the benefit of the Buyer and the Seller, as
their interests may appear, pursuant to a Subservicing Agreement. All funds
received by the Seller, in its capacity as servicer with respect to Mortgage
Loans that are Purchased Loans, shall be held by the Seller in trust for the
Buyer until such Mortgage Loans have been repurchased by the Seller.
8. REPURCHASE PRIOR TO REPURCHASE DATE
Notwithstanding any provision hereof to the contrary, the Buyer may require the
Seller to repurchase any of the Purchased Loans subject to a Transaction as to
which a breach of any representation contained in Exhibit B hereto has occurred
upon two Business Days' prior notice.
9. DELIVERY OF MORTGAGE LOANS
All of the Required Documents for Mortgage Loans that are to be Purchased Loans
for a Transaction shall be delivered to the Buyer (or the Custodian, if so
directed by the Buyer) at least two Business Days prior to the Purchase Date for
such Transaction.
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10. REPRESENTATIONS AND WARRANTIES
(a) Each of the Buyer and the Seller represents and warrants to the
other that (i) it is duly authorized to execute and deliver this
Agreement, to enter into Transactions contemplated hereunder and
to perform its obligations hereunder and has taken all necessary
action to authorize such execution, delivery and performance,
(ii) it will engage in such Transactions as principal, (iii) the
individual signing this Agreement on its behalf is duly
authorized to do so on its behalf, (iv) it has obtained all
authorizations of any governmental body required in connection
with this Agreement and the Transactions hereunder and such
authorizations are in full force and effect and (v) the
execution, delivery and performance of this Agreement and the
Transactions hereunder will not violate any law, ordinance,
charter, bylaw or rule applicable to it or any agreement by
which it is bound or by which any of its assets are affected. On
the Purchase Date for any Transaction the Buyer and the Seller
shall each be deemed to repeat all the foregoing representations
made by it.
(b) In addition to the foregoing, the Seller hereby represents and
warrants that, as of the date of this Agreement and as of the
Purchase Date for each Transaction:
(i) If the Seller is servicing any of the Purchased Loans, the
Seller is servicing such Purchased Loans in accordance
with industry standards for similar loans owned by third
parties.
(ii) No Event of Default has occurred or is continuing under
this Agreement.
(iii) Since the date of the most recent balance sheet or
financial statement delivered by the Seller to the Buyer
pursuant to the Agreement, there has been no material
adverse change in its financial condition or results of
operations.
(c) The Seller hereby represents and warrants to the Buyer that, as
to each Mortgage Loan, as of the applicable Purchase Date or
such other date specified herein:
(i) The information set forth in the schedule of Mortgage
Loans attached to each Confirmation is true and correct in
all material respects.
(ii) Such Mortgage Loan is an Eligible Mortgage Loan.
11. COVENANTS
The Seller hereby covenants and agrees with the Buyer that, as long as the Buyer
has any obligation to enter into Transactions under the Agreement:
(a) The Seller (or the Subservicer, at the option of the Seller)
shall hold all Additional Required Documents for the Mortgage
Loans that are Purchased Loans in trust for the benefit of the
Buyer.
(b) The Seller shall furnish or cause to be furnished to the Buyer:
(i) Within 90 days after the last day of each fiscal year of
the Seller and the Guarantor, consolidated statements of
income (and, in the case of the consolidated statement
of the Guarantor, cash flows) for the Seller and the
Guarantor for such year and consolidated balance sheets
for the Seller and the Guarantor as of the end of such
year presented fairly in all material respects in
accordance with GAAP and accompanied by an unqualified
report of a firm of independent certified public
accountants of nationally recognized standing and
including therewith a copy of any management letter from
such certified public accountants; and
(ii) Within 45 days after the last day of each fiscal
quarter, (A) unaudited consolidated statements of income
(and, in the case of the consolidated statement of the
Guarantor, cash flows) for the Seller and the Guarantor
for such quarter, and unaudited consolidated balance
sheets for the Seller and the Guarantor as of the end of
such quarter and (B) a certificate of an officer of the
Seller, whose position is vice president or higher,
stating that such financial statements are presented
fairly in all material respects and in accordance with
GAAP, subject to year-end audit adjustments, and further
certifying that neither the
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Seller nor any affiliate thereof is in default under the
terms and conditions of any agreement evidencing or
securing any indebtedness of such entity.
(c) The Seller shall promptly furnish such additional financial and
other information, including, without limitation, financial
statements of the Seller, and information regarding the
Purchased Loans, as the Buyer may from time to time reasonably
request.
(d) The Seller shall pay or otherwise satisfy at or before maturity
or before it becomes delinquent or accelerated, as the case may
be, all its indebtedness (including taxes), except indebtedness
being contested in good faith by appropriate proceedings and for
which provision is made to the satisfaction of the Buyer for the
payment thereof in the event the Seller is found to be obligated
to pay such indebtedness and which indebtedness is thereupon
promptly paid by the Seller.
(e) The Seller shall maintain its corporate existence and obtain and
maintain all rights, privileges, licenses, approvals,
franchises, properties and assets necessary or desirable in the
normal conduct of its business, including but not limited to any
required approvals with respect to the SEC or the Securities
Commission of the State of California and comply with all
contractual obligations and requirements of law (including,
without limitation, any requirements of law under or in
connection with ERISA, the federal Consumer Credit Protection
Act, the federal Real Estate Settlement Procedures Act, the
federal Equal Credit Opportunity Act, the federal
Truth-in-Lending Act, and any regulations promulgated
thereunder), except where the failure to so comply is not likely
to have a material adverse effect on the business, operations,
assets or financial or other condition of the Seller or on the
Purchased Loans.
(f) The Seller shall keep proper books of record and account in
which full, true and correct entries in conformity with GAAP and
all requirements of law shall be made of all dealings and
transactions in relation to its business and activities.
(g) The Seller shall permit representatives of the Buyer to (A)
visit and inspect any of its properties and examine and make
abstracts from any of its books and records (including without
limitation books and records relating to the Purchased Loans) at
any reasonable time and as often as may reasonably be desired by
the Buyer (but, prior to the occurrence of an Event of Default,
only upon not less than two Business Days' prior notice), and
(B) discuss the business, operations, properties and financial
and other condition of the Seller with officers and employees of
the Seller, and with its independent certified public
accountants; provided, however, that the results of any such
visit, inspection, examination, discussion or audit, to the
extent such results are proprietary and non-public, shall be
maintained by the Buyer in confidentiality except as required by
law or regulation or by any governmental agency or regulatory
body having authority over the Buyer, or to the extent such
information may be communicated to the legal counsel or auditors
of the Buyer.
(h) The Seller shall promptly give written notice to the Buyer of:
(i) the occurrence of any potential default or Event of
Default known to responsible management personnel of the
Seller and the proposed method of cure thereof;
(ii) any litigation or proceeding affecting the Seller or the
Purchased Loans which could have a material adverse effect
on the Purchased Loans, or the business, operations,
property, or financial or other condition of the Seller;
(iii) a material adverse change known to responsible management
personnel of the Seller in the business, operations,
property or financial or other condition of the Seller;
(iv) any changes in the following senior management positions
of the Seller: President, Chief Executive Officer, Chief
Operating Officer or Chief Financial Officer;
(v) any breach of a representation or warranty set out in
Exhibit B hereto; and
(vi) any default or event of default by the Seller or any of
the Seller's affiliates under the terms and conditions of
any agreement evidencing or securing any indebtedness of
such entity.
(i) The Seller shall pay all reasonable out-of-pocket costs and
expenses (including fees and disbursements of legal counsel up
to a maximum of $10,000) of the Buyer incident to the
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preparation and negotiation of this Agreement and all related
documents, and incident to the enforcement of the Seller's
obligations hereunder or under any Confirmation, whether by
judicial proceedings or otherwise, including, without
limitation, in connection with bankruptcy, insolvency,
liquidations, reorganization, moratorium or other similar
proceedings involving the Seller. The obligations of the Seller
under this Paragraph 11(i) shall be effective and enforceable
whether or not any Transaction is outstanding hereunder and
shall survive the termination of this Agreement.
(j) The Seller shall originate and acquire Mortgage Loans only in
accordance with the Seller's current Underwriting Standards.
(k) The Seller shall not, directly or indirectly, create, incur,
assume or suffer to exist, any lien or other encumbrance upon the
Collateral.
(l) The Seller shall not alter its current Underwriting Standards in
any material manner from those disclosed to the Buyer and
attached to the Agreement as Exhibit C unless it has given 10
Business Days' written notice of the proposed alteration to the
Buyer, and the Buyer has failed to object to the proposed
alteration within such 10 Business Day period.
(m) The Seller shall comply fully with the terms of the Custodial
Agreement.
12. EVENTS OF DEFAULT
The following shall constitute Events of Default hereunder (each, an "Event of
Default"):
(a) the Seller's failure to transfer or the Buyer's failure to
purchase Purchased Loans upon the applicable Purchase Date;
(b) the Seller's failure to repurchase or the Buyer's failure to
transfer Purchased Loans upon the applicable Repurchase Date;
(c) the Seller's or the Buyer's failure to comply with Paragraph 5
hereof;
(d) an Act of Insolvency occurs with respect to the Seller or the
Buyer;
(e) any representation or warranty made by the Seller (other than the
representations and warranties of the Seller set out in Paragraph
10(c)) or the Buyer in this Agreement shall have been incorrect
or untrue in any material respect when made or repeated or deemed
to have been made or repeated;
(f) the Seller or the Buyer shall admit to the other its inability
to, or its intention not to, perform any of its obligations
hereunder;
(g) the Seller shall breach any covenant, requirement or obligation
contained in this Agreement;
(h) a default or event of default shall occur under any credit
agreement or other material agreement having a face amount of
$5,000,000 or greater for which the Seller is the primary
obligor;
(i) the Seller shall fail to repurchase any Purchased Loans at the
Repurchase Price when required by Paragraph 8 of this Agreement;
(j) in the reasonable judgment of the Buyer a material adverse change
shall have occurred in the business, operations, properties,
prospects or financial condition of the Seller, or
(k) Seller dissolves, merges or consolidates with another entity
(unless it is the surviving party), is acquired by any Person
(unless such Person is reasonably acceptable to the Buyer), or
sells, transfers, or otherwise disposes of a material portion of
its business or assets, except for the sale or transfer of
Mortgage Loans in the ordinary course of business.
13. REMEDIES UPON EVENT OF DEFAULT
Upon the occurrence of any Event of Default and, with respect to any Event of
Default resulting from the breach of the Seller's covenants set forth in
Paragraph 11(b), if such Event of Default has not been cured within three
Business Days:
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(a) The nondefaulting party may, at its option (which option shall
be deemed to have been exercised immediately upon the occurrence
of an Act of Insolvency), declare an Event of Default to have
occurred hereunder and, upon the exercise or deemed exercise of
such option, the Repurchase Date for each Transaction hereunder,
shall, if it has not already occurred, be deemed immediately to
occur (except that, in the event that the Purchase Date for any
Transaction has not yet occurred as of the date of such exercise
or deemed exercise, such Transaction shall be deemed immediately
canceled). The nondefaulting party shall (except upon the
occurrence of an Act of Insolvency) give notice to the
defaulting party of the exercise of such option as promptly as
practicable.
(b) Upon the occurrence of an Event of Default by the Seller, if the
Buyer exercises or is deemed to have exercised the option
referred to in subparagraph (a) of this Paragraph, (i) the
Seller's obligation to repurchase all Purchased Loans at the
Repurchase Price therefor on the Repurchase Date determined in
accordance with subparagraph (a) of this Paragraph, shall
thereupon become immediately due and payable; (ii) all Income
paid after such exercise or deemed exercise shall be retained by
the Buyer and applied to the aggregate unpaid Repurchase Price
and any other amounts owing by the Seller hereunder; (iii) the
Seller shall immediately deliver to the Buyer any Purchased
Loans that are subject to a Transaction which are then in the
Seller's possession or control; (iv) the Buyer may, without
notice to the Seller, (A) immediately sell, in a recognized
market (or otherwise in a commercially reasonable manner) at
such price or prices as the Buyer may reasonably deem
satisfactory, any or all Purchased Loans subject to such
Transactions and apply the proceeds thereof to the aggregate
unpaid Repurchase Prices and any other amounts owing by the
Seller hereunder or (B) in its sole discretion elect, in lieu of
selling all or a portion of such Purchased Loans, to give the
Seller credit for such Purchased Loans in an amount equal to the
price therefor on such date, obtained from a generally
recognized source, against the aggregate unpaid Repurchase
Prices and any other amounts owing by the Seller hereunder; and
(v) the Buyer may refuse to enter into any further Transactions
with the Seller under this Agreement and may determine that the
Agreement is terminated.
(c) Upon the occurrence of an Event of Default by the Buyer and
tender by the Seller of payment of the aggregate Repurchase
Price for any Transaction, (i) all right, title and interest in
and entitlement to all Purchased Loans subject to such
Transaction shall be deemed transferred to the Seller; (ii) the
Buyer shall deliver all such Purchased Loans to the Seller;
(iii) the Seller may, without notice to the Buyer, (A)
immediately purchase, in a commercially reasonable manner, at
such price or prices as the Seller may reasonably deem
satisfactory, Mortgage Loans ("Replacement Mortgage Loans") of
the same class and amount as any Purchased Loans that are not
delivered by the Buyer to the Seller as required hereunder or
(B) in its sole discretion elect, in lieu of purchasing
Replacement Mortgage Loans, to be deemed to have purchased
Replacement Mortgage Loans at the price therefor on such date,
obtained from a generally recognized source; and (iv) the Buyer
shall be liable to the Seller for any excess of the price paid
(or deemed paid) by the Seller for Replacement Mortgage Loans
over the Repurchase Price for the Purchased Loans replaced
thereby.
(d) The parties acknowledge and agree that (i) in the absence of a
generally recognized source for prices or bid or offer
quotations for any Mortgage Loan, the nondefaulting party may
establish the source therefor in its sole discretion; and (ii)
all prices, bids and offers shall be determined together with
accrued Income (except to the extent contrary to market practice
with respect to the relevant Mortgage Loans).
(e) For purposes of this Paragraph 13, the Repurchase Price for each
Transaction hereunder with respect to which the Buyer is in
default shall not increase above the amount of such Repurchase
Price for such Transaction determined as of the date of the
exercise or deemed exercise by the nondefaulting party of the
option referred to in subparagraph (a) of this Paragraph.
(f) The defaulting party shall be liable to the nondefaulting party
for (i) the amount of all reasonable legal or other expenses
incurred by the nondefaulting party in connection with or as a
result of an Event of Default, (ii) damages in an amount equal
to the cost (including all fees, expenses and commissions) of
entering into replacement transactions and entering into or
terminating hedge transactions in connection with or as a result
of an Event of Default, and (iii) any other loss, damage, cost
or expense directly arising or resulting from the occurrence of
an Event of Default in respect of a Transaction.
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(g) To the extent permitted by applicable law, the defaulting party
shall be liable to the nondefaulting party for interest at the
Default Rate on any amounts owing by the defaulting party
hereunder from the date the defaulting party becomes liable for
such amounts hereunder until such amounts are (i) paid in full
by the defaulting party or (ii) satisfied in full by the
exercise of the nondefaulting party's rights hereunder.
(h) The nondefaulting party shall have, in addition to its rights
hereunder, any rights otherwise available to it under any other
agreement or applicable law.
(i) Upon default by the Seller, all rights of the Seller to receive
payments on the Mortgage Loans which it would otherwise be
authorized to receive hereunder shall cease, and all rights to
such payments shall become vested in the Buyer, which shall have
the sole right to receive such payments and apply them to the
amounts owed by the Seller pursuant to the Agreement. All
payments that are received by the Seller contrary to the
provisions of this clause (i) shall be received in trust for the
benefit of the Buyer, shall be segregated from other funds of
the Seller and shall be promptly paid to the Buyer.
(j) In addition to the other remedies available to the Buyer upon
the occurrence and during the continuance of an Event of Default
by the Seller, the Buyer shall be entitled to the right of
set-off with respect to any amounts owed by the Seller to the
Buyer under any contract, margin account or other arrangement.
The Seller hereby waives any right it may have to require that
any deposits held by the Buyer for the Seller be set off by the
Buyer against the Seller's obligations under the Agreement.
14. APPLICATION OF PROCEEDS
The proceeds of any sale of or other realization on any or all of the Collateral
at the time held by the Buyer under the Agreement, shall be applied by the Buyer
in the following order of priority:
(a) First, to the payment of all reasonable costs and expenses of
such sale incurred by the Buyer and its affiliates and all
reasonable expenses (including the fees and expenses of
counsel), liabilities and advances reasonably made or incurred
by the Buyer and its affiliates in connection therewith.
(b) Second, to the payment of the outstanding Repurchase Price owed
by the Seller under the Agreement.
(c) Third, to the payment of all other amounts owed by the Seller
under the Agreement.
(d) Fourth, to the payment of any other amounts owed by the Seller
to the Buyer or any affiliate thereof under any other instrument
or agreement.
(e) Fifth, to the payment to the Seller, or to such other Person as
court of competent jurisdiction may direct, of any surplus then
remaining from such proceeds and other cash.
As used in the Agreement, "proceeds" of the Collateral shall mean cash and other
property received or otherwise realized in respect of the Purchased Loans.
15. INDEMNIFICATION
If the Buyer becomes involved in any capacity in any action, proceeding or
investigation in connection with any matter contemplated by this Agreement, the
primary focus of which action, proceeding or investigation concerns the Seller,
the Seller will reimburse the Buyer for its legal and other expenses (including
the cost of any investigation and preparation) as they are incurred by the
Buyer. The Seller also agrees to indemnify and hold harmless the Buyer and its
affiliates and their respective directors, officers, employees and agents
(collectively, the "Indemnified Parties"), from and against any and all losses,
claims, damages and liabilities, joint or several, related to or arising out of
any matters contemplated by this Agreement, unless (and this clause shall apply
only to the extent that) such losses, claims, damages or liabilities resulted
primarily from the gross negligence or willful misconduct of the Buyer.
If the foregoing indemnification is for any reason unavailable to any of the
Indemnified Parties, then the Seller shall contribute to the amount paid or
payable by the Indemnified Parties as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect the relative benefits
received by the Seller, on the one hand, and such Indemnified Parties, on the
other, arising out of the matters contemplated by this Agreement.
11
<PAGE> 12
The reimbursement, indemnity and contribution provided for herein shall be in
addition to any other liability that the Seller may otherwise have under this
Agreement, at law or in equity, and shall survive the termination or expiration
of this Agreement.
16. PAYMENT AND TRANSFER
Unless otherwise mutually agreed, all transfers of funds hereunder shall be in
immediately available funds. All Mortgage Loans transferred by one party hereto
to the other party (a) shall be in suitable form for transfer or shall be
accompanied by duly executed instruments of transfer or assignment in blank and
such other documentation as the party receiving possession may reasonably
request, (b) shall be transferred on the book-entry system of a Federal Reserve
Bank, or (c) shall be transferred by any other method mutually acceptable to the
Seller and the Buyer.
17. LIMITED POWER OF ATTORNEY
The Seller hereby appoints the Buyer to act (after the occurrence and during the
continuation of an Event of Default) as the attorney-in-fact of the Seller for
the purpose of carrying out the provisions of this Agreement and taking any
action and executing any instruments that the Buyer shall deem necessary or
advisable to accomplish the purposes hereof. This appointment as
attorney-in-fact is irrevocable and is coupled with an interest. Without
limiting the generality of the foregoing, the Buyer and its assigns shall have
the right and power to sell Purchased Loans and to receive, endorse and collect
all checks made payable to the order of the Seller on account of the principal
or interest on any of the Purchased Loans and to give full discharge of the
same.
18. EFFECT OF TERMINATION
The termination of this Agreement by either party shall not eliminate any
liability for losses incurred by either party during the duration of this
Agreement. To the extent that this Agreement is terminated, the terms of this
Agreement shall continue to apply to any Transactions outstanding after the
termination of this Agreement. The provisions of Paragraph 15 relating to
Indemnification shall survive the termination of this Agreement.
19. TIME
All references to time contained in the Agreement shall be deemed to be local
time in Charlotte, North Carolina on the applicable day.
20. FEES AND EXPENSES
Nothing in this Agreement shall act as a bar to the collection of any fees or
expenses of the Buyer that the Seller may agree to pay in any separate agreement
relating to any or all of the Transactions.
21. PAYMENT OF SECURED CREDITORS
The Seller may direct the Buyer to pay all or any portion of the Purchase Price
for a Transaction to one or more creditors of the Seller, or any of its
affiliates, if such payment is necessary to release a lien on the Mortgage Loans
that are to be purchased in such Transaction. Such payment and release of an
existing lien may occur simultaneously with the purchase of Mortgage Loans under
this Agreement.
22. OPINIONS OF COUNSEL
The Seller shall, on the date hereof and, upon the request of the Buyer, on the
date of any subsequent Transaction, cause to be delivered to the Buyer, with
reliance thereon permitted as to any Person or entity that purchases the
Purchased Loans from the Buyer, a favorable opinion of the Seller's counsel with
respect to the matters set forth in Exhibit D hereto, in form and substance
reasonably acceptable to the Buyer.
23. SINGLE AGREEMENT
The Buyer and the Seller acknowledge that, and have entered into this Master
Repurchase Agreement and will enter into each Transaction hereunder in
consideration of and in reliance upon the fact that, all Transactions hereunder
constitute a single business and contractual relationship and have been made in
consideration of each other. Accordingly, each of the Buyer and the Seller
agrees (a) to perform all of its obligations in respect of each
12
<PAGE> 13
Transaction hereunder, and that a default in the performance of any such
obligations shall constitute a default by it in respect of all Transactions
hereunder, (b) that each of them shall be entitled to set off claims and apply
property held by them in respect of any Transaction against obligations owing to
them in respect of any other Transactions hereunder and (c) that payments,
deliveries and other transfers made by either of them in respect of any
Transaction shall be deemed to have been made in consideration of payments,
deliveries and other transfers in respect of any other Transactions hereunder,
and the obligations to make any such payments, deliveries and other transfers
may be applied against each other and netted.
24. NOTICES AND OTHER COMMUNICATIONS
Any and all notices, statements, demands or other communications hereunder may
be given by a party to the other by mail, facsimile, telegraph, messenger or
otherwise to the address listed below, or such other address as may be specified
in a notice of change of address hereafter received by the other:
SELLER: Aames Capital Corporation
350 South Grand Avenue
Los Angeles, California 90071
Attention: Michelle Treasure
Telephone: (213) 640-4881
Facsimile: (213) 210-5036
BUYER: First Union National Bank
301 South College Street, TW-06
Charlotte, North Carolina 28288-0166
Attention: Wallace M. Saunders
Telephone: (704) 374-4868
Facsimile: (704) 383-8121
All notices, demands and requests hereunder may be made orally, to be confirmed
promptly in writing, or by other communication as specified in the preceding
sentence. Any such notice, demand or request shall be deemed to have been
received on the date delivered to the premises of the addressee (as evidenced,
in the case of registered or certified mail, by the date noted on the return
receipt, or in the case of facsimile or other telecommunication device, the date
noted on the confirmation of such transmission).
25. ENTIRE AGREEMENT; SEVERABILITY
This Agreement shall supersede any existing agreements between the parties
containing general terms and conditions for repurchase transactions. Each
provision and agreement herein shall be treated as separate and independent from
any other provision or agreement herein and shall be enforceable notwithstanding
the unenforceability of any such other provision or agreement.
26. NON-ASSIGNABILITY; TERMINATION
(a) The rights and obligations of the parties under this Agreement
and under any Transaction shall not be assigned by either party
without the prior written consent of the other party, and any
such assignment without the prior written consent of the other
party shall be null and void. Subject to the foregoing, this
Agreement and any Transactions shall be binding upon and shall
inure to the benefit of the parties and their respective
successors and assigns. This Agreement may be terminated by
either party upon giving written notice to the other, except
that this Agreement shall, notwithstanding such notice, remain
applicable to any Transactions then outstanding.
(b) Subparagraph (a) of this Paragraph 26 shall not preclude a party
from assigning, charging or otherwise dealing with all or any
part of its interest in any sum payable to it under Paragraph 13
hereof.
(c) This Agreement may be terminated by the Buyer if, for any
reason, any Transaction is not deemed to be a purchase and sale,
and the Agreement shall for any reason cease to create a valid,
first priority security interest in any of the Purchased Loans
purported to be covered thereby.
13
<PAGE> 14
27. GOVERNING LAW
THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NORTH CAROLINA
WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF.
28. NO WAIVERS, ETC.
No express or implied waiver of any Event of Default by either party shall
constitute a waiver of any other Event of Default and no exercise of any remedy
hereunder by any party shall constitute a waiver of its right to exercise any
other remedy hereunder. No modification or waiver of any provision of this
Agreement and no consent by any party to a departure herefrom shall be effective
unless in writing and duly executed by both of the parties hereto. Without
limitation on any of the foregoing, the failure to give a notice pursuant to
Paragraph 5(b) hereof will not constitute a waiver of any right to do so at a
later date.
29. USE OF EMPLOYEE PLAN ASSETS
(a) If assets of an employee benefit plan subject to any provision of
ERISA are intended to be used by either party hereto (the "Plan
Party") in a Transaction, the Plan Party shall so notify the
other party prior to the Transaction. The Plan Party shall
represent in writing to the other party that the Transaction does
not constitute a prohibited transaction under ERISA or is
otherwise exempt therefrom, and the other party may proceed in
reliance thereon but shall not be required so to proceed.
(b) Subject to the last sentence of subparagraph (a) of this
Paragraph, any such Transaction shall proceed only if the Seller
furnishes or has furnished to the Buyer its most recent available
audited statement of its financial condition and its most recent
subsequent unaudited statement of its financial condition.
(c) By entering into a Transaction pursuant to this Paragraph, the
Seller shall be deemed to (i) represent to the Buyer that since
the date of the Seller's latest such financial statements, there
has been no material adverse change in the Seller's financial
condition which the Seller has not disclosed to the Buyer, and
(ii) agree to provide the Buyer with future audited and unaudited
statements of its financial condition as they are issued, so long
as it is a Seller in any outstanding Transaction involving a Plan
Party.
30. INTENT
(a) The parties recognize that each Transaction is a "repurchase
agreement" as that term is defined in Section 101 of Title 11 of
the Bankruptcy Code, and a "securities contract" as that term is
defined in Section 741 of the Bankruptcy Code. The parties
further intend and recognize that the Mortgage Loans constitute
"securities" as such term is defined in Section 101(49) of the
Bankruptcy Code.
(b) It is understood that either party's right to liquidate Mortgage
Loans delivered to it in connection with Transactions hereunder
or to exercise any other remedies pursuant to Paragraph 13 hereof
is a contractual right to liquidate such Transaction as described
in Sections 555 and 559 of the Bankruptcy Code.
(c) Although the parties intend that all Transactions hereunder be
sales and purchases and not loans, in the event any such
Transactions are deemed to be loans, the Seller shall be deemed
to have pledged to the Buyer as security for the performance by
the Seller of its obligations under each such Transaction, and
shall be deemed to have granted to the Buyer a security interest
in, all of the Purchased Loans with respect to all Transactions
hereunder and all Income thereon and other proceeds thereof.
(d) The parties agree and acknowledge that if a party hereto is an
"insured depository institution," as such term is defined in
FDIA, then each Transaction hereunder is a "qualified financial
contract," as that term is defined in FDIA and any rules, orders
or policy statements thereunder (except insofar as the type of
assets subject to such Transaction would render such definition
inapplicable).
(e) It is understood that this Agreement constitutes a "netting
contract" as defined in and subject to Title IV of FDICIA and
each payment entitlement and payment obligation under any
Transaction
14
<PAGE> 15
hereunder shall constitute a "covered contractual payment
entitlement" or "covered contractual payment obligation",
respectively, as defined in and subject to FDICIA (except
insofar as one or both of the parties is not a "financial
institution" as that term is defined in FDICIA).
31. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS
The parties acknowledge that they have been advised that:
(a) in the case of Transactions in which one of the parties is a
broker or dealer registered with the SEC under Section 15 of the
1934 Act, the Securities Investor Protection Corporation has
taken the position that the provisions of SIPA do not protect the
other party with respect to any Transaction hereunder;
(b) in the case of Transactions in which one of the parties is a
government securities broker or a government securities dealer
registered with the SEC under Section 15C of the 1934 Act, SIPA
will not provide protection to the other party with respect to
any Transaction hereunder; and
(c) in the case of Transactions in which one of the parties is a
financial institution, funds held by the financial institution
pursuant to a Transaction hereunder are not on deposit and
therefore are not insured by the Federal Deposit Insurance
Corporation or the National Credit Union Share Insurance Fund, as
applicable.
32. MULTIPLE COUNTERPARTS
For the purpose of facilitating the execution of this Agreement as herein
provided and for other purposes, this Agreement may be executed simultaneously
in any number of counterparts, each of which counterparts shall be deemed to be
an original, and such counterparts shall constitute and be one and the same
instrument.
15
<PAGE> 16
IN WITNESS WHEREOF, the Seller and the Buyer have caused this Master
Repurchase Agreement to be executed by their authorized representatives as of
this 19 day of August, 1998.
AAMES CAPITAL CORPORATION,
as Seller
By: /s/ David A. Sklar
--------------------------------------
Name: David A. Sklar
Title: Executive Vice President-Finance
FIRST UNION NATIONAL BANK,
as Buyer
By: /s/ C.L. Simms
--------------------------------------
Name: C.L. Simms
Title VP
16
<PAGE> 17
EXHIBIT A
FORM OF CONFIRMATION
[Date]
[Seller]
[____________________________]
[____________________________]
[____________________________]
Attention: [_________________]
Ladies and Gentlemen:
Pursuant to the master repurchase agreement (the "Master Repurchase
Agreement"), dated as of [___________ __, ____], between the undersigned (the
"Buyer") and you (the "Seller"), the Buyer hereby agrees to purchase the
Mortgage Loans identified on Schedule I attached hereto, subject to the terms
set forth below:
Purchase Date: ________________
Repurchase Date: ________________
Purchase Price: ________________
Pricing Rate: ________________
Margin: [___]%
Original Margin: [___]%
All of the representations and warranties made in the Master Repurchase
Agreement must be true and correct as of the Purchase Date and no Event of
Default shall have occurred. Capitalized terms not defined herein shall have the
meanings assigned to them in the Master Repurchase Agreement.
If you are in agreement with these terms, please execute the
acknowledgement and acceptance set forth below and return one copy of this
Confirmation to the Buyer.
Very truly yours,
FIRST UNION NATIONAL BANK,
as Buyer
By:_____________________________________
Name:___________________________________
Title:__________________________________
Accepted and Agreed as of this ____ day of __________, ____.
AAMES CAPITAL CORPORATION,
as Seller
By:________________________
Name:______________________
Title:_____________________
<PAGE> 18
SCHEDULE I TO CONFIRMATION
MORTGAGE LOAN SCHEDULE
<PAGE> 19
EXHIBIT B
REPRESENTATIONS AND WARRANTIES
RELATING TO ELIGIBLE MORTGAGE LOANS
(a) The Mortgage Loan is a binding and valid obligation of the obligor
thereon, in full force and effect and enforceable in accordance with its terms.
(b) The Mortgage Loan is genuine in all respects as appearing on its
face and as represented in the books and records of the Seller and all
information set forth therein is true and correct.
(c) The Mortgage Loan is free of any default of any party thereto
(including the Seller), other than as expressly permitted pursuant to
subparagraph (d) below, counterclaims, offsets and defenses and from any
rescission, cancellation or avoidance, whether by operation of law or otherwise.
(d) No payment under the Mortgage Loan is more than 59 days past due the
payment due date set forth in the underlying promissory note and deed of trust
(or mortgage); provided that in no event shall Purchased Loans having any
payment which is more than 30 days past due the payment date set forth in the
underlying promissory note and deed of trust (or mortgage) constitute more than
the lesser of (i) five percent (by Market Value) of the Aggregate Commitment or
(ii) ten percent (by Market Value) of all Purchased Loans then owned by the
Buyer pursuant to the terms of this Agreement.
(e) The Mortgage Loan contains the entire agreement of the parties
thereto with respect to the subject matter thereof, has not been modified or
amended in any respect and is free of concessions or understandings with the
obligor thereon of any kind not expressed in writing therein.
(f) The Mortgage Loan complies in all respects and was originated in
accordance with all applicable laws and regulations governing the same,
including, without limitation, the federal Consumer Credit Protection Act, the
federal Real Estate Settlement Procedures Act, the federal Equal Credit
Opportunity Act, the federal Truth-in-Lending Act, and the regulations
promulgated thereunder and all applicable usury laws and restrictions, and all
notices, disclosures and other statements or information required by law or
regulation to be given, and any other act required by law or regulation to be
performed, in connection with the Mortgage Loan have been given and performed as
required.
(g) The proceeds of each Mortgage Loan have been fully disbursed, and
there is no obligation on the part of the mortgagee to make future advances
thereunder. Any and all requirements as to completion of any on-site or off-site
improvements and as to disbursements of any escrow funds therefor either have
been complied with or are not yet required to be complied with but will be
complied with as and when required. All costs, fees and expenses incurred in
making or closing or recording such Mortgage Loans were paid.
(h) At all times the Mortgage Loan will be free and clear of all liens.
(i) The property covered by the Mortgage Loan is insured against loss or
damage by fire and all other hazards normally included within standard extended
coverage in accordance with the provisions of the Mortgage Loan with the Seller
named as a loss payee thereon.
(j) The property covered by the Mortgage Loan is free and clear of all
liens except:
(i) the lien in favor of the Seller;
(ii) the lien of current real property taxes and assessments not
yet due and payable;
(iii) covenants, conditions and restrictions, rights of way,
easements and other matters of the public record, as of the date of
recording, as are acceptable to mortgage lending institutions generally
and specifically referred to in a lender's title insurance policy
delivered to the originator of the Mortgage Loan and which (A) are
referred to or otherwise considered in the appraisal made for the
originator of the Mortgage Loan or (B) do not materially adversely
affect the appraised value of the property as set forth in such
appraisal;
(iv) other matters to which like properties are commonly subject
and which do not materially interfere with the benefits of the security
intended to be provided by the Mortgage Loan or the use, enjoyment,
value or marketability of the related property;
(v) liens subordinate in priority to the lien in favor of the
Seller; and
<PAGE> 20
(vi) in the case of second priority Mortgage Loans, one lien
superior in priority to the lien in favor of the Seller.
(k) The property shall be improved, and such improvements shall consist
of a completed one- to four-unit single family residence, including, but not
limited to, a condominium, planned unit development or townhouse, but excluding
in any event a co-op or mobile home.
(l) The Mortgage Loan is not subject to any servicing arrangement with
any Person other than the Seller or the Subservicer nor are any servicing rights
relating to the Mortgage Loan subject to any lien, claim, interest or negative
pledge in favor of any Person other than as permitted hereunder.
(m) The Additional Required Documents for each Mortgage Loan include an
appraisal of the related property signed prior to the approval of the Mortgage
Loan application by a qualified appraiser, duly appointed by the originator of
the Mortgage Loan, who has no interest, direct or indirect, in the mortgaged
property or in any loan made on the security thereof, other than as an employee
of the lender, and whose compensation is not affected by the approval or
disapproval of the Mortgage Loan, and the appraisal and appraiser both satisfy
the requirements of Title XI of the Federal Institutions Reform, Recovery, and
Enforcement Act of 1989 and the regulations promulgated thereunder, all as in
effect on the date the Mortgage Loan was originated.
(n) The Mortgage Loan is secured by a first or second priority mortgage
or deed of trust on the property covered thereby.
(o) The Mortgage Loan is not a revolving credit facility.
(p) No real property taxes or insurance payments due and payable with
respect to the property (or escrow installments therefor) covered by the
Mortgage Loan are past due the payment due date thereof.
(q) No more than 180 days have elapsed since the Mortgage Loan was first
purchased by the Buyer pursuant to this Agreement; provided that no more than 30
percent of all Purchased Loans owned by the Buyer pursuant to this Agreement at
any time shall have been first purchased by the Buyer pursuant to this Agreement
more than 120 days prior to the date on which eligibility hereunder is
determined.
(r) The Mortgage Loan has a loan-to-value ratio of not more than 95%,
based on the value assigned to the property securing the Mortgage Loan in the
appraisal referred to in (m) above.
(s) The Mortgage Loan complies with the Underwriting Standards.
<PAGE> 21
EXHIBIT C
SELLER'S UNDERWRITING STANDARDS
<PAGE> 22
EXHIBIT D
FORM OF OPINION OF COUNSEL
<PAGE> 1
EXHIBIT 11
AAMES FINANCIAL CORPORATION
EPS BASIC TO FULLY DILUTED RECONCILIATION
<TABLE>
<CAPTION>
YEAR-ENDED JUNE 30,
----------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BASIC W/A SHARES 28,548 26,400 21,681
ADD: OPTIONS 1,094 1,971 3,513
ADD: CONVERT SHARES 6,107 6,145 2,054
------- ------- -------
FULLY DILUTED SHARES 35,749 34,516 27,248
======= ======= =======
BASIC NET INCOME $40,317 $17,109 $29,791
CONVERT INTEREST 3,645 3,710 1,223
------- ------- -------
FULLY DILUTED NET INCOME $43,962 $20,819 $31,014
======= ======= =======
BASIC EPS $ 1.41 $ 0.65 $ 1.37
FULLY DILUTED EPS $ 1.23 $ 0.60 $ 1.14
</TABLE>
F-31
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY DOING BUSINESS NAMES JURISDICTION OF INCORPORATION
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Aames Capital Acceptance Corp. Delaware
Aames Capital Corporation Aames Home Loan, California
The Center for Loan Servicing
Aames Funding Corporation Aames Home Loan, California
The Center for Loan Servicing,
Metro Acceptance Corporation
One Stop Group Limited United Kingdom
One Stop Mortgage Limited United Kingdom
One Stop Mortgage, Inc. One Stop Funding Wyoming
One Stop Operations Limited United Kingdom
Oxford Aviation Corporation, Inc. California
Rossmore Financial Insurance Services, Inc. California
Serrano Insurance Services Nevada
Windsor Management Co. California
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Forms S-3 (Nos. 33-95120,
33-93826, 333-15777 and 333-27537) and S-8 (Nos. 33-44606, 333-01512, 333-12063
and 333-19675) of Aames Financial Corporation of our report dated August 6,
1997, appearing on page F-1 of this Form 10-K.
PricewaterhouseCoopers LLP
Los Angeles, California
September 28, 1998
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Aames Financial Corporation
We consent to incorporation by reference in the registration statements
(No. 33-95120, 33-93826, 333-15777 and 333-27537) on Forms S-3 of Aames
Financial Corporation (AFC) and in the registration statements (Nos. 33-44606,
333-01512, 333-12063 and 333-19675) on Forms S-8 of AFC, of our report dated
August 16, 1996, relating to the 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 the June 30, 1998 annual report on Form 10-K of AFC.
/s/ KPMG PEAT MARWICK LLP
Orange County, California
September 28, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 12,322,000
<SECURITIES> 0
<RECEIVABLES> 655,007,000
<ALLOWANCES> 664,000
<INVENTORY> 198,202,000
<CURRENT-ASSETS> 864,867,000
<PP&E> 24,019,000
<DEPRECIATION> 10,080,000
<TOTAL-ASSETS> 878,806,000
<CURRENT-LIABILITIES> 246,413,000
<BONDS> 286,990,000
0
0
<COMMON> 31,000
<OTHER-SE> 345,372,000
<TOTAL-LIABILITY-AND-EQUITY> 878,806,000
<SALES> 325,274,000
<TOTAL-REVENUES> 325,274,000
<CGS> 34,195,000
<TOTAL-COSTS> 34,195,000
<OTHER-EXPENSES> 135,506,000
<LOSS-PROVISION> 39,164,000
<INTEREST-EXPENSE> 43,982,000
<INCOME-PRETAX> 72,427,000
<INCOME-TAX> 32,110,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,317,000
<EPS-PRIMARY> 1.41<F1>
<EPS-DILUTED> 1.23
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
