<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
MEGO MORTGAGE CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
(MEGO MORTGAGE LOGO)
January 25, 1999
Dear Stockholder:
We invite you to attend the 1999 Annual Meeting of Stockholders of Mego
Mortgage Corporation to be held at 10:00 a.m., Eastern Standard Time, on
Tuesday, February 16, 1999 at the offices of King & Spalding, 191 Peachtree
Street, Atlanta, Georgia 30303. The matters to be considered at the meeting are
described in the formal Notice and Proxy Statement on the following pages.
Whether or not you plan to attend in person, it is important that your
shares be represented at the Annual Meeting. The Board of Directors recommends
that Stockholders vote FOR each of the matters described in the Proxy Statement
to be presented at the Annual Meeting. PLEASE DATE AND SIGN YOUR PROXY CARD AND
RETURN IT IN THE ENCLOSED ENVELOPE AS SOON AS POSSIBLE. Thank you.
Sincerely,
/s/Champ Meyercord
Champ Meyercord
Chairman of the Board and
Chief Executive Officer
<PAGE> 3
MEGO MORTGAGE CORPORATION
1000 PARKWOOD CIRCLE, SUITE 600, ATLANTA, GEORGIA 30339
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO THE STOCKHOLDERS OF MEGO MORTGAGE CORPORATION:
NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Stockholders or
any adjournment or postponement thereof of Mego Mortgage Corporation, a Delaware
corporation (the "Company"), will be held at 10:00 a.m., Eastern Standard Time,
on February 16, 1999 at the offices of King & Spalding, 191 Peachtree Street,
Atlanta, Georgia 30303 for the following purposes, all of which are set forth
more completely in the accompanying proxy statement:
(1) To elect six directors to serve until the next annual meeting of
stockholders or until their successors have been duly elected
and qualified;
(2) To amend the certificate of incorporation of the Company to
reflect a name change to Altiva Financial Corporation;
(3) To amend the certificate of incorporation of the Company to
reflect a reverse stock split;
(4) To vote on a proposal to adopt and approve the Mego Mortgage
Corporation 1999 Incentive Stock Plan; and
(5) To transact such other business as may properly come before the
meeting or any adjournment thereof.
The board of directors has fixed the close of business on December 18,
1998 as the record date for determining those stockholders entitled to notice
of, and to vote at, the annual meeting.
You are cordially invited to attend the annual meeting in person. EVEN
IF YOU PLAN TO ATTEND IN PERSON, YOU ARE REQUESTED TO DATE, SIGN AND RETURN THE
ENCLOSED PROXY AT YOUR EARLIEST CONVENIENCE. You may revoke your proxy at any
time prior to its use.
By Order of the Board of Directors
/s/Champ Meyercord
Champ Meyercord
Chairman of the Board and
Chief Executive Officer
Atlanta, Georgia
January 26, 1999
PLEASE DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT
PROMPTLY IN THE ENVELOPE PROVIDED FOR THAT PURPOSE.
<PAGE> 4
MEGO MORTGAGE CORPORATION
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies by the board of directors of Mego Mortgage Corporation, a Delaware
corporation (the "Company"), for use at the 1999 Annual Meeting of Stockholders
of the Company or any adjournment or postponement thereof. The annual meeting
will be held at 10:00 a.m., Eastern Standard Time, on February 16, 1999 at the
offices of King & Spalding, 191 Peachtree Street, Atlanta, Georgia 30303.
This Proxy Statement, the Notice of Annual Meeting, the proxy card and the
Company's Annual Report on Form 10-K were first mailed to stockholders of the
Company on or about January 26, 1999.
RECORD DATE
Only stockholders of record at the close of business on December 18, 1998
(the "Record Date") are entitled to vote at the annual meeting.
SHARES OUTSTANDING AND VOTING RIGHTS
As of the Record Date, there were 30,566,660 shares of the common stock of
the Company, no par value, outstanding and entitled to vote. Each share of
common stock entitles the holder to one vote on all matters presented at the
annual meeting.
PROXY PROCEDURE
Proxies properly executed and returned in a timely manner will be voted at
the annual meeting in accordance with the directions noted thereon. If no
direction is indicated, proxies will be voted FOR the election of the nominees
named herein as directors, FOR the other proposals set forth herein and in
accordance with the judgment of the persons acting under the proxies on any
other matters presented for a vote. Any stockholder giving a proxy has the power
to revoke it at any time before it is voted, either in person at the annual
meeting, by written notice to the Secretary of the Company or by delivery of a
later-dated proxy.
Votes cast by proxy or in person at the annual meeting will be tabulated by
the inspector(s) of elections appointed for the meeting and will be counted in
determining whether or not a quorum is present. A proxy submitted by a
stockholder may indicate that all or a portion of the shares represented by such
proxy are not being voted by such stockholder with respect to a particular
matter ("non-voted shares"). This could occur, for example, when a broker is not
permitted to vote shares held in "street name" on certain matters in the absence
of instructions from the beneficial owner of the shares. Non-voted shares with
respect to a particular matter will not be considered shares present and
entitled to vote on such matter, although such shares will be counted for
purposes of determining the presence of a quorum. Shares voting to abstain as to
a particular matter, and directions to "withhold authority" to vote for
directors, will not be considered non-voted shares and will be considered
present and entitled to vote with respect to such matter.
<PAGE> 5
VOTING REQUIREMENTS
Provided that a quorum is present at the annual meeting, the affirmative
vote of a plurality of the votes cast by the shares present in person or by
proxy will be required to elect each director. The proposal to adopt and approve
the Mego Mortgage Corporation 1999 Incentive Stock Plan (the "Plan") requires
the affirmative vote of the majority of the shares represented and entitled to
vote at the meeting. The affirmative vote of the holders of a majority of the
votes represented by the outstanding shares of the common stock, whether or not
present at the annual meeting, who are entitled to vote at the annual meeting,
is required for the approval and adoption of the proposals to amend the
Company's certificate of incorporation. Non-voted shares: (1) will have the
effect of a vote "Against" the proposals to amend the Company's certificate of
incorporation; and (2) will have no effect on the proposal to elect directors or
the proposal to adopt and approve the the Plan. Abstentions with respect to a
proposal are counted for purposes of establishing a quorum. If a quorum is
present, abstentions: (1) will have the effect of a vote "Against" the proposals
to amend the Company's certificate of incorporation and to adopt and approve the
the Plan; and (2) will have no effect on the election of directors.
COSTS OF SOLICITATION
Proxies will be solicited by the board of directors through the mail.
Proxies may also be solicited by directors, officers and other employees of the
Company, either personally, by mail, by telephone or otherwise, but such persons
will not be compensated for such services. Brokerage firms, banks, fiduciaries,
voting trustees or other nominees will be requested to forward the soliciting
material to each beneficial owner of stock held of record by them. The Company
has retained Georgeson & Company, Inc. to aid in the solicitation of proxies for
fees which the Company expects would not exceed $10,000.
PROPOSAL NUMBER ONE
ELECTION OF DIRECTORS
GENERAL
The Company's board of directors has fixed the number of directors at ten.
Stockholders annually elect directors to serve until the next Annual Meeting of
Stockholders or until their successors have been duly elected and qualified.
Stockholders are being asked to elect six directors to serve until the annual
meeting in 1999 or until their successors have been duly elected and qualified.
The following is a brief description of the business experience of each
nominee for at least the past five years.
Edward B. "Champ" Meyercord has been Chairman and Chief Executive Officer
of the Company since July 1998 and he was a special consultant to the Company
from May 1998 until July 1998. From 1994 to 1998, Mr. Meyercord was a senior
investment banker with Greenwich Capital Markets, most recently as a co-head of
the Mortgage and Asset Backed Finance Group. In addition to his involvement with
asset backed securities, Mr. Meyercord was involved in the development of
financing vehicles for specialty finance companies. Greenwich Capital Markets
has performed investment banking services for the Company since 1994. Prior to
1994, Mr. Meyercord was a co-managing partner of
2
<PAGE> 6
Hillcrest Partners, a private investment bank specializing in mergers and
acquisitions for financial institutions. Mr. Meyercord is a member of the Board
of Directors of The National Home Equity Mortgage Association.
Wm. Paul Ralser. Mr. Ralser has been a Director of the Company since June
1998 and President and Chief Operating Officer since September 1998. Mr. Ralser
has served as President and Chairman of the Board of First Fidelity Bancorp,
Inc. since June 1996. Since December 1994, Mr. Ralser has been President and
Chief Executive Officer of First Fidelity Thrift & Loan Association. From
October 1992 to December 1994, Mr. Ralser was Executive Vice President and
Director of Affordable Housing for Countrywide Funding Corporation and, from
September 1986 until August 1992, he served as President and Chief Executive
Officer of Countrywide Thrift and Loan.
Spencer I. Browne has been a Director of the Company since consummation of
its initial public offering in November 1996. For more than five years prior to
September 1996, Mr. Browne held various executive and management positions with
several publicly traded companies engaged in businesses related to the
residential and commercial mortgage loan industry. From August 1988 until
September 1996, Mr. Browne served as President, Chief Executive Officer and a
Director of Asset Investors Corporation ("AIC"), a New York Stock Exchange
("NYSE") traded company he co-founded in 1986. He also served as President,
Chief Executive Officer and a Director of Commercial Assets, Inc., an American
Stock Exchange traded company affiliated with AIC, from its formation in October
1993 until September 1996. In addition, from June 1990 until March 1996, Mr.
Browne served as President and a Director of M.D.C. Holdings, Inc., a NYSE
traded company and the parent company of a major home builder in Colorado.
Hubert M. Stiles, Jr. Mr. Stiles has been a Director of the Company since
July 1998. Since September 1996, Mr. Stiles has been a money manager for and
President of T. Rowe Price Recovery Fund II Associates, L.L.C. Mr. Stiles has
been Vice President of T. Rowe Price Associates, Inc. and a money manager for
and President of T. Rowe Price Recovery Fund Associates, Inc. since May 1988.
David J. Vida, Jr. Mr. Vida has been a Director of the Company since June
1998. Since July 1996, Mr. Vida has been President of City Mortgage Services, a
division of City National Bank. Mr. Vida served as Chief Financial Officer of
Prime Financial Corp. from June 1994 until June 1996. From January 1992 to June
1996, Mr. Vida was a Senior Accountant for KPMG Peat Marwick LLP.
John D. Williamson, Jr. has been a Director of the Company since September
1998. Since January 1997, Mr. Williamson has been practicing law as a sole
practitioner, focusing on consulting, mediation and expert witnesses. From 1976
to January 1997, Mr. Williamson worked in various capacities at Transport Life
Insurance Company (a subsidiary of Travelers Group, Inc.) including Vice
Chairman of the Board from 1995 to 1997 and Chairman of the Board from 1995 to
1998.
Each of these nominees has indicated a willingness to serve on the board of
directors of the Company.
VOTE REQUIRED
The six nominees who receive the greatest number of votes cast for the
election of directors shall become directors at the conclusion of the tabulation
of votes.
3
<PAGE> 7
THE BOARD OF DIRECTORS RECOMMENDS APPROVAL FOR THE NOMINEES SET FORTH
ABOVE. PROXY CARDS THAT ARE SIGNED AND RETURNED WILL BE SO VOTED UNLESS CONTRARY
INSTRUCTIONS ARE INDICATED THEREON.
PROPOSAL NUMBER TWO
APPROVAL OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION
TO EFFECT A NAME CHANGE FROM MEGO MORTGAGE CORPORATION
TO ALTIVA FINANCIAL CORPORATION
GENERAL
The board of directors has unanimously approved an amendment to Article I
of the Company's certificate of incorporation that would result in a change in
the Company's name to Altiva Financial Corporation. The proposed amendment would
amend Article I of the Company's certificate of incorporation to read as
follows:
"The name of the corporation is ALTIVA FINANCIAL CORPORATION
(hereinafter called the "Corporation")."
The board of directors has directed that the proposed amendment be
submitted for stockholder approval.
REASONS FOR THE NAME CHANGE
The board of directors has concluded that a change in the Company's name is
advisable due to the significant change in the Company's business strategy and
strategic initiatives during the last fiscal year. As described in the Company's
Annual Report on Form 10-K distributed along with this proxy statement, the
Company (i) experienced a significant loss in fiscal 1998 due in large part to a
write-down in the value of the mortgage related securities retained by the
Company in connection with prior securitizations of its loan production and (ii)
appointed a new senior management team following the Company's recapitalization
in June 1998. Due to the Company's recent financial performance and economic
factors that have adversely impacted the speciality finance industry generally,
the Company's new management team, in consultation with the board of directors,
reevaluated the Company's business strategy and strategic initiatives. The
Company's new business strategy and strategic initiatives include the following:
- - A focus on the production of home equity loans rather than a high
loan-to-value ratio loan product;
- - Development of a direct-to-consumer loan production platform;
- - Increased loan production through the acquisition of other mortgage lending
companies;
- - Sales of whole loans for cash in the secondary market rather than the disposal
of loans in securitization transactions; and
- - Implementation of cost saving measures, including a workforce reduction.
The board of directors of the Company has decided that changing the
Company's name to Altiva Financial Corporation will emphasize the Company's new
business strategy
4
<PAGE> 8
and strategic initiatives. In connection with the name change, the Company also
anticipates changing its ticker symbol on the Nasdaq Stock Market.
The change in the Company's name will not affect the validity of currently
outstanding stock certificates. Upon approval of Proposal Number Two only, the
Company's current stockholders will not be required to surrender or exchange any
stock certificates that they now hold and they should not send such certificates
to the Company or its transfer agent. If Proposal Number Three is approved, the
Company's current stockholders will be asked to exchange their stock
certificates. See "Proposal Number Three" beginning on page 5 of this Proxy
Statement.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding common
stock is required to approve Proposal Number Two.
THE BOARD OF DIRECTORS RECOMMENDS ADOPTION AND APPROVAL OF THE PROPOSED
AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION. THE AMENDMENT WOULD
CHANGE THE COMPANY'S NAME FROM MEGO MORTGAGE CORPORATION TO ALTIVA FINANCIAL
CORPORATION. PROXY CARDS THAT ARE SIGNED AND RETURNED WILL BE SO VOTED UNLESS
CONTRARY INSTRUCTIONS ARE INDICATED THEREON.
PROPOSAL NUMBER THREE
APPROVAL OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION
TO EFFECT A ONE-FOR-TEN CONSOLIDATION OF COMMON STOCK
GENERAL
The Company has experienced a low trading price and low trading volume for
its common stock over the past few months. Under the rules of the Nasdaq Stock
Market, the Company's common stock must have a trading price above $1.00 in
order to maintain its listing on the Nasdaq Stock Market. Given the recent low
trading price of the Company's common stock, the board of directors has
concluded that it would be advisable to amend the Company's certificate of
incorporation to effect a one-for-ten consolidation (the "consolidation") of the
Company's issued and outstanding common stock. The effect of the amendment to
the Company's certificate of incorporation will be to add a new paragraph
following the first paragraph of Article IV, which will read as follows:
"Each ten (10) issued and outstanding shares of common stock the
Corporation shall be combined into one (1) share of validly issued, fully
paid and non-assessable common stock, par value $.01. Each person, as of
the effective time set forth in the Certificate of amendment filed with
respect to this paragraph, holding of record any issued and outstanding
shares of common stock shall receive upon surrender to the Corporation's
transfer agent a stock certificate or certificates to evidence and
represent the number of shares of post-consolidation common stock to which
such shareholder is entitled after giving effect to the consolidation;
provided, however, that all fractional shares resulting therefrom shall be
paid in cash."
The proposed amendment to the certificate of incorporation of the Company
was unanimously approved by the board of directors, who directed that it be
submitted for
5
<PAGE> 9
stockholder approval. The amendment, if approved, will result in the
consolidation of outstanding stock. Therefore, following approval and filing of
the amendment, each share of post-consolidation common stock ("New common
stock") will be exchanged for every ten (10) shares of presently issued and
outstanding common stock ("Old common stock") owned by a stockholder.
Other than adjusting the total number of shares issued (by consolidation),
there will be no other changes to ownership of the Company's capital stock. The
voting rights and other privileges that each share of common stock enjoys before
the proposed consolidation will be the same following the consolidation, and the
consolidation will not affect any stockholder's proportionate equity interest in
the Company. The consolidation may, however, result in an immaterial adjustment
due to the purchase of any fractional shares of common stock that result from
the consolidation. Shares of common stock issuable upon the exercise of
outstanding stock options or upon the conversion of outstanding shares of
preferred stock will also be consolidated in the same ratio of one-for-ten. As a
result of such adjustment, the exercise price with respect to outstanding
options will be increased by a factor of ten.
This table gives an example of the effect of consolidation:
<TABLE>
<CAPTION>
POST-APPROVAL
PRE-APPROVAL SHARES SHARE
STOCKHOLDER SHARES OWNED OWNED FRACTIONS PAID
----------- ------------- ------------- --------------
<S> <C> <C> <C>
Stockholder A 30,000 shares 3,000 shares -0-
Stockholder B 500 shares 50 shares -0-
Stockholder C 66 shares 6 shares 0.6 share
</TABLE>
Fractional shares will be paid for upon exchange of the outstanding
certificates based upon the average of the high and low bid price for the common
stock as quoted on the Nasdaq Stock Market on the date of the consolidation.
The Company currently has outstanding one class of common stock and one
class of preferred stock. In the event that Proposal Number Three is approved
and adopted by the stockholders, the number of outstanding shares of common
stock would be reduced. The Company is authorized to issue 405,000,000 shares of
capital sock, 400,000,000 of which are designated common stock, and 5,000,000 of
which are designated preferred stock. Of the 400,000,000 shares of authorized
common stock, there were 30,566,660 shares issued and outstanding as of December
18, 1998. Further, there are approximately 6,018,591 shares of common stock
underlying stock options that have been reserved for issuance upon exercise of
stock options and 41,675,542 shares that have been reserved for issuance upon
conversion of the Company's convertible preferred stock. The number of shares of
common stock issuable upon exercise of stock options or conversion of preferred
stock would also be reduced (one-for-ten) to an aggregate of 4,769,413 shares in
connection with the proposed consolidation.
The proposed consolidation will not change the authorized number of shares
of common stock or preferred stock, although as a result of the consolidation,
the decrease in the number of issued and outstanding shares will result in an
increase in the number of shares available for future issuance. Such additional
unissued shares of common stock will be available at the discretion of the board
of directors for, among other things, future stock splits, stock dividends,
issuance in connection with acquisitions, issuance upon the exercise
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<PAGE> 10
of stock options or to raise additional capital in public or private offerings.
The issuance of additional shares of common stock could dilute the voting
rights, equity and earnings per share of existing stockholders of the Company.
In addition, the increase in the authorized but unissued common stock could be
considered an anti-takeover measure because the additional authorized but
unissued shares of common stock could be used by the board of directors make a
change in control of the Company more difficult. The board of directors' purpose
in recommending this proposal is not as an anti-takeover measure, but for the
reasons discussed above.
This table illustrates the principal effects of the proposed consolidation
on all outstanding shares of common stock on the date of the consolidation:
<TABLE>
<CAPTION>
NUMBER OF SHARES PRIOR TO PROPOSED AFTER PROPOSED
OF COMMON STOCK CONSOLIDATION CONSOLIDATION
---------------- ----------------- --------------
<S> <C> <C>
Authorized 400,000,000 400,000,000
Issued and Outstanding 30,566,660 3,056,666*
Available for Future
Issuance 369,433,330 396,943,334**
</TABLE>
- -------------------------
* Subject to minor adjustment due to the purchase of fractional shares
resulting from the consolidation.
** Does not include further reduction for shares that are reserved in connection
with options and outstanding preferred stock.
It is not anticipated that any change will be made in the Company's capital
stock as a result of the proposed consolidation.
REASONS FOR THE CONSOLIDATION
The Company's common stock is listed on the Nasdaq Stock Market. One of the
requirements for continued listing is that the minimum bid price for the
Company's common stock be $1 per share. Failure to meet this requirement for a
period of 30 consecutive business days will result in notification by Nasdaq of
possible delisting from the market if the minimum bid is not brought within
compliance over a 90 day period following the notification. One method to
increase the bid price for the common stock is to consolidate the outstanding
shares, thereby increasing the attached value per share. The following table
illustrates the possible effect of a consolidation on the stock price, assuming
all other market factors remain the same:
<TABLE>
<CAPTION>
BEFORE STOCK CONSOLIDATION AFTER STOCK CONSOLIDATION
--------------------------- -------------------------
NUMBER OF PER SHARE NUMBER OF PER SHARE
SHARES OWNED PRICE SHARES OWNED PRICE
-------------- ----------- ------------- ----------
<S> <C> <C> <C>
100,000....... $1.00 10,000 $10.00
10,000....... $1.00 1,000 $10.00
</TABLE>
This table demonstrates the mathematical implication of a stock consolidation.
The Company cannot predict the actual result of trading and bid price for the
shares of common stock following the consolidation due to the numerous market
factors that affect trading daily, including impacts to the market as a whole.
7
<PAGE> 11
The board of directors further believes that the current per share price of
the common stock and the large number of shares of common stock outstanding have
had a negative impact on the market for its common stock. Furthermore, the large
number of shares outstanding and the relatively few shares that are traded on a
daily basis in comparison has hindered the Company's ability to raise capital by
issuing additional shares of common stock. The board of directors is hopeful
that after the consolidation the market will react positively and in such a
fashion that the price of the Company's common stock will rise and cease to be
treated as "low-priced" stock by the investment community.
The board of directors recognizes that the proposed consolidation will not,
in itself, result in the Company's common stock being categorized other than as
a low-priced stock, and that the only path to being categorized as other than
low-priced is through sustained growth and profitability, neither of which can
be assured, and the absence of which will result negatively upon the trading
value of the Company's common stock following the proposed consolidation.
Although the board of directors is hopeful that the decrease in the number
of shares of common stock that would be outstanding after the proposed
consolidation will result in an increased price level per share of common stock
which will encourage interest in the market for that common stock and promote
greater marketability for the common stock, there can be no assurance that the
market will respond to the consolidation with an increase in the per share price
or with any increase in average daily trading volume.
Finally, the effect of the proposed consolidation, and resulting decrease
in the number of shares of common stock on the market, could adversely affect
the trading value of such common stock if there is not a corresponding increase
in the per share price level for such stock following the consolidation. Many
factors beyond the Company's control will affect the ultimate trading market and
there can be no assurance that the per-share price for the Company's common
stock immediately after the consolidation will reflect the corresponding math
material value based on the consolidation alone, or that any such value will be
sustained for any period of time.
The Company completed its initial public offering on November 19, 1996 and,
since that date, the common stock has traded on the Nasdaq Stock Market under
the symbol "MMGC." The following table sets forth the high and low sales prices
of the common stock as reported on the Nasdaq Stock Market for the periods
indicated.
<TABLE>
<CAPTION>
HIGH LOW
--------- --------
<S> <C> <C>
FISCAL YEAR 1997:
First Quarter (November 19, 1996 to November 30,
1996)................................................ $12.00 $10.75
Second Quarter.......................................... 15.75 10.125
Third Quarter........................................... 14.625 8.00
Fourth Quarter.......................................... 13.50 9.00
FISCAL YEAR 1998:
First Quarter........................................... 15.00 9.5625
Second Quarter.......................................... 10.25 3.00
Third Quarter........................................... 3.375 1.875
Fourth Quarter.......................................... 2.0625 1.00
FISCAL YEAR 1999:
First Quarter........................................... 1.53125 0.375
Second Quarter (through January 21, 1999)............... 0.813 0.375
</TABLE>
8
<PAGE> 12
EXCHANGE OF STOCK CERTIFICATES
If the proposed amendment is approved, stockholders will be notified and
requested to surrender their certificates representing shares of the Old common
stock to the Exchange Agent who will issue new certificates representing shares
of New common stock after giving effect to the consolidation. Commencing with
the effective date, however, each certificate representing shares of Old common
stock will be automatically deemed, without any action, for all purposes to
evidence ownership of New common stock taking into account the consolidation.
No scrip or fractional share certificates of New common stock will be
issued in connection with the proposed consolidation. Stockholders who would
otherwise receive fractional shares will receive, instead, the cash value for
such fractional shares determined by multiplying the fractional share by the
average of the high and low bid price for the Company's common stock on the date
of the consolidation ("Effective Date").
FEDERAL INCOME TAX CONSEQUENCES
The federal income tax consequences of the proposed consolidation are set
forth below. The following information is based upon existing law which is
subject to change by legislation, administrative action and judicial decision,
and is necessarily general in nature. Furthermore, individual circumstances may
alter the effect or require different tax treatment depending upon those
specific circumstances. Accordingly, stockholders are advised to consult with
their own tax advisor(s) for more detailed information relating to their
individual circumstances and the individual tax treatment that may result from
the proposed consolidation.
The proposed consolidation will be a tax-free recapitalization for the
Company and its stockholders. The shares of New common stock registered in the
name of a stockholder or beneficially owned by such stockholder (including
fractional shares deemed to have been received) will have an aggregate basis for
computing gain or loss equal to the aggregate basis of the Old common stock held
by that stockholder immediately prior to the Effective Date for the proposed
consolidation. A stockholder's holding period of shares of New common stock will
include the holding period of shares of Old common stock surrendered in exchange
therefor, provided that the shares of Old common stock were capital assets in
the hands of the stockholder on the Effective Date of the proposed
consolidation.
A stockholder who receives cash in lieu of a fractional share generally
will recognize gain or loss in an amount equal to the difference between the
cash received and the stockholder's basis allocable to the fractional share.
REGISTRATION AND TRADING
The New common stock will continue to be registered under the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and the Company will continue
to file periodic and current reports with the Securities and Exchange Commission
("Commission") pursuant to the Exchange Act. In addition, the Company's New
common stock will continue to be traded on the Nasdaq Stock Market. The Company
intends to file all required notifications with the Nasdaq Stock Market to
provide for continued trading (on a post-consolidated basis) in coordination
with the Effective Date. Certificates representing the New common stock will,
however, contain a new CUSIP number.
The Company has no current intention of entering into any future
transaction or business combination which would result in deregistration of the
New common stock under
9
<PAGE> 13
the Exchange Act, or which might result in loss of eligibility for the New
common stock to be listed and traded on the Nasdaq Stock Market.
ABANDONMENT
The board of directors has concluded that effecting the consolidation is in
the best interest of the Company and its stockholders only if necessary to raise
the bid price of the Company's common stock in order to comply with Nasdaq
requirements. In the event that effecting the consolidation is not required in
order to ensure compliance with Nasdaq rules, the board of directors has
reserved the authority to abandon the proposed amendment at any time prior to
its effectiveness without further action by the stockholders.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding common
stock is required to approve Proposal Number Three.
THE BOARD OF DIRECTORS RECOMMENDS ADOPTION AND APPROVAL OF THIS PROPOSAL TO
AMEND THE CERTIFICATE OF INCORPORATION TO PROVIDE FOR A ONE-FOR-TEN
CONSOLIDATION OF THE COMPANY'S COMMON STOCK. PROXY CARDS THAT ARE SIGNED AND
RETURNED WILL BE SO VOTED UNLESS CONTRARY INSTRUCTIONS ARE INDICATED THEREON.
10
<PAGE> 14
PROPOSAL NUMBER FOUR
APPROVAL AND ADOPTION OF THE MEGO MORTGAGE CORPORATION 1999
INCENTIVE STOCK PLAN
GENERAL
On January 12, 1999, the board of directors approved and adopted the Mego
Mortgage Corporation 1999 Incentive Stock Plan (the "Plan") subject to
stockholder approval. A copy of the Plan is attached hereto as Annex A. The
board of directors unanimously recommends that the stockholders vote for
approval and adoption of the Plan.
SUMMARY OF THE PLAN
The primary purpose of the Plan is to attract, retain and motivate selected
employees and directors of the Company. The following discussion summarizes the
principal features of the Plan. This discussion does not purport to be complete
and is qualified in its entirety by reference to the Plan.
Administration. The Plan will be administered by a committee of two or
more directors serving on the Board (the "Plan Committee"). Each director, while
a member of the Committee, must in addition satisfy the requirements for a
"non-employee" director under Rule 16b-3 of the Securities and Exchange Act of
1934 (the "Exchange Act") and an "outside director" under Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code"). All grants under the
Plan will be evidenced by a certificate that will incorporate such terms and
conditions as the Plan Committee deems necessary or appropriate.
Coverage and Participants. The Plan will provide for the issuance of stock
options ("Stock Options") and restricted stock ("Restricted Stock") to certain
of the Company's key employees and outside directors and for the issuance of
stock appreciation rights ("SARs") to certain of the Company's key employees. A
key employee shall be any employee of the Company (or any subsidiary, parent, or
affiliate of the Company) designated by the Plan Committee who, in the judgment
of the Plan Committee acting in its absolute discretion, is a key to the success
of the Company.
Initial Share Authorization. There will be 12,000,000 shares of Common
Stock available for use under the Plan. However, no key employee in any calendar
year may be granted a Stock Option to purchase more than 1,500,000 shares of
Common Stock or an SAR with respect to more than 1,500,000 shares of Common
Stock except that an Stock Option to purchase 4,818,591 shares of Common Stock
may be granted to the Company's chief executive officer in connection with the
renegotiation of his June 23, 1998 employment agreement.
Stock Options. Under the Plan, either incentive stock options ("ISOs"),
which are intended to qualify for special tax treatment under Code Section 422,
or non-incentive stock options ("Non-ISOs") may be granted to key employees by
the Committee. Each Stock Option granted under the Plan entitles the holder
thereof to purchase the number of shares of Common Stock specified in the grant
at the option price specified in the related stock option certificate. The terms
and conditions of each Stock Option granted under the Plan will be determined by
the Plan Committee, but no Stock Option will be granted at an exercise price
which is less than the fair market value of the Common Stock as
11
<PAGE> 15
determined on the grant date in accordance with the Plan or $1.50 per share,
whichever is greater. In addition, if the Stock Option is an ISO that is granted
to a ten percent shareholder of the Company, the option price may be no less
than 110% of the fair market value of the shares of Common Stock on the grant
date. An ISO by its terms may not be exercisable more than ten years from the
grant date or, if the ISO is granted to a ten percent shareholder of the
Company, it may not be exercisable more than five years from the grant date.
Moreover, no participant may be granted ISOs which are first exercisable in any
calendar year for stock having an aggregate fair market value (determined as of
the date that the ISO was granted) that exceeds $100,000.
Each outside director automatically will be granted a Non-ISO as of the
first day he or she serves as an outside director to purchase 35,000 shares of
Common Stock at an option price equal to the fair market value of the Common
Stock determined on the grant date in accordance with the Plan or $1.50 per
share, whichever is greater. Thereafter, each outside director who is serving as
such on the last day of the Company's fiscal year and who has served as such for
more than one full year automatically will be granted an Non-ISO as of the last
day of such fiscal year to purchase 5,000 shares of Common Stock at an option
price equal to the fair market value of the Common Stock as determined on the
grant date in accordance with the Plan or $1.50 per share, whichever is greater.
Stock Appreciation Rights. SARs may be granted by the Committee to key
employees under the Plan. SARs entitle the holder to receive an amount equal to
the excess of the fair market value of one share of Common Stock as of the date
such right is exercised over the baseline price specified in the SAR (the "SAR
Value"), multiplied by the number of shares of Common Stock in respect of which
the SAR is being exercised. The SAR Value for an SAR will be the fair market
value of a share of Common Stock as determined on the grant date or $1.50,
whichever is greater. SARs may be granted as part of a Stock Option or as stand
alone SARs.
Restricted Stock. Restricted Stock may be granted by the Committee to key
employees subject to such terms and conditions, if any, as the Committee acting
in its absolute discretion deems appropriate. The Committee, in its discretion,
may prescribe that a key employee's rights in a Restricted Stock award will be
nontransferable or forfeitable or both unless certain conditions are satisfied.
These conditions may include, for example, a requirement that the key employee
continue employment with the Company for a specified period or that the Company
or the key employee achieve stated performance or other objectives. Each grant
of Restricted Stock shall be evidenced by a certificate which will specify what
rights, if any, a key employee has with respect to such Restricted Stock as well
as any conditions applicable to the Restricted Stock.
An outside director's compensation for all services rendered as such in
each fiscal quarter for the Company will be paid by the Company in whole shares
of Restricted Stock and cash in lieu of any fractional share. All of an outside
director's compensation will be paid in whole shares of Common Stock unless the
outside director elects a smaller percentage. However, the percentage elected
cannot be less than 60%. All compensation due for service rendered before
January 12, 1999 and which has not been paid at that time will be payable in
Common Stock as of the end of the Company's fiscal quarter that ends February
28, 1999.
Non-transferability. No Stock Option, SAR or Restricted Stock will be
transferable by a key employee or an outside director other than by will or by
the laws of descent and distribution (except that an outside director may
transfer Restricted Stock granted to him
12
<PAGE> 16
or her (1) with the express written consent of the Plan Committee or (2) to his
or her employer (subject to additional restrictions) if the outside director
serves as such as a representative of his or her employer), and any Stock Option
or SAR will be exercisable during a key employee's or outside director's
lifetime only by the key employee or outside director.
Amendments to the Plan. The Plan may be amended by the Board to the extent
it deems necessary or appropriate (within the limits of Code Section 422), and
the Plan may be terminated by the Board at any time. The Board may not
unilaterally modify, amend or cancel any Stock Option, SAR or Restricted Stock
previously granted without the consent of the holder of such Stock Option, SAR
or Restricted Stock or unless there is a dissolution or liquidation of the
Company or a similar transaction.
Adjustment of Shares. The number, kind or class of shares of Common Stock
reserved for issuance under the Plan, the annual grant caps, the $1.50 floor on
the option price and SAR Value, the number, kind or class of shares of Common
Stock subject to Stock Options or SARs granted under the Plan, and the option
price of the Stock Options and the SAR Value of the SARs, as well as the number,
kind or class of shares of Restricted Stock granted under the Plan, shall be
adjusted by the Plan Committee in an equitable manner to reflect any change in
the capitalization of the Company. Thus all of these adjustments will be made
automatically if the shareholders approve the reverse stock split on the Common
Stock which was authorized by the Board on January 12, 1999.
Sale or Merger of the Company. If on any date the Company agrees to sell
all or substantially all of its assets or agrees to any merger, consolidation,
reorganization, division or other corporate transaction in which Common Stock is
converted into another security or into the right to receive securities or
property or a tender offer is made which could lead to a change in control of
the Company (as defined in the Plan and other than a tender offer by the Company
or an employee benefit plan established and maintained by the Company), the
Board will waive any conditions to the exercise of all then outstanding Options
and SARs and any then outstanding issuance and forfeiture conditions on any
Restricted Stock and the Board will have the right to cancel such Options, SARs
and Restricted Stock grants after each key employee and outside director is
provided a reasonable opportunity to exercise his or her Options, SARs and to
take such other actions as necessary or appropriate to receive the Common Stock
subject to any Restricted Stock grants.
Loans. If approved by the Plan Committee, the Company may lend money to,
or guarantee loans by a third party to, any key employee to finance the exercise
of any Stock Option granted under the Plan.
Term of the 1999 Incentive Stock Plan. No Stock Option, SAR or Restricted
Stock shall be granted under the Plan after January 12, 2009 or, if earlier, on
the date on which all of the Common Stock reserved under the Plan has been
issued or no longer is available for use under the Plan.
FEDERAL INCOME TAX CONSEQUENCES
The rules concerning the federal income tax consequences with respect to
grants made pursuant to the Plan are technical, and reasonable persons may
differ on the proper interpretation of such rules. Moreover, the applicable
statutory and regulatory provisions are subject to change, as are their
interpretations and applications, which may vary in
13
<PAGE> 17
individual circumstances. Therefore, the following discussion is designed to
provide only a brief, general summary description of the federal income tax
consequences associated with such grants, based on a good faith interpretation
of the current federal income tax laws, regulations (including certain proposed
regulations) and judicial and administrative interpretations. The following
discussion does not set forth (i) any federal tax consequences other than income
tax consequences or (ii) any state, local or foreign tax consequences that may
apply.
ISOs. In general, a key employee will not recognize taxable income upon
the grant or the exercise of an ISO. For purposes of the alternative minimum
tax, however, the key employee will be required to treat an amount equal to the
difference between the fair market value of the Common Stock on the date of
exercise over the exercise price as an item of adjustment in computing the key
employee's alternative minimum taxable income. If the key employee does not
dispose of the Common Stock received pursuant to the exercise of the ISO within
either (i) two years after the date of the grant of the ISO or (ii) one year
after the date of exercise of the ISO, a subsequent disposition of the Common
Stock will generally result in long-term capital gain or loss to such individual
with respect to the difference between the amount realized on the disposition
and the exercise price. The Company will not be entitled to any income tax
deduction as a result of such disposition. The Company normally will not be
entitled to take an income tax deduction at either the grant or the exercise of
an ISO.
If the key employee disposes of the Common Stock acquired upon exercise of
the ISO within either of the above-mentioned time periods, then in the year of
such disposition, such individual generally will recognize ordinary income, and
the Company will be entitled to an income tax deduction (provided the Company
satisfies applicable federal income tax reporting requirements), in an amount
equal to the lesser of (i) the excess of the fair market value of the Common
Stock on the date of exercise over the exercise price or (ii) the amount
realized upon disposition over the exercise price. Any gain in excess of such
amount recognized by the key employee or ordinary income would be taxed to such
individual as short-term or long-term capital gain (depending on the applicable
holding period).
Non-ISOs. A key employee or an outside director will not recognize any
taxable income upon the grant of a Non-ISO, and the Company will not be entitled
to take an income tax deduction at the time of such grant. Upon the exercise of
a Non-ISO, the key employee or outside director generally will recognize
ordinary income and the Company will be entitled to take an income tax deduction
(provided the Company satisfies applicable federal income tax reporting
requirements) in an amount equal to the excess of the fair market value of the
Common Stock on the date of exercise over the exercise price. Upon a subsequent
sale of the Common Stock by the key employee or outside director, such
individual will recognize short-term or long-term capital gain or loss
(depending on the applicable holding period).
SARs. A key employee will recognize ordinary income for federal income tax
purposes upon the exercise of an SAR under the Plan for cash, Common Stock or a
combination of cash and Common Stock, and the amount of income that the key
employee will recognize will depend on the amount of cash, if any, and the fair
market value of the Common Stock, if any, that the key employee receives as a
result of such exercise. The Company generally will be entitled to a federal
income tax deduction in an amount equal to the ordinary income recognized by the
key employee in the same taxable
14
<PAGE> 18
year in which the key employee recognizes such income, if the Company satisfies
applicable federal income tax reporting requirements.
Restricted Stock. A key employee is not subject to any federal income tax
upon the grant of Restricted Stock, nor does the grant of Restricted Stock
result in an income tax deduction for the Company, unless the restrictions on
the stock do not present a substantial risk of forfeiture as defined under
Section 83 of the Code. In the year that the Restricted Stock is no longer
subject to a substantial risk of forfeiture, the key employee will recognize
ordinary income in an amount equal to the fair market value of the shares of
Common Stock transferred to the key employee, generally determined on the date
the Restricted Stock is no longer subject to a substantial risk of forfeiture.
If a key employee is subject to Section 16(b) of the Exchange Act and cannot
sell the Common Stock without being subject to liability under such section, the
stock will be treated as subject to a substantial risk of forfeiture. If the
Restricted Stock is forfeited, the key employee will recognize no gain.
A key employee may make an election under Section 83(b) of the Code to
recognize the fair market value of the Common Stock as taxable income at the
time of grant of the Restricted Stock. If such an election is made, (i) the key
employee will not otherwise be taxed in the year that the Restricted Stock is no
longer subject to a substantial risk of forfeiture and (ii) if the Restricted
Stock is subsequently forfeited, the key employee will be allowed no deduction
with respect to such forfeiture. Cash dividends paid to a key employee on shares
of Restricted Stock prior to the date the Restricted Stock is no longer subject
to a substantial risk of forfeiture or is forfeited are treated as ordinary
income of the key employee in the year received. The Company generally will be
entitled to a federal income tax deduction equal to the amount of ordinary
income recognized by the key employee when such ordinary income is recognized by
the key employee, provided the Company satisfies applicable federal income tax
reporting requirements. Depending on the period shares of Common Stock are held
after receipt by the key employee, the sale or other taxable disposition of such
shares will result in short-term or long-term capital gain or loss equal to the
difference between the amount realized on such disposition and the fair market
value of such shares generally when the Restricted Stock is no longer subject to
a substantial risk of forfeiture.
Upon the transfer of Restricted Stock to an outside director under the
terms of the Plan, the outside director will recognize ordinary income in an
amount equal to the fair market value of the shares of Common Stock transferred
to the outside director, and the Company generally will be entitled to a federal
income tax deduction equal to the amount of ordinary income recognized by the
outside director when such ordinary income is recognized by the outside
director, provided the Company satisfies applicable federal income tax reporting
requirements.
THE BOARD OF DIRECTORS RECOMMENDS APPROVAL AND ADOPTION OF THE PLAN. PROXY
CARDS THAT ARE SIGNED AND RETURNED WILL BE SO VOTED UNLESS CONTRARY INSTRUCTIONS
ARE INDICATED THEREON.
15
<PAGE> 19
INFORMATION REGARDING THE BOARD OF DIRECTORS
AND COMMITTEES OF THE BOARD OF DIRECTORS
COMMITTEES AND MEETINGS OF THE BOARD
During the fiscal year ended August 31, 1998 ("fiscal 1998"), the board of
directors held 14 meetings. During fiscal 1998, each director attended at least
75% of the aggregate of the number of meetings of the board of directors and
respective committees on which he served while a member of the board or such
committees.
The board of directors has delegated certain functions to the following
standing committees:
Audit Committee. The Audit Committee's functions include recommending to
the board the engagement of the Company's independent certified public
accountants, reviewing with the accountants the plan and results of their audit
of the Company's financial statements and determining the independence of the
accountants. The Audit Committee held six meetings in fiscal 1998. The Audit
Committee is currently composed of Messrs. Stiles, Browne and Vida.
Compensation Committee. The Compensation Committee has the authority to
approve the compensation of the Company's executive officers. The Compensation
Committee held three meetings in fiscal 1998. Currently, the Compensation
Committee consists of Messrs. Williamson and Browne.
Nominating Committee. During fiscal 1998, the Nominating Committee had the
responsibility to recommend the nominees for election as Directors of the
Company to the Board of Directors. The Nominating Committee met one time during
fiscal 1998. The Company currently does not maintain a nominating committee.
Plan Committee. The Plan Committee was established in January 1999 to
administer the Plan. The Plan Committee is currently composed of Messrs. Stiles
and Williamson.
DIRECTORS' FEES
Directors who are compensated as employees or officers of the Company
receive no additional compensation for service on the board of directors or a
committee thereof. The Company's non-employee directors receive compensation in
connection with their service on the Company's board of directors. Upon being
elected to the board of directors, each non-employee director receives an option
to purchase 35,000 shares of the Company's common stock. In addition, such
directors receive additional options to purchase 5,000 shares of common stock
each additional year they serve on the board of directors. Finally, the
non-employee directors each receive an annual $30,000 retainer fee of which at
least 60% is payable in the common stock of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1998 and until June 29, 1998, Messrs. Robert Nederlander and
Spencer I. Browne served as members of the Compensation Committee. Mr. Browne
was a consultant of the Company during fiscal 1998, for which he was paid
$80,000. From July 1, 1998 until August 31, 1998, compensation decisions were
made by the full board of directors. See "Certain Relationships and Related
Transactions" beginning on page 26 of this Proxy Statement. Champ Meyercord
became Chief Executive Officer of the Company on July 1, 1998; however, he did
not vote on matters related to his specific compensation.
16
<PAGE> 20
PRINCIPAL HOLDERS OF COMMON STOCK
The following table sets forth, as of December 1, 1998, information with
respect to the beneficial ownership of the common stock by (1) each person known
by the Company to be the beneficial owner of more than 5% of the outstanding
shares of common stock, (2) each director of the Company, (3) the Company's
executive officers and (4) all directors and executive officers of the Company
as a group. Unless otherwise noted, the Company believes that all persons named
in the table have sole voting and investment power with respect to all shares of
common stock beneficially owned by them.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE
BENEFICIAL OWNER(1) BENEFICIALLY OWNED OWNERSHIP(2)
- ------------------- ------------------ ------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Champ Meyercord................................... -- *
J. Richard Walker................................. -- *
Spencer I. Browne................................. 37,260 *
Wm. Paul Ralser................................... 20,000 *
Hubert M. Stiles, Jr.(3).......................... 6,666,667 21.8%
David J. Vida, Jr................................. -- *
John D. Williamson, Jr............................ -- *
All executive officers and directors of the
Company as a group (8 persons).................. 6,723,927 22.0%
OTHER LARGE STOCKHOLDERS:
Value Partners, Ltd.(4)........................... 14,666,740 32.4%
City National Bank(5)............................. 13,333,367 30.1%
Sovereign Bancorp(6).............................. 13,333,367 30.1%
Friedman, Billings, Ramsey Group, Inc............. 9,742,470 27.9%
Emanuel J. Friedman(7)(8)......................... 6,666,667 21.8%
T. Rowe Price Recovery Fund II, L.P.(3)........... 6,666,667 21.8%
</TABLE>
- -------------------------
* Less than 1%.
(1) Unless otherwise stated, the address of each person is 1000 Parkwood Circle,
Atlanta, Georgia 30339. A person is deemed to be the beneficial owner of
securities that can be acquired by such person within 60 days from the date
of this prospectus upon the exercise of options and warrants. Each
beneficial owner's percentage ownership is determined by assuming that
options and warrants that are held by such person (but not those held by any
other person) and that are exercisable within 60 days from he date of this
prospectus have been exercised.
(2) Based on 30,566,660 shares of common stock outstanding as of December 1,
1998.
(3) The address of Mr. Stiles and T. Rowe Price Recovery Fund II, L.P. is 100
East Pratt Street, Baltimore, Maryland 21202. Represents shares beneficially
owned rice Recovery Fund II, L.P., T. Rowe Price Recovery Fund II
Associates, L.L.C. and T. Rowe Price Associates, Inc. (of which Mr. Stiles
is a vice president). Mr. Stiles disclaims beneficial ownership of these
shares. Based on a Schedule 13G filed with the SEC on July 10, 1998.
17
<PAGE> 21
(4) The address of Value Partners, Ltd. is 4514 Cole Avenue, Suite 808, Dallas,
Texas 75205. Represents shares issuable upon the conversion of 22,000 shares
of preferred stock.
(5) City National Bank's address is 25 Gatewater Road, Charleston, West Virginia
25313. Represents (i) 6,666,700 shares issuable upon conversion of preferred
stock and (ii) 6,666,667 shares issuable upon exercise of currently
outstanding options.
(6) Sovereign Bancorp's address is 1130 Berkshire Boulevard, P.O. Box 12646,
Reading, Pennsylvania 19612. Represents (i) 6,666,700 shares issuable upon
conversion of preferred stock and (ii) 6,666,667 shares issuable upon
exercise of currently outstanding options.
(7) The address of Friedman, Billings, Ramsey Group, Inc. ("FBRG") is 1001 19th
Street North, Arlington, Virginia 22209. As of December 1, 1998, FBRG,
through its three wholly owned subsidiaries Friedman, Billings, Ramsey
Investment Management, Inc. ("Investment Management"), FBR Offshore
Management, Inc. ("Offshore Management") and Orkney Holdings, Inc.
("Orkney"), had sole voting and dispositive power with respect to 5,359,116
shares of common stock. This number does not include 6,666,667 shares of
common stock owned by Emanuel J. Friedman, as to which FBRG disclaims
beneficial ownership. Investment Management serves as general partner and
discretionary investment manager for FBR Ashton, L.P. ("Ashton") which, as
of December 1, 1998, owned 824,187 shares of common stock and 4,450 shares
of preferred stock (which are convertible into 2,966,681 shares of common
stock). Offshore Management serves as discretionary manager for FBR
Opportunity Fund, Ltd. ("Opportunity Fund") which, as of December 1, 1998,
owned 82,622 shares of Common Stock. Each of FBRG, Investment Management and
Offshore Management disclaims beneficial ownership of shares of common stock
owned by the other two entities. Orkney is a wholly-owned subsidiary of FBRG
which, as of December 1, 1998, owned 4,452,307 shares of common stock and
2,125 shares of preferred stock (which are convertible into an aggregate of
1,416,673 shares of common stock). Each of FBRG, Ashton, Opportunity Fund
and Orkney disclaims beneficial ownership of the shares of common stock
owned by the other three entities. In addition, Emanuel J. Friedman, Eric F.
Billings and W. Russell Ramsey are each control persons with respect to
FBRG.
(8) Mr. Friedman's address is 1001 19th Street, Arlington, Virginia 22209.
Excludes 5,359,116 shares beneficially owned by FBRG, as to which Mr.
Friedman disclaims beneficial ownership. Mr. Friedman has notified the
Company that, until the earlier of (i) the first date on which he, together
with FBR and its affiliates, holds shares of common stock representing less
than 20% of the total issued and outstanding common stock or (ii) the date
on which he deposits his shares of common stock in a voting trust to be
voted by an unaffiliated third party, he waives the right to vote his shares
of common stock.
18
<PAGE> 22
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual and
long-term compensation earned by the Company's chief executive officer and the
other executive officer as of August 31, 1998 whose annual salary and bonus
during fiscal 1998 exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION NUMBER OF
NAME AND PRINCIPAL FISCAL ------------------- OTHER ANNUAL OPTIONS ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(1) GRANTED(2) COMPENSATION(3)
- ------------------ ------ -------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Champ Meyercord(4) 1998 $ 63,462 $ -- $ -- 4,818,591 $ --
Chairman of the 1997 -- -- -- -- --
Board and Chief 1996 -- -- -- -- --
Executive Officer
James L. Belter(5) 1998 $212,519 $100,000(6) $ 9,919 -- $135,868
Executive Vice 1997 180,003 100,000(6) 15,896 100,000 --
President and 1996 159,080 50,000(6) 4,330 -- --
Treasurer
</TABLE>
- -------------------------
(1) Other annual compensation consisted of car allowances, contributions to
401(k) plans and moving expenses.
(2) See "-- Employment Agreements" below.
(3) All other compensation consisted of funds received from the Company for
repurchase of outstanding SARs and stock options.
(4) Mr. Meyercord became Chief Executive Officer of the Company in June 1998.
(5) Mr. Belter resigned from the Company on November 30, 1998.
(6) Bonuses paid to Mr. Belter during fiscal years 1996 and 1997 were
discretionary bonuses determined by the board of directors. The bonus paid
during fiscal 1998 was paid pursuant to an employment contract entered into
with Mr. Belter in August 1997.
19
<PAGE> 23
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning grants of
stock options made during the fiscal year ended August 31, 1998 to the Named
Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE AT
NUMBER OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---- ---------- ------------ -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Champ Meyercord 4,818,591 80.1% $1.50 06/29/08 $11,773,465 $18,747,276
Chairman of the
Board and Chief
Executive Officer
James L. Belter -- -- -- -- -- --
Executive Vice
President and
Treasurer(1)
</TABLE>
- -------------------------
(1) Mr. Belter resigned from the Company on November 30, 1998.
AGGREGATED FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth certain information concerning unexercised
stock options held by the Named Executive Officers as of August 31, 1998. No
stock options were exercised by the Named Executive Officers during the fiscal
year ended August 31, 1998.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS HELD AT HELD AT
AUGUST 31, 1998 AUGUST 31, 1998(1)
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Champ Meyercord.................. -- 4,818,591 $ -- $ 144,558
James L. Belter(2)............... 20,000 80,000 -- --
</TABLE>
- -------------------------
(1) The closing sales price of the Company's common stock as reported on the
Nasdaq Stock Market on August 31, 1998 was $1.53. All options held by Mr.
Belter as of August 31, 1998 were granted at exercise prices in excess of
such market price.
(2) Mr. Belter resigned from the Company on November 30, 1998.
EMPLOYMENT AGREEMENTS
On June 23, 1998, the Company entered into an employment agreement with
Champ Meyercord (the "Meyercord Agreement") pursuant to which Mr. Meyercord
agreed to serve as the Chairman of the Board and Chief Executive Officer of the
Company. The
20
<PAGE> 24
initial term of the agreement terminates on December 31, 2001 and the agreement
will continue on a year-to-year basis unless terminated by either party. The
agreement provides for an initial annual base salary of $300,000. From the date
of the Meyercord Agreement until December 31, 1998, Mr. Meyercord is entitled to
a bonus of at least $250,000. For each subsequent calendar year during the term
of the agreement, Mr. Meyercord shall be entitled to receive bonuses pursuant to
a management incentive compensation plan for senior management to be established
by the Company. Pursuant to the Meyercord Agreement, Mr. Meyercord was granted
options to purchase 5% of the total outstanding shares of common stock
outstanding after the recapitalization on a fully-diluted basis at an exercise
price equal to the per share price in the private placements. In addition, the
Meyercord Agreement provides that upon consummation of an offering of rights to
purchase common stock, Mr. Meyercord shall be granted options to purchase a
number of shares of common stock equal to 5% of the number of shares of common
stock issued in the offering at an exercise price equal to price per share in
the offering.
Upon termination of the agreement for "cause," Mr. Meyercord will be
entitled to receive his base salary through the effective date of termination
and any determined but unpaid incentive compensation for any bonus period ending
on or before the date of termination. In the event of termination "without
cause," Mr. Meyercord will be entitled to (1) any unpaid base salary through the
date of termination, (2) accrued but unpaid incentive compensation, if any, for
the bonus period ending on or before the date of termination, (3) the
continuation of any benefits through the expiration of the Meyercord Agreement
and (4) the payment, through the date of expiration of the Meyercord Agreement,
of his base salary and incentive compensation (in an amount equal to the
incentive compensation paid to Mr. Meyercord for the calendar year immediately
preceding termination). In the event of a change of control of the Company
accompanied within two years by either (1) termination of Mr. Meyercord's
employment by the Company "without cause" or (2) Mr. Meyercord's voluntarily
termination for "good reason," Mr. Meyercord will be entitled to the amounts
receivable upon a termination "without cause." In addition, upon a change of
control any vested stock options granted to Mr. Meyercord will accelerate and
become immediately vested. The Meyercord Agreement contains a non-competition
provision that generally prohibits Mr. Meyercord from competing with the Company
during his employment by the Company and for the two-year period following the
termination of his employment for any reason.
The Company and Mr. Meyercord currently are engaged in discussions which
may result in revisions to the Meyercord Agreement, all of which would be
retroactive to July 1, 1998. The Company initiated these discussions, and the
discussions on behalf of the Company are being handled by the Compensation
Committee. The Company desires that Mr. Meyercord agree to waive his right under
the Meyercord Agreement to an option to purchase 5% of the Company's common
stock in exchange for an option to be granted under a stock option plan to be
adopted by the Company subject to the Company's shareholders approving the plan
and the related grant to Mr. Meyercord. The Company also desires to make the
Meyercord Agreement subject to the laws of the State of Georgia and to
restructure Mr. Meyercord's noncompetition provision and his other restrictive
covenants to increase the likelihood that a court will enforce these provisions
against Mr. Meyercord. Mr. Meyercord through his attorney in turn has asked for
certain revisions to the Meyercord Agreement, including adding a provision which
would protect him from any excise tax liability and any related income tax
liability from a change in control of the Company, deleting a provision under
which the Company could delay the payment of his compensation if the Company was
unable to claim an income tax deduction for the
21
<PAGE> 25
compensation and clarifying certain provisions related to his fringe and other
benefits. It is not clear whether an agreement will be reached on any revisions
to the Meyercord Agreement or, if an agreement is reached, when that agreement
will be reached. Neither the Company nor Mr. Meyercord have set a deadline for
either reaching an agreement or abandoning further discussions on revisions to
the Meyercord Agreement.
During fiscal 1998, James Belter, the Company's Executive Vice President
and Chief Financial Officer until November 30, 1998, was employed pursuant to an
employment agreement entered into in August 1997. The employment agreement
provided that Mr. Belter was entitled to receive discretionary performance
bonuses based on factors determined by the Committee and the board of directors
in accordance with the Company's executive bonus pool program. Notwithstanding
the foregoing, Mr. Belter was guaranteed to receive a bonus of $100,000 for each
of the first two years of his employment agreement.
THE FOLLOWING REPORT OF THE COMPENSATION COMMITTEE AND THE PERFORMANCE
GRAPH THAT APPEARS IMMEDIATELY AFTER SUCH REPORT SHALL NOT BE DEEMED TO BE
SOLICITING MATERIAL OR TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 OR
INCORPORATED BY REFERENCE IN ANY DOCUMENT SO FILED.
22
<PAGE> 26
REPORT ON EXECUTIVE COMPENSATION
Pursuant to the rules of the Securities and Exchange Commission, the
Compensation Committee of the board of directors of the Company (the
"Compensation Committee") is required to provide a report explaining the
rationale and considerations that led to fundamental compensation decisions
affecting the Company's executive officers, including the Named Executive
Officers, during the past fiscal year. Set forth below is the report of the
board of directors who were involved in compensation decisions during the 1998
fiscal year regarding such compensation policies. This report shall not be
deemed incorporated by reference by any general statement incorporating by
reference this Information Statement into any filing under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, except to
the extent that the Company specifically incorporates this information by
reference, and shall not otherwise be deemed filed under such acts.
At the end of fiscal 1998, the Company did not have a Compensation
Committee and compensation decisions were made by the full board of directors.
Mr. Meyercord did not vote on matters related to his specific compensation.
The primary elements of the Company's compensation program are base salary,
performance-based bonuses, deferred compensation and stock option plans designed
to provide long-term incentives. The board of directors' general philosophy with
respect to the compensation of the Company's executive officers (including the
Named Executive Officers) is to offer competitive compensation programs designed
to attract and retain key executives who are critical to the long-term success
of the Company and to recognize an individual's personal performance and
contribution to the Company, as well as the Company's overall performance. More
specifically, factors considered in determining compensation, to the extent
applicable, included the recommendations of the Chairman of the Board and Chief
Executive Officer, specific accomplishments of the executive officers, the
Company's historical and projected performance and success in reaching
performance goals and projections, and the Company's sales of loans, earnings
and financial condition.
The Company attempts to provide incentives to its executive officers to
remain with the Company and to improve performance through the grant of stock
options. Stock options allow executive officers to share, to some extent, in
stockholders' return on equity. All Company options vest in staggered amounts
over a period of years. Determinations as to the number of options to grant to
an executive officer are made by the board of directors.
OFFICERS PRIOR TO RECAPITALIZATION
During fiscal 1998, Jerome J. Cohen, the Company's Chairman of the board of
directors and Chief Executive Officer until July 1998, was employed pursuant to
an employment/consulting agreement. Such agreement provided that Mr. Cohen would
receive an annual Chairman's fee of at least $30,000 and an annual consulting
fee of $120,000, as well as an annual incentive bonus equal to one and
one-quarter percent (1.25%) of the Company' pre-Federal tax (and after state and
local tax) income for the prior calendar year. Except in the case of a change of
control of the Company, Mr. Cohen's agreement did not provide for an early
termination bonus or other additional compensation based on performance.
During fiscal 1998, Jeffrey S. Moore the Company's President and Chief
Operating Officer until August 14, 1998, was employed pursuant to an employment
agreement. The
23
<PAGE> 27
employment agreement provided for a base salary of $200,000. The employment
agreement also provided that Mr. Moore receive an incentive bonus each calendar
year equal to 1.5% of the Company's after tax income, provided that certain
scheduled goals were met, as well as deferred compensation of 1.0% of the gain
on sale from the Company's sales of loans during each year, payable in 48 equal
installments. In the event payments of the incentive bonus and deferred
compensation due in any year were to exceed $500,000, then the excess over
$500,000 would be payable only with the approval of the Company's board of
directors.
OFFICERS FOLLOWING RECAPITALIZATION
As of July 1, 1998, Champ Meyercord was elected Chairman and Chief
Executive Officer. On June 23, 1998, the Company entered into the Meyercord
Agreement with Mr. Meyercord pursuant to which Mr. Meyercord became the Chairman
of the Board and Chief Executive Officer of the Company. The initial term of the
agreement terminates on December 31, 2001 and the agreement will continue on a
year-to-year basis unless terminated by either party. The agreement provides for
an initial annual base salary of $300,000. From the date of the Meyercord
Agreement until December 31, 1998, Mr. Meyercord is entitled to a bonus of at
least $250,000. For each subsequent calendar year during the term of the
agreement, Mr. Meyercord shall be entitled to receive bonuses pursuant to a
management incentive compensation plan for senior management to be established
by the Company. Pursuant to the Meyercord agreement, Mr. Meyercord was granted
options to purchase 5% of the total outstanding shares of common stock
outstanding after the recapitalization on a fully-diluted basis at an exercise
price equal to the per share price in the private placements. In addition, the
Meyercord Agreement provides that upon consummation of an offering of rights to
purchase common stock, Mr. Meyercord shall be granted options to purchase a
number of shares of common stock equal to 5% of the number of shares of common
stock issued in the offering at an exercise price equal to price per share in
the offering.
Section 162(m) of the Code generally disallows a public company's deduction
for compensation to any one employee in excess of $1.0 million per year unless
the compensation is pursuant to a plan approved by the public company's
stockholders. None of the Named Executive Officers received annual cash
compensation in excess of the $1.0 million provided by Section 162(m) during
fiscal 1998. The Committee and the board of directors presently intend to use
their best efforts to take the necessary steps to ensure compliance with Section
162(m), in part, by seeking stockholder approval at the Annual Meeting of the
Company's employee benefit plans.
By the board of directors:
Spencer I. Browne
Edward B. Meyercord
Wm. Paul Ralser
Hubert M. Stiles
David J. Vida, Jr.
24
<PAGE> 28
PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total stockholder
return on the Company's common stock, based on the market price of the common
stock, with the cumulative total return of companies in the Nasdaq Market Index
and a peer group index (the "Peer Group Index") comprised of certain companies
whose business is comparable to the Company's. The companies reflected in the
Peer Group Index are Aames Financial Corporation, Advanta Corporation (class A
and class B common stock), BNC Mortgage, Inc., ContiFinancial Corporation, Delta
Financial Corporation, First Alliance Corporation, FirstPlus Financial Group,
Inc., Long Beach Financial Corporation, New Century Financial Corporation and
United Companies Financial Corporation. The graph below also shows the
cumulative total return of companies in the Mortgage Banker and Broker Peer
Group Index (the "MBB Index") which is a standard industrial classification or
"SIC" based index substantially similar to the Mortgage Bankers and Loan
Correspondents Peer Group Index which was reflected in the Company's performance
graph contained in the proxy statement prepared in conjunction with the
Company's annual stockholders meeting for the prior fiscal year. In the opinion
of the Company's management, use of the more narrowly focused Peer Group Index,
as opposed to the more broadly-based MBB Index, provides a more suitable index
against which to compare the Company's performance.
<TABLE>
<CAPTION>
Mego Nasdaq
Measurement Period Mortgage Market Peer Group
(Fiscal Year Covered) Corporation Index Index MBB Index
<S> <C> <C> <C> <C>
11/19/96 100.00 100.00 100.00 100.00
02/28/97 130.00 103.72 101.46 113.12
08/29/97 104.44 126.63 95.74 124.14
02/27/98 28.89 141.88 70.21 126.48
08/31/98 13.61 120.43 42.01 119.27
</TABLE>
- -------------------------
* Assumes $100 invested in the Company's common stock as of November 19, 1996,
and the investment of the same amount as of November 19, 1996 for the Nasdaq
Market Index, the Peer Group Index and the MBB Group Index. The graph above
assumes the reinvestment of all dividends; however, the Company did not issue
any dividends on its common stock during the period covered by the graph.
Returns for the Company are not necessarily indicative of future performance.
25
<PAGE> 29
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Listed below are transactions the Company has entered into with its
affiliates in the past three years. An "affiliate" generally is a person or
entity that is (1) "controlled by the Company," such as an officer of the
Company, (2) that "controls the Company" such as a director of a company, and in
the case of the Company, Mego Financial Corp. ("Mego Financial") the Company's
former parent; or (3) entities under "common control" with a company. PEC, a
subsidiary of Mego Financial, is an affiliate of Mego Financial because it is
"controlled by" Mego Financial, and is an affiliate of the Company, because the
directors that controlled the Company until the completion of the Company's
recapitalization also controlled Mego Financial.
RELATIONSHIP WITH GREENWICH
Champ Meyercord, the Company's Chairman of the Board and Chief Executive
Officer, was formerly a senior investment banker at Greenwich Capital Markets
("Greenwich"). In October 1996, Greenwich agreed to purchase from the Company
$2.0 billion of loans over a five year period. The Company has sold Greenwich
approximately $800 million in loans from the inception of the agreement. The
agreement with Greenwich was terminated in June 1998 and the Company has no
further obligation under the agreement.
In April 1997, the Company entered into a pledge and security agreement
with Greenwich for an $11.0 million revolving credit facility. The amount that
can be borrowed under the agreement was increased to $15.0 million in June 1997
and $25.0 million in July 1997. This facility is secured by a pledge of certain
of the Company's interest only and residual class certificates relating to
securitizations carried as mortgage related securities on the Company's
Statements of Financial Condition, payable to the Company pursuant to its
securitization agreements. As of August 31, 1998, approximately $10.0 million
was outstanding under the agreement. The agreement, which was originally
scheduled to mature in December 1998, was extended until December 1999.
TAX SHARING AND INDEMNITY AGREEMENT
For taxable periods up to the date of the spin-off of the Company by Mego
Financial, the Company's results of operations were includable in the tax
returns filed by Mego Financial's affiliated group for federal income tax
purposes. Under a tax allocation and indemnity agreement with Mego Financial,
the Company recorded a liability to Mego Financial for federal income taxes
calculated on a separate company basis. Under a prior tax sharing arrangement
with Mego Financial, the Company recorded a liability to Mego Financial for
federal income taxes applied to the Company's financial statement income after
giving consideration to applicable income tax law and statutory rates. In
addition, both the agreement and the arrangement provided that the Company and
Mego Financial each will indemnify the other under certain circumstances. The
Company no longer files consolidated returns with Mego Financial's affiliated
group. The Company believes that all obligations under the tax sharing agreement
have been satisfied.
MANAGEMENT SERVICES AGREEMENT WITH PEC
Until the recapitalization, PEC, a subsidiary of Mego Financial, supplied
the Company on an as-needed basis with certain executive, accounting, legal,
management
26
<PAGE> 30
information, data processing, human resources, advertising services and
promotional personnel. The Company paid management fees to PEC in an amount
equal to the direct and indirect expenses of PEC related to the services
supplied by its employees to the Company, including an allocable portion of the
salaries and expenses of these employees based upon the percentage of time these
employees spent performing services for the Company. This arrangement was
formalized on September 1, 1996 by execution of a management agreement (the
"Management Agreement"), in which PEC agreed to provide management services to
the Company for an aggregate annual fee of approximately $967,000. Effective
January 1, 1998, the annual fee payable by the Company under the Management
Agreement was reduced to $528,000. The Management Agreement was terminated on
June 29, 1998.
For the years ended August 31, 1996, 1997 and 1998, approximately $671,000,
$967,000 and $617,000, respectively, of the salaries and expenses of these
employees of PEC were attributable to and paid by the Company in connection with
services supplied by these employees to the Company. In addition, during the
years ended August 31, 1996 and 1997, the Company paid PEC for developing
computer programming, incurring costs of $56,000 and $0, respectively. During
the year ended August 31, 1998, these costs were $0.
SUB-SERVICING AGREEMENT WITH PEC
Prior to September 1, 1996, PEC sub-serviced the Company's loans pursuant
to which it paid servicing fees of 50 basis points on the principal balance of
loans serviced per year. For the years ended August 31, 1996, 1997 and 1998, the
Company paid sub-servicing fees to PEC of approximately $709,000, $1.9 million
and $2.1 million, respectively. The Company entered into a servicing agreement
with PEC (the "Servicing Agreement"), effective as of September 1, 1996,
providing for the payment of servicing fees of 50 basis points on the principal
balance of loans serviced per year. For the years ended August 31, 1996, 1997
and 1998, the Company incurred interest expense in the amount of $29,000,
$16,000 and $0, respectively, related to fees payable to PEC for these services.
The interest rates were based on PEC's average cost of funds and equaled 10.68%
in 1996 and 10.48% in 1997. Effective September 1, 1997, the servicing fees were
reduced to 40 basis points per year and effective January 1, 1998, the servicing
fees were further reduced to 35 basis points per year. The Servicing Agreement
has been terminated as the mortgage servicing rights were transferred to City
National Bank.
FUNDING AND GUARANTEES BY MEGO FINANCIAL
In order to fund the Company's past operations and growth, and in
conjunction with filing consolidated returns, the Company borrowed money from
Mego Financial. As of August 31, 1996, 1997 and 1998, the amount of intercompany
debt owed to Mego Financial was $12.0 million, $9.7 million and $0,
respectively. Prior to the initial public offering, Mego Financial had
guaranteed the Company's obligations under the Company's credit agreements and
an office lease. The guarantees of the Company's credit agreements were released
on the completion of the initial public offering. The Company did not pay any
compensation to Mego Financial for such guarantees.
In November 1996, Greenwich agreed to purchase from the Company $2.0
billion of loans over a five year period. Pursuant to the agreement, Mego
Financial issued to Greenwich four-year warrants to purchase 1.0 million shares
of Mego Financial's common
27
<PAGE> 31
stock. The value of the warrants, estimated at $3.0 million (0.15% of the
commitment amount) as of the commitment date (the "Warrant Value") plus a
$150,000 fee has been written off as the commitment for the purchase of loans
has been terminated.
On August 29, 1997, the Company and Mego Financial entered into a payment
agreement (the "Payment Agreement") for the Company's repayment after the
spin-off of (1) a portion of the debt owed by the Company to Mego Financial as
of May 31, 1997 and (2) debt owed by the Company to Mego Financial as of August
31, 1997. Upon consummation of the sale of the Old Notes in October 1997, $3.9
million was paid in accordance with the Payment Agreement. In April 1998, the
Company and Mego Financial entered into an agreement (the "1998 Agreement")
superseding the Payment Agreement. Pursuant to the 1998 Agreement, the parties
agreed to reduce the amounts owed to Mego Financial and agreed to pay such
amounts upon the occurrence of certain events. In connection with the
Recapitalization, the Company paid PEC $1.6 million to satisfy fully all amounts
owed to Mego Financial pursuant to the Payment Agreement and the 1998 Agreement,
and the 1998 Agreement was terminated.
RELATIONSHIPS WITH FRIEDMAN BILLINGS, RAMSEY GROUP, INC.
Friedman, Billings, Ramsey & Co, Inc. ("FBR") a subsidiary of FBRG served
as placement agent for the private placements pursuant to a placement agreement
(the "Placement Agreement"). Under the terms of the Placement Agreement, the
Company paid FBR a fee 1.6 million shares of common stock equal to 6.0% of the
gross proceeds received by the Company from the sale of the shares of common
stock and preferred stock in the recapitalization. The gross proceeds did not
include $10.0 million of Common Stock acquired by an affiliate of FBR. In
addition, the Company has agreed, pursuant to the Placement Agreement, to
indemnify FBR against certain liabilities, including liabilities under the
Securities Act, and other liabilities incurred in connection with the
recapitalization. In addition, the Company paid to FBR an advisory fee of
$416,667 in connection with the recapitalization.
FBR was a managing underwriter for the Company's initial public offering
and the Company's public offering of $40.0 million of Old Notes, and was the
initial purchaser for the Company's private offering of another $40.0 million of
the Old Notes. FBR received compensation for such services and the Company
agreed to indemnify FBR against certain liabilities, including liabilities under
the Securities Act, and other liabilities arising in connection with such
offerings. In addition, FBR has in the past provided certain investment banking
services to the Company and affiliates of the Company.
THE RECAPITALIZATION
The Company completed a recapitalization on July 1, 1998, which provided
the Company with approximately $84.5 million of new equity. City National Bank
and Sovereign Bancorp, each purchased 10,000 shares of the Company's newly
designated series A convertible preferred stock at a price of $1,000 per share.
In addition, City National Bank and Sovereign Bancorp were each granted an
option, which expires in December 2000, to acquire 6.67 million shares of common
stock at a price of $1.50 per share. City National Bank and Sovereign Bancorp
each has a right of first refusal to purchase the Company in the event the
Company's board of directors determines to sell the Company.
28
<PAGE> 32
In addition, City National Bank and Sovereign Bancorp each were granted the
right to appoint one member to the Company's board of directors and have the
right to appoint an additional board member if they exercise their option to
purchase additional shares of common stock. Upon completion of the
recapitalization, David J. Vida, Jr. was appointed to the board of directors at
the request of City National Bank. Sovereign Bancorp has not exercised its right
to appoint a board member but has exercised its right to have a representative
attend each board meeting.
In addition to the transactions described above, part of the
recapitalization, the Company and each of Sovereign Bancorp and City Holding
Company, the parent company of City National Bank, entered into the following
agreements:
- Sovereign Bancorp agreed to provide the Company up to $90.0 million in
borrowings under a warehouse line to fund its loan production prior the
sale of the loans
- Sovereign Bancorp agreed to purchase up to $100.0 million of the
Company's loans per quarter and has a right of first refusal to purchase
all other loans produced by the Company
- City National Bank purchased the Company's existing mortgage servicing
rights
- City Mortgage Services agreed to service all of the Company's mortgage
loans held for sale and loans sold on a servicing retained basis by the
Company
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than ten percent of a registered
class of the Company's equity securities to file with the Securities and
Exchange Commission and the Nasdaq Stock Market initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Such persons are required by the Commission to furnish the Company
with copies of all Section 16(a) forms that are filed.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, for the fiscal year ended August 31, 1997, all Section
16(a) filing requirements applicable to its directors, executive officers and
greater than ten-percent beneficial owners were properly filed except that
Spencer I. Browne receive 4,760 shares of the Company's common stock in
September 1997, as a result of the spin-off of the Company's common stock by
Mego Financial, which was not reported on his Form 4 until January 1998.
ANNUAL REPORT TO STOCKHOLDERS
The Company's Annual Report on Form 10-K is being furnished with this Proxy
Statement to stockholders of record as of December 18, 1998.
INDEPENDENT PUBLIC ACCOUNTANTS
Deloitte & Touche LLP, a firm of independent public accountants, has been
appointed the Company's independent public accountants for fiscal year ending
August 31,
29
<PAGE> 33
1999. The appointment of auditors is approved annually by the board of
directors. The decision of the Board is based on the recommendation of the Audit
Committee. A representative of Deloitte & Touche will be present at the meeting,
either in person or telephonically. Such representative will have the
opportunity to make a statement and will be available to respond to questions.
STOCKHOLDERS' PROPOSALS
Any stockholder of the Company who wishes to present a proposal at the 2000
annual meeting of stockholders of the Company, and who wishes to have such
proposal included in the Company's proxy statement and form of proxy for that
meeting, must deliver a copy of such proposal to the Company at its principal
executive offices at 1000 Parkwood Circle, Suite 600, Atlanta, Georgia 30339,
Attention: Corporate Secretary, no later than November 16, 1999; however, if
next year's annual meeting of stockholders is held on a date more than 30 days
before or after the 1999 annual meeting of stockholders, any stockholder who
wishes to have a proposal included in the Company's proxy statement for that
meeting must deliver a copy of the proposal to the Company at a reasonable time
before the proxy solicitation is made. The Company reserves the right to decline
to include in the Company's proxy statement any stockholder's proposal which
does not comply with the rules of the Securities and Exchange Commission for
inclusion therein.
By Order of the board of directors,
/s/Champ Meyercord
Champ Meyercord
Chairman and Chief Executive Officer
January 26, 1999
30
<PAGE> 34
ANNEX A
MEGO MORTGAGE CORPORATION
1999 INCENTIVE STOCK PLAN
<PAGE> 35
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
sec. 1 BACKGROUND AND PURPOSE......................................... A-1
sec. 2 DEFINITIONS.................................................... A-1
2.1 Affiliate.................................................... A-1
2.2 Board........................................................ A-1
2.3 Change in Control............................................ A-1
2.4 Code......................................................... A-1
2.5 Committee.................................................... A-1
2.6 Director..................................................... A-2
2.7 Fair Market Value............................................ A-2
2.8 ISO.......................................................... A-2
2.9 Key Employee................................................. A-2
2.10 1933 Act..................................................... A-2
2.11 1934 Act..................................................... A-2
2.12 Mego......................................................... A-2
2.13 Non-ISO...................................................... A-2
2.14 Option....................................................... A-2
2.15 Option Certificate........................................... A-2
2.16 Option Price................................................. A-2
2.17 Parent....................................................... A-2
2.18 Plan......................................................... A-2
2.19 Restricted Stock............................................. A-2
2.20 Restricted Stock Certificate................................. A-2
2.21 Rule 16b-3................................................... A-2
2.22 Stock........................................................ A-3
2.23 SAR Value.................................................... A-3
2.24 Stock Appreciation Right..................................... A-3
2.25 Stock Appreciation Right Certificate......................... A-3
2.26 Subsidiary................................................... A-3
2.27 Ten Percent Shareholder...................................... A-3
sec. 3 SHARES RESERVED UNDER PLAN..................................... A-3
sec. 4 EFFECTIVE DATE................................................. A-3
sec. 5 COMMITTEE...................................................... A-3
sec. 6 ELIGIBILITY AND ANNUAL GRANT CAPS.............................. A-4
sec. 7 OPTIONS........................................................ A-4
7.1 Committee Action............................................. A-4
7.2 $100,000 Limit............................................... A-4
7.3 Grants to Directors.......................................... A-5
7.4 Option Price................................................. A-5
7.5 Exercise Period.............................................. A-5
sec. 8 STOCK APPRECIATION RIGHTS...................................... A-6
8.1 Committee Action............................................. A-6
8.2 Terms and Conditions......................................... A-6
(a) Stock Appreciation Right Certificate..................... A-6
(b) Option Certificate....................................... A-6
8.3 Exercise..................................................... A-6
sec. 9 RESTRICTED STOCK............................................... A-7
9.1 Committee Action............................................. A-7
9.2 Effective Date............................................... A-7
</TABLE>
<PAGE> 36
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
9.3 Conditions................................................... A-7
(a) Conditions to Issuance of Stock.......................... A-7
(b) Forfeiture Conditions.................................... A-7
(c) Mandatory Conditions..................................... A-7
9.4 Dividends and Voting Rights.................................. A-8
9.5 Satisfaction of Forfeiture Conditions; Provision for Income
and Excise Taxes............................................. A-8
9.6 Section 162(m)............................................... A-8
9.7 Grants to Directors.......................................... A-8
(a) General Rule............................................. A-8
(b) Election................................................. A-9
(c) Transferability.......................................... A-9
(d) Transition Rule.......................................... A-9
sec. 10 NONTRANSFERABILITY............................................. A-9
sec. 11 SECURITIES REGISTRATION........................................ A-9
sec. 12 LIFE OF PLAN................................................... A-10
sec. 13 ADJUSTMENT..................................................... A-10
13.1 Capital Structure............................................ A-10
13.2 Mergers...................................................... A-10
13.3 Fractional Shares............................................ A-11
sec. 14 SALE, MERGER OR CHANGE IN CONTROL.............................. A-11
sec. 15 AMENDMENT OR TERMINATION....................................... A-11
sec. 16 MISCELLANEOUS.................................................. A-12
16.1 Shareholder Rights........................................... A-12
16.2 No Contract of Employment.................................... A-12
16.3 Withholding.................................................. A-12
16.4 Construction................................................. A-12
16.5 Other Conditions............................................. A-12
16.6 Rule 16b-3...... ............................................ A-12
16.7 Loans.......... ............................................. A-13
</TABLE>
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SEC. 1
BACKGROUND AND PURPOSE
The purpose of this Plan is to promote the interest of Mego by authorizing
the Committee to grant Options to Key Employees and Directors and to grant
Restricted Stock and Stock Appreciation Rights to Key Employees in order (1) to
attract and retain Key Employees and Directors, (2) to provide an additional
incentive to each Key Employee or Director to work to increase the value of
Stock and (3) to provide each Key Employee or Director with a stake in the
future of Mego which corresponds to the stake of each of Mego's stockholders.
SEC. 2
DEFINITIONS
2.1 Affiliate -- means any organization (other than a Subsidiary) that
would be treated as under common control with Mego under sec. 414(c) of the Code
if "50 percent" were substituted for "80 percent" in the income tax regulations
under sec. 414(c) of the Code.
2.2 Board -- means the Board of Directors of Mego.
2.3 Change in Control -- means (1) a "change in control" of Mego of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A for a proxy statement filed under Section 14(a) of the Securities
Exchange Act of 1934, as amended ("1934 Act"), (2) a "person" (as that term is
used in 14(d)(2) of the 1934 Act) becomes after the effective date of this Plan
the beneficial owner (as defined in Rule 13d-3 under the 1934 Act) directly or
indirectly of securities representing 50% or more of the combined voting power
for election of directors of the then outstanding securities of Mego, (3) the
individuals who at the beginning of any period of two consecutive years or less
constitute the Board cease for any reason during such period to constitute at
least a majority of the Board, unless the election or nomination for election of
each new member of the Board was approved by vote of at least two-thirds of the
members of the Board then still in office who were members of the Board at the
beginning of such period, (4) the shareholders of Mego approve any dissolution
or liquidation of Mego or any sale or disposition of 50% or more of the assets
or business of Mego or (5) the shareholders of Mego approve a merger or
consolidation to which Mego is a party (other than a merger or consolidation
with a wholly-owned subsidiary of Mego) or a share exchange in which Mego shall
exchange Mego shares for shares of another corporation as a result of which the
persons who were shareholders of Mego immediately before the effective date of
such merger, consolidation or share exchange shall have beneficial ownership of
less than 50% of the combined voting power for election of directors of the
surviving corporation following the effective date of such merger, consolidation
or share exchange.
2.4 Code -- means the Internal Revenue Code of 1986, as amended.
2.5 Committee -- means a committee of the Board which shall have at least 2
members, each of whom shall be appointed by and shall serve at the pleasure of
the Board and shall come within the definition of a "non-employee director"
under Rule 16b-3 and an "outside director" under sec. 162(m) of the Code.
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2.6 Director -- means any member of the Board who is not an employee of
Mego or a Parent or Subsidiary or affiliate (as such term is defined in Rule 405
of the 1933 Act) of Mego.
2.7 Fair Market Value -- means (1) the closing price on any date for a
share of Stock as reported by The Wall Street Journal under the quotation system
under which such closing price is reported or, if The Wall Street Journal no
longer reports such closing price, such closing price as reported by a newspaper
or trade journal selected by the Committee or, if no such closing price is
available on such date, (2) such closing price as so reported in accordance with
sec. 2.7(1) for the immediately preceding business day, or, if no newspaper or
trade journal reports such closing price or if no such price quotation is
available, (3) the price which the Committee acting in good faith determines
through any reasonable valuation method that a share of Stock might change hands
between a willing buyer and a willing seller, neither being under any compulsion
to buy or to sell and both having reasonable knowledge of the relevant facts.
2.8 ISO -- means an option granted under this Plan to purchase Stock which
is intended to satisfy the requirements of sec. 422 of the Code.
2.9 Key Employee -- means an employee of Mego or any Subsidiary or Parent
or Affiliate designated by the Committee who, in the judgment of the Committee
acting in its absolute discretion, is key directly or indirectly to the success
of Mego.
2.10 1933 Act -- means the Securities Act of 1933, as amended.
2.11 1934 Act -- means the Securities Exchange Act of 1934, as amended.
2.12 Mego -- means Mego Mortgage Corporation and any successor to Mego
Mortgage Corporation.
2.13 Non-ISO -- means an option granted under this Plan to purchase Stock
which is intended to fail to satisfy the requirements of sec. 422 of the Code.
2.14 Option -- means an ISO or a Non-ISO which is granted under sec. 7 of
this Plan.
2.15 Option Certificate -- means the written certificate which sets forth
the terms and conditions of an Option granted to a Key Employee or Director
under this Plan.
2.16 Option Price -- means the price which shall be paid to purchase one
share of Stock upon the exercise of an Option granted under this Plan.
2.17 Parent -- means any corporation which is a parent of Mego within the
meaning of sec. 424(e) of the Code.
2.18 Plan -- means this Mego Corporation 1999 Incentive Stock Plan as
effective as of the date adopted by the Board in 1999 and as amended from time
to time thereafter.
2.19 Restricted Stock -- means Stock granted to a Key Employee under sec. 9
of this Plan.
2.20 Restricted Stock Certificate -- means the written certificate which
sets forth the terms and conditions of a Restricted Stock grant to a Key
Employee.
2.21 Rule 16b-3 -- means the exemption under Rule 16b-3 to Section 16(b) of
the 1934 Act or any successor to such rule.
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2.22 Stock -- means $.01 par value common stock of Mego.
2.23 SAR Value -- means the value assigned by the Committee to a share of
Stock in connection with the grant of a Stock Appreciation Right under sec. 10.
2.24 Stock Appreciation Right -- means a right to receive the appreciation
in a share of Stock which is granted under sec. 8 of this Plan either as part of
an Option or independent of any Option.
2.25 Stock Appreciation Right Certificate -- means the written certificate
which sets forth the terms and conditions of a Stock Appreciation Right which is
granted to a Key Employee independent of an Option.
2.26 Subsidiary -- means a corporation which is a subsidiary corporation
(within the meaning of sec. 424(f) of the Code) of Mego.
2.27 Ten Percent Shareholder -- means a person who owns (after taking into
account the attribution rules of sec. 424(d) of the Code) more than ten percent
of the total combined voting power of all classes of stock of either Mego, a
Subsidiary or Parent.
SEC. 3
SHARES RESERVED UNDER PLAN
There shall be 12,000,000 shares of Stock reserved for use under this Plan.
Such shares of Stock shall be reserved to the extent that Mego deems appropriate
from authorized but unissued shares of Stock and from shares of Stock which have
been reacquired by Mego. Any shares of Stock subject to an Option which remain
unissued after the cancellation, expiration or exchange of such Option, any
shares of Restricted Stock which are forfeited or canceled and any shares of
Stock subject to a Stock Appreciation Right with respect to which no exercise
has been made under sec. 8 before the cancellation or expiration of such Stock
Appreciation Right thereafter shall again become available for use under this
Plan, but any shares of Stock used to exercise an Option or to satisfy a
withholding obligation shall not again become available for use under this Plan.
SEC. 4
EFFECTIVE DATE
The effective date of this Plan shall be January 12, 1999, the date of its
adoption by the Board, provided the shareholders of Mego (acting at a duly
called meeting of such shareholders) approve such adoption within twelve (12)
months of such effective date. Any Option or Restricted Stock or Stock
Appreciation Right granted before such shareholder approval automatically shall
be granted subject to such approval.
SEC. 5
COMMITTEE
This Plan shall be administered by the Committee. The Committee acting in
its absolute discretion shall exercise such powers and take such action as
expressly called for under this Plan and, further, the Committee shall have the
power to interpret this Plan and
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(subject to sec. 13, sec. 14 and sec. 15 and Rule 16b-3) to take such other
action in the administration and operation of this Plan as the Committee deems
equitable under the circumstances, which action shall be binding on Mego, on
each affected Key Employee or Director and on each other person directly or
indirectly affected by such action.
SEC. 6
ELIGIBILITY AND ANNUAL GRANT CAPS
Only Key Employees who are employed by Mego or a Subsidiary or Parent shall
be eligible for the grant of ISOs under this Plan, and Key Employees and
Directors shall be eligible for the grant of Non-ISOs under this Plan. Only Key
Employees shall be eligible for the grant of Restricted Stock or Stock
Appreciation Rights under this Plan. No Key Employee in any calendar year shall
be granted an Option to purchase more than 1,500,000 shares of Stock or a Stock
Appreciation Right with respect to more than 1,500,000 shares of stock except
that an Option to purchase 4,818,591 shares of Stock may be granted to Mego's
Chief Executive Officer in connection with the renegotiation of his June 23,
1998 Employment Agreement and the cancellation of his right to the option
described in sec. 4.5(a) of such Employment Agreement.
SEC. 7
OPTIONS
7.1 Committee Action. The Committee acting in its absolute discretion
shall have the right to grant Options to Key Employees under this Plan from time
to time to purchase shares of Stock; provided, however, that the Committee shall
not grant new Options in exchange for the cancellation of outstanding Options
which have a higher Option Price than the new Options. Each grant of an Option
to a Key Employee shall be evidenced by an Option Certificate, and each Option
Certificate shall set forth whether the Option is an ISO or a Non-ISO and shall
set forth such other terms and conditions of such grant as the Committee acting
in its absolute discretion deems consistent with the terms of this Plan;
however, if the Committee grants an ISO and a Non-ISO to a Key Employee on the
same date, the right of the Key Employee to exercise the ISO shall not be
conditioned on his or her failure to exercise the Non-ISO. The Committee shall
have the right to grant a Non-ISO and Restricted Stock to a Key Employee at the
same time and to condition the exercise of the Non-ISO on the forfeiture of the
Restricted Stock grant. The Committee also shall have the right in connection
with the grant of one Option to provide in the related Option Certificate for
the automatic grant of one, or more than one, additional Option, where the grant
of the additional Option or Options would be triggered by the occurrence of such
event or such events as the Committee deems appropriate under the circumstances.
7.2 $100,000 Limit. To the extent that the aggregate Fair Market Value of
Stock (determined as of the date the ISO is granted) with respect to which ISOs
first become exercisable in any calendar year exceeds $100,000, such Options
shall be treated as Non-ISOs. The Fair Market Value of Stock subject to any
other option (determined as of the date such option was granted) which (1)
satisfies the requirements of sec. 422 of the Code and (2) is granted to a Key
Employee under a plan maintained by Mego, a Subsidiary or a Parent Corporation
shall be treated (for purposes of this $100,000 limitation) as if
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granted under this Plan. The Committee shall interpret and administer the
limitation set forth in this sec. 7.2 in accordance with sec. 422(d) of the
Code, and the Committee shall treat this sec. 7.2 as in effect only for those
periods for which sec. 422(d) of the Code is in effect.
7.3 Grants to Directors. Each Director automatically shall be granted
(without any further action on the part of the Committee) a Non-ISO under this
Plan as of the first day he first serves as a Director to purchase 35,000 shares
of Stock at an Option Price equal to the Fair Market Value of a share of Stock
on the date of such grant or $1.50 per share, whichever is greater. Thereafter,
each Director who is serving as such on the last day of Mego's fiscal year and
who has served as such for more than one full year automatically shall be
granted (without any further action on the part of the Committee) a Non-ISO
under this Plan as of the last day of such fiscal year to purchase 5,000 shares
of Stock at an Option Price equal to the Fair Market Value of a share of Stock
on the date of such grant or $1.50 per share, whichever is greater. Each Non-ISO
granted under this Plan to a Director shall be evidenced by an Option
Certificate, shall be exercisable in full upon grant and shall expire on the
date set forth in the related Option Certificate or, if earlier, on the tenth
anniversary of the date of the grant of the Non-ISO. A Non-ISO granted to a
Director under this ss. 7.3 shall conform in all other respects to the terms and
conditions of a Non-ISO under this Plan, and no Director shall be eligible to
receive an Option under this Plan except as provided in this sec. 7.3. A grant
of a Non-ISO to a Director under this sec. 7.3 is intended to be granted in a
manner which continues to allow such Director to be a "non-employee director"
within the meaning of Rule 16b-3 and an "outside director" within the meaning of
sec. 162(m) of the Code, and all Non-ISOs granted to Directors under this
sec. 7.3 shall be construed to effect such intent.
7.4 Option Price. The Option Price for each share of Stock subject to an
Option which is granted to a Key Employee shall be no less than the greater of
the Fair Market Value of a share of Stock on the date the Option is granted or
$1.50; provided, however, if the Option is an ISO granted to a Key Employee who
is a Ten Percent Shareholder, the Option Price for each share of Stock subject
to such ISO shall be no less than 110% of the Fair Market Value of a share of
Stock on the date such ISO is granted. The Option Price shall be payable in full
upon the exercise of any Option, and at the discretion of the Committee an
Option Certificate can provide for the payment of the Option Price either in
cash, by check or in Stock which has been held for at least 6 months and which
is acceptable to the Committee or in any combination of cash, check and such
Stock. The Option Price in addition may be paid through any broker facilitated
cashless exercise procedure acceptable to the Committee or its delegate. Any
payment made in Stock shall be treated as equal to the Fair Market Value of such
Stock on the date the certificate for such Stock is tendered to the Committee or
its delegate in a manner satisfactory to the Committee.
7.5 Exercise Period. Each Option granted under this Plan to a Key Employee
shall be exercisable in whole or in part at such time or times as set forth in
the related Option Certificate, but no Option Certificate shall make an Option
granted to a Key Employee exercisable on or after the earlier of
(1) the date such Option is exercised in full, or
(2) the date which is the fifth anniversary of the date the Option is
granted, if the Option is an ISO and the Key Employee is a Ten Percent
Shareholder on the date the Option is granted, or
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(3) the date which is the tenth anniversary of the date the Option is
granted, if the Option is (a) a Non-ISO or (b) an ISO which is granted to a
Key Employee who is not a Ten Percent Shareholder on the date the Option is
granted.
An Option Certificate may provide for the exercise of an Option after the
employment of a Key Employee has terminated for any reason whatsoever, including
death or disability.
SEC. 8
STOCK APPRECIATION RIGHTS
8.1 Committee Action. The Committee acting in its absolute discretion
shall have the right to grant a Stock Appreciation Right to a Key Employee under
this Plan from time to time, and each Stock Appreciation Right grant shall be
evidenced by a Stock Appreciation Right Certificate or, if such Stock
Appreciation Right is granted as part of an Option, shall be evidenced by the
Option Certificate for the related Option.
8.2 Terms and Conditions.
(a) Stock Appreciation Right Certificate. If a Stock Appreciation
Right is evidenced by a Stock Appreciation Right Certificate, such
certificate shall set forth the number of shares of Stock to which the Key
Employee has the right to appreciation and the SAR Value of each share of
Stock. Such SAR Value shall be no less than the greater of Fair Market
Value of a share of Stock on the date that the Stock Appreciation Right is
granted or $1.50. The Stock Appreciation Right Certificate shall set forth
such other terms and conditions for the exercise of the Stock Appreciation
Right as the Committee deems appropriate under the circumstances, but no
Stock Appreciation Right Certificate shall make a Stock Appreciation Right
exercisable on or after the date which is the tenth anniversary of the date
such Stock Appreciation Right is granted.
(b) Option Certificate. If a Stock Appreciation Right is evidenced by
an Option Certificate, the SAR Value for each share of Stock subject to the
Stock Appreciation Right shall be the Option Price for the related Option.
Each such Option Certificate shall provide that the exercise of the Stock
Appreciation Right with respect to any share of Stock shall cancel the Key
Employee's right to exercise his or her Option with respect to such share
and, conversely, that the exercise of the Option with respect to any share
of Stock shall cancel the Key Employee's right to exercise his or her Stock
Appreciation Right with respect to such share. A Stock Appreciation Right
which is granted as part of an Option shall be exercisable only while the
related Option is exercisable. The Option Certificate shall set forth such
other terms and conditions for the exercise of the Stock Appreciation Right
as the Committee deems appropriate under the circumstances.
8.3 Exercise. A Stock Appreciation Right shall be exercisable only when
the Fair Market Value of a share of Stock subject to such Stock Appreciation
Right exceeds the SAR Value for such share, and the payment due on exercise
shall be based on such excess with respect to the number of shares of Stock to
which the exercise relates. A Key Employee upon the exercise of his or her Stock
Appreciation Right shall receive a payment from Mego in cash or in Stock, or in
a combination of cash and Stock, and any payment in Stock shall be based on the
Fair Market Value of a share of Stock on the date
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the Stock Appreciation Right is exercised. The Committee acting in its absolute
discretion shall have the right to determine the form and time of any payment
under this sec. 8.3.
SEC. 9
RESTRICTED STOCK
9.1 Committee Action. The Committee acting in its absolute discretion
shall have the right to grant Restricted Stock to Key Employees under this Plan
from time to time and, further, shall have the right to make new Restricted
Stock grants in exchange for the cancellation of an outstanding Restricted Stock
grant to such Key Employee. Each Restricted Stock grant shall be evidenced by a
Restricted Stock Certificate, and each Restricted Stock Certificate shall set
forth the conditions, if any, under which the grant will be effective and the
conditions under which the Key Employee's interest in the underlying Stock will
become nonforfeitable.
9.2 Effective Date. A Restricted Stock grant shall be effective (1) as of
the date set by the Committee when the grant is made or, if the grant is made
subject to one, or more than one, condition, (2) as of the date such conditions
have been timely satisfied.
9.3 Conditions.
(a) Conditions to Issuance of Stock. The Committee acting in its
absolute discretion may make the issuance of Restricted Stock to a Key
Employee subject to the satisfaction of one, or more than one, condition
which the Committee deems appropriate under the circumstances for Key
Employees generally or for a Key Employee in particular, and the related
Restricted Stock Certificate shall set forth each such condition and the
deadline for satisfying each such condition. Stock subject to a Restricted
Stock grant shall be issued in the name of a Key Employee only after each
such condition, if any, has been timely satisfied, and any Stock which is
so issued shall be held by Mego pending the satisfaction of the forfeiture
conditions, if any, under sec. 9.3(b) for the related Restricted Stock
grant.
(b) Forfeiture Conditions. The Committee acting in its absolute
discretion may make Restricted Stock issued in the name of a Key Employee
subject to one, or more than one, objective employment, performance or
other forfeiture condition that the Committee acting in its absolute
discretion deems appropriate under the circumstances for Key Employees
generally or for a Key Employee in particular, including a condition which
results in a forfeiture if a Key Employee exercises a Non-ISO granted in
tandem with his or her Restricted Stock grant, and the related Restricted
Stock Certificate shall set forth each such condition, if any, and the
deadline, if any, for satisfying each such forfeiture condition. A Key
Employee's nonforfeitable interest in the shares of Stock underlying a
Restricted Stock grant shall depend on the extent to which he or she timely
satisfies each such condition. Each share of Stock underlying a Restricted
Stock grant shall be unavailable under sec. 3 after such grant is effective
unless such share is forfeited as a result of a failure to timely satisfy a
forfeiture condition, in which event such share of Stock shall again become
available under sec. 3 as of the date of such failure.
(c) Mandatory Conditions. All Restricted Stock grants that are
subject to one or more performance-based issuance conditions under
sec. 9.3(a) or one or more performance-based forfeiture conditions under
sec. 9.3(b) shall also be subject to the
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condition that the Key Employee remain employed by Mego until the date
which is the first anniversary of the date the Restricted Stock is granted.
If a Restricted Stock grant is not subject to one or more performance-based
conditions, the Restricted Stock grant shall be subject to the condition
that the Key Employee remain employed by Mego until the date which is the
third anniversary of the date the Restricted Stock is granted.
9.4 Dividends and Voting Rights. If a cash dividend is declared on a share
of Stock underlying a Restricted Stock grant during the period which begins on
the date such grant is effective and ends immediately before the first date that
a Key Employee's interest in such underlying Stock (1) is forfeited completely
or (2) becomes completely nonforfeitable, Mego shall pay such cash dividend
directly to such Key Employee. If a Stock dividend is declared on such a share
of Stock during such period, such Stock dividend shall be treated as part of the
grant of the related Restricted Stock, and a Key Employee's interest in such
Stock dividend shall be forfeited or shall become nonforfeitable at the same
time as the Stock with respect to which the Stock dividend was paid is forfeited
or becomes nonforfeitable. The disposition of each other form of dividend which
is declared on such a share of Stock during such period shall be made in
accordance with such rules as the Committee shall adopt with respect to each
such dividend. A Key Employee also shall have the right to vote the Stock
underlying his or her Restricted Stock grant during such period.
9.5 Satisfaction of Forfeiture Conditions; Provision for Income and Excise
Taxes. A share of Stock shall cease to be Restricted Stock at such time as a
Key Employee's interest in such Stock becomes nonforfeitable under this Plan,
and the certificate representing such share shall be transferred to the Key
Employee as soon as practicable thereafter. The Committee acting in its absolute
discretion shall have the power to authorize and direct the payment of a cash
bonus (or to provide in the terms of the Restricted Stock Certificate for Mego
to make such payment) to a Key Employee to pay all, or any portion of, his or
her federal, state and local income and excise tax liability which the Committee
deems attributable to his or her interest in his or her Restricted Stock grant
becoming nonforfeitable and, further, to pay any such tax liability attributable
to such cash bonus.
9.6 Section 162(m). Except where the Committee deems it in the best
interests of Mego, the Committee shall use its best efforts to grant Restricted
Stock either (1) subject to at least one condition which can result in the
Restricted Stock qualifying as "performance-based compensation" under
sec. 162(m) of the Code if the shareholders of Mego approve such condition and
the Committee takes such other action as the Committee deems necessary or
appropriate for such grant to so qualify under sec. 162(m) or (2) under such
other circumstances as the Committee deems likely to result in an income tax
deduction for the grant.
9.7 Grants to Directors.
(a) General Rule. At least 60% of a Director's compensation for all
services rendered as such in each fiscal quarter for Mego shall be paid by
Mego in whole shares of Stock based on the Fair Market Value of such Stock
on the last day of each such fiscal quarter and in cash in lieu of any
fractional share and, absent an effective election under sec. 9.7(b) 100%
of such compensation shall be paid in whole shares of Stock and in cash in
lieu of any fractional share of Stock.
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(b) Election. A Director may elect in a manner satisfactory to the
Committee that any percentage of his or her compensation be paid in whole
shares of Stock, but the percentage elected by the Director cannot be less
than 60% or more than 100%. An election under this sec. 9.7(b) shall be
effected for compensation which is otherwise payable in cash after the end
of the fiscal quarter for Mego in which the election is delivered to the
Committee or its delegate.
(c) Transferability. No shares of Stock transferred to a Director may
be transferred by the Director to any other person while he or she remains
a Director other than by will or by the laws of descent and distribution
without the express consent of the Committee unless the Director serves as
such as a representative of his or her employer, in which event the
Director may assign all his or her rights in such Stock to his or her
employer subject to the general restriction on transfers set forth in this
sec. 9.7(c).
(d) Transition Rule. If any Director is due any compensation for
services rendered as such on the date this Plan becomes effective under
sec. 4, such compensation shall be paid in whole shares of Stock under this
sec. 9.7 (and in cash in lieu of any fractional share) as of the last day
of the fiscal quarter for Mego which includes the date this Plan becomes
effective under sec. 4.
SEC. 10
NONTRANSFERABILITY
No Option, Restricted Stock or Stock Appreciation Right shall (absent the
Committee's consent or the application of sec. 9.7(c)) be transferable by a Key
Employee or an Director other than by will or by the laws of descent and
distribution, and any Option or Stock Appreciation Right shall (absent the
Committee's consent or the application of sec. 9.7(c)) be exercisable during a
Key Employee's or Director's lifetime only by the Key Employee or Director. The
person or persons to whom an Option or Restricted Stock or Stock Appreciation
Right is transferred by will or by the laws of descent and distribution (or with
the Committee's consent) thereafter shall be treated as the Key Employee or
Director.
SEC. 11
SECURITIES REGISTRATION
Each Option Certificate, Restricted Stock Certificate and Stock
Appreciation Right Certificate shall provide that, upon the receipt of shares of
Stock as a result of the exercise of an Option or a Stock Appreciation Right or
the satisfaction of the forfeiture conditions under a Restricted Stock
Certificate, the Key Employee or Director shall, if so requested by Mego, hold
such shares of Stock for investment and not with a view of resale or
distribution to the public and, if so requested by Mego, shall deliver to Mego a
written statement satisfactory to Mego to that effect. As for Stock issued
pursuant to this Plan, Mego at its expense shall take such action as it deems
necessary or appropriate to register the original issuance of such Stock to a
Key Employee or Director under the 1933 Act or under any other applicable
securities laws or to qualify such Stock for an exemption under any such laws
prior to the issuance of such Stock to a Key Employee or Director; however,
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Mego shall have no obligation whatsoever to take any such action in connection
with the transfer, resale or other disposition of such Stock by a Key Employee
or Director.
SEC. 12
LIFE OF PLAN
No Option, Restricted Stock or Stock Appreciation Right shall be granted
under this Plan on or after the earlier of
(1) the tenth anniversary of the effective date of this Plan (as
determined under sec. 4 of this Plan), in which event this Plan otherwise
thereafter shall continue in effect until all outstanding Options and Stock
Appreciation Rights have been exercised in full or no longer are
exercisable and all Restricted Stock grants under this Plan have been
forfeited or the forfeiture conditions, if any, on such Stock have been
satisfied in full, or
(2) the date on which all of the Stock reserved under sec. 3 of this
Plan has (as a result of the exercise of Options or Stock Appreciation
Rights granted under this Plan or the satisfaction of the forfeiture
conditions, if any, on Restricted Stock) been issued or no longer is
available for use under this Plan, in which event this Plan also shall
terminate on such date.
SEC. 13
ADJUSTMENT
13.1 Capital Structure. The number, kind or class (or any combination
thereof) of shares of Stock reserved under sec. 3 of this Plan, the grant caps
described in sec. 6 of this Plan, the $1.50 floor on the Option Price in
sec. 7.3 and sec. 7.4 and on the SAR Value in sec. 8.2(a), the number, kind or
class (or any combination thereof) of shares of Stock subject to Options or
Stock Appreciation Rights granted under this Plan and the Option Price of such
Options and the SAR Value of such Stock Appreciation Rights as well as the
number, kind or class of shares of Restricted Stock granted under this Plan
shall be adjusted by the Committee in an equitable manner to reflect any change
in the capitalization of Mego, including, but not limited to, such changes as
stock dividends or stock splits.
13.2 Mergers. The Committee as part of any corporate transaction described
in sec. 424(a) of the Code shall have the right to adjust (in any manner which
the Committee in its discretion deems consistent with sec. 424(a) of the Code)
the number, kind or class (or any combination thereof) of shares of Stock
reserved under sec. 3 of this Plan and the grant caps described in sec. 6 of
this Plan. Furthermore, the Committee as part of any corporate transaction
described in sec. 424(a) of the Code shall have the right to adjust (in any
manner which the Committee in its discretion deems consistent with sec. 424(a)
of the Code) the number, kind or class (or any combination thereof) of shares of
Stock underlying any Restricted Stock grants previously made under this Plan and
any related grant conditions and forfeiture conditions, and the number, kind or
class (or any combination thereof) of shares subject to Option and Stock
Appreciation Right grants previously made under this Plan and the related Option
Price and SAR Value for each such Option and Stock Appreciation Right, and,
further, shall have the right (in any
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manner which the Committee in its discretion deems consistent with sec. 424(a)
of the Code) to make Restricted Stock, Option and Stock Appreciation Right
grants to effect the assumption of, or the substitution for, restricted stock,
option and stock appreciation right grants previously made by any other
corporation to the extent that such corporate transaction calls for such
substitution or assumption of such restricted stock, option or appreciation
right grants.
13.3 Fractional Shares. If any adjustment under this sec. 13 would create
a fractional share of Stock or a right to acquire a fractional share of Stock,
such fractional share shall be disregarded and the number of shares of Stock
reserved under this Plan and the number subject to any Options or Stock
Appreciation Right grants and Restricted Stock grants shall be the next lower
number of shares of Stock, rounding all fractions downward. An adjustment made
under this sec. 13 by the Board shall be conclusive and binding on all affected
persons and, further, shall not constitute an increase in "the number of shares
reserved under sec. 3" within the meaning of sec. 15 of this Plan.
SEC. 14
SALE, MERGER OR CHANGE IN CONTROL
If on any date Mego agrees to sell all or substantially all of its assets
or agrees to any merger, consolidation, reorganization, division or other
corporate transaction in which Stock is converted into another security or into
the right to receive securities or property or if a tender offer is made which
could lead to a Change in Control (other than a tender offer by Mego or an
employee benefit plan established and maintained by Mego), the Board shall waive
any conditions to the exercise of all then outstanding Options and Stock
Appreciation Rights and waive any then outstanding issuance and forfeiture
conditions on any Restricted Stock and shall have the right to cancel such
Options, Stock Appreciation Rights and Restricted Stock grants after providing
each Key Employee and Director a reasonable opportunity to exercise his or her
Options and Stock Appreciation Rights and to take such other action as necessary
or appropriate to receive the Stock subject to any Restricted Stock grants.
SEC. 15
AMENDMENT OR TERMINATION
This Plan may be amended by the Board from time to time to the extent that
the Board deems necessary or appropriate; provided, however, no such amendment
shall be made absent the approval of the shareholders of Mego required under
sec. 422 of the Code (1) to increase the number of shares of stock reserved
under sec. 3 which can be used for ISO grants, or (2) to change the class of
employees eligible for Options which are ISOs. The Board also may suspend the
granting of Options or Stock Appreciation Rights or Restricted Stock under this
Plan at any time and may terminate this Plan at any time; provided, however, the
Board shall not have the right unilaterally to modify, amend or cancel any
Option, Stock Appreciation Right or Restricted Stock granted before such
suspension or termination unless (1) the Key Employee or Director consents in
writing to
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<PAGE> 48
such modification, amendment or cancellation or (2) there is a dissolution or
liquidation of Mego or a transaction described in sec. 13 or sec. 14 of this
Plan.
SEC. 16
MISCELLANEOUS
16.1 Shareholder Rights. No Key Employee or Director shall have any rights
as a shareholder of Mego as a result of the grant of an Option or a Stock
Appreciation Right granted to him or her under this Plan or his or her exercise
of such Option or Stock Appreciation Right pending the actual delivery of the
Stock subject to such Option to such Key Employee or Director. Subject to
sec. 9.4, a Key Employee's rights as a shareholder in the shares of Stock
underlying a Restricted Stock grant which is effective shall be set forth in the
related Restricted Stock Certificate.
16.2 No Contract of Employment. The grant of an Option or a Stock
Appreciation Right or Restricted Stock to a Key Employee or Director under this
Plan shall not constitute a contract of employment or a right to continue to
serve on the Board and shall not confer on a Key Employee or Director any rights
upon his or her termination of employment or service in addition to those
rights, if any, expressly set forth in the related Option Certificate, Stock
Appreciation Right Certificate, or Restricted Stock Certificate.
16.3 Withholding. Each Option, Stock Appreciation Right and Restricted
Stock grant shall be made subject to the condition that the Key Employee or
Director consents to whatever action the Committee directs to satisfy the
federal and state tax withholding requirements, if any, which the Committee in
its discretion deems applicable to the exercise of such Option or Stock
Appreciation Right or the satisfaction of any forfeiture conditions with respect
to Restricted Stock issued in the name of the Key Employee or Director. The
Committee also shall have the right to provide in an Option Certificate, Stock
Appreciation Right Certificate or a Restricted Stock Certificate that a Key
Employee or Director may elect to satisfy federal and state tax withholding
requirements through a reduction in the cash or the number of shares of Stock
actually transferred to him or to her under this Plan.
16.4 Construction. All references to sections (sec.) are to sections
(sec.) of this Plan unless otherwise indicated. This Plan shall be construed
under the laws of the State of Georgia. Finally, each term set forth in sec. 2
shall have the meaning set forth opposite such term for purposes of this Plan
and, for purposes of such definitions, the singular shall include the plural and
the plural shall include the singular.
16.5 Other Conditions. Each Option Certificate, Stock Appreciation Right
Certificate or Restricted Stock Certificate may require that a Key Employee or
Director (as a condition to the exercise of an Option or a Stock Appreciation
Right or a Restricted Stock grant) enter into any agreement or make such
representations prepared by Mego, including any agreement which restricts the
transfer of Stock acquired pursuant to the exercise of an Option or a Stock
Appreciation Right or Restricted Stock grant or provides for the repurchase of
such Stock by Mego under certain circumstances.
16.6 Rule 16b-3. The Committee shall have the right to amend any Option,
Restricted Stock or Stock Appreciation Right grant or to withhold or otherwise
restrict the transfer of any Stock or cash under this Plan to a Key Employee or
Director as the Committee deems appropriate in order to satisfy any condition or
requirement under
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<PAGE> 49
Rule 16b-3 to the extent Rule 16 of the 1934 Act might be applicable to such
grant or transfer.
16.7 Loans. If approved by the Committee, Mego may lend money to, or
guarantee loans made by a third party to, any Key Employee to finance the
exercise of any Option granted under this Plan, and the exercise of an Option
with the proceeds of any such loan shall be treated as an exercise for cash
under this Plan. If approved by the Committee, Mego also may, in accordance with
a Key Employee's instructions, transfer Stock upon the exercise of an Option
directly to a third party in connection with any arrangement made by the Key
Employee for financing the exercise of such Option.
IN WITNESS WHEREOF, Mego Mortgage Corporation has caused its duly
authorized officer to execute this Plan to evidence its adoption of this Plan.
MEGO MORTGAGE CORPORATION
By:
--------------------------------------
Date:
--------------------------------------
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<PAGE> 50
MEGO MORTGAGE CORPORATION
1000 PARKWOOD CIRCLE, SUITE 600
ATLANTA, GEORGIA 30339
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS FEBRUARY 16, 1999
The undersigned stockholder of Mego Mortgage Corporation, a Delaware
corporation (the "Company"), hereby appoints Edward B. Meyercord and J. Richard
Walker or either of them, the proxy or proxies of the undersigned, each with
full power of substitution, to vote all shares of common stock of the Company
which the undersigned is entitled to vote a the Annual Meeting of the
Stockholders of the Company to be held at 10:00 a.m., Eastern Standard Time, on
February 16, 1999, at the offices of King & Spalding, 191 Peachtree Street,
Atlanta Georgia 30303, and at all adjournments or postponements thereof, with
authority to vote said common stock on the matters set forth on the reverse
side.
THE SHARES OF COMMON STOCK REPRESENTED BY THIS PROXY WILL BE VOTED IN THE
MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER, WHO SHALL BE ENTITLED TO
THE VOTE CORRESPONDING TO EACH SHARE OF COMMON STOCK HELD BY SUCH STOCKHOLDER.
(CONTINUED, AND TO BE SIGNED ON REVERSE SIDE)
<TABLE>
<C> <S>
- ------ PLEASE MARK YOUR
VOTES AS IN THIS
X EXAMPLE.
- ------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
FOR AGAINST ABSTAIN
This proxy will be voted as specified. If no specification is 2. To approve the proposal [ ] [ ] [ ]
made, this proxy will be voted FOR the first four proposals and in to amend the Company's
the discretion of the proxies on any other business properly certificate of
brought before the meeting. Please mark, date, sign and return incorporation in order to
using the enclosed envelope. Your prompt attention will be reflect a name change to
appreciated. Altiva Financial
Corporation (the "Name
Change")
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE 3. To approve the proposal [ ] [ ] [ ]
FOLLOWING: to amend the Company's
1. To elect six (6) directors to serve until the 2000 Annual certificate of
Meeting of Stockholders: incorporation in order to
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL effect a reverse stock split
NOMINEE, STRIKE A LINE THROUGH THE NOMINEE'S NAME IN THE LIST of the Company's outstanding
BELOW.) common stock (the
"Consolidation")
Spencer I. Browne, Hubert M. Stiles, Jr., 4. To approve the Mego [ ] [ ] [ ]
Edward B. Meyercord, David J. Vida, Jr., Mortgage Corporation 1999
Wm. Paul Ralser, John D. Williamson, Jr. Incentive Stock Plan
5. In their judgment, the [ ] [ ] [ ]
proxies are authorized to
vote upon such other
business as may be
properly brought before
the meeting and each
adjournment or
postponement thereof.
[ ] WITHHOLD AUTHORITY to vote for all nominees listed
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Signature Date ,1999
------------------------------ ------------
Signature Date ,1999
------------------------------ ------------
NOTE: Please sign exactly as your name or names appear hereon. For
more than one owner as shown above, each should sign. When
signing in a fiduciary or representative capacity, please
give full title. If this Proxy is submitted by a
corporation, it should be executed in the full corporate
name by a duly authorized officer, if a partnership, please
sign in partnership name by authorized person.
</TABLE>
