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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
Form 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 22, 1999
AAMES FINANCIAL CORPORATION
(Exact name of Registrant as Specified in Its Charter)
Delaware 0-19604 95-340340
- ---------------------------- ------------ -------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
350 South Grand Avenue, 52nd Floor
Los Angeles, California 90071
(Address of Principal Executive Offices)
(323) 210-5000
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(Registrant's Telephone Number, Including Area Code)
NA
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(Former Name or Former Address, if Changed Since Last Report)
1
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ITEM 5. OTHER EVENTS
Reference is made to the press release of Registrant issued on February
22, 1999 which contains information meeting the requirements of this Item 5 and
is incorporated herein by this reference. A copy of the press release is
attached to this Form 8-K as Exhibit 99.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) EXHIBITS
99 Press release issued February 22, 1999.
2
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Current Report on Form 8-K to be
signed on its behalf by the undersigned hereunto duly authorized.
AAMES FINANCIAL CORPORATION
Dated: February 24, 1999 By: /s/ Barbara S. Polsky
----------------------------
Barbara S. Polsky
Executive Vice President,
General Counsel and Secretary
3
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EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
99 Press release issued February 22, 1999
4
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EXHIBIT 99
Contact: David Sklar
Aames Financial Corporation
(213) 210-5311
or
Jeffrey Lloyd/Steve Hawkins
Sitrick And Company
(310) 788-2850
Aames Financial Corporation Reports Second Quarter Results
RECORDS $192 MILLION NET LOSS IN VALUATION OF INTEREST-ONLY STRIPS;
ADOPTS "CASH-OUT" METHOD OF ACCOUNTING; AND
Appoints New Auditors
LOS ANGELES, CALIFORNIA, FEBRUARY 22, 1999 - AAMES FINANCIAL
CORPORATION (NYSE: AAM), a leader in subprime home equity lending, today
reported the results of operations for the three and six months ended December
31, 1998. The Company also announced that the negative market conditions that
existed during the quarter caused it to record a net loss in valuation of its
interest-only strips in the amount of $192 million, it has adopted the cash-out
method of accounting and it has appointed the accounting firm of Ernst & Young
LLP as auditors, replacing PricewaterhouseCoopers LLP.
Results of Operations
Total revenue for the three and six months ended December 31, 1998 was
$(154) million and $(96.7) million, as compared to $70.3 million and $135
million for the three and six months ended December 31, 1997, respectively. The
1998 revenues include a $192 million net loss on the valuation of the Company's
interest-only strips (discussed below). Excluding the $192 million valuation
adjustment, revenues for the three and six months ended December 31, 1998 were
$37.2 million and $89.8 million, respectively.
Net income (loss) for the quarter and six month period was $(195.7)
million and $(197.9) million, respectively, compared to net income of $9.2
million and $19.1 million for the same periods a year ago. On a basic and
diluted per share basis, net income (loss) per share for the three month period
was $(6.31) and $(6.27) compared to $0.33 and $0.29, respectively, in the
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prior year. For the six month period, on a basic and diluted per share basis,
net income (loss) per share was $(6.39) and $(6.34), respectively, compared to
$0.69 and $0.59 for the prior year's period. These per share amounts do not
reflect the shares issued to Capital Z Financial Services Fund II, L.P.
("Capital Z") on February 10, 1999 in connection with its $76.5 million equity
investment in the Company.
Cary H. Thompson, Aames chief executive officer, stated, "The results
of operations for the quarter ended December 31, 1998 reflect the
extraordinarily negative market conditions that existed throughout the quarter.
While the U.S. capital and credit markets stabilized in December from the global
economic crisis of the previous months, the subprime home equity sector
generally, and the Company specifically, continued to feel the adverse effects
of restricted access to capital and credit markets.
"The Company was precluded from completing a securitization during the
quarter due to the negative cash flows associated with a securitization and the
weak asset-backed market. Foregoing the higher gains of the securitization
market had an extremely negative impact on the Company's profitability, as it
was forced to rely upon less profitable whole loan sales as a means of disposing
of its loan production.
"The $76.5 million equity investment by Capital Z has helped the
Company address the liquidity constraints that confronted it during the December
1998 quarter. Effective February 10, 1999, and in conjunction with the Capital Z
investment, the Company obtained two additional committed repurchase facilities
in the aggregate amount of $400 million and one uncommitted repurchase facility
in the amount of $100 million. During the December quarter, the Company was
effectively limited to a single $300 million committed warehouse facility, which
expires in April 1999. The limited warehouse capacity severely constrained loan
production and affected profitability by requiring the Company to expedite its
whole loan sales, putting further downward pressure on the whole loan prices
being paid," Thompson added.
Thompson explained, "The Company's ability to expedite whole loan
sales was facilitated by a forward commitment to sell $500 million, subsequently
amended to $750 million, of loans to an affiliate of one of the Company's
lenders. The commitment, which expires in May 1999, reflects the lower whole
loan prices that existed during the quarter. As of January 31,1999, the Company
had satisfied $379 million of its commitment. The commitment is
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expected to adversely impact the gain on sale recognized in subsequent quarters
at least until the commitment is satisfied. Accordingly, the Company expects to
record a loss in the quarter ended March 31,1999 as it will continue to rely
solely on the whole loan market for its loan dispositions and will not yet have
realized the benefits from its cost savings plan, which initially includes
personnel reductions on a Company-wide basis and the closure of less profitable
branch offices, most of which have already been implemented."
Adjustment in Valuation of Interest-Only Strip
In its regular quarterly review of its interest-only strips, 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 it
should adjust each of its assumptions relating to rate of prepayment, discount
rate and credit loss to reflect current market conditions.
Rate of Prepayment: For the quarters up to and including September 30,
1998, prepayment rates used by the Company were held constant, e.g. flat, over
the life of the pool. During the quarter ended December 31, 1998, the Company
finalized the development of an enhanced analytical model, which allowed the
Company to more precisely estimate the performance of the securitized loans.
This new model resulted in the Company changing the estimate of prepayment rates
from a flat to a vectored rate, which more closely approximates the actual
performance of the securitized loans. This, along with the consideration of
other industry data and declining spreads in the pools over time, resulted in a
charge of $62 million, which is included in the $192 million adjustment.
Discount Rate: 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 conditions deteriorated in the December
quarter, it became apparent that a change in the discount rate would be required
in order for the estimate of fair value to be consistent with market conditions.
Based upon its analysis of market conditions, the Company increased its discount
rate to 15 percent to reflect the appropriate risk adjusted rate of return for
its interest-only strips. The impact of this change in discount rate amounted to
approximately $65 million, which is included in the $192 million adjustment.
<PAGE> 4
Credit Losses: The adverse market conditions that existed during the
December 1998 quarter also resulted in the Company increasing the prospective
cumulative loan loss estimate for its pools. The Company analyzed enhanced
credit loss information on its securitized pools and considered industry
information regarding the effects of the recent market conditions on subprime
borrowers. This analysis resulted in a charge of $67 million, which is included
in the $192 million adjustment recorded for the quarter.
Change to "Cash-Out" Method of Accounting
As previously announced, in December 1998, the FASB issued a Special
Report titled: "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 observed that two
methods have arisen in practice for accounting for credit enhancements relating
to securitizations: the "cash-in" method and the "cash-out" method. The
"cash-in" method treats credit enhancements as belonging to the Company, and as
such, are recorded at their face value at the time they are received by the
trust. The "cash-out" method treats credit enhancements as assets owned by the
related securitzation trust. As such, these assets are treated as part of the
interest-only strips 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.
A 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 the 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 loan servicing revenue
resulting from the impact of discounting cash-flows.
The Company has historically used the cash-in method to account for its
interest-only strips. However, during the quarter ended December 31, 1998, the
Company retroactively changed its practice of measuring and accounting for its
interest-only strips to the cash-out method in response to the FASB's Special
report and public comments from the Securities and Exchange Commission released
on December 8, 1998. The Company's financial results for all
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prior periods will be restated to reflect the cash-out method of accounting and
reporting for its interest-only strips. The aggregate pretax amount of this
charge is $67.1 million.
Appointment of Ernst & Young LLP as Auditors
The Company's reconstituted audit committee has approved the
appointment of Ernst & Young LLP as the Company's auditors, replacing
PricewaterhouseCoopers LLP. Ernst & Young LLP performed due diligence for
Capital Z in connection with the Fund's recent equity investment in the Company.
Loan Production
Neil B. Kornswiet, Aames' president, said, "Despite adverse market
conditions, total loan production for the six months ended December 31, 1998
increased 12 percent to $1.28 billion from $1.14 billion for the six months
ended December 31, 1997. The Company's retail originations increased 46 percent
to $426 million for the six-month period, compared to $291 million for the six
months ended December 31, 1997. Origination volume for the broker network
reached $640 million for the six-months, up 19 percent compared to $536 million
for the six months ended December 31, 1997.
He added, "Total loan originations for the quarter were $550 million,
down from $616 million for the quarter ended December 31, 1997, primarily
reflecting the Company's limited warehouse capacity, and the impact of price and
underwriting changes implemented to permit the Company to access the whole loan
market and stay within its liquidity constraints.
Kornswiet said that the Company's core operations, retail and broker,
increased 13 percent to $487 million for the quarter, compared to $431 million
for the comparable three-month period in 1997. This growth was primarily the
result of the increase in the number of retail and broker branches over the
prior year's quarter. Retail originations were $198 million for the quarter
ended December 31, 1998, compared to $158 million for the quarter ended December
31, 1997. Origination volume for the broker network reached $289 million for the
quarter, compared to $274 million for the comparable quarter in 1997.
Correspondent purchases were $63 million for the quarter ended December 31,
1998, compared to $185 million for the prior year's comparable quarter,
reflecting pricing changes implemented in response to the Company's liquidity
constraints and the emphasis on core operation loan origination.
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He said that the Company's loan servicing portfolio at December 31,
1998 increased to $4.43 billion, up 18 percent from $3.75 billion at December
31, 1997. "I am pleased to report that one hundred percent of the Company's
$4.43 billion servicing portfolio was serviced in-house, as of December 31,
1998, compared to 75 percent at December 31, 1997," Kornswiet added.
The Company sold $501 million and $606 million of loans during the
three months ended December 31, 1998 and 1997, respectively, and $1.20 billion
and $1.15 billion of loans during the six months ended December 31, 1998, and
1997, respectively. Of the total amount of loans sold during the six months
ended December 31, 1998 and 1997, $650 million and $1.1 billion were sold in
securitizations, respectively. The Company did not complete a securitization
during the quarter ended December 31, 1998.
Aames Financial Corporation is a leading home equity lender, and
currently operates 89 retail Aames Home Loan offices serving 33 states,
including the District of Columbia. Its broker division operates 40 branches
serving 46 states (including the District of Columbia). Retail Direct operates
21 offices serving 12 states.
From time to time the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance and results of the Company's business include the
following: negative cash flows and capital needs; delinquencies and losses in
securitization trusts; negative impact on cash flow, right to terminate mortgage
servicing; changes in interest rate environment; year 2000 compliance and
technological enhancement; prepayment risk; basis risk; credit risk; risk of
adverse changes in the secondary market for mortgage loans; dependence on
funding sources; dependence on broker network; risks involved in commercial
mortgage lending; strategic alternatives; competition; concentration of
operations in California; timing of loan sales; economic conditions; contingent
risks; and government regulation. For a more complete discussion of these risks
and uncertainties, see "Item 7.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors" in the Company's form 10-K for the fiscal year ended
June 30, 1998 and "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors" in form 10-Q for the
quarters ended September 30, 1998 and December 31, 1998.
# # #
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AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 JUNE 30, 1998
----------------- -------------
(RESTATED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 11,790,000 12,322,000
Loans held for sale, at lower of cost or market 271,324,000 198,202,000
Accounts receivable 48,844,000 51,072,000
Interest-only strips, estimated at fair market value 323,246,000 490,542,000
Mortgage servicing rights, net 34,504,000 32,090,000
Equipment and improvements, net 14,730,000 13,939,000
Prepaid and other 17,210,000 17,020,000
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Total assets $ 721,648,000 815,187,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings $ 306,990,000 286,990,000
Revolving warehouse facilities 249,500,000 141,012,000
Accounts payable and accrued expenses 45,003,000 49,964,000
Income taxes payable 14,792,000 33,170,000
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Total liabilities 616,285,000 511,136,000
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Stockholders' equity:
Preferred Stock, par value $.001 per
share, 1,000,000 shares authorized;
none outstanding -- --
Common Stock, par value $.001 per share
50,000,000 shares authorized; 31,000 31,000
31,015,900 and 30,962,600 shares outstanding
Additional paid-in capital 250,096,000 249,851,000
Retained earnings (deficit) (144,764,000) 54,169,000
------------- -------------
Total stockholders' equity 105,363,000 304,051,000
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Total liabilities and stockholders' equity $ 721,648,000 815,187,000
============= =============
</TABLE>
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AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31, December 31, December 31,
----------------------------- ----------------------------
1998 1997 1998 1997
-------------- ------------- ------------- -------------
(Restated) (Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue:
Gain on sale of loans $ 8,752,000 35,130,000 28,429,000 66,438,000
Net gain (loss) on valuation of
interest-only
strips and mortgage servicing rights (191,646,000) 5,726,000 (186,451,000) 10,755,000
Commissions 7,758,000 7,161,000 17,746,000 13,016,000
Loan servicing 11,629,000 10,362,000 20,854,000 20,144,000
Fees and other 9,084,000 11,962,000 22,760,000 24,487,000
-------------- ------------ ------------ -----------
Total revenue including valuation (154,423,000) 70,341,000 (96,662,000) 134,840,000
adjustment
-------------- ------------ ------------ -----------
Expenses:
Compensation 19,907,000 24,561,000 43,701,000 46,320,000
Production 10,559,000 7,541,000 21,489,000 13,338,000
General and administrative 13,784,000 9,580,000 27,172,000 17,665,000
Interest 9,403,000 10,819,000 22,285,000 20,917,000
-------------- ------------ ------------ -----------
Total expenses 53,653,000 52,501,000 114,647,000 98,240,000
-------------- ------------ ------------ -----------
Income (loss) before income taxes (208,076,000) 17,840,000 (211,309,000) 36,600,000
Provision (benefit) for income taxes (12,331,000) 8,670,000 (13,408,000) 17,497,000
Net income (loss) $ (195,745,000) 9,170,000 (197,901,000) 19,103,000
============== ============ ============ ===========
Net income (loss) per share:
Basic $ (6.31) 0.33 (6.39) 0.69
Diluted (6.27) 0.29 (6.34) 0.59
Dividends per share - 0.03 0.03 0.07
Weighted average number shares outstanding:
Basic 31,007,000 27,799,000 30,992,000 27,784,000
============== ============ ============ ===========
Diluted 31,211,000 34,949,000 31,239,000 35,272,000
============== ============ ============ ===========
</TABLE>
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AAMES FINANCIAL CORPORATION
QUARTERLY FINANCIAL STATISTICS
<TABLE>
<CAPTION>
QUARTER ENDED YEAR TO DATE
DECEMBER DECEMBER DECEMBER DECEMBER
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
ORIGINATION VOLUME:
BROKER NETWORK $ 289,492,000 273,756,000 640,293,000 535,590,000
RETAIL 1 197,937,000 157,292,000 426,114,000 290,838,000
CORRESPONDENT 62,789,000 184,615,000 208,868,000 312,374,000
-------------- ----------- ------------- -------------
TOTAL 550,218,000 615,663,000 1,275,275,000 1,138,802,000
============== =========== ============= =============
RETAIL WTD AVG COMM RATE 4.41% 4.34% 4.31% 4.45%
SERVICING PORTFOLIO: 2 $ - 4,429,457,000 3,750,750,000
LOAN SALES:
WHOLE LOANS SOLD $ 501,358,000 1,002,000 547,124,000 40,035,000
SECURITIZATIONS 605,142,000 649,999,000 1,109,278,000
SERVICING SPREAD ON SECURITIZATIONS 3.61% 3.86% 3.61% 4.00%
COMPONENTS OF REVENUE: 3
GAIN ON SALE OF LOANS 8,752,000 35,130,000 28,429,000 66,438,000
NET GAIN (LOSS) ON VALUATION OF INTEREST - ONLY
STRIPS AND MORTGAGE SERVICING RIGHTS (191,646,000) 5,726,000 (186,451,000) 10,755,000
COMMISSIONS:
RETAIL 5,351,000 6,507,000 14,957,000 11,461,000
BROKER NETWORK 2,027,000 220,000 1,816,000 758,000
OTHER 380,000 434,000 973,000 797,000
LOAN SERVICING:
SERVICING SPREAD 5,458,000 5,251,000 8,827,000 11,421,000
PREPAYMENT FEES 3,649,000 3,263,000 7,149,000 5,618,000
LATE CHGS & OTHER SERV FEES 2,522,000 1,848,000 4,878,000 3,105,000
FEES & OTHER:
CLOSING 572,000 670,000 1,190,000 1,257,000
APPRAISAL 770,000 634,000 1,717,000 1,135,000
UNDERWRITING 384,000 294,000 837,000 540,000
INTEREST INCOME 7,208,000 10,078,000 18,722,000 21,109,000
OTHER 150,000 286,000 294,000 446,000
-------------- ----------- ------------- -------------
TOTAL REVENUE $ (154,423,000) 70,341,000 (96,662,000) 134,840,000
============== =========== ============= =============
</TABLE>
NOTE: 1 - Includes 125 Product, Private Investor repurchases, and Broker loans.
2 - Includes loans serviced on an interim basis.
3 - Revenues for the three months ended December 31,1997 and the
six months ended December 31, 1997 & December 31, 1998 have been
restated.
