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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
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<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-19604
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AAMES FINANCIAL CORPORATION
[Exact name of Registrant as specified in its charter]
<TABLE>
<S> <C>
DELAWARE 95-4340340
[State or other jurisdiction of [I.R.S. Employer
incorporation or organization] Identification No.]
</TABLE>
350 SOUTH GRAND AVENUE, LOS ANGELES, CA 90071-3459
[Address of Registrant's principal executive offices including zip code]
(323) 210-5000
[Registrant's telephone number,
including area code]
NO CHANGES
[Former name, former address and former fiscal year,
if changed since last report]
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
AT NOVEMBER 11, 1999, REGISTRANT HAD 31,032,223 SHARES OF COMMON STOCK
OUTSTANDING.
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<PAGE>
TABLE OF CONTENTS
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PAGE
ITEM NO. NO.
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PART I--FINANCIAL INFORMATION
Item 1 -- Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1999
and June 30, 1999........................................... 3
Condensed Consolidated Statements of Operations for the
three months ended September 30, 1999 and 1998 (Restated)... 4
Condensed Consolidated Statements of Cash Flows for the
three months ended September 30, 1999 and 1998 (Restated)... 5
Notes to Condensed Consolidated Financial Statements........ 6-8
Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9-35
PART II--OTHER INFORMATION
Item 1 -- Legal Proceedings........................................... 36
Item 2 -- Changes in Securities....................................... 36
Item 3 -- Defaults Upon Senior Securities............................. 36
Item 4 -- Submission of Matters to a Vote of Security Holders......... 36
Item 5 -- Other Information........................................... 37
Item 6 -- Exhibits and Reports on Form 8-K............................ 37
Signature Page........................................................ 38
</TABLE>
2
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AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
------------- --------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 5,194,000 $ 20,764,000
Loans held for sale, at lower of cost or market............. 384,207,000 559,869,000
Accounts receivable......................................... 76,022,000 56,964,00
Residual interests, at estimated fair market value.......... 357,636,000 332,327,000
Mortgage servicing rights, net.............................. 22,237,000 20,928,000
Equipment and improvements, net............................. 12,297,000 13,495,000
Prepaid and other........................................... 12,347,000 15,013,000
Income tax refund receivable................................ -- 1,737,000
------------- --------------
Total assets............................................ $ 869,940,000 $1,021,097,000
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings.................................................. $ 281,220,000 $ 281,220,000
Revolving warehouse and repurchase facilities............... 359,767,000 535,997,000
Accounts payable and accrued expenses....................... 50,742,000 50,505,000
Income taxes payable........................................ 9,411,000 7,819,000
------------- --------------
Total liabilities....................................... 701,140,000 875,541,000
------------- --------------
Commitments and contingencies............................... -- --
Stockholders' equity:
Series A Preferred Stock, par value $.001 per share,
500,000 shares authorized; none outstanding............. -- --
Series B Convertible Preferred Stock, par value $0.001 per
share; 29,704,000 and 100,000,000 shares authorized;
26,704,000 and 26,704,000 shares outstanding............ 26,704,000 26,704,000
Series C Convertible Preferred Stock, par value $0.001 per
share; 107,105,700 and 100,000,000 shares authorized;
100,046,000 (includes 25,000,000 shares issued in
October 1999) and 75,046,000 shares outstanding......... 89,475,000 65,475,000
Common Stock, par value $.001 per share 400,000,000 and
50,000,000 shares authorized; 30,016,964 and 30,016,964
shares outstanding...................................... 31,000 31,000
Additional paid-in capital................................ 250,118,000 250,116,000
Retained deficit.......................................... (197,528,000) (196,770,000)
------------- --------------
Total stockholders' equity.............................. 168,800,000 145,556,000
------------- --------------
Total liabilities and stockholders' equity.............. $ 869,940,000 $1,021,097,000
============= ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
(RESTATED)
<S> <C> <C>
Revenue:
Gain on sale of loans..................................... $21,797,000 $24,872,000
Commissions............................................... 10,316,000 9,988,000
Loan service.............................................. 3,755,000 6,269,000
Interest income and fees.................................. 25,070,000 16,632,000
----------- -----------
Total revenue........................................... 60,938,000 57,761,000
----------- -----------
Expenses:
Compensation.............................................. 23,112,000 23,794,000
Production................................................ 8,641,000 10,930,000
General and administrative................................ 14,271,000 13,588,000
Interest.................................................. 13,548,000 12,682,000
----------- -----------
Total expenses.......................................... 59,572,000 60,994,000
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Income (loss) before income taxes........................... 1,366,000 (3,233,000)
Provision (benefit) for income taxes........................ 575,000 (1,077,000)
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Net income (loss)........................................... $ 791,000 $(2,156,000)
=========== ===========
Net income (loss) per common share:
Basic................................................. $ (0.02) $ (0.07)
=========== ===========
Diluted............................................... $ (0.02) $ (0.07)
=========== ===========
Dividends per common share.................................. $ -- $ 0.03
=========== ===========
Weighted average number of common shares outstanding:
Basic................................................. 31,009,000 30,977,000
=========== ===========
Diluted............................................... 31,009,000 30,977,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
(RESTATED)
<S> <C> <C>
Operating activities:
Net income (loss)......................................... $ 791,000 $ (2,156,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 1,522,000 1,224,000
Gain on sale of loans................................... (21,037,000) (40,303,000)
Accretion of residual interests......................... (13,137,000) (2,949,000)
Mortgage servicing rights originated.................... (3,601,000) (6,195,000)
Mortgage servicing rights amortized..................... 2,292,000 2,824,000
Changes in assets and liabilities:
Loans held for sale originated or purchased........... (523,524,000) (725,057,000)
Proceeds from sale of loans held for sale............. 699,186,000 700,414,000
Decrease (increase) in:
Accounts receivable................................. (19,058,000) (7,416,000)
Residual interests.................................. 8,864,000 12,363,000
Prepaid and other................................... 2,666,000 1,144,000
Income tax refund receivable........................ 1,737,000 --
Increase (decrease) in:
Accounts payable and accrued expenses............... 237,000 7,958,000
Income taxes payable................................ 1,592,000 (5,378,000)
6.5% accrued preferred stock dividend............... (1,541,000) --
------------- -------------
Net cash provided (used in) operating activities............ 136,989,000 (63,527,000)
------------- -------------
Investing activities:
Purchases of equipment and improvements................... (323,000) (1,319,000)
------------- -------------
Net cash used in investing activities....................... (323,000) (1,319,000)
------------- -------------
Financing activities:
Net proceeds from convertible preferred stock issuance.... 24,000,000 --
Proceeds from sale of stock or exercise of options........ 2,000 235,000
Proceeds from borrowing................................... -- 20,000,000
Proceeds from (reductions in) revolving warehouse and
repurchase facilities................................... (176,230,000) 38,936,000
Dividends paid............................................ -- (1,022,000)
Other..................................................... (8,000) --
------------- -------------
Net cash provided by (used in) financing activities......... (152,236,000) 58,149,000
------------- -------------
Net decrease in cash and cash equivalents................... (15,570,000) (6,697,000)
Cash and cash equivalents at beginning of period............ 20,764,000 12,322,000
------------- -------------
Cash and cash equivalents at end of period.................. $ 5,194,000 $ 5,625,000
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
AAMES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The condensed consolidated financial statements of Aames Financial
Corporation, a Delaware corporation, and its subsidiaries (collectively, the
"Company") included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted.
The condensed consolidated financial statements include the accounts of the
Company and all of its subsidiaries after eliminating all significant
intercompany transactions and reflect all normal, recurring adjustments which
are, in the opinion of management, necessary to present a fair statement of the
results of operations of the Company for the interim periods reported. The
results of operations for the Company for the three months ended September 30,
1999 are not necessarily indicative of the results expected for the full fiscal
year.
NOTE 2: RESTATEMENT OF THE RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
In December 1998, the Financial Accounting Standards Board ("FASB") issued,
in question and answer format, "A Guide to Implementation of Statement 125 on
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, Questions and Answers, Second Edition" (the "Special Report").
The Special Report indicates that two methods have arisen in practice for
accounting for credit enhancements relating to securitization. These methods are
the cash-in method and the cash-out method. The cash-in method treats credit
enhancements (pledged loans or cash) as belonging to the Company. As such, these
assets are recorded at their face value as of the time they are received by the
trust. The cash-out method treats credit enhancements as assets owned by the
related securitization trust. As such, these assets are treated as part of the
residual interests and are recorded at a discounted value for the period between
when collected by the trust and released to the Company. The special Report
indicates that if no true market exists for credit enhancement assets, the
cash-out method should be used to measure the fair value of credit enhancements.
The Company had historically used the cash-in method to account for its
residual interests. However, during the three months ended December 31, 1998,
the Company retroactively changed its practice of measuring and accounting for
residual interests to the cash-out method in response to the FASB's Special
Report and to public comments from the Securities and Exchange Commission
released on December 8, 1998.
Under the cash-in method previously used by the Company, the assumed
discount period for measuring the present value of the residual interests ended
when the cash flows were received by the securitization trust; and, the initial
deposits to overcollateralization accounts were recorded at face value. Under
the cash-out method now required by the FASB and Securities and Exchange
Commission, the assumed discount period for measuring the present value of the
residual interests ends when cash, including the return of any initial deposits,
is distributed to the Company on an unrestricted basis. The change to the
cash-out method results only in a difference in the timing of revenue
recognition from a securitization and has no effect on the total cash flows of
securitization transactions. While the total amount of revenue recognized over
the term of a securitization is the same under either method, the cash-out
method results in lower initial gains on the sale of loans due to the longer
discount period, and higher subsequent interest revenue resulting from the
impact of discounting cash flows.
6
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AAMES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: RESTATEMENT OF THE RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(CONTINUED)
Accordingly, the Company's condensed consolidated results of operations of
all periods prior to December 31, 1998 as presented herein have been restated to
reflect the cash-out method of accounting and reporting for its residual
interests.
As used throughout this document, residual interests includes
overcollateralization amounts.
The restatement resulted in the following changes to financial information
as of and for the three months ended September 30, 1998 (Unaudited. Dollars in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30, 1998
------------------
<S> <C>
Revenue:
Previous.................................................. $61,767
As restated............................................... 57,761
Net income (loss):
Previous.................................................. 448
As restated............................................... (2,156)
Earnings (loss) per share:
Basic:
Previous................................................ 0.01
As restated............................................. (0.07)
Diluted:
Previous................................................ 0.01
As restated............................................. (0.07)
Residual interests (end of period):
Previous.................................................. 589,056
As restated............................................... 521,431
Stockholders' equity (end of period):
Previous.................................................. 345,063
As restated............................................... 301,107
</TABLE>
NOTE 3: SUBSIDIARY GUARANTORS
In October 1996, the Company completed an offering of its 9.125% Senior
Notes due 2003 which were guaranteed by all of the Company's operating
subsidiaries, all of which are wholly-owned. The guarantees are joint and
several, full, complete and unconditional. There are no restrictions on the
ability of such subsidiaries to transfer funds to the Company in the form of
cash dividends, loans or advances. The Company is a holding company with limited
assets or operations other than its investments in its subsidiaries. Separate
financial statements of the guarantors are not presented because the aggregate
total assets, net earnings and net equity of such subsidiaries are substantially
equivalent to the total assets, net earnings and net equity of the Company on a
consolidated basis.
NOTE 4: STOCKHOLDERS' EQUITY
On August 3, 1999, the Company received $25.0 million of additional capital
(the "Additional Investment") from a partnership controlled by Capital Z
Financial Services Fund, II, L.P., a Bermuda
7
<PAGE>
AAMES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: STOCKHOLDERS' EQUITY (CONTINUED)
limited partnership ("Capital Z") at which time the Company issued 25,000
additional shares of Series C Convertible Preferred Stock for $1,000 per share.
Net proceeds to the Company from the Additional Investment, after issuance
expenses, was $24.8 million.
On September 24, 1999, the Company effected a 1,000-for-1 stock split to the
then outstanding shares of its Series B Convertible Preferred Stock and
Series C Convertible Preferred Stock. All authorized and outstanding Series B
and Series C Convertible Preferred Stock share amounts in the accompanying
condensed consolidated financial statements have been retroactively restated to
reflect the stock split.
On October 7, 1999, the Company received $4,159,266 of capital from existing
holders of the Company's Common Stock in connection with its rights offering of
up to 31,016,964 shares of Series C Convertible Preferred Stock to stockholders
(the "Rights Offering"). On October 27, 1999, the Company received $20,840,734
of capital from Capital Z in connection with Capital Z's standby commitment to
purchase up to $25.0 million unsubscribed shares in the Rights Offering (the
"Standby Commitment"). The Company issued an aggregate of 25.0 million shares of
Series C Convertible Preferred Stock in the Rights Offering and pursuant to the
Standby Commitment of which net proceeds, after issuance expenses, were
approximately $24.0 million. Proceeds from the Rights Offering and the Standby
Commitment are reflected in accounts receivable and stockholders' equity in the
accompanying condensed consolidated balance sheet at September 30, 1999,
pursuant to the FASB's Emerging Issues Task Force ("EITF") Issue No. 85-1. EITF
85-1 provides guidance on recording capital proceeds as an asset if a binding
agreement exists at a balance sheet date requiring that the capital be infused;
and, if such capital is realized in cash prior to the issuance of the financial
statements.
The following table sets forth information regarding net income (loss) per
common share for the three months ended September 30, 1999 and 1998 (unaudited):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
----------- -----------
(RESTATED)
<S> <C> <C>
Basic net income (loss) per common share:
Net income (loss)......................................... $ 791,000 $(2,156,000)
Less: Accrued dividends on Series B and C Convertible
Preferred Stock......................................... (1,541,000) --
----------- -----------
Net income (loss) available to common stockholders........ (750,000) (2,156,000)
Weighted average number of common shares outstanding...... 31,009,000 30,977,000
----------- -----------
Basic net income (loss) per common share.................... $ (0.02) $ (0.07)
=========== ===========
Diluted net income (loss) per common share:
Net income (loss) available to common stockholders........ $ (750,000) $(2,156,000)
Weighted average number of common shares outstanding...... 31,009,000 30,977,000
----------- -----------
Diluted net income (loss) per common share.................. $ (0.02) $ (0.07)
=========== ===========
</TABLE>
NOTE 5: RECLASSIFICATIONS
Certain amounts related to fiscal year 1999 have been reclassified to
conform to the fiscal year 2000 presentation.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations of the Company should be read in conjunction with the Company's
Condensed Consolidated Financial Statements included in Item 1 of this
Form 10-Q.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Report contains 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
thereof are intended to identify forward-looking statements. Such statements
appear in a number of places in this filing and include statements regarding the
intent, belief or current expectations of the Company, its directors or officers
with respect to, among other things (a) market conditions in the securitization,
capital, credit and whole loan markets and their future impact on the Company's
operations, (b) trends affecting the Company's liquidity position, including,
but not limited to, its access to warehouse, working capital and other credit
facilities and its ability to effect securitizations and whole loan sales,
(c) the impact of the various cash savings plans and other restructuring
strategies being considered by the Company, (d) the Company's on-going efforts
in improving its equity position, (e) trends affecting the Company's financial
condition and results of operations, (f) the Company's plans to address the Year
2000 problem and (g) the Company's business and liquidity strategies. The
stockholders of the Company are cautioned not to put undue reliance on such
forward-looking statements. Such forward-looking statements are not guarantees
of future performance and involve risks and uncertainties. Actual results may
differ materially from those projected in this Report, for the reasons, among
others, discussed under the captions "--Recent Developments" and "--Risk
Factors" and the other portions of Management's Discussion and Analysis of
Financial Condition and Results of Operations. The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date hereof. Readers should carefully
review the factors referred to above and the other documents the Company files
from time to time with the Securities and Exchange Commission, including the
Company's Annual Report on Form 10-K and Form 10-K/A for the fiscal year ended
June 30, 1999, the quarterly reports on Form 10-Q filed by the Company during
the remainder of fiscal 2000, and any current reports on Form 8-K filed by the
Company.
RECENT DEVELOPMENTS
During the three months ended September 30, 1999, the Company recorded net
income of $791,000 compared to a net loss of $2.2 million in the comparable
period a year ago. The first quarter of fiscal 2000 is the Company's first
profitable quarter since June 30, 1998. The Company believes the results for the
September 1999 quarter are an important first step in its turn-around efforts in
response to the global economic crises that existed in early fiscal 1999 and the
continuing effects of those crises on the credit, capital and asset-backed
markets.
The Company increased its loan production to $523.5 million for the
September 1999 quarter from $516.6 million for the quarter-ended June 30, 1999.
Although loan production for the September 1999 quarter has not yet recovered to
the production levels of $725.1 million for the comparable quarter in the prior
year, $133.3 million of the $201.6 million decrease is due to a decline in
correspondent production, primarily as a result of the Company's previously
announced plans to focus on its core retail and broker production.
The Company sold $692.7 million of loans during the September 1999 quarter,
compared to $695.8 million of loans sold during the quarter-ended September 30,
1998. The Company's loan dispositions during the September 1999 quarter included
a $400.0 million securitization, its first since the September 1998 quarter, and
whole loan sales totaling $292.6 million, reflecting the Company's strategy of
9
<PAGE>
disposition of loans through a combination of securitizations and whole loan
sales. The Company's loan dispositions during the quarter ended September 30,
1998 included a $650.0 million securitization, and whole loan sales totaling
$45.8 million.
By completing the securitization of servicing retained mortgage loans during
the most recent quarter, the Company also increased its servicing portfolio, net
of run-off, by $29.0 million from the prior quarter to $3.9 billion, the first
increase since the quarter ended September 30, 1998, when the portfolio stood at
$4.4 billion.
The Company also increased its borrowing capacity to fund its loan
originations by adding an additional $250.0 million revolving repurchase
facility in October 1999, increasing its committed warehouse capacity from
$590.0 million to $840.0 million.
The Company also completed the final phase of its recapitalization through
the successful completion of the Rights Offering to its stockholders for
$4.2 million and the Standby Commitment from Capital Z for $20.8 million.
Effective October 25, 1999, the Board of Directors appointed A. Jay Meyerson
as the Company's Chief Executive Officer replacing Mani A. Sadeghi, a director
of the Company, who was serving as the Company's Chief Executive Officer on an
interim basis. Mr. Meyerson was also appointed to the Board of Directors,
effective November 1, 1999, to replace George W. Coombe who resigned.
The Company believes that these efforts will enable it to resume its growth
strategy. This growth strategy consists of: (i) continuing to focus on its core
loan production units; (ii) increasing its servicing portfolio and servicing
capabilities; and (iii) diversifying its funding sources to become
self-financing (i.e., the ability to obtain sufficient lines of credit to
provide financing for assets created by the Company and the reduction of
reliance on the public equity and debt markets). In particular, the Company
intends to employ the following strategies:
FOCUS ON CORE LOAN PRODUCTION. The Company intends to evaluate expansion
opportunities in its retail and broker operations by improving market
penetration in existing locations and evaluating other potential locations and
by building new relationships with independent mortgage brokers, with the goal
of increasing market share in these areas. The Company regularly reviews its
loan offerings and introduces new loan products to further meet the needs of its
customers and increase its core loan production volume. However, no assurance as
to the Company's ability to accomplish this goal can be given.
INCREASE SERVICING PORTFOLIO; INCREASE MARGINS AND DEVELOP SUBSERVICING
CAPABILITIES. The Company plans to continue to build the size of its servicing
portfolio to provide a stable and significant source of recurring revenue. At
September 30, 1999, the Company's servicing portfolio was $3.9 billion. The
Company expects to increase the size of its loan servicing portfolio by
continuing to increase loan originations and purchases, completing new
securitizations and subservicing on behalf of third parties. However, no
assurance as to the Company's ability to accomplish this goal can be given.
CONTINUE TO DIVERSIFY FUNDING SOURCES AND BECOME SELF-FINANCING. The
Company intends to continue to expand and diversify its funding sources by
adding additional warehouse or repurchase facilities, disposing of a portion of
its loan production for cash in the whole loan market, and developing new
sources for working capital. However, no assurance as to the Company's ability
to accomplish this goal can be given.
The strategies discussed above contain forward-looking statements. Such
statements are based on current expectations and are subject to risks,
uncertainties and assumptions, including those discussed under "--Risk Factors."
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected. Thus, no assurance can be given that
the Company will be able to accomplish the above strategies.
10
<PAGE>
GENERAL
The Company is a consumer finance company primarily engaged, through its
subsidiaries, in the business of originating, purchasing, selling, and servicing
home equity mortgage loans secured by single family residences. Upon its
formation in 1991, the Company acquired Aames Home Loan, a home equity lender
founded in 1954. In August 1996, the Company acquired One Stop Mortgage, Inc.
("One Stop") which originates mortgage loans primarily through a broker network.
The Company has substantially completed consolidating its loan production
channels into one company and the retail and broker production channels
(including One Stop) now operate under the name "Aames Home Loan."
The Company's principal market is borrowers whose financing needs are not
being met by traditional mortgage lenders for a variety of reasons, including
the need for specialized loan products or credit histories that may limit such
borrowers' access to credit. The Company believes these borrowers continue to
represent an underserved niche of the home equity loan market and present an
opportunity to earn a superior return for the risk assumed. The residential
mortgage loans originated and purchased by the Company, which include fixed and
adjustable rate loans, are generally used by borrowers to consolidate
indebtedness or to finance other consumer needs rather than to purchase homes.
LOAN ORIGINATION. The Company originates and purchases loans nationally
through three production channels--retail, broker and correspondent. In recent
quarters, the Company has emphasized its core retail and broker loan production
channels and decreased its reliance on correspondent purchases. The Company
underwrites and appraises every loan it originates and generally reviews
appraisals and re-underwrites all loans it purchases.
The following table presents the volume of loans originated and purchased by
the Company during the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Loans originated and purchased:
Broker Network................................. $331,546,000 $350,801,000(1)
Retail......................................... 179,216,000 228,177,000
Correspondent.................................. 12,762,000 146,079,000
------------ ------------
Total........................................ $523,524,000 $725,057,000
============ ============
</TABLE>
- ------------------------
(1) Includes $14.4 million of commercial loans.
Total loan production for the three months ended September 30, 1999 was
$523.5 million, up $6.9 million, or 1.3%, from the $516.6 million reported for
the quarter ended June 30, 1999. Loan origination from the Company's core retail
and broker channels increased to $510.8 million during the September 1999
quarter, up $7.5 million, or 1.5%, from the $503.3 million reported for the
three months ended June 30, 1999. Correspondent production during the three
months ended September 30, 1999 was approximately $12.8 million as compared to
$13.3 million during the quarter ended June 30, 1999.
Total origination for the three months ended September 30, 1999 of
$523.5 million was down $201.6 million from loan origination levels reported for
the three months ended September 30, 1998. Of the $201.6 million decline,
$133.3 million resulted from the decrease in correspondent production to
$12.8 million during the September 1999 quarter from $146.1 million in the
comparable quarter a year ago. This decline reflects the Company's previously
reported decision to decrease its reliance on this channel for loan production.
The Company's core retail and broker channels had loan origination volume of
$510.8 million for the September 1999 quarter compared to $579.0 million in the
comparable quarter a
11
<PAGE>
year ago. This decline in production volume is due to a number of factors
including the closure of unprofitable branches and increased pricing and other
underwriting changes in response to adverse conditions in the mortgage refinance
market. The Company expects such adverse market conditions to continue which
could adversely impact the Company's future loan production.
The following table sets forth the number of retail branch and broker
offices operated by the Company at September 30, 1999 and 1998:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Retail branch offices....................................... 102 109
Broker offices.............................................. 35 51
</TABLE>
The decline in the number of retail branches reflects the Company's cost
saving efforts in closing smaller, less productive centralized retail channel
branch offices. The decline in the number of broker offices reflects the
Company's decision, as part of its cost reduction efforts, to close unprofitable
branches and to regionalize its back office operations including the
underwriting, loan processing and appraisal review functions while maintaining
its national network of loan officers dealing with individual loan brokers
within its markets across the country.
LOAN SECURITIZATIONS AND SALES. As a fundamental part of its business and
financing strategy, the Company sells its loans to third party investors in the
secondary market as market conditions allow. The Company maximizes opportunities
in its loan disposition transactions by disposing of its loan production through
a combination of securitizations and whole loan sales, depending on market
conditions, profitability and cash flows. During the three months ended
September 30, 1998 and the preceding quarters, the Company had historically and
primarily relied upon securitizations for its loan dispositions. During the
three quarters ended June 30, 1999, the asset-backed market remained weak, and
inaccessible to, or impracticable for, the Company. Therefore, the Company
relied solely upon whole loan sales for cash during that period. The Company's
loan dispositions during the three months ended September 30, 1999 reflected a
combination of securitizations and whole loan sales. The following table sets
forth certain information regarding the Company's securitizations and whole loan
sales during the three months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Loans pooled and sold in securitizations......... $400,065,000 $649,999,000
Whole loan sales................................. 292,601,000 45,766,000
------------ ------------
Total loans securitized and sold........... $692,666,000 $695,765,000
============ ============
</TABLE>
LOAN SERVICING. The Company retains the servicing on the loans it
originates or purchases and securitizes. In April 1999, the Company entered into
a subservicing arrangement with a loan servicing company with respect to
$388.0 million in principal of loans (at September 30, 1999, $375.0 million)
primarily to reduce the burden on its cash resources used under its obligation
to advance interest on delinquent loans in its servicing portfolio.
12
<PAGE>
The following table sets forth certain information regarding the Company's
servicing portfolio at September 30, 1999 and 1998:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Servicing portfolio.............................. $3,870,000(1) $4,441,000(2)
Serviced in-house................................ 3,495,000(1) 4,387,000(2)
</TABLE>
- ------------------------
(1) Includes $188.0 million of loans subserviced for others by the Company on an
interim basis.
(2) Includes $35.4 million of loans subserviced for others by the Company on an
interim basis.
CERTAIN ACCOUNTING CONSIDERATIONS
NEW ACCOUNTING DEVELOPMENT. In December 1998, the FASB issued, in question
and answer format, "A Guide to Implementation of Statement 125 on Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
Questions and Answers, Second Edition" (the "Special Report"). The Special
Report indicates that two methods have arisen in practice for accounting for
credit enhancements relating to securitization. These methods are the cash-in
method and the cash-out method. The cash-in method treats credit enhancements
(pledged loans or cash) as belonging to the Company. As such, these assets are
recorded at their face value as of the time they are received by the trust. The
cash-out method treats credit enhancements as assets owned by the related
securitization trust. As such, these assets are treated as part of the residual
interests and are recorded at a discounted value for the period between when
collected by the trust and released to the Company. The Special Report indicates
that if no true market exists for credit enhancement assets, the cash-out method
should be used to measure the fair value of credit enhancements.
The Company has historically used the cash-in method to account for its
residual interests. However, during the three months ended December 31, 1998,
the Company retroactively changed its practice of measuring and accounting for
its residual interests to the cash-out method in response to the FASB's Special
Report and to public comments from the Securities and Exchange Commission
released on December 8, 1998.
Under the cash-in method previously used by the Company, the assumed
discount period for measuring the present value of the residual interests ended
when the cash flows were received by the securitization trust; and, the initial
deposits to overcollateralization accounts were recorded at face value. Under
the cash-out method now required by the FASB and Securities and Exchange
Commission, the assumed discount period for measuring the present value of the
residual interests ends when cash, including the return of any initial deposits,
is distributed to the Company on an unrestricted basis. The change to the
cash-out method results only in a difference in the timing of revenue
recognition from a securitization and has no effect on the total cash flows of
securitization transactions. While the total amount of revenue recognized over
the term of a securitization is the same under either method, the cash-out
method results in lower initial gains on the sale of loans due to the longer
discount period, and higher subsequent interest income resulting from the impact
of discounting cash flows.
13
<PAGE>
Accordingly, the Company's condensed consolidated results of operations for
all periods prior to the quarter ended December 31, 1998 as presented herein
have been restated to reflect the cash-out method of accounting and reporting
for its residual interests. The restatement resulted in the following changes to
financial information as of and for the three months ended September 30, 1998
(Unaudited. Dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
<S> <C>
Revenue:
Previous................................................ $61,767
As restated............................................. 57,761
Net income (loss):
Previous................................................ 448
As restated............................................. (2,156)
Earnings (loss) per share:
Basic:
Previous.............................................. 0.01
As restated........................................... (0.07)
Diluted:
Previous.............................................. 0.01
As restated........................................... (0.07)
Residual interests (end of period):
Previous................................................ 589,056
As restated............................................. 521,431
Stockholders' equity (end of period):
Previous................................................ 345,063
As restated............................................. 301,107
</TABLE>
ACCOUNTING FOR SECURITIZATIONS. The Company's loan disposition strategy
relies on a combination of securitization transactions and whole loan sales. The
Company sold $292.6 million of loans in whole loan sales and $400.0 million in a
securitization during the September 1999 quarter. During the three months ended
September 30, 1998, the Company sold $45.8 million and $650.0 million in whole
loan sales and securitizations, respectively. The following discusses certain
accounting considerations which arise only in the context of securitization
transactions.
In a securitization, the Company conveys loans that it has originated or
purchased to a separate entity (such as a trust or trust estate) in exchange for
cash proceeds and an interest in the loans securitized represented by the
non-cash gain on sale of loans. The cash proceeds are raised through an offering
of the pass-through certificates or bonds evidencing the right to receive
principal payments on the securitized loans and the interest rate on the
certificate balance or on the bonds. The non-cash gain on sale of loans
represents the difference between the proceeds (including premiums) from the
sale, net of related transaction costs, and the allocated carrying amount of the
loans sold. The allocated carrying amount is determined by allocating the
original amount of loans (including premiums paid on loans purchased) between
the portion sold and any retained interests (residual interests), based on their
relative fair values at the date of transfer. The residual interests represent,
over the estimated life of the loans, the present value of the estimated future
cash flows. These cash flows are determined by the excess of the weighted
average coupon on each pool of loans sold over the sum of the interest rate paid
to investors, the contractual servicing fee (currently .50%), a monoline
insurance fee, if any, and an estimate for loan losses. In quarters where the
Company engaged in a securitization transaction, net gains or losses in
valuation of residual interests and mortgage servicing rights include the
recognition of a gain or loss which represents the initial difference between
the allocated carrying amount and the fair market value of the residual
interests at the date of sale. Additionally, increases or decreases in valuation
of the residual interests are
14
<PAGE>
also recognized as net gains or losses. Each agreement that the Company has
entered into in connection with its securitizations requires either the
overcollateralization of the trust or the establishment of a reserve account
that may initially be funded by cash deposited by the Company.
The Company determines the present value of the cash flows at the time each
securitization transaction closes using certain estimates made by management at
the time the loans are sold. These estimates include: (i) future rate of
prepayment; (ii) discount rate used to calculate present value; and
(iii) credit losses on loans sold. The future cash flows represent management's
best estimate. Management monitors the performance of the loans, and any changes
in the estimates are reflected in earnings. There can be no assurance of the
accuracy of management's estimates.
RATE OF PREPAYMENT. The estimated life of the securitized loans depends
on the assumed annual prepayment rate which is a function of estimated
voluntary (full and partial) and involuntary (liquidations) prepayments. The
prepayment rate represents management's expectations of future prepayment
rates based on prior and expected loan performance, the type of loans in the
relevant pool (fixed or adjustable rate), the production channel which
produced the loan, prevailing interest rates, the presence of prepayment
penalties, the loan-to-value ratios and the credit grades of the loans
included in the securitization and other industry data. The rate of
prepayment may be affected by a variety of economic and other factors. For
the quarters up to and including September 30, 1998, prepayment rates used
by the Company were held constant, i.e. flat, over the life of the pool. The
estimates used by the Company for the quarters up to and including
September 30, 1998 were flat prepayment rates ranging from 26% for fixed to
30.5% for adjustable and hybrid loan products. These rates represented a
weighted average loan life of approximately 2.6 to 3.8 years. During the
quarter ended December 31, 1998, the Company changed its estimate of
prepayment rates from a flat constant prepayment rate to a vectored rate,
which more closely approximates the performance of the securitized loans.
The new vectored prepayment rates peak at approximately 29% for fixed and
approximately 42% to 57% for adjustable rate loans. These revised prepayment
rates result in a weighted average life of approximately 2.9 years.
DISCOUNT RATE. In order to determine the fair value of the cash flow
from the residual interests, the Company discounts the cash flows based upon
rates prevalent in the market. For the quarters up to and including
September 30, 1998, the Company used the weighted average interest rates of
the loans included in the pool as the best estimate available as an
appropriate discount rate to determine fair value. As the market
deteriorated in the quarter ended December 31, 1998, it became apparent that
a change in discount rate would be required in order for the estimate of
fair value to be consistent with market conditions. For the quarters ended
December 31, 1998, the Company used a discount rate of 15% to reflect
current market conditions and the appropriate rate of return given the
inherent risk of the related asset.
CREDIT LOSSES. In determining the estimate for credit losses on loans
securitized, the Company uses assumptions that it believes are reasonable
based on information from its prior securitizations, the loan-to-value
ratios, credit grades of the loans included in the current securitizations
and other industry data. For the quarters up to and including September 30,
1998, the Company used a prospective cumulative loan loss estimate of
approximately 1.4% of the balance of the loans in the securitization pools
as an appropriate estimate to determine fair value. As market conditions
deteriorated in the quarter ended December 31, 1998, the Company refined its
estimate of credit losses by expanding the factors it considers in
developing its credit loss estimates to include loss and delinquency
information by channel, credit grade and product, and information available
from other market participants such as investment bankers, credit providers
and credit agencies. Accordingly, the Company increased its prospective
cumulative loan loss estimate which currently is 2.4% of the balance of the
loans in the securitization pools. The recent increase in losses on
liquidations principally reflects losses in the portfolio of lower credit
grade correspondent loans purchased in bulk sales, together with the
Company's efforts to improve its liquidity by accelerating delinquent loan
loss
15
<PAGE>
resolution through early disposition of REO and acceptance of less than full
principal payoffs in certain cases. The Company has also incurred losses
during the three months ended September 30, 1999 on mortgage loans having
lower than average balances and secured by properties having low appraised
values. Although such loans were originated by correspondents and brokers
with whom the Company has since ceased doing business, the Company may incur
continued losses on these loans. While the Company has eliminated its bulk
purchase program, the seasoning of the lower grade bulk portfolio may
continue to contribute to increased losses over time. The Company believes
that its practice of early disposition of REO and accepting short principal
payoffs in certain cases is more cost effective than incurring longer-term,
and generally higher costs (including interest advances in the
securitizations) associated with extended REO holding periods or with
migration of delinquent loans through the foreclosure process.
The Company believes its efforts in early problem credit intervention
result in higher loss trends in the near term, but do not increase the
absolute level of losses. The Company closely monitors its residual
interests and should higher losses continue, it will incorporate this factor
into its normal quarterly valuation of its residual interests.
The residual interests are recorded at estimated fair value and are marked
to market through a charge (or credit) to earnings. On a quarterly basis, the
Company reviews the fair value of the residual interests by analyzing its
prepayment, discount rate and loss assumptions in relation to its actual
experience and current rates of prepayment and loss prevalent in the industry
and may adjust or take a charge to earnings through an adjustment to net gain or
loss on valuation of residual interests. In its regular quarterly review of its
residual interests, the Company considered the historical performance of its
securitized loan pools, the recent prepayment experience of those pools, the
credit performance of previously securitized loans and other industry data and
determined that no adjustment of its assumptions (rate of prepayment, discount
rate and credit loss) was warranted.
Additionally, upon sale or securitization of servicing retained mortgages,
the Company capitalizes the fair value of mortgage servicing rights ("MSRs")
assets separate from the loan. The Company determines fair value based on the
present value of estimated net future cash flows related to servicing income.
The Company uses an interest rate of 15% to discount these cash flows. The
capitalized cost basis allocated to the servicing rights is amortized over the
period of estimated net future servicing fee income. The Company periodically
reviews the valuation of capitalized servicing rights. This review is performed
on a disaggregated basis for the predominant risk characteristics of the
underlying loans which are loan type and origination date.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In July 1999, the FASB issued SFAS 137
which deferred the effective date of SFAS 133 to fiscal years beginning after
June 15, 2000. SFAS No. 133 requires companies to record derivatives on the
balance sheet as assets and liabilities, measured at fair value. Gains and
losses resulting from changes in the values of those derivatives would be
accounted for in earnings. Depending on the use of the derivative and the
satisfaction of other requirements, special hedge accounting may apply. The
Company has not determined the impact that adoption of their standard will have
on its future consolidated financial statements.
16
<PAGE>
RESULTS OF OPERATIONS--THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
The following table sets forth information regarding the components of the
Company's revenue and expenses for the three months ended September 30, 1999 and
1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
----------- -----------
(RESTATED)
<S> <C> <C>
Revenue:
Gain on sale of loans............................ $21,797,000 $24,872,000
Commissions...................................... 10,316,000 9,988,000
Loan service..................................... 3,755,000 6,269,000
Interest income and fees......................... 25,070,000 16,632,000
----------- -----------
Total revenue...................................... 60,938,000 57,761,000
----------- -----------
Expenses:
Compensation..................................... 23,112,000 23,794,000
Production....................................... 8,641,000 10,930,000
General and administrative....................... 14,271,000 13,588,000
Interest......................................... 13,548,000 12,682,000
----------- -----------
Total expenses..................................... 59,572,000 60,994,000
----------- -----------
Income (loss) before income taxes.................. 1,366,000 (3,233,000)
Provision (benefit) for income taxes............... 575,000 (1,077,000)
----------- -----------
Net income (loss).................................. $ 791,000 $(2,156,000)
=========== ===========
</TABLE>
REVENUE
Total revenue for the three months ended September 30, 1999 was
$60.9 million, up modestly from $57.8 million for the three months ended
September 30, 1998. During the three months ended September 30, 1999, the
Company executed a $400.0 million securitization and sold $292.6 million of
loans in whole loan sales. In the comparable quarter a year ago, the Company
consummated a $650.0 million securitization and sold $45.8 million in whole loan
sales. The increase in whole loan sales reflects the Company's intention to
dispose a portion of its loan production for cash in the whole loan market in
its efforts to diversify its funding sources. See "--General."
Gain on sale for the three months ended September 30, 1999 was
$21.8 million, a $3.1 million decline from the $24.9 million gain on sale
reported in the comparable period a year ago. Included in gain on sale for the
quarter ended September 30, 1998 is the hedge loss of $15.3 million, comprised
of a $10.7 million realized loss and a valuation charge recorded for contracts
which subsequently expired in December 1998. During the three months ended
September 30, 1998, the Company, as it had historically, hedged its fixed rate
pipeline by purchasing hedges against U.S. Treasury securities. Changes in
Treasury rates were generally reflected in the pass-through rates of the fixed
portion of the Company's securitizations. However, unsettled market conditions
during the quarter ended September 30, 1998 resulted in a $15.3 million loss on
the Company's hedge position without an equivalent benefit from reductions in
the pass-through rate paid on certificates sold in the fixed rate portion of
that quarter's securitization. During the three months ended September 30, 1999,
the Company had no hedge positions in place. Gain on sale for the quarter ended
September 30, 1999 reflects gains recorded on substantially the same volume of
loans sold compared to the quarter ended September 30, 1998 ($692.6 million
compared to $695.7 million); however, the gain on sale for the quarter ended
September 30, 1999 reflects the lower gain on sale recorded on loans sold in
whole loan sales and smaller gains recorded on the loan securitization compared
to the gain recorded on the securitization during the quarter ended
September 30, 1998. The gain on sale
17
<PAGE>
for the securitization in the quarter ended September 30, 1999 was lower than
historical gains due to, among other things, market conditions at the time of
the securitization and the Company's adoption of the revised assumptions during
the quarter ended December 31, 1998.
Commission revenue for the three months ended September 30, 1999 was
$10.3 million up 3% from the $10.0 million reported in the three months ended
September 30, 1998. Included in commission revenue during the three months ended
September 30, 1999 and 1998 was $1.7 million and $264,000, respectively, of
deferred commission revenue relating to prior period loan origination. The
deferred commission revenue recognized during the quarters was due to the mix of
the composition of loans being either securitized or sold in whole loan sales in
excess of such loans originated during the same periods. For the quarter ended
September 1999, commissions, net of the deferred amount recognized was
$8.6 million compared to $9.7 million for the comparable period a year ago.
Commission revenue is primarily a function of the volume of mortgage loans
originated by the Company through its retail loan office network, the credit
grade of the loans originated and the weighted average commission rate charged
on such loans. The decline in commission revenue during the three months ended
September 30, 1999 from commission revenue reported in the September 1998
quarter is primarily due to decreased loan production levels reported in the
Company's retail units. Commission revenue earned in future periods could be
reduced by recent changes in the Company's pricing strategies that place a
higher emphasis on coupon rates rather than commissions at origination.
The Company's loan servicing portfolio at September 30, 1999 decreased to
$3.9 billion from $4.4 billion at September 30, 1998 reflecting the Company's
reliance on whole loan sales with servicing released from September 1998 until
consummation of the $400.0 million securitization in the September 1999 quarter.
The Company's loan servicing portfolio at September 30, 1999 increased
$29.0 million, or .7% from the $3.8 billion reported at June 30, 1999,
reflecting the Company's $400.0 million securitization during the quarter, net
of loan servicing portfolio run-off during the period.
At September 30, 1999, of the Company's $3.9 billion servicing portfolio,
90.3% was serviced in-house compared to 98.7% of the Company's $4.4 billion
servicing portfolio serviced in-house at September 30, 1998. In April 1999, the
Company entered into a subservicing arrangement with a loan servicing company
with respect to an aggregate of $388.0 million in principal amount of loans. The
loan servicing company agreed to make future servicing advances on those loans.
The Company entered into the subservicing arrangement primarily to reduce the
burden of making servicing advances on those loans. In June 1999, the Company
entered into an arrangement with an investment bank pursuant to which the bank
purchased certain cumulative advances and undertook the obligation to make a
substantial portion of the Company's advance obligations on its pre-1999
securitization trusts. The growth of the Company's servicing portfolio will be
impacted by the Company's sales of whole loans on a servicing released basis
which will result in lower growth than historical periods when the Company
predominately sold its loan production in securitizations. Should prepayments be
faster in future periods, such portfolio run off could lead to a smaller
servicing portfolio in spite of a return to securitization. Nevertheless, the
Company believes that the business of loan servicing provides a more consistent
revenue stream and is less cyclical than the business of loan origination and
purchasing. See "Risk Factors."
Loan service revenue decreased to $3.8 million in the three months ended
September 30, 1999 from $6.3 million during the three months ended
September 30, 1998. Loan service revenue consists of prepayment fees, late
charges and other fees retained by the Company; and, servicing fees earned on
securitized pools reduced by the amortization of the Company's MSRs. The
decrease in loan service revenues during the three months ended September 30,
1999 from the comparable period in 1998 was due primarily to expenses incurred
in the September 1999 quarter for subservicing arrangements and monthly
servicing advances being handled by third parties that were not in place a year
ago. To a lesser extent, the decrease is due to the decline in the balance of
loans serviced by the Company during the current quarter when compared to the
1998 quarter.
18
<PAGE>
The delinquency rate at September 30, 1999 was 14.9% compared to 15.6% at
September 30, 1998. The Company has historically experienced delinquency rates
that are higher than those prevailing in this industry due to its origination of
lower credit grade loans. At the close of calendar year 1996, the Company
started to focus more on higher credit grade loans which the Company believes
will cause delinquencies in the Company's servicing portfolio to decrease in the
future. The Company's sale of loans in the whole loan market on a servicing
released basis diminishes growth of the servicing portfolio. The seasoning of
the old portfolio with slow or no growth in the portfolio could cause
delinquency rates to rise.
During the quarter ended September 30, 1999, REO losses increased to
$19.5 million from $8.6 million in the comparable prior year period primarily
due to the seasoning of the lower credit grade loans purchased in bulk and
included in the Company's earlier trusts. The Company has eliminated its bulk
purchase program; however, the seasoning of the lower credit grade bulk
portfolio may continue to contribute to an increase in losses over time.
Further, the adverse market conditions that have existed since the fall of 1998
have resulted in the tightening in underwriting guidelines by purchasers of
whole loans and 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. The Company closely monitors its residual interests and should high
losses continue, it will incorporate this factor into its normal quarterly
valuation of its residual interests.
The following table sets forth delinquency, foreclosure, and loss
information of the Company's servicing portfolio for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JUNE 30, SEPTEMBER 30,
---------------------------------- ---------------------
1999 1998 1997 1999 1998
---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Percentage of dollar amount of
delinquent loans to loans serviced
(period end) (1)(2)(3)(4)
One month.............................. 2.4% 3.8% 4.3% 2.1% 3.9%
Two months............................. 1.0% 1.3% 1.9% 0.9% 1.3%
Three or more months:
Not foreclosed (4)(5).................. 10.3% 9.0% 8.1% 9.9% 8.8%
Foreclosed (6)......................... 2.0% 1.5% 1.0% 2.0% 1.6%
---------- --------- --------- --------- ---------
Total................................ 15.7% 15.6% 15.3% 14.9% 15.6%
========== ========= ========= ========= =========
Percentage of dollar amount of loans
foreclosed during the period to
servicing portfolio(4)(8)............ 2.9% 2.0% 1.5% 0.9% 0.6%
Number of loans foreclosed during the
period(6)............................ 1,680 1,125 560 478 346
Principal amount of foreclosed loans
during the period.................... $ 122,445 84,613 48,029 33,877 25,731
Net losses on liquidations during the
period(7)............................ $ 51,730 26,488 5,470 19,479 8,627
Percentage of annualized losses to
servicing portfolio(4)(8)............ 1.2% 0.7% 0.2% 2.0% 0.8%
Servicing portfolio at period end...... $3,841,300 4,147,000 3,174,000 3,870,000 4,441,000
</TABLE>
- ------------------------
(1) Delinquent loans are loans for which more than one payment is due.
(2) The delinquency and foreclosure percentages are calculated on the basis of
the total dollar amount of mortgage loans serviced by the Company, and any
subservicers as of the end of the periods indicated.
19
<PAGE>
(3) At September 30, 1999, the dollar volume of loans delinquent more than
90 days in 11 of the Company's REMIC trusts, exceeded the permitted limit in
the related pooling and servicing agreements. Four of those REMIC trusts
have also exceeded certain loss limits. See "--Certain Accounting
Considerations" and "--Risk Factors".
(4) The servicing portfolio used in the percentage calculations includes loans
subserviced for others by the Company on an interim basis of $84 million,
$82 million, $-0-, $188 million, and $35 million for the periods ended
June 30, 1999, June 30, 1998, June 30, 1997, September 30, 1999, and,
September 30, 1998, respectively.
(5) Represents loans which are in foreclosure but as to which foreclosure
proceedings have not concluded
(6) Represents properties acquired following a foreclosure sale and still
serviced by the Company.
(7) Represents losses, net of gains, on foreclosed properties sold during the
period indicated.
(8) The percentages for periods subsequent to June 30, 1998 were calculated to
reflect the dollar volume of loans foreclosed or annualized losses, as the
case may be, to the average dollar amount of mortgage loans serviced by the
Company and any subservicers during the related periods indicated.
Interest income and fees during the three months ended September 30, 1999
increased to $25.1 million, up $8.5 million, or 50.7% from $16.6 million during
the comparable three month period in 1998. Interest income and fees includes
interest income on loans held for sale, accretion income associated with the
Company's residual interests and fees and other income such as closing,
appraisal, underwriting and other fees. Interest income increased during the
current quarter from a year ago due primarily to increased accretion on the
Company's residual interests due, in part, to the use of a higher discount rate
in the September 1999 quarter offset by decreases in other fees and interest
income earned on loans held for sale. The decrease in other fees during the
three months ended September 30, 1999 was directly related to that quarter's
lower production volumes when compared to the September 1998 quarter. The
decline in interest income on loans held for sale was due to the timing of the
Company's sales and securitizations during the September 1999 quarter resulting
in interest being earned on smaller amounts of loans held by the Company during
the period from origination of the loans until the date sold by the Company.
EXPENSES
Total expenses for the three months ended September 30, 1999 were
$59.6 million, down $1.4 million from $61.0 million during the comparable period
in 1998. The overall decline is primarily attributable to decreases in
compensation and production expenses in the September 1999 quarter brought about
by production declines, and to cost reductions achieved from the Company's cost
savings plan, partially offset by increases in general and administrative and
interest expense.
Compensation expense declined $682,000 from $23.8 million during the quarter
ended September 30, 1998 to $23.1 million during the three months ended
September 30, 1999. Compensation expense for the three months ended
September 30, 1999 includes $1.0 million of nonrecurring severance costs, and
also includes $2.3 million, compared to $333,000 during the quarter ended
September 30, 1998, of deferred direct compensation costs on loans originated in
prior periods that were disposed of in either whole loan sales or the
securitization during the current quarter. Compensation expense for the three
months ended September 30, 1999, net of nonrecurring severance costs and the
recognition of the deferred costs in the aggregate amount of $3.3 million, was
$19.8 million, or a $4.8 million decline from the comparable amount a year ago.
This decrease was primarily due to the Company's reduction in force which
occurred in February 1999, a decrease in compensation incentives due to the
decline in the Company's loan origination volumes in the current quarter when
compared to the 1998 quarter and a reduction in incentive compensation due to
the Company's results of operations. Despite the decline in compensation expense
in the 1999 quarter from the comparable period a year ago, compensation expense
expressed as a percentage of loan origination volume for the three months ended
September 30, 1999 was 4.4%, compared to 3.3% for the comparable quarter a year
ago. The increase in this percentage during the three months ended
September 30, 1999 from the level in the September 1998 quarter is due
principally to the decline in loan origination volume between the two periods.
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Production expense, primarily advertising, outside appraisal costs, travel
and entertainment, and credit reporting fees is generally related to the
Company's loan origination volume. Production expense decreased $2.3 million to
$8.6 million during the three months ended September 30, 1999 from
$10.9 million during the comparable three month period a year ago. The decrease
in production expense during the three months ended September 30, 1999 from the
three months ended September 30, 1998 is due primarily to the Company closing
smaller, less productive centralized retail channel branch offices and
transferring other branches to its decentralized retail channel which has lower
advertising costs. As part of its cost reduction efforts, the Company has been
exploring ways to improve the efficiency and penetration of its advertising
strategies and will continue to closely monitor this expense component.
Production expense expressed as a percentage of total loan origination for the
three months ended September 30, 1999 and 1998 was 1.6% and 1.5%, respectively.
The increase in the percentage of production costs to total loan origination
volume for the three months ended September 30, 1999 from the similar percentage
in the comparable 1998 period is due principally to the decline between periods
in the level of loan originations.
General and administrative expenses increased 5.0%, or $683,000, to
$14.3 million from $13.6 million during the three months ended September 30,
1999 and 1998, respectively. The increase was primarily the result of the
Company's decision to use outside professional advisors on specific projects
which is expected to decline in the future. The increase in professional costs
during the three months ended September 30, 1999 from the comparable quarter a
year ago was $1.1 million. Communication expense, primarily telephone costs, for
the three months ended September 30, 1999 was down $650,000 from the same
quarter a year ago due to cost saving efforts implemented by the Company.
Occupancy costs for the three months ended September 30, 1999 increased $209,000
from the same period a year ago. As part of the Company's on-going costs savings
program, it ceased activities in certain retail and broker branches that were
deemed unprofitable by management or as part of the regionalization of branches
in the broker network. The office space for some of the closed branches remains
subject to operating leases that management is attempting to sublease or
terminate. The Company is also attempting to sublet significant space at its
headquarter office located at 350 South Grand Avenue in downtown Los Angeles. If
such office space is subleased at lease rates less than existing base lease
terms or if the lease commitments are bought out as a consequence of a
negotiated lease termination, the Company could incur a significant one-time
charge.
Interest expense during the three months ended September 30, 1999 was
$13.5 million, an increase of $866,000 from the $12.7 million reported during
the comparable period a year ago. This increase in the September 1999 quarter
over the September 1998 quarter was primarily the result of increased borrowings
at higher rates under various revolving warehouse and repurchase facilities to
fund the origination and purchase of mortgage loans prior to their
securitization or sale in the secondary market. Interest expense is expected to
increase in future periods due to the Company's continued reliance on external
financing to fund its operations.
INCOME TAXES
During the three months ended September 30, 1999 and 1998, the Company
recorded an income tax provision (benefit) of $575,000 and $(1.1) million,
respectively. The tax provision (benefit) for the three months ended
September 30, 1999 and 1998 reflect effective tax rates of 42.0% and (33.0%),
respectively. The September 1999 quarter provision for taxes relates to the
Company's estimate for taxes on excess inclusion income on its REMIC trusts. The
September 1998 quarter tax benefit is due to the net operating loss incurred
during that period and is net of a tax valuation adjustment to account for
estimated nonrealizable deferred tax assets. The investment in the Company by
Capital Z resulted in a change in control for income tax purposes thereby
limiting future net operating loss and certain other future deductions.
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FINANCIAL CONDITION
LOANS HELD FOR SALE. The Company's portfolio of loans held for sale
decreased to $384.2 million at September 30, 1999 from $559.9 million at
June 30, 1999. The decline is due to the Company's $400.0 million securitization
in August 1999 and whole loan sales in the secondary markets in the amount of
$292.6 million during the quarter ended September 1999, offset by the Company's
loan production during the period.
ACCOUNTS RECEIVABLE. Accounts receivable, representing servicing fees and
advances and other receivables, increased to $76.0 million at September 30, 1999
from $57.0 million at June 30, 1999. The level of servicing related advances, in
any given period, is dependent upon portfolio delinquencies, the levels of REO
and loans in the process of foreclosure and the timing of cash collections. At
September 30, 1999, accounts receivable includes $25.0 million of estimated
proceeds due from the Rights Offering and the Standby Commitment both of which
closed during October 1999. At June 30, 1999, accounts receivable included
$25.0 million of estimated proceeds due from the Additional Investment which
closed in August 1999.
RESIDUAL INTERESTS. Residual interests increased to $357.6 million at
September 30, 1999 from $332.3 million at June 30, 1999 reflecting the non-cash
gain recognized on the Company's securitization in the quarter ended September,
plus accretion during the quarter.
MORTGAGE SERVICING RIGHTS, NET. Mortgage servicing rights, net, increased
to $22.2 million at September 30, 1999 from $20.9 million at June 30, 1999
reflecting the capitalization of mortgage servicing rights on the securitization
during the quarter ended September 30, 1999, net of amortization during the
quarter.
EQUIPMENT AND IMPROVEMENTS, NET. Equipment and improvements, net, decreased
to $12.3 million at September 30, 1999 from $13.5 million at June 30, 1999 due
to depreciation and amortization outpacing current period equipment and
improvement acquisitions.
PREPAID AND OTHER ASSETS. Prepaid and other assets declined to
$12.3 million at September 30, 1999 to $16.8 million, which includes the income
tax refund receivable, at June 30, 1999.
BORROWINGS. Amounts outstanding under borrowings at September 30, 1999
remained unchanged from the $281.2 million outstanding at June 30, 1999.
REVOLVING WAREHOUSE FACILITIES. Amounts outstanding under revolving
warehouse and repurchase facilities decreased to $359.8 million at
September 30, 1999 from $536.0 million at June 30, 1999, primarily as the result
of the decrease in loans held for sale due to whole loan sales and the
securitization during the quarter. Proceeds from whole loan sales and
securitizations are used to reduce balances outstanding under the Company's
revolving warehouse and repurchase facilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require continued access to short-term and
long-term sources of cash. The Company's primary operating cash requirements
include the funding of: (i) mortgage loan originations and purchases prior to
their securitization and sale, (ii) fees, expenses and hedging costs, if any,
incurred in connection with the securitization and sale of loans, (iii) cash
reserve accounts or overcollateralization requirements in connection with the
securitization and sale of mortgage loans, (iv) tax payments due on recognition
of non-cash gain on sale other than in a debt-for-tax securitization structure,
(v) ongoing administrative and other operating expenses, (vi) interest and
principal payments under the Company's warehouse credit facilities and other
existing indebtedness, (vii) advances in connection with the Company's servicing
portfolio and (viii) costs associated with expanding the Company's core
production units.
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The Company has historically financed its operating cash requirements
primarily through: (i) warehouse and repurchase facilities and working capital
lines of credit, (ii) the securitization and sale of mortgage loans, and
(iii) the issuance of debt and equity securities.
WAREHOUSE, REPURCHASE AND WORKING CAPITAL FACILITIES. Prior to the global
economic crises that existed in early fiscal 1999, the Company retained access
to warehouse and other credit facilities with borrowing limits aggregating in
excess of $1.0 billion. However, during the September 1998 quarter, changes in
advance rates imposed by lenders effectively limited the Company to a single
$300.0 million committed warehouse line until the initial investment by Capital
Z on February 10, 1999. The Company replaced that line, which expired on April
8, 1999, with new committed revolving warehouse and repurchase facilities in the
amount of $390.0 million, and an uncommitted warehouse line of $100.0 million
obtained on February 10, 1999 and a committed repurchase line in the amount of
$200.0 million obtained in April 1999. Of the $590.0 million of committed
facilities available at September 30, 1999, $90 million expires on February 9,
2000, $300.0 million expires on March 31, 2000 and the remaining $200.0 million
expires on April 7, 2000. In October 1999, the Company added an additional
$250.0 million committed revolving repurchase facility which expires on
October 29, 2000.
During the quarter-ended September 30, 1999, two of the Company's revolving
warehouse and repurchase lines required the Company to have cash and cash
equivalents on and after October 1, 1999 of $15.0 million. During the quarter
ended September 30, 1999, these two facilities were amended to extend the
requirements to October 31, 1999. The Company complied with these requirements
by consummating the Rights Offering and the Standby Commitment. All of the
Company's revolving warehouse and repurchase facilities contain provisions
requiring the Company to meet certain periodic financial covenants, including
among other things, minimum liquidity, stockholders' equity and net earnings
levels. If the Company is unable to meet these tests or for any other reason is
unable to maintain existing warehouse or repurchase lines, it would have to
cease loan production operations which would negatively impact profitability and
jeopardize the Company's ability to continue to operate as a going concern.
The Company has historically relied on working capital lines to help it fund
its servicing advance obligations. In April 1999, the Company reduced its
servicing advance obligations by engaging a loan servicing company to subservice
two of the Company's securitization trusts. Further, the loan service company
assumed the obligations to make all future advances on those two trusts. The
Company also sold to the loan servicing company the outstanding servicing
advances on those two trusts for approximately $13 million. In June 1999, the
Company entered into an arrangement with an investment bank pursuant to which
the bank purchased certain cumulative advances and undertook the obligation to
make a substantial portion of the Company's advance obligations on its pre-1999
securitization trusts. As a result of this arrangement, the Company received
approximately $50.0 million for certain servicing advances carried on its books.
Part of these proceeds were used to pay off a working capital line which was
terminated in the quarter ended June 1999. The Company has no existing working
capital lines available. Working capital for the Company's needs is provided
through cash on hand, including the cash raised in the Rights Offering and from
the Standby Committment.
Under the terms of the Company's Indenture dated October 21, 1996 with
respect to its 9.125% Senior Notes due 2003, the Company's ability to incur
certain additional indebtedness, including residual financing, is limited to two
times stockholders' equity. Warehouse indebtedness is not included in the
indebtedness limitations. The Company's new repurchase and warehouse facilities
contain similar limits on the Company's ability to incur additional
indebtedness. Further, until the Company receives investment grade ratings for
the notes issued under the Indenture, the amount of residual and servicing
advance financing the Company may incur on such assets allocable to
post-September 1996 securitizations is limited to 75% of the difference between
such post-September 1996 residuals and servicing advances and $225.0 million.
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THE SECURITIZATION AND SALE OF MORTGAGE LOANS. The Company securitized
$400.0 million and $650.0 million during the quarter ended September 30, 1999
and September 30, 1998, respectively. The gain on sale recognized in the quarter
ended September 30, 1999 was lower than historical gains due, among other
things, to market conditions at the time of the securitization, and the
Company's adoption of the revised assumptions during the quarter ended
December 31, 1998. See "--Certain Accounting Considerations--Accounting for
Securitizations." In connection with securitization transactions completed
during these periods, the Company was required to provide credit enhancements in
the form of overcollateralization amounts or reserve accounts. In addition,
during the life of the related securitization trusts, the Company subordinates a
portion of the excess cash flow otherwise due it to the rights of holders of
senior interests as a credit enhancement to support the sale of the senior
interests. The terms of the securitization trusts generally required that all
excess cash flow otherwise payable to the Company during the early months of the
trusts be used to increase the cash reserve accounts or to repay the senior
interests in order to increase overcollateralization to specified maximums.
Overcollateralization requirements for certain pools increase up to
approximately twice the level otherwise required when the delinquency rates for
those pools exceed the specified limit. As of September 30, 1999, the Company
was required to maintain an additional $70.6 million in overcollateralization
amounts as a result of the level of its delinquency rates above that which would
have been required to be maintained if the applicable delinquency rates had been
below the specified limit. Of this amount, at September 30, 1999, $26.9 million
remains to be added to the overcollateralization amounts from future spread
income on the loans held by these trusts.
In the Company's securitizations structured as a REMIC, the recognition of
non-cash gain on sale has a negative impact on the cash flow of the Company
since the Company is required to pay federal and state taxes on a portion of
these amounts in the period recognized although it does not receive the cash
representing the gain until later periods as the related service fees are
collected and applicable reserve or overcollateralization requirements are met.
The Company sold loans for cash in whole loan sales with servicing released
of $292.6 million and $45.8 million during the three months ended September 30,
1999 and 1998, respectively. The Company's ability to sell loans originated and
purchased by it in the secondary market is necessary to generate cash proceeds
to pay down its warehouse and repurchase facilities and fund new originations
and purchases. The ability of the Company to sell loans in the secondary market
on acceptable terms is essential for the continuation of the Company's loan
origination and purchase operations. See "--Risk Factors--A Prolonged
Interruption or Reduction in the Secondary Market Would Hurt Our Financial
Performance."
THE ISSUANCE OF DEBT AND EQUITY SECURITIES. The Company has historically
funded negative cash flow primarily from the sale of its equity and debt
securities. However, current market conditions have restricted the Company's
ability to access its traditional equity and debt sources. In December 1991,
July 1993, June 1995 and October 1996, the Company effected public offerings and
in April 1998 effected a private placement of its common stock with net proceeds
to the Company aggregating $217.0 million. In the private placement, the Company
also issued warrants to purchase an aggregate additional 6.3 million shares (as
adjusted) of the Company's common stock at an exercise price of $7.67 (as
adjusted), subject to customary anti-dilution provisions. The warrants are
exercisable only upon a change in control of the Company and expire in April
2001. In March 1995, the Company completed an offering of its 10.5% Senior Notes
due 2002 with net proceeds to the Company of $22.2 million. In February 1996,
the Company completed an offering of its 5.5% Convertible Subordinated
Debentures due 2006 with net proceeds to the Company of $112.0 million. In
October 1996, the Company completed an offering of its 9.125% Senior Notes due
2003 with net proceeds to the Company of $145.0 million. Under the agreements
relating to these debt issuances, the Company is required to comply with various
operating and financial covenants including covenants which may restrict the
Company's ability to pay certain distributions, including dividends. At
September 30, 1999, under the most restrictive of such covenants, the Company
had no
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money available for the payment of such distributions and does not expect to
have the ability to pay dividends for the foreseeable future.
The Company has raised $127.9 million through the sale of preferred stock in
several phases to Capital Z and its designees, certain members of the Company's
management and holders of the Company's common stock. The Company raised
$76.8 million in February 1999, $25.0 million in August 1999 and $25 million
($4.2 million in the Rights Offering and $20.8 million pursuant to the Standby
Commitment) in October 1999 which was accrued at September 30, 1999. In
October 1999, the Company also issued $1.1 million of preferred stock to certain
management investors. In connection with the sale of stock to Capital Z, the
Company also issued warrants to affiliates and employees of an affiliate of
Capital Z to purchase an aggregate of 2.5 million shares of the Company's common
stock for $1.00 per share.
The Company's primary sources of liquidity are expected to be fundings under
warehouse and repurchase facilities, whole loan sales and the monetization of
the Company's servicing advances and residual interests. The Company's primary
and potential sources of liquidity as described above (assuming access to
working capital financing, access to securitization and whole loan markets, and
the achievement of cost savings through the implementation of the cash savings
plans which by no means can be assured) are expected to be sufficient to fund
the Company's liquidity requirements through at least the next 12 months if the
Company's future operations are consistent with management's current growth
expectations. If the Company's access to warehouse lines, working capital or the
securitization or whole loan markets is restricted, or the cash savings are not
realized, the Company may have to seek additional equity. Further, if available
at all, the type, timing and terms of financing selected by the Company will be
dependent upon the Company's cash needs, the availability of other financing
sources, limitations under debt covenants and the prevailing conditions in the
financial markets. There can be no assurance that any such sources will be
available to the Company at any given time or that favorable terms will be
available. As a result of the limitations described above, the Company may be
restricted in the amount of loans that it will be able to produce and dispose
of.
YEAR 2000 COMPLIANCE AND TECHNOLOGICAL ENHANCEMENT
Readers are cautioned that forward-looking statements contained in this Year
2000 disclosure should be read in conjunction with the Company's disclosures
under the heading, "Special Note on Forward-looking Statements," beginning on
page 9 above. Readers should understand that the dates on which the Company
believes the Year 2000 project will be completed are based upon management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, or that there will not be a delay in, or
increased costs associated with, the implementation of the Company's Year 2000
Compliance Project. A delay in specific factors that might cause differences
between the estimates and actual results include, but are not limited to, the
availability and cost of personnel trained in corrections by third parties and
suppliers, the ability to implement interfaces between the new systems and the
systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third parties and the inter-connection
of national and international businesses, the Company cannot ensure its ability
to timely and cost effectively resolve problems associated with the Year 2000
issue that may affect its operations and business, or expose it to third party
liability.
The Company's Year 2000 compliance program consists of four
phases--inventory, risk assessment process, corrective action and testing. The
Company has completed the inventory phase which included the identification of
all computer hardware and software, electronic data exchanges, operating
systems, communications systems and non-information items. As a corollary to the
inventory phase, the Company has made inquiries of its significant vendors as to
their Year 2000 readiness. The Company has also completed the risk assessment
process of assigning risk factors to each system used by the Company to
determine the priority and resource allocation of its Year 2000 efforts. In
addition, the Company has
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completed the corrective action and testing phases with respect to mission
critical systems. The Company will complete any remaining testing and compliance
by the end of 1999.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. The Company has completed
the conversion of its major in-house computer systems to vendor-supported
systems. These conversions were planned to upgrade and improve functionality
rather than as a result of Year 2000 issues. Other than costs associated with
the conversion of these in house systems which have been completed, the Company
anticipates that costs relating to Year 2000 issues will not be material since
the Company primarily relies on third party software for its primary information
technology systems and does not require significant internal reprogramming
resources to change program codes.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES. The most significant risk
associated with the Company's Year 2000 compliance would result from the loss of
the Company's vendor supported servicing system and the inability to maintain
the ongoing loan service operations, including payment processing, collections
and investor remittance processing. The Company's servicing platform uses
software supplied by a subsidiary of Fiserv, Inc. To reduce the risk of
non-compliance, the Company intends to rely on the vendor's representations
regarding Year 2000 compliance, the Company's testing efforts, as well as the
testing results of other companies that use the same software. The testing and
other costs relating to the Company's Year 2000 compliance program are not
expected to be material.
Another Year 2000 risk relates to the Company's two vendor supported loan
origination systems for its different production channels. In the event of Year
2000 issues with respect to the software used with either such system, the
Company's ability to originate loans would be diminished and may result in
reduced loan production until the problem is resolved. The Company intends to
rely on the vendors' assurances and Company testing to minimize the risk of
non-compliance of these systems.
CONTINGENCY PLAN. The Company has no reason to believe that its most
significant systems will not be Year 2000 compliant. If testing indicates any of
the systems are not compliant, the Company will implement its contingency plan.
RISK MANAGEMENT
The Company is currently re-evaluating its current hedging policy, and at
September 30, 1999 had no hedge transactions in place. While the Company
monitors the interest rate environment and has employed fixed rate hedging
strategies, there can be no assurance that the earnings of the Company would not
be adversely affected during any period of unexpected changes in interest rates
or prepayment rates.
FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITIES
SALE OF LOANS--SECURITIZATIONS AND WHOLE LOAN SALES--INTEREST RATE
RISK. The most significant variable in the determination of gain on sale in a
securitization is the spread between the weighted average coupon on the
securitized loans and the pass-through interest rate. In the interim period
between loan origination or purchase and securitization of such loans, the
Company is exposed to interest rate risk. The majority of loans are securitized
within 90 days of origination or purchase. However, a portion of the loans are
held for sale or securitization for as long as 12 months (or longer in very
limited circumstances) prior to securitization or sale. If interest rates rise
during the period that the mortgage loans are held, the spread between the
weighted average interest rate on the loans to be securitized and the
pass-through interest rates on the securities to be sold (the latter having
increased as a result of market rate movements) would narrow. Upon
securitization, this would result in a reduction of the Company's related gain
on sale. The Company is also exposed to rising interest rates for loans
originated or purchased which are held pending sale in the whole loan market. In
the past, the Company mitigated exposure to rising interest rates through swap
agreements with third parties that sell United States Treasury securities not
yet purchased and the purchase of Treasury Put Options. Hedge gains or losses
are initially deferred and subsequently included in gain on sale upon completion
of the securitization or whole loan sale. These hedging activities help mitigate
the risk of absolute movements in interest rates but they do not mitigate the
risk of a widening in the spreads between pass-through certificates and U.S.
Treasury securities with comparable maturities.
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At September 30, 1999, the Company did not have any hedge transactions in
place. At September 30, 1998, the Company had outstanding notional balances of
Treasury swap agreements in the amount of $85 million. This position, which was
terminated by the Company on December 31, 1998, had a market value at
September 30, 1998 of $80 million. The Company recorded the related hedge loss
at September 30, 1998 for the $4.6 million shortfall in the gain on sale for
that period. The Company had a similar swap agreement in the notional amount of
$250 million which expired on September 30, 1998 and had a market value at
June 30, 1998 of $248 million. Due to market conditions in the quarter ended
September 30, 1998, this position deteriorated to a loss of $10.7 million which
was recorded in gain on sale during the three months ended September 30, 1998.
During the three months ended September 30, 1999, there were no hedge losses in
gain on sale.
The Company also had LIBOR cap contracts outstanding at September 30, 1998
in the notional amount of $7.2 million. These positions were valued at par at
September 30, 1998 as their contractual cap (strike price) exceeded the LIBOR
market rate at September 30, 1998. The September 30, 1998 position expired
December 23, 1998. These instruments had no negative risk above the original
premiums paid in cash.
RESIDUAL INTERESTS AND MSRS. The Company had residual interests of
$357.6 million and $332.3 million outstanding at September 30, 1999 and
June 30, 1999, respectively. The Company also had MSRs outstanding at
September 30, 1999 and June 30, 1999 in the amount of $22.2 million and
$20.9 million, respectively. Both of these instruments are valued at market at
September 30, 1999 and June 30, 1999. The Company values these assets based on
the present value of future revenue streams net of expenses using various
assumptions. The discount rate used to calculate the present value of the
residual interests and MSRs was 15.0% both at September 30, 1999 and June 30,
1999. The weighted average life used for valuations at September 30, 1999 and
June 30, 1999 was 2.86 years.
These assets are subject to risk in accelerated mortgage prepayment or
losses in excess of assumptions used in valuation. Ultimate cash flows realized
from these assets would be reduced should prepayments or losses exceed
assumptions used in the valuation. Conversely, cash flows realized would be
greater should prepayments or losses be below expectations.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company's financial instruments
recorded at contractual amounts that approximate market or fair value primarily
consist of trade receivables, accounts payable and trade receivables sold under
agreements to repurchase. As these amounts are short term in nature and/or
generally bear market rates of interest, the carrying amounts of these
instruments are reasonable estimates of their fair values. The carrying amount
of the Company's long-term debt approximate fair value when valued using
available quoted market prices.
CREDIT RISK. The Company is exposed to on-balance sheet credit risk related
to its loans held for sale and residual interests. The Company is exposed to
off-balance sheet credit risk related to loans which the Company has committed
to originate or purchase.
The Company is a party to financial instruments with off-balance sheet
credit risk in the normal course of business. These financial instruments
include commitments to extend credit to borrowers and commitments to purchase
loans from correspondents. The Company has a first or second lien position on
all of its loans, and the combined loan-to-value ratio ("CLTV") permitted by the
Company's mortgage underwriting guidelines generally may not exceed 90%. In some
cases, the Company originates loans up to 97% CLTV that are insured down to
approximately 67% with mortgage insurance. The CLTV represents the combined
first and second mortgage balances as a percentage of the appraised value of the
mortgaged property, with the appraised value determined by an appraiser with
appropriate professional designations. A title insurance policy is required for
all loans.
WAREHOUSING EXPOSURE. The Company utilizes warehouse and repurchase
financing facilities to facilitate the holding of mortgage loans prior to
securitization. As both September 30, 1999 and June 30,
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1999, the Company had total warehouse and repurchase facilities available in the
amount of $590 million; the total outstanding related to these facilities was
$359.8 million and $536.0 million at September 30, 1999 and June 30, 1999,
respectively. Warehouse and repurchase facilities are typically for a term of
one year or less and are designated to fund mortgages originated within
specified underwriting guidelines. The majority of the assets remain in the
facilities for a period of up to 90 days at which point they are securitized and
sold to institutional investors. As these amounts are short term in nature
and/or generally bear market rates of interest, the contractual amounts of these
instruments are reasonable estimates of their fair values.
RISK FACTORS
IF OUTSIDE SOURCES OF CASH ARE NOT SUFFICIENT, OUR ABILITY TO MAKE AND
SERVICE LOANS WILL BE IMPAIRED AND OUR REVENUES WILL SUFFER.
We operate on a negative cash flow basis, which means our cash expenditures
exceed our cash earnings. Therefore, we need continued access to short- and
long-term external sources of cash to fund our operations.
Our primary uses of cash include:
- mortgage loan originations and purchases before their securitization or
sale in the secondary market;
- fees, expenses and hedging costs, if any, incurred for the securitization
of loans;
- cash reserve accounts or overcollateralization required in the
securitization of loans;
- tax payments generally due on recognition of non-cash gain on sale
recorded in the securitizations;
- ongoing administrative and other operating expenses;
- interest and principal payments under our credit facilities and other
existing indebtedness;
- cash advances made on delinquent loans included in our loan servicing
portfolio; and
- costs of expanding our loan production units.
Our primary sources of cash are expected to be warehouse and repurchase
facilities, transactions by which we monetize our servicing advance receivables,
and/or residual interests, 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.
OUR RIGHT TO SERVICE LOANS MAY BE TERMINATED BECAUSE OF THE HIGH
DELINQUENCIES AND LOSSES ON THE LOANS IN OUR SERVICING PORTFOLIO.
If, at any measuring date, the delinquencies or losses with respect to any
of our securitization trusts credit-enhanced by monoline insurance were to
exceed the delinquency or loss limits applicable to that trust, our rights to
service the loans in the affected trust may be terminated.
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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, which means loans past due 90, or in some cases past due 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. The monoline
insurance company can terminate us as servicer if delinquencies or losses are
over a specified limit. Additionally, the agreements entered into in connection
with our 1999 securitizations provide that our rights and obligations to service
the loans will periodically cease unless renewed by the monoline insurance
carrier for successive periods.
At September 30, 1999, the dollar volume of loans delinquent more than
90 days in 11 of our securitization trusts formed in December 1992, during the
period from March 1995 to March 1997 and in December 1997 exceeded the permitted
limit in the related securitization agreements.
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 September 30, 1999
was 14.9% and at June 30, 1999 was 15.6%.
Four of the ten trusts referred to above, which represent in the aggregate
14.6% of the dollar volume of our servicing portfolio, exceeded loss limits at
September 30, 1999. The limit that has been exceeded provides that losses may
not exceed a certain threshold, which ranges from .50% to .77% of the original
pool balances in the relevant securitization trusts, on a rolling 12 month
basis. During the three months ended September 30, 1999, one additional trust
exceeded the delinquency level and one of the four trusts that exceeded its loss
limit was cured.
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.
HIGH DELINQUENCIES ON THE LOANS IN OUR SERVICING PORTFOLIO MAY HURT OUR CASH
FLOWS.
High 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
overcollateralization level represents 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 September 30, 1999, we were required to maintain an additional
$70.6 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 September 30, 1999, $26.9 million remains to be added to the
overcollateralization amounts from future spread income on the loans held by
these trusts.
High 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 advance to the trust past due interest.
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HIGH DELINQUENCIES AND LOSSES MAY HURT OUR EARNINGS.
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 residual
interests strips recorded on our balance sheet.
OUR LOANS ARE SUBJECT TO HIGHER RISKS OF DELINQUENCY AND LOSS THAN THOSE
MADE BY CONVENTIONAL MORTGAGE SOURCES.
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.
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.
IF WE ARE UNABLE TO MAINTAIN ADEQUATE FINANCING SOURCES, OUR ABILITY TO MAKE
MORTGAGE LOANS WILL BE IMPAIRED AND OUR REVENUES WILL SUFFER.
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 four committed lines with
aggregate borrowing capacity of $840.0 million and one $100.0 million
uncommitted warehouse line. Our existing facilities expire between February 2000
and October 2000 and no assurances can be given that we will be able to extend
or replace these facilities at the times they mature. 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, or 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 credit facilities, arrange new warehouse, repurchase
or other credit facilities or obtain additional commitments to sell whole loans
for cash, we may have to curtail making loans. 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.
OUR BUSINESS OPERATIONS MAY BE INTERRUPTED IF WE EXPERIENCE UNEXPECTED YEAR
2000 PROBLEMS.
Many existing computer systems and software products do not properly
recognize dates after December 31, 1999. This Year 2000 problem could result in
data corruption, system failures or disruptions of operations. We are subject to
potential Year 2000 problem affecting our products and services, our internal
systems and the systems of third parties on whom we rely. As part of our overall
systems enhancement program, we are using both internal and external resources
to identify, correct, reprogram or
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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 use
third-party equipment, software and content that may not be Year 2000 compliant.
Although we have received assurances from third parties that they are Year 2000
compliant, we generally do not independently verify their Year 2000 compliance.
If third parties on whom we rely are not Year 2000 compliant, our business could
be adversely affected later this year.
FASTER THAN EXPECTED PREPAYMENT RATES ON OUR LOANS WILL HURT EARNINGS.
If actual prepayments occur more quickly than was projected at the time
loans were sold, the carrying value of the residual interests 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.
OUR OPERATIONS MAY BE HURT BY A SUBSTANTIAL AND SUSTAINED INCREASE OR
DECREASE IN INTEREST RATES.
A substantial and sustained increase in long-term interest rates could,
among other things:
- decrease the demand for consumer credit;
- adversely affect our ability to make loans; and
- 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.
A substantial and sustained increase in short-term interest rates could,
among other things,
- increase our borrowing costs, most of which are tied to those rates; and
- reduce the gains recorded by us upon the securitization and sale of loans.
IN AN INCREASING INTEREST RATE ENVIRONMENT, OUR EARNINGS COULD SUFFER
BECAUSE OF ADJUSTABLE RATE LOANS THAT WE SECURITIZED.
The value of our residual interests created as a result of the
securitization of adjustable rate mortgage loans is subject to so-called basis
risk. Basis risk arises when the adjustable rate, 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. In the absence of effective hedging or loss mitigation strategies, in a
period of increasing interest rates, the value of the residual interests would
be adversely affected because the interest rates on the certificates or bonds
issued by a securitization trust could adjust faster than the interest rates on
our adjustable rate mortgage loans in the trust. Adjustable rate mortgage loans
are typically subject to periodic and lifetime interest rate caps, which limit
the amount an adjustable rate mortgage loan's interest rate can change during
any given period. In a period of rapidly increasing interest rates, the value of
the residual interests 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 adjustable rate mortgage loans would be so
limited.
A PROLONGED INTERRUPTION OR REDUCTION IN THE SECONDARY MARKET WOULD HURT OUR
FINANCIAL PERFORMANCE.
We must be able to sell loans we make in the securitization and whole loan
market to generate cash proceeds to pay down our warehouse and repurchase
facilities and fund new loans. Our ability to sell loans in the securitization
and whole loan markets on acceptable terms is essential for the continuation of
our
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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.
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 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 program.
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 materially adversely
affected if we could not successfully identify whole loan purchasers or
negotiate favorable terms for loan purchases.
IF WE ARE UNABLE TO SELL A SIGNIFICANT PORTION OF OUR LOANS ON AT LEAST A
QUARTERLY BASIS, OUR EARNINGS WOULD BE SIGNIFICANTLY AFFECTED.
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. Our
loan disposition strategy calls for substantially all of our production to be
sold in the secondary market within 90 days of origination. 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.
CHANGES IN THE VOLUME AND COST OF OUR BROKER LOANS MAY DECREASE OUR LOAN
PRODUCTION.
We depend on independent mortgage brokers for the origination and purchase
of our broker loans, which constitute a significant portion of our loan
production. Our future results of operations and financial condition may be
vulnerable to changes in the volume and cost of our broker loans resulting from,
among other things, competition from other lenders and purchasers of such loans.
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 COMPETITORS IN THE MORTGAGE BANKING MARKET ARE OFTEN LARGER AND HAVE
GREATER FINANCIAL RESOURCES THAN WE DO, WHICH WILL MAKE IT DIFFICULT FOR US TO
SUCCESSFULLY COMPETE.
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
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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.
BECAUSE A SIGNIFICANT AMOUNT OF THE LOANS WE SERVICE ARE IN CALIFORNIA AND
FLORIDA, OUR OPERATIONS COULD BE HURT BY ECONOMIC DOWNTURNS OR NATURAL DISASTERS
IN THOSE STATES.
At September 30, 1999, 21.0% and 11.3% of the loans we serviced were
collateralized by residential properties located in California and Florida,
respectively. Because of these concentrations, our financial position and
results of operations have been and are expected to continue to be influenced by
general trends in the California and Florida economies and their residential
real estate markets. 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.
California historically has been vulnerable to certain natural disaster risks,
such as earthquakes and erosion-caused mudslides. Florida historically has been
vulnerable to certain other natural disasters, such as tropical storms and
hurricanes. Such natural disasters 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.
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.
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EVEN AFTER WE SELL OUR LOANS, WE REMAIN SUBJECT TO RISKS FROM DELINQUENCIES
AND LOSSES ON THE LOANS WE SERVICE.
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 those loans. 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.
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 connection with our whole loan sales, we may be obligated
in certain instances to buy back mortgage loans if the borrower defaults on the
first payment of principal and interest due.
WE MAY BE REQUIRED TO REPURCHASE LOANS OR INDEMNIFY INVESTORS IF WE BREACH
REPRESENTATIONS AND WARRANTIES.
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 to comply with various laws
and regulations applicable to our business. 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. 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 expenses or liabilities which could have a material adverse
effect on our financial position and results of operations.
IF WE ARE UNABLE TO COMPLY WITH MORTGAGE BANKING RULES AND REGULATIONS, OUR
ABILITY TO MAKE MORTGAGE LOANS MAY BE RESTRICTED.
Our operations are subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and are subject
to various laws, regulations and judicial and administrative decisions imposing
requirements and restrictions on part or all of our operations. 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. Our consumer lending activities are subject
to various federal laws and regulations. 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 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. Because our
business is highly regulated, the laws, rules and regulations applicable to us
are subject to
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regular modification and change. There are currently proposed various laws,
rules and regulations which, if adopted, could negatively impact us.
CHANGES IN THE MORTGAGE INTEREST DEDUCTION COULD HURT OUR FINANCIAL
PERFORMANCE.
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.
WE WILL BE UNABLE TO PAY DIVIDENDS ON OUR CAPITAL STOCK FOR THE FORESEEABLE
FUTURE.
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. Under the most restrictive of these limitations, we will be
prevented from paying cash dividends on our capital stock for the foreseeable
future.
THE CONCENTRATED OWNERSHIP OF OUR VOTING STOCK BY OUR CONTROLLING
STOCKHOLDER MAY HAVE AN ADVERSE EFFECT ON YOUR ABILITY TO INFLUENCE THE
DIRECTION WE WILL TAKE.
At October 27, 1999, Capital Z beneficially owned senior preferred stock
representing 46.3% of our combined voting power in the election of directors and
76.6% of the combined voting in all matters other than the election of
directors. Representatives or nominees of Capital Z have five seats on our nine
person Board of Directors, and Capital Z has the continuing right to appoint
four directors as current members' terms expire. As a result of its beneficial
ownership and Board representation, Capital Z has, and will continue to have,
sufficient power to determine our direction and policies.
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PART II--OTHER INFORMATION
Item 1. Legal Proceedings--None
Item 2. Changes in Securities--None
Item 3. Defaults upon Senior Securities--None
Item 4. Submission of Matters to a Vote of Security Holders:
(a) The Company held its annual meeting of stockholders on September 13, 1999
which meeting was adjourned to September 24, 1999.
(b) The following directors were elected at the annual meeting to serve
one-year terms:
Steven M. Gluckstern
Adam M. Mizel
Mani A. Sadeghi
David A. Spuria
The following director was elected at the annual meeting to serve a
three-year term:
Eric C. Rahe
The following directors continued in office after the annual meeting:
George W. Coombe (resigned from the Board effective November 1, 1999)
Neil B. Kornswiet
Georges C. St. Laurent
Cary H. Thompson
(c) At the annual meeting, stockholders voted on (1) the amendment of the
Company's Certificate of Incorporation to increase the Company's
authorized common stock by 350,000,000 shares to an aggregate of
400,000,000 shares ("Common Stock Proposal"); (2) the amendment of the
Company's Certificate of Incorporation to increase the Company's authorize
preferred stock by 199,000,000 shares to 200,000,000 shares ("Preferred
Stock Proposal"); (3) an amendment to the Company's Certificate of
Incorporation with respect to the Series B Convertible Preferred Stock and
Series C Convertible Preferred Stock to change to September 30, 1999 the
date by which the amendments to the Certificate of Incorporation for the
increase in the authorized common stock and authorized preferred stock
were required to be approved to avoid an increase in the dividend rate on
such series from 6.5% to 15% ("Preferred Stock Amendment Proposal");
(4) the amendment to the Company's Certificate of Incorporation to effect
a 1,000-for-1 forward stock split of the Company's Series B Convertible
Preferred Stock and Series C Convertible Preferred Stock outstanding as of
Septmber 13, 1999 ("Stock Split"); (5) the election of five Series B
Directors (6) the election of one Class III Common Stock Director;
(7) the ratification of the
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appointment of Ernst & Young LLP as the Company's independent accountants
for the fiscal year ended June 30, 1999. The results of the voting were as
follows:
<TABLE>
<CAPTION>
BROKER
VOTES NON-
MATTER VOTES FOR AGAINST WITHHELD ABSTENTIONS VOTES
------ ----------- --------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Common Stock Proposal (All
Stockholders)................... 93,093,077 2,128,833 -- 221,018 --
Common Stock Proposal (Class
Vote--Common Stockholders)...... 16,343,777 2,128,833 -- 221,018 --
Preferred Stock Proposal (All
Stockholders)................... 89,596,534 1,737,217 -- 217,708 --
Preferred Stock Proposal (Class
Vote--Preferred Stockholders)... 76,750,000 -- -- -- --
Preferred Stock Amendment Proposal
(All Stockholders).............. 89,645,782 1,556,983 -- 348,694 --
Preferred Stock Amendment Proposal
(Class Vote--Preferred
Stockholders)................... 76,750,000 -- -- -- --
Stock Split (All Stockholders).... 89,416,650 1,838,704 -- 296,105 --
Stock Split (Class Vote--Preferred
Stockholders)................... 76,750,000 -- -- -- --
Series B Directors
-Steven M. Gluckstern............. 26,704,000 -- -- -- --
-Mani A. Sadeghi.................. 26,704,000 -- -- -- --
-Adam M. Mizel.................... 26,704,000 -- -- -- --
-David A. Spuria.................. 26,704,000 -- -- -- --
Class III Common Stock Director
(Eric C. Rahe).................. 104,196,425 -- 1,085,460 -- --
1999 Stock Option Plan............ 88,762,858 2,462,365 -- 326,236 --
Auditors.......................... 104,463,122 622,062 -- 196,701 --
</TABLE>
Item 5. Other Information--None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: See Exhibit Index
(b) During the quarter ended September 30, 1999, the Company filed (i) a
Current Report on Form 8-K on July 8, 1999 (earliest event reported
July 1, 1999), reporting information under Item 5 with respect to a
financing facility based on servicing advances; (ii) a Current Report on
Form 8-K on August 31, 1999 (earliest event reported August 26, 1999),
reporting information under Item 5 with respect to the notification of the
Company's rights offering; (iii) a Current Report on Form 8-K on
September 10, 1999 (earliest event reported September 3, 1999), reporting
information under Item 5 with respect to the Company's fiscal year-end
results.
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AAMES FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report on Form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
AAMES FINANCIAL CORPORATION
By: /s/ DAVID A. SKLAR
-----------------------------------------
David A. Sklar
Executive Vice President-Finance and
Date: November 15, 1999 Chief Financial and Accounting Officer
</TABLE>
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- --------------------- ----------------------
<S> <C>
3.1 Certificate of Incorporation of Registrant, as amended
10.26 (e) Third Amendment to Amended and Restated Master Repurchase
Agreement Governing Purchase and Sales of Mortgage Loans,
dated as of November 1, 1999, between Aames Capital
Corporation and Lehman Commercial Paper, Inc.
10.27 (f) Amendment No. 2 to Guaranty, dated as of September 1, 1999,
between Aames Financial Corporation and Greenwich Capital
Financial Products, Inc.
10.28 (d) Second Amendment to Master Repurchase Agreement and
Guaranty, dated as of September 27, 1999, between Aames
Capital Corporation, the Company and Bank of America, N.A.
11 Computation of Per Share Earnings
27.1 Financial Disclosure Schedule
</TABLE>
39
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
AAMES FINANCIAL CORPORATION
FIRST: The name of this corporation is Aames Financial
Corporation (the "Corporation").
SECOND: The address of the registered office of the
Corporation in the State of Delaware is 1209 Orange Street, City of Wilmington,
County of New Castle. The name of its registered agent at that address is The
Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any
lawful act or activity for which a corporation may now or hereafter be
organized under the General Corporation Law of the State of Delaware as set
forth in Title 8 to the Delaware Code (the "GCL").
FOURTH: The total number of shares which the Corporation
shall have authority to issue is 8,000,000 consisting of 7,000,000 shares of
common stock, par value $0.001 per share (the "Common Stock"), and 1,000,000
shares of preferred stock, par value $0.001 per share (the "Preferred Stock").
Shares of the Preferred Stock of the Corporation may be issued
from time to time in one or more classes or series, each of which class or
series shall have such distinctive designation or title as shall be fixed by
the Board of Directors of the Corporation (the "Board of Directors") prior to
the issuance of any shares thereof. Each such class or series of Preferred
Stock shall have such voting powers, full or limited, or no voting powers, and
such preferences and relative, participating, optional or other special rights
and such qualifications, limitations or restrictions thereof, as shall be
stated in such resolution or resolutions providing for the issue of such class
or series of Preferred Stock as may be adopted from time to time by the Board
of Directors prior to the issuance of any shares thereof pursuant to the
authority hereby expressly vested in it, all in accordance with the laws of the
State of Delaware.
FIFTH: All rights to vote and all voting power shall be
vested in the Common Stock and the holders thereof shall be entitled at all
elections of directors to one (1) vote per share. Special meetings of the
stockholders for any purpose or purposes may be called at any time only by the
Board of Directors, the Chairman of the Board or by the Chief Executive Officer
or President of the Corporation.
SIXTH: The directors of the Corporation shall be divided
into three classes, designated Class I, Class II and Class III. The term of
the initial Class I directors shall terminate on the date of the 1994 annual
meeting of stockholders; the term of the initial Class II directors shall
terminate on the date of the 1993 annual meeting of stockholders and the term
of the initial Class III directors shall terminate on the date of the 1992
annual meeting of stockholders. At each annual
<PAGE>
meeting of stockholders beginning in 1992, successors to the class of
directors whose term expires at that annual meeting shall be elected for a
three-year term. If the number of directors is changed, any increase or
decrease shall be apportioned among the classes so as to maintain the number
of directors in each class as nearly equal as reasonably possible, and any
additional directors of any class elected to fill a vacancy resulting from an
increase in such class shall hold office for a term that shall coincide with
the remaining term of that class, but in no case will a decrease in the
number of directors shorten the term of any incumbent directors. A director
shall hold office until the annual meeting for the year in which his term
expires and until his successor shall be elected and shall qualify, subject,
however, to prior death, resignation, retirement, disqualification or removal
from office. Any vacancy on the Board of Directors, howsoever resulting,
shall be filled only by a majority of the directors then in office, even if
less than a quorum, or by a sole remaining director and not by the
stockholders. Any director elected to fill a vacancy shall hold office for a
term that shall coincide with the terms of the class to which such director
shall have been elected.
Subject to the rights, if any, of the holders of shares of
Preferred Stock then outstanding, any or all of the directors of the
Corporation may be removed from office at any time, for cause only, by the
affirmative vote of the holders of a majority of the outstanding shares of the
Corporation then entitled to vote generally in the election of directors,
considered for purposes of this Article SIXTH as one class.
Notwithstanding the foregoing, whenever the holders of any one
or more classes or series of Preferred Stock issued by the Corporation shall
have the right, voting separately by class or series, to elect directors at an
annual or special meeting of stockholders, the election, term of office,
filling of vacancies and other features of such directorships shall be governed
by the terms of this Certificate of Incorporation or the resolution or
resolutions adopted by the Board of Directors pursuant to the second paragraph
of Article FOURTH applicable thereto, and such directors so elected shall not
be divided into classes pursuant to this Article SIXTH unless expressly
provided by such terms.
SEVENTH: Elections of directors at an annual or
special meeting of stockholders need not be by written ballot unless the Bylaws
of the Corporation shall otherwise provide.
Any action required or permitted to be taken at any annual or
special meeting of stockholders may be taken only upon the vote of the
stockholders at an annual or special meeting duly noticed and called, as
provided in the Bylaws of the Corporation, and may not be taken by written
consent of the stockholders pursuant to the GCL.
EIGHTH: The officers of the Corporation shall be chosen in
such a manner, shall hold their offices for such terms and shall carry out such
duties as are determined solely by the Board of Directors, subject to the right
of the Board of Directors to remove any officer or officers at any time with or
without cause.
2
<PAGE>
NINTH: (A) The Corporation shall indemnify to the full
extent authorized or permitted by law (as now or hereafter in effect) any
person made, or threatened to be made, a defendant or witness to any action,
suit or proceeding (whether civil or criminal or otherwise) by reason of the
fact that he, his testator or intestate, is or was a director or officer of the
Corporation or by reason of the fact that such director or officer, at the
request of the Corporation, is or was serving any other corporation,
partnership, joint venture, trust, employee benefit plan or enterprise, in any
capacity. Nothing contained herein shall affect any rights to indemnification
to which employees other than directors and officers may be entitled by law.
No amendment or repeal of this Section A of Article NINTH shall apply to or
have any effect on any right to indemnification provided hereunder with respect
to any acts or omissions occurring prior to such amendment or repeal.
(B) No director of the Corporation
shall be personally liable to the Corporation or its stockholders for monetary
damages for any breach of fiduciary duty by such a director as a director.
Notwithstanding the foregoing sentence, a director shall be liable to the
extent provided by applicable law (i) for any breach of the Director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) pursuant to Section 174 of the GCL, or (iv) for any transaction from
which such director derived an improper personal benefit. No amendment to or
repeal of this Section B of Article NINTH shall apply to or have any effect on
the liability or alleged liability of any director of the Corporation for or
with respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
(C) In furtherance and not in limitation
of the powers conferred by statute:
(i) the Corporation may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify against such liability under the provisions
of law; and
(ii) the Corporation may create a
trust fund, grant a security interest and/or use other means (including,
without limitation, letters of credit, surety bonds and/or other similar
arrangements), as well as enter into contracts providing indemnification to the
full extent authorized or permitted by law and including as part thereof
provisions with respect to any or all of the foregoing to ensure the payment of
such amounts as may become necessary to effect indemnification as provided
therein, or elsewhere.
3
<PAGE>
TENTH: In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized to adopt,
repeal, alter, amend or rescind the Bylaws of the Corporation.
ELEVENTH: The Corporation reserves the right to repeal,
alter, amend or rescind any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred on stockholders herein are granted subject to this
reservation.
TWELFTH: The name and mailing address for the
Incorporator of the Corporation is as follows: Barbara J. Gillen, 10940
Wilshire Boulevard, Suite 600, Los Angeles, California 90024-3902.
IN WITNESS WHEREOF, the undersigned has executed the
Certificate of Incorporation this 2nd day of October, 1991.
/s/ Barbara J. Gillen
---------------------
Barbara J. Gillen
Incorporator
4
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
AAMES FINANCIAL CORPORATION, a corporation organized and existing
under the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That a meeting of the Board of Directors of Aames Financial
Corporation (the "Corporation"), resolutions were duly adopted setting forth a
proposed amendment of the Certificate of Incorporation of the Corporation,
declaring the amendment to be advisable and calling a meeting of the
stockholders of the Corporation for consideration thereof. The resolution
setting forth the proposed amendment is as follows:
RESOLVED, that the Certificate of Incorporation of the
Corporation be amended by changing Article FOURTH to provide
that the authorized number of shares shall be 11,000,000,
consisting of 10,000,000 shares of common stock, par value
$0.001 per shares, and 1,000,000 shares of preferred stock,
par value $0.001 per share.
SECOND: That thereafter, pursuant to resolution of its Board
of Directors, the annual meeting of the stockholders of the Corporation was
duly called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
THIRD: That the amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporate law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by Gary K. Judis, its Chief Executive Officer, and Bobbie J. Burroughs,
its Secretary, this 25 day of April, 1994.
By: /s/ Gary K. Judis
------------------------------
Chief Executive Officer
ATTEST: /s/ Bobbie J. Burroughs
--------------------------
Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
AAMES FINANCIAL CORPORATION
(A DELAWARE CORPORATION)
The undersigned GARY JUDIS and BOBBIE BURROUGHS, the President and
Secretary, respectively, of Aames Financial Corporation (the "Corporation"), a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware (the "DGCL"), do hereby certify
pursuant to Section 103 of the DGCL:
The text of Article FOURTH of the Certificate of Incorporation of the
Corporation is hereby amended and restated to read in full as follows:
FOURTH: The total number of shares which the Corporation shall
have authority to issue is 51,000,000, consisting of
50,000,000 shares of common stock, par value $0.001 per share
(the "Common Stock") and 1,000,000 shares of preferred stock,
par value $0.001 per share (the "Preferred Stock").
IN WITNESS WHEREOF, the undersigned have executed this Certificate of
Amendment to the Certificate of Incorporation of the Corporation as of this
17th day of January, 1996.
By: /s/ Gary K. Judis
---------------------------------------
Gary K. Judis, President
Attest: /s/ Bobbie J. Burroughs, Secretary
-----------------------------------
Bobbie J. Burroughs, Secretary
<PAGE>
CERTIFICATE OF DESIGNATION OF
RIGHTS, PREFERENCES AND PRIVILEGES OF
SERIES A PREFERRED STOCK
OF
AAMES FINANCIAL CORPORATION
Pursuant to Section 151 of the Delaware General Corporation law:
The undersigned hereby certifies that the following resolution has
been adopted by the Board of Directors of Aames Financial Corporation, a
Delaware corporation (the "Corporation") as required by Section 151 of the
Delaware General Corporation Law by unanimous written consent on June 21, 1996;
RESOLVED, that pursuant to the authority granted to
and vested in the Board of Directors of this
Corporation (hereinafter called the "Board of
Directors") in accordance with the provisions of the
Certificate of Incorporation of the Corporation, the
Board of Directors hereby creates a new series of the
previously authorized Preferred Stock, par value
$0.001 per share (the "Preferred Stock") of the
Corporation, and hereby states the designation and
number of shares, and fixes the, relative rights,
preferences and limitations thereof (in addition to
any provision set forth in the Certificate of
Incorporation of the Corporation which are applicable
to the Preferred Stock of all classes and series) as
follows:
Series A Preferred Stock:
Section 1. Designation and Amount. The shares of such series
shall be designated as "Series A Preferred Stock" (the "Series A Preferred
Stock") and the number of shares constituting the Series A Preferred Stock
shall be 500,000 shares of Series A Preferred Stock, having a par value of
$0.001 per share. Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, that no decrease shall reduce
the number of shares of Series A Preferred Stock to a number less than the
number of shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights or warrants or upon
the conversion of any outstanding securities issued by the Corporation
convertible into Series A Preferred Stock.
<PAGE>
Section 2. Dividends and Distributions
(a) Subject to the rights of the holders of any shares of
any series of Preferred Stock (or any similar stock) ranking prior and superior
to the Series A Preferred Stock with respect to dividends, the holders of
shares of Series A Preferred Stock, in preference to the holders of Common
Stock, par value $0.001 per share (the "Common Stock"), of the Corporation, and
of any other junior stock, shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for the
purpose, (i) cash dividends in an amount per whole share (rounded to the
nearest cent) equal to the Formula Number (as defined below) then in effect,
times the aggregate per share amount of all cash dividends declared or paid on
the Common Stock, and (ii) a preferential cash dividend (a "Preferential
Dividend"), if any, on the first day of July, October, January and April in
each year (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Series A Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to $1.00 per
share of Series A Preferred Stock less the per share amount of all cash
dividends declared on the Series A Preferred Stock pursuant to clause (i) of
this sentence since the immediately preceding Quarterly Dividend Payment Date
or, with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A Preferred Stock. In
addition, if the Corporation shall pay any dividend or make any distribution on
the Common Stock payable in assets, securities or other forms of noncash
consideration (other than dividends or distributions solely in shares of Common
Stock), then, in each such case, the Corporation shall simultaneously pay or
make on each whole outstanding share of Series A Preferred Stock, a dividend or
distribution in like kind equal to the Formula Number then in effect times such
dividend or distribution on each share of the Common Stock. The dividends and
distributions on the Series A Preferred Stock to which holders thereof are
entitled pursuant to clause (i) of the first sentence of this paragraph and the
second sentence of this paragraph are hereinafter referred to as "Participating
Dividends." As used herein, the "Formula Number" shall be 100; provided,
however, that if at any time after June 21, 1996, the Corporation shall (i)
declare or pay any dividend or make any distribution on the Common Stock,
payable in shares of Common Stock, (ii) subdivide (by a stock split or
otherwise), the outstanding shares of Common Stock into a larger number of
shares of Common Stock, or (iii) combine (by a reverse stock split or
otherwise) the outstanding shares of Common Stock into a smaller number of
shares of Common Stock, then in each such case the Formula Number in effect
immediately prior to such event shall be adjusted to a number determined by
multiplying the Formula Number then in effect by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event (and rounding the result
to the nearest whole number); and provided further, that, if at any time after
June 21, 1996, the Corporation shall issue any shares of its capital stock in a
merger, reclassification, or change of the outstanding shares of Common Stock,
then in each such event the Formula Number shall be appropriately adjusted to
reflect such merger, reclassification, or change so that each share of Series A
Preferred Stock continues to be the economic equivalent of a Formula Number of
shares of Common Stock prior to such merger, reclassification or change.
<PAGE>
(b) The Corporation shall declare each Participating
Dividend immediately prior to or at the same time it declares any cash or
non-cash dividend or distribution on the Common Stock in respect of which a
Participating Dividend is required to be paid. No cash or non-cash dividend or
distribution on the Common Stock in respect of which a Participating Dividend
is required shall be paid or set aside for payment on the Common Stock unless a
Participating Dividend in respect of such dividend shall have been paid.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares, unless the date
of issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series A Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series A
Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board
of Directors may fix a record date for the determination of holders of shares
of Series A Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 60 days
prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
(a) Each holder of Series A Preferred Stock shall be
entitled to a number of votes equal to the Formula Number then in effect, for
each share of Series A Preferred Stock held of record on each matter on which
holders of the Common Stock or stockholders generally are entitled to vote,
multiplied by the maximum number of votes per share which any holder of the
Common Stock or stockholders generally then have with respect to such matter
(assuming any holding period or other requirement to vote a greater number of
shares is satisfied).
(b) Except as otherwise provided herein, in any other
Certificate of Amendment creating a series of Preferred Stock or any similar
stock, or by law, the holders of shares of Series A Preferred Stock and the
holders of shares of Common Stock and any other capital stock of the
Corporation having general voting rights shall vote together as one class on
all matters submitted to a vote of stockholders of the Corporation.
(c) Except as set forth herein, or as otherwise provided
by law, holders of Series A Preferred Stock shall have no special voting rights
and their consent shall not be required (except
3
<PAGE>
to the extent they are entitled to vote with holders of Common Stock as set
forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(a) Whenever Preferential Dividends or Participating
Dividends are in arrears or the Corporation shall be in default in payment
thereof, thereafter and until all accrued and unpaid Participating Dividends
and Preferential Dividends, whether or not declared, on shares of Series A
Preferred Stock outstanding shall have been paid or set aside for payment in
full, the Corporation shall not:
(i) declare or pay dividends, or make any other
distributions on or redeem or purchase or otherwise acquire for consideration
any shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on the shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Series A Preferred Stock
and all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are
then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior or on a parity (either as to
dividends or upon liquidation, dissolution or winding up) to or with the Series
A Preferred Stock, provided that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such junior or parity stock in
exchange for shares of any stock of the Corporation ranking junior (either as
to dividends or upon dissolution, liquidation or winding up) to the Series A
Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration shares of Series A Preferred Stock, or any shares of stock
ranking on a parity with the Series A Preferred Stock, except in accordance
with a purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such terms as the Board
of Directors, after consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable treatment among
the respective series or classes.
(b) The Corporation shall not permit any subsidiary of
the Corporation to purchase or otherwise acquire for consideration any shares
of stock of the Corporation unless the Corporation could, under paragraph (a)
of this Section 4, purchase or otherwise acquire such shares at such time and
in such manner.
4
<PAGE>
Section 5. Reacquired Shares. Any shares of Series A Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock subject to the conditions and restrictions on issuance set
forth herein, in the Certificate of Incorporation, or in any other Certificate
of Amendment or Certificate of Designation creating a series of Preferred Stock
or any similar stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (a) to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution
or winding up) to the Series A Preferred Stock unless, prior thereto, the
holders of shares of Series A Preferred Stock shall have received an amount
equal to the accrued and unpaid dividends and distributions thereon, whether or
not declared, to the date of such payment, plus an amount equal to the greater
of (i) $0.01 per whole share, or (ii) an aggregate amount per share equal to
the Formula Number then in effect times the aggregate amount to be distributed
per share to holders of Common Stock, or (b) to the holders of shares of stock
ranking on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, unless simultaneously therewith
distributions are made ratably on the Series A Preferred Stock and all such
parity stock in proportion to the total amounts to which the holders of Series
A Preferred Stock shares are entitled under clause (a)(i) of this sentence and
to which the holders of such parity shares are entitled in each case upon such
liquidation, dissolution or winding up.
Section 7. Consolidation, Merger, etc. If the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share equal to the Formula Number then in effect
times the aggregate amount of stock, securities, cash and/or any other property
(payable in kind), as the case may be, into which or for which each share of
Common Stock is changed or exchanged. In the event that both this Section 7
and Section 2 appear to apply to a transaction, this Section 7 shall control.
Section 8. Effective Time of Adjustments.
(a) Adjustments to the Series A Preferred Stock required
by the provisions hereof shall be effective as of the time at which the event
requiring such adjustments occurs.
(b) The Corporation shall give prompt written notice to
each holder of a share of Series A Preferred Stock of the effect on any such
shares of any adjustment to the dividend rights or rights upon liquidation,
dissolution or winding up of the Corporation required by the provisions hereof.
Notwithstanding the foregoing sentence, the failure of the Corporation to give
such notice shall not affect the validity of or the force or effect of or the
requirement for such adjustment.
5
<PAGE>
Section 9. No Redemption. The shares of Series A Preferred Stock
shall not be redeemable.
Section 10. Rank. Unless otherwise provided in the Certificate
of Incorporation or a Certificate of Designation relating to a subsequent
series of Preferred Stock of the Corporation, the Series A Preferred Stock
shall rank, with respect to the payment of dividends and the distribution of
assets, junior to all series of any other class of the Corporation's Preferred
Stock.
Section 11. Fractional Shares. The Series A Preferred Stock
shall be issuable upon exercise of the Rights issued pursuant to the Rights
Agreement in whole shares or in any fraction of a share that is one
one-hundredth (1/100th) of a share or any integral multiple of such fraction
which shall entitle the holder, in proportion to such holder's fractional
shares, to receive dividends, exercise voting rights, participate in
distributions and to have the benefit of all other rights of holders of Series
A Preferred Stock. In lieu of fractional shares, the Corporation, prior to the
first issuance of a share or a fraction of a share of Series A Preferred Stock,
may elect (1) to make a cash payment as provided in the Rights Agreement for
fractions of a share other than one one-hundredth (1/100th) of a share or any
integral multiple thereof, or (2) to issue depository receipts evidencing such
authorized fraction of a share of Series A Preferred Stock pursuant to an
appropriate agreement between the Corporation and a depository selected by the
Corporation; provided that such agreement shall provide that the holders of
such depository receipts shall have the rights, privileges and preferences to
which they are entitled as holders of the Series A Preferred Stock.
Section 12. Amendment. The Certificate of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Preferred
Stock so as to affect them adversely without the affirmative vote of the
holders of at least two-thirds of the outstanding shares of Series A Preferred
Stock, voting together as a single class.
IN WITNESS WHEREOF, AAMES FINANCIAL CORPORATION has caused
this Certificate to be signed and attested this 21st day of June, 1996.
/s/ Gary K. Judis
--------------------------------
Gary K. Judis,
Chief Executive Officer
Attest:
/s/ Audry Patterson
- - --------------------------------
Audry Patterson, Secretary
6
<PAGE>
CERTIFICATE OF CORRECTION
FILED TO CORRECT A CERTAIN ERROR IN THE
CERTIFICATE OF AMENDMENT OF
AAMES FINANCIAL CORPORATION
Aames Financial Corporation, a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
does hereby certify:
1. The name of the corporation is Aames Financial Corporation.
2. That a Certificate of Amendment was filed by the Secretary of
State of Delaware on January 19, 1996 and that said Certificate requires
correction as permitted by Section 103 of the General Corporation Law of the
State of Delaware.
3. The inaccuracy or defect of said Certificate to be corrected
is as follows: the second paragraph of Article FOURTH was inadvertently
deleted.
4. Article FOURTH of said Certificate is corrected to read in its
entirety as follows:
FOURTH: The total number of shares which the
Corporation shall have authority to issue is
51,000,000, consisting of 50,000,000 shares of common
stock, par value $0.001 per share (the "Common
Stock") and 1,000,000 shares of preferred stock, par
value $0.001 per share (the "Preferred Stock").
Shares of the Preferred Stock of the Corporation may
be issued from time to time in one or more classes or
series, each of which class or series shall have such
distinctive designation or title as shall be fixed by
the Board of Directors of the Corporation (the "Board
of Directors") prior to the issuance of any shares
thereof. Each such class or series of Preferred Stock
shall have such voting powers, full or limited, or no
voting powers, and such preferences and relative,
participating, optional or other special rights and
such qualifications, limitations or restrictions
thereof, as shall be stated in such resolution or
resolutions providing for the issue of such class or
series of Preferred Stock as may be adopted from time
to time by the Board of Directors prior to the
issuance of any shares thereof pursuant to the
authority hereby expressly vested in it, all in
accordance with the laws of the State of Delaware.
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Aames Financial Corporation has caused this Certificate of Correction
to be signed by Barbara S. Polsky, its authorized officer, this 26th day of
August, 1997.
By: /s/ Barbara S. Polsky
----------------------------------
Barbara S. Polsky
Executive Vice President,
General Counsel and Secretary
<PAGE>
- --------------------------------------------------------------------------------
CERTIFICATE OF THE VOTING POWERS, DESIGNATIONS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
OR OTHER SPECIAL RIGHTS, AND QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS THEREOF, OF
SERIES B CONVERTIBLE PREFERRED STOCK OF
AAMES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
AAMES FINANCIAL CORPORATION, a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies that the following resolutions were adopted by the Board of
Directors of the Corporation (the "Board of Directors") pursuant to authority of
the Board of Directors as required by Section 151 of the Delaware General
Corporation Law:
RESOLVED, that pursuant to the authority granted to and vested in
the Board of Directors in accordance with the provisions of the Certificate of
Incorporation of the Corporation, as amended (the "Certificate of
Incorporation"), the Board of Directors hereby creates a series of the
Corporation's previously authorized preferred stock, par value $0.001 per share
(the "Preferred Stock"), and hereby states the designation and number thereof,
and fixes the voting powers, preferences and relative, participating, optional
and other special rights, and the qualifications, limitations and restrictions
thereof, as follows:
SERIES B CONVERTIBLE PREFERRED STOCK:
I. DESIGNATION AND AMOUNT
The designation of this series of shares shall be "Series B
Convertible Preferred Stock" (the "Series B Preferred Stock") par value $0.001
per share; the initial stated value per share shall be $1,000.00 (the "Initial
Stated Value"); and the number of shares constituting such series shall be
100,000. The number of shares of the Series B Preferred Stock may be decreased
from time to time by a resolution or resolutions of the Board of Directors;
provided, however, that such number shall not be decreased below the aggregate
number of shares of the Series B Preferred Stock then outstanding.
II. RANK
A. With respect to dividends, the Series B Preferred Stock shall
rank (i) senior to each other class or series of Preferred Stock, except for the
Series C Convertible Preferred Stock, par value $0.001 per share, of the
Corporation (the "Series C Preferred Stock"); (ii) on a parity with the Series C
Preferred Stock; and (iii) senior to the Corporation's Common Stock, par value
$.001 per share (the "Common Stock"), and, except as specified above, all other
classes and series of capital stock of the Corporation hereafter issued by the
Corporation. With respect to dividends, all equity securities of the Corporation
to which the Series B Preferred Stock ranks senior, including the Common Stock,
are collectively referred to herein as the
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"Junior Dividend Securities"; all equity securities of the Corporation with
which the Series B Preferred Stock ranks on a parity, including the Series C
Preferred Stock, are collectively referred to herein as the "Parity Dividend
Securities"; and all equity securities of the Corporation (other than
convertible debt securities) to which the Series B Preferred Stock ranks junior,
with respect to dividends, are collectively referred to herein as the "Senior
Dividend Securities."
B. With respect to the distribution of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the Series B Preferred Stock shall rank (i) senior to each other class or series
of Preferred Stock of the Corporation, except for the Series C Preferred Stock;
(ii) on a parity with the Series C Preferred Stock; and (iii) senior to the
Common Stock, and, except as specified above, all other classes and series of
capital stock of the Corporation hereafter issued by the Corporation. With
respect to the distribution of assets upon liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, all equity securities
of the Corporation to which the Series B Preferred Stock ranks senior, including
the Common Stock, are collectively referred to herein as "Junior Liquidation
Securities"; all equity securities of the Corporation (other than convertible
debt securities) to which the Series B Preferred Stock ranks on parity,
including the Series C Preferred Stock, are collectively referred to herein as
"Parity Liquidation Securities"; and all equity securities of the Corporation to
which the Series B Preferred Stock ranks junior are collectively referred to
herein as "Senior Liquidation Securities."
C. The Series B Preferred Stock shall be subject to the creation
of Junior Dividend Securities and Junior Liquidation Securities (collectively,
"Junior Securities"), but no Parity Dividend Securities or Parity Liquidation
Securities (collectively, "Parity Securities") (other than the Series C
Preferred Stock) or Senior Dividend Securities or Senior Liquidation Securities
(collectively, "Senior Securities") shall be created except in accordance with
the terms hereof.
III. DIVIDENDS
A. DIVIDENDS. Subject to the terms of paragraph D below, shares
of Series B Preferred Stock shall accumulate dividends at a rate of 6.5% per
annum (the "Dividend Rate"), which dividends shall be paid quarterly in cash, in
four equal quarterly installments on the last day of March, June, September and
December of each year, or if any such date is not a Business Day, the Business
Day next preceding such day (each such date, regardless of whether any dividends
have been paid or declared and set aside for payment on such date, a "Dividend
Payment Date"), to holders of record (the "Registered Holders") as they appear
on the stock record books of the Corporation on the fifteenth day prior to the
relevant Dividend Payment Date; provided, however, that during the Accrual
Period (as defined in Article IX hereof) the Corporation shall have the option
to accrue such dividends, which dividends, to the extent so accrued, shall
compound quarterly. Prior to the consummation of the Recapitalization, dividends
shall accrue and accumulate on the Initial Stated Value of each share of Series
B Preferred Stock. Following the consummation of the Recapitalization, dividends
shall accrue and accumulate on the Post-Recapitalization Stated Value of each
share of Series B Preferred Stock. Dividends shall be paid only when, as and if
declared by the Board of Directors out of funds at the time
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<PAGE>
legally available for the payment of dividends. Dividends shall begin to
accumulate on outstanding shares of Series B Preferred Stock from the date of
issuance and shall be deemed to accumulate from day to day whether or not earned
or declared until paid. Dividends shall accumulate on the basis of a 360-day
year consisting of twelve 30-day months (four 90-day quarters) and the actual
number of days elapsed in the period for which payable.
B. ACCUMULATION. Dividends on the Series B Preferred Stock shall
be cumulative, and from and after (i) any Dividend Payment Date on which any
dividend that has accumulated or been deemed to have accumulated through such
date has not been paid in full (other than by reason of the election of the
Corporation to accrue dividends during the Accrual Period); or (ii) any payment
date set for a redemption on which such redemption payment has not been paid in
full, additional dividends shall accumulate in respect of the amount of such
unpaid dividends or unpaid redemption payment (the "Arrearage") at 125% of the
stated dividend rate (or such lesser rate as may be the maximum rate that is
then permitted by applicable law). Such additional dividends in respect of any
Arrearage shall be deemed to accumulate from day to day whether or not earned or
declared until the Arrearage is paid, shall be calculated as of such successive
Dividend Payment Date, and shall constitute an additional Arrearage from and
after any Dividend Payment Date to the extent not paid on such Dividend Payment
Date. References in any Article herein to dividends that have accumulated or
that have been deemed to have accumulated with respect to the Series B Preferred
Stock shall include the amount, if any, of any Arrearage together with any
dividends accumulated or deemed to have accumulated on such Arrearage pursuant
to the immediately preceding two sentences. Additional dividends in respect of
any Arrearage may be declared and paid at any time, in whole or in part, without
reference to any regular Dividend Payment Date, to Registered Holders as they
appear on the stock record books of the Corporation on such record date as may
be fixed by the Board of Directors (which record date shall be no less than 10
days prior to the corresponding payment date). Dividends in respect of any
Arrearage shall be paid in cash.
C. METHOD OF PAYMENT. Dividends paid on the shares of Series B
Preferred Stock in an amount less than the total amount of such dividends at the
time accumulated and payable on all outstanding shares of Series B Preferred
Stock shall be allocated pro rata on a share-by-share basis among all such
shares then outstanding. After the Second Anniversary Date, dividends that are
declared and paid in an amount less than the full amount of dividends
accumulated on the Series B Preferred Stock (and on any Arrearage) shall be
applied first to the earliest dividend which has not theretofore been paid. All
cash payments of dividends on the shares of Series B Preferred Stock shall be
made in such coin or currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts.
D. SPECIAL DIVIDEND RIGHTS.
1. In addition to the dividend rights set forth in paragraph A
above, prior to the consummation of the Recapitalization, the holders of shares
of Series B Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for such
purpose, cash dividends in an amount per whole share (rounded to the nearest
cent) equal to the Formula Number then in effect times the aggregate per share
amount of all
3
<PAGE>
cash dividends declared or paid on the Common Stock. If, prior to the
consummation of the Recapitalization, the Corporation shall pay any dividend or
make any distribution on the Common Stock payable in assets, securities or other
forms of non-cash consideration, then, in each such case, the Corporation shall
simultaneously pay or make on each whole outstanding share of the Series B
Preferred Stock a dividend or distribution in like kind equal to the Formula
Number then in effect times such dividend or distribution on each share of the
Common Stock. The dividends and distributions on the Series B Preferred Stock
pursuant to this paragraph are hereinafter referred to as "Participating
Dividends." The Corporation shall declare each Participating Dividend
immediately prior to or at the same time it declares any cash or non-cash
dividend or distribution on the Common Stock in respect of which a Participating
Dividend is required to be paid. No cash or non-cash dividend or distribution on
the Common Stock in respect of which a Participating Dividend is required shall
be paid or set aside for payment on the Common Stock unless a Participation
Dividend in respect of such dividend shall be have been paid. Nothing contained
in this paragraph D shall obligate the Company to declare or pay any dividend or
other distribution on the Common Stock or (except pursuant to paragraph A of
this Article III or in connection with a dividend or distribution on the Common
Stock as provided in this paragraph D) the Series B Preferred Stock.
2. If the Recapitalization is not consummated prior to June 30,
1999, the Dividend Rate shall be deemed to be 15% per annum during the period
commencing on such date and ending on the date the Recapitalization is
consummated.
IV. LIQUIDATION PREFERENCE
A. PRIOR TO THE RECAPITALIZATION. In the event of a liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
occurring prior to the consummation of the Recapitalization, the holders of
then-outstanding shares of Series B Preferred Stock shall be entitled to receive
out of the assets of the Corporation, whether such assets are capital or surplus
of any nature, an amount per share equal to the sum of (i) the dividends, if
any, accumulated or deemed to have accumulated thereon, to the date of final
distribution to such holders, whether or not such dividends are declared; and
(ii) the Initial Stated Value thereof, before any payment shall be made or any
assets distributed to the holders of any Junior Liquidation Securities (the
"Initial Preferred Distribution"). After the Initial Preferred Distribution has
been made, the holders of Series B Preferred Stock shall be entitled to share
pro rata with the holders of Common Stock in the distribution of any remaining
assets of the Corporation on the basis of each whole outstanding share of the
Series B Preferred Stock receiving an amount equal to the Formula Number then in
effect times such distribution on each share of the Common Stock. The
distributions on the Series B Preferred Stock pursuant to the immediately
preceding sentence of this paragraph A are hereinafter referred to as
"Participating Liquidation Distributions." No distribution on the Common Stock
in respect of which a Participating Liquidation Distribution is required shall
be paid or set aside for payment on the Common Stock unless a Participating
Liquidation Distribution in respect of such distribution is concurrently paid.
4
<PAGE>
B. AFTER THE RECAPITALIZATION. Subsequent to the consummation of
the Recapitalization, the holders of the outstanding shares of Series B
Preferred Stock shall be entitled to receive out of the assets of the
Corporation, whether such assets are capital or surplus of any nature, an amount
per share equal to the sum of (i) the dividends, if any, accumulated or deemed
to have accumulated thereon to the date of final distribution to such holders,
whether or not such dividends are declared; and (ii) the Post-Recapitalization
Stated Value thereof, before any payment shall be made or any assets distributed
to the holders of any Junior Liquidation Securities. After any such payment in
full after the consummation of the Recapitalization, the holders of Series B
Preferred Stock shall not, as such, be entitled to any further participation in
any distribution of assets of the Corporation.
C. PARITY SECURITIES. All the assets of the Corporation available
for distribution to stockholders after the liquidation preferences of any Senior
Liquidation Securities shall be distributed ratably (in proportion to the full
distributable amounts to which holders of Series B Preferred Stock and Parity
Liquidation Securities, if any, are respectively entitled upon such dissolution,
liquidation or winding up) among the holders of the then-outstanding shares of
Series B Preferred Stock and Parity Liquidation Securities, if any, when such
assets are not sufficient to pay in full the aggregate amounts payable thereon.
D. MERGER NOT A LIQUIDATION. Neither a consolidation or merger of
the Corporation with or into any other Person or Persons, nor a sale,
conveyance, lease, exchange or transfer of all or part of the Corporation's
assets for cash, securities or other property to a Person or Persons shall be
deemed to be a liquidation, dissolution or winding up of the Corporation for
purposes of this Article IV, but the holders of shares of Series B Preferred
Stock shall nevertheless be entitled from and after any such consolidation,
merger or sale, conveyance, lease, exchange or transfer of all or part of the
Corporation's assets to the rights provided by this Article IV following any
such transaction. Notice of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, stating the payment date or dates
when, and the place or places where, the amounts distributable to each holder of
shares of Series B Preferred Stock in such circumstances shall be payable, shall
be given by first-class mail, postage prepaid, mailed not less than 30 days
prior to any payment date stated therein, to holders of record as they appear on
the stock record books of the Corporation as of the date such notices are first
mailed.
V. REDEMPTION
A. INTENTIONALLY OMITTED
B. OPTIONAL REDEMPTION. Commencing on the earlier to occur of (x)
the tenth anniversary of the Issue Date and (y) the date on which fewer than 25%
of the shares of Series B Preferred Stock issued on the Issue Date remain
outstanding, and at all times thereafter, the Corporation may, at its option,
redeem all (but not less than all) outstanding shares of Series B Preferred
Stock on a date specified by the Corporation (the "Optional Redemption Date") by
paying the Redemption Price therefor in cash out of funds legally available for
such purpose.
C. NOTICE AND REDEMPTION PROCEDURES. Notice of the redemption of
shares of Series B Preferred Stock pursuant to paragraph B of this Article V (a
"Notice of Redemption")
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<PAGE>
shall be sent to the holders of record of the shares of Series B Preferred Stock
to be redeemed by first class mail, postage prepaid, at each such holder's
address as it appears on the stock record books of the Corporation not more than
120 nor fewer than 90 days prior to the Optional Redemption Date, which date
shall be set forth in such notice (the "Redemption Date"); provided that failure
to give such Notice of Redemption to any holder, or any defect in such Notice of
Redemption to any holder shall not affect the validity of the proceedings for
the redemption of any shares of Series B Preferred Stock held by any other
holder. In order to facilitate the redemption of shares of Series B Preferred
Stock, the Board of Directors may fix a record date for the determination of the
holders of shares of Series B Preferred Stock to be redeemed not more than 30
days prior to the date the Notice of Redemption is mailed. On or after the
Optional Redemption Date, each holder of the shares called for redemption shall
surrender the certificate evidencing such shares to the Corporation at the place
designated in such notice and shall thereupon be entitled to receive payment of
the Redemption Price for such shares. From and after the Optional Redemption
Date, all dividends on shares of Series B Preferred Stock shall cease to
accumulate and all rights of the holders thereof as holders of Series B
Preferred Stock shall cease and terminate, except to the extent the Corporation
shall default in payment thereof on the Optional Redemption Date.
D. DEPOSIT OF FUNDS. The Corporation shall, on or prior to the
Optional Redemption Date, pursuant to paragraph C of this Article V, deposit
with its transfer agent or other redemption agent in the Borough of Manhattan,
The City of New York having a capital and surplus of at least $500,000,000
selected by the Board of Directors, as a trust fund for the benefit of the
holders of the shares of Series B Preferred Stock to be redeemed, cash that is
sufficient in amount to redeem the shares to be redeemed in accordance with the
Notice of Redemption, with irrevocable instructions and authority to such
transfer agent or other redemption agent to pay to the respective holders of
such shares, as evidenced by a list of such holders certified by an officer of
the Corporation, the Redemption Price for such shares upon surrender of their
respective share certificates. Such deposit shall be deemed to constitute full
payment of the Redemption Price for such shares to the holders, and from and
after the date of such deposit, all rights of the holders of the shares of
Series B Preferred Stock that are to be redeemed as stockholders of the
Corporation with respect to such shares, except the right to receive the
Redemption Price upon the surrender of their respective certificates, shall
cease and terminate. No dividends shall accumulate on any shares of Series B
Preferred Stock after the Optional Redemption Date for such shares (unless the
Corporation shall fail to deposit cash sufficient to redeem all such shares). In
case holders of any shares of Series B Preferred Stock called for redemption
shall not, within two years after such deposit, claim the cash deposited for
redemption thereof, such transfer agent or other redemption agent shall, upon
demand, pay over to the Corporation the balance so deposited. Thereupon, such
transfer agent or other redemption agent shall be relieved of all responsibility
to the holders thereof and the sole right of such holders, with respect to
shares to be redeemed, shall be to receive the Redemption Price as general
creditors of the Corporation. Any interest accrued on any funds so deposited
shall belong to the Corporation, and shall be paid to it from time to time on
demand.
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<PAGE>
VI. RESTRICTIONS ON DIVIDENDS
So long as any shares of the Series B Preferred Stock are
outstanding, the Board of Directors shall not declare, and the Corporation shall
not pay or set apart for payment any dividend on any Junior Securities or make
any payment on account of, or set apart for payment money for a sinking or other
similar fund for, the repurchase, redemption or other retirement of, any Junior
Securities or Parity Securities or any warrants, rights or options exercisable
for or convertible into any Junior Securities or Parity Securities (other than
the repurchase, redemption or other retirement of debentures or other debt
securities that are convertible or exchangeable into any Junior Securities or
Parity Securities), or make any distribution in respect of the Junior
Securities, either directly or indirectly, and whether in cash, obligations or
shares of the Corporation or other property (other than distributions or
dividends in Junior Securities to the holders of Junior Securities), and shall
not permit any corporation or other entity directly or indirectly controlled by
the Corporation to purchase or redeem any Junior Securities or Parity Securities
or any warrants, rights, calls or options exercisable for or convertible into
any Junior Securities or Parity Securities (other than the repurchase,
redemption or other retirement of debentures or other debt securities that are
convertible or exchangeable into any Junior Securities or Parity Securities or
the repurchase, redemption or other retirement of Junior Securities or Parity
Securities in exchange for Junior Securities or Parity Securities) unless prior
to or concurrently with such declaration, payment, setting apart for payment,
repurchase, redemption or other retirement or distribution, as the case may be,
all accumulated and unpaid dividends on shares of the Series B Preferred Stock
not paid on the dates provided for in paragraph A of Article III hereof
(including Arrearages and accumulated dividends thereon) shall have been paid,
except that when dividends are not paid in full as aforesaid upon the shares of
Series B Preferred Stock, all dividends declared on the Series B Preferred Stock
and any series of Parity Dividend Securities shall be declared and paid pro rata
so that the amount of dividends so declared and paid on Series B Preferred Stock
and such series of Parity Dividend Securities shall in all cases bear to each
other the same ratio that accumulated dividends (including interest accrued on
or additional dividends accumulated in respect of such accumulated dividends) on
the shares of Series B Preferred Stock and such Parity Dividend Securities bear
to each other.
VII. VOTING RIGHTS
A. On or prior to the consummation of the Recapitalization, the
holders of Series B Preferred Stock shall be entitled to one thousand (1,000)
votes per share of Series B Preferred Stock at each meeting of stockholders of
the Corporation with respect to any and all matters presented to the
stockholders of the Corporation for their action and consideration. After the
consummation of the Recapitalization, the holders of Series B Preferred Stock
shall be entitled to the number of votes per share of Series B Preferred Stock
equal to the number of shares of Common Stock for which such share of Series B
Preferred Stock is then convertible pursuant to Article VIII at each meeting of
stockholders of the Corporation with respect to any and all matters presented to
the stockholders of the Corporation for their action and consideration.
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B. So long as any shares of the Series B Preferred Stock are
outstanding, (i) each share of Series B Preferred Stock shall entitle the holder
thereof to vote on all matters voted on by holders of Common Stock; and (ii) the
shares of Series B Preferred Stock shall vote together with shares of Common
Stock (and any shares of Series C Preferred Stock entitled to vote) as a single
class.
C. At each annual meeting of the stockholders of the Corporation,
the holders of Series B Preferred Stock, voting as a separate class, shall have
the right to elect, by the written consent (if action by written consent is
permitted) or affirmative vote of the holders of a majority of the outstanding
shares of Series B Preferred Stock, four members of a separate class of
directors, each of whom shall serve until the next annual meeting of the
stockholders of the Corporation or until his or her successor is elected and
qualified. Such vote or consent shall be taken in accordance with the procedures
specified in paragraph F below. The initial directors shall be Steven M.
Gluckstern, Adam M. Mizel, Mani Sadeghi and David Spuria.
D. Without the written consent (if action by written consent is
permitted) or affirmative vote of the holders of a majority of the outstanding
shares of Series B Preferred Stock and Series C Preferred Stock, voting together
as a single class, the Corporation shall not (i) authorize, create or issue, or
increase the authorized amount of, (x) any Senior Securities or Parity
Securities or (y) any class or series of capital stock or any security
convertible into or exercisable for any class or series of capital stock,
redeemable mandatorily or redeemable at the option of the holder thereof or (ii)
enter into any Transaction (as defined in paragraph H of Article VIII). Such
vote or consent shall be taken in accordance with the procedures specified in
paragraph F below.
E. Without the written consent (if action by written consent is
permitted) or affirmative vote of the holders of at least a majority of the
outstanding shares of Series B Preferred Stock and Series C Preferred Stock,
voting together as a single class, the Corporation shall not (i) amend, alter or
repeal any provision of the Certificate of Incorporation or the Bylaws, if the
amendment, alteration or repeal alters or changes the powers, preferences or
special rights of the Series B Preferred Stock so as to affect them materially
and adversely or (ii) authorize or take any other action if such action alters
or changes any of the rights of the Series B Preferred Stock in any respect or
otherwise would be inconsistent with the provisions of this Certificate of
Designations and the holders of any class or series of the capital stock of the
Corporation is entitled to vote thereon. Such vote or consent shall be taken in
accordance with the procedures specified in paragraph F below.
F. The foregoing rights of holders of shares of Series B
Preferred Stock to take any actions as provided in this Article VII may be
exercised at any annual meeting of stockholders or at a special meeting of
stockholders held for such purpose as hereinafter provided or at any adjournment
thereof, or by the written consent, delivered to the Secretary of the
Corporation, of the holders of the minimum number of shares required to take
such action, if action by written consent of stockholders of the Corporation is
then permitted.
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The Chairman of the Board of the Corporation may call, and upon
written request of holders of record of 35% of the outstanding shares of Series
B Preferred Stock, if the holders of Series B Preferred Stock are to vote
separately as a single class, or the holders of record of 35% of the outstanding
shares of Series B Preferred Stock and Series C Preferred Stock, if the holders
of shares of Series B Preferred Stock are to vote as a class with the holders of
shares of any Series C Preferred Stock, addressed to the Secretary of the
Corporation at the principal office of the Corporation shall call, a special
meeting of the holders of shares entitled to vote as provided herein. Such
meeting shall be held within 30 days after delivery of such request to the
Secretary, at the place and upon the notice provided by law and in the By-laws
of the Corporation for the holding of meetings of stockholders.
At each meeting of stockholders at which the holders of shares of
Series B Preferred Stock shall have the right, voting separately as a single
class or as a class with the holders of shares of any Series C Preferred Stock,
to elect directors of the Corporation as provided in paragraph C above or to
take any action, the presence in person or by proxy of the holders of record of
one-third of the total number of shares of Series B Preferred Stock, if the
holders of shares of Series B Preferred Stock are to vote separately as a single
class, or the holders of record of one-third of the total number of shares of
Series B Preferred Stock and Series C Preferred Stock, if the holder of shares
of Series B Preferred Stock are to vote as a class with the holders of shares of
Series C Preferred Stock, then outstanding and entitled to vote on the matter
shall be necessary and sufficient to constitute a quorum. At any such meeting or
at any adjournment thereof:
(A) the absence of a quorum of the holders of shares of Series B
Preferred Stock, if the holders of Series B Preferred Stock are to vote
separately as a single class, shall not prevent the election of
directors other than those to be elected by the holders of shares of
Series B Preferred Stock, and the absence of a quorum of the holders of
shares of any other class or series of capital stock shall not prevent
the election of directors to be elected by the holders of shares of
Series B Preferred Stock or the taking of any action as provided in this
Article VII; and
(B) in the absence of a quorum of the holders of shares of Series
B Preferred Stock, if the holders of Series B Preferred Stock are to
vote separately as a single class, or the holders of shares of Series B
Preferred Stock and Series C Preferred Stock, if the holders of Series B
Preferred Stock are to vote as a class with the holders of shares of
Series C Preferred Stock, a majority of the holders of such shares
present in person or by proxy shall have the power to adjourn the
meeting as to the actions to be taken by the holders of shares of Series
B Preferred Stock or the holders of Series B Preferred Stock and Series
C Preferred Stock, as the case may be, from time to time and place to
place without notice other than announcement at the meeting until a
quorum shall be present.
For taking of any action as provided in this Article VII by the
holders of shares of Series B Preferred Stock voting separately as a single
class or together with the holders of shares of Series B Preferred Stock and
Series C Preferred Stock as a single class, as the case may be, each such holder
shall have one vote for each share of such stock standing in his name on the
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transfer books of the Corporation as of any record dated fixed for such purpose
or, if no such date be fixed, at the close of business on the Business Day next
preceding the day on which notice is given, or if notice if waived, at the close
of business on the Business Day next preceding the day on which the meeting is
held.
In case any vacancy shall occur among the directors elected by
the holders of shares of Series B Preferred Stock, as provided in paragraph C
above, such vacancy may be filled for the unexpired portion of the term by vote
of the remaining directors theretofore elected by such holders (if there is a
remaining director), or the last remaining director's successor in office. If
any such vacancy is not so filled within 20 days after the creation thereof or
if all directors so elected by the holders of Series B Preferred Stock shall
cease to serve as directors before their terms shall expire, the holders of the
Series B Preferred Stock then outstanding and entitled to vote for such
directors may, by written consent as herein provided (if action by written
consent is permitted), or at a special meeting of such holders called as
provided herein, elect successors to hold office for the unexpired terms of the
directors whose places shall be vacant.
Any director elected by the holders of shares of Series B
Preferred Stock voting separately as a single class may be removed from office
with or without cause by the vote or written consent (if action by written
consent is permitted) of the holders of at least a majority of the outstanding
shares of Series B Preferred Stock. A special meeting of the holders of shares
of Series B Preferred Stock may be called in accordance with the procedures set
forth in this paragraph F.
G. The Corporation shall not enter into any agreement or issue
any security that prohibits, conflicts or is inconsistent with, or would be
breached by, the Corporation's performance of its obligations hereunder.
VIII. CONVERSION
The holders of the Series B Preferred Stock shall have conversion
rights as follows:
A. Each share of Series B Preferred Stock shall be convertible at
the direction of, and by notice to the Corporation from, the
holders of a majority of the outstanding shares of Series B
Preferred Stock, at any time, at the office of the Corporation or
any transfer agent for such Series, into one thousand (1,000)
fully paid and nonassessable shares of Common Stock subject (x)
to adjustment from time to time as provided below (as so
adjusted, the "conversion ratio") and (y) (prior to the
consummation of the Recapitalization) to limitations resulting
from the available number of shares of Common Stock which may be
reserved for issuance upon such conversion, provided ,that any
conversion pursuant to this paragraph A of less than all of the
outstanding shares of Series B Preferred Stock shall be on a pro
rata basis amongst all holders of Series B Preferred Stock. After
consummation of the Recapitalization, the number "1,000" in this
paragraph shall be "1", subject to adjustment as provided in
paragraph VIII.G.
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B. If the holders of a majority of the outstanding shares of Series
B Preferred Stock give notice of conversion under paragraph A
above, the Corporation shall notify all other record holders of
Series B Preferred Stock (a "Conversion Notice"). Following
receipt of a Conversion Notice, the holders of Series B Preferred
Stock shall surrender the certificate or certificates therefor
duly endorsed, at the office of the Corporation or of any
transfer agent for such Series, and shall state therein the name
or names in which the certificate or certificates for shares of
Common Stock are to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such
holder, or to the nominee or nominees of such holder, a
certificate or certificates for the number of shares of Common
Stock to which such holder shall be entitled as aforesaid. Such
conversion shall be deemed to have been made immediately prior to
the close of business on the date of such Conversion Notice and
the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all
purposes as the recordholder or holders of such shares of Common
Stock as of such date. The issuance of certificates or shares of
Common Stock upon conversion of shares of Series B Preferred
Stock shall be made without charge for any issue, stamp or other
similar tax in respect of such issuance.
C. No fractional shares shall be issued upon conversion of any
shares of Series B Preferred Stock and the number of shares of
Common Stock to be issued shall be rounded down to the nearest
whole share, and the holder of Series B Preferred Stock shall be
paid in cash for any fractional share.
D. In case at any time or from time to time the Corporation shall
pay any dividend or make any other distribution to the holders of
its Common Stock or other class of securities, or shall offer for
subscription pro rata to the holders of its Common Stock or other
class of securities any additional shares of stock of any class
or any other right, or there shall be any capital reorganization
or reclassification of the Common Stock of the Corporation or
consolidation or merger of the Corporation with or into another
corporation, or any sale or conveyance to another corporation of
the property of the Corporation as an entirety or substantially
as an entirety, or there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Corporation, then,
in any one or more of said cases the Corporation shall give at
least 20 days' prior written notice (the time of mailing of such
notice shall be deemed to be the time of giving thereof) to the
registered holders of the Series B Preferred Stock at the
addresses of each as shown on the books of the Corporation
maintained by the Transfer Agent thereof of the date on which (i)
the books of the Corporation shall close or a record shall be
taken for such stock dividend,
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<PAGE>
distribution or subscription rights or (ii) such reorganization,
reclassification, consolidation, merger, sale or conveyance,
dissolution, liquidation or winding up shall take place, as the
case may be, provided that in the case of any Transaction to
which paragraph H applies the Corporation shall give at least 30
days' prior written notice as aforesaid. Such notice shall also
specify the date as of which the holders of the Common Stock of
record shall participate in said dividend, distribution or
subscription rights or shall be entitled to exchange their Common
Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale or
conveyance or participate in such dissolution, liquidation or
winding up, as the case may be. Failure to give such notice shall
not invalidate any action so taken.
E. From and after the Recapitalization, the Corporation shall at all
times reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of Series B Preferred
Stock, such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all
outstanding shares of Series B Preferred Stock, and if at any
time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then
outstanding shares of Series B Preferred Stock, then in addition
to such other remedies as shall be available to the holder of
Series B Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for
such purposes.
F. Any notice required by the provisions of paragraph D to be given
the holders of shares of Series B Preferred Stock shall be deemed
given if sent by facsimile transmission, by telex, or if
deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his, her or its address
appearing on the books of the Corporation.
G. The conversion ratio shall be subject to adjustment from time to
time as follows:
(i) In case the Corporation shall at any time or from time
to time after the Issue Date (A) pay a dividend or make a
distribution, on the outstanding shares of Common Stock in shares
of Common Stock, (B) subdivide the outstanding shares of Common
Stock into a larger number of shares of Common Stock, (C) combine
the outstanding shares of Common Stock into a smaller number of
shares or (D) issue by reclassification of the shares of Common
Stock any shares of capital stock of the Corporation, then, and
in each such case, the conversion ratio in effect immediately
prior to such event or the record date therefor, whichever is
earlier, shall be adjusted so that the holder of any shares of
Series B Preferred Stock thereafter surrendered for conversion
shall be entitled to receive the number of shares of Common Stock
or other securities of the Corporation which such holder would
have owned or have been entitled to receive after the happening
of any of the events described above, had such shares of Series B
Preferred Stock been surrendered for conversion immediately prior
to the happening of such event or the record date therefor,
whichever is earlier. An adjustment made pursuant to this clause
(i) shall become effective (x) in the case of any such dividend
or distribution, immediately after the close of business on the
record date for the determination of holders of shares of Common
Stock
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<PAGE>
entitled to receive such dividend or distribution, or (y) in the
case of any such subdivision, reclassification or combination, at
the close of business on the day upon which such corporate action
becomes effective.
(ii) In the case the Corporation shall, after the Issue
Date, issue shares of Common Stock at a price per share, or
securities convertible into or exchangeable for shares of Common
Stock ("Convertible Securities") having a "Conversion Price" (as
defined below) less than the Current Market Price (for a period
of 15 consecutive trading days prior to such date), then, and in
each such case, the conversion ratio shall be adjusted so that
the holder of each share of Series B Preferred Stock shall be
entitled to receive, upon the conversion thereof, the number of
shares of Common Stock determined by multiplying (A) the
applicable conversion ratio on the day immediately prior to such
date by (B) a fraction, the numerator of which shall be the sum
of (1) the number of shares of Common Stock outstanding on the
date on which such shares or Convertible Securities are issued
and (2) the number of additional shares of Common Stock issued,
or into which the Convertible Securities may convert, and the
denominator of which shall be the sum of (x) the number of shares
of Common Stock outstanding on such date and (y) the number of
shares of Common Stock which the aggregate consideration
receivable by the Corporation for the total number of shares of
Common Stock so issued, or the number of shares of Common Stock
which the aggregate of the Conversion Price of such Convertible
Securities so issued, would purchase at such Current Market price
on such date. An adjustment made pursuant to this clause (ii)
shall be made on the next Business Day following the date on
which any such issuance is made and shall be effective
retroactively immediately after the close of business on such
date. For purposes of this clause (ii), the aggregate
consideration receivable by the Corporation in connection with
the issuance of any securities shall be deemed to be the sum of
the aggregate offering price to the public (before deduction of
underwriting discounts or commissions and expenses payable to
third parties), and the "Conversion Price" of any Convertible
Securities is the total amount received or receivable by the
Corporation as consideration for the issue or sale of such
Convertible Securities (before deduction of underwriting
discounts or commissions and expenses payable to third parties)
plus the minimum aggregate amount of additional consideration, if
any, payable to the Corporation upon the conversion, exchange or
exercise of any such Convertible Securities. Neither (A) the
issuance of any shares of Common Stock (whether treasury shares
or newly issued shares) pursuant to a dividend or distribution
on, or subdivision, combination or reclassification of, the
outstanding shares of Common Stock requiring an adjustment in the
conversion ratio pursuant to clause (i) of this paragraph G, or
pursuant to any employee benefit plan or program of the
Corporation or pursuant to any option, warrant, right, or
Convertible Security outstanding as of the date hereof
(including, but not limited to, the Rights, the Series B
Preferred Stock, the Series C Preferred Stock and the Warrants)
nor (B) the issuance of shares of Common Stock pursuant thereto
shall be deemed to
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<PAGE>
constitute an issuance of Common Stock or Convertible Securities
by the Corporation to which this clause (ii) applies. Upon
expiration of any Convertible Securities which shall not have
been exercised or converted and for which an adjustment shall
have been made pursuant to this clause (ii), the Conversion Price
computed upon the original issue thereof shall upon expiration be
recomputed as if the only additional shares of Common Stock
issued were such shares of Common Stock (if any) actually issued
upon exercise or conversion of such Convertible Securities and
the consideration received therefor was the consideration
actually received by the Corporation for the issue of such
Convertible Securities (whether or not exercised or converted)
plus the consideration actually received by the Corporation upon
such exercise of conversion.
(iii) In case the Corporation shall at any time or from
time to time after the Issue Date declare, order, pay or make a
dividend or other distribution (including, without limitation,
any distribution of stock or other securities or property or
rights or warrants to subscribe for securities of the Corporation
or any of its Subsidiaries by way of dividend or spin-off), on
its Common Stock, other than (A) regular quarterly dividends
payable in cash in an aggregate amount not to exceed 15% of net
income from continuing operations before extraordinary items of
the Corporation, determined in accordance with generally accepted
accounting principles, during the period (treated as one
accounting period) commencing on July 1, 1998, and ending on the
date such dividend is paid or (B) dividends or distributions of
shares of Common Stock which are referred to in clause (i) of
this paragraph G, then, and in each such case, the conversion
ratio shall be adjusted so that the holder of each share of
Series B Preferred Stock shall be entitled to receive, upon the
conversion thereof, the number of shares of Common Stock
determined by multiplying (1) the applicable conversion ratio on
the day immediately prior to the record date fixed for the
determination of stockholders entitled to receive such dividend
or distribution by (2) a fraction, the numerator of which shall
be the then Current Market Price per share of Common Stock for
the period of 20 Trading Days preceding such record date, and the
denominator of which shall be such Current Market Price per share
of Common Stock for the period of 20 Trading Days preceding such
record date, less the Fair Market Value (as defined in Article
IX) per share of Common Stock (as determined in good faith by the
Board of Directors of the Corporation, a certified resolution
with respect to which shall be mailed to each holder of shares of
Series B Preferred Stock) of such dividend or distribution;
provided, however, that in the event of a distribution of shares
of capital stock of a Subsidiary of the Corporation (a
"Spin-Off") made to holders of shares of Common Stock, the
numerator of such fraction shall be the sum of the Current Market
Price per share of Common Stock for the period of 20 Trading Days
preceding the 35th Trading Day after the effective date of such
Spin-Off and the Current Market Price of the number of shares (or
the fraction of a share) of capital stock of the Subsidiary which
is
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<PAGE>
distributed in such Spin-Off in respect of one share of Common
Stock for the period of 20 Trading Days preceding such 35th
Trading Day and the denominator of which shall be the current
market price per share of the Common Stock for the period of 20
Trading Days proceeding such 35th Trading Day. An adjustment made
pursuant to this clause (iii) shall be made upon the opening of
business on the next Business Day following the date on which any
such dividend or distribution is made and shall be effective
retroactively immediately after the close of business on the
record date fixed for the determination of stockholders entitled
to receive such dividend or distribution; provided, however, if
the proviso to the preceding sentence applies, then such
adjustment shall be made and be effective as of such 35th Trading
Day after the effective date of such Spin-Off.
(iv) For purposes of this paragraph G, the number of shares
of Common Stock at any time outstanding shall not include any
shares of Common Stock then owned or held by or for the account
of the Corporation.
(v) The term "dividend", as used in this paragraph G shall
mean a dividend or other distribution upon stock of the
Corporation except pursuant to the Rights Agreement (as defined
in Article IX). Notwithstanding anything in this Article VIII to
the contrary, the conversion ratio shall not be adjusted as a
result of any dividend, distribution or issuance of securities of
the Corporation pursuant to the Rights Agreement.
(vi) Anything in this paragraph G to the contrary
notwithstanding, the Corporation shall not be required to give
effect to any adjustment in the conversion ratio unless and until
the net effect of one or more adjustments (each of which shall be
carried forward), determined as above provided, shall have
resulted in a change of the conversion ratio by at least
one-hundredth of one share of Common Stock, and when the
cumulative net effect of more than one adjustment so determined
shall be to change the conversion ratio by at least one-hundredth
of one share of Common Stock, such change in conversion ratio
shall thereupon be given effect.
(vii) The certificate of any firm of independent public
accountants of recognized standing selected by the Board of
Directors of the Corporation (which may be the firm of
independent public accountants regularly employed by the
Corporation) shall be presumptively correct for any computation
made under this paragraph G.
(viii) If the Corporation shall take a record of the
holders of its Common Stock for the purpose of entitling them to
receive a dividend or other distribution, and shall thereafter
and before the distribution to stockholders thereof legally
abandon its plan to pay or deliver such dividend or distribution,
then thereafter no adjustment in the number of shares of Common
Stock issuable upon exercise of
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<PAGE>
the right of conversion granted by this paragraph G or in the
conversion ratio then in effect shall be required by reason of
the taking of such record.
(ix) There shall be no adjustment of the conversion ratio
in case of the issuance of any stock of the Corporation in a
merger, reorganization, acquisition or other similar transaction
except as set forth in paragraph G(i), G(ii) and H of this
Article VIII.
H. In case of any reorganization or reclassification of outstanding
shares of Common Stock (other than a reclassification covered by
paragraph G(i) of this Article VIII, or in case of any
consolidation or merger of the Corporation with or into another
corporation, or in the case of any sale or conveyance to another
corporation of the property of the Corporation as an entirety or
substantially as an entirety (each of the foregoing being
referred to as a "Transaction"), each share of Series B Preferred
Stock then outstanding shall thereafter be convertible into, in
lieu of the Common Stock issuable upon such conversion prior to
consummation of such Transaction, the kind and amount of shares
of stock and other securities and property receivable (including
cash) upon the consummation of such Transaction by a holder of
that number of shares of Common Stock into which one share of
Series B Preferred Stock was convertible immediately prior to
such Transaction (including, on a pro rata basis, the cash,
securities or property received by holders of Common Stock in any
tender or exchange offer that is a step in such Transaction). In
case securities or property other than Common Stock shall be
issuable or deliverable upon conversion as aforesaid, then all
reference in this paragraph H shall be deemed to apply, so far as
appropriate and as nearly as may be, to such other securities or
property.
I. Upon any adjustment of the conversion ratio then in effect and
any increase or decrease in the number of shares of Common Stock
issuable upon the operation of the conversion set forth in
Article VIII, then, and in each such case, the Corporation shall
promptly deliver to the registered holders of the Series B
Preferred and Common Stock, a certificate signed by the President
or a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the
Corporation setting forth in reasonable detail the event
requiring the adjustment and the method by which such adjustment
was calculated and specifying the conversion ratio then in effect
following such adjustment and the increased or decreased number
of shares issuable upon the conversion set forth in this Article
VIII.
IX. ADDITIONAL DEFINITIONS
For the purposes of this Certificate of Designations of Series B
Preferred Stock, the following terms shall have the meanings indicated:
"Accrual Period" means the end of the first quarterly period
following the Second Anniversary Date.
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"Beneficially Own" with respect to any securities means having
"beneficial ownership" of such securities (as determined pursuant to Rule 13d-3
under the Exchange Act as in effect on the date hereof, except that a Person
shall be deemed to Beneficially Own all such securities that such Person has the
right to acquire whether such right is exercisable immediately or after the
passage of time). The terms "Beneficial Ownership" and "Beneficial Owner" have
correlative meanings.
"Business Day" means any day, other than a Saturday, Sunday or a
day on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Bylaws" means the Bylaws of the Corporation, as amended.
"Current Market Price", when used with reference to shares of
Common Stock or other securities on any date, shall mean the closing price per
share of Common Stock or such other securities on such date and, when used with
reference to shares of Common Stock or other securities for any period shall
mean the average of the daily closing prices per share of Common Stock or such
other securities for such period. The closing price for each day shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Common Stock or such other securities are not listed or admitted to
trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Common Stock or such
other securities are listed or admitted to trading or, if the Common Stock is
not listed or admitted to trading on any national securities exchange, the last
quoted sale price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. National Market System or such other
securities are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Common Stock or such other securities selected by the Board of Directors
of the Corporation. If the Common Stock or such other securities are not
publicly held or so listed or publicly traded, "Current Market Price" shall mean
the Fair Market Value per share of Common Stock or of such other securities as
determined in good faith by the Board of Directors of the Corporation based on
an opinion of an independent investment banking firm with an established
national reputation as a valuer of securities, which opinion may be based on
such assumption as such firm shall deem to be necessary and appropriate.
"Equity Securities" of any Person means any and all common stock,
preferred stock and any other class of capital stock of, and any partnership or
limited liability company interests of such Person or any other similar
interests of any Person that is not a corporation, partnership or limited
liability company.
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder, from time to
time.
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"Fair Market Value" shall mean the amount which a willing buyer
would pay a willing seller in an arm's-length transaction.
"Formula Number" shall mean one thousand (1,000) prior to
consummation of the Recapitalization, provided, however, that if at any time
prior to the consummation of the Recapitalization, the Corporation shall (i)
declare or pay any dividend or make any distribution on the Common Stock,
payable in shares of Common Stock; (ii) subdivide (by a stock split or
otherwise) the outstanding shares of Common Stock into a larger number of shares
of Common Stock; or (iii) combine (by a reverse stock split or otherwise) the
outstanding shares of Common Stock into a smaller number of shares of Common
Stock, then in each such case the Formula Number in effect immediately prior to
such event shall be adjusted to a number determined by multiplying the Formula
Number then in effect by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event (and rounding the result to the
nearest whole number); and provided further, that, if prior to the consummation
of the Recapitalization the Corporation shall issue any shares of its capital
stock in a merger, reclassification, or change of the outstanding shares of
Common Stock, then in each such event the Formula Number shall be appropriately
adjusted to reflect such merger, reclassification, or change so that each share
of Series B Preferred Stock continues to be the economic equivalent of a Formula
Number of shares of Common Stock immediately prior to such merger,
reclassification, or change.
"Group" has the meaning set forth in Rule 13d-5 under the
Exchange Act.
"Issue Date" shall mean the first date on which shares of Series
B Preferred Stock are issued.
"Person" means any individual, corporation, company, association,
partnership, joint venture, trust or unincorporated organization, or a
government or any agency or political subdivision thereof.
"Post-Recapitalization Stated Value" shall be equal to $1.00.
"Recapitalization" means the amendment of the Corporation's
Certificate of Incorporation to increase the authorized shares of Common Stock
from 50,000,000 to 400,000,000, and the authorized shares of Preferred Stock
from 1,000,000 to 200,000,000, and the subsequent one thousand-for-one split of
Series B Preferred Stock and Series C Preferred Stock.
"Redemption Price" of a share of Class B Preferred Stock shall
mean the sum of (a) the dividends, if any, accumulated or deemed to have
accumulated thereon to the Optional Redemption Date, whether or not such
dividends are declared plus (b) either (i) the Initial Stated Value thereof (if
the Recapitalization has not been consummated prior to June 30, 1999) or (ii)
the Post-Recapitalization Stated Value thereof (if the Recapitalization has been
consummated prior to June 30, 1999), in each case subject to adjustment for
splits, reclassifications, recombinations or other similar events.
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"Rights" shall mean any rights to purchase securities of the
Corporation issued pursuant to any Rights Agreement.
"Rights Agreement" shall mean the Rights Agreement, dated as of
June 21, 1996, between the Company and Wells Fargo Bank as rights agent, and all
amendments, supplements and replacements thereof.
"Second Anniversary Date" means the second anniversary of the
Issue Date.
"Subsidiary" means, as to any Person, any other Person of which
more than 50% of the shares of the Voting Securities or other voting interests
are owned or controlled, or the ability to select or elect 50% or more of the
directors or similar managers is held, directly or indirectly, by such first
Person and one or more of its Subsidiaries.
"Trading Day" means a day on which the principal national
securities exchange on which the Common Stock is listed or admitted to trading
is open for the transaction of business or, if the Common Stock is not listed or
admitted to trading on any national securities exchange a Business Day.
"Voting Securities" means, (i) with respect to the Company, the
Equity Securities of the Company entitled to vote generally for the election of
directors of the Company, and (ii) with respect to any other Person, any
securities of or interests in such Person entitled to vote generally for the
election of directors or any similar managing person of such Person.
X. MISCELLANEOUS
A. NOTICES. Any notice referred to herein shall be in writing
and, unless first-class mail shall be specifically permitted for such notices
under the terms hereof, shall be deemed to have been given upon personal
delivery thereof, upon transmittal of such notice by telecopy (with confirmation
of receipt by telecopy or telex) or five days after transmittal by registered or
certified mail, postage prepaid, addressed as follows:
(i) if to the Corporation, to its office at 2 California
Plaza, 350 South Grand Avenue, Los Angeles, California
90071 (Attention: General Counsel) or to the transfer
agent for the Series B Preferred Stock;
(ii) if to a holder of the Series B Preferred Stock, to such
holder at the address of such holder as listed in the
stock record books of the Corporation (which may
include the records of any transfer agent for the
Series B Preferred Stock); or
(iii) to such other address as the Corporation or such
holder, as the case may be, shall have designated by
notice similarly given.
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B. REACQUIRED SHARES. Any shares of Series B Preferred Stock
redeemed, purchased or otherwise acquired by the Corporation, directly or
indirectly, in any manner whatsoever shall be retired and canceled promptly
after the acquisition thereof (and shall not be deemed to be outstanding for any
purpose) and, if necessary to provide for the lawful redemption or purchase of
such shares, the capital represented by such shares shall be reduced in
accordance with the Delaware General Corporation Law. All such shares of Series
B Preferred Stock shall upon their cancellation and upon the filing of an
appropriate certificate with the Secretary of State of the State of Delaware,
become authorized but unissued shares of Preferred Stock, par value $0.001 per
share, of the Corporation and may be reissued as part of another series of
Preferred Stock, par value $0.001 per share, of the Corporation subject to the
conditions or restrictions on issuance set forth herein.
C. ENFORCEMENT. Any registered holder of shares of Series B
Preferred Stock may proceed to protect and enforce its rights and the rights of
such holders by any available remedy by proceeding at law or in equity to
protect and enforce any such rights, whether for the specific enforcement of any
provision in this Certificate of Designations or in aid of the exercise of any
power granted herein, or to enforce any other proper remedy.
D. TRANSFER TAXES. Except as otherwise agreed upon pursuant to
the terms of this Certificate of Designations, the Corporation shall pay any and
all documentary, stamp or similar issue or transfer taxes and other governmental
charges that may be imposed under the laws of the United States of America or
any political subdivision or taxing authority thereof or therein in respect of
any issue or delivery of Common Stock on conversion of, or other securities or
property issued on account of, shares of Series B Preferred Stock pursuant
hereto or certificates representing such shares or securities. The Corporation
shall not, however, be required to pay any such tax or other charge that may be
imposed in connection with any transfer involved in the issue or transfer and
delivery of any certificate for Common Stock or other securities or property in
a name other than that in which the shares of Series B Preferred Stock so
exchanged, or on account of which such securities were issued, were registered
and no such issue or delivery shall be made unless and until the Person
requesting such issue has paid to the Corporation the amount of any such tax or
has established to the satisfaction of the Corporation that such tax has been
paid or is not payable.
E. TRANSFER AGENT. The Corporation may appoint, and from time to
time discharge and change, a transfer agent for the Series B Preferred Stock.
Upon any such appointment or discharge of a transfer agent, the Corporation
shall send notice thereof by first-class mail, postage prepaid, to each holder
of record of shares of Series B Preferred Stock.
F. RECORD DATES. In the event that the Series B Preferred Stock
shall be registered under either the Securities Act of 1933, as amended, or the
Exchange Act, the Corporation shall establish appropriate record dates with
respect to payments and other actions to be made with respect to the Series B
Preferred Stock.
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IN WITNESS WHEREOF, this Certificate of Designations is executed
on behalf of the Corporation by its Executive vice President, General Counsel
and Secretary and attested by its Assistant Secretary, this 10th day of February
, 1999.
AAMES FINANCIAL CORPORATION
By: /s/ Barbara S. Polsky
---------------------------------
Name: Barbara S. Polsky
Title: Executive Vice President, General
Counsel and Secretary
[Corporate Seal]
ATTEST:
/s/ John F. Madden, Jr.
- - ---------------------------------
John F. Madden Jr.
Assistant Secretary
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- --------------------------------------------------------------------------------
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
AAMES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
AAMES FINANCIAL CORPORATION, a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies that the following resolutions were adopted by the Board of
Directors of the Corporation (the "Board of Directors") pursuant to authority of
the Board of Directors as required by Section 151 of the Delaware General
Corporation Law:
RESOLVED, that pursuant to the authority granted to and vested in
the Board of Directors in accordance with the provisions of the Certificate of
Incorporation of the Corporation, as amended (the "Certificate of
Incorporation"), the Board of Directors hereby creates a series of the
Corporation's previously authorized preferred stock, par value $0.001 per share
(the "Preferred Stock"), and hereby states the designation and number thereof,
and fixes the voting powers, preferences and relative, participating, optional
and other special rights, and the qualifications, limitations and restrictions
thereof, as follows:
SERIES C CONVERTIBLE PREFERRED STOCK:
I. DESIGNATION AND AMOUNT
The designation of this series of shares shall be "Series C
Convertible Preferred Stock" (the "Series C Preferred Stock") par value $0.001
per share; the initial stated value per share shall be $1,000.00 (the "Initial
Stated Value"); and the number of shares constituting such series shall be
100,000. The number of shares of the Series C Preferred Stock may be decreased
from time to time by a resolution or resolutions of the Board of Directors;
provided, however, that such number shall not be decreased below the aggregate
number of shares of the Series C Preferred Stock then outstanding.
II. RANK
A. With respect to dividends, the Series C Preferred Stock shall
rank (i) senior to each other class or series of Preferred Stock, except for the
Series B Convertible Preferred Stock, par value $0.001 per share, of the
Corporation (the "Series B Preferred Stock"); (ii) on a parity with the Series B
Preferred Stock; and (iii) senior to the Corporation's Common Stock, par value
$.001 per share (the "Common Stock"), and, except as specified above, all other
classes and series of capital stock of the Corporation hereafter issued by the
Corporation. With respect to dividends, all equity securities of the Corporation
to which the Series C Preferred Stock ranks senior, including the Common Stock,
are collectively referred to herein as the
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"Junior Dividend Securities"; all equity securities of the Corporation with
which the Series C Preferred Stock ranks on a parity, including the Series B
Preferred Stock, are collectively referred to herein as the "Parity Dividend
Securities"; and all equity securities of the Corporation (other than
convertible debt securities) to which the Series C Preferred Stock ranks
junior, with respect to dividends, are collectively referred to herein as the
"Senior Dividend Securities."
B. With respect to the distribution of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the Series C Preferred Stock shall rank (i) senior to each other class or series
of Preferred Stock, except for the Series B Preferred Stock; (ii) on a parity
with the Series B Preferred Stock; and (iii) senior to the Common Stock, and,
except as specified above, all other classes and series of capital stock of the
Corporation hereafter issued by the Corporation. With respect to the
distribution of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, all equity securities of the
Corporation to which the Series C Preferred Stock ranks senior, including the
Common Stock, are collectively referred to herein as "Junior Liquidation
Securities"; all equity securities of the Corporation (other than convertible
debt securities) to which the Series C Preferred Stock ranks on parity,
including the Series B Preferred Stock, are collectively referred to herein as
"Parity Liquidation Securities"; and all equity securities of the Corporation to
which the Series C Preferred Stock ranks junior are collectively referred to
herein as "Senior Liquidation Securities."
C. The Series C Preferred Stock shall be subject to the creation
of Junior Dividend Securities and Junior Liquidation Securities (collectively,
"Junior Securities"), but no Parity Dividend Securities or Parity Liquidation
Securities (collectively, "Parity Securities") (other than the Series B
Preferred Stock) or Senior Dividend Securities or Senior Liquidation Securities
(collectively, "Senior Securities") shall be created except in accordance with
the terms hereof.
III. DIVIDENDS
A. DIVIDENDS. Subject to the terms of paragraph D below, shares
of Series C Preferred Stock shall accumulate dividends at a rate of 6.5% per
annum (the "Dividend Rate"), which dividends shall be paid quarterly in cash, in
four equal quarterly installments on the last day of March, June, September and
December of each year, or if any such date is not a Business Day, the Business
Day next preceding such day (each such date, regardless of whether any dividends
have been paid or declared and set aside for payment on such date, a "Dividend
Payment Date"), to holders of record (the "Registered Holders") as they appear
on the stock record books of the Corporation on the fifteenth day prior to the
relevant Dividend Payment Date; provided, however, that during the Accrual
Period (as defined in Article IX hereof) the Corporation shall have the option
to accrue such dividends, which dividends, to the extent so accrued, shall
compound quarterly. Prior to the consummation of the Recapitalization, dividends
shall accrue and accumulate on the Initial Stated Value of each share of Series
B Preferred Stock. Following the consummation of the Recapitalization, dividends
shall accrue and accumulate on the Post-Recapitalization Stated Value of each
share of Series B Preferred Stock. Dividends shall be paid only when, as and if
declared by the Board of Directors out of funds at the time
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legally available for the payment of dividends. Dividends shall begin to
accumulate on outstanding shares of Series C Preferred Stock from the date of
issuance and shall be deemed to accumulate from day to day whether or not earned
or declared until paid. Dividends shall accumulate on the basis of a 360-day
year consisting of twelve 30-day months (four 90-day quarters) and the actual
number of days elapsed in the period for which payable.
B. ACCUMULATION. Dividends on the Series C Preferred Stock shall
be cumulative, and from and after (i) any Dividend Payment Date on which any
dividend that has accumulated or been deemed to have accumulated through such
date has not been paid in full (other than by reason of the election of the
Corporation to accrue dividends during the Accrual Period); or (ii) any payment
date set for a redemption on which such redemption payment has not been paid in
full, additional dividends shall accumulate in respect of the amount of such
unpaid dividends or unpaid redemption payment (the "Arrearage") at 125% of the
stated dividend rate (or such lesser rate as may be the maximum rate that is
then permitted by applicable law). Such additional dividends in respect of any
Arrearage shall be deemed to accumulate from day to day whether or not earned or
declared until the Arrearage is paid, shall be calculated as of such successive
Dividend Payment Date, and shall constitute an additional Arrearage from and
after any Dividend Payment Date to the extent not paid on such Dividend Payment
Date. References in any Article herein to dividends that have accumulated or
that have been deemed to have accumulated with respect to the Series C Preferred
Stock shall include the amount, if any, of any Arrearage together with any
dividends accumulated or deemed to have accumulated on such Arrearage pursuant
to the immediately preceding two sentences. Additional dividends in respect of
any Arrearage may be declared and paid at any time, in whole or in part, without
reference to any regular Dividend Payment Date, to Registered Holders as they
appear on the stock record books of the Corporation on such record date as may
be fixed by the Board of Directors (which record date shall be no less than 10
days prior to the corresponding payment date). Dividends in respect of any
Arrearage shall be paid in cash.
C. METHOD OF PAYMENT. Dividends paid on the shares of Series C
Preferred Stock in an amount less than the total amount of such dividends at the
time accumulated and payable on all outstanding shares of Series C Preferred
Stock shall be allocated pro rata on a share-by-share basis among all such
shares then outstanding. After the Second Anniversary Date, dividends that are
declared and paid in an amount less than the full amount of dividends
accumulated on the Series C Preferred Stock (and on any Arrearage) shall be
applied first to the earliest dividend which has not theretofore been paid. All
cash payments of dividends on the shares of Series C Preferred Stock shall be
made in such coin or currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts.
D. SPECIAL DIVIDEND RIGHTS.
1. In addition to the dividend rights set forth in paragraph A
above, prior to the consummation of the Recapitalization, the holders of shares
of Series C Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for such
purpose, cash dividends in an amount per whole share (rounded to the nearest
cent) equal to the Formula Number then in effect times the aggregate per share
amount of all
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cash dividends declared or paid on the Common Stock. If, prior to the
consummation of the Recapitalization, the Corporation shall pay any dividend or
make any distribution on the Common Stock payable in assets, securities or other
forms of non-cash consideration, then, in each such case, the Corporation shall
simultaneously pay or make on each whole outstanding share of the Series C
Preferred Stock a dividend or distribution in like kind equal to the Formula
Number then in effect times such dividend or distribution on each share of the
Common Stock. The dividends and distributions on the Series C Preferred Stock
pursuant to this paragraph D are hereinafter referred to as "Participating
Dividends." The Corporation shall declare each Participating Dividend
immediately prior to or at the same time it declares any cash or non-cash
dividend or distribution on the Common Stock in respect of which a Participating
Dividend is required to be paid. No cash or non-cash dividend or distribution on
the Common Stock in respect of which a Participating Dividend is required shall
be paid or set aside for payment on the Common Stock unless a Participation
Dividend in respect of such dividend shall be have been paid. Nothing contained
in this paragraph D shall obligate the Company to declare or pay any dividend or
other distribution on the Common Stock or (except pursuant to paragraph A of
this Article III or in connection with a dividend or distribution on the Common
Stock as provided in this paragraph D) the Series B Preferred Stock.
2. If the Recapitalization is not consummated prior to June 30,
1999, the Dividend Rate shall be deemed to be 15% per annum during the period
commencing on such date and ending on the date the Recapitalization is
consummated.
IV. LIQUIDATION PREFERENCE
A. PRIOR TO THE RECAPITALIZATION. In the event of a liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
occurring prior to the consummation of the Recapitalization, the holders of
then-outstanding shares of Series C Preferred Stock shall be entitled to receive
out of the assets of the Corporation, whether such assets are capital or surplus
of any nature, an amount per share equal to the sum of (i) the dividends, if
any, accumulated or deemed to have accumulated thereon, to the date of final
distribution to such holders, whether or not such dividends are declared; and
(ii) the Initial Stated Value thereof, before any payment shall be made or any
assets distributed to the holders of any Junior Liquidation Securities (the
"Initial Preferred Distribution"). After the Initial Preferred Distribution has
been made, the holders of Series C Preferred Stock shall be entitled to share
pro rata with the holders of Common Stock in the distribution of any remaining
assets of the Corporation on the basis of each whole outstanding share of the
Series C Preferred Stock receiving an amount equal to the Formula Number then in
effect times such distribution on each share of the Common Stock. The
distributions on the Series C Preferred Stock pursuant to the immediately
preceding sentence of this paragraph A are hereinafter referred to as
"Participating Liquidation Distributions." No distribution on the Common Stock
in respect of which a Participating Liquidation Distribution is required shall
be paid or set aside for payment on the Common Stock unless a Participating
Liquidation Distribution in respect of such distribution is concurrently paid.
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<PAGE>
B. AFTER THE RECAPITALIZATION. Subsequent to the consummation of
the Recapitalization, the holders of the outstanding shares of Series C
Preferred Stock shall be entitled to receive out of the assets of the
Corporation, whether such assets are capital or surplus of any nature, an amount
per share equal to the sum of (i) the dividends, if any, accumulated or deemed
to have accumulated thereon to the date of final distribution to such holders,
whether or not such dividends are declared; and (ii) the Post-Recapitalization
Stated Value thereof, before any payment shall be made or any assets distributed
to the holders of any Junior Liquidation Securities. After any such payment in
full after the consummation of the Recapitalization, the holders of Series C
Preferred Stock shall not, as such, be entitled to any further participation in
any distribution of assets of the Corporation.
C. PARITY SECURITIES. All the assets of the Corporation available
for distribution to stockholders after the liquidation preferences of any Senior
Liquidation Securities shall be distributed ratably (in proportion to the full
distributable amounts to which holders of Series C Preferred Stock and Parity
Liquidation Securities, if any, are respectively entitled upon such dissolution,
liquidation or winding up) among the holders of the then-outstanding shares of
Series C Preferred Stock and Parity Liquidation Securities, if any, when such
assets are not sufficient to pay in full the aggregate amounts payable thereon.
D. MERGER NOT A LIQUIDATION. Neither a consolidation or merger of
the Corporation with or into any other Person or Persons, nor a sale,
conveyance, lease, exchange or transfer of all or part of the Corporation's
assets for cash, securities or other property to a Person or Persons shall be
deemed to be a liquidation, dissolution or winding up of the Corporation for
purposes of this Article IV, but the holders of shares of Series C Preferred
Stock shall nevertheless be entitled from and after any such consolidation,
merger or sale, conveyance, lease, exchange or transfer of all or part of the
Corporation's assets to the rights provided by this Article IV following any
such transaction. Notice of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, stating the payment date or dates
when, and the place or places where, the amounts distributable to each holder of
shares of Series C Preferred Stock in such circumstances shall be payable, shall
be given by first-class mail, postage prepaid, mailed not less than 30 days
prior to any payment date stated therein, to holders of record as they appear on
the stock record books of the Corporation as of the date such notices are first
mailed.
V. REDEMPTION
A. INTENTIONALLY OMITTED
B. OPTIONAL REDEMPTION. Commencing on the earlier to occur of (x)
the tenth anniversary of the Issue Date and (y) the date on which fewer than 25%
of the shares of Series C Preferred Stock issued on the Issue Date remain
outstanding, and at all times thereafter, the Corporation may, at its option,
redeem all (but not less than all) outstanding shares of Series C Preferred
Stock on a date specified by the Corporation (the "Optional Redemption Date") by
paying the Redemption Price therefor in cash out funds legally available for
such purpose.
C. NOTICE AND REDEMPTION PROCEDURES. Notice of the redemption of
shares of Series C Preferred Stock pursuant to paragraph B of this Article V (a
"Notice of Redemption")
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shall be sent to the holders of record of the shares of Series C Preferred Stock
to be redeemed by first class mail, postage prepaid, at each such holder's
address as it appears on the stock record books of the Corporation not more than
120 nor fewer than 90 days prior to the Optional Redemption Date, which date
shall be set forth in such notice (the "Redemption Date"); provided that failure
to give such Notice of Redemption to any holder, or any defect in such Notice of
Redemption to any holder shall not affect the validity of the proceedings for
the redemption of any shares of Series C Preferred Stock held by any other
holder. In order to facilitate the redemption of shares of Series C Preferred
Stock, the Board of Directors may fix a record date for the determination of the
holders of shares of Series C Preferred Stock to be redeemed not more than 30
days prior to the date the Notice of Redemption is mailed. On or after the
Optional Redemption Date, each holder of the shares called for redemption shall
surrender the certificate evidencing such shares to the Corporation at the place
designated in such notice and shall thereupon be entitled to receive payment of
the Redemption Price for such shares. From and after the Optional Redemption
Date, all dividends on shares of Series C Preferred Stock shall cease to
accumulate and all rights of the holders thereof as holders of Series C
Preferred Stock shall cease and terminate, except to the extent the Corporation
shall default in payment thereof on the Optional Redemption Date.
D. DEPOSIT OF FUNDS. The Corporation shall, on or prior to the
Optional Redemption Date, pursuant to paragraph C of this Article V, deposit
with its transfer agent or other redemption agent in the Borough of Manhattan,
The City of New York having a capital and surplus of at least $500,000,000
selected by the Board of Directors, as a trust fund for the benefit of the
holders of the shares of Series C Preferred Stock to be redeemed, cash that is
sufficient in amount to redeem the shares to be redeemed in accordance with the
Notice of Redemption, with irrevocable instructions and authority to such
transfer agent or other redemption agent to pay to the respective holders of
such shares, as evidenced by a list of such holders certified by an officer of
the Corporation, the Redemption Price upon surrender of their respective share
certificates. Such deposit shall be deemed to constitute full payment of the
Redemption Price for such shares to the holders, and from and after the date of
such deposit, all rights of the holders of the shares of Series C Preferred
Stock that are to be redeemed as stockholders of the Corporation with respect to
such shares, except the right to receive the Redemption Price upon the surrender
of their respective certificates, shall cease and terminate. No dividends shall
accumulate on any shares of Series C Preferred Stock after the Optional
Redemption Date, for such shares (unless the Corporation shall fail to deposit
cash sufficient to redeem all such shares). In case holders of any shares of
Series C Preferred Stock called for redemption shall not, within two years after
such deposit, claim the cash deposited for redemption thereof, such transfer
agent or other redemption agent shall, upon demand, pay over to the Corporation
the balance so deposited. Thereupon, such transfer agent or other redemption
agent shall be relieved of all responsibility to the holders thereof and the
sole right of such holders, with respect to shares to be redeemed, shall be to
receive the Redemption Price as general creditors of the Corporation. Any
interest accrued on any funds so deposited shall belong to the Corporation, and
shall be paid to it from time to time on demand.
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<PAGE>
VI. RESTRICTIONS ON DIVIDENDS
So long as any shares of the Series C Preferred Stock are
outstanding, the Board of Directors shall not declare, and the Corporation shall
not pay or set apart for payment any dividend on any Junior Securities or make
any payment on account of, or set apart for payment money for a sinking or other
similar fund for, the repurchase, redemption or other retirement of, any Junior
Securities or Parity Securities or any warrants, rights or options exercisable
for or convertible into any Junior Securities or Parity Securities (other than
the repurchase, redemption or other retirement of debentures or other debt
securities that are convertible or exchangeable into any Junior Securities or
Parity Securities), or make any distribution in respect of the Junior
Securities, either directly or indirectly, and whether in cash, obligations or
shares of the Corporation or other property (other than distributions or
dividends in Junior Securities to the holders of Junior Securities), and shall
not permit any corporation or other entity directly or indirectly controlled by
the Corporation to purchase or redeem any Junior Securities or Parity Securities
or any warrants, rights, calls or options exercisable for or convertible into
any Junior Securities or Parity Securities (other than the repurchase,
redemption or other retirement of debentures or other debt securities that are
convertible or exchangeable into any Junior Securities or Parity Securities or
the repurchase, redemption or other retirement of Junior Securities or Parity
Securities in exchange for Junior Securities or Parity Securities) unless prior
to or concurrently with such declaration, payment, setting apart for payment,
repurchase, redemption or other retirement or distribution, as the case may be,
all accumulated and unpaid dividends on shares of the Series C Preferred Stock
not paid on the dates provided for in paragraph A of Article III hereof
(including Arrearages and accumulated dividends thereon) shall have been paid,
except that when dividends are not paid in full as aforesaid upon the shares of
Series C Preferred Stock, all dividends declared on the Series C Preferred Stock
and any series of Parity Dividend Securities shall be declared and paid pro rata
so that the amount of dividends so declared and paid on Series C Preferred Stock
and such series of Parity Dividend Securities shall in all cases bear to each
other the same ratio that accumulated dividends (including interest accrued on
or additional dividends accumulated in respect of such accumulated dividends) on
the shares of Series C Preferred Stock and such Parity Dividend Securities bear
to each other.
VII. VOTING RIGHTS
A. On or prior to the consummation of the Recapitalization, the
holders of Series C Preferred Stock shall be entitled to one thousand (1,000)
votes per share of Series C Preferred Stock at each meeting of stockholders of
the Corporation with respect to any and all matters presented to the
stockholders of the Corporation for their action and consideration, other than
the election of directors. After the consummation of the Recapitalization, the
holders of Series C Preferred Stock shall be entitled to the number of votes per
share of Series C Preferred Stock equal to the number of shares of Common Stock
for which such share of Series C Preferred Stock is then convertible pursuant to
Article VIII at each meeting of stockholders of the Corporation with respect to
any and all matters presented to the stockholders of the Corporation for their
action and consideration, other than the election of directors.
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B. So long as any shares of the Series C Preferred Stock are
outstanding, (i) each share of Series C Preferred Stock shall entitle the holder
thereof to vote on all matters voted on by holders of Common Stock, other than
the election of directors; and (ii) the shares of Series C Preferred Stock shall
vote together with shares of Common Stock and shares of Series B Preferred Stock
as a single class.
C. Without the written consent (if action by written consent is
permitted) or affirmative vote of the holders of a majority of the outstanding
shares of Series C Preferred Stock and Series B Preferred Stock, voting together
as a single class, the Corporation shall not (i) authorize, create or issue, or
increase the authorized amount of, (x) any Senior Securities or Parity
Securities or (y) any class or series of capital stock or any security
convertible into or exercisable for any class or series of capital stock,
redeemable mandatorily or redeemable at the option of the holder thereof or (ii)
enter into any Transaction (as defined in paragraph H of Article VIII). Such
vote or consent shall be taken in accordance with the procedures specified in
paragraph E below.
D. Without the written consent (if action by written consent is
permitted) or affirmative vote of the holders of at least a majority of the
outstanding shares of Series C Preferred Stock and Series B Preferred Stock,
voting together as a single class, the Corporation shall not (i) amend, alter or
repeal any provision of the Certificate of Incorporation or the Bylaws, if the
amendment, alteration or repeal alters or changes the powers, preferences or
special rights of the Series C Preferred Stock so as to affect them materially
and adversely or (ii) authorize or take any other action if such action alters
or changes any of the rights of the Series C Preferred Stock in any respect or
otherwise would be inconsistent with the provisions of this Certificate of
Designations and the holders of any class or series of the capital stock of the
Corporation is entitled to vote thereon. Such vote or consent shall be taken in
accordance with the procedures specified in paragraph E below.
E. The foregoing rights of holders of shares of Series C
Preferred Stock to take any actions as provided in this Article VII may be
exercised at any annual meeting of stockholders or at a special meeting of
stockholders held for such purpose as hereinafter provided or at any adjournment
thereof, or by the written consent, delivered to the Secretary of the
Corporation, of the holders of the minimum number of shares required to take
such action, if action by written consent of stockholders of the Corporation is
then permitted.
The Chairman of the Board of the Corporation may call, and upon
written request of holders of record of 35% of the outstanding shares of Series
C Preferred Stock and Series B Preferred Stock, addressed to the Secretary of
the Corporation at the principal office of the Corporation shall call, a special
meeting of the holders of shares entitled to vote as provided herein. Such
meeting shall be held within 30 days after delivery of such request to the
Secretary, at the place and upon the notice provided by law and in the By-laws
of the Corporation for the holding of meetings of stockholders.
At each meeting of stockholders at which the holders of shares of
Series C Preferred Stock shall have the right to take any action, the presence
in person or by proxy of the
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holders of record of one-third of the total number of shares of Series C
Preferred Stock and Series B Preferred Stock then outstanding and entitled to
vote on the matter shall be necessary and sufficient to constitute a quorum. At
any such meeting or at any adjournment thereof:
(A) the absence of a quorum of the holders of shares of Series C
Preferred Stock shall not prevent the election of directors to be
elected by the holders of shares of Series B Preferred Stock or the
taking of any action as provided in this Article VII; and
(B) in the absence of a quorum of the holders of shares of Series
C Preferred Stock and Series B Preferred Stock, a majority of the
holders of such shares present in person or by proxy shall have the
power to adjourn the meeting as to the actions to be taken by the
holders of shares of Series C Preferred Stock and Series B Preferred
Stock, from time to time and place to place without notice other than
announcement at the meeting until a quorum shall be present.
For taking of any action as provided in this Article VII by the
holders of shares of Series C Preferred Stock and Series B Preferred Stock, each
such holder shall have one vote for each share of such stock standing in his
name on the transfer books of the Corporation as of any record dated fixed for
such purpose or, if no such date be fixed, at the close of business on the
Business Day next preceding the day on which notice is given, or if notice if
waived, at the close of business on the Business Day next preceding the day on
which the meeting is held.
F. The Corporation shall not enter into any agreement or issue
any security that prohibits, conflicts or is inconsistent with, or would be
breached by, the Corporation's performance of its obligations hereunder.
VIII. CONVERSION
The holders of the Series C Preferred Stock shall have conversion
rights as follows:
A. Each share of Series C Preferred Stock shall be convertible at
the direction of, and by notice to the Corporation from, (i) the
holder thereof or (ii) the holders of a majority of the
outstanding shares of Series C Preferred Stock, at any time, at
the office of the Corporation or any transfer agent for such
Series, into one thousand (1,000) fully paid and nonassessable
shares of Common Stock subject (x) to adjustment from time to
time as provided below (as so adjusted, the "conversion ratio")
and (y) (prior to the consummation of the Recapitalization) to
limitations resulting from the available number of shares of
Common Stock which may be reserved for issuance upon such
conversion, provided, that any conversion pursuant to clause (ii)
above of less than all of the outstanding shares of Series C
Preferred Stock shall be on a pro rata basis amongst all holders
of Series C Preferred Stock. After consummation of the
Recapitalization, the number "1,000" in this paragraph shall be
"1", subject to adjustment as provided in paragraph VIII.G.
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B. If a holder of Series C Preferred Stock gives notice (an
"Optional Conversion Notice") of conversion under paragraph A
above, such holder shall surrender with such Optional Conversion
Notice the duly endorsed certificate or certificates for the
Series C Preferred Stock being converted, at the office of the
Corporation or of any transfer agent for such Series, and shall
state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. If the
holders of a majority of the outstanding shares of Series C
Preferred Stock give notice of conversion under paragraph A
above, the Corporation shall notify all other record holders of
Series C Preferred Stock (a "Mandatory Conversion Notice").
Following receipt of a Mandatory Conversion Notice, the holders
of Series C Preferred Stock shall surrender the certificate or
certificates therefor duly endorsed, at the office of the
Corporation or of any transfer agent for such Series, and shall
state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. The
Corporation shall, as soon as practicable after the surrender of
a Series C Preferred Stock certificate or certificates pursuant
to an Optional Conversion Notice or Mandatory Conversion Notice,
issue and deliver at such office to such holder, or to the
nominee or nominees of such holder, a certificate or certificates
for the number of shares of Common Stock to which such holder
shall be entitled as aforesaid. Such conversion shall be deemed
to have been made immediately prior to the close of business on
the date of such Optional Conversion Notice or Mandatory
Conversion Notice, as applicable, and the person or persons
entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the recordholder
or holders of such shares of Common Stock as of such date. The
issuance of certificates or shares of Common Stock upon
conversion of shares of Series C Preferred Stock shall be made
without charge for any issue, stamp or other similar tax in
respect of such issuance.
C. No fractional shares shall be issued upon conversion of any
shares of Series C Preferred Stock and the number of shares of
Common Stock to be issued shall be rounded down to the nearest
whole share, and the holder of Series C Preferred Stock shall be
paid in cash for any fractional share.
D. In case at any time or from time to time the Corporation shall
pay any dividend or make any other distribution to the holders of
its Common Stock or other class of securities, or shall offer for
subscription pro rata to the holders of its Common Stock or other
class of securities any additional shares of stock of any class
or any other right, or there shall be any capital reorganization
or reclassification of the Common Stock of the Corporation or
consolidation or merger of the Corporation with or into another
corporation, or any sale or conveyance to another corporation of
the property of the Corporation as an entirety or substantially
as an entirety, or there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Corporation, then,
in any one or more of said cases the Corporation shall give at
least 20 days' prior written notice (the time of mailing of such
notice shall be deemed to be the time of giving thereof) to the
registered holders of the Series C
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Preferred Stock at the addresses of each as shown on the books of
the Corporation maintained by the Transfer Agent thereof of the
date on which (i) the books of the Corporation shall close or a
record shall be taken for such stock dividend, distribution or
subscription rights or (ii) such reorganization,
reclassification, consolidation, merger, sale or conveyance,
dissolution, liquidation or winding up shall take place, as the
case may be, provided that in the case of any Transaction to
which paragraph H applies the Corporation shall give at least 30
days' prior written notice as aforesaid. Such notice shall also
specify the date as of which the holders of the Common Stock of
record shall participate in said dividend, distribution or
subscription rights or shall be entitled to exchange their Common
Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale or
conveyance or participate in such dissolution, liquidation or
winding up, as the case may be. Failure to give such notice shall
not invalidate any action so taken.
E. From and after the Recapitalization, the Corporation shall at all
times reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of Series C Preferred
Stock, such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all
outstanding shares of Series C Preferred Stock, and if at any
time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then
outstanding shares of Series C Preferred Stock, then in addition
to such other remedies as shall be available to the holder of
Series C Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for
such purposes.
F. Any notice required by the provisions of paragraph D to be given
the holders of shares of Series C Preferred Stock shall be deemed
given if sent by facsimile transmission, by telex, or if
deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his, her or its address
appearing on the books of the Corporation.
G. The conversion ratio shall be subject to adjustment from time to
time as follows:
(i) In case the Corporation shall at any time or from time
to time after the Issue Date (A) pay a dividend or make a
distribution, on the outstanding shares of Common Stock in shares
of Common Stock, (B) subdivide the outstanding shares of Common
Stock into a larger number of shares of Common Stock, (C) combine
the outstanding shares of Common Stock into a smaller number of
shares or (D) issue by reclassification of the shares of Common
Stock any shares of capital stock of the Corporation, then, and
in each such case, the conversion ratio in effect immediately
prior to such event or the record date therefor, whichever is
earlier, shall be adjusted so that the holder of any shares of
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<PAGE>
Series C Preferred Stock thereafter surrendered for conversion
shall be entitled to receive the number of shares of Common Stock
or other securities of the Corporation which such holder would
have owned or have been entitled to receive after the happening
of any of the events described above, had such shares of Series C
Preferred Stock been surrendered for conversion immediately prior
to the happening of such event or the record date therefor,
whichever is earlier. An adjustment made pursuant to this clause
(i) shall become effective (x) in the case of any such dividend
or distribution, immediately after the close of business on the
record date for the determination of holders of shares of Common
Stock entitled to receive such dividend or distribution, or (y)
in the case of any such subdivision, reclassification or
combination, at the close of business on the day upon which such
corporate action becomes effective.
(ii) In the case the Corporation shall, after the Issue
Date, issue shares of Common Stock at a price per share, or
securities convertible into or exchangeable for shares of Common
Stock ("Convertible Securities") having a "Conversion Price" (as
defined below) less than the Current Market Price (for a period
of 15 consecutive trading days prior to such date), then, and in
each such case, the conversion ratio shall be adjusted so that
the holder of each share of Series C Preferred Stock shall be
entitled to receive, upon the conversion thereof, the number of
shares of Common Stock determined by multiplying (A) the
applicable conversion ratio on the day immediately prior to such
date by (B) a fraction, the numerator of which shall be the sum
of (1) the number of shares of Common Stock outstanding on the
date on which such shares or Convertible Securities are issued
and (2) the number of additional shares of Common Stock issued,
or into which the Convertible Securities may convert, and the
denominator of which shall be the sum of (x) the number of shares
of Common Stock outstanding on such date and (y) the number of
shares of Common Stock which the aggregate consideration
receivable by the Corporation for the total number of shares of
Common Stock so issued, or the number of shares of Common Stock
which the aggregate of the Conversion Price of such Convertible
Securities so issued, would purchase at such Current Market price
on such date. An adjustment made pursuant to this clause (ii)
shall be made on the next Business Day following the date on
which any such issuance is made and shall be effective
retroactively immediately after the close of business on such
date. For purposes of this clause (ii), the aggregate
consideration receivable by the Corporation in connection with
the issuance of any securities shall be deemed to be the sum of
the aggregate offering price to the public (before deduction of
underwriting discounts or commissions and expenses payable to
third parties), and the "Conversion Price" of any Convertible
Securities is the total amount received or receivable by the
Corporation as consideration for the issue or sale of such
Convertible Securities (before deduction of underwriting
discounts or commissions and expenses payable to third parties)
plus the minimum aggregate amount of additional consideration, if
any, payable to the Corporation upon the conversion, exchange or
exercise of any such Convertible Securities. Neither (A)
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<PAGE>
the issuance of any shares of Common Stock (whether treasury
shares or newly issued shares) pursuant to a dividend or
distribution on, or subdivision, combination or reclassification
of, the outstanding shares of Common Stock requiring an
adjustment in the conversion ratio pursuant to clause (i) of this
paragraph G, or pursuant to any employee benefit plan or program
of the Corporation or pursuant to any option, warrant, right, or
Convertible Security outstanding as of the date hereof
(including, but not limited to, the Rights, the Series B
Preferred Stock, the Series C Preferred Stock and the Warrants)
nor (B) the issuance of shares of Common Stock pursuant thereto
shall be deemed to constitute an issuance of Common Stock or
Convertible Securities by the Corporation to which this clause
(ii) applies. Upon expiration of any Convertible Securities which
shall not have been exercised or converted and for which an
adjustment shall have been made pursuant to this clause (ii), the
Conversion Price computed upon the original issue thereof shall
upon such expiration be recomputed as if the only additional
shares of Common Stock issued were such shares of Common Stock
(if any) actually issued upon exercise of such Convertible
Securities and the consideration received therefor was the
consideration actually received by the Corporation for the issue
of such Convertible Securities (whether or not exercised or
converted) plus the consideration actually received by the
Corporation upon such exercise of conversion.
(iii) In case the Corporation shall at any time or from
time to time after the Issue Date declare, order, pay or make a
dividend or other distribution (including, without limitation,
any distribution of stock or other securities or property or
rights or warrants to subscribe for securities of the Corporation
or any of its Subsidiaries by way of dividend or spin-off), on
its Common Stock, other than (A) regular quarterly dividends
payable in cash in an aggregate amount not to exceed 15% of net
income from continuing operations before extraordinary items of
the Corporation, determined in accordance with generally accepted
accounting principles, during the period (treated as one
accounting period) commencing on July 1, 1998, and ending on the
date such dividend is paid or (B) dividends or distributions of
shares of Common Stock which are referred to in clause (i) of
this paragraph G, then, and in each such case, the conversion
ratio shall be adjusted so that the holder of each share of
Series C Preferred Stock shall be entitled to receive, upon the
conversion thereof, the number of shares of Common Stock
determined by multiplying (1) the applicable conversion ratio on
the day immediately prior to the record date fixed for the
determination of stockholders entitled to receive such dividend
or distribution by (2) a fraction, the numerator of which shall
be the then Current Market Price per share of Common Stock for
the period of 20 Trading Days preceding such record date, and the
denominator of which shall be such Current Market Price per share
of Common Stock for the period of 20 Trading Days preceding such
record date less the Fair Market Value (as defined in Article IX)
per share of Common Stock (as determined in good faith by the
Board of Directors of the Corporation, a certified resolution
with
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<PAGE>
respect to which shall be mailed to each holder of shares of
Series C Preferred Stock) of such dividend or distribution;
provided, however, that in the event of a distribution of shares
of capital stock of a Subsidiary of the Corporation (a
"Spin-Off") made to holders of shares of Common Stock, the
numerator of such fraction shall be the sum of the Current Market
Price per share of Common Stock for the period of 20 Trading Days
preceding the 35th Trading Day after the effective date of such
Spin-Off and the Current Market Price of the number of shares (or
the fraction of a share) of capital stock of the Subsidiary which
is distributed in such Spin-Off in respect of one share of Common
Stock for the period of 20 Trading Days preceding such 35th
Trading Day and the denominator of which shall be the current
market price per share of the Common Stock for the period of 20
Trading Days proceeding such 35th Trading Day. An adjustment made
pursuant to this clause (iii) shall be made upon the opening of
business on the next Business Day following the date on which any
such dividend or distribution is made and shall be effective
retroactively immediately after the close of business on the
record date fixed for the determination of stockholders entitled
to receive such dividend or distribution; provided, however, if
the proviso to the preceding sentence applies, then such
adjustment shall be made and be effective as of such 35th Trading
Day after the effective date of such Spin-Off.
(iv) For purposes of this paragraph G, the number of shares
of Common Stock at any time outstanding shall not include any
shares of Common Stock then owned or held by or for the account
of the Corporation.
(v) The term "dividend", as used in this paragraph G shall
mean a dividend or other distribution upon stock of the
Corporation except pursuant to the Rights Agreement (as defined
in Article IX). Notwithstanding anything in this Article VIII to
the contrary, the conversion ratio shall not be adjusted as a
result of any dividend, distribution or issuance of securities of
the Corporation pursuant to the Rights Agreement.
(vi) Anything in this paragraph G to the contrary
notwithstanding, the Corporation shall not be required to give
effect to any adjustment in the conversion ratio unless and until
the net effect of one or more adjustments (each of which shall be
carried forward), determined as above provided, shall have
resulted in a change of the conversion ratio by at least
one-hundredth of one share of Common Stock, and when the
cumulative net effect of more than one adjustment so determined
shall be to change the conversion ratio by at least one-hundredth
of one share of Common Stock, such change in conversion ratio
shall thereupon be given effect.
(vii) The certificate of any firm of independent public
accountants of recognized standing selected by the Board of
Directors of the Corporation (which may be the firm of
independent public accountants regularly employed by the
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<PAGE>
Corporation) shall be presumptively correct for any computation
made under this paragraph G.
(viii) If the Corporation shall take a record of the
holders of its Common Stock for the purpose of entitling them to
receive a dividend or other distribution, and shall thereafter
and before the distribution to stockholders thereof legally
abandon its plan to pay or deliver such dividend or distribution,
then thereafter no adjustment in the number of shares of Common
Stock issuable upon exercise of the right of conversion granted
by this paragraph G or in the conversion ratio then in effect
shall be required by reason of the taking of such record.
(ix) There shall be no adjustment of the conversion ratio
in case of the issuance of any stock of the Corporation in a
merger, reorganization, acquisition or other similar transaction
except as set forth in paragraph G(i), G(ii) and H of this
Article VIII.
H. In case of any reorganization or reclassification of outstanding
shares of Common Stock (other than a reclassification covered by
paragraph G(i) of this Article VIII), or in case of any
consolidation or merger of the Corporation with or into another
corporation, or in the case of any sale or conveyance to another
corporation of the property of the Corporation as an entirety or
substantially as an entirety (each of the foregoing being
referred to as a "Transaction"), each share of Series C Preferred
Stock then outstanding shall thereafter be convertible into, in
lieu of the Common Stock issuable upon such conversion prior to
consummation of such Transaction, the kind and amount of shares
of stock and other securities and property receivable (including
cash) upon the consummation of such Transaction by a holder of
that number of shares of Common Stock into which one share of
Series C Preferred Stock was convertible immediately prior to
such Transaction (including, on a pro rata basis, the cash,
securities or property received by holders of Common Stock in any
tender or exchange offer that is a step in such Transaction). In
case securities or property other than Common Stock shall be
issuable or deliverable upon conversion as aforesaid, then all
reference in this paragraph H shall be deemed to apply, so far as
appropriate and as nearly as may be, to such other securities or
property.
I. Upon any adjustment of the conversion ratio then in effect and
any increase or decrease in the number of shares of Common Stock
issuable upon the operation of the conversion set forth in
Article VIII, then, and in each such case, the Corporation shall
promptly deliver to the registered holders of the Series C
Preferred and Common Stock, a certificate signed by the President
or a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the
Corporation setting forth in reasonable detail the event
requiring the adjustment and the method by which such adjustment
was calculated and specifying the conversion ratio then in effect
following such adjustment and
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<PAGE>
the increased or decreased number of shares issuable upon the
conversion set forth in this Article VIII.
IX. ADDITIONAL DEFINITIONS
For the purposes of this Certificate of Designations of Series C
Preferred Stock, the following terms shall have the meanings indicated:
"Accrual Period" means the end of the first quarterly period
following the Second Anniversary Date.
"Beneficially Own" with respect to any securities means having
"beneficial ownership" of such securities (as determined pursuant to Rule 13d-3
under the Exchange Act as in effect on the date hereof, except that a Person
shall be deemed to Beneficially Own all such securities that such Person has the
right to acquire whether such right is exercisable immediately or after the
passage of time). The terms "Beneficial Ownership" and "Beneficial Owner" have
correlative meanings.
"Business Day" means any day, other than a Saturday, Sunday or a
day on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Bylaws" means the Bylaws of the Corporation, as amended.
"Current Market Price", when used with reference to shares of
Common Stock or other securities on any date, shall mean the closing price per
share of Common Stock or such other securities on such date and, when used with
reference to shares of Common Stock or other securities for any period shall
mean the average of the daily closing prices per share of Common Stock or such
other securities for such period. The closing price for each day shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Common Stock or such other securities are not listed or admitted to
trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Common Stock or such
other securities are listed or admitted to trading or, if the Common Stock is
not listed or admitted to trading on any national securities exchange, the last
quoted sale price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. National Market System or such other
securities are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Common Stock or such other securities selected by the Board of Directors
of the Corporation. If the Common Stock or such other securities are not
publicly held or so listed or publicly traded, "Current Market Price" shall mean
the Fair Market Value per share of Common Stock or of such other securities as
determined in good faith by the Board of Directors of the
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<PAGE>
Corporation based on an opinion of an independent investment banking firm with
an established national reputation as a valuer of securities, which opinion may
be based on such assumption as such firm shall deem to be necessary and
appropriate.
"Equity Securities" of any Person means any and all common stock,
preferred stock and any other class of capital stock of, and any partnership or
limited liability company interests of such Person or any other similar
interests of any Person that is not a corporation, partnership or limited
liability company.
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder, from time to
time.
"Fair Market Value" shall mean the amount which a willing buyer
would pay a willing seller in an arm's-length transaction.
"Formula Number" shall mean one thousand (1,000) prior to
consummation of the Recapitalization; provided, however, that if at any time
prior to the consummation of the Recapitalization, the Corporation shall (i)
declare or pay any dividend or make any distribution on the Common Stock,
payable in shares of Common Stock; (ii) subdivide (by a stock split or
otherwise) the outstanding shares of Common Stock into a larger number of shares
of Common Stock; or (iii) combine (by a reverse stock split or otherwise) the
outstanding shares of Common Stock into a smaller number of shares of Common
Stock, then in each such case the Formula Number in effect immediately prior to
such event shall be adjusted to a number determined by multiplying the Formula
Number then in effect by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event (and rounding the result to the
nearest whole number); and provided further, that, if prior to the consummation
of the Recapitalization the Corporation shall issue any shares of its capital
stock in a merger, reclassification, or change of the outstanding shares of
Common Stock, then in each such event the Formula Number shall be appropriately
adjusted to reflect such merger, reclassification, or change so that each share
of Series C Preferred Stock continues to be the economic equivalent of a Formula
Number of shares of Common Stock immediately prior to such merger,
reclassification, or change.
"Group" has the meaning set forth in Rule 13d-5 under the
Exchange Act.
"Issue Date" shall mean the first date on which shares of Series
C Preferred Stock are issued. "Person" means any individual, corporation,
company, association, partnership, joint venture, trust or unincorporated
organization, or a government or any agency or political subdivision thereof.
"Post-Recapitalization Stated Value" shall be equal to $1.00.
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"Recapitalization" means the amendment of the Corporation's
Certificate of Incorporation to increase the authorized shares of Common Stock
from 50,000,000 to 400,000,000, and the authorized shares of Preferred Stock
from 1,000,000 to 200,000,000, and the subsequent one thousand-for-one split of
Series C Preferred Stock and Series B Preferred Stock.
"Redemption Price" of a share of Series C Preferred Stock shall
mean the sum of (a) the dividends, if any, accumulated or deemed to have
accumulated thereon to the Optional Redemption Date, whether or not such
dividends are declared plus (b) either (i) the Initial Stated Value thereof (if
the Recapitalization has not been consummated prior to June 30, 1999) or (ii)
the Post-Recapitalization Stated Value thereof (if the Recapitalization has been
consummated prior to June 30, 1999), in each case subject to adjustment for
splits, reclassifications, recombinations or similar events.
"Rights" shall mean any rights to purchase securities of the
Corporation issued pursuant to any Rights Agreement.
"Rights Agreement" shall mean the Rights Agreement, dated as of
June 21, 1996, between the Company and Wells Fargo Bank as rights agent, and all
amendments, supplements and replacements thereof.
"Second Anniversary Date" means the second anniversary of the
Issue Date.
"Subsidiary" means, as to any Person, any other Person of which
more than 50% of the shares of the Voting Securities or other voting interests
are owned or controlled, or the ability to select or elect 50% or more of the
directors or similar managers is held, directly or indirectly, by such first
Person and one or more of its Subsidiaries.
"Trading Day" means a day on which the principal national
securities exchange on which the Common Stock is listed or admitted to trading
is open for the transaction of business or, if the Common Stock is not listed or
admitted to trading on any national securities exchange a Business Day.
"Voting Securities" means, (i) with respect to the Company, the
Equity Securities of the Company entitled to vote generally for the election of
directors of the Company, and (ii) with respect to any other Person, any
securities of or interests in such Person entitled to vote generally for the
election of directors or any similar managing person of such Person.
X. MISCELLANEOUS
A. NOTICES. Any notice referred to herein shall be in writing
and, unless first-class mail shall be specifically permitted for such notices
under the terms hereof, shall be deemed to have been given upon personal
delivery thereof, upon transmittal of such notice by telecopy (with confirmation
of receipt by telecopy or telex) or five days after transmittal by registered or
certified mail, postage prepaid, addressed as follows:
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<PAGE>
(i) if to the Corporation, to its office at 2 California
Plaza, 350 South Grand Avenue, Los Angeles, California
90071 (Attention: General Counsel)
or to the transfer agent for the Series C
Preferred Stock;
(ii) if to a holder of the Series C Preferred Stock, to such
holder at the address of such holder as listed in the
stock record books of the Corporation (which may
include the records of any transfer agent for the
Series C Preferred Stock); or
(iii) to such other address as the Corporation or such
holder, as the case may be, shall have designated by
notice similarly given.
B. REACQUIRED SHARES. Any shares of Series C Preferred Stock
redeemed, purchased or otherwise acquired by the Corporation, directly or
indirectly, in any manner whatsoever shall be retired and canceled promptly
after the acquisition thereof (and shall not be deemed to be outstanding for any
purpose) and, if necessary to provide for the lawful redemption or purchase of
such shares, the capital represented by such shares shall be reduced in
accordance with the Delaware General Corporation Law. All such shares of Series
C Preferred Stock shall upon their cancellation and upon the filing of an
appropriate certificate with the Secretary of State of the State of Delaware,
become authorized but unissued shares of Preferred Stock, par value $0.001 per
share, of the Corporation and may be reissued as part of another series of
Preferred Stock, par value $0.001 per share, of the Corporation subject to the
conditions or restrictions on issuance set forth herein.
C. ENFORCEMENT. Any registered holder of shares of Series C
Preferred Stock may proceed to protect and enforce its rights and the rights of
such holders by any available remedy by proceeding at law or in equity to
protect and enforce any such rights, whether for the specific enforcement of any
provision in this Certificate of Designations or in aid of the exercise of any
power granted herein, or to enforce any other proper remedy.
D. TRANSFER TAXES. Except as otherwise agreed upon pursuant to
the terms of this Certificate of Designations, the Corporation shall pay any and
all documentary, stamp or similar issue or transfer taxes and other governmental
charges that may be imposed under the laws of the United States of America or
any political subdivision or taxing authority thereof or therein in respect of
any issue or delivery of Common Stock on conversion of, or other securities or
property issued on account of, shares of Series C Preferred Stock pursuant
hereto or certificates representing such shares or securities. The Corporation
shall not, however, be required to pay any such tax or other charge that may be
imposed in connection with any transfer involved in the issue or transfer and
delivery of any certificate for Common Stock or other securities or property in
a name other than that in which the shares of Series C Preferred Stock so
exchanged, or on account of which such securities were issued, were registered
and no such issue or delivery shall be made unless and until the Person
requesting such issue has paid to the Corporation the amount of any such tax or
has established to the satisfaction of the Corporation that such tax has been
paid or is not payable.
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<PAGE>
E. TRANSFER AGENT. The Corporation may appoint, and from time to
time discharge and change, a transfer agent for the Series C Preferred Stock.
Upon any such appointment or discharge of a transfer agent, the Corporation
shall send notice thereof by first-class mail, postage prepaid, to each holder
of record of shares of Series C Preferred Stock.
F. RECORD DATES. In the event that the Series C Preferred Stock
shall be registered under either the Securities Act of 1933, as amended, or the
Exchange Act, the Corporation shall establish appropriate record dates with
respect to payments and other actions to be made with respect to the Series C
Preferred Stock.
20
<PAGE>
IN WITNESS WHEREOF, this Certificate of Designations is executed
on behalf of the Corporation by its Executive Vice President, General Counsel
and Secretary and attested by its Assistant Secretary, this 10th day of
February , 1999.
AAMES FINANCIAL CORPORATION
By: /s/ Barbara S. Polsky
---------------------------------
Name: Barbara S. Polsky
Title: Executive Vice President, General
Counsel and Secretary
[Corporate Seal]
ATTEST:
/s/ John F. Madden, Jr.
- - ---------------------------------
John F. Madden Jr.
Assistant Secretary
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<PAGE>
CERTIFICATE OF INCREASE
OF
AUTHORIZED NUMBER OF SHARES
OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF
AAMES FINANCIAL CORPORATION
(Pursuant to Section 151 of the
General Corporation Law of the State of Delaware)
Aames Financial Corporation, a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
That a Certificate of the Voting Powers, Designations, Preferences and
Relative, Participating, Optional or Other Special Rights, and Qualifications,
Limitations or Restrictions Thereof, of Series B Convertible Preferred Stock was
filed in the Office of the Secretary of State on February 10,1999.
That the Board of Directors of the Corporation adopted a resolution
authorizing and directing an increase in the authorized number of shares of
Series B Convertible Preferred Stock of the Corporation, from 100,000 shares to
29,704,000 shares, all in accordance with the provisions of Section 151 of The
General Corporation Law of the State of Delaware and the Certificate of
Incorporation of the Corporation.
That the effective date and time of this Certificate of Increase is
September 30, 1999 at 11:59 p.m., eastern time.
IN WITNESS WHEREOF, Aames Financial Corporation has caused this
certificate to be signed by Barbara S. Polsky, its Executive Vice President,
General Counsel and Secretary, this 30th day of September, 1999.
AAMES FINANCIAL CORPORATION
By: /s/ Barbara S. Polsky
-----------------------------------
Name: Barbara S. Polsky
Title: Executive Vice President,
General Counsel and Secretary
<PAGE>
CERTIFICATE OF INCREASE
OF
AUTHORIZED NUMBER OF SHARES
OF
SERIES C CONVERTIBLE PREFERRED STOCK
OF
AAMES FINANCIAL CORPORATION
(Pursuant to Section 151 of the
General Corporation Law of the State of Delaware)
Aames Financial Corporation, a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
That a 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 was
filed in the Office of the Secretary of State on February 10,1999.
That the Board of Directors of the Corporation adopted a resolution
authorizing and directing an increase in the authorized number of shares of
Series C Convertible Preferred Stock of the Corporation, from 100,000 shares to
107,122,664 shares, all in accordance with the provisions of Section 151 of The
General Corporation Law of the State of Delaware and the Certificate of
Incorporation of the Corporation.
That the effective date and time of this Certificate of Increase is
September 30, 1999 at 11:59 p.m., eastern time.
IN WITNESS WHEREOF, Aames Financial Corporation has caused this
certificate to be signed by Barbara S. Polsky, its Executive Vice President,
General Counsel and Secretary, this 30th day of September, 1999.
AAMES FINANCIAL CORPORATION
By: /s/ Barbara S. Polsky
------------------------------------
Name: Barbara S. Polsky
Title: Executive Vice President,
General Counsel and Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
AAMES FINANCIAL CORPORATION
(A DELAWARE CORPORATION)
The undersigned Barbara S. Polsky the Executive Vice President, General
Counsel and Secretary, respectively, of Aames Financial Corporation (the
"Corporation"), a corporation organized and existing under and by virtue of the
General Corporation Law of the State of Delaware (the "DGCL"), do hereby certify
that the following amendments were adopted in accordance with the provisions of
Section 242 of the DGCL:
The text of the first paragraph of Article FOURTH of the Certificate of
Incorporation of the Corporation is hereby amended and restated to read in full
as follows:
FOURTH: The total number of shares which the Corporation shall
have the authority to issue is 600,000,000, consisting of 400,000,000
shares of common stock, par value $0.001 per share (the "Common Stock")
and 200,000,000 shares of preferred stock, par value $0.001 per share
(the "Preferred Stock").
Simultaneously with the effective date of this amendment (the
"EFFECTIVE DATE"), each share of the Corporation's Series B Convertible
Preferred Stock having a par value of $0.001 per share issued and
outstanding immediately prior to the Effective Date (the "PRE-SPLIT
SERIES B PREFERRED STOCK") shall automatically and without any action
on the part of the holder thereof be reclassified as and changed into
one thousand (1,000) shares of Series B Convertible Preferred Stock,
par value of $0.001 per share (the "POST-SPLIT SERIES B STOCK"). Each
holder of a certificate or certificates which immediately prior to the
Effective Date represented outstanding shares of Pre-Split Series B
Convertible Preferred Stock (the "PRE-SPLIT SERIES B CERTIFICATES,"
whether one or more) shall be entitled to receive upon surrender of
such Pre-Split Series B Certificates to the Corporation's Secretary for
cancellation, a certificate or certificates (the "POST-SPLIT SERIES B
CERTIFICATES," whether one or more) representing the number of whole
shares of Post-Split Series B Convertible Preferred Stock into which
and for which the shares of Pre-Split Series B Convertible Preferred
Stock formerly represented by such Pre-Split Series B Certificates so
surrendered, are reclassified pursuant to the terms hereof. From and
after the Effective Date, Pre-Split Series B Certificates shall
represent only the right to receive Post-Split Series B Certificates
pursuant to the provisions hereof. If more than one Pre-Split Series B
Certificate shall be surrendered at one time for the account of the
same stockholder, the number of full shares of Post-Split Series B
Convertible Preferred Stock for which the Post-Split Series B
Certificates shall be issued shall be computed on the basis of the
aggregate number of shares represented by the Pre-Split Series B
Certificates so surrendered. If any Post-Split Series B Certificate is
to be issued in a name other than that in which the Pre-Split Series B
Certificate surrendered for exchange are issued, the Pre-Split Series B
Certificates so surrendered shall be properly endorsed and otherwise in
proper form for transfer, and the person or persons requesting such
exchange shall affix any requisite stock transfer tax stamps to the
Pre-Split Series B Certificates surrendered, or provide funds for their
purchase, or establish to the satisfaction of the Corporation's
Secretary that such taxes are not payable;
Simultaneously with the Effective Date, each share of the
Corporation's Series C Convertible Preferred Stock having a par value
of $0.001 per share issued and outstanding immediately prior to the
Effective Date (the "PRE-SPLIT SERIES C PREFERRED STOCK")
<PAGE>
shall automatically and without any action on the part of the holder
thereof be reclassified as and changed into one thousand (1,000)
shares of Series C Convertible Preferred Stock, par value of $0.001
per share (the "POST-SPLIT SERIES C STOCK"). Each holder of a
certificate or certificates which immediately prior to the Effective
Date represented outstanding shares of Pre-Split Series C Convertible
Preferred Stock (the "PRE-SPLIT SERIES C CERTIFICATES," whether one or
more) shall be entitled to receive upon surrender of such Pre-Split
Series C Certificates to the Corporation's Secretary for cancellation,
a certificate or certificates (the "POST-SPLIT SERIES C CERTIFICATES,"
whether one or more) representing the number of whole shares of
Post-Split Series C Convertible
Preferred Stock into which and for which the shares of
Pre-Split Series C Convertible Preferred Stock formerly represented by
such Pre-Split Series C Certificates so surrendered, are reclassified
pursuant to the terms hereof. From and after the Effective Date,
Pre-Split Series C Certificates shall represent only the right to
receive Post-Split Series C Certificates pursuant to the provisions
hereof. If more than one Pre-Split Series C Certificate shall be
surrendered at one time for the account of the same stockholder, the
number of full shares of Post-Split Series C Convertible Preferred
Stock for which the Post-Split Series C Certificates shall be issued
shall be computed on the basis of the aggregate number of shares
represented by the Pre-Split Series C Certificates so surrendered. If
any Post-Split Series C Certificate is to be issued in a name other
than that in which the Pre-Split Series C Certificate surrendered for
exchange are issued, the Pre-Split Series C Certificates so surrendered
shall be properly endorsed and otherwise in proper form for transfer,
and the person or persons requesting such exchange shall affix any
requisite stock transfer tax stamps to the Pre-Split Series C
Certificates surrendered, or provide funds for their purchase, or
establish to the satisfaction of the Corporation's Secretary that such
taxes are not payable;
The Corporation's Series A Preferred Stock shall not be
affected by the filing of this Amendment.
The text of Article III, Subsection D(2) of the Series B Certificate of
Designations of the Corporation is hereby amended and restated to read in full
as follows:
2. If the Recapitalization is not consummated prior to the
earlier to occur of September 30, 1999 and the date of a meeting of the
stockholders of the Company at which any proposal necessary to
consummate the Recapitalization is defeated, the Dividend Rate shall be
deemed to be 15% per annum during the period commencing on such date
and ending on the date the Recapitalization is consummated.
The text of Article III, Subsection D(2) of the Series C Certificate of
Designations of the Corporation is hereby amended and restated to read in full
as follows:
2. If the Recapitalization is not consummated prior to the
earlier to occur of September 30, 1999 and the date of a meeting of the
stockholders of the Company at which any proposal necessary to
consummate the Recapitalization is defeated, the Dividend Rate shall be
deemed to be 15% per annum during the period commencing on such date
and ending on the date the Recapitalization is consummated."
The Effective Date of this Certificate of Amendment is September 30,
1999 at 11:59 p.m., eastern time.
IN WITNESS WHEREOF, the undersigned have executed this Certificate of
Amendment to the Certificate of Incorporation of the Corporation as of this 30th
of September, 1999.
<PAGE>
By: /s/ Barbara S. Polsky
---------------------------------
Barbara S. Polsky
Executive Vice President, General Counsel
and Secretary
<PAGE>
EXHIBIT 11
AAMES FINANCIAL CORPORATION
EARNINGS (LOSS) PER SHARE
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
----------- ----------
<S> <C> <C>
(RESTATED)
BASIC EARNINGS(LOSS)PER COMMON SHARE:
Net income (loss)...................................... $ 791,000 (2,156,000)
Less: Accrued preferred dividends...................... (1,541,000) -
----------- ----------
Net income (loss) available to common stockholders..... $ (750,000) (2,156,000)
Average common shares outstanding...................... 31,009,000 30,977,000
----------- ----------
Basic earnings (loss) per common share................. $ (0.02) (0.07)
=========== ==========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) for calculating diluted
earnings (loss) per common share..................... $ (750,000) (2,156,000)
Adjust net income (loss) to add back the after-tax
amount
of interest recognized in the period associated
with the convertible subordinated notes.............. - -
----------- ----------
Adjusted diluted net income (loss)..................... $ (750,000) (2,156,000)
----------- ----------
Average common shares outstanding...................... 31,009,000 30,977,000
Add exercise of options and warrants................... - -
Convertible subordinated notes......................... - -
----------- ----------
Diluted shares outstanding............................. 31,009,000 30,977,000
----------- ----------
Diluted earnings (loss) per common share............... $ (0.02) (0.07)
=========== ==========
</TABLE>
1
<PAGE>
Exhibit 10.26(e)
SECOND AMENDMENT TO AMENDED AND RESTATED MASTER
REPURCHASE AGREEMENT GOVERNING
PURCHASES AND SALES OF MORTGAGE LOANS
This Second Amendment to Amended and Restated Master Repurchase
Agreement Governing Purchases and Sales of Mortgage Loans dated as of
February 10, 1999 (this "SECOND AMENDMENT"), dated as of November 1, 1999, is
made by and between LEHMAN COMMERCIAL PAPER INC. ("BUYER") and AAMES CAPITAL
CORPORATION ("SELLER" and, together with the Buyer, the "Parties").
R E C I T A L S :
WHEREAS, the Seller and the Buyer are parties to an Amended and
Restated Master Repurchase Agreement Governing Purchases and Sales of
Mortgage Loans, dated as of February 10, 1999 (as amended, the "AGREEMENT"),
pursuant to which Buyer has agreed, subject to the terms and conditions set
forth in the Agreement, to purchase certain mortgage loans owned by the
Seller, including, without limitation, all rights of Seller to service and
administer such mortgage loans. Terms used but not defined herein shall have
the respective meanings ascribed to such terms in the Agreement, as amended
hereby.
WHEREAS, effective as of May 1, 1999, the Parties amended the
Agreement by the Amendment to Amended and Restated Master Repurchase
Agreement Governing Purchases and Sales of Mortgage Loans, dated as of June
30, 1999.
WHEREAS, the Parties wish to further amend the Agreement to modify
certain of the terms and conditions governing the purchase and sale of the
mortgage loans.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties hereto agree as
follows, effective as of the date hereof:
SECTION 1. AMENDMENTS.
1.1 The following definition of "A- MI LOAN" is added to Section 2
of the Agreement immediately following the definition of "AGREEMENT" and
immediately preceding the definition of "BALLOON MORTGAGE LOAN":
"A- MI LOAN" shall mean a Mortgage Loan described in Exhibit
VI hereto."
1.2 The definition of "COLLATERAL INFORMATION" in Section 2 of
the Agreement is deleted in its entirety and replaced with the following:
"COLLATERAL INFORMATION" means the following
information with respect to each Mortgage Loan: (i) Seller's loan
number, (ii) the Mortgagor's name, (iii) the address of the
Mortgaged Property, (iv) the current interest rate, (v) the
original balance, (vi) current
<PAGE>
balance as of the first day of the current month, (vii) the paid
to date and the next payment date, (viii) the appraised value of
the Mortgaged Property at the time the Mortgage Loan was
originated, (ix) whether the interest rate is fixed or adjustable
(and if adjustable, the ARM code, which includes the index,
adjustment frequency, spread and caps), (x) the lien position of
the Mortgage Loan on the Mortgaged Property (and if a second
lien, the outstanding principal balance of the first lien at the
time the Mortgage Loan was originated), (xi) the occupancy status
of the Mortgaged Property (including whether owner occupied),
(xii) whether the Mortgage Loan is a Balloon Loan, (xiii) the
first payment date, (xiv) the maturity date, (xv) the principal
and interest payment, (xvi) the property type of the Mortgaged
Property, (xvii) the Mortgagor's Credit Score (where available in
the Mortgage File), (xviii) the Mortgage Loan grade and FICO
score (where available in the Mortgage File), (xix) the
delinquency status, (xx) whether the Mortgage Loan is an A-MI
Loan, and (xxi) if the Mortgage Loan is an A-MI Loan, the
identity of the mortgage insurance company insuring such A-MI
Loan and the percentage of insurance coverage so provided."
1.3 The following paragraph (aaa) is added immediately following
paragraph (zz) in Exhibit V to the Agreement:
"(aaa) A- MI LOAN CONCENTRATION. If the Mortgage
Loan is an A-Loan, it, together with the other Purchased Mortgage
Loans which are A-MI Loans subject to the Transactions,
constitutes the lesser of (i) 20% of the aggregate outstanding
Repurchase Price of all Purchased Mortgage Loans subject to the
Transactions or (ii) $65,000,000."
1.4 Exhibit A attached hereto is added to the Agreement as
Exhibit VI thereto.
SECTION 2. COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE
PARTIES.
2.1 Except as expressly amended by Section 1 hereof, the Agreement
remains unaltered and in full force and effect. Each Party hereby reaffirms
all terms and covenants made in the Agreement as amended hereby.
2.2 Each of the Parties hereby represents and warrants to the
other parties that (a) this Second Amendment constitutes the legal, valid and
binding obligation of such Party, enforceable against such Party in
accordance with its terms, and (b) the execution and delivery by such Party
of this Second Amendment has been duly authorized by all requisite corporate
action on the part of such Party and will not violate any provision of the
organizational documents of such Party.
SECTION 3. EXPENSES
Seller shall pay all out-of-pocket costs and expenses (including
legal fees and disbursements) reasonably incurred by Buyer in connection with
the preparation and execution of this Second Amendment.
2
<PAGE>
SECTION 4. EFFECT UPON THE AGREEMENT.
4.1 Except as specifically set forth herein, the Agreement shall
remain in full force and effect and is hereby ratified and confirmed. All
references to the "Agreement" in the Amended and Restated Master Repurchase
Agreement Governing Purchases and Sales of Mortgage Loans shall mean and
refer to the Amended and Restated Master Repurchase Agreement Governing
Purchases and Sales of Mortgage Loans as modified and amended hereby.
4.2 The execution, delivery and effectiveness of this Second
Amendment shall not operate as a waiver of any right, power or remedy of any
Party under the Agreement, or any other document, instrument or agreement
executed and/or delivered in connection therewith.
SECTION 5. GOVERNING LAW.
THIS SECOND AMENDMENT SHALL BE CONSTRUED, INTERPRETED AND
GOVERNED BY THE LAW OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE
CONFLICT OF LAWS PRINCIPLES THEREOF.
SECTION 6. COUNTERPARTS.
This Second Amendment may be executed in any number of
counterparts, and all such counterparts shall together constitute the same
agreement.
[SIGNATURE PAGE FOLLOWS]
3
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Second
Amendment to be executed as of the day and year first above written.
SELLER:
AAMES CAPITAL CORPORATION, as Seller
By: /s/ David A. Sklar
--------------------------------------
Name: David A. Sklar
Title: Executive Vice President
BUYER:
LEHMAN COMMERCIAL PAPER INC., as Buyer
By: /s/ Francis X. Gilhool
--------------------------------------
Name: Francis X. Gilhool
Title: Authorized Signatory
4
<PAGE>
Exhibit A
A- MI Loan means a Mortgage Loan with an LTV of 97% or less, with
mortgage insurance coverage which reduces the exposure to the equivalent of
an LTV of 67%.
5
<PAGE>
Exhibit 10.27(f)
AMENDMENT NO. 2
TO
GUARANTY
This Amendment No. 2 (this "Amendment") dated September 1, 1999 amends the
Guaranty dated as of February 10, 1999 (the "Guaranty"), made by Aames Financial
Corporation (the "Guarantor") in favor of Greenwich Capital Financial Products,
Inc. (the "Lender"). Capitalized terms used herein and not otherwise defined
herein shall have the meanings set forth in the Guaranty or, if not so defined
therein, the Loan Agreement (as defined in the Guaranty). The Guarantor and the
Lender, for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged enter into this Amendment and agree as follows:
1. AMENDMENT
Effective as of September 1, 1999, Section 3(b)(iii) of the Guaranty is hereby
amended and restated in its entirety as follows:
(iii) LIQUIDITY. The aggregate amount of the Guarantor's
cash, Cash Equivalents and available borrowing
capacity on unencumbered assets that could be drawn
against (taking into account required haircuts) under
committed warehouse or working capital facilities, on
a consolidated basis and on any given day, shall be
(a) prior to October 31, 1999, $5,000,000; and (b) on
and after October 31, 1999, $15,000,000.
2. REPRESENTATIONS
In order to induce the Lender to execute and deliver this Amendment, the
Guarantor hereby represents to the Lender that as of the date hereof, after
giving effect to this Amendment, (a) the representations and warranties set
forth in Section 3 of the Guaranty are and shall be and remain true and correct
and (b) the Guarantor is in full compliance with all of the terms and conditions
of the Guaranty.
3. MISCELLANEOUS
Except as specifically amended herein, the Guaranty shall continue in full force
and effect in accordance with its original terms. Reference to this specific
Amendment need not be made in the Guaranty or any other instrument or document
executed in connection therewith, or in any certificate, letter or communication
issued or made pursuant to or with respect to the Guaranty, any reference in any
of such items to the Guaranty being sufficient to refer to the Guaranty as
amended hereby.
<PAGE>
IN WITNESS WHEREOF, the Guarantor and the Lender have caused this Amendment No.
2 to be duly executed and delivered as of the date first above written.
AAMES FINANCIAL CORPORATION
By:
-------------------------------------
David A. Sklar
Executive Vice President and CFO
GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC.
By:
-------------------------------------
John C. Anderson
Senior Vice President
<PAGE>
Exhibit 10.28(d)
SECOND AMENDMENT
TO MASTER REPURCHASE AGREEMENT AND GUARANTY
THIS SECOND AMENDMENT TO MASTER REPURCHASE AGREEMENT AND
GUARANTY (this "Second Amendment") is made and dated as of the 27th day of
September, 1999, by and among AAMES CAPITAL CORPORATION, a California
corporation (the "Seller"), AAMES FINANCIAL CORPORATION, a Delaware corporation
(the "Guarantor"), and BANK OF AMERICA, N.A. (formerly NationsBank, N.A.), a
national banking association (the "Buyer").
RECITALS
A. Pursuant to that certain Master Repurchase Agreement dated
as of April 8, 1999 by and between the Buyer and the Seller (as amended from
time to time, the "Repo Agreement"), the Buyer and the Seller agreed to enter
into Transactions on the terms and subject to the conditions set forth therein.
All capitalized terms not otherwise defined herein shall have the meanings given
to such terms in the Repo Agreement.
B. Pursuant to that certain Guaranty dated as of April 8, 1999
by the Guarantor in favor of the Buyer (as amended from time to time, the
"Guaranty"), the Guarantor agreed to guarantee the Seller's obligations under
the Repo Agreement on the terms and subject to the conditions set forth therein.
C. The parties hereto wish to amend certain provisions in the
Repo Agreement and in the Guaranty, all as set forth more particularly below.
NOW, THEREFORE, in consideration of the foregoing Recitals and
for other valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. MAINTENANCE OF LIQUIDITY. To reflect the agreement of the
parties hereto to amend the negative covenant regarding the maintenance of
liquidity, effective as of the Second Amendment Effective Date (as defined in
Paragraph 2 below):
(a) Subparagraph 12(m)(1) of the Repo Agreement is hereby
amended to replace the date "October 1, 1999" each time it is referenced therein
with the date "October 31, 1999."
(b) Subparagraph 4(m)(1) of the Guaranty is hereby amended
to replace the date "October 1, 1999" each time it is referenced therein with
the date "October 31, 1999."
2. SECOND AMENDMENT EFFECTIVE DATE. This Second Amendment
shall become effective on the date (the "Second Amendment Effective Date") upon
which the Buyer has received a copy of this Second Amendment, duly executed by
all parties hereto.
3. REAFFIRMATION OF OBLIGATIONS. Each of Seller and Guarantor
hereby reaffirms all of its obligations under the Repo Agreement and Guaranty
respectively and under all other
<PAGE>
documents, instruments and agreements executed in connection therewith and
acknowledges and agrees that such obligations are not altered, modified or
affected in any manner or to any extent except as expressly provided herein.
4. COUNTERPARTS. This Second Amendment may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original and all of which when taken together shall constitute one and the same
agreement.
5. REPRESENTATIONS AND WARRANTIES. Each of Seller and
Guarantor hereby represents and warrants to Buyer as follows:
(a) Each of Seller and Guarantor has the corporate power
and authority and the legal right to execute, deliver and perform this Second
Amendment and has taken all necessary corporate action to authorize the
execution, delivery and performance of this Second Amendment. This Second
Amendment has been duly executed and delivered on behalf of Seller and Guarantor
and constitutes the legal, valid and binding obligations of each, enforceable
against each in accordance with its terms.
(b) At and as of the date of execution hereof and at and
as of the Second Amendment Effective Date and both prior to and after giving
effect hereto: (i) the representations and warranties of Seller and Guarantor
contained in the Repo Agreement and the Guaranty are accurate and complete in
all respects, and (ii) there has not occurred an Event of Default or Potential
Default.
6. NO OTHER AMENDMENT. Except as expressly amended hereby, the
Repo Agreement and the Guaranty shall remain in full force and effect as written
and amended to date.
-----------------------------------------------------------------------
[signature page to follow]
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be executed as of the day and year first above written.
AAMES CAPITAL CORPORATION
By /s/ David A. Sklar
-------------------------------------
Name David A. Sklar
-----------------------------------
Title Executive Vice President, and
----------------------------------
Chief Financial Officer
AAMES FINANCIAL CORPORATION
By /s/ David A. Sklar
-------------------------------------
Name David A. Sklar
-----------------------------------
Title Executive Vice President, and
----------------------------------
Chief Financial Officer
BANK OF AMERICA, N.A.
By /s/ Carolyn Warren
-------------------------------------
Name Carolyn Warren
-----------------------------------
Title Principal
----------------------------------
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,194,000
<SECURITIES> 0
<RECEIVABLES> 468,906,000
<ALLOWANCES> 664,000
<INVENTORY> 384,207,000
<CURRENT-ASSETS> 857,643,000
<PP&E> 29,237,000
<DEPRECIATION> 16,940,000
<TOTAL-ASSETS> 869,940,000
<CURRENT-LIABILITIES> 419,920,000
<BONDS> 281,220,000
0
116,179,000
<COMMON> 31,000
<OTHER-SE> 52,590,000
<TOTAL-LIABILITY-AND-EQUITY> 869,940,000
<SALES> 60,938,000
<TOTAL-REVENUES> 60,938,000
<CGS> 8,641,000
<TOTAL-COSTS> 8,641,000
<OTHER-EXPENSES> 37,383,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,548,000
<INCOME-PRETAX> 1,366,000
<INCOME-TAX> 575,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 791,000
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
