<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
Form 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 17, 1999
AAMES FINANCIAL CORPORATION
(Exact name of Registrant as Specified in Its Charter)
Delaware 0-19604 95-340340
- ---------------------------- ----------- -------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
350 South Grand Avenue, 52nd Floor
Los Angeles, California 90071
(Address of Principal Executive Offices)
(323) 210-5000
-------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
NA
-------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
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ITEM 5. OTHER EVENTS
Reference is made to the press release of Registrant issued on May 17,
1999 which contains information meeting the requirements of this Item 5 and is
incorporated herein by this reference. A copy of the press release is attached
to this Form 8-K as Exhibit 99.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) EXHIBITS
99 Press release issued May 17, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Current Report on Form 8-K to be
signed on its behalf by the undersigned hereunto duly authorized.
AAMES FINANCIAL CORPORATION
Dated: May 19, 1999 By: /s/ Barbara S. Polsky
-----------------------------
Barbara S. Polsky
Executive Vice President,
General Counsel and Secretary
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
99 Press release issued May 17, 1999
</TABLE>
4
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EXHIBIT 99
Contact: David Sklar
Aames Financial Corporation
(323) 210-5311
or
Jeffrey Lloyd/Steve Hawkins
Sitrick And Company
(310) 788-2850
AAMES FINANCIAL CORPORATION ANNOUNCES THIRD QUARTER RESULTS
Company Reports Further Progress As It Strives To Return To Profitability
Equity Infusion, Financial And Operational Improvements Highlight Quarter
LOS ANGELES, CALIFORNIA, MAY 17, 1999 - AAMES FINANCIAL CORPORATION (NYSE:
AAM), a leader in subprime home equity lending, today reported a net loss of
$(36.0) million, or $(1.16) per share diluted, for the three months ended March
31, 1999, compared to restated net income of $2.0 million, or $0.07 per share
diluted, for the three months ended March 31, 1998. Contributing to the loss was
$15.1 million in pre-tax operating losses and $37.0 million for a one-time
charge related to the Company's servicing advances. The net loss for the nine
month period ended March 31, 1999 was $(234) million, or $(7.55) per share
diluted, compared to restated net income of $21.1 million, or $0.68 per share
diluted, for the nine months ended March 31, 1998. Net income for the nine-month
period ended March 31, 1999 included the impact of the $191.6 million valuation
adjustment to the Company's interest-only strip recorded in the quarter ended
December 31, 1998.
Commenting on these results, Mani Sadeghi, Aames' chief executive officer,
stated, "The results of operations for the quarter ended March 31, 1999 reflect
the challenging environment faced by the home equity industry and the actions
Aames is taking to position itself for success in the new environment.
"Specifically, Aames closed on the first tranche of the Capital Z
investment, bringing much needed equity capital into the Company. Aames also
successfully negotiated new warehouse and working capital facilities and began
to rebuild its loan production volumes.
<PAGE> 2
Simultaneously, management is taking steps to reduce costs, streamline
operations and build strategic capabilities.
"Finally, after completing a comprehensive review of its servicing advance
and financing methods, the Company is continuing to implement new financial
management practices that will facilitate monetizing its servicing advance
obligations.
"These continue to be challenging times for our industry and our Company,
but we believe that by being proactive and focussed, Aames will position itself
for future success."
Equity Capital and Liquidity
During the quarter ended March 31, 1999, the Company said it issued 26,704
shares of Series B Convertible Preferred Stock and 50,046 shares of Series C
Convertible Preferred Stock to Capital Z Financial Services Fund II, L.P. (and
certain investors designated by it) and received in return proceeds of $67.4
million, net of $9.4 million of issuance related expenses under the terms of a
stock purchase agreement. Under that agreement, subject to the receipt of
stockholder approval of an increase in the Company's authorized common and
preferred stock (together with a 1000 to 1 stock split of the preferred stock
(the "Recapitalization")), the Company said it intends to make a distribution in
the form of a dividend to the common stockholders of the Company of
nontransferable subscription rights to purchase up to $25 million of Series C
Preferred Stock for $1.00 per share (the "Rights Offering"); and (iii) Capital Z
has agreed to purchase any shares of the Series C Preferred Stock which are not
purchased by common stockholders in the Rights Offering.
Certain provisions relating to the stock purchase agreement require the
Recapitalization to be completed by June 30, 1999. Each of the Company's
warehouse and working capital facilities require the Rights Offering to be
completed by June 30,1999.
The Company had originally anticipated that the Recapitalization and Rights
Offering would be completed in the quarter ending June 30, 1999. However, the
Company was delayed in making the required filings with the Securities and
Exchange Commission. The Company currently expects the Rights Offering to be
completed in July or August 1999. The Company intends to request a waiver for
this breach from each of the lenders and expects that the waiver
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will be forthcoming. Capital Z has agreed to extend their deadline to August 16,
1999. Further, the failure to complete the Rights Offering by June 30, 1999,
combined with the net loss reported for the quarter ended March 31, 1999 and the
net loss that may be reported for the quarter ended June 30, 1999 if the Company
does not complete a securitization, may violate other provisions in those credit
lines relating to minimum levels of net worth at certain dates. The Company
intends to ask the lenders to modify those provisions to avoid a potential
default and expects those modifications to be forthcoming. If the waivers or
modifications are not obtained, the Company would have to find alternative
sources of funds.
Total Revenue
Total revenue for the three and nine months ended March 31, 1999 was $36.8
million and $(59.8) million, compared to $59.5 million and $194.4 million for
the three and nine months ended March 31, 1998, respectively. The nine month
period ended March 31, 1999 total revenue includes the $191.6 million in
valuation adjustment to the interest-only strip recorded in the three months
ended December 31,1998. Excluding this write down, revenue for the nine months
ended March 31, 1999 was $126.6 million, a 34.9 percent decrease from 1998's
comparable period.
The Company said that the decline in total revenue for the quarter
primarily reflects the Company's reliance on whole loan sales for cash during
the quarter, rather than securitization for its loan disposition strategy, and
to a lesser extent, reduced loan production.
Gain on sale for the three months ended March 31, 1999 declined $16.6
million, or 66.8 percent from $24.8 million recorded for the three months ended
March 31, 1998. Gain on sale for the three months ended March 31, 1999 reflects
the Company's reliance solely on the whole loan market for its disposition
strategy. Gain on sale for the nine-month period ended March 31, 1999 decreased
by $54.6 million or 59.8 percent, including the $13.5 million hedge loss which
was recorded during the six months ended December 31, 1998.
The Company said that gains associated with whole loan sales for cash are
generally lower than those recognized when such loans are securitized. This
disparity was exacerbated further during the quarter as substantially all of the
whole loan sales were closed under a forward
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commitment entered into in the prior quarter when whole loan prices were at
their lowest level. The commitment, which expires in May 1999, represented a
forward commitment to sell $500 million, subsequently amended to $750 million,
of loans at whole loan prices that existed during the prior quarter. As of April
30, 1999, the Company had satisfied $674.2 million of this commitment. The
Company said that management is evaluating market and other conditions regarding
re-entering the securitization market in the June 1999 quarter. No assurance can
be given that market conditions will not change or other events will not occur
that would preclude or inhibit the Company's ability to complete a
securitization in the June 1999 quarter. Completing a securitization in the June
quarter would increase the Company's profitability for that quarter.
TheCompany's loan servicing portfolio at March 31, 1999 increased slightly
to $4.05 billion from $4.03 billion at March 31, 1998. At March 31, 1999, the
Company's loan servicing portfolio had declined 2.5 percent, or approximately
$102 million, from the $4.1 billion reported at June 30, 1998, reflecting the
Company's recent reliance on whole loan sales with servicing released. At March
31, 1999, 100 percent of the Company's servicing portfolio was serviced
in-house, compared to 95 percent at March 31, 1998. In April 1999 as part of its
efforts to reduce the cash burden of its servicing advance obligations, the
Company entered into a sub-servicing agreement with a loan servicing company
covering two pools consisting of $394.3 million in principal amount of loans at
March 31, 1999. Loan Production
Neil B. Kornswiet, Aames' president, stated, "Further contributing to the
decrease in total revenue was a 29.6 percent decrease in total loan production
during the quarter to $401.7 million from $570.9 million during the three month
ended March 31, 1998, reflecting a combination of the Company's limited
warehouse capability in the first half of the quarter, and price and
underwriting changes implemented in the second fiscal quarter to permit the
Company to access the whole loan market and stay within its liquidity
constraints."
He added, "The Company's core operations, retail and broker, decreased 4.6
percent to $382.5 million for the quarter from $400.8 million for the same
quarter in 1998. Retail
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originations for the quarter were $156.1 million, compared to $165 million for
the same period in 1998. Origination volume for the broker network declined to
$226.4 million for the quarter, compared to $235.8 million for the quarter ended
March 31, 1998. Correspondent purchases were $19.3 million, compared to $170.1
million for the prior year's quarter, reflecting changes implemented by the
Company in response to the liquidity constraints and an emphasis on core
operation loan origination."
Mr. Kornswiet said that total loan production for the nine months ended
March 31, 1999 declined 1.9 percent to $1.68 billion from $1.7 billion for the
nine months ended March 31, 1998. Retail originations increased 27.7 percent for
the nine months ended to $582.2 million compared to $455.9 million for the same
period a year ago. Origination volume for the broker network reached $866.7
million for the nine months ended March 31, 1999, up 12.4 percent when compared
to $771.4 million for the nine months ended March 31, 1998. Correspondent volume
decreased 52.7 percent to $228.1 million in the nine-month period from $482.5
million for the comparable period in 1998.
"Given the very difficult circumstances under which we were operating, I
believe that our sales force did an admirable job this past quarter. The
combination of a very difficult home equity lending market, combined with the
financial constraints which limited our ability to generate loan production,
created a situation which could have splintered an organization's sales force.
We are more committed than ever to reestablish our leadership position in the
subprime lending industry," Mr. Kornswiet added.
Servicing Advance Obligations
As servicer of the loans it securitizes, the Company is obligated to
advance, or "loan," to the trusts delinquent interest. In addition, as servicer,
the Company advances to the trusts foreclosure related expenses and certain tax
and insurance remittances relating to loans in securitized pools. The Company,
as servicer, is then entitled to recover these advances from regular monthly
cash flows into the trusts, including monthly payments, pay-offs and liquidation
proceeds on the related loan. In addition, the Company, as servicer, is
obligated to make additional payments into the trusts that are not recoverable
from monthly cash flows. Payments
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into a trust that are not recovered from monthly cash flows may be recoverable
from the trusts' distributions to the Company, as residual certificate holder.
After a comprehensive review, the Company determined that its accounts
receivables should reflect only those receivables that are recoverable from the
trusts' monthly cash flows and wrote down accounts receivable by $37.0 million.
The Company has been exploring ways in which it could reduce the cash
burden of its servicing advance obligations and reduce its reliance on working
capital lines. In April 1999, the Company reduced its servicing advance
obligations by engaging a loan servicing company to subservice two of the
Company's securitization pools and assume the obligations to make all future
advances on those two pools. The Company is in the process of completing
negotiations with the loan servicing company for the sale of the outstanding
servicing advances on those two pools for approximately $13.3 million. The
Company is currently in negotiations for arrangements to finance or otherwise
monetize its servicing advance obligations. The Company believes that its
ability to monetize its advances requires it to change the way it has paid,
recovered and recorded advances to the securitization trusts. These changes will
require the Company to make a one-time cash deposit to the trusts equal to
certain cumulative advances in the amount of $34.0 million. The one-time cash
deposit will be paid into the trusts during the quarter ended June 30, 1999. The
one-time cash deposit will strain the Company's liquidity until the completion
of the Rights Offering, unless an arrangement to monetize the Company's
servicing advances can be finalized sooner. After the cash deposits are made,
the amount of cash the Company will be obligated to advance into the trusts on a
monthly basis will be reduced from historical levels.
Aames Financial Corporation is a leading home equity lender currently
operating 101 retail offices and 44 broker offices nationwide.
From time to time the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated
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results or other expectations expressed in the Company's forward-looking
statements. The risks and uncertainties that may affect the operations,
performance and results of the Company's business include the following:
negative cash flows and capital needs; delinquencies and losses in
securitization trusts; negative impact on cash flow, right to terminate mortgage
servicing; changes in interest rate environment; year 2000 compliance and
technological enhancement; prepayment risk; basis risk; credit risk; risk of
adverse changes in the secondary market for mortgage loans; dependence on
funding sources; dependence on broker network; risks involved in commercial
mortgage lending; strategic alternatives; competition; concentration of
operations in California; timing of loan sales; economic conditions; contingent
risks; and government regulation. For a more complete discussion of these risks
and uncertainties, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors" in the Company's
form 10-K for the fiscal year ended June 30, 1998 and "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors" in form 10-Q for the quarters ended September 30, 1998, December 31,
1998 and March 31, 1999.
# # #
[Financial Tables Follow]
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AAMES FINANCIAL CORPORATION
QUARTERLY FINANCIAL STATISTICS
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
MARCH MARCH
--------------------------- -------------------------------
1999 1998 1999 1998
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
ORIGINATION VOLUME
BROKER NETWORK 1 226,420,000 235,788,000 866,713,000 771,378,000
RETAIL 2 156,059,000 165,018,000 582,173,000 455,856,000
CORRESPONDENT' 19,270,000 170,090,000 228,138,000 482,464,000
------------ ----------- ------------- -------------
TOTAL 401,749,000 570,896,000 1,677,024,000 1,709,698,000
============ =========== ============= =============
RETAIL WTD AVG COMMISSION RATE 5.40% 4.16% 4.31% 4.35%
SERVICING PORTFOLIO 3 4,044,778,000 4,030,900,000
PORTFOLIO SERVICED IN-HOUSE 4,044,778,000 3,829,355,000
LOAN SALES:
WHOLE LOANS SOLD 393,914,000 305,000,000 940,138,000 344,790,000
SECURITIZATIONS - 299,985,000 649,999,000 1,409,263,000
TOTAL 393,914,000 604,985,000 1,590,137,000 1,754,053,000
SERVICING SPREAD ON SECURITIZATIONS - 3.91% 3.61% 3.98%
COMPONENTS OF REVENUE 4
GAIN ON SALE OF LOANS 8,236,000 24,821,000 36,665,000 91,259,000
NET GAIN(LOSS) ON VALUATION OF INTEREST-ONLY
STRIPS AND MORTGAGE SERVICING RIGHTS - 3,058,000 (186,451,000) 13,813,000
COMMISSIONS
RETAIL 7,137,000 6,903,000 22,094,000 18,364,000
BROKER NETWORK 1,424,000 (15,000) 3,240,000 743,000
OTHER 444,000 627,000 1,417,000 1,424,000
LOAN SERVICING
SERVICING SPREAD 5,846,000 6,830,000 14,673,000 18,251,000
PREPAYMENT FEES 3,215,000 2,629,000 10,363,000 8,247,000
LATE CHARGES AND OTHER SERVICING FEES 2,595,000 2,175,000 7,474,000 5,280,000
FEES AND OTHER
CLOSING 109,000 697,000 1,299,000 1,954,000
APPRAISAL 522,000 704,000 2,239,000 1,839,000
UNDERWRITING 443,000 282,000 1,280,000 822,000
INTEREST INCOME 6,639,000 10,761,000 25,361,000 31,870,000
OTHER 204,000 66,000 498,000 512,000
------------ ----------- ------------- -------------
TOTAL REVENUE 36,814,000 59,538,000 (59,848,000) 194,378,000
============ =========== ============= =============
</TABLE>
1 Includes commercial loans
2 1998 includes 125 product, private investor repurchases and broker loans.
3 Includes loan serviced on an interim basis.
4 Revenues for the three and nine months ended March 31, 1998 and nine months
ended March 31,1999 have been restated
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AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 1999 June 30,1998
------------- -------------
(Restated)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 10,984,000 12,322,000
Loans held for sale, at lower of cost or market 342,060,000 198,202,000
Accounts receivable 19,656,000 51,072,000
Interest-only strips at estimated fair market value 324,842,000 490,542,000
Mortgage servicing rights,net 23,249,000 32,090,000
Equipment and improvements, net 14,464,000 13,939,000
Prepaid and other 12,954,000 17,020,000
Income tax refund receivable 9,850,000 --
------------- -------------
Total assets $ 758,059,000 815,187,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings $ 281,240,000 286,990,000
Revolving warehouse facilities 284,387,000 141,012,000
Accounts payable and accrued expenses 47,825,000 49,964,000
Income tax payable 8,486,000 33,170,000
------------- -------------
Total liabilities 621,938,000 511,136,000
------------- -------------
Stockholders' equity:
Preferred Stock, par value $.001 per
share, 1,000,000 shares authorized;
0 shares outstanding -- --
Series B Convertible preferred stock, par value $.001 per share,
100,000 shares authorized ;26,704 and 0 shares outstanding 26,704,000 --
Series C Convertible preferred stock, par value $.001per share,
100,000 shares authorized; 50,046 and 0 shares outstanding 40,725,000 --
Common Stock, par value $.001 per share
50,000,000 shares authorized;
31,015,893 and 30,962,578 shares outstanding 31,000 31,000
Additional paid-in capital 250,096,000 249,851,000
Retained earnings(deficit) (181,435,000) 54,169,000
------------- -------------
Total stockholders' equity 136,121,000 304,051,000
------------- -------------
Total liabilities and stockholders' equity $ 758,059,000 815,187,000
============= =============
</TABLE>
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AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- ------------------------------
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
------------- ------------ ------------ -----------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue:
Gain on sale of loans $ 8,236,000 24,821,000 36,665,000 91,259,000
Net gain(loss) on valuation of interest only
strips and mortgage servicing rights 3,058,000 (186,451,000) 13,813,000
Commissions 9,005,000 7,515,000 26,751,000 20,531,000
Loan servicing 11,656,000 11,634,000 32,510,000 31,778,000
Fees and other 7,917,000 12,510,000 30,677,000 36,997,000
------------- ------------ ------------ -----------
Total revenue, including valuation adjustment 36,814,000 59,538,000 (59,848,000) 194,378,000
------------- ------------ ------------ -----------
Expenses:
Compensation 21,759,000 24,348,000 65,460,000 70,668,000
Production 9,390,000 9,292,000 30,879,000 22,630,000
General and administrative 11,300,000 10,258,000 38,472,000 27,923,000
Interest 9,474,000 11,703,000 31,759,000 32,620,000
Nonrecurring servicing receivable 37,044,000 - 37,044,000 -
------------- ------------ ------------ -----------
Total expenses 88,967,000 55,601,000 203,614,000 153,841,000
------------- ------------ ------------ -----------
Income (loss) before income taxes (52,153,000) 3,937,000 (263,462,000) 40,537,000
Provision(benefit) for income taxes (16,174,000) 1,919,000 (29,582,000) 19,416,000
------------- ------------ ------------ -----------
Net income (loss) $ (35,979,000) 2,018,000 (233,880,000) 21,121,000
============= ============ ============ ===========
Net income(loss) per share:
Basic $ (1.16) 0.07 (7.55) 0.76
Diluted (1.16) 0.07 (7.55) 0.68
Dividends per share - 0.03 0.03 0.10
Weighted average number of shares outstanding:
Basic 31,006,962 27,898,000 30,997,000 27,827,000
============= ============ ============ ===========
Diluted 31,006,962 28,740,000 30,997,000 35,097,000
============= ============ ============ ===========
</TABLE>
