<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
Form 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 16, 1998
AAMES FINANCIAL CORPORATION
(Exact name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
Delaware 0-19604 95-340340
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
</TABLE>
350 South Grand Avenue, 52nd Floor
Los Angeles, California 90071
(Address of Principal Executive Offices)
(213) 210-5000
(Registrant's Telephone Number, Including Area Code)
NA
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
ITEM 5. OTHER EVENTS
Reference is made to the press release of Registrant issued on November
16, 1998 which contains information meeting the requirements of this Item 5 and
is incorporated herein by this reference. A copy of the press release is
attached to this Form 8-K as Exhibit 99.
2
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Current Report on Form 8-K to be
signed on its behalf by the undersigned hereunto duly authorized.
AAMES FINANCIAL CORPORATION
Dated: November 17, 1998 By: /s/ Barbara S. Polsky
---------------------
Barbara S. Polsky
Executive Vice President,
Geeneral Counsel and Secretary
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<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
99 Press release issued November 16, 1998
</TABLE>
4
<PAGE> 1
EXHIBIT 99
FOR IMMEDIATE RELEASE
Contact:
David Sklar
Aames Financial Corporation
(213) 210-5311
or
Jeffrey Lloyd/Steve Hawkins
Sitrick And Company
(310) 788-2850
AAMES FINANCIAL CORPORATION REPORTS FIRST QUARTER RESULTS
In Substantive Discussions Regarding Potential Capital Infusion of
Up to $100 Million
Record Loan Production in Core Retail and Broker Units
$500 Million Forward Commitment Executed
Significant Loss on Hedge Position Reduces Securitization Gains
Cancels Regular Quarterly Cash Dividend
LOS ANGELES, CALIFORNIA, NOVEMBER 16, 1998 - AAMES FINANCIAL
CORPORATION (NYSE: AAM), a leader in subprime home equity lending, today
reported results for the first fiscal quarter ended September 30, 1998. The
Company also announced that it is in exclusive, substantive discussions with a
private equity fund, with respect to a proposal pursuant to which up to $100
million would be invested in the Company.
Commenting on these discussions, Cary H. Thompson, Aames chief
executive officer, said, "As part of its evaluation of strategic financing
alternatives, the Company is in discussions with a private equity fund
concerning a proposal for an up to $100 million equity investment in the Company
at a purchase price well below the current trading price of the Company's common
stock on the New York Stock Exchange, resulting in substantial dilution to
existing stockholders."
Thompson said that the fund has not completed due diligence, and the
Company and the fund have not entered into a definitive agreement to consummate
the transaction. The parties intend to proceed with due diligence, subject to
certain restrictions on the Company's ability to solicit, negotiate or discuss
alternative strategic transactions with third parties for a period of time
ending no later than December 31, 1998. In connection with these discussions,
the Company has agreed to reimburse the fund for its out-of-pocket expenses and
to pay certain fees, including a fee payable in certain circumstances if the
Company consummates an alternative strategic transaction.
Given the preliminary nature of the discussions and the conditions
involved, investors should not place undue reliance on the existence of these
discussions. There can be no assurance that the fund will, in fact, make an
offer to the Company that the Company will find acceptable, that an agreement
will be entered into or that a transaction will, in fact, even occur. Further,
it is
5
<PAGE> 2
not expected that a transaction with the fund, even if an agreement were
reached, could be consummated in time to address the short-term liquidity
requirements of the Company. However, the Company believes that the contemplated
transaction would address the Company's long-term liquidity requirements.
Thompson also said that the Company was taking action to deal with its
current liquidity requirements. He said, "As a Company that operates on a
negative cash flow basis, Aames depends upon the securitization market, the
credit and capital markets and the whole loan market for its liquidity. Global
conditions in the capital and credit markets have severely restricted the
Company's access to the securitization, credit and capital markets. The
Company's gain on sale from its $650 million securitization completed in
September 1998 was significantly reduced due to the loss on its hedge position
which was not offset by enhanced securitization execution. Weakness in the
asset-backed market continues. These market conditions have had a material and
adverse impact on the Company's liquidity and financial condition. While the
Company retains access to warehouse and other credit facilities with borrowing
limits aggregating in excess of $1.0 billion, changes in advance rates recently
imposed by some of the lenders have limited the amount of warehouse capacity
available to the Company. Although the Company is currently seeking additional
credit facilities, current market conditions have severely hampered the
Company's ability to obtain additional warehouse or residual facilities.
Further, the Company's liquidity constraints have been exacerbated by the drop
in home equity stock prices and the consequent unavailability of the capital
markets. The weakness in the securitization market has caused the Company, along
with other subprime home equity lenders, to seek refuge in the whole loan
market. This has created an abundance in the supply of loans in that market
which has resulted in lowering the prices paid and tightening the underwriting
guidelines applied by the whole loan purchasers. The Company has raised its
prices and modified its underwriting guidelines in response to these changes the
effect of which will decrease loan production in the current quarter. If the
Company cannot obtain additional credit lines secured by its interest-only
strips and residual assets or additional equity capital in the next 30 days, it
may have to engage in extraordinary transactions, such as seeking subservicing
arrangements that include the obligation to make servicing advances or strategic
asset sales, to provide the liquidity necessary to operate, albeit on a much
smaller scale."
First Quarter Results
The Company reported revenue for the quarter was $77.0 million, down
slightly from $77.9 million from last year's first fiscal quarter. Net income
for the quarter was $448 thousand, compared to net income of $13.1 million for
the same period a year ago. On a basic and diluted per share basis, net income
per share for the quarter totaled $0.01, compared to $0.47 and $0.40,
respectively, in the prior year period.
The decrease in revenues and net income primarily reflects a $15.3
million loss the Company incurred on its hedge positions expiring in September
and December 1998 which reduced its gain on sale. For the first fiscal quarter,
gain on sale, including net unrealized gain on valuation of interest-only
strips, was $44.1 million, down 11.3 percent from $49.8 million recorded in last
year's first quarter. During the first fiscal quarter, the Company, as it has
done
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historically, hedged its fixed rate pipeline by purchasing hedges against U.S.
Treasuries. In the past, changes in Treasury rates were generally reflected in
the pass-through rates of the fixed rate portion of the Company's
securitization. During 1998's first fiscal quarter, unsettled market conditions
resulted in a loss on the Company's hedge position without an equivalent benefit
from reductions in the pass-through rate paid on certificates sold in the fixed
rate portion of the Company's securitization.
Neil B. Kornswiet, Aames president and co-chairman, said, "Despite an
increasingly hostile environment, we were able to achieve record loan production
in the Company's core retail and broker production channels, which mitigated the
decrease in gain on sale. Total loan production for the quarter increased 39
percent to $725 million, compared to $523 million for the comparable quarter
last year. Aames' retail originations for the quarter were $228 million,
compared to $134 million for the same quarter last year, an increase of 70
percent, and origination volume for the One Stop broker unit reached $351
million, compared to $262 million in 1997, an increase of 34 percent. Even our
correspondent unit, which implemented pricing changes in last year's fourth
fiscal quarter resulting from the elimination of bulk purchases, increased
production 14 percent to $146 million from $128 million in the prior year."
Kornswiet said that at September 30, 1998, Aames' loan servicing
portfolio increased to $4.4 billion, up 29 percent from $3.4 billion for the
same period last year. Of the Company's $4.4 billion loan servicing portfolio,
only 1 percent was serviced by a third party at September 30, 1998. Of the
Company's $3.4 billion servicing portfolio at September 30, 1997, 45 percent was
subserviced by a third party at that date. Despite the increase in the
portfolio, income from loan servicing decreased to $9.2 million for the quarter,
compared to $9.8 million a year earlier, due to decreased servicing spreads and
increased amortization of the interest-only strips.
He added, "In October, the Company sold $125 million of loans on a
whole loan basis, which represented a majority of the loans held for sale at
September 30, 1998. In addition, the Company has signed a forward commitment to
sell $500 million of loans; this commitment expires in May 1999. Despite these
whole loan sales, we have not abandoned securitization. As we have stated, we
will continue to monitor market conditions and cash flow needs, as well as
profitability, in our loan disposition strategy, and will act opportunistically,
seeking the best return possible."
Kornswiet said, "The gains associated with whole loan sales for cash
are generally at levels lower than those recognized when such loans are
securitized. Further, prices currently being paid by whole loan purchasers are
less than the Company's costs of production. Accordingly, sales of loans in the
whole loan market are expected to result in a loss in the next calendar quarter.
Additionally, so long as the Company sells whole loans on a servicing released
basis, the Company will no longer grow the servicing portfolio. A loss in the
second fiscal quarter combined with the first quarter's limited profitability
could violate the minimum profitability covenant in the Company's primary
warehouse facility. In the event of such a violation, the Company would seek the
necessary waivers. However, there can be no assurance that such waivers would be
obtained. If such waivers were not obtained, the warehouse line could be
terminated. If the Company were unable to secure replacement lines, it would
have to
7
<PAGE> 4
cease loan production operations, which would negatively impact profitability
and jeopardize the Company's ability to continue to operate as a going concern."
The Company said that future earnings may be affected by a change in
accounting being proposed by the FASB. On October 23, 1998, the FASB issued a
draft guide, in question and answer format, entitled: "A Guide to Implementation
of Statement 125 on Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, Questions and Answers, Second Edition (the
"Q&A")." The Q&A indicates that two methods have arisen in practice for
accounting for credit enhancements, an item which the Company records as
`Residual Assets.' These methods are the cash-in method and the cash-out method.
The cash-in method treats credit enhancements (pledged loans or cash) as
belonging to the Company. As such, these assets are recorded at their face value
as of the time they are received by the trust. The cash-out method treats credit
enhancements as assets owned by the related securitization trust. As such, these
assets are treated as part of the interest-only strip and are recorded at a
discounted value for the period between when collected by the trust and released
to the Company. The draft Q&A indicates that if no true market exists for credit
enhancement assets, the cash-out method should be used to measure the fair value
of credit enhancements. The draft Q&A remains subject to a comment period and
further amendments prior to becoming final.
The Company has historically used the cash-in method to account for its
residual assets. It is the Company's belief that the cash-in method of
accounting is appropriate and has been an acceptable accounting convention used
by many in the subprime home equity finance sector and other industries. The
Company has not yet completed the calculations necessary to determine what the
ultimate impact of the cash-out method would have on the carrying value of its
residual assets or how that change would be recorded. At September 30, 1998, the
amount of residual assets included in the Company's balance sheet is $211
million. If the FASB does not modify its current position as reflected in the
draft guide to Financial Accounting Standard 125, the Company believes that a
change to the cash-out method will result in a material write-down of its
interest-only strips and a loss in the quarter in which the write-down is
recorded.
Cash Dividend Canceled
The Company announced that its board of directors has canceled the
regular quarterly cash dividend until such time as the Company's earnings and
cash flow improve.
Aames Financial Corporation is a leading home equity lender, and
currently operates 95 Aames Home Loan offices serving 33 states, including the
District of Columbia. Its wholly owned subsidiary, One Stop Mortgage, Inc.
currently operates 51 broker offices serving 46 states, including the District
of Columbia, and 14 Retail Direct offices serving 10 states.
From time to time the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated
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<PAGE> 5
results or other expectations expressed in the Company's forward-looking
statements. The risks and uncertainties that may affect the operations,
performance and results of the Company's business include the following:
negative cash flows and capital needs; delinquencies and losses in
securitization trusts; negative impact on cash flow, right to terminate mortgage
servicing; changes in interest rate environment; year 2000 compliance and
technological enhancement; prepayment risk; basis risk; credit risk; risk of
adverse changes in the secondary market for mortgage loans; dependence on
funding sources; 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. For a more complete discussion of these risks
and uncertainties, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Factors" in the Company's
form 10-K for the fiscal year ended June 30, 1998 and "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors" in form 10-Q for the quarter ended September 30, 1998.
# # #
9
<PAGE> 6
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
Revenue:
Gain on sale of loans $38,892,000 $44,721,000
Net unrealized gain on valuation
of interest-only strips 5,196,000 5,029,000
Commissions 9,988,000 5,855,000
Loan service 9,225,000 9,782,000
Fees and other 13,676,000 12,525,000
----------- -----------
Total revenue $76,977,000 $77,912,000
----------- -----------
Expenses:
Compensation and related expenses 23,794,000 21,759,000
Production expenses 10,930,000 5,797,000
General and administrative expenses 13,389,000 8,085,000
Interest expense 12,881,000 10,098,000
Provision for loan losses 15,210,000 8,570,000
Nonrecurring charges - -
----------- -----------
Total expenses 76,204,000 54,309,000
----------- -----------
Income before income taxes 773,000 23,603,000
Provision for income taxes 325,000 10,522,000
----------- -----------
Net income $448,000 $13,081,000
Net income per share
Basic $0.01 $0.47
=========== ===========
Diluted $0.01 $0.40
=========== ===========
Dividends per share $0.03 $0.03
=========== ===========
Weighted average number
of shares outstanding
limits, Basic 30,977,000 27,767,000
=========== ===========
Diluted 31,265,000 35,333,000
=========== ===========
</TABLE>
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AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
------------- -------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,625,000 $ 12,322,000
Loans held for sale, at lower of cost or market 222,845,000 198,202,000
Accounts receivable 58,488,000 51,072,000
Interest-only strips, estimated at fair market value 378,475,000 359,600,000
Mortgage servicing rights 35,460,000 32,090,000
Residual assets 210,581,000 194,561,000
Equipment and improvements, net 14,034,000 13,939,000
Prepaid and other 15,876,000 17,020,000
------------- -------------
Total assets $ 941,384,000 $ 878,806,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings 306,990,000 286,990,000
Revolving warehouse facilities 179,948,000 141,012,000
Accounts payable and accrued expenses 57,922,000 49,964,000
Income taxes payable 51,461,000 55,437,000
------------- -------------
Total liabilities 596,321,000 533,403,000
------------- -------------
Stockholders' equity:
Preferred Stock, par value $.001 per
share, 1,000,000 shares authorized;
none outstanding
Common Stock, par value $.001 per share
50,000,000 shares authorized;
31,015,800 and 30,962,600 shares outstanding 31,000 31,000
Additional paid-in capital 250,095,000 249,851,000
Retained earnings 94,937,000 95,521,000
------------- -------------
Total stockholders' equity 345,063,000 345,403,000
------------- -------------
Total liabilities and stockholder's equity $ 941,384,000 $ 878,806,000
============= =============
</TABLE>
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AAMES FINANCIAL CORPORATION
QUARTERLY FINANCIAL STATISTICS
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
ORIGINATION VOLUME:
BROKER NETWORK $ 350,801,000 $ 261,834,000
RETAIL 1 228,177,000 133,546,000
CORRESPONDENT 146,079,000 127,759,000
-
--------------- ---------------
TOTAL $ 725,057,000 $ 523,139,000
=============== ===============
RETAIL WTD AVG COMM RATE 4.24% 4.57%
SERVICING PORTFOLIO: $ 4,440,573,000 $ 3,402,000,000
SERVICED IN HOUSE: 4,387,016,000 1,871,100,000
LOAN SALES:
WHOLE LOANS SOLD $ 45,766,000 $ 39,033,000
SECURITIZATIONS 649,999,000 504,136,000
SERVICING SPREAD ON SECURITIZATIONS 3.61% 4.17%
COMPONENTS OF REVENUE:
GAIN ON SALE OF LOANS $ 38,892,000 $ 44,721,000
NET UNREALIZED GAIN ON VALUATION
OF INTEREST-ONLY STRIPS 5,196,000 5,029,000
COMMISSIONS:
RETAIL 9,606,000 4,954,000
BROKER NETWORK (211,000) 538,000
OTHER 593,000 363,000
LOAN SERVICE:
SERVICING SPREAD 3,369,000 6,170,000
PREPAYMENT FEES 3,500,000 2,355,000
LATE CHGS & OTHER SERV FEES 2,356,000 1,257,000
FEES & OTHER:
CLOSING 618,000 587,000
APPRAISAL 947,000 501,000
UNDERWRITING 453,000 246,000
INTEREST INCOME 11,514,000 11,031,000
OTHER 144,000 160,000
=============== ===============
TOTAL REVENUE $ 76,977,000 $ 77,912,000
=============== ===============
</TABLE>
NOTE: 1- Includes 125 Product, Private Investor repurchases, and Broker loans
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The following table sets forth delinquency, foreclosure, loss and reserve
information of the Company's servicing portfolio for the periods indicated:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
June 30, September 30,
-------------------------------------- --------------------------
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <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% 3.9% 3.2%
Two months 1.3% 1.9% 1.8% 1.3% 1.3%
Three or more months:
Not foreclosed (5) 9.0% 8.1% 8.0% 8.8% 8.3%
Foreclosed (6) 1.5% 1.0% 1.0% 1.6% 1.2%
---- ---- ---- ---- ----
Total 15.6% 15.3% 15.7% 15.6% 14.0%
Percentage of dollar amount of loans foreclosed to
loans serviced (period end) (2)(4) 2.0% 1.5% 1.1% 0.58% 0.58%
Number of loans foreclosed (7) 1,125 (6) 560 (6) 221 (6) 346 (6) 241 (6)
Principal amount of foreclosed loans (7) $84,613 $48,029 $14,349 $25,731 $19,744
Net losses on liquidations (8) $26,488 $ 5,470 $ 931 $ 8,627 $ 4,160
One time charge-offs to reserve (9) $ 6,000
Percentage of annualized losses to average
servicing portfolio (4)(10) 0.72% 0.24% 0.09% 0.80% 0.51%
Liquidation loss reserve (11) $50,262 $43,586 $10,300 $56,845 $47,948
</TABLE>
- -----------------------------------
(1) Delinquent loans are loans for which more than one payment is due.
(2) The delinquency and foreclosure percentages are calculated on the basis of
the total dollar amount of mortgage loans originated or purchased by the
Company and, in each case, serviced by the Company, and any subservicer as
of the end of the periods indicated. Percentages for fiscal year 1996 have
not been restated to include delinquencies on loans originated by One Stop.
The Company believes any such adjustment would not be material.
(3) At Sepember 30, 1998, the dollar volume of loans delinquent more than 90
days in the Company's eleven REMIC trusts, four of which also exceeded
certain loss limits, formed in November 1992, June 1993 and during the
period form March 1995 to March 1997, exceeded the permitted limit in the
related pooling and servicing agreements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Capital
Resources;" and "-- Risk Factor--Deliquencies and Losses in Securitzations;
Trusts Right to Terminate Mortgage Servicing" and "Negative Impact on Cash
Flow".
(4) The servicing portfolio used in the percentage calculations includes $35.4
millions of loans subserviced by the Company on an interim basis at
September 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 the periods presented is due to the larger, more
seasoned servicing portfolio.
(8) Represents losses, net of gains, on foreclosed properties sold during the
period indicated excluding the one time charge referred to in the footnote
(9) below.
(9) Represents a one time reversal of $6.0 milliion to the loss reserve
recorded in March 1998 resulting from the Company's delay in recording
information transferred from a third pary servicer regarding loan payoffs.
The amount was not sufficiently material to require adjustment of
previously reported receivables of the reserve. of previously reported
receivables of 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.
13
