<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
INFORMATION STATEMENT
PURSUANT TO SECTION 14(F)
OF THE
SECURITIES EXCHANGE ACT OF 1934
AND RULE 14F-1 THEREUNDER
COMMISSION FILE NO: 0-19604
AAMES FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-4340340
STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.
</TABLE>
350 SOUTH GRAND AVENUE, 52ND FLOOR, LOS ANGELES, CA 90071
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE:
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (323) 210-5000
INFORMATION STATEMENT PURSUANT TO SECTION 14(F) OF THE
SECURITIES EXCHANGE ACT OF 1934 AND RULE 14F-1 THEREUNDER
This Information Statement is being mailed on or about January 29, 1999, to
holders of shares of Common Stock, par value $0.001 (the "Common Stock"), of
Aames Financial Corporation, a Delaware corporation (the "Company"), pursuant to
Section 14(f) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and Rule 14f-1 promulgated thereunder. This Information Statement is
being furnished in connection with the nomination of persons by Capital Z
Financial Services Fund II, LP, a Bermuda limited partnership ("Capital Z"), to
the Board of Directors of the Company pursuant to the Preferred Stock Purchase
Agreement, dated as of December 23, 1998 by and between the Company and Capital
Z (the "Agreement"). The Agreement provides for an equity investment of up to
$100 million (the "Investment") in the Company. The Investment is to be made in
three stages, as follows: (i) at an initial closing, expected to occur prior to
February 15, 1999 (the "Initial Closing") Capital Z, and certain other investors
to be designated by it (collectively, the "Preferred Stock Investors"), will
purchase 26,704 shares of the Series B Convertible Preferred Stock of the
Company (the "Series B Stock") and 48,296 shares of the Series C Convertible
Preferred Stock of the Company (the "Series C Stock") for $1,000 per share, or
an aggregate purchase price of $75 million; (ii) as soon as practicable
thereafter, subject to the approval by the stockholders of the Company of an
amendment to the Company's Certificate of Incorporation increasing the number of
authorized shares of Common Stock and Preferred Stock (the "Stock Proposal") and
a subsequent 1,000-for-1 split of the outstanding Series B Stock and Series C
Stock (the "Recapitalization), the Company intends to commence a public offering
to the common stockholders of the Company of nontransferable subscription rights
(the "Subscription Rights") to purchase up to $25 million of Series C Stock for
$1.00 per share (the "Rights Offering"), and (iii) following the Rights
Offering, Capital Z will purchase any shares of the Series C Stock which are not
purchased by common stockholders in the Rights Offering. Section 4.12 of the
Agreement provides that the Company will, concurrently with the Initial Closing,
cause the Board of Directors to consist of nine persons as of the date of the
Initial Closing and, subject to compliance with Section 14(f) of the Exchange
Act, cause five nominees of Capital Z (the "Capital Z Designees") to be
appointed to the Board of Directors as of such date.
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NO ACTION IS REQUIRED BY THE STOCKHOLDERS OF THE COMPANY IN CONNECTION WITH
ANY ELECTION OF DIRECTORS NOMINATED BY CAPITAL Z TO THE BOARD. However, because
a majority of the Company's directors may be changed other than at a meeting of
stockholders, Section 14(f) of the Exchange Act requires the Company to provide
its stockholders and the Securities and Exchange Commission (the "Commission")
with the information set forth in this Information Statement not less than ten
days prior to the date on which the change will take place, or such other time
period as may be established by the Commission.
The information contained in this Information Statement concerning Capital
Z and the Capital Z Designees has been furnished to the Company by Capital Z,
and the Company assumes no responsibility for the accuracy or completeness of
such information.
INFORMATION RELATING TO THE COMPANY'S STOCK
As of January 19, 1999, the Company had outstanding 31,015,893 shares of
Common Stock and no shares of Preferred Stock. Holders of each share of Common
Stock are entitled to cast one vote per share on all matters submitted to a vote
of stockholders. The Capital Z Designees will be appointed to the Board of
Directors concurrently with the Initial Closing, which is expected to occur no
later than February 15, 1999. At the Initial Closing, the Preferred Stock
Investors will purchase an aggregate of 75,000 shares of Series B Stock and
Series C Stock. A stockholder is entitled to cast one vote for each share of
Common Stock and 1,000 votes for each share of Series B Stock and Series C Stock
for which he or she is entitled to vote. The Common Stock, Series B Stock and
Series C Stock entitles the holders thereof to vote with respect to all matters
(other than, with respect to the Series C Stock, the election of Directors)
submitted to the Stockholders for vote, with all classes voting together as a
single class, except as otherwise provided under Delaware law. The Series B
Stock and Series C Stock have separate rights to vote as a class on certain
matters. The Bylaws of the Company provide that the Board of Directors shall
consist of no fewer than three and no more than nine members as determined from
time to time by the Board of Directors. The Board of Directors of the Company,
effective as of the Initial Closing, shall consist of nine Directors divided
into two classes. One class, consisting of four Directors (the "Series B
Directors") are elected by the holders of the Series B Stock, voting as a single
class, annually and the other class of Directors, consisting of five Directors
(the "Common Stock Directors") are elected by the holders of the Common Stock
and the holders of the Series B Stock, voting together as a single class, for
staggered three year terms. The holders of the Series C Stock are not entitled
to vote with respect to the election of Directors. Upon shareholder approval of
the Stock Proposal and the completion of the Recapitalization, each share of
Series B Stock and each share of Series C Stock will be entitled to cast one
vote per share.
CHANGE OF CONTROL TRANSACTION
On December 23, 1998, the Company and Capital Z entered into the Agreement
providing for the purchase by Capital Z and the other Preferred Stock Investors
of up to $100,000,000 of the Series B Stock and Series C Stock. Pursuant to the
Agreement, the Company will issue to the Preferred Stock Investors at the
Initial Closing 26,704 shares of the Series B Stock and 48,296 shares of the
Series C Stock for $1,000 per share or an aggregate of $75,000,000. The identity
of the Preferred Stock Investors other than Capital Z has not, at the date of
this Information Statement, been determined. However, Capital Z intends to
purchase a substantial majority of the Series B Stock and Series C Stock to be
issued to the Preferred Stock Investors pursuant to the Agreement and
consequently will be able to direct the control of the Company and its affairs.
Pursuant to the Agreement, the Company will commence the Rights Offering as soon
as practicable following adoption of the Stock Proposals and the completion of
the Recapitalization. Pursuant to the Rights Offering, the Company will
distribute Subscription Rights to its Common Stock holders providing them the
right to purchase up to 25,000,000 shares of the Series C Stock of the Company
for $1.00 per share or an aggregate of $25,000,000. Capital Z has agreed to
purchase any and all of the shares of Series C Stock not purchased by the Common
Stock holders in the Rights Offering.
On January 4, 1999, a designee of Capital Z received, as a standby
commitment fee, warrants to purchase 1,250,000 of the Common Stock at an
exercise price of $1.00 per share. In addition, at the time of the Initial
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Closing, the Company will pay a designee of Capital Z a $1,000,000 transaction
fee in connection with the transactions contemplated by the Agreement and
Capital Z will receive an additional warrant (the "Contingent Warrant") to
purchase up to 3,000,000 shares of the Common Stock at an exercise price of
$1.00 per share, which would be exercisable only if the Recapitalization is not
completed by June 30, 1999. In addition, in connection with the transactions
contemplated by the Agreement, the Company has paid Capital Z aggregate
additional fees of $2,000,000 and has agreed to reimburse Capital Z for all of
its expenses incurred in connection with the negotiation and execution of the
Agreement and the transactions contemplated thereby.
Following the Initial Closing, Capital Z will hold Series B Stock and
Series C Stock representing 70.744% of the combined voting power of the Company.
Following the completion of the Rights Offering, Capital Z will hold Series B
Stock and Series C Stock representing 57.2% of the combined voting power of the
Company if all shares offered in the Rights Offering are purchased by Common
Stockholders and 76.3% of the combined voting power of the Company if none of
the Shares offered in the Rights Offering are purchased by Common Stockholders.
Further, it is anticipated that Capital Z will hold a substantial majority of
the Series B Stock to be outstanding following the Initial Closing, and
consequently will have the power to direct the election of all of the Series B
Directors.
As part of the Agreement, the Company agreed to solicit approval of the
stockholders of the Stock Proposal in order to allow the Recapitalization and
Rights Offering to occur. Neither of these events may be consummated unless and
until the Stock Proposal is adopted. Pursuant to the terms of the Series B Stock
and Series C Stock, if the Company fails to effect the Recapitalization prior to
June 30, 1999 (i) the dividend rate on the Series B Stock and Series C Stock
will increase to 15% per annum, (ii) the Series B Stock and Series C Stock will
become mandatorily redeemable on the sixth anniversary of its issuance, and
(iii) the warrant to purchase up to 3,000,000 shares of Common Stock held by
Capital Z or a designee of Capital Z will become exercisable at an exercise
price of $1.00 per share. Further, prior to the Recapitalization, in addition to
its regular dividend rights and rights in liquidation based on its stated value
per share, the Senior Preferred Stock will participate in dividends and rights
in liquidation with holders of the Common Stock in any remaining assets of the
Company.
The total amount of funds required to pay the consideration payable with
respect to the purchases by the Preferred Stock Investors under the Agreement
are $75,000,000 (if all of the shares of Series C Stock issuable in the Rights
Offering are purchased by the holders of the Company's Common Stock) and
$100,000,000 (if none of the shares of Series C Stock issuable in the Rights
Offering are purchased by the holders of the Company's Common Stock). Capital Z
has informed the Company that none of such funds will be borrowed.
CONTINUING DIRECTORS
Following the appointment of the Capital Z Designees, there will be four
continuing directors of the Company. The name, age and present principal
occupation or employment, and material occupations, positions, offices or
employment for the past five years, of each continuing director are set forth
below:
GEORGE W. COOMBE, JR. is a Senior Fellow at the Stanford Law School
teaching International Commercial Arbitration. From 1990 to 1995, Mr. Coombe was
a partner in the law firm of Graham & James and from 1975 to 1990, he was
Executive Vice President and General Counsel of Bank of America. From 1968 to
1975, Mr. Coombe served as Assistant General Counsel and Corporate Secretary of
General Motors Corporation.
NEIL B. KORNSWIET was elected a Director in September 1996 and appointed
Co-Chairman of the Board in November 1997. Mr. Kornswiet founded One Stop in
August 1995 and was its Chairman, Chief Executive Officer and President from
September 1995 through its acquisition by the Company in August 1996. Mr.
Kornswiet continues to serve as Chairman, Chief Executive Officer and President
of One Stop, now a wholly owned subsidiary of the Company. Mr. Kornswiet was
also named an Executive Vice President of the Company in September 1996 and
President of the Company in May 1997. From 1992 to 1995, Mr. Kornswiet was
President of Quality Mortgage, a privately held mortgage banking company. From
1983 to 1992,
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Mr. Kornswiet was a lawyer specializing in consumer credit and other regulatory
matters for financial institutions and mortgage banking companies.
GEORGES C. ST. LAURENT, JR., appointed Co-Chairman of the Board in November
1997, is the former Chairman of the Board and Chief Executive Officer of Western
Bank, Oregon (1988 to 1997). Currently, Mr. St. Laurent is a principal in
various real estate, agricultural and forestry related ventures and also serves
as a director of Baxter International, Inc. and The Perkin Elmer Corporation.
CARY H. THOMPSON has served as a Director of the Company since January
1992. He was named Chief Operating Officer of the Company in March 1996 and
Chief Executive Officer of the Company in May 1997. From May 1994 until joining
the Company, Mr. Thompson served as Managing Director-Head of United States
Financial Institutions Group for NatWest Markets. From June 1989 to May 1994,
Mr. Thompson was Senior Vice President-Head of West Coast Financial Institutions
Group for Oppenheimer & Co. Mr. Thompson is also on the Board of Directors of
Fidelity National Financial, Inc., a title insurance company.
CAPITAL Z DESIGNEES
The name, age and present principal occupation or employment, and material
occupations, positions, offices or employments for the past five years, of each
person whom Capital Z has nominated to serve on the Company's Board of Directors
effective as of the date of the Initial Closing are set forth below. Capital Z
has informed the Company that each of such persons has consented to act as a
director.
STEVEN M. GLUCKSTERN, 47, has served as a Partner of Capital Z Partners,
Ltd. since July 1998, as Chairman of Zurich Centre Group LLP since 1996 and as
Chairman of Zurich Reinsurance (North America), Inc. since 1993.
ADAM MIZEL, 29, has served as a Senior Vice President and Director of
Capital Z Management, Inc. and a partner of Capital Z Partners since August of
1988. From April of 1994 through August of 1998, Mr. Mizel served as Vice
President and Managing Director at Zurich Center Insurance.
ERIC RAHE, 29, has served as a principal of Capital Z Partners, Ltd. since
August 1998. From March through July of 1998, Mr. Rahe served as both an
Associate and Vice President of Insurance Partners, a private equity fund
focused on the insurance industry. From January 1994 through August of 1994, Mr.
Rahe was an Associate Analyst at the investment banking firm of Donaldson,
Lufkin & Jenrette.
MANI A. SADEGHI, 35, has served as Chief Executive of Equifin Capital
Partners, LLC, which provides private equity investment management and advisory
services, since June of 1998. Mr. Sadeghi has also served as Group President of
AT&T Capital Corporation from September 1994 until February of 1998 and as the
Director of Strategic Planning and Business Development at GE Capital from July
1992 through September 1994.
DAVID A. SPURIA, 38, has served as General Counsel of Capital Z Partners
Ltd. and Capital Z Management, Inc. since July of 1998. Mr. Spuria was a partner
from January 1995 through July of 1998 and an associate from March of 1992
through January of 1995 with the law firm of Weil, Gotshal & Manges, LLC.
Following the election of Capital Z's Designees, and prior to the earlier
of June 30, 1999 and the consummation of the purchase by Capital Z of all shares
of Series C Stock not purchased in the Rights Offering, any amendment or waiver
of any term or condition of the Agreement or the Company's Amended and Restated
Certificate of Incorporation and Restated Bylaws, any amendment, waiver or
termination of the Rights Offering and the Recapitalization, any extension by
the Company of the time for the performance of any of the obligations or other
acts of Capital Z under the Agreement, any waiver or assertion of any of the
Company's rights under the Agreement, or any other consents or actions by the
Board of Directors with respect to the Agreement or the transactions
contemplated thereby, will require, and will require only, the concurrence of a
majority of the Continuing Directors; provided, however, that if applicable law
requires that any action be acted upon by the full Board of Directors, such
action will require the concurrence of a majority of the Directors, which
majority shall include each of the Continuing Directors.
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The Company has been advised by Capital Z that, to the best of the Capital
Z's knowledge, except as described below, none of such persons, (i) is currently
a director of, or holds any position with, the Company, (ii) has a familial
relationship with any of the directors or executive officers of the Company,
(iii) beneficially owns any securities (or rights to acquire any securities) of
the Company, (iv) is a party adverse to the Company or any of its subsidiaries,
or has a material interest adverse to the Company or any of its subsidiaries, in
any legal proceeding, or (v) has been involved in any transactions with the
Company or any of its directors, executive officers or affiliates which are
required to be disclosed pursuant to the rules and regulations of the Securities
and Exchange Commission.
BENEFICIAL OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of January 19, 1999, certain information
relating to the ownership of the Common Stock by (i) each person known by the
Company to be the beneficial owner of more than 5% of the outstanding shares of
the Common Stock (other than Capital Z and the other Preferred Stock Investors
who may be deemed to own an aggregate of 75,000 shares of Series B Stock and
Series C Stock by virtue of entering into the Agreement and related ancillary
agreements), (ii) each of the Company's directors and, (iii) each of the Named
Executive Officers (as defined under "Executive Compensation -- Summary
Compensation Table") and (iv) all of the Company's executive officers and
directors as a group. Except as may be indicated in the footnotes to the table
and subject to applicable community property laws, each of such persons has sole
voting and investment power with respect to the shares beneficially owned.
Beneficial ownership has been determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Under this
Rule, certain shares may be deemed to be beneficially owned by more than one
person (such as where persons share voting power or investment power). In
addition, shares are deemed to be beneficially owned by a person if the person
has the right to acquire the shares (for example, upon exercise of an option)
within 60 days of the date as of which the information is provided; in computing
the percentage ownership of any person, the amount of shares outstanding is
deemed to include the amount of shares beneficially owned by such person (and
only such person) by reason of these acquisition rights. As a result, the
percentage of outstanding shares of any person as shown in the following table
does not necessarily reflect the person's actual voting power at any particular
date. The address of each individual listed is in care of the Company, 350 S.
Grand Avenue, Los Angeles California 90071.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF CLASS
---------------- ---------------- ----------------
<S> <C> <C>
Thirty-Five East Investments LLC...................... 2,225,865(1) 6.74%
35 East 62nd Street
New York, New York
Turtle Creek Revocable Trust.......................... 556,466(1) 1.68%
200 Crescent Court, Suite 1350
Dallas, Texas 75201
George W. Coombe, Jr.................................. 4,300(2) *
Mark E. Costello...................................... 36,875(3) *
John C. Getzelman..................................... 3,829(4) *
Melvyn Kinder......................................... 22,995(5) *
Stephen M. Gluckstern................................. --(6) *
Neil B. Kornswiet..................................... 2,387,860(7) 7.23%
Joseph A. Magnus(8)................................... 38,000(9) *
Adam Mizel............................................ --(6) *
Lee Masters........................................... 3,829(10) *
Barbara S. Polsky..................................... 68,750(11) *
Eric Rahe............................................. --(6) *
Marie Sandeghi........................................ --(6) *
David A. Spuria....................................... --(6) *
Georges C. St. Laurent, Jr. .......................... 53,300(12) *
Cary H. Thompson...................................... 1,281,906(13) 3.88%
All executive officers, directors and nominees as a
group
(17 persons)........................................ 3,930,790(14) 11.90%
</TABLE>
- ---------------
* Less than one percent.
(1) This information was obtained from a Schedule 13D filed with the SEC on
March 19, 1998. Thirty-Five East Investments LLC and Turtle Creek Revocable
Trust filed jointly, however each disclaimed beneficial ownership in any
shares of Common Stock beneficially owned by the other.
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(2) Includes 3,300 shares of Common Stock underlying options which are
currently exercisable or which will become exercisable within 60 days of
January 19, 1999.
(3) Includes 32,075 shares of Common Stock underlying options which are
currently exercisable or which will become exercisable within 60 days of
January 19, 1999.
(4) Represents shares of Common Stock underlying options which are currently
exercisable within 60 days of January 19, 1999
(5) Includes 14,745 shares of Common Stock underlying options which are
currently exercisable or which will become exercisable within 60 days of
January 19, 1999.
(6) Does not include Series B Stock, Series C Stock, warrants for the purchase
of Common Stock or possible beneficial ownership in stock as a result of
any management voting agreement which has been or will be issued to the
Preferred Stock Investors in connection with the Agreement.
(7) Includes 575,000 shares of Common Stock underlying options which are
currently exercisable or which will become exercisable within 60 days of
January 19, 1999.
(8) Joseph A. Magnus resigned as an executive officer of the Company on
November 20, 1998.
(9) Represents shares of Common Stock underlying options that are currently
exercisable, all of which will terminate on February 18, 1999.
(10) Represents shares of Common Stock underlying options which are currently
exercisable within 60 days of January 19, 1999.
(11) Represents shares of Common Stock underlying options which are currently
exercisable within 60 days of January 19, 1999.
(12) Includes 3,300 shares of Common Stock underlying options which are
currently exercisable or which will become exercisable within 60 days of
January 19, 1999.
(13) Includes 1,260,006 shares of Common Stock underlying options which are
currently exercisable or which will become exercisable within 60 days of
January 19, 1999.
(14) Includes 2,029,480 shares of Common Stock underlying options which are
currently exercisable or which will become exercisable within 60 days of
January 19, 1999.
CORPORATE GOVERNANCE
Board Meetings and Committees. The Board of Directors held a total of 14
meetings during the fiscal year ended June 30, 1998. Among its committees, the
Board of Directors has an Audit Committee, a Compensation Committee and a
Nominating Committee. During the fiscal year ended June 30, 1998, each director,
with the exception of Lee Masters, attended at least 75% of the meetings of the
Board of Directors and Committees on which he served.
The Audit Committee met 5 times, the Compensation Committee met 7 times and
the Nominating Committee did not meet during the fiscal year ended June 30,
1998. The Audit Committee's functions include recommending to the Board of
Directors the engagement of the Company's independent accountants, discussing
the scope and results of the audit with the accountants, discussing the
Company's financial accounting and reporting principles and the adequacy of the
Company's financial controls with the accountants and the Company's management,
discussing the results of internal audits with management and reviewing and
evaluating the Company's accounting policies and internal accounting controls.
The Compensation Committee reviews, approves and recommends to the Board of
Directors all short-term compensation and compensation plans for the CEO (and
President, if not the CEO) of the Company, and the Named Executive Officers as
well as approves and authorizes grants under the Corporation's stock option
plans. See "Report of the Compensation Committee on Executive Compensation"
attached to this Proxy Statement as Exhibit "A." The Nominating Committee
reviews the qualifications of possible candidates to serve on the Board of
Directors, the retirement policy of the Board of Directors, director
independence, proposed changes in senior management, succession planning and
recommends a successor to the Chief Executive Officer upon vacancy. The
Nominating Committee does not consider nominations made by stockholders.
Currently, the members of the Audit Committee are Messrs. Getzelman, Coombe and
St. Laurent, the members of the Compensation
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Committee are Messrs. Kinder, Masters and St. Laurent and the members of the
Nominating Committee are Messrs. Kinder and St. Laurent.
Compensation of Directors. Each director who is not an officer of or
otherwise employed by the Company as either an employee or a consultant (each an
"Outside Director") receives a non-qualified option to purchase 10,000 shares of
the Common Stock at the time of the director's original appointment or election
to the Board. In addition, each Outside Director is entitled to receive an
annual retainer of $8,000, a fee of $2,000 for each regular or special Board
meeting attended in person, $500 for each regular or special committee meeting
attended in person or by telephone, $1,000 for each regular or special Board
meeting attended by telephone, and an option to purchase an additional 1,500
shares of the Common Stock as of each annual meeting at the conclusion of which
the Outside Director still serves as a director of the Company.
Compensation Committee Interlocks and Insider Participation. During the
last fiscal year, executive compensation for the Company was administered by the
Compensation Committee of the Board. Messrs. Kinder, Masters and St. Laurent who
are not, and have never been, officers or employees of the Company, served as
members of the Compensation Committee during the 1998 fiscal year.
Report of the Compensation Committee. The Report of the Compensation
Committee of the Board of Directors of the Company, describing the compensation
policies and the compensation philosophy of the Company's executive compensation
policy and certain determinations with respect to bonuses and stock option
grants for the year ended June 30, 1998, is attached to this Information
Statement as Exhibit "A."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 28, 1996, the Company acquired One Stop, a residential mortgage
lender. Prior to the acquisition, One Stop was owned by Neil B. Kornswiet,
currently the Co-Chairman of the Board of the Directors and President of the
Company. In the acquisition, the Company issued approximately 3.5 million shares
of the Common Stock, 2.4 million shares of which was issued to Mr. Kornswiet. In
addition, Mr. Kornswiet has agreed to purchase 1,667,000 shares of Series C
Stock in the Rights Offering for $1.00 per share. Mr. Kornswiet continues to
serve as President, Chief Executive Officer and Chairman of the Board of
Directors of One Stop. See "Executive Compensation."
On January 26, 1998, the Board of Directors approved the Executive and
Director Loan Program under which directors and executive officers of the
Company are entitled to obtain a mortgage loan from the Company at the Company's
cost of funds (plus 25 basis points) as determined by an approved, independent
investment banking firm. All loans made under the Executive and Director Loan
Program are fixed rate, fully amortized, 15- or 30-year loans with no prepayment
penalties and are underwritten to the Company's underwriting guidelines in
effect at the time of the loan. Participants in this program are not charged any
loan fees except for those fees or costs charged by third parties. The following
executive officers and directors have home refinance loans with the Company for
the following principal amount and outstanding balance (as of October 19, 1998)
at an interest rate of 6.5%: Mark E. Costello, executive officer, $325,000 loan
amount, $315,794.87 outstanding balance; Melvyn Kinder, $400,000 loan amount,
$397,427.28 outstanding balance; John C. Getzelman, $642,000 loan amount,
$638,470.23 outstanding balance; Barbara S. Polsky, executive officer, $400,500
loan amount, $397,924.06 outstanding balance; David A. Sklar, executive officer,
$379,300 loan amount, $379,300 outstanding balance; Cary H. Thompson, executive
officer and director, $240,500 loan amount, $240,500 outstanding balance.
From time to time certain officers, directors and employees of the Company,
as well as members of their immediate families, acted as private investors in
loan transactions originated by the Company. All such loans are originated on
terms and conditions which are no more favorable than loans originated by the
Company for other nonaffiliated private investors except that such persons
receive 75% of any prepayment fees collected by the Company on such loans. The
Company discontinued its private investor program in August 1997.
Cary Thompson, the Company's Chief Executive Officer and a director of the
Company and the owner of 21,900 shares of the Company's Common Stock, and Neil
Kornswiet, the Company's President and a director of the Company and the owner
of 1,812,860 shares of the Company's Common Stock (collectively, the
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<PAGE> 8
"Management Stockholders"), have each entered into a Management Voting Agreement
with Capital Z (the "Management Voting Agreement") pursuant to which the
Management Investors have agreed to vote all of the shares of capital stock
beneficially owned by them (the "Management Shares") in favor of the Stock
Proposal and against any proposal for an alternative transaction or any other
matter which would materially impede, interfere with or delay any of the
transaction contemplated by the Agreement. In the event the Recapitalization is
not consummated prior to June 30, 1999, the Management Stockholders have agreed
to vote all Management Shares as directed by the Board of Directors. The
Management Voting Agreement will terminate at the completion of the
Recapitalization and with respect to any Management Shares which are transferred
as permitted by the Management Voting Agreement.
On December 23, 1998, each of the Management Stockholders entered into a
Management Investment Agreement with the Company. Pursuant to the Management
Investment Agreements, Cary Thompson agreed to purchase 250 shares of Series C
Stock for $1,000 per share at the Initial Closing (equivalent to 250,000 shares
at $1.00 per share if the Recapitalization is effected) and Neil Kornswiet
agreed to purchase 1,667,000 shares of Series C Stock in the Rights Offering for
$1.00 per share.
The Company entered into an employment agreement with Cary H. Thompson,
Chief Executive Officer of the Company, in March 1996 (amended in May 1997 and
August 1998) (the "Original Thompson Employment Agreement") pursuant to which
Mr. Thompson was employed as Chief Executive Officer at a base salary of
$900,000 per year. He was also entitled to receive, at the expense of the
Company, the use of an automobile (including all maintenance and expenses
associated therewith), a standard term life insurance policy in the amount of $1
million, a standard term accidental death policy in the amount of $1 million,
under certain circumstances, a long-term disability policy providing an annual
disability payment equal to 125% of his base salary and coverage for him and the
dependent members of his family under the Company's medical and dental policies.
Pursuant to the Original Thompson Employment Agreement, at the time he was
hired, Mr. Thompson was also granted a bonus in the form of non-qualified
options to purchase 1,125,000 shares of the Common Stock and additional
non-qualified options to purchase 670,950 shares of the Common Stock to assist
him in providing for federal and state income taxes payable as a result of such
bonus options and in recognition of the fact that the Company may benefit from
federal and state tax deductions as a result. In the event of a Severance
Termination (as defined in the agreement) or a voluntary termination following a
Change in Control (generally, a 20% change in the voting power of the Common
Stock, certain changes in Board membership, a merger or complete liquidation or
dissolution of the Company), the Company was obligated to pay Mr. Thompson two
years' base salary plus an amount based on the performance bonuses previously
paid. In addition, all options held by him are to vest as of the Severance
Termination and remain exercisable for 12 months following such date. In
addition, in the event of a Change in Control, all options would become
immediately vested and remain exercisable for the entire remaining term of the
option.
Concurrently with the execution of the Agreement, the Company entered into
a five-year employment agreement with Cary H. Thompson, the Company's Chief
Executive Officer (the "New Thompson Employment Agreement"). The New Thompson
Employment Agreement will be effective on the date of the Initial Closing, at
which time the Original Thompson Employment Agreement will be terminated. The
New Thompson Employment Agreement will supersede and invalidate any of Mr.
Thompson's rights and benefits accruing under all other employment, change in
control, stock option and any and all other agreements between Mr. Thompson and
the Company that provide for the payment of compensation or benefits to Mr.
Thompson other than (i) benefits provided under the Company's 401(k) plan, (ii)
the use of an automobile (including all maintenance and expenses associated
therewith) at the expense of the Company, and (iii) stock options granted to Mr.
Thompson under the Company's various stock option plans and stock options
granted outside of such plans. Under the New Thompson Employment Agreement, Mr.
Thompson will earn an annual base salary of $600,000 and is entitled to receive
cash bonuses after the 1999 calendar year of between 0 - 100% of his annual base
salary, with an expected bonus of $400,000 and a bonus in excess of 100% of his
annual base salary for extraordinary performance which shall be based on the
achievement of other non-financial goals adopted by the Board and payable in
accordance with a budget approved by the Board of Directors of the Company. Mr.
Thompson is also entitled to receive, at the expense of the Company, (i) not
less than $2 million of standard term life insurance, (ii) medical and dental
benefits for Mr. Thompson
8
<PAGE> 9
and members of his family, (iii) a long-term disability policy providing for
payments in an amount equal to 60% of Mr. Thompson's annual base salary,
provided such policy can be obtained for a reasonable cost, (iv) other benefits
under the Company's savings, pension and retirement plans and other benefit
plans or programs maintained by the Company for the benefit of its executives,
and (v) reimbursement of reasonable business expenses incurred in accordance
with the Company's policies. Under the New Thompson Employment Agreement, the
Company will grant to Mr. Thompson an option to purchase 2,630,162 shares of the
Company's common stock pursuant to the Company's 1999 Stock Option Plan. Upon
termination of employment by Mr. Thompson for "Good Reason", as defined in the
Thompson Employment Agreement or by the Company for any reason, Mr. Thompson
will be entitled to receive severance benefits for a period of 12 months,
payable in accordance with the Company's payroll policy, an amount equal to (i)
$2 million, if the termination occurs within one year of the Initial Closing,
(ii) $1.5 million, if the termination occurs during the second year, (iii) $1.0
million if the termination occurs in the third year, and (iv) $0.5 million if
the termination occurs after the fourth anniversary of the Initial Closing. The
New Thompson Employment Agreement requires that for so long as Capital Z or its
designated purchasers owns at least 25% of the outstanding voting securities of
the Company, Mr. Thompson may not to sell, assign or otherwise transfer during
his employment with the Company, in any twelve month period, more than 25% of
the aggregate amount of shares of Company stock which Mr. Thompson owned
immediately prior to the Initial Closing, subject to waiver by the Board of
Directors in the event of extraordinary hardship.
The Company entered into an employment agreement with Neil B. Kornswiet,
the Company's President and One Stop's Chairman, President and Chief Executive
Officer on August 28, 1997 with an original expiration date of August 27, 2002.
The agreement was amended and restated and extended for an additional two years
in August 1998 (as amended, the "Original Kornswiet Employment Agreement").
Under the Original Kornswiet Employment Agreement, Mr. Kornswiet earned a base
salary of $900,000 per year and was entitled to an annual performance bonus
equal to between $1.35 million and $1.65 million depending on the retail and
broker loan production of the Company (the "Performance Bonus"). Mr. Kornswiet
was also entitled to receive, at the expense of the Company, the use of an
automobile (including all maintenance and expenses associated therewith), a
standard term life insurance policy in the amount of $1 million, a standard term
accidental death policy in the amount of $1 million, under certain
circumstances, a long-term disability policy providing an annual disability
payment equal to 125% of his base salary and coverage for him and the dependent
members of his family under the Company's medical and dental policies. In the
event of a Change in Control (defined the same as in the Original Thompson
Employment Agreement) Mr. Kornswiet would have received $30 million minus the
amount of any Performance Bonus previously paid (the "Performance Severance
Payment"). In the event of a Severance Termination (as defined in the agreement)
or a voluntary termination following a Change in Control, Mr. Kornswiet would
receive his base salary for three years (or the remaining term of the agreement,
if longer), the Performance Severance Payment to the extent not previously paid
and an amount, if any, necessary to reimburse him on a net after-tax basis for
any applicable federal excise tax. In addition, in the event of a Change in
Control, all options would become immediately vested and remain exercisable for
the entire remaining term of the option.
Concurrently with the execution of the Agreement with Capital Z, the
Company entered into a five-year employment agreement with Neil B. Kornswiet,
which supersedes the prior employment agreement (the "New Kornswiet Employment
Agreement"). The New Kornswiet Employment Agreement becomes effective on the
date of the Initial Closing. The New Kornswiet Employment Agreement will
supersede and invalidate any of Mr. Kornswiet's rights and benefits accruing
under all other employment, change in control and any and all other agreements
between Mr. Kornswiet and the Company and its subsidiaries that provide for the
payment of compensation or benefits to Mr. Kornswiet other than (i) benefits
provided under the Company's 401(k) plan, (ii) the use of an automobile
(including all maintenance and expenses associated therewith) at the expense of
the Company, and (iii) stock options granted to Mr. Kornswiet under the
Company's various stock option plans and certain stock options granted to, and
forfeited by, employees of One Stop which were assumed by the Company in
connection with the Company's acquisition of One Stop. Under the New Kornswiet
Employment Agreement, Mr. Kornswiet will earn an annual base salary of $600,000
and will be entitled to receive (i) payment of $1,460,000 which represents Mr.
Kornswiet's June 1998 bonus which was previously deferred by Mr. Kornswiet, (ii)
a guaranteed cash bonus for calendar year 1999 in the amount of
9
<PAGE> 10
$540,000 in the form of a recourse loan which will be forgiven and deemed paid
in full so long as Mr. Kornswiet remains employed by the Company through the
first anniversary of the effective date of the New Kornswiet Employment
Agreement or through the date his employment is terminated by death, disability,
by Mr. Kornswiet for good reason or by the Company for any reason, (iv) a cash
supplemental bonus for Mr. Kornswiet's first year of employment payable within
2 1/2 months after the first anniversary of the effective date subject to the
Board of Directors' determination that the Company has completed a satisfactory
program of cost reductions by such anniversary date, (v) cash bonuses after the
1999 calendar year of between 0 - 100% of Mr. Kornswiet's annual base salary,
with an expected bonus of $400,000 and a bonus in excess of 100% of his annual
base salary for extraordinary performance which shall be payable in accordance
with a budget approved by the Board of Directors of the Company and the
achievement of other non-financial goals adopted by the Board, (vi) a loan equal
to $1,167,000 which shall be non recourse provided that Mr. Kornswiet remains
employed by the Company through the date of the first anniversary of the
effective date of the New Kornswiet Employment Agreement or termination of
employment based upon death, disability, by Mr. Kornswiet with good reason or by
the Company for any reason. Mr. Kornswiet is also entitled to receive, at the
expense of the Company, (i) not less than $2 million of standard term life
insurance, (ii) medical and dental benefits for Mr. Kornswiet and members of his
family, (iii) a long-term disability policy providing for payments in an amount
equal to 60% of Mr. Kornswiet's annual base salary, provided such policy can be
obtained for a reasonable cost, (iv) other benefits under the Company's savings,
pension and retirement plans and other benefit plans or programs maintained by
the Company for the benefit of its executives, and (v) reimbursement of
reasonable business expenses incurred in accordance with the Company's policies.
Under the New Kornswiet Employment Agreement, the Company will grant Mr.
Kornswiet an option to purchase 3,214,642 shares of the Company's common stock
pursuant to the Company's 1999 Stock Option Plan. Upon termination of employment
by Mr. Kornswiet for "Good Reason," as defined in the New Kornswiet Employment
Agreement or by the Company for any reason, Mr. Kornswiet will be entitled to
receive severance benefits for a period of 12 months, payable in accordance with
the Company's payroll policy, an amount equal to (i) $2 million, if the
termination occurs within one year of the Initial Closing, (ii) $1,5 million, if
the termination occurs during the second year, (iii) $1.0 million if the
termination occurs in the third year, and (iv) $0.5 million if the termination
occurs after the fourth anniversary of the Initial Closing. The New Kornswiet
Employment Agreement requires that, for so long as Capital Z or its designated
purchasers, owns at least 25% of the outstanding voting securities of the
Company, Mr. Kornswiet may not to sell, assign or otherwise transfer during his
employment with the Company, in any twelve month period, more than 25% of the
aggregate amount of shares of Company stock which Mr. Kornswiet owned
immediately prior to the Initial Closing, subject to waiver by the Board of
Directors in the event of extraordinary hardship.
Effective June 1, 1997, the Company entered into a two-year employment
agreement with Mark E. Costello, Executive Vice President - Loan Production.
Under the agreement, Mr. Costello is entitled to a base salary of $200,000 per
year and a quarterly bonus under the Company's performance bonus plan for
executive officers. If Mr. Costello's employment is terminated without cause, he
will receive an amount equal to six months' base salary. If Mr. Costello's
employment is terminated or he voluntarily resigns for Good Reason (defined to
include a material reduction in his duties or base salary) in connection with a
Change in Control (generally, a 50% change in the voting power of the Common
Stock, certain changes in Board membership, a merger or complete liquidation or
dissolution of the Company), he will receive two years' base salary plus an
amount equal to the performance bonus paid to him with respect to the eight
fiscal quarters preceding the date of termination.
The Company entered into a second amended and restated employment agreement
with Barbara S. Polsky, Executive Vice President, General Counsel and Secretary,
effective June 1, 1997, with a term expiring on June 20, 2001. The agreement
provides for a base salary of $300,000 per year and a quarterly bonus under the
Company's performance bonus plan for executive officers. Ms. Polsky is also
entitled to a long term disability policy providing for an annual disability
payment in an amount equal to 100% of her base salary. In the event of a
termination without cause, Ms. Polsky will receive two years' base salary plus
an amount equal to the performance bonus paid to her for eight fiscal quarters
preceding the date of termination. In addition, all options previously granted
would become immediately exercisable. In the event of a termination or voluntary
10
<PAGE> 11
resignation in connection with a Change in Control (defined the same as in the
Original Thompson Employment Agreement), Ms. Polsky would receive the same
benefits as in a termination without cause.
The Company entered into an amended and restated employment agreement with
Joseph Magnus, Executive Vice President, Chief Credit Officer, effective June 1,
1997 with a term expiring on January 15, 2000. Mr. Magnus resigned his executive
officer position on November 20, 1998. The agreement provided for a base salary
of $160,000 per year and a quarterly bonus under the Company's performance bonus
plan for executive officers. If Mr. Magnus' employment would have terminated
without cause, he would have received an amount equal to six months' base
salary. If Mr. Magnus' employment would have terminated or he voluntarily
resigned for Good Reason (defined to include a material reduction in his duties
or base salary) in connection with a Change in Control (generally, a 20% change
in the voting power of the Common Stock, certain changes in Board membership, a
merger or complete liquidation or dissolution of the Company), he would have
received two years' base salary plus an amount equal to the performance bonus
paid to him with respect to the eight fiscal quarters preceding the date of
termination. In addition, all of the Options granted over the term shall become
immediately exercisable as of the date of such termination and shall remain so
for a period of 12 months thereafter.
11
<PAGE> 12
MANAGEMENT
INFORMATION WITH RESPECT TO EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers of the Company as of January 19, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Neil B. Kornswiet.... 41 Co-Chairman of the Board and President Chairman and Chief
Executive Officer of One Stop Mortgage, Inc. ("One
Stop")
Cary H. Thompson..... 41 Chief Executive Officer and Director
Mark E. Costello..... 48 Executive Vice President -- Loan Production
Barbara S. Polsky.... 44 Executive Vice President, General Counsel and Secretary
Daniel H. Relf....... 55 Executive Vice President -- Loan Services
David A. Sklar....... 45 Executive Vice President -- Finance & Chief Financial
Officer (Chief Accounting Officer)
</TABLE>
The executive officers of the Company are appointed by and serve at the
discretion of the Board of Directors. There is no family relationship between
any director and any executive officer of the Company.
NEIL B. KORNSWIET was elected a Director in September 1996 and appointed
Co-Chairman of the Board in November 1997. Mr. Kornswiet founded One Stop in
August 1995 and was its Chairman, Chief Executive Officer and President from
September 1995 through its acquisition by the Company in August 1996. Mr.
Kornswiet continues to serve as Chairman, Chief Executive Officer and President
of One Stop, now a wholly owned subsidiary of the Company. Mr. Kornswiet was
also named an Executive Vice President of the Company in September 1996 and
President of the Company in May 1997. From 1992 to 1995, Mr. Kornswiet was
President of Quality Mortgage, a privately held mortgage banking company. From
1983 to 1992, Mr. Kornswiet was a lawyer specializing in consumer credit and
other regulatory matters for financial institutions and mortgage banking
companies.
CARY H. THOMPSON has served as a Director of the Company since January
1992. He was named Chief Operating Officer of the Company in March 1996 and
Chief Executive Officer of the Company in May 1997. From May 1994 until joining
the Company, Mr. Thompson served as Managing Director -- Head of United States
Financial Institutions Group for NatWest Markets. From June 1989 to May 1994,
Mr. Thompson was Senior Vice President -- Head of West Coast Financial
Institutions Group for Oppenheimer & Co. Mr. Thompson is also on the Board of
Directors of Fidelity National Financial, Inc., a title insurance company.
MARK E. COSTELLO joined the Company in March 1995 as Vice
President -- Correspondent Lending. He was named Senior Vice
President -- Correspondent Lending in October 1995 and Executive Vice
President -- Loan Production in May 1997. Prior to joining the Company, he was
Director of Wholesale Lending for Advanta Mortgage Corporation USA. From 1980 to
1993, Mr. Costello was a Vice President with Citibank, New York, in the mortgage
and consumer banking areas.
BARBARA S. POLSKY joined the Company in May 1996 as Senior Vice President
and General Counsel. In May 1997, she became Executive Vice President and
General Counsel and in June 1997 she was appointed Secretary of the Company.
Prior to joining the Company, Ms. Polsky was a partner in the law firm of
Manatt, Phelps & Phillips, LLP, where she specialized in financial institution
and corporate securities matters. From September 1992 to March 1994, Ms. Polsky
was a partner in the law firm of Hughes Hubbard & Reed.
DANIEL H. RELF joined the Company in July 1995 as a Vice President in the
Servicing Department and subsequently was promoted to Senior Vice President in
1996. In May 1997, Mr. Relf was named Executive Vice President -- Loan Services.
Prior to joining the Company, Mr. Relf served as Senior Vice President --
Service Operations of Great Western Bank from 1986 to 1992.
DAVID A. SKLAR joined the Company in May 1997 as Executive Vice
President -- Finance. In November 1997, he was named Executive Vice
President -- Finance and Chief Financial Officer. Prior to joining the Company
he was Executive Vice President and Chief Financial Officer of Imperial Bancorp
and subsidiaries.
12
<PAGE> 13
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows information concerning all compensation paid for
services to the Company in all capacities during the last three fiscal years or
accrued within the current fiscal year as to the current Chief Executive Officer
of the Company and each of the other four most highly compensated executive
officers of the Company (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------- ------------
NAME AND FISCAL OTHER ANNUAL STOCK OPTION ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS COMPENSATION
------------------ ------ -------- ---------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Neil B. Kornswiet......... 1998 $900,000 $5,297,449(2) -- -- $40,800(3)
President(4) 1997 666,042 4,408,863 -- 555,000 N/A
1996 N/A N/A -- N/A N/A
Cary H. Thompson.......... 1998 $900,000 $ -- -- -- $ 4,800(5)
Chief Executive Officer(6) 1997 634,805 1,073,339 -- -- N/A
1996 125,000 298,000 -- 1,821,825 N/A
Barbara S. Polsky......... 1998 $300,000 $ 244,000 -- 60,000 $13,000(7)
Executive Vice President, 1997 245,000 318,120 -- 10,000 N/A
General Counsel 1996 35,538 -- -- 56,350 N/A
and Secretary(8)
Mark E. Costello.......... 1998 $200,000 $ 224,188(9) -- 30,000 $12,800(10)
Executive Vice
President -- 1997 165,000 466,968 -- 12,500 4,500(5)
Loan Production(11) 1996 130,000 201,000 -- 11,250 2,438(5)
Joseph Magnus............. 1998 $180,000 $ 220,000(12) -- 30,000 $10,116(13)
Executive Vice
President -- 1997 69,641 466,968 -- -- N/A
Chief Credit Officer(14)(15) 1996 N/A N/A -- N/A N/A
</TABLE>
- ---------------
(1) The aggregate amount of all perquisites and personal benefits received by
each of the Named Executive Officers in each of fiscal years 1996, 1997 and
1998 was not in excess of $50,000 or 10% of the total of annual salary and
bonus reported for such Named Executive Officer.
(2) Mr. Kornswiet initially deferred his June 30, 1998 bonus. As part of the
New Kornswiet Employment Agreement, which will become effective on the
Initial Closing, the Company will pay a cash bonus to Mr. Kornswiet in an
amount equal to $1,460,000.
(3) Consists of $36,000 in employer contributions to the Company's Deferred
Compensation Plan and $4,800 in employer contributions to the Company's
Section 401(k) plan.
(4) Mr. Kornswiet joined the Company in August 1996.
(5) Consists of employer contributions to the Company's Section 401(k) plan.
(6) Mr. Thompson joined the Company in March 1996 and became the Chief
Executive Officer in May 1997.
(7) Consists of $8,200 in employer contributions to the Company's Deferred
Compensation Plan and $4,800 in employer contributions to the Company's
Section 401(k) plan.
(8) Ms. Polsky joined the Company in May 1996.
(9) Includes fiscal fourth quarter ended June 30, 1998 bonus of $54,188 which
Mr. Costello has agreed to defer.
(10) Consists of $8,000 in employer contributions to the Company's Deferred
Compensation Plan and $4,800 in employer contributions to the Company's
Section 401(k) plan.
(11) Mr. Costello joined the Company as an officer in March 1995.
(12) Consists of $6,400 in employer contributions to the Company's Deferred
Compensation Plan and $3,716 in employer contributions to the Company's
Section 401(k) plan.
13
<PAGE> 14
(13) Mr. Magnus joined the Company in January 1997.
(14) Includes fiscal fourth quarter ended June 30, 1998 bonus of $50,000 which
Mr. Magnus has agreed to defer.
(15) Mr. Magnus resigned on November 20, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding grants of
stock options made during the fiscal year ended June 30, 1998 to the Named
Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL
GRANTS POTENTIAL REALIZABLE
-------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SHARES TOTAL OPTIONS EXERCISE PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------
NAME GRANTED(2) FISCAL YEAR(3) SHARE(4) DATE 5% 10%
---- ---------- -------------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Neil B. Kornswiet........... -- -- -- -- -- --
Cary H. Thompson............ -- -- -- -- -- --
Barbara S. Polsky(5)........ 60,000 6.63% $13.44 11/18/2007 $506,896 $1,284,805
Mark E. Costello(5)......... 30,000 3.32% $13.44 11/18/2007 $253,448 $ 642,402
Joseph A. Magnus(5)(6)...... 30,000 3.32% $13.44 11/18/2007 $253,448 $ 642,402
</TABLE>
- ---------------
(1) The potential realizable value is based on the assumption that the Common
Stock of the Company appreciates at the annual rate shown (compounded
annually) from the date of grant until the expiration of the option term.
These amounts are calculated pursuant to the applicable requirements of the
SEC and do not represent a forecast of the future appreciation of the
Company's Common Stock.
(2) All of the options set forth in this chart were granted for a term of 10
years.
(3) Options covering an aggregate of 904,300 shares were granted to eligible
employees during the fiscal year ended June 30, 1998.
(4) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock, as determined by reference to the closing price
reported on the NYSE on the last trading day prior to the date of grant. The
exercise price and tax withholding obligations related to exercise may be
paid by delivery of already owned shares, subject to certain conditions.
(5) These options become exercisable as to 1/5 of the shares on November 18,
1997. The remaining shares vest at a rate of 20% on each anniversary of the
date of grant thereafter until fully vested.
(6) The unvested portion of this option terminated immediately upon Mr. Magnus'
resignation on November 20, 1998. The vested portion of the option will
terminate 90 days after Mr. Magnus' resignation to the extent that such
vested portion has not been exercised.
14
<PAGE> 15
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS
The following table sets forth, for each of the Named Executive Officers,
certain information regarding the exercise of stock options during the fiscal
year ended June 30, 1998 and the value of options held at fiscal year end.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES (1)
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF ALL UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED VALUE FISCAL YEAR-END FISCAL YEAR-END(2)(3)
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- --------------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Neil B. Kornswiet............ -- -- 550,000/ -- -- / --
Cary Thompson................ -- -- 900,303/719,997 $2,168,494/$1,012,500
Barbara S. Polsky............ -- -- 49,750/ 76,500 $ 4,200/$ 15,600
Mark Costello................ -- -- 18,075/ 37,250 $ 33,038/$ 7,800
Joseph A. Magnus(4).......... -- -- 25,000/ 52,500 $ 2,340/$ 8,160
</TABLE>
- ---------------
(1) All amounts shown in this table have been adjusted to reflect the
three-for-two split of the Common Stock effected on February 21, 1997.
(2) Based upon the last reported sale price of the Common Stock on the NYSE on
June 30, 1998 ($13.75) less the option exercise price.
(3) As of January 20, 1999, none of the options outstanding were in-the-money.
The closing price on January 20, 1999 was $2.875.
(4) Mr. Magnus resigned on November 20, 1998.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers, directors and persons who own more than ten percent of a registered
class of the Company's equity securities to file reports of ownership and
changes in ownership with the SEC. Executive officers, directors, and
greater-than-ten percent stockholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file. Based solely on
its review of the copies of such forms received by it and written
representations from the Company's reporting persons that they have complied
with the relevant filing requirements, the Company believes that, during the
year ended June 30, 1998, all relevant Section 16(a) filing requirements were
complied with.
SECTION 401(K) PLAN
The Company has a tax-qualified cash or deferred profit sharing plan (the
"401(k) Plan") covering all employees over the age of 21 who have completed six
months of service with the Company prior to a plan entry date. Pursuant to the
401(k) Plan, eligible employees may make salary deferral (before-tax)
contributions of up to 25% of their compensation per plan year up to a specified
maximum contribution as determined by the Internal Revenue Service. The 401(k)
Plan also includes provisions which authorize the Company to make discretionary
contributions. Such contributions, if made, are allocated among all eligible
employees as determined under the 401(k) Plan. The trustees under the 401(k)
Plan invest the assets of each participant's account in selected investment
options at the direction of such participant.
DEFERRED COMPENSATION PLAN
In April 1997, the Company implemented a deferred compensation plan for
highly compensated employees and directors of the Company. The plan is unfunded
and non-qualified. Eligible participants may defer a portion of their
compensation (including bonuses) and receive a Company matching amount up to 4%
15
<PAGE> 16
of their annual base salary. The Company may also make discretionary
contributions to the plan. For the 1998 fiscal year, the Company made no
matching or discretionary contributions to the plan. In October 1998, the
Company suspended contributions to the Deferred Compensation Plan.
PERFORMANCE GRAPH
Set forth below is a line graph comparing the annual percentage change in
the cumulative return to the stockholders of the Company's Common Stock with the
cumulative return of the NYSE Stock Market (US Companies) Index and the Index
for NYSE/AMEX/NASDAQ Stocks (SIC 6160-6169 US Companies) Mortgage Bankers and
Brokers for the period commencing July 1, 1993 and ending on June 30, 1998. The
information contained in the performance graph shall not be deemed "soliciting
material" or to be "filed" with the SEC, nor shall such information be
incorporated by reference into any future filing under the Securities Act of
1933, as amended, or the Exchange Act, except to the extent that the Company
specifically incorporates it by reference into such filing. The stock price
performance on the following graph is not necessarily indicative of future stock
price performance.
GRAPH
<TABLE>
<CAPTION>
AAMES FINANCIAL CORP. NY STOCK EXCHANGE INDEX PEER GROUP
--------------------- ----------------------- ----------
<S> <C> <C> <C>
'Jun 93' 100.00 100.00 100.00
'Jun 94' 87.73 98.42 91.54
'Jun 95' 193.01 117.16 128.34
'Jun 96' 578.01 144.20 187.59
'Jun 97' 449.72 185.64 216.97
'Jun 98' 337.35 232.33 243.50
</TABLE>
DATED: January 29, 1999 AAMES FINANCIAL CORPORATION
/s/ BARBARA S. POLSKY
Barbara S. Polsky
Executive Vice President,
General Counsel and Secretary
16
<PAGE> 17
EXHIBIT "A"
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The following report of the Compensation Committee of the Board of
Directors shall not be deemed to be incorporated by reference into any previous
filing by the Company under either the Securities Act of 1933, as amended
("Securities Act"), or the Securities Exchange Act of 1934, as amended
("Exchange Act"), that incorporates future Securities Act or Exchange Act
filings in whole or in part by reference.
During the 1998 fiscal year, the Compensation Committee of the Board of
Directors was comprised of Dr. Melvyn Kinder, Georges St. Laurent and Lee
Masters who are non-employee directors of the Company. The Board of Directors
delegated to the Compensation Committee the responsibility for developing and
administering policies which govern the total compensation program for the Named
Executive Officers of the Company. The Committee also administers the Company's
stock option plans.
During the 1998 fiscal year, the goal of the Company's executive
compensation program was to retain, motivate and reward management through the
compensation policies and awards, while aligning their interests more closely
with that of the Company and stockholders. In furtherance of this goal, the
program consisted of three main components: (1) base salary; (2) bonuses which
were either discretionary or based on individual and Company performance; and
(3) stock options to provide long-term incentives for performance and to align
executive officer and stockholder interests.
EXECUTIVE COMPENSATION
Base salaries for the Named Executive Officers were established by the
Compensation Committee based on the recommendations of management which
considered, and applied subjectively as appropriate, individual performance and
achievement, areas of responsibility, position, the extent to which the
officers' skills were in demand or could be marketed to other companies or
industries and internal and external comparability. Base salaries for other
executive officers were established by the Chief Executive Officer who applied
the same criteria. The base salary for Mr. Kornswiet was initially established
under the terms of an employment agreement entered into in connection with the
Company's acquisition of One Stop, a company of which Mr. Kornswiet was the
Chief Executive Officer, President and sole stockholder. Under the initial terms
of the employment agreement, Mr. Kornswiet was appointed Executive Vice
President of the Company and Chief Executive Officer and President of One Stop.
Upon his appointment as President of the Company in May 1997, Mr. Kornswiet's
employment agreement was revised by the Compensation Committee to increase his
annual base salary from $750,000 to $900,000.
Bonuses paid to the Company's executive officers (excluding the Chief
Executive Officer and President) during the 1998 fiscal year were based on
Company performance under the terms of the Company's performance bonus plans.
See -- "Performance Bonus Plan." Under the terms of his then existing employment
agreement, Mr. Kornswiet was entitled to, and received during the first three
fiscal quarters, a cash bonus equal to 7.5% of One Stop's adjusted pre-tax
income. For the quarter ended June 30, 1998, Mr. Kornswiet agreed to defer his
bonus. Under the New Kornswiet Employment Agreement, Mr. Kornswiet will receive
his previously deferred bonus.
The Compensation Committee believed that it was important for key employees
to have long-term incentives through an equity interest in the Company.
Accordingly, from time to time, the Company has granted key employees stock
options pursuant to the Company's stock option arrangements. The Committee has
granted options upon the recommendations of management. As of June 30, 1998, the
Company's six key employees (excluding the Company's Chief Executive Officer)
held options to acquire 971,575 shares of the Company's Common Stock.
PERFORMANCE BONUS PLAN
In October 1995, the Compensation Committee adopted a performance bonus
plan (the "Old Performance Bonus Plan") for executives, other than those
primarily responsible for the origination and purchase of
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loans, which provided for a performance-based cash bonus equal to a specified
dollar level (the "Payment Amount") for every percentage point for which return
on average equity exceeds a specified return (the "Target ROE"). The Target ROE
was set at fifteen percent. The Compensation Committee believed that a fifteen-
percent return was generally perceived as a good return on equity for a
financial services company, and only performance in excess of a good return
should be rewarded through the performance-based compensation program. Each
Performance Bonus Plan participant was given a Payment Amount based on the
participant's contribution to, and impact upon, the success of the Company. For
fiscal 1998, the range in Payment Amounts for Old Performance Bonus Plan
participants was from $4,000 to $15,000. Commencing June 1997 through the fiscal
quarter ending December 31, 1997, the quarterly bonuses paid to Old Performance
Bonus Plan participants were fixed at the third 1997 fiscal quarter levels
pending review of the Old Performance Bonus Plan by the Compensation Committee.
In November 1997 and as amended in May 1998, the Compensation Committee
determined that a bonus based on return on average equity may not provide the
appropriate management incentives for a company that historically operated on a
negative cash flow basis and requires continuous access to the capital markets
and adopted the New Performance Bonus Plan. All executive officers, other than
the Chief Executive Officer and the President, participate in the New
Performance Bonus Plan. Under the New Performance Bonus Plan, bonuses are paid
quarterly and are tied to (i) the achievement by each participant of certain
predetermined goals established annually by the Chief Executive Officer subject,
in the case of the Named Executive Officers, to approval by the Compensation
Committee, (ii) the achievement by the Company of net income goals established
annually by the Chief Executive Officer and presented to the Board of Directors,
and (iii) maximum levels of bonus for each individual established annually by
the Chief Executive Officer subject, in the case of the Named Executive
Officers, to approval by the Compensation Committee. Participants receive the
full quarterly bonus in each quarter where at least seventy percent of the
individual and Company performance goals are met. Where the Company achieves at
least seventy percent of its goals, but the participant achieves less than
seventy percent of his or her goals, bonuses may be paid based on the
participant's percentage of achievement of his or her individual goals.
Otherwise, bonuses are subject to the approval of the Compensation Committee.
EXECUTIVE COMPENSATION -- CHIEF EXECUTIVE OFFICERS
On May 7, 1997, Mr. Thompson, the Company's then Chief Operating Officer,
assumed the duties of Chief Executive Officer. Prior to May 7, 1997, Mr.
Thompson's compensation was established under the terms of an employment
agreement entered into in March 1996 and amended in May 1997 and August 1998
with the approval of the Compensation Committee. Under that agreement, as
amended, Mr. Thompson was paid a base salary of $500,000 and received a
performance bonus under the Company's Performance Bonus Plan with a Payment
Amount of $45,000 for each percentage point for which return on average equity
exceeded the Target ROE. The employment agreement also provided for the grant of
stock options covering 1,795,950 shares. The Compensation Committee believed
that the grant of the options to Mr. Thompson was necessary to attract Mr.
Thompson to the Company and provided the appropriate level of long-term
incentive to foster continued strong growth in stockholder values.
Upon his appointment as Chief Executive Officer in May 1997, Mr. Thompson's
employment agreement was revised by the Compensation Committee to increase his
base salary to $900,000. Further, at Mr. Thompson's request, the Compensation
Committee replaced the performance bonus provisions of his agreement with a
discretionary bonus subject to the approval of the Board or the stockholders.
Considering the number of stock options Mr. Thompson was granted at the time he
became Chief Executive Officer, the Committee believes his compensation was
primarily performance based. Concurrently with the execution of the Agreement,
Mr. Thompson entered into the New Thompson Employment Agreement effective as of
the Initial Closing.
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STATEMENT REGARDING TAX POLICY COMPLIANCE
Section 162(m) of the Code limits the deductible allowable to the Company
for compensation paid to the chief executive officer and each of the four other
most highly compensated executive officers to $1 million. Qualified
performance-based compensation is excluded from this limitation if certain
requirements are met, including receipt of stockholder approval or if amounts
are paid pursuant to a written contract that was in effect on February 17, 1993
and not subsequently materially modified. Under certain circumstances, the
Compensation Committee, in its discretion, may authorize payments, such as
salary, bonuses or otherwise that may cause an executive officer's income to
exceed the deductible limits. The fiscal 1998 compensation paid to Mr. Kornswiet
in excess of $1 million exceeded the deductible limits.
Compensation Committee: Melvyn Kinder, Chairman
Lee Masters
Georges St. Laurent
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