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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<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, 2000
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
------------------------
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 Identification No.)
incorporation or organization)
</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 OCTOBER 31, 2000, REGISTRANT HAD 6,249,799 SHARES OF COMMON STOCK
OUTSTANDING.
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<PAGE>
TABLE OF CONTENTS
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<CAPTION>
ITEM NO. PAGE NO.
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PART I--FINANCIAL INFORMATION
Item 1-- Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2000
(Unaudited) and June 30, 2000 (Audited).................... 3
Condensed Consolidated Income Statement for the three months
ended September 30, 2000 and 1999 (Unaudited).............. 4
Condensed Consolidated Statements of Cash Flows for the
three months ended September 30, 2000 and 1999
(Unaudited)................................................ 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................ 6
Item 2-- Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 8
PART II--OTHER INFORMATION
Item 1-- Legal Proceedings........................................... 28
Item 2-- Changes in Securities....................................... 28
Item 3-- Defaults Upon Senior Securities............................. 28
Item 4-- Submission of Matters to a Vote of Security Holders......... 28
Item 5-- Other Information........................................... 28
Item 6-- Exhibits and Reports on Form 8-K............................ 28
Signature Page.............................................................. 29
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
------------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 28,656,000 $ 10,179,000
Loans held for sale, at lower of cost or market............. 249,444,000 398,921,000
Accounts receivable......................................... 69,066,000 52,713,000
Residual interests, at estimated fair value................. 281,535,000 290,956,000
Mortgage servicing rights, net.............................. 10,605,000 12,346,000
Equipment and improvements, net............................. 10,766,000 10,522,000
Prepaid and other........................................... 16,079,000 14,727,000
------------ ------------
Total assets............................................ $666,151,000 $790,364,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings.................................................. $275,470,000 $275,470,000
Revolving warehouse and repurchase facilities............... 236,300,000 375,015,000
Accounts payable and accrued expenses....................... 58,067,000 56,985,000
Income taxes payable........................................ 8,448,000 8,416,000
------------ ------------
Total liabilities....................................... 578,285,000 715,886,000
------------ ------------
Commitments and contingencies
Stockholders' equity:
Series A Preferred Stock, par value $0.001 per share;
500,000 shares authorized; none outstanding........... -- --
Series B Convertible Preferred Stock, par value $0.001
per share; 26,704,000 shares authorized; 26,704,000
shares outstanding.................................... 27,000 27,000
Series C Convertible Preferred Stock, par value $0.001
per share; 61,230,000 and 107,123,000 shares
authorized; 20,354,000 and 60,976,000 shares
outstanding........................................... 20,000 61,000
Series D Convertible Preferred Stock; par value $0.001
per share; 108,566,000 shares authorized; 59,412,000
shares outstanding.................................... 59,000 --
Common Stock, par value $0.001 per share; 400,000,000
shares authorized; 6,238,000 and 6,235,000 shares
outstanding........................................... 6,000 6,000
Additional paid-in capital.................................. 417,490,000 401,652,000
Retained deficit............................................ (329,736,000) (327,268,000)
------------ ------------
Total stockholders' equity.................................. 87,866,000 74,478,000
------------ ------------
Total liabilities and stockholders' equity.................. $666,151,000 $790,364,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENT
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Revenue:
Gain on sale of loans..................................... $19,921,000 $21,797,000
Origination fees.......................................... 12,332,000 11,388,000
Loan servicing............................................ 4,306,000 3,755,000
Interest.................................................. 23,354,000 23,998,000
----------- -----------
Total revenue........................................... 59,913,000 60,938,000
----------- -----------
Expenses:
Compensation.............................................. 26,072,000 23,112,000
Production................................................ 4,514,000 8,641,000
General and administrative................................ 13,589,000 14,271,000
Interest.................................................. 15,009,000 13,548,000
----------- -----------
Total expenses.......................................... 59,184,000 59,572,000
----------- -----------
Income before income taxes.................................. 729,000 1,366,000
Provision for income taxes.................................. 36,000 575,000
----------- -----------
Net income.................................................. $ 693,000 $ 791,000
=========== ===========
Net loss per common share:
Basic..................................................... $ (0.40) $ (0.12)
=========== ===========
Diluted................................................... $ (0.40) $ (0.12)
=========== ===========
Weighted average number shares outstanding:
Basic..................................................... 6,211,000 6,202,000
Diluted................................................... 6,211,000 6,202,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Operating activities:
Net income................................................ $ 693,000 $ 791,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 1,320,000 1,522,000
Gain on sale of loans................................... -- (21,037,000)
Accretion of residual interests......................... (10,923,000) (13,137,000)
Mortgage servicing rights originated.................... -- (3,601,000)
Mortgage servicing rights amortized..................... 1,741,000 2,292,000
Changes in assets and liabilities:
Loans held for sale originated or purchased........... (518,136,000) (523,524,000)
Proceeds from sale of loans held for sale............. 667,613,000 699,186,000
Decrease (increase) in:
Accounts receivable................................... (16,353,000) (19,058,000)
Residual interests.................................... 20,345,000 8,864,000
Prepaid and other..................................... (1,352,000) 2,666,000
Income tax refund receivable.......................... -- 1,737,000
Increase (decrease) in:
Accounts payable and accrued expenses................. (2,081,000) (1,304,000)
Income taxes payable.................................. 32,000 1,592,000
------------- -------------
Net cash provided by operating activities................... 142,899,000 136,989,000
------------- -------------
Investing activities:
Purchases of equipment and improvements................... (1,564,000) (323,000)
------------- -------------
Net cash used in investing activities....................... (1,564,000) (323,000)
------------- -------------
Financing activities:
Net proceeds from convertible preferred stock issuance.... 15,857,000 24,000,000
Proceeds from exercise of common stock options............ -- 2,000
Proceeds from (reductions in) revolving warehouse and
repurchase facilities................................... (138,715,000) (176,230,000)
Other, net................................................ -- (8,000)
------------- -------------
Net cash used in financing activities....................... (122,858,000) (152,236,000)
------------- -------------
Net increase (decrease) in cash and cash equivalents........ 18,477,000 (15,570,000)
Cash and cash equivalents at beginning of period............ 10,179,000 20,764,000
------------- -------------
Cash and cash equivalents at end of period.................. $ 28,656,000 $ 5,194,000
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
AAMES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 in conformity with generally accepted
accounting principles in the United States for the interim periods reported. The
results of operations for the Company for the three months ended September 30,
2000 are not necessarily indicative of the results expected for the full fiscal
year.
At September 30, 2000, Specialty Finance Partners ("SFP"), a partnership
controlled by Capital Z Financial Services Fund, II, L.P., a Bermuda partnership
(together with SFP, "Capital Z") owned preferred stock representing
approximately 47.3% of the Company's combined voting power in the election of
directors and approximately 91.4% of the combined voting power in all matters
other than the election of directors. Representatives or nominees of Capital Z
have five of the nine seats on the Board of Directors, and as current members'
terms expire, Capital Z has the continuing right to appoint and elect four
directors and nominate one additional director. As a result of its beneficial
ownership and Board representation, Capital Z has, and will continue to have,
sufficient power to determine the Company's direction and policies.
NOTE 2: 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 3: STOCKHOLDERS' EQUITY
On June 10, 2000 and in the first of a two-phase $50.0 million investment by
Capital Z, the Company issued 40.8 million shares of Series C Convertible
Preferred Stock, par value $0.001 per share (the "Series C Stock"), for $0.85
per share to Capital Z and received $34.7 million, and issued warrants to
Capital Z to purchase 5.0 million shares of the Series C Stock at $0.85 per
share. Net proceeds to the Company, after issuance expenses, were
$34.3 million.
Subsequently, in the second phase which occurred on July 12, 2000, the
Company issued 18.0 million of Series D Convertible Preferred Stock, par value
$0.001 per share (the "Series D Stock"), to Capital Z for $0.85 per share, its
stated value, and received $15.3 million. Net proceeds, after issuance expenses,
were $14.5 million. At the same time, Capital Z exchanged the 40.8 million
6
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AAMES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
NOTE 3: STOCKHOLDERS' EQUITY (CONTINUED)
shares of Series C Stock and the warrants to purchase 5.0 million shares of
Series C Stock received in the first phase for an equal number of shares and
warrants to purchase Series D Stock.
NOTE 4: PER SHARE DATA
The following table sets forth information regarding net loss per common
share for the three months ended September 30, 2000 and 1999 (unaudited):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
------------------------
2000 1999
----------- ----------
<S> <C> <C>
Basic net loss per common share:
Net income................................................ $ 693,000 $ 791,000
Less: Accrued dividends on Series B, C and D Convertible
Preferred
Stock................................................ (3,162,000) (1,541,000)
----------- ----------
Basic net loss to common stockholders..................... (2,469,000 (750,000)
Basic weighted average number of common shares
outstanding............................................. 6,211,000 6,202,000
----------- ----------
Basic net loss per common share............................. $ (0.40) $ (0.12)
=========== ==========
Diluted net loss per common share:
Diluted net loss to common stockholders................... $(2,469,000) $ (750,000)
Diluted weighted average number of common shares
outstanding............................................. 6,211,000 6,202,000
----------- ----------
Diluted net loss per common share........................... $ (0.40) $ (0.12)
=========== ==========
</TABLE>
NOTE 5: RECLASSIFICATIONS
Certain amounts related to fiscal year 2000 have been reclassified to
conform to the fiscal year 2001 presentation.
7
<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 Aames Financial Corporation (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 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. 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 for the fiscal year ended June 30, 2000,
the quarterly reports on Form 10-Q filed by the Company during the remainder of
fiscal 2001, and any current reports on Form 8-K filed by the Company.
RECENT EVENTS
During the three months ended September 30, 2000, the Company recorded net
income of $693,000 compared to $791,000 in the comparable period a year ago. The
first quarter of fiscal 2001 is the Company's first profitable quarter since
September 30, 1999.
As previously reported, on September 21, 2000, the Company completed a
securitization of $460.0 million of mortgage loans and sold its residual
interest to Capital Z Investments, L.P., a Bermuda partnership ("CZI") an
affiliate of Capital Z Financial Services Fund II, L.P., a Bermuda partnership
through the Residual Forward Sale Facility with CZI (the "Residual Facility")
for cash. Although the Company generally retains the servicing on the loans it
securitizes, the Company sold its servicing rights and the rights to prepayment
penalties under the securitization because the price paid by the purchaser
resulted in a realized gain on sale higher than what the Company would have
realized had the mortgage servicing rights and the rights to prepayment fees
been retained, and the gain was for cash.
As a result of the investment of $50.0 million by Specialty Finance
Partners, the Company's largest stockholder ("SFP" and, together with Capital Z
Financial Services Fund II, L.P. which controls SFP, "Capital Z") completed in
July of 2000, the Company intends to make a distribution to the holders of the
Company's Common Stock, and Series C Convertible Preferred Stock, in the form of
a dividend of nontransferable subscription rights to purchase shares of
Series D Convertible Preferred Stock for $0.85 per share (the "Rights
Offering"). Capital Z has agreed that neither they nor any of their affiliates
(including SFP) will participate in the Rights Offering. Consequently, the
number of shares offered in the Rights Offering to stockholders not affiliated
with Capital Z (the "Nonaffiliated Stockholders") will
8
<PAGE>
be approximately 19.8 million shares of Series D Convertible Preferred Stock.
The Company currently expects to complete the Rights Offering during the quarter
ending March 31, 2001.
As previously reported, the Company was notified in writing by the New York
Stock Exchange (the "NYSE") on September 12, 2000 (the "NYSE Notice") that the
average closing price per share of the Company's Common Stock was below the
NYSE's minimum stock price requirement of $1.00 per share as of the thirty
trading-day period ended July 19, 2000. Pursuant to the NYSE Notice, the Company
has until December 29, 2000 to raise the thirty day average closing price of the
Common Stock above $1.00 per share or the NYSE will suspend the Company's
listing and apply to the Securities and Exchange Commission ("SEC") for
delisting. Based upon the NYSE Notice, the Company expects the NYSE to review
the closing price of the Common Stock on that date. The closing price of the
Common Stock on November 10, 2000 was $1.50 per share and the average closing
price for the thirty trading-day period ended November 10, 2000 was $1.573 per
share. There can be no assurance that the thirty day average closing price of
the Common Stock will remain above $1.00 per share or that the Common Stock will
not be delisted by the NYSE. If the Common Stock were delisted by the NYSE, it
would seriously impair the ability of Common stockholders to trade their shares.
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
making loans in California since it was founded in 1954. In 1995, the Company
expanded its retail presence outside of California and began purchasing loans
from correspondents. In August 1996, the Company acquired its broker production
channel through the acquisition of One Stop Mortgage, Inc. In 1999, the Company
consolidated its loan production channels into one company, and the retail and
broker production channels (including the former 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, and to a lesser extent, to
purchase homes.
The Company continues to focus on its core business strategy, which consists
of: (i) increasing core loan production; (ii) maximizing opportunities in loan
servicing; and (iii) becoming 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)
through continuing to diversify funding sources and reducing its costs of
production.
INCREASE CORE LOAN PRODUCTION. The Company intends to evaluate expansion
opportunities in its retail and broker operations, including Internet, 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.
MAXIMIZE OPPORTUNITIES IN LOAN SERVICING. The Company intends to build
slowly the size of its servicing portfolio to provide a stable and significant
source of recurring revenue by continuing to increase loan originations, selling
a portion of its loan production through new securitizations and retaining the
servicing in such securitizations. However, as a means to maximize profitability
and cash
9
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flow in securitizations, the Company may, from time to time, consider
securitizing on a servicing released basis through the sale for cash of the
rights to service loans in a securitization.
BECOME SELF FINANCING THROUGH CONTINUING TO DIVERSIFY FUNDING SOURCES AND
REDUCING ITS COSTS OF PRODUCTION. 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, selling residual interests created in securitizations through the
Residual Facility until the expiration of that facility, and developing new
sources for working capital. The Company also intends to reduce its costs of
production primarily through increasing the economies of scale of its core
retail and broker production, including Internet production, while at the same
time identifying opportunities for cost containment and/or continued reductions
in the costs of production within the Company.
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.
LOAN ORIGINATION. The Company originates loans nationally through its core
retail and broker channels, including the Internet. The Company also purchases
closed loans through correspondents, which it has materially decreased since
fiscal 1998. 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, JUNE 30,
--------------------------- ---------------
2000 1999 2000
------------ ------------ ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Broker Network(1)............... $281,814,000 $331,546,000 $303,789,000
Retail(2)....................... 232,201,000 179,216,000 222,118,000
Correspondent................... 4,123,000 12,762,000 2,297,000
------------ ------------ ------------
Total....................... $518,138,000 $523,524,000 $528,204,000
============ ============ ============
</TABLE>
------------------------
(1) Includes loans originated through telemarketing and the Internet, through an
affiliation with certain Internet lending sites, of $15.6 million, and
$19.1 million during the three months ended September 30, 2000 and June 30,
2000, respectively.
(2) Includes loans originated through the Internet, through an affiliation with
certain Internet lending sites, of $8.2 million, and $5.0 million during the
three months ended September 30, 2000 and June 30, 2000, respectively.
Total loan production during the three months ended September 30, 2000 of
$518.1 million was down $10.1 million, or 1.9% from the $528.2 million reported
during the three months ended June 30, 2000. The Company's core retail and
broker production was $514.0 million during the three months ended
September 30, 2000, down $11.9 million from the $525.9 million reported for the
three months ended June 30, 2000. The decline was due to a $22.0 million
decrease in broker production due to certain credit and pricing changes made by
the Company, partially offset by a $10.1 million increase in retail production.
Correspondent production during the three months ended September 30, 2000 was
approximately $4.1 million as compared to $2.3 million during the three months
ended June 30, 2000. In the latter part of the quarter ended December 31, 1999,
the Company commenced originating retail loans through the Internet, through an
affiliation with certain Internet lending sites. Retail loans originated through
the Internet during the three months ended September 30, 2000 were $8.2 million
10
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compared to $5.0 million during the three months ended June 30, 2000. During the
quarter ended June 30, 2000, the Company's broker channel commenced originating
loans through telemarketing and Internet, through an affiliation with certain
Internet lending sites. Loan originations from these sources were $15.6 million
during the three months ended September 30, 2000 compared to $19.1 million
during the three months ended June 30, 2000. Total loan production of
$23.8 million attributable to the Internet and electronic sourcing represents
4.6% of total loan production during the three months ended September 30, 2000.
The Company expects Internet and other electronically sourced production to
generate an increasing dollar amount and percentage of total loan production in
the coming quarters.
Total loan production during the three months ended September 30, 2000 of
$518.1 million was down $5.4 million, or 1.0%, from the $523.5 million reported
for the three months ended September 30, 1999. Although total loan originations
declined by $5.4 million, origination volume through the Company's core retail
and broker channels increased by $3.2 million to $514.0 million during the three
months ended September 30, 2000, compared to $510.8 million during the three
months ended September 30, 2000. The increase was due to a $53.0 million
increase in retail production largely offset by a $49.7 million decline in
broker production due to increased pricing in response to a rising interest rate
environment and changes in underwriting designed to improve credit quality.
Correspondent production decreased by $8.7 million to $4.1 million during the
three months ended September 30, 2000 from $12.8 million in the comparable three
month period a year ago. This decline reflects the Company's previously reported
decision to decrease its reliance on this channel for loan production.
The following table sets forth the number of retail branch and broker
offices operated by the Company at September 30, 2000 and 1999:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Retail branch offices....................................... 97 102
Broker offices.............................................. 5 35
</TABLE>
The decline between September 30, 2000 and 1999 in the number of retail
branch offices reflects the Company's decision, as part of cost reduction
efforts, to close unprofitable branches and, with respect to broker offices, 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 mortgage loans to third party investors in
the secondary markets as market conditions allow. The Company generally seeks to
dispose of substantially all of its loan production within 90 days. The Company
applies the net proceeds of the loan dispositions, whether through
securitizations or whole loan sales, to pay down its warehouse and repurchase
facilities in order to make these facilities available for future funding of
mortgage loans.
The following table sets forth certain information regarding the Company's
securitizations and whole loan sales during the three months ended
September 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
Loans pooled and sold in securitizations......... $460,002,000 $400,065,000
Whole loan sales................................. 207,939,000 292,601,000
------------ ------------
Total loans securitized and sold............. $667,941,000 $692,666,000
============ ============
</TABLE>
11
<PAGE>
The Company maximizes opportunities in its loan disposition transactions by
selling its loan production through a combination of securitizations and whole
loan sales, depending on market conditions, profitability and cash flows. The
Company generally realizes higher gain on sale on securitization than it does on
whole loan sales for cash. The higher gain on sale in securitizations
transactions is attributable to the excess servicing spread and mortgage
servicing rights associated with retaining a residual interest and the servicing
on the mortgage loans in the securitization, respectively, net of transactional
costs. In whole loan sales with servicing released, the gain on sale is
generally lower than gains realized in securitizations, but the Company receives
the gain in the form of cash.
Moreover, in a securitization the underlying securities are generally
over-collateralized by the Company depositing a combination of mortgage loans
with a principal balance exceeding the principal balance of the securities, and
cash into the securitization, which requires a cash outflow. The upfront
over-collateralization and servicing advance obligations required on retaining
the servicing in securitizations are cash flow negative to the Company in the
early years of the securitization. These negative cash flow considerations along
with conditions in the securitization market precluded the Company from
securitizing mortgage loans in certain recent quarters. The Company believes
that the Residual Facility will assist the Company by strengthening its ability
to include securitizations in its loan disposition strategy through reducing the
negative cash flow aspects of securitization and by providing another source of
cash to the Company through periodically converting residual interests into
cash. On September 21, 2000, the Company completed a securitization of
$460.0 million of mortgage loans and sold its residual interest through the
Residual Facility for cash.
LOAN SERVICING. It is the Company's strategy to build and retain its
servicing portfolio. 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 disposition. The Company generally retains the servicing
on the loans it securitizes. However, in the securitization completed by the
Company on September 21, 2000, the Company sold its servicing rights, together
with the rights to prepayment penalties because the price paid by the purchaser
resulted in a realized gain on sale higher than what the Company would have
realized had the mortgage servicing rights and the rights to prepayment fees
been retained, and the gain was for cash. Moreover, the Company generally does
not retain servicing on loans it sells in whole loan sales for cash. The
following table sets forth certain information regarding the Company's servicing
portfolio at September 30, 2000 and 1999 and June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
------------------------------ ------------
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Servicing portfolio............... $ 3,399,000(1) $ 3,870,000(2) $ 3,560,000(3)
Serviced in-house................. $ 3,159,000 $ 3,495,000 $ 3,296,000
Percentage serviced in-house...... 92.9% 90.3% 92.6%
</TABLE>
------------------------
(1) Includes $518.6 million of loans subserviced for others by the Company on an
interim basis and approximately $240.0 million of loans subserviced by
others.
(2) Includes $188.0 million of loans subserviced for others by the Company on an
interim basis and approximately $374.4 million of loans subserviced by
others.
(3) Includes $280.2 million of loans subserviced for others by the Company on an
interim basis and approximately $265.4 million of loans subserviced by
others.
The Company's loan servicing portfolio at September 30, 2000 decreased
$161.0 million, or 4.5% to $3.4 billion from $3.6 billion reported at June 30,
2000, reflecting loan servicing portfolio runoff during the period, partially
offset by the $518.1 million in originations during the September quarter. The
Company's loan servicing portfolio at September 30, 2000 was $500.0 million
below the $3.9 billion reported at September 30, 1999, reflecting loan service
run-off during the period which exceeded the addition of new loans to the
portfolio because the Company sold $1.3 billion of loans in whole loan
12
<PAGE>
sales for cash with servicing released during the period compared to
$863.6 million of loans sold in securitizations.
Moreover, subsequent to September 30, 2000, the Company transferred to the
purchasers or their designated servicers the approximately $518.6 million of
loans, which represented loans sold in whole loan sales and the September 2000
securitization but subserviced by the Company at September 30, 2000 on an
interim basis. The Company's servicing portfolio will continue to be impacted in
the future by the Company's business strategy of loan dispositions through a
combination of whole loan sales with servicing released as well as
securitizations, which will result in slower growth than historical periods when
the Company predominately sold its loan production in securitizations, and could
lead to a smaller servicing portfolio in spite of securitization activity. See
"Risk Factors."
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. As previously reported, in more recent quarters the Company has
discontinued its bulk purchase of correspondent loans, increased its focus on
higher credit grade loans and discontinued certain broker programs which the
Company believes will cause delinquencies in the Company's servicing portfolio
to decrease in the future. Delinquent loans (by principal balance) decreased at
September 30, 2000 to $464.5 million from $483.2 million at June 30, 2000 and
$577.6 million at September 30, 1999. The delinquency rate at September 30, 2000
was 13.7% compared to 13.6% at June 30, 2000 and 14.9% at September 30, 1999.
Although the principal balance of delinquent loans at September 30, 2000
decreased compared to June 30, 2000, the delinquency rate increased due to a
higher decrease in the size of the Company's loan servicing portfolio. The
delinquency rate at September 30, 2000 declined from the delinquency rate at
September 30, 1999, despite the decline in the size of the servicing portfolio.
This decline in delinquencies is due primarily to the Company's strategy of
increasing early collection intervention efforts on one payment delinquencies
within applicable grace payment periods and to the inclusion of an increased
percentage of higher credit grade loans in the Company's securitizations
completed in 1999. A decline in delinquencies generally reduces the Company's
servicing advance obligations. The Company's strategy of dispositions through
whole sales and securitizations will diminish growth of the servicing portfolio.
A slow growing or declining portfolio could cause delinquency rates to rise. See
"Results of Operations--Revenue."
During the three months ended September 30, 2000, losses on loan
liquidations increased to $25.7 million from $19.5 million in the comparable
period a year ago due in part to acceleration of losses due to increased loss
mitigation efforts. The Company believes that while such efforts increase losses
in the short-term, they reduce the size of the overall loss. In addition, credit
losses incurred by the Company on liquidation were disproportionately higher for
correspondent loans purchased in bulk and included in the Company's earlier
trusts than experienced upon liquidations of loans originated in the Company's
core production channels. During the quarter ended September 30, 2000,
approximately 46.8% of losses on liquidation were from losses on disposition of
real estate collateral for bulk purchased correspondent loans. In turn, bulk
purchased correspondent loans comprised approximately 23.8% of the Company's
servicing portfolios when measured at July 1, 2000. The Company has eliminated
its bulk purchase program. The seasoning of the bulk purchased portfolio may
continue to contribute disproportionately to loan losses during the current
fiscal year. Moreover, the adverse market conditions that existed during 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 believes that continuance of these factors
might contribute to the Company's loan losses during the current fiscal year.
13
<PAGE>
Because foreclosures and losses typically occur months or years after a loan
is originated, data relating to delinquencies, foreclosures and losses as a
percentage of the current portfolio can understate the risk of future
delinquencies, losses or foreclosures. See "Certain Accounting
Considerations--Accounting for Securitizations--Credit Losses."
The following table sets forth delinquency, foreclosure, and loss
information of the Company's servicing portfolio at and for the periods
indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, YEAR ENDED JUNE 30,
----------------------- ------------------------------------
2000 1999 2000 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.................................. 2.2% 2.1% 1.9% 2.4% 3.8%
Two months................................. 0.8% 0.9% 0.8% 1.0% 1.3%
Three or more months:
Not foreclosed(5).......................... 8.9% 9.9% 9.0% 10.3% 9.0%
Foreclosed(6).............................. 1.8% 2.0% 1.9% 2.0% 1.5%
---------- ---------- ---------- ---------- ----------
Total...................................... 13.7% 14.9% 13.6% 15.7% 15.6%
========== ========== ========== ========== ==========
Percentage of dollar amount of loans
foreclosed during the period to servicing
portfolio(4)(8).......................... 0.8% 0.9% 3.6% 2.9% 2.0%
Number of loans foreclosed during the
period................................... 345 478 1,854 1,680 1,125
Principal amount of foreclosed loans during
the period............................... $ 25,789 $ 33,877 $ 135,629 $ 122,445 $ 84,613
Number of loans liquidated during the
period................................... 690 590 2,749 1,518 812
Net losses on liquidations during the
period(7)................................ $ 25,738 $ 19,479 $ 96,119 $ 51,730 $ 26,488
Percentage of annualized losses to
servicing portfolio(4)(8)................ 2.9% 2.0% 2.6% 1.2% 0.7%
Servicing portfolio at period end.......... $3,399,000 $3,870,000 $3,560,000 $3,841,000 $4,147,000
</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.
(3) At September 30, 2000, the dollar volume of loans delinquent more than
90 days in eleven of the Company's REMIC trusts, exceeded the permitted
limit in the related pooling and servicing agreements. Four of the
aforementioned REMIC trusts plus two additional 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
$518.6 million, $188.0 million, $280.2 million, $84.0 million and
$82.0 million for the periods ended September 30, 2000, September 30, 1999,
June 30, 2000, June 30, 1999 and June 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 at period end.
(7) Represents losses, net of gains, on properties sold through foreclosed or
other default management activities 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.
CERTAIN ACCOUNTING CONSIDERATIONS
ACCOUNTING FOR SECURITIZATIONS. The Company's loan disposition strategy
relies on a combination of securitization transactions and whole loan sales. The
following discusses certain accounting considerations which arise only in the
context of securitization transactions.
14
<PAGE>
In a securitization, the Company conveys loans that it has originated or
purchased to a separate entity (such as a trust) in exchange for cash proceeds
and a residual interest in the trust. The cash proceeds are raised through an
offering of the pass-through certificates or bonds evidencing the right to
receive principal payments and interest 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 cost basis 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 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, a monoline insurance fee, if any, and an estimate for loan
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) credit losses; and (iii) discount rate used to calculate
present value. 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.
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, credit loss and discount rate assumptions in relation to its actual
experience and current rates of prepayment and credit loss prevalent in the
industry. The Company may adjust the value of the residual interests or take a
charge to earnings related to the residual interests, as appropriate, to reflect
a valuation or write-down of its residual interests based upon the actual
performance of the Company's residual interests as compared to the Company's key
assumptions and estimates used to determine fair value. Although management
believes that the assumptions to estimate the fair values of its residual
interests are reasonable, there can be no assurance as to the accuracy of the
assumptions or 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.
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 and
credit grades of the loans included in the securitizations, loss and delinquency
information by origination channel, and information available from other market
participants such as investment bankers, credit providers and credit rating
agencies. On a quarterly basis, the Company re-evaluates its credit loss
estimates.
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.
15
<PAGE>
Certain historical data and key assumptions and estimates used by the
Company in its September 30, 2000 review of the residual interests were the
following:
<TABLE>
<S> <C>
Prepayments:
Actual weighted average annual prepayment rate, as a
percentage of outstanding principal balance of
securitized loans, during the quarter ended September
30, 2000................................................ 32.9%
Estimated peak annual prepayment rates, as a percentage of
outstanding principal balance of securitized loans:
Fixed rate loans........................................ 22.3% to 29.5%
Adjustable rate loans................................... 36.7% to 46.3%
Estimated weighted average life of securitized loans...... 3.1 years
Credit losses:
Actual credit losses to date, as a percentage of original
principal balances of securitized loans................. 2.9%
Future estimated prospective credit losses, as a
percentage of original principal balances of securitized
loans................................................... 1.7%
Total actual and estimated prospective credit losses, as a
percentage of original principal balance of securitized
loans................................................... 4.6%
Total actual credit losses to date and estimated
prospective credit losses (dollars in thousands)........ $325,529
Discount rate............................................... 15.0%
</TABLE>
In its regular quarterly review of its residual interests during the three
months ended September 30, 2000, the Company considered the historical
performance of its securitized pools, the recent prepayment experience of loans
in those pools, the credit loss performance of loans in previously securitized
pools and other industry data and determined that no adjustment of its
assumptions (rate of prepayment, credit loss and discount rate) was warranted.
The Company closely monitors its residual interests. Should the actual rate of
prepayment and credit loss performance of loans in its securitized pools vary
adversely in relation to the estimates and assumptions used by the Company to
estimate the fair value, the Company will adjust the fair value of the residual
interests through a charge to earnings.
The residual interest created in the $460.0 million securitization
consummated during the three months ended September 30, 2000 was sold to CZI
during the period. Consequently, that residual interest is not subject to the
Company's normal quarterly evaluation of assumptions and estimates as compared
to its actual performance.
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 cost allocated to the servicing rights is amortized over the period of
estimated net future servicing fee income. The Company periodically reviews the
valuation of its MSRs. This review is performed on a disaggregated basis for the
predominant risk characteristics of the underlying loans which are loan type and
origination date.
The Company sold to an independent, third party loan servicer the mortgage
servicing rights on the loans included in the $460.0 million securitization
consummated during the three months ended September 30, 2000. Accordingly, no
MSR was capitalized by the Company during the September 2000 quarter.
16
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." ("SFAS 133") 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. At
June 30, 2000, the Company had no freestanding derivative instruments in place
and had no material amounts of embedded derivative instruments. The Company
adopted SFAS 133, as amended, on July 1, 2000. Based upon the Company's
application of SFAS No. 133, its adoption had no materially adverse effect on
the Company's consolidated financial statements.
RESULTS OF OPERATIONS--THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
The following table sets forth information regarding the components of the
Company's revenue and expenses for the three months ended September 30, 2000 and
1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenue:
Gain on sale of loans............................ $19,921,000 $21,797,000
Origination fees................................. 12,332,000 11,388,000
Loan servicing................................... 4,306,000 3,755,000
Interest income.................................. 23,354,000 23,998,000
----------- -----------
Total revenue...................................... 59,913,000 60,938,000
----------- -----------
Expenses:
Compensation..................................... 26,072,000 23,112,000
Production....................................... 4,514,000 8,641,000
General and administrative....................... 13,589,000 14,271,000
Interest......................................... 15,009,000 13,548,000
----------- -----------
Total expenses..................................... 59,184,000 59,572,000
----------- -----------
Income before provision for income taxes........... 729,000 1,366,000
Provision for income taxes......................... 36,000 575,000
----------- -----------
Net income......................................... $ 693,000 $ 791,000
=========== ===========
</TABLE>
REVENUE
Total revenue during the three months ended September 30, 2000 was
$59.9 million, compared to $60.9 million during the three months ended
September 30, 1999. The decline in total revenue during the three months ended
September 30, 2000 from the comparable period a year ago is due primarily to
decreases in gain on sale of loans and interest income, partially offset by
increases in origination fees and loan servicing income.
Gain on sale of loans during the three months ended September 30, 2000 was
$19.9 million, a $1.9 million decrease from the $21.8 million gain on sale of
loans reported during the comparable three month period a year ago. The decrease
in gain on sale resulted from a $24.8 million decrease in loan dispositions
during the quarter coupled with a lower gain rate recognized by the Company in
the securitization during the September 2000 quarter, partially offset by a
higher gain rate recognized on whole loan sales during the September 2000
quarter compared to the same period a year ago. During
17
<PAGE>
the three months ended September 30, 2000, the Company disposed of
$667.9 million of loans, compared to $692.7 million of loans during the three
months ended September 30, 1999. Loan dispositions during the September 2000
quarter consisted of $460.0 million of loans in securitizations and
$207.9 million of loans in whole loan sale transactions, an increase of
$60.0 million from the $400.0 million securitization but a decline of
$84.7 million from the $292.6 million of whole loan sales consummated during the
comparable three month period in 1999. The gain rate on the $460.0 million
securitization during the quarter ended September 30, 2000 was lower than the
gain rate for the $400.0 million securitization during the quarter ended
September 30, 1999, due to lower excess spread resulting from an increase in
interest rates during the period, higher expenses attributable to the Residual
Facility and a $2.3 million hedge loss in the quarter ended September 30, 2000.
Included in gain on sale for the quarter ended September 30, 2000, is the
Company's sale to an affiliate for cash of the residual interest created in the
securitization for $18.0 million, and the proceeds from the sale of the
servicing rights and the rights to the prepayment fee income on this
securitization. The gains on sale recognized during the three months ended
September 30, 2000 on whole loan sales for cash were generally higher than gains
recognized on whole loan sales for cash during the comparable three month period
in 1999, due to generally better market conditions prevailing during the
September 2000 quarter compared to the same period a year ago. Included in gain
on sale of loans during the three months ended September 30, 2000 is a hedge
loss of $2.3 million. As a result of the Residual Facility, the Company was able
to rely on a combination of securitizations and whole loan sales for cash as its
loan disposition strategy during the three months ended September 30, 2000,
based upon its review of market conditions, profitability and cash flow needs of
the Company. During the three months ended September 30, 2000, the Company, as
it has from time to time, entered into a forward interest rate swap agreement to
hedge exposure to its fixed rate pipeline in anticipation of closing a
securitization during the quarter.
Origination fee revenue is primarily comprised of points and other fees
charged by the Company on mortgage loans originated by the Company. Origination
fee revenue is primarily a function of the volume of mortgage loans originated
by the Company through its retail channel, the credit grade of the loans
originated and the weighted average points charged on such loans. Origination
fee revenue during the three months ended September 30, 2000 was $12.3 million,
up $900,000, or 7.9% from $11.4 million during the three months ended
September 30, 1999. Origination fee revenue for the three months ended
September 30, 2000 and 1999 includes $2.4 million and $1.7 million,
respectively, of origination fee revenue recognized during the period relating
to prior periods' loan production. Deferred origination fee revenue recognized
during the period is attributable to the mix in the composition of loans being
either securitized or sold in whole loan sales in excess of the loans originated
during the same periods. The recognition or deferral of deferred origination fee
revenue during a period coincides with the recognition or deferral of deferred
compensation expense during the same period. See "Expenses--Compensation." Net
of the effects of the recognition of deferred origination fee revenue during the
three months ended September 30, 2000, origination fee revenue increased
$200,000 to $9.9 million from $9.7 million during the comparable period a year
ago. The increase in origination fee revenue during the September 2000 quarter
is attributable primarily to the increase in retail loan production during the
period, partially offset by a decrease in average points and fees per loan due
to changes in the Company's pricing strategies that place a higher emphasis on
coupon rates rather than points at origination and a focus on higher
credit-quality borrowers.
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 subservicing costs and amortization of the Company's MSRs. Loan
service revenue increased by $500,000 to $4.3 million in the three months ended
September 30, 2000 from $3.8 million during the three months ended
September 30, 1999. Servicing fees, late charges and prepayment fees declined
$1.1 million during the three months ended September 30, 2000 from the
comparable period a year ago, largely due to the decline in the servicing
portfolio during the period. However, these declines were more than offset by a
18
<PAGE>
decrease of $1.1 million in expenses incurred relating to the servicing advance
arrangements, discussed more fully below, and by a reduction of $551,000 in
amortization of the Company's MSRs during the three months ended September 30,
2000 from the levels in the comparable period a year ago. The Company had two
arrangements in place in order to reduce its servicing advance obligations
during the quarter ended September 30, 2000 and the quarter ended September 30,
1999. In the first arrangement, a loan servicing company purchased certain
servicing related advances and agreed to make future servicing advances with
respect to an aggregate of $388.0 million ($240.0 million at September 30, 2000)
in principal amount of loans. In the second arrangement, an investment bank
purchased certain servicing related advances from the Company, and agreed to
undertake the obligation to make a substantial portion of the Company's advance
obligations on its pre-1999 securitization trusts. During the quarter ended
September 30, 2000, the Company had an additional arrangement with the same
investment bank which was not in place during the quarter ended September 30,
1999, pursuant to which the investment bank purchased certain servicing related
advances and agreed to undertake the obligation to make a substantial portion of
the Company's advance obligations on its 1999 securitization trusts. See
"General--Loan Servicing."
Interest income includes interest on loans held for sale, interest on
short-term overnight investments and accretion income associated with the
Company's residual interests. Interest income during the three months ended
September 30, 2000 decreased $600,000 to $23.4 million from $24.0 million during
the three months ended September 30, 1999 due primarily to lower accretion on
Company's residual interests due to a lower level of residuals in the
September 2000 quarter compared to a year ago, partially offset by an increase
in interest income attributable to higher balances of loans held for sale with
higher weighted average interest rates during the three months ended
September 30, 2000 compared to such balances and rates during the comparable
period in 1999.
EXPENSES
Compensation expense, which includes incentives, is generally related to the
Company's loan origination volume, as retail and broker account executives earn
incentives on funded loans. Compensation expense during the three months ended
September 30, 2000 increased $3.0 million, or 13.0%, to $26.1 million from
$23.1 million during the three months ended September 30, 1999. This increase
was primarily due to $2.6 million of incentive compensation to retail loan
account executives paid on the $53.0 million of increased retail originations
during the quarter ended September 30, 2000 compared to the quarter ended
September 30, 1999, and, to a lesser extent, $300,000 of bonus compensation
awards to other senior management. Compensation expense for the three months
ended September 30, 2000 and 1999 includes $2.5 million and $2.3 million,
respectively, of deferred direct compensation costs associated with loans
originated in prior periods that were disposed of in securitizations and whole
loan sales consummated during the September 2000 and 1999 quarters. Net of the
recognition of deferred direct compensatory costs, compensation expense during
the three months ended September 30, 2000 increased $2.8 million to
$23.6 million from $20.8 million during the comparable three month period a year
ago.
19
<PAGE>
Production expense, primarily advertising, outside appraisal costs, travel
and entertainment, and credit reporting fees decreased $4.1 million, or 47.7%,
to $4.5 million during the three months ended September 30, 2000, from
$8.6 million during the three months ended September 30, 1999. The decrease in
production expense during the three months ended September 30, 2000 from the
comparable period in 1999 is due primarily to the Company's cost reduction
efforts, which include reducing its advertising expenses by improving the
efficiency and penetration of its advertising strategies through the adoption of
the decentralized marketing approach in its retail loan office network.
Additionally, in December 1999, in an effort to further reduce production costs,
the Company commenced the practice of having prospective borrowers pay for
appraisal costs prior to incurrence of the appraisal expense during the loan
origination process whenever possible. Prior thereto, the Company did not charge
customers for appraisals unless and until their loans closed, and absorbed as a
production expense appraisal costs incurred for loan applications where the
prospective applicants' loans were not closed and funded. Production expense
expressed as a percentage of total loan origination volume for the three months
ended September 30, 2000 was 0.87% compared to 1.7% during the comparable three
month period in 1999. The decline is attributable to the 47.7% decrease in
production expense more than offsetting the $5.4 million, or 1.0% decline in
total origination volume during the three months ended September 30, 2000 from
the comparable three month period in 1999.
General and administrative expenses decreased $700,000 to $13.6 million
during the three months ended September 30, 2000 from $14.3 million during the
comparable three month period in 1999. The decrease was primarily attributable
to declines in the legal, professional and depreciation expense, partially
offset by an increase in communication and other miscellaneous expense. As part
of the Company's on-going costs savings program, the Company is attempting to
sublet significant space at its headquarter office located at 350 South Grand
Avenue in downtown Los Angeles. If the Company agrees to sublease such space at
lease rates significantly 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 charge to earnings.
Interest expense increased $1.5 million to $15.0 million for the three
months ended September 30, 2000, from $13.5 million for the comparable three
month period in 1999. The increase in interest expense during the three months
ended September 30, 2000 from levels reported in the comparable 1999 period
resulted primarily from increased borrowings at higher interest 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 arrangements to fund
its operations.
INCOME TAXES
During the three months ended September 30, 2000, the Company recorded an
income tax provision of $36,000 and such provision relates principally to
miscellaneous state tax obligations as no tax provision on estimated excess
inclusion income on the Company's REMIC trusts was incurred during the period.
During the three months ended September 30, 1999, the Company recorded an income
tax provision of $575,000 and such provision relates primarily to the Company's
estimated tax on excess inclusion income on its REMIC trusts. The investment in
the Company by Capital Z in fiscal 1999 resulted in a change in control for
income tax purposes thereby limiting future net operating loss and certain other
future deductions.
FINANCIAL CONDITION
LOANS HELD FOR SALE. The Company's portfolio of loans held for sale
decreased to $249.4 million at September 30, 2000 from $398.9 million at
June 30, 2000. The decline is due to the Company's $460.0 million securitization
and $207.9 million of whole loan sales in the secondary markets during the
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three months ended September 30, 2000, partially offset by the Company's loan
production during the period.
ACCOUNTS RECEIVABLE. Accounts receivable, representing servicing fees,
servicing, advances and other receivables, increased to $69.1 million at
September 30, 2000 from $52.7 million at June 30, 2000. The $16.4 million
increase in accounts receivable at September 30, 2000 from June 30, 2000
includes a $6.5 million increase in servicing related advances to the Company's
securitized pools, a $4.6 million receivable representing the remaining closing
proceeds due from counterparties to the residual interest and mortgage servicing
sale during the September 2000 quarter (of which approximately $3.1 million was
received subsequent to September 30, 2000), accrued interest and fees receivable
of $2.4 million and deposits and other receivables of $2.9 million. 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.
RESIDUAL INTERESTS. Residual interests decreased to $281.5 million at
September 30, 2000 from $291.0 million at June 30, 2000 reflecting $20.2 million
of cash received from the securitized trusts, partially offset by $10.9 million
of accretion during the three months ended September 30, 2000. During the three
months ended September 30, 2000, the Company did not retain a residual interest
in the $460.0 million securitization consummated during the period. The residual
interest created in the securitization during the September 2000 quarter was
sold for cash to CZI.
MORTGAGE SERVICING RIGHTS, NET. Mortgage servicing rights, net, decreased
to $10.6 million at September 30, 2000 from $12.3 million at June 30, 2000
reflecting amortization during the three months ended September 30, 2000. During
the three months ended September 30, 2000, the Company did not capitalize any
mortgage servicing rights as the Company sold for cash the servicing rights on
the mortgage loans in the $460.0 million securitization which closed during the
period.
EQUIPMENT AND IMPROVEMENTS, NET. Equipment and improvements, net, increased
to $10.8 million at September 30, 2000 from $10.5 million at June 30, 2000
reflecting the capitalization of new equipment and improvement acquisitions,
partially offset by depreciation and amortization during the three months ended
September 30, 2000.
PREPAID AND OTHER ASSETS. Prepaid and other assets increased to
$16.1 million at September 30, 2000 from $14.7 million at June 30, 2000,
reflecting the capitalization of expenses incurred for financing and other
arrangements entered into by the Company during the three months ended
September 30, 2000.
BORROWINGS. Amounts outstanding under borrowings at September 30, 2000
remained unchanged from the $275.5 million outstanding at June 30, 2000.
REVOLVING WAREHOUSE FACILITIES. Amounts outstanding under revolving
warehouse and repurchase facilities decreased to $236.3 million at
September 30, 2000 from $375.0 million at June 30, 2000, primarily as the result
of the decrease in loans held for sale due to whole loan sales and the
securitizations during the three months ended September 30, 2000, partially
offset by the Company's loan production during the period. 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 had cash and cash equivalents of approximately $28.7 million at
September 30, 2000. The Company's operations require continued access to
short-term and long-term sources of cash. The Company's primary operating cash
requirements include: (i) the funding of 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
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over-collateralization requirements in connection with the securitization,
(iv) ongoing administrative, operating, and tax expenses, (v) interest and
principal payments under the Company's revolving warehouse and repurchase
facilities and other existing indebtedness and (vi) advances in connection with
the Company's servicing portfolio.
The Company's primary sources of liquidity are expected to be (i) fundings
under revolving warehouse and repurchase facilities, (ii) the securitization and
sale of mortgage loans, (iii) sales of residual interests under the Residual
Facility and (iv) the monetization of the Company's servicing advances. The
Company historically also had access to working capital financing facilities and
the issuance of debt and equity securities, to finance its operating cash
requirements; however, due to the Company's operating performance in the two
most recent fiscal years, the Company does not expect access to those capital
resources in the foreseeable future. See "--Risk Factors--If we are unable to
maintain adequate financing sources or outside sources of cash are not
sufficient, earnings and financial position will suffer and jeopardize our
ability to operate as a going concern."
WAREHOUSE AND REPURCHASE FACILITIES. The Company generally relies on
revolving warehouse and repurchase facilities to originate and purchase mortgage
loans and hold them prior to securitization or sale. At September 30, 2000, the
Company had committed revolving warehouse and repurchase facilities in the
amount of $678.0 million (excluding the $22.0 million outstanding on the
$35.0 million non-revolving subline described more fully below). Of the
$678.0 million of committed revolving warehouse and repurchase facilities
available to the Company at September 30, 2000, $200.0 million, $178.0 million
and $300.0 million expire on November 30, 2000 (extended from October 31, 2000),
January 31, 2001 and October 26, 2001, respectively.
The Company is not permitted to use its revolving warehouse and repurchase
facilities to fund mortgage loans at closing; instead, the Company uses working
capital to close mortgage loans. After the mortgage loans are closed, the
Company pledges them under one of its other revolving warehouse or repurchase
facilities to replenish working capital. The Company is currently seeking a new
revolving warehouse or repurchase facility to fund mortgage loans at closing.
However, unless and until a new facility is negotiated, the Company is required
to fund mortgage loans exclusively out of working capital, and hold them until
such mortgage loans can be transferred to another facility or sold. As a result
of the recent $50.0 million additional equity investment by Capital Z, the sale
of the residential interest created in the recent $460.0 million securitization
under the Residual Facility and the sale of servicing rights and the rights to
prepayment penalties completed September 21, 2000, the Company currently
believes it has sufficient cash to fund at closing its current loan production.
Historically, the Company has had access to warehouse and repurchase
facilities which advanced up to 100% of the principal balance of the mortgage
loans to the Company. However, as a result of the difficult current market
conditions which began in the quarter ended December 31, 1998, and the Company's
recent financial performance, including the prices the Company has received in
recent whole loan sales, all of the Company's warehouse and repurchase lenders
advance less than 100% of the principal balance of the mortgage loans, requiring
the Company to use working capital to fund the remaining portion of the
principal balance of the mortgage loans.
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,
leverage, and net income levels. If the Company is unable to meet these
financial covenants going forward, or to obtain subsequent amendments, or for
any other reason is unable to maintain existing warehouse or repurchase lines or
renew them when they expire, it would have to decrease or cease loan production
operations which would negatively impact profitability and jeopardize the
Company's ability to continue to operate as a going concern.
THE SECURITIZATION AND SALE OF MORTGAGE LOANS. The Company's ability to
sell loans originated and purchased by it in the secondary market through
securitizations and whole loan sales is necessary to
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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--An
interruption or reduction in the securitization and whole loan market would hurt
our financial performance."
The Company securitized $460.0 million of loans and sold $207.9 million of
loans in whole loan sales during the three months ended September 30, 2000
compared to $400.0 million of loans securitized and $292.9 million of loans sold
in whole loan sales, respectively, in the comparable period a year ago. The gain
on sale recognized by the Company on securitizations and whole loan sales is
affected by, among other things, market conditions at the time of the loan
disposition, and the Company's assumptions used in securitizations. See "Results
of Operations--Revenue."
In connection with securitization transactions, the Company is generally
required to provide credit enhancements in the form of overcollateralization
amounts or reserve accounts as a credit enhancement to support the sale of the
senior interests. The terms of the securitization trusts generally require 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 or
realized losses for those pools exceed the specified limit. As of September 30,
2000, the Company was required to maintain an additional $48.2 million in
overcollateralization amounts as a result of the level of its delinquency rates
and realized losses above that which would have been required to be maintained
if the applicable delinquency rates and realized losses had been below the
specified limits. Of this amount, at September 30, 2000, $39.8 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 cash flows are received and
applicable reserve or overcollateralization requirements are met.
RESIDUAL FORWARD SALE FACILITY. On August 31, 2000, the Company entered
into the Residual Facility with CZI, an affiliate of Capital Z, the Company's
largest shareholder. Pursuant to the terms of the Residual Facility, the Company
may sell up to $75.0 million of its residual interests for cash in future
securitizations through the earliest of (i) September 30, 2002, (ii) the full
utilization of the $75.0 million amount of the Residual Facility, or (iii) a
termination event, as defined in the Residual Facility. The Company believes
that the Residual Facility will assist the Company by strengthening its ability
to include securitizations in its loan disposition strategy through reducing the
negative cash flow aspects of securitizations and by providing another source of
cash to the Company through periodically converting residual interests into
cash.
On September 21, 2000, the Company sold an $18.0 million residual interest
to CZI pursuant to the Residual Facility for cash. It is the Company's
expectation to sell to CZI residual interests created in future securitizations
as a means of enhancing its working capital on a periodic basis.
MONETIZATION OF SERVICING ADVANCES. 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,
pursuant to which the loan servicing 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
$13.0 million. In June 1999 and February 2000, in order to further reduce its
servicing advance obligations, 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 securitization trusts.
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WORKING CAPITAL FINANCING FACILITIES. On February 11, 2000, the Company
secured $35.0 million ($22.0 million at September 30, 2000) in working capital
secured by certain of its residual interests and certain other collateral
through the renewal of a $90.0 million committed warehouse line which expired on
February 9, 2000. The committed warehouse line was increased to $200.0 million
and included a $35.0 million non-revolving subline, which the Company drew down
on February 11, 2000. As part of the transaction, Capital Z, the Company's
largest shareholder, agreed to provide certain credit enhancements to the lender
for a portion of the subline. In connection therewith, the Company agreed to pay
Capital Z a $1 million fee, which was remitted during the three months ended
September 30, 2000.
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.
As previously reported, on June 10, 2000 and in the first of a two phase
$50.0 million equity investment by SFP, a partnership controlled by Capital Z
(the "Supplemental Investment"), the Company received $34.7 million of
additional capital. In return, the Company issued (i) 40.8 million shares of
Series C Convertible Preferred Stock at a price of $0.85, which reflected the
average closing market price for the five trading days prior to closing phase
one and (ii) warrants to purchase 5.0 million shares of Series C Convertible
Preferred Stock at $0.85 per share. Net proceeds to the Company, after issuance
expenses, were $34.4 million. Subsequently, on July 12, 2000, in the second
phase of the Supplemental Investment, the Company received $15.3 million of
additional capital. In return, the Company issued 18.0 million shares of
Series D Convertible Preferred Stock at a price of $0.85. At the same time, the
40.8 million shares of Series C Convertible Preferred Stock and the warrants to
purchase 5.0 million shares of Series C Convertible Preferred Stock issued in
phase one were canceled and the Company issued an equivalent number of share and
warrants of Series D Convertible Preferred Stock in replacement thereof. Net
proceeds to the Company, after issuance expenses, were $14.3 million.
As a result of the Supplemental Investment, the Company intends to make a
distribution to the holders of the Company's Common Stock and Series C
Convertible Preferred Stock, in the form of a dividend of nontransferable
subscription rights to purchase shares of Series D Convertible Preferred Stock
for $0.85 per share. Capital Z has agreed that neither they nor any of their
affiliates (including SFP) will participate in the Rights Offering.
Consequently, the number of shares offered in the Rights Offering to
Nonaffiliated Stockholders will be approximately 19.8 million shares of
Series D Convertible Preferred Stock. The Company currently expects to complete
the Rights Offering in the quarter ending March 31, 2001.
As previously reported, in August 2000, the Company issued $1.3 million of
preferred stock to certain current and former management investors, and
consultants to the Company.
The Company has previously 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 $25.0 million ($4.2 million in a rights offering and $20.8 million from
Capital Z pursuant to their 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 500,000 shares of the Company's common stock for $5.00 per share.
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
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aggregate additional 1.3 million shares (as adjusted) of the Company's common
stock at an exercise price of $38.35 (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, 2000, the Company did not have the ability to pay such
distributions and does not expect to have the ability to pay dividends for the
foreseeable future.
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. Funded warehouse indebtedness is generally not
included in the indebtedness limitations. Securitization obligations are
generally not included in the indebtedness limitations. As a result of the net
loss for the fiscal year ended June 30, 2000, the Company is restricted from
incurring additional indebtedness as defined in the Indenture. The Company's
repurchase and warehouse facilities also contain 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 assets
allocable to post-September 1996 securitizations which the Company may pledge to
secure debt is limited by the Indenture to 75% of the difference between such
post-September 1996 residuals and servicing advances and $225.0 million. The
Company pledged substantially all of its previously unencumbered residual
interests in order to secure the subline. The Company does not anticipate having
additional residual interests available to finance in the near term. This could
restrict the Company's ability to borrow to provide working capital as needed in
the future.
If the Company's access to warehouse lines, working capital or the
securitization or whole loan markets is restricted, 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 sell. This would negatively impact profitability and
jeopardize the Company's ability to continue to operate as a going concern.
RISK MANAGEMENT
At September 30, 2000, the Company had a $95.0 million forward interest rate
swap contract in place to hedge exposure to its fixed rate loans held for sale.
Included in gain on sale of loans for the three months ended September 30, 2000
is a $231,000 charge to earnings reflecting the Company's mark to the estimated
fair value of the contract at September 30, 2000. The Company continually
monitors the interest rate environment and its hedging strategies. However,
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, including additional charges to earnings on the Company's
existing forward interest rate swap contract or charges to earnings on future
derivative contracts into which the Company may enter.
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FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITIES
SALE OF LOANS--SECURITIZATIONS AND WHOLE LOAN SALES--INTEREST RATE RISK. A
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 or sale of such loans, the Company is exposed to
interest rate risk. The majority of loans are securitized or sold 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, for securitized loans 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, and reduce the
Company's related gain on sale upon securitization. For loans sold in whole loan
sales, if interest rates rise while the loans are held, the gain on sale
recognized by the Company may be reduced.
From time to time, the Company mitigates exposure to rising interest rates
through swap agreements with third parties that sell United States Treasury
securities not yet purchased, forward interest rate swap contracts and the
purchase of Treasury Put Options. 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. Derivatives are recorded at fair value on
the Company's balance sheet. Gains and losses on derivatives are recorded in
earnings as realized or incurred. The Company's risk management activities do
not qualify for special hedge accounting. The Company did not have any hedge or
similar instruments in place at or during the three months ended September 30,
1999. Included in gain on sale of loans during the three months ended
September 30, 2000, is $2.3 million of hedge losses. Of the $2.3 million,
$2.1 million was realized on a $200.0 million forward interest rate swap
contract entered into during the September 2000 quarter and which closed on
September 21, 2000. The Company entered into the forward interest rate swap
contract to mitigate interest rate exposure to its inventory and pipeline of
fixed rate loans held for sale prior to the September 2000 securitization. At
September 30, 2000, the Company had a $95.0 million forward interest rate swap
contract in place to mitigate interest rate exposure prior to the sale of its
inventory and pipeline of fixed rate mortgage loans held for sale. Included in
gain on sale during the three months ended September 30, 2000, is a $231,000
charge to earnings reflecting the Company's mark to the estimated fair value of
the contract at September 30, 2000.
RESIDUAL INTERESTS AND MSRS. The Company had residual interests of
$281.5 million and $291.0 million outstanding at September 30, 2000 and
June 30, 2000, respectively. The Company also had MSRs outstanding at
September 30, 2000 and June 30, 2000 in the amount of $10.6 million and
$12.3 million, respectively. Both of these instruments are recorded at estimated
fair value at September 30, 2000 and June 30, 2000. 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% at September 30, 2000 and June 30,
2000. The weighted average life of the mortgage loans used for valuation at
September 30, 2000 was years and at June 30, 2000 was 3.1 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 loans held for sale, accounts receivables and revolving warehouse and
repurchase facilities. As the amounts are short term in nature
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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 borrowings 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 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
facilities to facilitate the holding of mortgage loans prior to securitization.
As of September 30, 2000, the Company had total committed revolving warehouse
and repurchase facilities available in the amount of $678.0 million (net of
$22.0 million outstanding on a $35.0 million subline); the total amounts
outstanding related to these facilities was $236.3 million at September 30,
2000. Revolving 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 WE ARE UNABLE TO MAINTAIN ADEQUATE FINANCING SOURCES OR OUTSIDE SOURCES
OF CASH ARE NOT SUFFICIENT, OUR EARNINGS AND FINANCIAL POSITION WILL SUFFER AND
JEOPARDIZE OUR ABILITY TO OPERATE AS A GOING CONCERN.
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. Without continued
access to cash, we may be restricted in the amount of mortgage loans that we
will be able to produce and sell, and our ability to operate as a going concern
would be jeopardized.
We use cash primarily for:
- mortgage loan originations and purchases before their securitization or
sale in the secondary market;
- fees and expenses incurred for the securitization of mortgage 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 of mortgage loans;
- ongoing administrative and other operating expenses;
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- interest and principal payments under our revolving warehouse and
repurchase facilities and other existing indebtedness;
- delinquent interest and other servicing related expenses we advance on the
mortgage loans in our servicing portfolio; and
- investments in technology initiatives and other capital improvements.
We receive cash primarily from the following sources:
- REVOLVING BORROWINGS. We borrow cash from various commercial loans, called
revolving warehouse and repurchase facilities, to fund the mortgage loans
that we make or buy. We are required to pay down these revolving warehouse
and repurchase facilities when we sell our mortgage loans. We currently
have three revolving warehouse and repurchase facilities with a total
credit limit of $678.0 million. These revolving warehouse and repurchase
facilities expire between November 2000 and October 2001.
- SALE OF MORTGAGE LOANS. We sell some of our mortgage loans for cash in the
whole loan sale market and we sell the rest of our mortgage loans in
securitization transactions. We receive the difference between the price
at which we sell the mortgage loans and the amount owed on our revolving
warehouse or repurchase facilities for these loans in cash.
- SALE OF RESIDUAL INTEREST ASSETS CREATED IN SECURITIZATIONS. In a
securitization transaction, we retain a subordinated interest, called the
residual interest, in the securitized mortgage loans. The holder of the
residual interest is entitled to receive the excess spread from the
securitization, or the difference between the interest rate we receive on
the mortgages, and the lower interest rate we pay the bondholders in the
securitization transaction. As the holder of the residual interest, we
also retain the right to any mortgage loans that are still outstanding
after the bonds from the securitization transaction are paid in full. At
the time of the securitization transaction, we determine the value of the
residual interest as the present value of expected cash flows from the
excess spread, and record the value of the residual interest as an asset.
We sold the residual interest in the September, 2000 transaction for cash
under a residual forward sale facility and may sell future residual
interests for cash until the expiration of that facility.
- SALE OF ACCOUNTS RECEIVABLE. When borrowers fail to make payments on their
mortgage loans that we service, we are required to advance the interest
due to the bondholders. We also advance delinquent property taxes and
property insurance on the mortgage loans that we service if our borrowers
do not pay them. These advances become accounts receivable of the Company.
The Company is repaid when the borrowers make their delinquent payments or
when the loans are foreclosed upon and the mortgaged properties are sold.
We have, from time to time, sold these accounts receivable, in order to
recover our advances without having to wait until borrowers make their
payments or until the mortgage loans are foreclosed upon.
OUR RIGHT TO SERVICE LOANS MAY BE TERMINATED BECAUSE OF THE HIGH
DELINQUENCIES AND LOSSES ON THE MORTGAGE LOANS IN OUR SERVICING PORTFOLIO WHICH
WILL HURT OUR EARNINGS.
The value of our right to service most of our approximately $3.4 billion
mortgage loan servicing portfolio (at September 30, 2000) is an asset on our
balance sheet called the mortgage servicing rights. If we were to lose the right
to service some or all of the mortgage loans in our portfolio, we would be
required to write-down or write-off our mortgage servicing rights which would
hurt our earnings and decrease our net worth.
Most of our securitization transactions are insured by certain commercial
insurance companies called monoline insurers. The policies issued by the
monoline insurers protect the securitization bondholder against certain losses.
The agreement that we generally enter into with the monoline insurer allows the
monoline insurer to terminate us as the servicer in certain cases. For example,
we
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could be terminated as the servicer for any transaction if the dollar amount or
percentage of mortgage loans that are more than a certain number of days past
due (usually 60 days, 90 days or more) or if the losses on mortgage loans in a
particular securitization transaction are over a specified limit. Also, our
agreement with the monoline insurer for the securitization transactions we
completed in 1999 and 2000 automatically terminates us periodically unless the
monoline insurer renews our servicing right.
As of September 30, 2000, we are over the limit for delinquent mortgage
loans we service for 11 of our securitization transactions and we are over the
limit for losses for four of those 11 securitization transactions plus two
additional securitization transactions. The monoline insurers have the right to
terminate us as the servicer for these securitization transactions as well as
the securitization transactions from 1999 and 2000.
None of our servicing rights have been terminated so far, and our monoline
insurers have not indicated that they plan to terminate us. However, the
monolone insurers do have the right to terminate us at any time with respect to
those securitization transactions described above. If we are terminated, we
would be required to write-down or write-off our mortgage servicing rights.
HIGH DELINQUENCIES OR LOSSES ON THE MORTGAGE LOANS IN OUR SERVICING
PORTFOLIO MAY HURT OUR CASH FLOWS.
In a securitization transaction, the excess spread is initially used to
over-collateralize the bonds by paying down the principal balance of the bonds
below the principal balance of the mortgage loans securing the bonds in the
securitization transaction. Once the bonds are over-collateralized to a certain
amount, we start receiving the excess spread. If the mortgage loans are more
delinquent or if the loss on mortgage loans is greater than expected, the excess
spread that we are supposed to receive from the securitization transaction is
diverted to over-collateralize the bonds further.
In addition, when borrowers do not make their required mortgage loan
payments or do not pay their real estate taxes or insurance premiums on loans
that we service, we are required to advance those payments out of our working
capital.
HIGH LOSSES ON THE MORTGAGE LOANS IN OUR SERVICING PORTFOLIO MAY HURT OUR
NET EARNINGS.
All of our mortgage loans are secured by residential property. If borrowers
do not repay their loans, we recover the principal and unpaid interest and any
servicing expenses incurred by us by foreclosing on the loans and selling the
properties. If the value of the property securing a loan is not sufficient to
cover the principal amount of the loan and related interest and servicing
expenses in the event of foreclosure of that loan and sale of the mortgaged
property, we suffer a loss.
High loan loss levels may affect our net earnings. During the period of time
we hold mortgage loans before we sell them, the entire loan loss reduces our
earnings. For mortgage loans we have sold in a securitization transaction, we
apply certain assumptions to estimate losses to determine the amount of non-cash
gain on sale that we record at the closing of a securitization transaction. If
actual loan losses exceed our estimated losses, we may be required to write-down
our residual interests which would hurt our earnings and decrease our net worth.
OUR MORTGAGE LOANS ARE SUBJECT TO HIGHER RISKS OF LOSS WHICH MAY HURT OUR
EARNINGS.
We make many of our mortgage loans to borrowers in lower credit grades. In
addition, many of the mortgage loans we make have an adjustable interest rate
feature. Both low credit grade mortgage loans and adjustable interest rate
mortgage loans are more likely to result in a loss. Low credit grade mortgage
loans are more likely to become delinquent and result in a foreclosure loss
because the borrowers on these loans have a history of late payment or
non-payment. Adjustable interest rate mortgage loans are more likely to become
delinquent and result in a foreclosure loss because the borrower is qualified
for the loan at a reduced interest rate and the amount of the payment in most
cases will increase over time. If the payment amounts increase, borrowers may
have difficulty making their payments. When loan loss rates are higher than we
expected, our earnings can be hurt.
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IF THE MORTGAGE LOANS WE SERVICE PAY OFF FASTER THAN EXPECTED, OUR EARNINGS
WILL BE HURT.
When we close a securitization transaction, we record the value of the
residual interest asset based upon the present value of the excess spread that
we expect to receive from the mortgage loans until they are repaid. In order to
estimate the present value of the expected excess spread, we estimate (among
other factors) how quickly the mortgage loans in the securitization transaction
will pay off, which we call the prepayment rate. An increase in the actual rate
the mortgage loans pay off would reduce the number of loans that we service and
the income we earn from servicing. If the actual rate the mortgage loans pay off
is higher than we expected, we are required to write-down the residual interest
that we recorded when we closed the securitization transaction.
OUR OPERATIONS MAY BE HURT BY INCREASES OR DECREASES IN INTEREST RATES.
An increase in long-term interest rates could, among other things:
- decrease the demand for consumer credit in general; and
- reduce the average size of mortgage loans that we make, by decreasing
demand for refinancing lower-rate first mortgage loans and increasing
demand for second mortgage loans.
An increase in short-term interest rates could, among other things,
- increase our borrowing costs, most of which are tied to those rates;
- reduce our excess spread and the income recognized in a securitization. In
addition, during the time the securitization bonds are outstanding,
adjustable rate mortgage loans adjust based on an index or adjustment
period different from the index and adjustment period for bonds issued in
a securitization. Adjustable rate mortgage loans are also subject to
interest rate caps, which limit the amount the interest rate can change
during any given period and over the life of the loans. If interest rates
increase, the interest rates on the bonds issued in a securitization
transaction could increase faster without limitation by caps, than the
interest rates on our adjustable rate mortgage loans in the
securitization, and
- reduce the price paid for loans we made at lower interest rates in whole
loan sales of mortgage loans.
A decline in long-term or short-term interest rates could increase the
prepayment rate. Any of these changes in interest rates could hurt our earnings.
AN INTERRUPTION OR REDUCTION IN THE SECURITIZATION AND WHOLE LOAN MARKET
WOULD HURT OUR FINANCIAL PERFORMANCE.
In order for us to continue our mortgage loan origination and purchase
operations, we must be able to sell the mortgage loans we make in the
securitization and whole loan markets. We use the cash proceeds from these sales
to pay down our warehouse and repurchase facilities and make new mortgage loans.
The value of our mortgage loans depends on a number of factors, including
general economic conditions, interest rates and governmental regulations. In
addition, we rely on institutional purchasers, such as investment banks,
financial institutions and other mortgage lenders, to purchase our mortgage
loans in the whole loan market and our bonds issued in securitization
transactions. We cannot be sure that the purchasers will be willing to purchase
mortgage loans on satisfactory terms or that the market for such loans will
continue. Adverse changes in the securitization and whole loan markets may
affect our ability to securitize or sell our mortgage loans for acceptable
prices within a reasonable period of time which would hurt our earnings.
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IF WE ARE UNABLE TO SELL A SIGNIFICANT PORTION OF OUR MORTGAGE LOANS ON AT
LEAST A QUARTERLY BASIS, OUR EARNINGS WOULD BE HURT.
We earn income on our mortgage loans when they are sold. Our strategy is to
sell all of the mortgage loans we make at least quarterly. However, market and
other considerations could affect the timing of the sale of our mortgage loans.
If we are not able to sell all of the mortgage loans that we make during the
quarter in which the loans are made, we would not likely be profitable for that
quarter.
CHANGES IN THE VOLUME AND COST OF OUR BROKER LOANS MAY DECREASE OUR LOAN
PRODUCTION AND HURT OUR EARNINGS.
We depend on independent mortgage brokers for many of our mortgage loans,
called broker loans. A significant portion of our loan production is made up of
broker loans. Our earnings and financial condition could be hurt by a decrease
in the volume or an increase in the cost of our broker loans. A decrease in
volume or an increase in the cost of broker loans could result from competition
from other lenders and purchasers of broker loans. The independent mortgage
brokers are not obligated by contract or otherwise to do business with us and
negotiate with many lenders for each prospective borrower. We compete with these
other lenders for the independent brokers' business on pricing, service, loan
fees, costs and other factors.
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 mortgage loan, customer service,
marketing and distribution channels, amount and term of the loan, mortgage loan
origination fees and interest rates. Many of our competitors are substantially
larger and have considerably greater financial, technical and marketing
resources and lower costs of capital than we do. In the future, we may also face
competition from government-sponsored entities, such as FannieMae and
FreddieMac. These government-sponsored entities may enter the subprime mortgage
market and target potential customers in our highest credit grades, who
constitute a significant portion of our customer base. Additional competition
may lower the rates we can charge borrowers and increase the cost to purchase
mortgage loans, which would decrease our earnings on the sale or securitization
of these loans. Increased competition may also reduce the volume of our mortgage
loan originations and mortgage loan sales and increase the demand for our
experienced personnel and the potential that such personnel will leave for
competitors.
BECAUSE A SIGNIFICANT AMOUNT OF THE MORTGAGE 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, 2000, 21.9% and 11.6% of the mortgage loans we serviced
were secured by residential properties located in California and Florida,
respectively. Because of these concentrations in California and Florida,
declines in those residential real estate markets may reduce the values of the
properties securing our mortgage loans, increase foreclosures and losses and
hurt our earnings.
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. Since such natural disasters are not typically covered by the
standard hazard insurance policies maintained by borrowers, the borrowers have
to pay for repairs due to such disasters. Uninsured borrowers may not repair the
property or may stop paying their mortgage if the property is damaged. This
would cause increased foreclosures and decrease our ability to recover losses on
properties affected by such disasters, and hurt our earnings.
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THE RISKS ASSOCIATED WITH OUR BUSINESS INCREASE IN ANY ECONOMIC SLOWDOWN OR
RECESSION.
Foreclosures and resulting losses generally increase during economic
slowdowns or recessions. Periods of economic slowdown or recession may also
reduce real estate values. Any decline in real estate values reduces the ability
of borrowers to use their home equity to borrow money, and may reduce the demand
for our mortgage loans. Declines in real estate values also increase losses in
the event of foreclosure.
WE MAY BE REQUIRED TO REPURCHASE MORTGAGE LOANS OR INDEMNIFY INVESTORS IF WE
BREACH REPRESENTATIONS AND WARRANTIES WHICH WOULD HURT OUR EARNINGS.
We are required under agreements governing our securitization transactions
and whole loan sales to repurchase or replace mortgage loans which do not
conform to representations and warranties we make at the time of sale concerning
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, we may be
obligated, in certain whole loan sales, to buy back mortgage loans if the
borrower defaults on the first payment of principal and interest due. Such
repurchase obligations could hurt our earnings and have a material adverse
effect on our financial position.
IF WE ARE UNABLE TO COMPLY WITH MORTGAGE BANKING RULES AND REGULATIONS, OUR
ABILITY TO MAKE MORTGAGE LOANS MAY BE RESTRICTED WHICH WOULD HURT OUR EARNINGS.
Our operations are subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities. Our operations
are also subject to various laws, regulations and judicial and administrative
decisions. 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 mortgage 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. 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.
Because our business is highly regulated, the laws, rules and regulations
applicable to us are subject to regular modification and change. There are
currently proposed various laws, rules and regulations which, if adopted, could
negatively impact our operations and our earnings.
CHANGES IN THE MORTGAGE INTEREST DEDUCTION COULD DECREASE OUR LOAN
PRODUCTION AND 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 mortgage 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
this change. Accordingly, the reduction or elimination of these tax benefits
could have a material adverse effect on the demand for mortgage 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.
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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 September 30, 2000, entities controlled by Capital Z beneficially owned
senior preferred stock representing 47.3% of our combined voting power in the
election of directors and 91.4% 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 as current members' terms
expire Capital Z has the continuing right to appoint and elect four directors
and nominate one additional director. 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.
THERE MAY NOT BE A LIQUID MARKET FOR OUR COMMON STOCK WHICH AFFECTS THE
LIQUIDITY OF OUR COMMON STOCK AND OUR PREFERRED STOCK.
The Common Stock is traded on the New York Stock Exchange under the symbol
"AAM." However, we cannot assure you that the Common Stock will remain listed on
the New York Stock Exchange. We have received a notice from the New York Stock
Exchange that, due to the fact that the 30-day average trading price of our
Common Stock was below $1.00 in, we do not meet the requirements to maintain an
ongoing listing on the New York Stock Exchange. We are also notified that the
Common Stock may be subject to suspension or delisting. On November 10, 2000,
the 30-day average closing price of the Common Stock was $1.573.
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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--NONE
ITEM 5. OTHER INFORMATION--NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS: SEE EXHIBIT INDEX
(B) THE COMPANY FILED THE FOLLOWING CURRENT REPORTS ON FORM 8-K DURING THE
QUARTER ENDED SEPTEMBER 30, 2000:
(1) THE COMPANY FILED A CURRENT REPORT ON FORM 8-K ON JULY 14, 2000 (DATED
JULY 12, 2000) REPORTING AN INVESTMENT IN THE COMPANY BY AN ENTITY
CONTROLLED BY CAPITAL Z FINANCIAL SERVICES FUND II, L.P.
(2) THE COMPANY FILED A CURRENT REPORT ON FORM 8-K ON JULY 31, 2000 (DATED
JULY 27, 2000) REPORTING THE APPOINTMENT OF ROBERT A. SPASS TO THE
COMPANY'S BOARD OF DIRECTORS.
(3) THE COMPANY FILED A CURRENT REPORT ON FORM 8-K ON AUGUST 18, 2000 (DATED
AUGUST 10, 2000) REPORTING DELINQUENCY AND LOSS STATISTICS IN THE LOAN
SERVICING PORTFOLIO OF AAMES CAPITAL CORPORATION, A WHOLLY OWNED
SUBSIDIARY OF THE COMPANY.
(4) THE COMPANY FILED A CURRENT REPORT ON FORM 8-K ON AUGUST 18, 2000 (DATED
AUGUST 15, 2000) REPORTING THE APPOINTMENT OF JAMES HUSTON AS THE
COMPANY'S CHIEF FINANCIAL OFFICER.
(5) THE COMPANY FILED A CURRENT REPORT ON FORM 8-K ON SEPTEMBER 22, 2000
(DATED SEPTEMBER 5, 2000) REPORTING ON ITEM 5 THE EXECUTION OF A RESIDUAL
FORWARD SALE FACILITY AGREEMENT.
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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/ JAMES HUSTON
-----------------------------------------
James Huston
EXECUTIVE VICE PRESIDENT--FINANCE AND
Date: November 14, 2000 CHIEF FINANCIAL AND ACCOUNTING OFFICER
</TABLE>
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
3.1 Certificate of Incorporation of Registrant, as amended(1)
10.1 Warrant to Purchase Series D Convertible Preferred Stock of
the Registrant, dated as of July 12, 2000, granted by the
Registrant to Specialty Finance Partners(2)
10.2 Fifth Amendment, dated as of August 31, 2000, to the Master
Loan and Security Agreement, dated as of December 30, 1999,
between Aames Capital Corporation, a wholly owned subsidiary
of the Registrant ("ACC"), and Morgan Stanley Mortgage
Capital, Inc.(3)
10.3(a) First Amendment, dated as of June 1, 2000, to the Second
Amended and Restated Master Repurchase Agreement Governing
Purchases and Sales of Mortgage Loans, dated as of April 28,
2000, between ACC and Lehman Commercial Paper, Inc.
10.3(b) Second Amendment, dated as of August 25, 2000, to the Second
Amended and Restated Master Repurchase Agreement Governing
Purchases and Sales of Mortgage Loans, dated as of April 28,
2000, between ACC and Lehman Commercial Paper, Inc.
10.3(c) Third Amendment, dated as of October 31, 2000, to the Second
Amended and Restated Master Repurchase Agreement Governing
Purchases and Sales of Mortgage Loans, dated as of April 28,
2000, between ACC and Lehman Commercial Paper, Inc.
10.4(a) Amended and Restated Amendment No. 2, dated as of June 1,
2000, to the Warehouse Loan and Security Agreement, dated as
of February 10, 2000, between the Registrant and Greenwich
Capital Financial Products, Inc.
10.4(b) Amendment Number Three, dated as of September 1, 2000, to
the Warehouse Loan and Security Agreement, dated as of
February 10, 2000, between the Registrant and Greenwich
Capital Financial Products, Inc.
10.4(c) Amendment No. 2, dated June 1, 2000, to Guaranty dated as of
February 10, 2000 between the Registrant and Greenwich
Capital Financial Products, Inc.
10.5 Residual Forward Sale Facility, dated as of August 31, 2000,
between the Registrant and Capital Z Investments L.P.(4)
11 Computation of Per Share Loss
27 Financial Disclosure Schedule
</TABLE>
------------------------
(1) Incorporated by reference from Registrant's Annual Report on Form 10-K for
the year ended June 30, 2000 and filed with the Commission on September 28,
2000.
(2) Incorporated by reference from Exhibit 10.28 to Registrant's Annual Report
on Form 10- K for the year ended June 30, 2000 and filed with the
Commission on September 28, 2000.
(3) Incorporated by reference from Exhibit 10.36(f) to Registrant's Annual
Report on Form 10-K for the year ended June 30, 2000 and filed with the
Commission on September 28, 2000.
(4) Incorporated by reference from Exhibit 10.39 to Registrant's Annual Report
on Form 10- K for the year ended June 30, 2000 and filed with the
Commission on September 28, 2000.
