As filed with the Securities and Registration No. 333-______
Exchange Commission on August 13, 1999
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM S-3REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
____________________
AAMES FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-4340340
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
350 SOUTH GRAND AVENUE, 52ND FLOOR
LOS ANGELES, CALIFORNIA 90071
(323) 210-5000
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
------------------
BARBARA S. POLSKY, ESQ.
EXECUTIVE VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
AAMES FINANCIAL CORPORATION
350 SOUTH GRAND AVENUE, 52ND FLOOR
LOS ANGELES, CALIFORNIA 90071
(323) 210-5000
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
--------------------
Copies to:C.N. FRANKLIN REDDICK, III, ESQ.
TROOP STEUBER PASICH REDDICK & TOBEY, LLP
2029 CENTURY PARK EAST, 24TH FLOOR
LOS ANGELES, CALIFORNIA 90067
(310) 728-3000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
- ------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF REGISTRATION FEE
SECURITIES TO BE REGISTERED OFFERING PRICE (2)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
SUBSCRIPTION RIGHTS (1) $0 $0
- ------------------------------------------------------------------------------------------------
SERIES C CONVERTIBLE PREFERRED $31,016,964 $8,622.72
STOCK
- ------------------------------------------------------------------------------------------------
COMMON STOCK(3) (4) (4)
- ------------------------------------------------------------------------------------------------
<FN>
(1)EVIDENCING THE RIGHT TO SUBSCRIBE FOR THE SERIES C CONVERTIBLE PREFERRED
STOCK DESCRIBED BELOW. PURSUANT TO RULE 457(G), NO SEPARATE REGISTRATION FEE
IS REQUIRED FOR THE SUBSCRIPTION RIGHTS SINCE THEY ARE BEING REGISTERED IN
THE SAME REGISTRATION STATEMENT AS THE SERIES C CONVERTIBLE PREFERRED STOCK
UNDERLYING THE SUBSCRIPTION RIGHTS.
(2)CALCULATED IN ACCORDANCE WITH RULE 457(O) BASED ON THE ESTIMATED MAXIMUM
AGGREGATE OFFERING PRICE OF THE SERIES C CONVERTIBLE PREFERRED STOCK. THE
REGISTRANT WILL OFFER ONE SUBSCRIPTION RIGHT FOR EACH SHARE OF COMMON STOCK
OUTSTANDING ON THE RECORD DATE FOR THE OFFERING. THE PROPOSED MAXIMUM
AGGREGATE OFFERING PRICE STATED ABOVE IS BASED ON THE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING ON AUGUST 9, 1999.
(3)INCLUDES CERTAIN PREFERRED STOCK PURCHASE RIGHTS OF THE REGISTRANT,
EXERCISABLE UPON THE OCCURRENCE OF CERTAIN EVENTS. SEE "DESCRIPTION OF
CAPITAL STOCK--ANTI-TAKEOVEr PROVISIONS" IN THE PROSPECTUS WHICH CONSTITUTES
A PART OF THIS REGISTRATION STATEMENT.
(4)SUCH INDETERMINATE NUMBER OF SHARES OF COMMON STOCK AS SHALL BE ISSUABLE
UPON THE CONVERSION OF THE SERIES C CONVERTIBLE PREFERRED STOCK BEING
REGISTERED HEREUNDER. NO SEPARATE CONSIDERATION WILL BE RECEIVED BY THE
REGISTRANT UPON CONVERSION OF THE SERIES C CONVERTIBLE PREFERRED STOCK AND,
ACCORDINGLY, NO ADDITIONAL REGISTRATION FEE IS PAYABLE PURSUANT TO RULE
457(I).
</FN>
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE TIME UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED AUGUST__, 1999
PROSPECTUS
AAMES FINANCIAL CORPORATION
31,016,964 SHARES OF SERIES C CONVERTIBLE PREFERRED STOCK
$1.00 PER SHARE
We are distributing subscription rights to purchase an aggregate of
31,016,964 shares of Series C Convertible Preferred Stock to the holders of our
common stock. You may not transfer your subscription rights. You will receive
one subscription right for each share of our common stock that you held on
____________, 1999. Each subscription right entitles you to purchase one share
of Series C Convertible Preferred Stock for $1.00 per share. The subscription
rights are exercisable beginning on the date of this prospectus and continuing
until 5:00 p.m. New York City Time on ______, 1999.
Neil B. Kornswiet, the President of Aames Financial Corporation, has
agreed to purchase 1,667,000 shares of Series C Convertible Preferred Stock in
the rights offering. Mr. Kornswiet will pay for his shares with a note given to
Aames. His promise to pay the note will be secured by the Series C Convertible
Preferred Stock he purchases in the rights offering. In addition, if less than
25 million shares of Series C Convertible Preferred Stock are purchased in this
rights offering, Capital Z Financial Services Fund II, L.P., a major stockholder
of Aames, has agreed to purchase the difference (up to 25 million shares of
Series C Convertible Preferred Stock) for $1.00 per share.
THE SERIES C CONVERTIBLE PREFERRED STOCK
DIVIDEND RATE:
6.5% per year, which we may accrue and not pay in cash until June 30, 2001.
Restrictions related to our debt will preclude us from paying cash dividends on
the Series C Convertible Preferred Stock and all other shares of our capital
stock for the foreseeable future.
VOTING:
The Series C Convertible Preferred Stock will vote with the common stock on an
as-converted basis, EXCEPT THAT HOLDERS OF THE SERIES C CONVERTIBLE PREFERRED
STOCK ARE NOT ENTITLED TO VOTE FOR OUR DIRECTORS.
CONVERSION:
You may convert each share of Series C Convertible Preferred Stock held by you
into one share of common stock at any time. Also, the holders of a majority of
the outstanding shares of Series C Convertible Preferred Stock may direct the
conversion of all holders' shares of Series C Convertible Preferred Stock into
common stock at any time.
REDEMPTION:
We may redeem all of the outstanding shares of Series C Convertible Preferred
Stock at any time on or after February 10, 2009, or earlier if fewer than 25% of
the shares of Series C Convertible Preferred Stock issued to Capital Z Financial
Services Fund II, L.P. and its designated investor on February 10, 1999 are
outstanding.
PRIORITY:
The Series C Convertible Preferred Stock will be senior to all of our common and
preferred stock, except that the Series C Convertible Preferred Stock will be
equal in seniority to our Series B Convertible Preferred Stock.
We intend to file an application to list the Series C Convertible
Preferred Stock for trading on the New York Stock Exchange under the symbol
"___." Our common stock is traded on the New York Stock Exchange under the
symbol "AAM." On August ___, 1999, the closing sale price of the common stock on
the New York Stock Exchange was $________ per share.
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
SUBSCRIPTION PRICE PROCEEDS TO US (BEFORE
EXPENSES)
- ----------------------------------------------------------------------
<S> <C> <C>
PER SHARE $1.00 $1.00
- ----------------------------------------------------------------------
TOTAL $31,016,964 $31,016,964
- ----------------------------------------------------------------------
</TABLE>
THE SERIES C CONVERTIBLE PREFERRED STOCK INVOLVES A HIGH DEGREE OF RISK AND
SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE
INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 15.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------
The date of this prospectus is ______________, 1999.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
Where You Can Find More Information......................................6
A Warning About Forward-Looking Statements...............................7
Prospectus Summary.......................................................9
Risk Factors............................................................15
Aames Financial Corporation.............................................23
The Capital Z Financing.................................................24
Use of Proceeds.........................................................25
Determination of the Subscription Price.................................25
The Rights Offering.....................................................25
Description of the Series C Convertible Preferred Stock.................31
Description of Capital Stock............................................33
Certain Federal Income Tax Consequences.................................35
Plan of Distribution....................................................38
Legal Matters...........................................................38
Experts.................................................................38
</TABLE>
Page 1
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You can read and copy
these documents at the SEC's Public Reference Room, located at 450 Fifth Street,
NW, Room 1024, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room. Our SEC filings are also
available on the SEC's Website at "http://www.sec.gov." You can also read our
SEC filings at the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
The SEC allows us to "incorporate by reference" in this prospectus the
information we file with the SEC, which means that we can disclose important
information to you by referring to the documents containing that information.
The information incorporated by reference is an important part of this
prospectus, and information that we file later with the SEC will automatically
update and supersede this information. We incorporate by reference the documents
listed below and any future filings made with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"),
until the expiration of the rights offering made by this prospectus:
o Our Annual Report on Form 10-K, as amended by Form 10-K/A for the year
ended June 30, 1998.
o Our Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.
o Our Quarterly Report on Form 10-Q for the quarter ended December 31,
1998.
o Our Quarterly Report on Form 10-Q for the quarter ended March 31,
1999.
o Our Current Report on Form 8-K dated August 12, 1998 filed with the
SEC on August 24, 1998.
o Our Current Report on Form 8-K dated November 16, 1998 filed with the
SEC on November 19, 1998.
o Our Current Report on Form 8-K dated December 14, 1998 filed with the
SEC on December 16, 1998.
o Our Current Report on Form 8-K dated December 23, 1998 filed with the
SEC on December 31, 1998.
o Our Current Report on Form 8-K dated January 29, 1999 filed with the
SEC on February 1, 1999.
o Our two Current Reports on Form 8-K, each dated February 2, 1999 and
filed with the SEC on February 4, 1999.
o Our Current Report on Form 8-K dated February 10, 1999 filed with the
SEC on February 25, 1999.
o Our Current Report on Form 8-K dated February 11, 1999 filed with the
SEC on February 16, 1999.
o Our Current Report on Form 8-K dated February 22, 1999 filed with the
SEC on February 24, 1999.
o Our Current Report on Form 8-K dated February 22, 1999 filed with the
SEC on March 1, 1999.
o Our Current Report on Form 8-K dated May 14, 1999 filed with the SEC
on May 24, 1999.
o Our Current Report on Form 8-K dated May 17, 1999 filed with the SEC
on May 18, 1999.
o Our Current Report on Form 8-K dated July 1, 1999, filed with the SEC
on July 8, 1999.
o Our Proxy Statement on Schedule 14A dated August 6, 1999.
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<PAGE>
o Our Information Statement on Schedule 14F dated January 29, 1999.
o Description of our common stock contained in our Registration
Statement on Form 8-A filed with the SEC on October 22, 1991.
o Description of our Series C Convertible Preferred Stock contained in
our Registration Statement on Form 8-A filed with the SEC on ______,
1999.
o Description of our preferred stock purchase rights contained in our
Registration Statement on Form 8-A filed with the SEC on July 12,
1996.
This prospectus is part of a registration statement we filed with the SEC.
You may request a copy of the above information incorporated by reference, at no
cost, by writing to or calling:
Barbara S. Polsky, Esq.
Executive Vice President, Secretary and General Counsel
Aames Financial Corporation
350 South Grand Avenue, 52nd Floor
Los Angeles, California 90071
(323) 210-5000
You should rely only on the information incorporated by reference or
provided in this prospectus or any supplement to this prospectus. We have not
authorized anyone else to provide you with different information. We will not
offer to sell the Series C Convertible Preferred Stock in any state where the
offer is not permitted. You should not assume that the information in this
prospectus or any supplement to this prospectus is accurate as of any date other
than the date on the cover page of this prospectus or any supplement.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains or may incorporate by reference statements that
constitute "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933.
The words "expect," "estimate," "anticipate," "predict," "believe," and similar
expressions and variations of such words are intended to identify
forward-looking statements. Such statements appear in a number of places in this
prospectus and include statements regarding our intent, belief or current
expectations with respect to, among other things:
o market conditions in the securitization, capital, credit and whole
loan markets and their future impact on our operations;
o trends affecting our liquidity position, including, but not limited
to, our access to warehouse and other credit facilities and our
ability to effect whole loan sales;
o the impact of the various cash savings plans and other restructuring
strategies that we are considering;
o our on-going efforts in improving our equity position;
o trends affecting our financial condition and results of operations;
o our plans to address the Year 2000 problem; and
o our business and liquidity strategies.
Page 3
<PAGE>
We caution you not to put undue reliance on such forward-looking
statements. Such forward-looking statements are not guarantees of our future
performance and involve risks and uncertainties. Our actual results may differ
materially from those projected in this prospectus, for the reasons, among
others, discussed in this prospectus under the caption "Risk Factors." We
undertake no obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after the date of this prospectus. In
addition to the risks and uncertainties discussed below, our filings with the
Securities and Exchange Commission contain additional information concerning
risks and uncertainties that would cause actual results to differ materially
from those projected or suggested in our forward-looking statements. You should
carefully review the risk factors discussed in this prospectus and the documents
that are incorporated by reference into this prospectus.
Page 4
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary is not complete and does not contain all of the
important information that you should consider before exercising your
subscription rights. You should carefully read the entire prospectus.
AAMES FINANCIAL CORPORATION
We are a consumer finance company primarily engaged in the business of
originating, purchasing, selling and servicing home equity mortgage loans
secured by single family residences. Our 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 residential mortgage loans
that we originate and purchase, 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.
We originate and purchase loans nationally through three production
channels--retail, broker and correspondent. In recent quarters, we have
emphasized our core retail and broker loan production channels and decreased our
reliance on correspondent purchases. During the three and nine months ended
March 31, 1999, we originated and purchased $402 million and $1.68 billion,
respectively, of mortgage loans.
We retain the servicing on the loans that we originate or purchase and
securitize. At March 31, 1999, we serviced all of our $4.05 billion servicing
portfolio. In April 1999, we entered into a sub-servicing arrangement with a
loan servicing company with respect to $394 million of loans primarily to reduce
the burden on our cash resources caused by our obligation to advance interest on
delinquent loans in our servicing portfolio
As a fundamental part of our business and financing strategy, we sell our
loans to third party investors in the secondary market. We maximize
opportunities in our loan disposition transactions by selling our loan
production through a combination of securitizations and whole loan sales,
depending on market conditions, profitability and cash flows. We sold $394
million and $605 million of loans during the three months ended March 31, 1999
and 1998, respectively, and $1.6 billion and $1.8 billion of loans during the
nine months ended March 31, 1999 and 1998, respectively. Of the total amount of
loans sold during the nine months ended March 31, 1999 and 1998, $650 million
and $1.4 billion were sold in securitizations, respectively. We did not complete
a securitization during the quarters ended December 31, 1998, March 31, 1999 and
June 30, 1999. We did complete a securitization of $393.3 million of mortgage
loans in August 1999.
We are a Delaware corporation formed in 1991. Our executive offices are
located at 350 South Grand Avenue, 52nd Floor, Los Angeles, California 90071,
and our telephone number is (323) 210-5000.
THE CAPITAL Z FINANCING
In February 1999, Capital Z (through a partnership majority owned by it)
invested $75 million in Series B Convertible Preferred Stock and Series C
Convertible Preferred Stock, representing 69.6% of our total equity and voting
power after the investment. Concurrently with this investment, persons
designated by Capital Z purchased $1.5 million and Cary Thompson, our former
Chief Executive Officer, purchased $250 thousand of the Series C Convertible
Preferred Stock pursuant to a management investment agreement with Capital Z. In
August 1999, Capital Z (through a partnership majority-owned by it) purchased an
additional $25 million of Series C Convertible Preferred Stock. The Series B
Convertible Preferred Stock and the Series C Convertible Preferred Stock are
described in this prospectus as the Senior Preferred Stock. The $100 million
investment in Aames by Capital Z is described in this prospectus as the Capital
Z Financing. On September 13, 1999, we will hold our 1998 annual stockholders
meeting. At that meeting, our stockholders will consider, among other things,
proposed amendments to our certificate of incorporation to increase the number
of shares of our authorized common and preferred stock and to effect a
1,000-for-1 forward stock split of our outstanding Senior Preferred Stock. These
proposed amendments to our certificate of incorporation are referred to in this
prospectus as the Recapitalization. After giving effect to the Recapitalization,
Capital Z will beneficially own 26,704,000 shares of Series B
Page 5
<PAGE>
Convertible Preferred Stock and 73,296,000 shares of Series C Convertible
Preferred Stock which were purchased in the Capital Z Financing at an effective
purchase price of $1.00 per share.
Subject to the Recapitalization, Capital Z has agreed, if less than 25
million shares of Series C Convertible Preferred Stock are purchased in the
rights offering, to purchase the difference (up to 25 million shares of Series C
Convertible Preferred Stock) for $1.00. This contractual commitment is referred
to in this prospectus as the Standby Commitment.
THE RIGHTS OFFERING
THE SUBSCRIPTION RIGHTS
DISTRIBUTION OF SUBSCRIPTION RIGHTS
We are distributing to each of our common stockholders, at no charge, one
subscription right for each share of common stock that you owned as of the close
of business on _________, 1999. The subscription rights will be evidenced by
nontransferable Right Certificates.
SUBSCRIPTION RIGHTS
Each subscription right entitles you to purchase one share of Series C
Convertible Preferred Stock for $1.00. When you "exercise" a subscription right,
that means you choose to purchase the Series C Convertible Preferred Stock that
the subscription right entitles you to purchase. You may exercise any number of
your subscription rights, or you may choose not to exercise any subscription
rights. You cannot sell or give your subscription rights to anyone else--only
you can exercise them.
EXPIRATION DATE; AMENDMENT AND TERMINATION
The subscription rights will expire at 5:00 p.m., New York City time, on
______________, 1999. We may extend the expiration date until , 1999 for any
reason. We may amend or terminate the rights offering for any reason. If we
terminate the rights offering, we will promptly return all subscription
payments. We will not pay interest on, or deduct any amounts from, subscription
payments returned if we terminate the rights offering. Subscription rights that
remain unexercised at the expiration time will expire and will no longer be
exercisable.
TRANSFERABILITY
You cannot sell or give your subscription rights to any person.
RISK FACTORS
The exercise of subscription rights involves certain risks. Exercising
subscription rights means making an additional equity investment in us and
should be carefully considered as you would with any other equity investment.
Among other things, you should consider the risks described under the heading
"Risk Factors" beginning on page 15.
STANDBY COMMITMENT
Subject to the Recapitalization, Capital Z has agreed, if less than 25 million
shares of Series C Convertible Preferred Stock are purchased in the rights
offering, to purchase the difference (up to 25 million shares of Series C
Convertible Preferred Stock) for $1.00 per share.
RECORD DATE ______________, 1999, at 5:00 p.m., New York City time.
CONDITIONS TO THE RIGHTS OFFERING
The consummation of the rights offering is conditioned upon the completion of
the Recapitalization and the approval of our application to list the Series C
Convertible Preferred Stock and the underlying common stock for trading on the
NYSE.
Page 6
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Generally, you will not recognize taxable income in connection with the
distribution or exercise of the subscription rights. You may recognize a gain or
loss upon the sale of shares of Series C Convertible Preferred Stock acquired
through exercise of the subscription right. You will not recognize taxable
income on conversion of the Series C Convertible Preferred Stock acquired
through exercise of the subscription rights. You may recognize a gain or loss
upon the sale of shares of Common Stock acquired through conversion of the
Series C Convertible Preferred Stock.
SERIES C CONVERTIBLE PREFERRED STOCK
CONVERSION
Each share of Series C Convertible Preferred Stock is convertible into one share
of common stock. Each holder of Series C Convertible Preferred Stock may convert
its shares at any time. All of the Series C Convertible Preferred Stock is
convertible at the direction of the holder or holders of a majority of the
outstanding shares of Series C Convertible Preferred Stock.
DIVIDENDS
Dividends on the Series C Convertible Preferred Stock will be cumulative and
will accrue at an annual rate of 6.5% on the $1 stated value of each share of
Series C Convertible Preferred Stock. Dividends will be payable quarterly in
cash on March 31, June 30, September 30 and December 31 of each year, except
that we may accrue and not pay dividends through June 30, 2001. We will pay
dividends on the Series C Convertible Preferred Stock only if declared by our
Board of Directors out of funds legally available to pay dividends. Restrictions
related to our debt will preclude us from paying cash dividends on the Series C
Convertible Preferred Stock and all other shares of our capital stock for the
foreseeable future.
PRIORITY
The Series C Convertible Preferred Stock will rank senior in right to dividends
and payment upon liquidation to all classes and series of our common and
preferred stock, except that the Series C Convertible Preferred Stock will be
equal in rank to the Series B Convertible Preferred Stock.
VOTING
The Series C Convertible Preferred Stock will vote in all matters on which our
common stockholders vote on an as-converted basis with the common stock, EXCEPT
THAT THE SERIES C CONVERTIBLE PREFERRED STOCK WILL NOT BE ENTITLED TO VOTE FOR
OUR DIRECTORS.
REDEMPTION
We may redeem all of the outstanding shares of Series C Convertible Preferred
Stock at any time on or after February 10, 2009, or earlier if fewer than 25% of
the shares of Series C Convertible Preferred Stock issued on February 10, 1999
are outstanding.
MECHANICS OF THE OFFERING
PROCEDURE FOR EXERCISING SUBSCRIPTION RIGHTS
You may exercise subscription rights by properly completing and signing your
rights certificate. You must deliver to the subscription agent your rights
certificate with payment of the subscription price of $1.00 for each share of
Series C Convertible Preferred Stock subscribed for on or prior to the date and
time when the rights offering expires. If you use the United States mail to send
your rights certificate, we recommend that you use insured, registered mail. If
you cannot deliver your rights certificate to the subscription agent on time,
you may use the procedures for guaranteed delivery described under "The Rights
Offering -- Exercise of Subscription Rights." We will not pay interest on
subscription payments.
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<PAGE>
Funds paid by uncertified personal checks may take five business days or more to
clear. If you wish to pay the subscription price for Series C Convertible
Preferred Stock by uncertified personal check, we urge you to make payment
sufficiently in advance of the expiration date to ensure that your payment is
received and clears in time. We urge you to consider using a certified or
cashier's check, money order or wire transfer of funds to avoid missing the
opportunity to exercise your subscription rights.
IN ORDER TO EXERCISE YOUR SUBSCRIPTION RIGHTS, YOU MUST EXERCISE THEM BEFORE
THEY EXPIRE. ONCE YOU EXERCISE YOUR SUBSCRIPTION RIGHTS, YOU CANNOT REVOKE YOUR
SUBSCRIPTION.
PERSONS HOLDING COMMON STOCK AND DESIRING TO EXERCISE SUBSCRIPTION RIGHTS
THROUGH OTHERS
If you hold shares of our common stock through a broker, dealer or other
nominee, we will send your rights certificate to your broker, dealer or nominee.
Your broker, dealer or nominee will notify you of the rights offering. If you
wish to exercise your subscription rights, you will need to have your broker,
dealer or nominee act for you. You should contact them and request that they
take the necessary and proper actions to sell or exercise your subscription
rights.
HOW FOREIGN AND CERTAIN OTHER STOCKHOLDERS CAN EXERCISE SUBSCRIPTION RIGHTS
We will not mail rights certificates to you if you are a stockholder with an
address outside the United States or if you have an Army Post Office (APO) or
Fleet Post Office (FPO) address. Instead, the subscription agent will hold
rights certificates for your account. To exercise such subscription rights, you
must notify the subscription agent on or prior to 11:00 a.m., New York City
time, on ___________, 1999, and establish to the satisfaction of the
subscription agent that your exercise is permitted under applicable law.
ISSUANCE OF SERIES C CONVERTIBLE PREFERRED STOCK
We will issue certificates representing shares of Series C Convertible Preferred
Stock purchased pursuant to the exercise of subscription rights as soon as
practicable after the expiration of the rights offering.
SUBSCRIPTION AGENT
ChaseMellon Shareholder Services L.L.C. is acting as the subscription agent in
connection with the rights offering. ChaseMellon's telephone number is ________.
LISTING
We intend to file an application to list the Series C Convertible Preferred
Stock and the underlying common stock for trading on the New York Stock Exchange
under the symbol "___." Our common stock is listed on the NYSE under the symbol
"AAM."
USE OF PROCEEDS
We will receive approximately between $24 million and $30 million from the
rights offering, after paying estimated offering expenses of $1 million. We will
use the proceeds from the rights offering and the Capital Z Financing for
general corporate purposes. See "Use of Proceeds."
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<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The selected consolidated financial and other data as of and for the years
ended June 30, 1998, 1997, 1996, 1995 and 1994 are derived from our audited
consolidated financial statements that are incorporated in this prospectus by
reference. The selected consolidated financial and other data as of and for the
three and nine months ended March 31, 1999 and 1998 are derived from our
unaudited consolidated financial statements that are incorporated in this
prospectus by reference. You should read the following data with the more
detailed information contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report on Form
10-K/A for the year ended June 30, 1998, and Quarterly Report on Form 10-Q for
the Three Months Ended March 31, 1999, each of which is incorporated in this
prospectus by reference.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------- ---------
1999 1998 1999 1998
---- ---- ---- ----
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenue:
<S> <C> <C> <C> <C>
Gain on sale of loans................... $ 8,236 24,821 36,665 91,259
Net gain or (loss) on valuation
of interest-only strips............... - 3,058 (186,451) 13,813
Commissions............................. 9,005 7,515 26,751 20,531
Loan service............................ 11,656 11,634 32,510 31,778
Fees and other.......................... 7,917 12,510 30,667 36,997
----- ------ ------ ------
Total revenue....................... 36,814 59,538 (59,858) 194,378
Total expenses.......................... 88,967 55,601 203,614 153,841
------ ------ ------- -------
Income (loss) before income taxes....... (52,153) 3,937 (263,472) 40,537
Provision for income taxes.............. (16,174) 1,919 (29,582) 19,416
-------- ----- -------- ------
Net income (loss)....................... $ (35,979) 2,018 (233,890) 21,121
========= ===== ========= ======
Net income (loss) per share (diluted)... (1.16) 0.07 (7.55) 0.68
====== ==== ====== ====
Weighted average number of
shares outstanding
(in thousands) (diluted)................ 31,007 28,740 30,997 35,097
Cash dividends declared per share..... $ - 0.03 0.03 0.10
CASH FLOW DATA:
Provided by (used in) operating
activities............................. $ (76,136) 26,239 (200,940) 19,613
Used in investing activities............ (1,239) (2,361) (4,667) (4,356)
Provided by (used in) financing
activities........ .................... 76,572 (3,892) 204,269 (13,482)
Net increase (decrease) in cash and
cash equivalents...................... (803) 19,986 (1,338) 1,775
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenue:
<S> <C> <C> <C> <C> <C>
Gain on sale of loans.................. 120,828 135,421 71,255 15,870 8,705
Net 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........................... 51,642 31,131 20,394 8,791 6,099
Fees and other......................... 46,860 37,679 15,215 7,940 5,595
------ ------ ------ ----- -----
Total revenue...................... 266,489 214,531 128,428 48,400 36,831
Total expenses......................... 213,683 205,071 89,541 37,788 27,848
------- ------- ------ ------ ------
Income (loss) before income taxes...... 52,806 9,460 38,887 10,612 8,983
Provision for income taxes............. 25,243 7,982 17,814 4,828 3,684
------ ----- ------ ----- -----
Net income (loss)...................... 27,563 1,478 21,073 5,784 5,299
====== ===== ====== ===== =====
Net income (loss) per share (diluted).. 0.87 0.05 0.82 0.43 0.41
==== ==== ==== ==== ====
Weighted average number of
shares outstanding
(in thousands) (diluted)............... 35,749 28,371 27,248 13,532 13,127
====== ====== ====== ====== ======
Cash dividends declared per share.... .13 .13 .13 .13 .13
=== === === === ===
CASH FLOW DATA:
Provided by (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 (used in) by financing
activities............................ 40,244 291,898 250,540 48,209 22,855
Net increase (decrease) in cash and
cash equivalents..................... (14,580) 2,961 3,582 3,846 8,128
</TABLE>
Page 9
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30,
----------------------------------------------
AT MARCH 31, AT MARCH 31,
1999 1998 1998 1997 1996 1995 1994
--------- --------- ---- ---- ---- ---- ----
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents 10,984 28,667 $ 12,322 26,902 23,941 20,359 16,513
Servicing assets(2) 348,073 479,652 522,632 360,892 167,740 50,421 18,780
Total assets 758,059 739,245 815,187 717,595 401,524 108,084 53,344
-------- -------- -------- -------- -------- -------- --------
10.5% Senior Notes due 2002 17,250 23,000 23,000 23,000 23,000 23,000 --
9.125% Senior Notes due 2003 150,000 150,000 150,000 150,000 -- -- --
5.5% Convertible Subordinated Debentures
due 2006 113,990 113,990 113,990 113,990 115,000 -- --
Other long-term debt -- -- -- -- 45 144 1,104
-------- -------- -------- -------- -------- -------- --------
Total long-term debt 281,240 286,990 286,990 286,990 138,045 23,144 1,104
Stockholders' equity 136,121 258,394 $304,051 239,755 120,461 75,797 31,669
</TABLE>
(1) As used throughout this document, interest-only strips includes
overcollateralization amounts.
(2) Represents the sum of interest-only strips and mortgage servicing rights.
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<PAGE>
RISK FACTORS
Investment in the Series C Convertible Preferred Stock covered by this
prospectus involves a substantial degree of risk. You should carefully consider
the following factors, together with the other information contained in this
prospectus, before exercising your subscription rights to purchase the Series C
Convertible Preferred Stock that we are offering.
NEGATIVE CASH FLOW AND CAPITAL NEEDS
We operate on a negative cash flow basis (our cash expenditures exceed our
cash earnings). Our negative cash flow arises mostly from our use of
securitization to sell our loans. Each time we enter into a securitization
transaction, we transfer a significant amount of loans that we recently
originated or purchased to a separate entity, usually a trust. In exchange for
the loans, we receive cash and an interest in the loans securitized. Our
interest in the loans securitized is evidenced by the non-cash gain on sale we
record at the closing of the securitization. The cash we receive from the trust
is raised through the trust's sale of certificates or bonds. These certificates
or bonds give the holders the right to receive principal payments on the
securitized loans and the interest rate on the certificate or bond. The interest
rate on the loans is higher than, usually substantially so, the interest rate on
the certificates or bonds. The amount of that excess spread provides the basis
for the non-cash gain we record at the closing. The actual amount of the gain is
reduced by fees paid to us as servicer of the loans (collecting interest and
managing delinquencies and foreclosures), fees paid to a back-up servicer, if
any, and fees paid to an insurance company for a credit-enhancement policy, if
one is issued. The gain recorded also reflects our estimate of the life of the
loans (most of our loans prepay in under 3 years even though substantially all
have 30 year terms) and estimated losses on the loans. A risk adjusted discount
rate is then applied to the estimated cash flows. The end result is our non-cash
gain on sale. The amount of the gain is added to the interest-only strips
carried on our balance sheet. The interest-only strips represents the aggregate
amount of gain on sale recorded on all of our securitizations. This amount is
adjusted through amortization (payments received by the trusts) and actual
prepay or loss performance that is different from our original estimates. In a
securitization, we record as income the non-cash gain on sale of the loans
securitized upon the closing of the securitization. We receive the cash
representing the gain over the actual life of the loans securitized.
Our primary uses of cash relate to our use of securitizations to sell our
loans. These uses include:
o mortgage loan originations and purchases before their securitization
and sale;
o fees, expenses and hedging costs, if any, incurred for the
securitization of loans;
o cash reserve accounts or overcollateralization required in the
securitization and sale of loans;
o tax payments generally due on recognition of non-cash gain on sale
recorded in the securitizations;
o ongoing administrative and other operating expenses;
o interest and principal payments under our credit facilities and other
existing indebtedness;
o cash advances made on delinquent loans included in our loan servicing
portfolio; and
o costs of expanding our loan production units.
We did not execute a securitization during the quarters ended March 31,
1999 and June 30, 1999 and relied on whole loan sales for cash. We did complete
a securitization in August 1999. Whole loan sales and this securitization are
not sufficient to eliminate our negative cash flow. We have implemented and have
under discussion various cash savings plans. However, we may be unable to
implement these plans. Even if we do implement these plans, cash expenditures
may still exceed cash income. Therefore, we need continued access to short- and
long-term external sources of cash to fund our operations.
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<PAGE>
Our primary sources of cash are expected to be cash from the rights offering,
warehouse (loan origination) facilities, working capital (bank credit)
facilities, transactions by which we monetize our servicing advance receivables,
securitizations and whole loan sales.
Our primary and potential sources of cash as described in the paragraph above
should be sufficient to fund our cash requirements through at least the next 12
months, but only if our future operations are consistent with our current growth
expectations. If available at all, the type, timing and terms of financing
selected by us will be dependent upon our cash needs, the availability of other
financing sources, limitations under debt covenants and the prevailing
conditions in the financial markets. However, we are not sure that these sources
of cash will be available when needed. Even if the sources of cash are
available, the providers of cash may impose terms that are not favorable to us.
As a result of the limitations described above, we may be restricted in the
amount of loans that we will be able to produce and dispose of.
DELINQUENCIES AND LOSSES IN SECURITIZATION TRUSTS; RIGHT TO TERMINATE MORTGAGE
SERVICING; NEGATIVE IMPACT ON CASH FLOW
A substantial majority of our servicing portfolio consists of loans
securitized by us and sold to real estate mortgage investment conduits or owner
trusts in securitization transactions. Generally, the agreement entered into in
connection with these securitizations contains specified limits on delinquencies
(i.e., loans past due 90, or in some cases 60, days or more) and losses that may
be incurred in each trust. Losses occur when the cash we receive from the sale
of foreclosed properties, less sales expenses, is less than the principal
balances of the loans previously secured by those properties and related
interest and servicing advances (see below).
A majority of our securitization transactions were credit-enhanced by an
insurance policy issued by a monoline insurance company. That insurance policy
protects the securitization investor against certain losses. If, at any
measuring date, the delinquencies or losses with respect to any trust
credit-enhanced by monoline insurance were to exceed the delinquency or loss
limits applicable to that trust, provisions of the agreements permit the
monoline insurance company to terminate our rights to service the loans in the
affected trust.
Higher delinquency rates hurt our cash flows. When delinquency rates exceed
the limit specified in the securitization agreement, our right to receive cash
from the trust is delayed. When delinquency rates exceed the specified amount,
we are required to use the cash flows from the trust to make accelerated
payments of principal on the certificates or bonds issued by the trust. These
accelerated payments increase the overcollateralization levels (the amount that
the principal balance of the loans in the trust exceeds the principal balance of
the certificates or bonds issued by the trust). We do not receive distributions
from the trust until after the required overcollateralization levels are met.
Generally, provisions in the securitization agreements have the effect of
requiring the overcollateralization amount to be increased up to approximately
twice the level otherwise required when the delinquency rates do not exceed the
specified limit. As of March 31, 1999, we were required to maintain an
additional $76.4 million in overcollateralization amounts as a result of the
level of the delinquency rates above that which would have been required to be
maintained if the applicable delinquency rates had been below the specified
limit. Of this amount, at March 31, 1999, $41.0 million remains to be added to
the overcollateralization amounts from future spread income on the loans held by
these trusts.
Higher delinquency rates also negatively affect our cash flows because we act
as servicer of the loans in the trust. As the servicer, we are required to use
our cash to pay (advance) to the trust past due interest.
Higher delinquency and loss levels may also affect our reported earnings. We
apply certain assumptions with respect to expected losses on loans in a
securitization trust to determine the amount of non-cash gain on sale that we
record at the closing of a securitization transaction. If actual losses exceed
those assumptions, we may be required to take a charge to earnings. The charge
to earnings would result in an adjustment to the carrying value of the
interest-only strips recorded on our balance sheet.
At March 31, 1999, the dollar volume of loans delinquent more than 90 days in
our 10 securitization trusts formed in December 1992 and during the period from
March 1995 to March 1997 exceeded the permitted limit in the related
securitization agreements.
Page 12
<PAGE>
We have implemented various plans to lower the delinquency rates in our
future trusts, including diversifying the loans we originate and purchase to
include higher credit grade loans. The delinquency rate at March 31, 1999 was
16.4% and at June 30, 1998 was 15.4%.
Five of the ten trusts referred to above (representing in the aggregate 15.4%
of the dollar volume of our servicing portfolio) exceeded loss limits at March
31, 1999. The limit that has been exceeded provides that losses may not exceed a
certain threshold (which ranges from .50% to .94% of the original pool balances
in the relevant securitization trusts) on a rolling 12 month basis.
Although the monoline insurance company has the right to terminate servicing
with respect to the trusts that exceed the delinquency and loss limits, no
servicing rights have been terminated and we believe that it is unlikely that we
will be terminated as servicer. We cannot be sure, however, that our servicing
rights with respect to the mortgage loans in such trusts, or any other trusts
which exceed the specified delinquency or loss limits in future periods, will
not be terminated.
We believe that current loss levels have increased in part due to our
recently implemented strategy of minimizing the period of time foreclosed
properties are held before sale. In this way, we reduce carrying costs. The
implementation of this strategy accelerated the volume of foreclosed properties
sold. Current loss levels have also increased due to the aging of the lower
credit grade loans purchased in bulk and included in our earlier securitization
trusts. The losses incurred on those lower credit grade loans are higher than we
originally anticipated. We no longer purchase large volumes of lower credit
grade loans in bulk purchases. We expect the accelerated efforts to sell
properties to have a short-term impact on loss levels. We expect the aging of
the lower credit grade bulk portfolio and the current origination of higher
credit grade loans to contribute to an increase in losses over time.
Further, the adverse market conditions that existed in the quarter ended
December 31, 1998 and, to a lesser extent, March 31, 1999, resulted in
o the tightening of underwriting guidelines by purchasers of whole
loans, and
o the insolvency of several large subprime home equity lenders.
These factors have had the effect of decreasing the availability of credit to
delinquent lower credit grade borrowers who in the past had avoided default by
refinancing their loans with other lenders. We believe that this will increase
our level of losses.
RISK OF CHANGES IN INTEREST RATE ENVIRONMENT
A substantial and sustained increase in long-term interest rates could, among
other things:
o decrease the demand for consumer credit;
o adversely affect our ability to originate or purchase loans; and
o reduce the average size of loans we underwrite.
A significant decline in long-term interest rates could increase the level of
loan prepayments. An increase in prepayments would decrease the size of, and
servicing income from, our servicing portfolio. Our expectations as to
prepayment are used to determine the amount of non-cash gain on sale recorded at
the closing of a securitization transaction. An increase in prepayment rates
could result in a charge to earnings if the rate is faster than originally
expected. The charge to earnings would result in an adjustment to the carrying
value of the interest-only strips recorded on our balance sheet.
A substantial and sustained increase in short-term interest rates could,
among other things,
o increase our borrowing costs (most of which are tied to those rates);
and
Page 13
<PAGE>
o reduce the gains recorded by us upon the securitization and sale of
loans.
YEAR 2000 COMPLIANCE AND TECHNOLOGY ENHANCEMENTS
As part of our overall systems enhancement program, we are using both
internal and external resources to identify, correct, reprogram or replace, and
test our systems for year 2000 compliance. It is anticipated that all of our
year 2000 compliance efforts will be completed on time. We cannot be sure,
however, that the systems of other companies on which our systems rely will be
timely reprogrammed for year 2000 compliance.
Certain state regulatory authorities have imposed early deadlines for year
2000 compliance. We are unable to meet those deadlines. If we are unable to
satisfy those regulators that our year 2000 compliance effort is adequate, our
license to conduct business in a state could be revoked or not renewed.
We have recently installed and are testing a year 2000 compliant loan
origination system that is expected to add approximately $2.0 million per year
to our technology costs over the next three years. Other technology enhancements
are being reviewed but, to date, the costs for those 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. The rate of
prepayment of loans may be affected by a variety of economic and other factors.
We estimate prepayment rates based on our expectations of future prepayment
rates, which are based, in part, on the historic performance of our loans and
other considerations.
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 use
conventional mortgage sources. We believe that the underwriting criteria and
collection methods we use permit us to mitigate the higher risks inherent in
loans made to these borrowers. However, we cannot be sure that those criteria or
methods will protect us against those risks. In the event that loans we
originate and purchase experience higher delinquencies, foreclosures or losses
than anticipated, our results of operations or financial condition could be
adversely affected.
All of our loans are collateralized by residential property. The value of the
property collateralizing our 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 could have a material adverse effect on our results of
operations and financial condition. In addition, historical loss rates affect
the assumptions used by us in computing our non-cash gain on sale. If actual
losses exceed those assumptions, we may be required to take a charge to
earnings.
Adjustable rate loans account for a substantial portion of the mortgage loans
that we originate or purchase. Substantially all of the 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 our 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 certificates or bonds issued by the
trust. Accordingly, in the absence of effective hedging (loss mitigation)
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 certificates or bonds
Page 14
<PAGE>
issued by a securitization trust could adjust faster than the interest rates on
our ARMs in the trust. 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. 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 certificates or
bonds issued by a securitization trust could increase without limitation by
caps, while the interest rates on our ARMs would be so limited.
DEPENDENCE ON FUNDING SOURCES
We use cash draws under credit facilities, referred to as warehouse and
repurchase facilities, to fund new originations and purchases of mortgage loans
before securitization or sale. We currently have three committed lines with
aggregate borrowing capacity of $590 million and one $100 million uncommitted
repurchase line. We recently entered into a transaction pursuant to which we
sold certain accounts receivable representing servicing advances we had
previously made and engaged an investment bank to make a substantial portion of
future servicing advances on substantially all of the loans in our servicing
portfolio. As servicer of the loans we securitize, we are required to advance,
"loan," to the trusts delinquent interest. In addition, as servicer , we advance
to the trusts foreclosure related expenses, and certain tax and insurance
remittances relating to loans serviced. To the extent that we are unable to
maintain existing facilities, arrange new warehouse, repurchase or other credit
facilities or obtain additional commitments to sell whole loans for cash, we may
have to curtail loan origination and purchasing activities. This would have a
material adverse effect on our financial position and results of operations and
jeopardize our ability to continue to operate as a going concern.
RISK OF ADVERSE CHANGES IN THE SECONDARY MARKET FOR MORTGAGE LOANS
We must be able to sell loans we originate and purchase in the
securitization and whole loan market to generate cash proceeds to pay down our
warehouse and repurchase facilities and fund new originations and purchases. See
"-- Dependence on Funding Sources." Our ability to sell loans in the
securitization and whole loan markets on acceptable terms is essential for the
continuation of our loan origination and purchase operations. The value of and
market for our loans are dependent upon a number of factors, including general
economic conditions, interest rates and governmental regulations. Adverse
changes in these factors may affect our ability to securitize or sell whole
loans for acceptable prices within a reasonable period of time. Adverse changes
in the global markets severely weakened the asset-backed market in the quarter
ended December 31, 1998. We continued to feel those effects in the quarter ended
March 31, 1999. During the December quarter, we entered into a mandatory forward
commitment to sell $750 million of our loan production based on a pricing
formula that reflected the negative market conditions that then existed. That
forward commitment permitted us to continue to operate under our restricted
warehouse capacity. Changes we made to our underwriting guidelines and pricing
during the second fiscal quarter to conform to the forward commitment's pricing
formula maximized the profitability of that formula during the March quarter.
Even with the maximized profitability, the forward's pricing formula was still
lower than securitization gains and lower than then current whole loan prices,
which steadily increased throughout the quarter. Still, the size of the forward
commitment effectively required us to sell substantially all of our loan
production under the forward commitment. Therefore, we were unable to reap the
benefit of the improved whole loan prices.
To facilitate the sale of certificates or bonds issued by the securitization
trust, we must obtain investment grade ratings for the certificates or bonds. To
obtain those credit ratings, we credit-enhance the securitization trust. The
overcollateralization amount (the amount by which the principal amount of the
loans in the securitization trust exceeds the principal amount of the
certificates or bonds issued by the trust) is one form of credit enhancement.
Additionally, we either obtain an insurance policy to protect holders of the
certificates or bonds against certain losses, or sell subordinated interests in
the securitization trusts.
Our financial position and results of operations would be materially affected
if investors were unwilling to purchase interests in our securitization trusts
or monoline insurance companies were unwilling to provide financial guarantee
insurance for the certificates or bonds sold. Other accounting, tax or
regulatory changes could also adversely affect our securitization program.
We rely on institutional purchasers, such as investment banks, financial
institutions and other mortgage lenders, to purchase our loans in the whole loan
market. We cannot be sure that the purchasers will be willing to purchase loans
on satisfactory terms or that the market for such loans will continue. Our
results of operations and financial condition could be
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<PAGE>
materially adversely
affected if we could not successfully identify whole loan purchasers or
negotiate favorable terms for loan purchases.
DEPENDENCE ON BROKER NETWORK
We depend on independent mortgage brokers for the origination and purchase of
our broker loans, which constitute a significant portion of our loan production.
These independent mortgage brokers negotiate with multiple lenders for each
prospective borrower. We compete with these lenders for the independent brokers'
business on pricing, service, loan fees, costs and other factors. Our
competitors also seek to establish relationships with such brokers, who are not
obligated by contract or otherwise to do business with us. Our 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.
COMPETITION
We face 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 our competitors are substantially larger and have
considerably greater financial, technical and marketing resources than we do.
Our 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,
we 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 our highest credit grades, who
constitute a significant portion of our customer base.
The historical level of gains realized on the sale of subprime 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, subprime
mortgage loans, and some of these large mortgage companies, thrifts and
commercial banks have begun offering subprime loan products to customers similar
to our targeted borrowers. 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 our
broker lending business.
Additional competition may lower the rates we can charge borrowers and
increase the cost to purchase loans, which could potentially lower the gain on
future loan sales or securitizations. Increased competition may also reduce the
volume of our loan origination and loan sales and increase the demand for our
experienced personnel and the potential that such personnel will leave for
competitors.
Competitors with lower costs of capital have a competitive advantage over us.
During periods of declining rates, competitors may solicit our customers to
refinance their loans. In addition, during periods of economic slowdown or
recession, our borrowers may face financial difficulties and be more receptive
to the offers of our competitors to refinance their loans.
Our correspondent and broker programs depend largely on independent mortgage
bankers and brokers and other financial institutions for the purchases of new
loans. Our competitors also seek to establish relationships with the same
sources.
CONCENTRATION OF OPERATIONS IN CALIFORNIA
At March 31, 1999, 21.8% of the loans we serviced were collateralized by
residential properties located in California. Because of this concentration in
California, our 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 collateralizing
loans. If the principal balances of our loans, together with any primary
financing on the mortgaged properties, equal or exceed the value of the
mortgaged properties, we could incur higher losses on sales of properties
collateralizing foreclosed loans. In addition, California
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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 our ability to recover losses on properties affected by
such disasters and adversely impact our results of operations.
TIMING OF LOAN SALES
Our loan disposition strategy calls for substantially all of our 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 the sale
transactions. Any delay in the sale of a significant portion of our 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 the
quarter.
ECONOMIC CONDITIONS
The risks associated with our 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. Material declines in real
estate values also weakens collateral coverage and increases the possibility of
a loss in the event of liquidation. Further, delinquencies, foreclosures and
losses generally increase during economic slowdowns or recessions. Because of
our 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, our servicing costs may increase. Any sustained period of
increased delinquencies, foreclosure, losses or increased costs could adversely
affect our ability 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 we sell substantially all the mortgage loans which we originate
or purchase, we retain some degree of credit risk on substantially all loans
sold where we continue to service (collect loan payments and manage late
payments and defaults). During the period of time that loans are held before
sale, we are 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. Cash flows from the securitization trust
are represented by the interest rate earned on the loans in the trust over the
amount of interest paid by the trust to the holders of the certificates or bonds
issued by the trust, plus certain monoline and servicing fees. The agreements
governing our securitization program require us to credit-enhance the
securitization trust by either establishing deposit accounts or building
overcollateralization levels. Deposit accounts are established by maintaining a
portion of the excess cash flows in a trust deposit account.
Overcollateralization levels are built up by applying these excess cash flows to
reduce the principal balances of the certificates or bonds issued by the trust.
Those amounts are available to fund losses realized on loans held by such trust.
We continue to be subject to the risks of default and foreclosure following
securitization and the sale of loans to the extent excess cash flows are
required to be maintained in the deposit account or applied to build up
overcollateralization, as opposed to being distributed to us. In addition,
agreements governing our securitization program and whole loan sales require us
to commit to repurchase or replace loans which do not conform to our
representations and warranties at the time of sale.
When borrowers are delinquent in making monthly payments on loans included in
a securitization trust, as servicer of the loans in the trust, we are required
to advance interest payments with respect to such delinquent loans. These
advances require funding from our 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 our business, we are subject to claims made against
us 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 our employees
and officers, incomplete documentation and failures
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to comply with various laws and regulations applicable to our business. We
believe that liability with respect to any currently asserted claims or legal
actions is not likely to be material to our 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 our
financial position and results of operations.
GOVERNMENT REGULATION
Our 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 our operations. Our 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 our activities. We are 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 us, 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 our 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 us.
RESTRICTIONS ON CASH DIVIDENDS.
The indentures governing certain of our outstanding indebtedness as well
as our other credit agreements limit our ability to pay cash dividends on our
capital stock, including the Series C Convertible Preferred Stock offered in
this rights offering. Under the most restrictive of these limitations, we will
be prevented from paying cash dividends on the Series C Convertible Preferred
Stock for the foreseeable future.
NO REVOCATION OF EXERCISE OF SUBSCRIPTION RIGHTS; CANCELLATION OF RIGHTS
OFFERING.
Once you exercise your subscription rights, you may not revoke the
exercise. If we elect to withdraw or terminate the rights offering, neither we
nor the subscription agent will have any obligation with respect to the
subscription rights except to return, without interest, any subscription
payments.
CONTROL BY PRINCIPAL STOCKHOLDER
Following completion of the rights offering, Capital Z will beneficially
own Senior Preferred Stock representing 61.1% of combined voting power if all
the Series C Convertible Preferred Stock offered in the rights offering are
purchased by our common stockholders and 78.2% of our combined voting power if
none of the Series C Convertible Preferred Stock offered in the rights offering
are purchased by our common stockholders (other than by our President, Neil B.
Kornswiet, who is contractually obligated to purchase 1.67 million shares in the
rights offering) and 25 million shares of the Series C Convertible Preferred
Stock are purchased by Capital Z pursuant to the Standby Commitment. As a result
of its beneficial ownership, Capital Z has, and will continue to have,
sufficient voting power to determine our direction and policies and the election
of our Series B Directors, 46.3% of the voting power entitled to elect the
Common Stock Directors
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and 61.1% of the voting power entitled to vote with respect to all other
matters, assuming that all of the shares of Series C Convertible Preferred Stock
offered in the rights offering are purchased by the holders of the common stock.
MARKET CONSIDERATIONS
To exercise your subscription rights, you must pay the subscription price
of $1.00 per share of Series C Convertible Preferred Stock. The subscription
price is not necessarily related to our assets, book value or net worth or any
other established criteria of value, and may not be indicative of the fair value
of the Series C Convertible Preferred Stock. We cannot assure you that the
Series C Convertible Preferred Stock will trade at prices equal to or greater
than the subscription price. In addition, there can be no assurance that the
market price of our common stock will not decline during the subscription period
or following the issuance of the subscription rights and the issuance of the
shares of Series C Convertible Preferred Stock. Nor can we assure you that you
will be able to sell your shares of Series C Convertible Preferred Stock
purchased in the rights offering at a price equal to or greater than the
subscription price.
AAMES FINANCIAL CORPORATION
GENERAL
We are a consumer finance company primarily engaged in the business of
originating, purchasing, selling, and servicing home equity mortgage loans
secured by single family residences. Upon our formation in 1991, we acquired
Aames Home Loan, a home equity lender founded in 1954. In August 1996, we
acquired One Stop Mortgage, Inc., which originates mortgage loans primarily
through a broker network. In March 1998, we augmented our retail production by
establishing One Stop Retail Direct. Unlike our traditional retail network,
which uses a centralized marketing approach, One Stop Retail Direct uses a
decentralized marketing approach at the branch level.
Our 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. We believe 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 that
we originate and purchase, 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.
We originate and purchase loans nationally through three production
channels--retail, broker and correspondent. In recent quarters, we have
emphasized our core retail and broker loan production channels and decreased our
reliance on correspondent purchases. During the three and nine months ended
March 31, 1999, we originated and purchased $402 million and $1.68 billion,
respectively, of mortgage loans. We underwrite and appraise every loan that we
originate and we generally review appraisals and re-underwrite all loans that we
purchase. Included in the $1.68 billion of loans that we originated during the
nine months ended March 31, 1999 is $14.4 million of commercial loans originated
through our commercial loan division which ceased operations in January 1999.
We retain the servicing on the loans that we originate or purchase and
securitize. At March 31, 1999, we serviced all of our $4.05 billion servicing
portfolio. In April 1999, we entered into a sub-servicing arrangement with a
loan servicing company with respect to $394 million of loans primarily to reduce
the burden on our cash resources caused by our obligation to advance interest on
delinquent loans in our servicing portfolio.
As a fundamental part of our business and financing strategy, we sell our
loans to third party investors in the secondary market. We maximize
opportunities in our loan disposition transactions by selling our loan
production through a combination of securitizations and whole loan sales,
depending on market conditions, profitability and cash flows. We sold $394
million and $605 million of loans during the three months ended March 31, 1999
and 1998, respectively, and $1.6 billion and $1.8 billion of loans during the
nine months ended March 31, 1999 and 1998, respectively. Of the total amount of
loans sold during the nine months ended March 31, 1999 and 1998, $650 million
and $1.4 billion were sold in securitizations, respectively. We did not complete
a securitization during the quarters ended December 31, 1998, March 31, 1999 and
June 30, 1999. We did complete a securitization of $393.3 million of mortgage
loans in August 1999. Due to
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market conditions at the time of our securitization, the higher margins we had
to pay on the certificate issued by the securitization trust resulted in lower
than our historical gains.
THE CAPITAL Z FINANCING
In February 1999, Capital Z (through a partnership majority owned by
Capital Z) invested $75 million in our Series B Convertible Preferred Stock and
Series C Convertible Preferred Stock, representing 69.6% of our total equity and
voting power after the investment. Concurrently with this investment, persons
designated by Capital Z purchased 1.5 million, and Cary Thompson, our former
Chief Executive Officer, purchased $250 thousand of the Series C Convertible
Preferred Stock pursuant to the terms of a management investment agreement with
Capital Z.
In August 1999, Capital Z (through a partnership majority owned by Capital
Z) purchased $25 million of additional Series C Convertible Preferred Stock (the
"Additional Investment") which, together with the $75 million invested on
February 1999, represented 75.3% of the total equity and voting power.
On September 13, 1999, we will hold our 1998 annual stockholders meeting.
At that meeting, our stockholders will consider, among other things, the
approval of the Recapitalization, which will cause an increase in the number of
shares of our authorized common and preferred stock and a 1,000-for-1 forward
stock split of our outstanding Senior Preferred Stock. After giving effect to
the Recapitalization, Capital Z will beneficially own 26,704,000 shares of
Series B Convertible Preferred Stock and 73,296,000 shares of Series C
Convertible Preferred Stock, which were purchased in the Capital Z Financing at
an effective purchase price of $1.00 per share.
The Capital Z Financing represented the first and second stage of a
three-stage investment. Subject to the Recapitalization, the third stage
consists of the rights offering that we are making pursuant to this prospectus,
in which our common stockholders will have the opportunity to purchase in the
aggregate up to approximately 31 million shares (or such greater number as the
total number of shares of our common stock outstanding on the record date for
the rights offering) of Series C Convertible Preferred Stock for $1.00 per
share. Subject to the Recapitalization, if the Common Shareholders do not
purchase at least 25 million shares of Series C Convertible Preferred Stock in
the rights offering, Capital Z will purchase the difference (up to 25 million
shares of Series C Convertible Preferred Stock) for a purchase price of $1.00
per share pursuant to the Standby Commitment.
On January 4, 1999, we issued to Capital Z Management, Inc., an affiliate
of Capital Z, a warrant to purchase 1.25 million shares of our common stock at
an initial exercise price of $1.00 per share as a fee for Capital Z's Standby
Commitment, and, on August 3, 1999, we issued to designees of Capital Z
additional warrants to purchase an aggregate of 1.25 million shares of our
common stock at an initial exercise price of $1.00 per share as a fee for
Capital Z's agreement to invest an additional $25 million. In addition, on
February 10, 1999, we paid to Capital Z Management a $1 million transaction fee
in connection with the transactions contemplated by the purchase agreement with
Capital Z and issued to Capital Z Management an additional warrant to purchase
up to 3 million shares of our common stock at an initial exercise price of $1.00
per share, which is exercisable only if the Recapitalization is not completed by
September 30, 1999. In addition, in connection with the transactions
contemplated by the purchase agreement with Capital Z, we have paid to Capital Z
Management aggregate additional fees of $2 million and have agreed to reimburse
Capital Z Management for all of its expenses incurred in connection with the
negotiation and execution of the purchase agreement with Capital Z and the
transactions contemplated thereby.
On February 10, 1999, we also entered into an Agreement For Management
Advisory Services with Equifin Capital Management, LLC, pursuant to which we
must pay to Equifin Management a quarterly management advisory fee of $250,000
for a period of five (5) years, which, on July 16, 1999, was increased by
$250,000 so long as Mr. Mani Sadeghi, Chief Executive Officer of Equifin
Management, serves as interim Chief Executive Officer of Aames. As required by
this management agreement, on February 10, 1999, we paid to Equifin Management
$250,000 in consideration of consulting services rendered prior to the execution
of the management agreement and as an advance for consulting services to be
rendered in the quarter ending March 31, 1999. Equifin Capital is an affiliate
of Capital Z.
Effective February 10, 1999, Melvyn Kinder, Lee Masters and John C.
Getzelman resigned from our Board of Directors. Currently our Board of Directors
consists of nine Directors divided into two groups. One group, consisting of
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four Directors (the "Series B Directors"), are elected annually by the holders
of the Series B Convertible Preferred Stock, voting as a single class. The other
group of Directors, consisting of five directors (the "Common Stock Directors"),
one of whom was nominated by Capital Z, are elected by the holders of the common
stock and the holders of the Series B Convertible Preferred Stock, voting
together as a single class, for staggered three year terms. The holders of the
Series C Convertible Preferred Stock are not entitled to vote with respect to
the election of Directors.
As of August 3, 1999, Capital Z beneficially owned Series B Convertible
Preferred Stock and Series C Convertible Preferred Stock representing 100% of
the voting rights entitled to elect the Series B Directors, 46.3% of the voting
rights entitled to elect the Common Stock Directors, and 75.3% of the voting
rights entitled to vote with respect to all other matters. Following completion
of the rights offering, Capital Z will beneficially own Senior Preferred Stock
representing 61.1% of our combined voting power if all the Series C Convertible
Preferred Stock offered in the rights offering are purchased by our common
stockholders and 78.2% of our combined voting power if none of the Series C
Convertible Preferred Stock offered in the rights offering are purchased by our
common stockholders (other than Neil Kornswiet, the President of Aames, who is
contractually obligated to purchase 1.67 million shares in the rights offering)
and the difference (23.3 million shares) is purchased by Capital Z pursuant to
the Standby Commitment.
USE OF PROCEEDS
After deducting the expenses, we will receive between approximately $24
million and $30 million from the rights offering and the Standby Commitment. We
will use the proceeds from the rights offering for general corporate purposes.
DETERMINATION OF THE SUBSCRIPTION PRICE
The subscription price of the subscription rights is equal to the price
per share for the Senior Preferred Stock paid by Capital Z in the Capital Z
Financing, after giving effect to the 1,000-for-1 split of the Senior Preferred
Stock. The price for the Senior Preferred Stock in the Capital Z Financing was
established through negotiations between us and Capital Z. On December 23, 1998,
the date we entered into the preferred stock purchase agreement with Capital Z,
the closing sale price on the New York Stock Exchange for our common stock was
$2.50 per share. On ______, 1999, the closing sale price on the New York Stock
Exchange for our common stock was $_____ per share. The subscription price in
the rights offering is not necessarily related to our assets, book value or net
worth or any other established criteria of value, and may not be indicative of
the fair value of the Series C Convertible Preferred Stock to be offered in the
rights offering.
THE RIGHTS OFFERING
THE SUBSCRIPTION RIGHTS
We are issuing subscription rights to shareholders who owned our common
stock at the close of business on _______________, 1999. Beneficial owners of
shares of our common stock held in the name of Cede & Co. as nominee for the
Depository Trust Company, or in the name of any other depository or nominee, on
the record date for this rights offering will also receive subscription rights.
You may not transfer your subscription rights to others.
You will receive one subscription right for each share of our common stock
that you held on ____________, 1999. Each subscription right entitles you to
purchase one share of Series C Convertible Preferred Stock for $1.00 per share.
The subscription rights will be evidenced by subscription certificates (see
Appendix A) which will be mailed to shareholders other than foreign shareholders
whose record addresses are outside the United States. The United States includes
the 50 states, the District of Columbia, United States Territories and
Possessions.
The subscription rights issued to foreign shareholders will be held by the
subscription agent for their account until instructions are received to exercise
those subscription rights. Foreign shareholders may exercise their subscription
rights only if it is permissible to do so under applicable foreign securities
laws.
Neil Kornswiet, our President, is obligated to purchase 1,667,000 shares
of Series C Convertible Preferred Stock as part of the rights offering. Any
shares of Series C Convertible Preferred Stock acquired by officers, directors
and other persons who are "affiliates" of Aames, as that term is defined under
the Securities Act of 1933, may only be resold in
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accordance with Rule 144 under the Securities Act of 1933 or pursuant to an
effective registration statement under the Securities Act. In general, under
Rule 144, as currently in effect, an "affiliate" of Aames is entitled to sell
within any three month period, a number of shares of Series C Convertible
Preferred Stock that does not exceed the greater of one percent of the then
outstanding Series C Convertible Preferred Stock or the average weekly reported
trading volume of the Series C Convertible Preferred Stock during the four
calendar weeks preceding the sale. Sales under Rule 144 are also subject to
certain restrictions in the manner of sale, notice requirements and the
availability of current public information about us.
SUBSCRIPTION PRICE
To exercise your subscription rights, you must pay the subscription price
of $1.00 per share of Series C Convertible Preferred Stock, payable in cash,
check, bank draft, money order or wire transfer to the designated account as
explained more fully below under "Exercise of Subscription Rights." The
subscription price was established through negotiations between us and Capital Z
and was intended to permit the common stockholders to participate in the
refinancing of Aames on the same terms as Capital Z. The subscription price in
the rights offering is not necessarily related to our assets, book value or net
worth or any other established criteria of value, and may not be indicative of
the fair value of the Series C Convertible Preferred Stock to be offered in the
rights offering. We cannot assure you that the Series C Convertible Preferred
Stock will trade at prices equal to or greater than the subscription price. Nor
can we assure you that you will be able to sell your shares of Series C
Convertible Preferred Stock purchased in the rights offering at a price equal to
or greater than the Subscription Price.
We announced the rights offering on December 23, 1998. The last reported
sale price per share of our common stock on the New York Stock Exchange on
December 23, 1998 and August __, 1999 was $2.50 and $_____, respectively.
EXPIRATION; EXTENSION
You may exercise your subscription rights at any time before 5:00 p.m.,
New York City time, on ______________________, 1999.
We may extend the time for exercising the subscription rights. If you do
not exercise your subscription rights before the time they expire, then your
subscription rights will be null and void. We will not be obligated to honor
your exercise of subscription rights if the subscription agent receives the
documents relating to your exercise after the time the subscription rights
expire, regardless of when you transmitted the documents, except when you have
timely transmitted the documents pursuant to the guaranteed delivery procedures
described below.
If we terminate the rights offering, we will promptly return all of your
subscription payments to you, without interest.
If we elect to extend the date the subscription rights expire, we will
issue a press release announcing the extension before the first trading day on
the New York Stock Exchange after the most recently announced expiration date.
See "-- Amendments and Termination."
CONDITIONS OF THE RIGHTS OFFERING
The consummation of the rights offering is conditioned upon the completion
of the Recapitalization and the New York Stock Exchange's approval of our
application to list the Series C Convertible Preferred Stock and the underlying
common stock for trading on the NYSE.
EXERCISE OF SUBSCRIPTION RIGHTS
You may exercise your subscription rights by delivering the following to
the subscription agent at or before the time the subscription rights expire:
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o Your properly completed and executed rights certificate evidencing
those subscription rights with any required signature guarantees; and
o Your payment in full of the subscription price for each share of
Series C Convertible Preferred Stock subscribed for pursuant to your
subscription rights.
Your payment of the subscription price must be made by either:
o Check or bank draft drawn upon a U.S. bank or postal, telegraphic, or
express money order payable to ChaseMellon Shareholder Services
L.L.C., as subscription agent; or
o Wire transfer of immediately available funds to the account maintained
by the subscription agent for such purpose at ________, ABA No.
___________, Account No. ________ (marked: "_______________").
Your payment of the subscription price will be deemed to have been
received by the subscription agent only upon:
o Clearance of any uncertified check;
o Receipt by the subscription agent of any certified check or bank draft
drawn upon a U.S. bank or any postal, telegraphic or express money
order; or
o Receipt of collected funds in the subscription agent's account
designated above.
YOU SHOULD NOTE THAT FUNDS PAID BY UNCERTIFIED PERSONAL CHECKS MAY TAKE AT
LEAST FIVE BUSINESS DAYS TO CLEAR. IF YOU WISH TO PAY THE SUBSCRIPTION PRICE BY
AN UNCERTIFIED PERSONAL CHECK, WE URGE YOU TO MAKE PAYMENT SUFFICIENTLY IN
ADVANCE OF THE TIME THE SUBSCRIPTION RIGHTS EXPIRE TO ENSURE THAT YOUR PAYMENT
IS RECEIVED AND CLEARS BY THAT TIME. WE URGE YOU TO CONSIDER USING A CERTIFIED
OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS TO AVOID MISSING THE
OPPORTUNITY TO EXERCISE YOUR SUBSCRIPTION RIGHTS.
You should deliver the rights certificate and payment of the subscription
price, as well as any Nominee Holder Certifications, Notices of Guaranteed
Delivery and DTC Participant Over-subscription Forms,
IF BY MAIL TO:
-------------------------------------
IF BY HAND DELIVERY TO:
-------------------------------------
IF BY OVERNIGHT COURIER TO:
-------------------------------------
You may call the subscription agent at 1-800-___________.
If you do not indicate the number of subscription rights being exercised,
or do not forward full payment of the aggregate subscription price for the
number of subscription rights that you indicate are being exercised, then you
will be deemed to have exercised the subscription rights that may be exercised
for the aggregate subscription price payment you delivered to the subscription
agent. If we do not apply your full subscription price payment to your purchase
of shares of Series C Convertible Preferred Stock or if the Recapitalization is
not completed prior to the expiration or termination of the rights offering, we
will return the excess amount to you by mail without interest or deduction as
soon as practicable after the date the subscription rights expire or terminate.
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The subscription agent will hold your payment of the subscription price in
a segregated account with other payments received from holders of subscription
rights until we issue to you your shares of Series C Convertible Preferred
Stock.
Your signature on each rights certificate must be guaranteed by an
Eligible Institution (a member firm of a registered national securities exchange
or a member of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or correspondent in the United
States), subject to standards and procedures adopted by the subscription agent,
unless
o Your rights certificate provides that the shares of the Series C
Convertible Preferred Stock you subscribed for are to be delivered to
you; or
o You are an Eligible Institution.
If you are a broker, a trustee or a depositary for securities who holds
shares of our common stock for the account of others (a "Nominee Record Date
Holder"), you should notify the respective beneficial owners of such shares of
the subscription rights as soon as possible to find out such beneficial owners'
intentions. You should obtain instructions from the beneficial owner with
respect to the subscription rights, as set forth in the instructions distributed
by Nominee Record Date Holders to beneficial owners. If the beneficial owner so
instructs, you should complete the appropriate rights certificates and submit
them to the subscription agent with the proper payment.
If you are a beneficial owner of shares of our common stock or
subscription rights that you hold through a Nominee Record Date Holder, you
should contact the Nominee Record Date Holder and request the Nominee Record
Date Holder to effect transactions in accordance with your instructions.
You should read and follow the instructions accompanying the rights
certificates carefully. If you want to exercise your subscription rights, you
must send your rights certificates to the subscription agent. YOU SHOULD NOT
SEND THE RIGHTS CERTIFICATES TO THE COMPANY.
YOU ARE RESPONSIBLE FOR THE METHOD OF DELIVERY OF RIGHTS CERTIFICATES AND
PAYMENT OF THE SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT. IF YOU SEND THE
RIGHTS CERTIFICATES AND PAYMENT OF THE SUBSCRIPTION PRICE BY MAIL, WE RECOMMEND
THAT YOU SEND THEM BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED. YOU SHOULD ALLOW A SUFFICIENT NUMBER OF DAYS TO ENSURE DELIVERY TO
THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO THE TIME THE
SUBSCRIPTION RIGHTS EXPIRE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT
LEAST FIVE BUSINESS DAYS TO CLEAR, WE STRONGLY URGE YOU TO PAY, OR ARRANGE FOR
PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER
OF FUNDS.
We will decide all questions concerning the timeliness, validity, form and
eligibility of your exercise of subscription rights. Our decisions will be final
and binding. We, in our sole discretion, may waive any defect or irregularity,
or permit a defect or irregularity to be corrected within such time as we may
determine. We may reject the exercise of any of your subscription rights because
of any defect or irregularity. Your subscription will not be deemed to have been
received or accepted until all irregularities have been waived by us or cured by
you within such time we decide, in our sole discretion.
Neither we nor the subscription agent will be under any duty to notify you
of a defect or irregularity. We will not be liable for failing to give you such
notice. We reserve the right to reject your exercise of subscription rights if
your exercise is not in accordance with the terms of the rights offering or in
proper form. We will also not accept your exercise of subscription rights if our
issuance of shares of Series C Convertible Preferred Stock pursuant to your
exercise could be deemed unlawful or materially burdensome. See "--Regulatory
Limitation."
GUARANTEED DELIVERY PROCEDURES
If you wish to exercise your subscription rights, but you do not have
sufficient time to deliver the rights certificates evidencing your subscription
rights to the subscription agent on or before the time the subscription rights
expire, you may exercise your subscription rights by the following guaranteed
delivery procedures:
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o Make your payment in full of the subscription price for each share of
Series C Convertible Preferred Stock being subscribed for pursuant to
the subscription rights (in the manner set forth in "--Exercise of
Subscription Rights") to the subscription agent on or before the time
the subscription rights expire;
o Deliver a Notice of Guaranteed Delivery to the subscription agent at
or before the time the subscription rights expire; and
o Deliver the properly completed rights certificate evidencing the
subscription rights being exercised (and, if applicable for a nominee
holder, the related Nominee Holder Certification), with any required
signatures guaranteed, to the subscription agent within three New York
Stock Exchange trading days following the date of the Notice of
Guaranteed Delivery was delivered to the subscription agent.
Your Notice of Guaranteed Delivery must be substantially in the form
provided with the Instructions as to Use of Rights Certificates distributed to
you with your rights certificate. Your Notice of Guaranteed Delivery must come
from an Eligible Institution (a member firm of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc. or
a commercial bank or trust company having an office or correspondent in the
United States). In your Notice of Guaranteed Delivery you must state:
o Your name;
o The number of subscription rights represented by your rights
certificates and the number of shares of Series C Convertible
Preferred Stock you are subscribing for pursuant to your subscription
rights; and
o Your guarantee that you will deliver to the subscription agent any
rights certificates evidencing the subscription rights you are
exercising within three New York Stock Exchange trading days following
the date the subscription agent receives your Notice of Guaranteed
Delivery.
You may deliver the Notice of Guaranteed Delivery to the subscription
agent in the same manner as the rights certificate at the addresses set forth in
"-- Exercise of Subscription Rights." You may also transmit the Notice of
Guaranteed Delivery to the subscription agent by telegram or facsimile
transmission (telecopier no.)__________. To confirm facsimile deliveries, you
may call 1-800-_____________.
The subscription agent will send you additional copies of the form of
Notice of Guaranteed Delivery if you need them. Please call the subscription
agent at 1-800-______________ to request any copies of the form of Notice of
Guaranteed Delivery.
SUBSCRIPTION AGENT
We have appointed ChaseMellon Shareholder Services L.L.C. as subscription
agent for the rights offering. We will pay the fees and expenses of the
subscription agent. We also have agreed to indemnify the subscription agent from
certain liabilities which it may incur in connection with the rights offering.
You may call the subscription agent at 1-800-_______ with any questions that you
have regarding this rights offering.
NO REVOCATION
Once you have exercised your subscription rights, you may not revoke your
exercise.
FRACTIONAL SHARES
We will not issue any fractional shares of Series C Convertible Preferred
Stock. You may not exercise a subscription right in part.
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IF YOU DO NOT EXERCISE YOUR SUBSCRIPTION RIGHTS BEFORE THE SPECIFIED
EXPIRATION TIME, YOUR SUBSCRIPTION RIGHTS WILL EXPIRE AND WILL NO LONGER BE
EXERCISABLE.
DTC PARTICIPANTS
We expect that your exercise of your subscription rights may be made
through the facilities of The Depository Trust Company.
AMENDMENTS AND TERMINATION
We may extend the rights offering and the period for exercising your
subscription rights. We may amend the terms of the rights offering or withdraw
or terminate the rights offering at any time prior to the expiration time of the
rights offering. We will not pay any interest on or deduct any amounts from
subscription payments returned to you if we terminate the rights offering.
NO RECOMMENDATIONS TO RIGHTS HOLDERS
We are not making any recommendation as to whether or not you should
exercise your subscription rights. You should make your decision based on your
own assessment of your best interests. None of our Board of Directors, our
officers or any other person are making any recommendations as to whether or not
you should exercise your subscription rights.
FOREIGN AND CERTAIN OTHER STOCKHOLDERS
We will not mail rights certificates to holders on the record date for the
rights offering whose addresses are outside the United States or who have an
Army Post Office (APO) or Fleet Post Office (FPO) address. Instead, we will have
the subscription agent hold such rights certificates for such holders' accounts.
To exercise their subscription rights, such holders must notify the subscription
agent prior to 11:00 a.m., New York City time, on _____________, 1999, three
business days prior to the date the subscription rights expire, and must
establish to the satisfaction of the subscription agent that such exercise is
permitted under applicable law.
REGULATORY LIMITATION
We will not be required to issue shares of Series C Convertible Preferred
Stock pursuant to the rights offering to you if, in our opinion, you would be
required to obtain prior clearance or approval from any state or federal
regulatory authorities to own or control such shares if, at the time the
subscription rights expire, you have not obtained such clearance or approval.
ISSUANCE OF SERIES C CONVERTIBLE PREFERRED STOCK
The subscription agent will issue to you certificates representing shares
of Series C Convertible Preferred Stock you purchase pursuant to the rights
offering as soon as practicable after the time the subscription rights expire.
Your payment of the subscription price will be retained by the
subscription agent, and will not be delivered to us, until your subscription is
accepted and you are issued your stock certificates. We will not pay you any
interest on funds paid to the subscription agent, regardless of whether such
funds are applied to the subscription price or returned to you. You will have no
rights as a stockholder of the Company with respect to shares of Series C
Convertible Preferred Stock subscribed for until certificates representing such
shares are issued to you. Unless otherwise instructed in the rights
certificates, your certificates for shares issued pursuant to your exercise of
subscription rights will be registered in your name.
If the rights offering is not completed for any reason, the subscription
agent will promptly return, without interest, all funds received by it.
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SHARES OF SENIOR PREFERRED STOCK OUTSTANDING AFTER THE RIGHTS OFFERING
Assuming that we issue all of the shares of Series C Convertible Preferred
Stock offered in the rights offering, approximately 106,062,964 shares of Series
C Convertible Preferred Stock and 26,704,000 shares of Series B Convertible
Preferred Stock will be issued and outstanding. Based on the number of shares of
Series C Convertible Preferred Stock purchased by Capital Z in the Capital Z
Financing, our issuance of shares in the rights offering would result (on a pro
forma basis as of the date of this prospectus) in a 41.3% increase in the number
of outstanding shares of Series C Convertible Preferred Stock.
OTHER MATTERS
We are not making the rights offering in any state or other jurisdiction
in which it is unlawful to do so. We will not sell or accept an offer to
purchase Series C Convertible Preferred Stock from you if you are a resident of
any such state or other jurisdiction. We may delay the commencement of the
rights offering in certain states or other jurisdictions in order to comply with
the laws of such states or other jurisdictions. We do not expect that there will
be any changes in the terms of the rights offering. However, we may decide, in
our sole discretion, not to modify the terms of the rights offering as may be
requested by certain states or other jurisdictions. If that happens and you are
a resident of that state, you will not be eligible to participate in the rights
offering.
DESCRIPTION OF THE SERIES C CONVERTIBLE PREFERRED STOCK
The following description is a summary of the material provisions of the
Series C Convertible Preferred Stock and the Certificate of Designations
relating to the Series C Convertible Preferred Stock. It does not restate the
Certificate of Designations in its entirety. We urge you to read the Certificate
of Designations relating to the Series C Convertible Preferred Stock because the
Certificate of Designations, and not this description, defines your rights as
the holder of the Series C Convertible Preferred Stock. The Certificate of
Designations is included as an exhibit to the registration statement that
includes this prospectus.
RANKING
The Series C Convertible Preferred Stock will, with respect to dividends
and the distribution of assets upon liquidation, dissolution or winding up of
Aames, rank
o senior to each other class or series of our preferred stock (except
for the Series B Convertible Preferred Stock), our common stock, and
all other classes and series of our capital stock that we may issue in
the future. These securities are collectively referred to as "Junior
Stock"; and
o equal to the Series B Convertible Preferred Stock.
DIVIDENDS
The holders of the Series C Convertible Preferred Stock will be entitled
to receive, when, as and if dividends are declared by our Board of Directors out
of legally available funds, cumulative dividends according to the following
terms:
o dividends will be declared in preference to dividends on any Junior
Stock;
o dividends will be paid at an annual rate of 6.5% on the $1 per share
stated value of the Series C Convertible Preferred Stock;
o dividends will be paid in cash; and
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o from the issue date of the Series C Convertible Preferred Stock until
June 30, 2001 (the "Accrual Period"), we may elect not to pay cash
dividends on the Series C Convertible Preferred Stock. Any dividends
not paid during this period will accrue and compound quarterly.
Dividends on the Series C Convertible Preferred Stock will be cumulative
and will accumulate on the basis of a 360-day year consisting of twelve 30-day
months and the actual number of days elapsed in the period for which dividends
are payable. Additional dividends will accumulate at 125% of the stated dividend
rate of the Series C Convertible Preferred Stock on the amount of any dividends
that are not timely paid. No such additional dividends will accrue during the
Accrual Period.
As long as any shares of Series C Convertible Preferred Stock are
outstanding, we may not declare, pay or set apart for payment any dividends,
distributions or other payments (including for repurchase, redemption or
retirement) with respect to any Junior Stock unless all accumulated dividends on
the Series C Convertible Preferred Stock are paid. If dividends are not paid in
full on the Series C Convertible Preferred Stock, dividends on the Series C
Convertible Preferred Stock and the Series B Convertible Preferred Stock will be
declared and paid ratably in proportion to the respective amounts of accumulated
and unpaid dividends on the Series C Convertible Preferred Stock and the Series
B Convertible Preferred Stock.
LIQUIDATION PREFERENCE
Upon any liquidation, dissolution or winding up of Aames, holders of the
Series C Convertible Preferred Stock will be entitled to receive accumulated and
unpaid dividends and the stated value of their shares out of our available
assets before any payments are made on Junior Stock. If liquidation payments are
not made in full on the outstanding Series C Convertible Preferred Stock, we
will make distributions ratably on the Series C Convertible Preferred Stock and
Series B Convertible Preferred Stock in proportion to their respective full
distributive shares. After the holders of the Series C Convertible Preferred
Stock are paid the full amount of their accumulated dividends and the stated
value of their shares, the holders will not be entitled to any further
liquidation distributions.
CONVERSION
Each share of Series C Convertible Preferred Stock is convertible into one
share of common stock, subject to the Recapitalization, subject to adjustment as
described below. Each holder of Series C Convertible Preferred Stock may convert
its shares of Series C Convertible Preferred Stock into common stock at any
time. Additionally, the holder or holders of a majority of the outstanding
shares of Series C Convertible Preferred Stock can require the conversion of all
outstanding shares of Series C Convertible Preferred Stock at any time.
The initial conversion ratio is one share of Series C Convertible
Preferred Stock for one share of common stock. The conversion ratio will be
subject to adjustments as the result of certain events, including:
o the payment of dividends (and other distributions) in common stock
on the outstanding shares of common stock;
o subdivisions, combinations, and reclassifications of common stock;
o the issuance of common stock at a price per share less than the
then-current market price, or the issuance of securities convertible
into or exchangeable for shares of common stock at a conversion
price less than the then-current market price of the common stock;
and
o our declaration, ordering, paying or making a dividend or
distributions on common stock, other than regular quarterly cash
dividends on common stock in an aggregate amount not to exceed 15%
of net income from continuing operations before extraordinary items
during the period commencing on July 1, 1998, and ending on the date
such dividend is paid.
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In the case of any reorganization or reclassification of outstanding
shares of common stock (other than a reclassification described above) or in the
case of any consolidation or merger to which we are a party or the transfer of
substantially all of our assets, each share of Series C Convertible Preferred
Stock then outstanding would become convertible only into the kind and amount of
securities, cash and other property that is receivable upon the occurrence of
such event by a holder of the number of shares of common stock into which such
share of Series C Convertible Preferred Stock was convertible immediately prior
to such event.
No fractional shares of common stock will be issued upon conversion of the
Series C Convertible Preferred Stock. Instead, we will pay a cash adjustment for
any fractional share.
REDEMPTION
We may redeem the Series C Convertible Preferred Stock at any time on and
after the earlier of (1) February 10, 2009 and (2) the date on which fewer than
25% of the shares of Series C Convertible Preferred Stock issued on February 10,
1999 remain outstanding. The redemption price will be equal to all accumulated
and unpaid dividends on the outstanding shares of Series C Convertible Preferred
Stock and the stated value of such shares.
Notice of redemption of the Series C Convertible Preferred Stock will be
mailed to each holder of record of the shares to be redeemed by first class
mail, postage prepaid at such holder's address as the same appears on our stock
record books not fewer 90 or more than 120 days prior to the redemption date.
The notice sent to each holder of Series C Convertible Preferred Stock will
state: (1) the redemption date; (2) the place or places where certificates for
such shares of Series C Convertible Preferred Stock are to be surrendered for
cash; and (3) the then-current conversion ratio into shares of common stock.
From and after the redemption date, dividends on the shares of Series C
Convertible Preferred Stock will cease to accumulate or accrue, such shares will
no longer be deemed to be outstanding and all rights of the holders of such
shares will cease (except the right to receive the cash payable upon such
redemption without interest thereon).
VOTING
The Series C Convertible Preferred Stock will vote on all matters on which
our common stockholders vote on an as-converted basis with the common stock,
EXCEPT THAT THE SERIES C CONVERTIBLE PREFERRED STOCK WILL NOT BE ENTITLED TO
VOTE FOR MEMBERS OF OUR BOARD OF DIRECTORS.
DESCRIPTION OF CAPITAL STOCK
Prior to the adoption of certain of the Proposals presented to our
stockholders at the 1998 Annual Meeting, the total number of shares that we are
authorized to issue is 51 million, consisting of 50 million shares of common
stock, par value $0.001 per share, and 1 million shares of preferred stock, par
value $0.001 per share. Assuming the adoption of the proposals by our
stockholders at the 1998 Annual Meeting, we will prior to the closing of the
rights offering, be authorized to issue 600 million shares, consisting of 400
million shares of common stock, par value $0.001 per share, and 200 million
shares of preferred stock, par value $0.001 per share. The following statements
are brief summaries of certain provisions relating to our capital stock.
COMMON STOCK
The holders of our common stock are entitled to one vote for each share
held of record on all matters to be voted on by the stockholders. Our common
stockholders are entitled to receive ratably dividends when, as and if declared
by our Board of Directors out of funds legally available for the declaration of
dividends. In the event of a liquidation, dissolution or winding up of Aames,
our common stockholders are entitled, subject to the rights of holders of
preferred stock that we have issued (including the Senior Preferred Stock), to
share ratably in all assets remaining available for distribution to them after
payment of liabilities and after provision is made for each class of stock, if
any, having preference over the common stock. The holders of common stock, as
such, have no conversion, preemptive or other subscription rights and there are
no redemption provisions applicable to the common stock. We distribute periodic
reports and other information, including
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notices of annual meetings and special meetings of our stockholders, to record
holders of common stock to the addresses indicated on our stock records.
PREFERRED STOCK
GENERAL. Our Board of Directors has the authority to issue the authorized
and unissued preferred stock with such designations, rights and preferences as
may be determined from time to time by the Board of Directors. Accordingly, our
Board of Directors is empowered, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which adversely affect the voting power or other rights of the holders of the
common stock.
SENIOR PREFERRED STOCK. We have three designated series of preferred
stock, Series A Preferred Stock, Series B Convertible Preferred Stock and Series
C Convertible Preferred Stock. The 500,000 designated shares of Series A
Preferred Stock have been reserved for issuance in connection with the Rights
Plan (described below). There are no shares of Series A Preferred Stock
outstanding. The material terms and provisions of the Series C Convertible
Preferred Stock are summarized above under the heading "Description of the
Series C Convertible Preferred Stock." The terms of the Series B Convertible
Preferred Stock and the Series C Convertible Preferred Stock are identical,
except for voting rights to elect our directors. Our Board of Directors is
divided into two classes. One class of four directors are elected annually by
the holders of the Series B Convertible Preferred Stock, voting as a single
class. The other class of five directors are elected by the holders of our
common stock and the Series B Convertible Preferred Stock, voting together as a
single class, for staggered three-year terms. HOLDERS OF THE SERIES C
CONVERTIBLE PREFERRED STOCK ARE NOT ENTITLED TO VOTE TO ELECT DIRECTORS.
ANTI-TAKEOVER PROVISIONS
Our Certificate of Incorporation and Bylaws include a number of provisions
which may have the effect of discouraging persons from pursuing non-negotiated
takeover attempts. These provisions include a classified Board of Directors, the
inability of stockholders to take action by written consent without a meeting,
the inability of stockholders to call for a special meeting of stockholders
under certain circumstances without the approval of our Board of Directors and
the inability of stockholders to remove directors without cause.
Each share of our outstanding common stock also evidences one stock
purchase right (a "Right") pursuant to the terms and conditions of a
Stockholders' Rights Plan that we adopted in June 1996 (as amended, the "Rights
Plan"). In general, the Rights will not be exercisable, or transferable, apart
from the common stock, until the tenth day after a person or group (other than
an "Exempt Person" as defined in the Rights Plan) either: (1) acquires
beneficial ownership of 15% or more of the outstanding common stock; or (2)
commences a tender offer or an exchange offer to acquire beneficial ownership of
15% or more of the outstanding common stock; or (3) who previously acquired 15%
or more of the common stock in a transaction approved by our Board of Directors
increases its ownership of common stock by more than 1%; or (4) files a
registration statement with the SEC with respect to an exchange offer to acquire
15% or more of the common stock; or (5) who beneficially owns 10% or more of the
outstanding common stock is declared an "Adverse Person" by the Board of
Directors.
Following a triggering event described above, each Right will be converted
into a right to purchase from the Company, for the exercise price (as defined in
the Rights Plan), that number of one one-hundredth (1/100th) of a share of our
Series A Preferred Stock (or, in certain circumstances, common stock, cash,
property or other of our securities) having a market value of twice the exercise
price. Further, if after the Rights become exercisable, Aames or a majority of
its assets or earning power is acquired by merger, consolidation, transfer, sale
or otherwise, each Right will be converted into the right to purchase that
number of shares of common stock of the surviving entity or (in certain
circumstances) its parent corporation, having a market value of twice the
exercise price. In general, no Adverse Person, nor the person or group whose
purchase transaction or tender or exchange offer triggers the exercisability of
the Rights, nor any of that person's or group's transferees, may exercise Rights
held by them. Each Right, at the option of the holder of the Right, also may be
exercised without the payment of cash. In such case, the Right's holder will
receive securities having a value equal to the difference between the value of
the securities that would have been issuable upon payment of the exercise price
and the exercise price. At any time prior to the tenth day following a
triggering event described in (1) through (5) of the prior
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paragraph, the Board of Directors may redeem all outstanding Rights at a price
of $0.001 per Right, and may amend the Rights Agreement and the Rights in any
and all respects. The Rights will expire on the earlier of the date of their
redemption or June 20, 2006.
On December 23, 1998, we amended the Rights Plan to provide that Capital Z
and its affiliates and associates are Exempt Persons under the Rights Plan.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Because we are a Delaware corporation, Delaware law may have an effect on
your rights as a stockholder. In particular, Section 203 of the Delaware General
Corporation Law prohibits certain transactions between a Delaware corporation
and an "interested stockholder." An interested stockholder is defined as a
person who, together with any affiliates or associates of such person,
beneficially owns, directly or indirectly, 15% or more of the outstanding voting
shares of a Delaware corporation. This provision prohibits certain business
combinations between an interested stockholder and a corporation for a period of
three years after the date the interested stockholder becomes an interested
stockholder. The term "business combination" is broadly defined to include
mergers, consolidations, sales or other dispositions of assets having a total
value in excess of 10% of the consolidated assets of the corporation, and
certain transactions that would increase the interested stockholder's
proportionate share ownership in the corporation.
This prohibition is effective unless:
o The business combination is approved by the corporation's board of
directors prior to the time the interested stockholder becomes an
interested stockholder;
o The interested stockholder acquired at least 85% of the voting stock
of the corporation (other than stock held by directors who are also
officers or by certain employee stock plans) in the transaction in
which it becomes an interested stockholder; or
o The business combination is approved by a majority of the board of
directors and by the affirmative vote of 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder.
For purposes of Section 203, our Board of Directors has approved of
Capital Z's acquisition of Senior Preferred Stock in the Capital Z Financing and
pursuant to the Standby Commitment. Because of this approval, we may engage in
the future in any "business combination" with Capital Z.
TRANSFER AGENT
The Company's transfer agent and registrar for its common stock is
ChaseMellon Shareholder Services LLC.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material United States federal income
tax matters that you should consider with respect to the subscription rights.
This summary describes provisions of the Internal Revenue Code of 1986, as
amended, Treasury regulations under the Code, judicial authority and
administrative rulings and practice. This summary only speaks as of the date of
this prospectus, and any such authority could change, possibly with retroactive
effect.
Moreover, this summary does not discuss all aspects of federal income
taxation that may be relevant to you, especially if you are subject to special
treatment under the federal income tax laws. For example, if you are a bank,
dealer in securities, life insurance company, tax-exempt organization or foreign
taxpayer, this discussion may not cover all relevant tax issues. Also we have
not discussed applicable tax consequences if you hold our common stock as part
of a hedging, straddle, constructive sale, conversion or other risk reduction
transaction. This summary also does not address any aspect of state, local or
foreign tax laws.
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This summary is only applicable to you if you hold common stock, and/or
will hold the subscription rights and any shares of Series C Convertible
Preferred Stock you acquire upon the exercise of subscription rights, as capital
assets (generally, property held for investment) within the meaning of Section
1221 of the Code. YOU SHOULD CONSULT YOUR OWN TAX ADVISORS TO DETERMINE THE
SPECIFIC TAX CONSEQUENCES OF THE RIGHTS OFFERING TO YOU.
ISSUANCE OF THE SUBSCRIPTION RIGHTS
If you hold common stock on the record date for the rights offering, you
should not be required to recognize taxable income upon the receipt of the
subscription rights.
In general, a distribution by a corporation to its stockholders of rights
to acquire stock in the distributing corporation is not taxable. An exception to
this general rule applies in the case of a distribution which constitutes a
"disproportionate distribution" with respect to any class or classes of stock of
the corporation. A distribution of stock rights constitutes a "disproportionate
distribution" if it is a part of a distribution or a series of distributions
(including deemed distributions) that has the effect of (1) the receipt of
property (including cash) by some stockholders and (2) an increase in the
proportionate interests of other stockholders in the assets or earnings and
profits of the distributing corporation. The rights offering should not result
in a disproportionate distribution because you will not receive any property in
the offering other than Series C Convertible Preferred Stock that you may
purchase by exercising your subscription rights.
We intend to treat the distribution of subscription rights as a nontaxable
distribution. If the Internal Revenue Service were to take a contrary position
with respect to this matter, by deeming the distribution of subscription rights
to constitute a taxable distribution, a person receiving subscription rights
would recognize a dividend, taxable as ordinary income, in an amount equal to
the fair market value of the subscription rights received, but only to the
extent of our current and accumulated earnings and profits. To the extent the
deemed distribution exceeds our current and accumulated earnings and profits,
such excess would be treated first as a nontaxable recovery of adjusted tax
basis in the common stock with respect to which the subscription rights were
distributed and then as gain from the sale or exchange of the common stock. A
person's tax basis in a subscription right received in a taxable distribution
would equal the fair market value of the subscription right as of the date of
distribution of the subscription right. A person's holding period in the
subscription rights would begin on the day following the date of distribution of
the subscription rights.
Except as provided above, the following discussion assumes that the
distribution of the subscription rights will be treated as a nontaxable
distribution.
BASIS AND HOLDING PERIOD OF THE SUBSCRIPTION RIGHTS
Generally, if you hold common stock on the record date for the rights
offering, your basis in the subscription rights received by you will be zero.
If, however, either
o the fair market value of the subscription rights, if exercised, on the
date we issue the subscription rights is 15% or more of the fair
market value (on that same date) of our common stock; or
o you properly elect under Section 307 of the Code in your federal
income tax return to allocate part of the basis of your common stock
to the subscription rights;
then your basis in your shares of common stock will be allocated between the
common stock and the subscription rights in proportion to the fair market values
of each on the date we issue the subscription rights.
The holding period of your subscription rights will include your holding
period (as of the date of issuance) for the common stock with respect to which
we distributed the subscription rights to you.
EXPIRATION OF THE SUBSCRIPTION RIGHTS
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If your basis in your subscription rights is zero, and you allow your
subscription rights to expire unexercised, you will not recognize any gain or
loss.
If you have a basis in your subscription rights and you allow your
subscription rights to expire unexercised, you will recognize a loss equal to
the basis of those subscription rights. Any loss you recognize on the expiration
of your subscription rights will be a capital loss if the Series C Convertible
Preferred Stock obtainable by you after the exercise of the subscription rights
would be a capital asset.
EXERCISE OF THE SUBSCRIPTION RIGHTS; BASIS AND HOLDING PERIOD OF ACQUIRED SHARES
You will not recognize any gain or loss upon the exercise of your
subscription rights. Your basis in each share of Series C Convertible Preferred
Stock you acquire through exercise of your subscription rights will equal the
sum of the subscription price you paid to exercise your subscription rights and
your basis, if any, in the subscription rights. Your holding period for the
Series C Convertible Preferred Stock you acquire through exercise of your
subscription rights will begin on the date you exercise your subscription
rights.
SALE OR EXCHANGE OF SERIES C CONVERTIBLE PREFERRED STOCK
If you sell or exchange shares of Series C Convertible Preferred Stock,
you will generally recognize gain or loss on the transaction. The gain or loss
you recognize is equal to the difference between the amount you realize on the
transaction and your basis in your shares you sold. Such gain or loss generally
will be capital gain or loss so long as you held the shares as a capital asset
at the time of the sale or exchange. Gain or loss from an asset held for more
than one year will generally be taxable as long term capital gain or loss. If
you recognize any such long term capital gain, the Internal Revenue Service will
generally tax such gain at a maximum rate of 20%.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Under the backup withholding rules of the Code, you may be subject to 31%
backup withholding with respect to payments made pursuant to the rights
offering. You will not be subject to backup withholding if you:
o Are a corporation or fall within certain other exempt categories and,
when required, demonstrate that fact; or
o Provide a correct taxpayer identification number and certify under
penalty of perjury that your taxpayer identification number is
correct and that you are not subject to backup withholding because you
previously failed to report all dividends and interest income.
Any amount withheld under these rules will be credited against your
federal income tax liability. We may require you to establish your exemption
from backup withholding or make other arrangements with respect to the payment
of backup withholding.
THIS SUMMARY IS INCLUDED FOR GENERAL INFORMATION ONLY. YOU SHOULD CONSULT
YOUR OWN TAX ADVISORS REGARDING THE CONSEQUENCES OF THE RIGHTS OFFERING TO YOUR
PARTICULAR TAX SITUATION, INCLUDING STATE AND LOCAL INCOME AND OTHER TAX LAWS.
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PLAN OF DISTRIBUTION
We are making this rights offering directly to you, the holders of our
common stock. We will pay the fees and expenses of ChaseMellon Shareholder
Services L.L.C. as subscription agent, and we have also agreed to indemnify the
subscription agent from any liability that it may incur in connection with the
rights offering, including liabilities under the Securities Act.
LEGAL MATTERS
Troop Steuber Pasich Reddick & Tobey, LLP, Los Angeles, California, has
rendered to us a legal opinion as to the validity of the subscription rights,
the Series C Convertible Preferred Stock and the underlying common stock covered
by this prospectus.
EXPERTS
PricewaterhouseCoopers LLP ("PWC") audited our consolidated financial
statements and schedule as of June 30, 1998 and 1997 and for each of the three
years in the period ended June 30, 1998. We incorporate by reference those
financial statements in this prospectus with the permission of PWC and rely on
PWC's reports given upon their authority as experts in accounting and auditing.
KPMG LLP audited the financial statements of One Stop Mortgage, Inc. for
the six months ended June 30, 1996 and the period beginning August 24, 1995
(inception) through December 31, 1995. We incorporate by reference those
financial statements in this prospectus with the permission of KPMG and rely on
KPMG's reports given upon their authority as experts in accounting and auditing.
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- --------------------------------------------------------------------------------
No dealer, salesman or other person is authorized to give oral or written
information about this offering that is not included in this prospectus. If
given or made, such information or representation must not be relied upon as
having been authorized by Aames Financial Corporation. This prospectus does not
constitute an offer to sell, or the solicitation of an offer to buy, Series C
Convertible Preferred Stock in any jurisdiction. Neither the delivery of this
prospectus nor any sale made hereunder shall, under any circumstances, create an
implication that there has been no change in the affairs of Aames Financial
Corporation since the date of this prospectus.
- --------------------------------------------------------------------------------
--------------------
AAMES FINANCIAL CORPORATION
PROSPECTUS
SERIES C CONVERTIBLE PREFERRED STOCK
_____________, 1999
--------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the offering are as follows:
Amount
---------
Registration Fee Under Securities Act of 1933....... $ 8,622.72
NYSE Listing Fee ................................... $_______
Legal Fees and Expenses............................. $ 200,000.00
Subscription Agent Fee ............................. $ 150,000.00
Accounting Fees and Expenses........................ $ 75,000.00
Miscellaneous Expenses.............................. $ 250,000.00
---------
TOTAL............................................... $_______
=========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has adopted provisions in its Certificate of Incorporation
which limit the liability of directors. As permitted by applicable provisions of
the Delaware General Corporation law (the "Delaware Law"), directors will not be
liable to the Company for monetary damages arising from a breach of their
fiduciary duty as directors in certain circumstances. Such limitation does not
affect liability for any breach of a director's duty to the Company or its
stockholders (i) with respect to approval by the director of any transaction
from which he derives an improper personal benefit, (ii) with respect to acts or
omissions involving an absence of good faith, that he believes to be contrary to
the best interests of the Company or its stockholders, that involve intentional
misconduct or knowing and culpable violation of law, that constitute an
unexcused pattern of inattention that amounts to an abdication of his duty to
the Company or its stockholders, or that show a reckless disregard for his duty
to the Company or its stockholders in circumstances in which he was or should
have been aware, in the ordinary course of performing his duties, of a risk of
serious injury to the Company or its stockholders, or (iii) based on
transactions between the Company and its directors or other corporations with
interrelated directors or on improper distributions, loans or guarantees under
applicable sections of the Delaware Law. Such limitation of liability also does
not affect the availability of equitable remedies such as injunctive relief or
rescission. The Company's Bylaws provide that the Company must indemnify its
directors and officers to the full extent permitted by the Delaware Law,
including circumstances in which indemnification is otherwise discretionary
under the Delaware Law, and the Company has entered into indemnification
agreements (the "Indemnification Agreements") with its directors providing such
indemnity. The Indemnification Agreements constitute binding agreements between
the Company and each of the other parties thereto, thus preventing the Company
from modifying its indemnification policy in a way that is adverse to any person
who is a party to an Indemnification Agreement.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Company pursuant to the above statutory provisions or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
Page 1
<PAGE>
ITEM 16. EXHIBITS
See the Exhibit Index of this Registration Statement.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to include any material
information with respect to the plan of distribution not previously disclosed in
the Registration Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof; and
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial BONA FIDE offering
thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of the appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Page 2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California, on August 13, 1999.
AAMES FINANCIAL CORPORATION
(Registrant)
By: /s/ BARBARA S. POLSKY
----------------------------------
Barbara S. Polsky
Executive Vice President,
General Counsel and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Barbara S. Polsky and David A. Sklar or any one
of them, his attorney-in-fact and agent, with full power of substitution, for
him in any and all capacities, to sign any amendments to this Registration
Statement on Form S-3, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that said attorney-in-fact, or their
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-3 has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MANI A. SADEGHI Interim Chief August 13, 1999
------------------------------------ Executive Officer and
Mani A. Sadeghi Director
/s/ NEIL B. KORNSWIET President and Director August 13, 1999
------------------------------------
Neil B. Kornswiet
/s/ DAVID A. SKLAR Chief Financial August 13, 1999
------------------------------------ Officer
David A. Sklar (Principal Financial
and Accounting
Officer)
/s/ STEVEN M. GLUCKSTERN Chairman of the Board August 13, 1999
------------------------------------
Steven M. Gluckstern
/s/ DAVID A. SPURIA Director August 13, 1999
------------------------------------
David A. Spuria
</TABLE>
Page 3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ ERIC C. RAHE Director August 13, 1999
------------------------------------
Eric C. Rahe
/s/ ADAM M. MIZEL Director August 13, 1999
------------------------------------
Adam M. Mizel
/s/ GEORGE W. COOMBE, JR. Director August 13, 1999
------------------------------------
George W. Coombe, Jr.
/s/ CARY H. THOMPSON Director August 13, 1999
------------------------------------
Cary H. Thompson
/s/ GEORGES C. ST. LAURENT Director August 13, 1999
------------------------------------
Georges C. St. Laurent
</TABLE>
Page 4
<PAGE>
EXHIBIT INDEX
No. Item
3.1 Certificate of the Voting Powers, Designations, Preferences and Relative,
Participating, Optional or Other Special Rights, and Qualifications,
Limitations or Restrictions Thereof, of Series C Convertible Preferred
Stock of the Registrant, as filed with the Secretary of State of the State
of Delaware on February 10, 1999 (1)
4.1 Form of Specimen Certificate for Rights of the Registrant (2)
5.1 Opinion of Troop Steuber Pasich Reddick & Tobey, LLP
23.1 Consent of PricewaterhouseCoopers LLP (2)
23.2 Consent of Troop Steuber Pasich Reddick & Tobey, LLP (included as part of
Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
99.1 Form of Instructions to Stockholders as to use of Subscription Rights (2)
99.2 Form of Notice of Guaranteed Delivery for Subscription Rights and
Important Tax Information (2)
99.3 Form of Letter to Stockholders who are record holders (2)
99.4 Form of Letter to Stockholders who are beneficial holders (2)
99.5 Form of Subscription Agent Agreement by and between Aames Financial
Corporation and ChaseMellon Shareholder Services LLC. (2)
- -----------------------------------
(1)Incorporated herein by reference to Exhibit 3.4 of the Registrant's
Quarterly Report on Form 10-Q, filed with the Commission on February 22,
1999.
(2) To be filed by amendment.
Page 44
EXHIBIT 5.1
[Letterhead of Troop Steuber Pasich Reddick & Tobey, LLP]
August 13, 1999
Aames Financial Corporation
350 South Grand Avenue, 52nd Floor
Los Angeles, California 90071
Ladies/Gentlemen:
At your request, we have examined the Registration Statement on Form S-3
(the "Registration Statement") to which this letter is attached as Exhibit 5.1
filed by Aames Financial Corporation, a Delaware corporation (the "Company"), to
register under the Securities Act of 1933 (the "Act") (i) subscription rights to
purchase up to an aggregate of 31,016,964 shares of Series C Convertible
Preferred Stock (the "Rights"), (ii) up to 31,016,964 shares of Series C
Convertible Preferred Stock, par value $0.001 per share (the "Series C Stock"),
and (iii) up to 31,016,964 shares of Common Stock, par value $0.001 per share
(the "Common Stock" and, together with the Rights and the Series C Stock, the
"Securities").
Assuming completion of the Recapitalization, as such term is defined in
the Registration Statement, the completion of which is a condition to the
completion of the rights offering, we are of the opinion that the Securities
have been duly authorized, and upon issuance and sale in conformity with and
pursuant to the Registration Statement, the Securities will be validly issued,
fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to use of our name in the Prospectus constituting a part thereof.
Respectfully Submitted,
/s/ TROOP STEUBER PASICH REDDICK & TOBEY, LLP
