SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 1)
Filed by the registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use
of the Commission Only
[X] Definitive Proxy Statement (as permitted by Rule
14a-6(e)(2)
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to
240.14a-11(c) or 240.14a-12
AAMES FINANCIAL CORPORATION
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(Name of Registrant as Specified in Its Charter)
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(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)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transactions applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(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
previously paid. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing party:
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(4) Date filed:
<PAGE>
[AAMES LOGO]
August 6, 1999
Dear Stockholder:
You are cordially invited to attend the 1998 Annual Meeting of
Stockholders of Aames Financial Corporation (the "Company") to be held at the
Hotel Inter-Continental, 251 S. Olive Street, Los Angeles, California 90012, on
Monday, September 13, 1999, at 10:00 a.m., Los Angeles time (the "Meeting"). The
Meeting was originally scheduled for December 18, 1998 (the "Originally
Scheduled Meeting") and was later postponed by the Company to allow for the
completion of negotiations with the Company's new equity partner, Capital Z
Financial Services Fund II, L.P. ("Capital Z").
After considering the Company's rapidly worsening financial distress, its
immediate need for capital and its inability to attract other sources of the
necessary capital, the Board of Directors decided it was in the best interests
of the Company and its public stockholders to agree to the terms of a $125
million equity investment by Capital Z. As of today, Capital Z has purchased
$100 million worth of the Company's equity for a per share equivalent price of
$1.00 and received 75% of the voting control and 5 of 9 seats on the Board of
Directors. Prior to the announcement of the Capital Z investment, the Company's
common stock was trading at $2.50 per share. Donaldson, Lufkin & Jenrette
Securities Corporation, the Company's financial advisor, considered the per
share equivalent price of $1.00 to be fair to the Company's stockholders.
The investment by Capital Z is a three-phase transaction:
PHASE 1
FEBRUARY 10, 1999
o Capital Z purchased 75,500 shares of Series B Convertible
Preferred Stock and Series C Convertible Preferred Stock for
$1,000 per share, for an aggregate investment of $75 million.
Parties designated by Capital Z purchased 1,500 shares of Series
C Convertible Preferred Stock for $1,000 per share.
o Capital Z appointed or nominated five of the nine members of the
Company's Board of Directors.
PHASE 2
AUGUST 3, 1999
o Capital Z purchased 25,000 additional shares of Series C
Convertible Preferred Stock for $1,000 per share, for an
aggregate additional investment of $25 million, bringing Capital
Z's total investment to $101.5 million.
o The dilutive effect of Phases 1 and 2 is as follows:
<TABLE>
<CAPTION>
Percent of Voting Power
-----------------------------
PRIOR TO AFTER PHASE 1
PHASE 1 AND PHASE 2
<S> <C> <C>
Capital Z 0% 75.3%
Other 100% 24.7%
stockholders
</TABLE>
PHASE 3
o PHASE 3 WILL ONLY OCCUR IF THE STOCKHOLDERS APPROVE THE
AMENDMENTS To THE COMPANY'S CERTIFICATE OF INCORPORATION AND A
1,000-FOR-1 STOCK SPLIT OF THE STOCK PURCHASED BY CAPITAL Z TO BE
CONSIDERED AT THE MEETING.
o The Company will offer to its existing holders of common stock
the right to purchase one share of Series C Convertible Preferred
Stock for each share of their common stock in a rights offering.
<PAGE>
o If the existing holders of common stock purchase less than $25
million of the Series C Convertible Preferred Stock in the rights
offering, Capital Z has agreed to purchase any additional amount
of Series C Convertible Preferred Stock necessary to bring the
total amount of stock sold in the rights offering to $25 million
of the Series C Convertible Preferred Stock.
o The dilutive effect of Phases 1 through 3 is as follows:
<TABLE>
<CAPTION>
Percent of Voting Power
-------------------------------------------
PRIOR TO AFTER RIGHTS AFTER RIGHTS
PHASE 1 OFFERING (IF OFFERING (IF
---------- NONE OF THE ALL OF THE
OTHER OTHER
STOCKHOLDERS STOCKHOLDERS
EXERCISE EXERCISE
THEIR RIGHT THEIR RIGHT
TO PURCHASE) TO PURCHASE)
------------ -----------
<S> <C> <C> <C>
Capital Z 0% 78.2% 61.1%
Other stockholders 100% 21.8% 38.9%
</TABLE>
After the rights offering, the Company will have sold newly issued shares
of its capital stock representing between 80.3% and 81.1% of the total equity of
the Company for an aggregate of between $126.8 million and $132.8 million. The
following are the primary effects of the investment by Capital Z:
o THE STOCKHOLDERS EXISTING PRIOR TO THE INVESTMENT BY CAPITAL Z
HAVE SUFFERED SUBSTANTIAL DILUTION TO THEIR STOCK HOLDINGS. AS A
RESULT OF THE INVESTMENT BY CAPITAL Z, THESE STOCKHOLDERS WILL BE
REDUCED FROM HOLDING 100% OF THE VOTING POWER TO BETWEEN 21.8%
AND 38.9% OF THE VOTING POWER OF THE COMPANY.
o THE STOCK PRICE PRIOR TO THE ANNOUNCEMENT OF THE INVESTMENT BY
CAPITAL Z (AS OF DECEMBER 23, 1998) WAS $2.50 AS COMPARED TO THE
$1.00 PER SHARE PAID BY CAPITAL Z FOR CONTROL OF THE COMPANY.
o Capital Z will ultimately beneficially own between 61.1% and
78.2% of the total equity and voting power of the Company. For
this position, Capital Z will have paid between $100 million and
$125 million. Capital Z's final ownership percentage and total
investment will depend upon the amount of Series C Convertible
Preferred Stock purchased by the holders of the common stock in
the rights offering.
o The pro forma book value per share of common stock (assuming full
subscription of the rights offering) was $0.64 at December 31,
1998 compared to the actual book value per share of $3.40
reported at December 31, 1998.
o 4 of the 9 directors have been appointed and a fifth nominated by
Capital Z.
o We have obtained $101.5 million in additional capital from
Capital Z and other parties designated by Capital Z and will
obtain an additional amount between $25 million and approximately
$31 million if the rights offering is consummated.
At the Meeting, you will be asked to consider and vote upon several
proposals related to the investment by Capital Z . Specifically, you will be
asked to consider proposals to amend the Company's Certificate of Incorporation
to (1) increase the authorized amount of the Company's common stock, (2)
increase the authorized amount of the Company's preferred stock, (3) amend the
Certificate of Incorporation with respect to the Series B and Series C Preferred
Stock to change to September 30, 1999 the date by which stockholders must
approve those increases in the Company's authorized capital, and (4) effect a
1,000-for-1 forward stock split of the outstanding classes of preferred stock.
These amendments are necessary to complete a recapitalization of the Company and
are conditions for consummating the rights offering. The Board of Directors of
the Company recommends that the stockholders vote in favor of all of the
proposals.
Pursuant to the terms of a waiver given by the current holders of the
Series B and Series C Convertible Preferred Stock, if the Company fails to adopt
these amendments prior to the earlier of September 30, 1999 or the date of the
Meeting (if, in the latter case, any of the proposed amendments to the
Certificate of Incorporation is defeated at the Meeting), the dividend rate on
the Series B and Series C Convertible Preferred Stock will increase from 6.5% to
15% per annum. Further, if these amendments are not adopted by September 30,
1999, a warrant to purchase up to 3 million shares of common stock held by
Capital Z Management, Inc., an affiliate of Capital Z, will become exercisable
at an exercise price of $1.00 per share.
<PAGE>
In addition to the proposals to amend the Company's Certificate of
Incorporation, you will be asked to vote in the election of directors, to adopt
the 1999 Stock Option Plan and to ratify the appointment of Ernst & Young LLP as
the Company's independent accountants.
The enclosed materials supersede and replace the materials that were sent
to you for the Originally Scheduled Meeting, and we therefore encourage you to
read carefully the enclosed Notice of Annual Meeting and Proxy Statement, which
more fully describe the proposals to be considered at the Meeting.
It is important that your shares be represented at the Meeting, whether or
not you plan to attend personally. Therefore, you are requested to complete,
sign and date the enclosed proxy card and return it as soon as possible in the
enclosed envelope so that your shares will be represented. Please note that
proxy cards returned for the Originally Scheduled Meeting are invalid and, in
order for your shares to be counted, you should return the enclosed proxy card.
If you attend the Meeting in person, you may vote in person even if you have
previously returned your proxy card.
We appreciate your support.
Sincerely,
/s/ Steven M. Gluckstern
Steven M. Gluckstern
Chairman of the Board
<PAGE>
AAMES FINANCIAL CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 13, 1999
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the
"Meeting") of Aames Financial Corporation (the "Company") will be held at the
Hotel Inter-Continental, 251 S. Olive Street, Los Angeles, California 90012, on
Monday, September 13, 1999, at 10:00 a.m., Los Angeles time, for the purpose of
voting upon:
1. Common Stock Proposal. A proposal to approve an amendment to the
Company's Certificate of Incorporation to increase the Company's
authorized common stock by 350,000,000 shares to an aggregate of
400,000,000 shares (the "Common Stock Proposal");
2. Preferred Stock Proposal. A proposal to approve an amendment to the
Company's Certificate of Incorporation to increase the Company's
authorized preferred stock by 199,000,000 shares to an aggregate of
200,000,000 shares (the "Preferred Stock Proposal");
3. Preferred Stock Amendment Proposal. A proposal to approve an amendment
to the Company's Certificate of Incorporation with respect to the
Series B and Series C Convertible Preferred Stock to change to
September 30, 1999 the date by which the Common Stock Proposal and
Preferred Stock Proposal must be approved to avoid an increase in the
dividend rate on each such series from 6.5% to 15% (the "Preferred
Stock Amendment Proposal" and, together with the Common Stock Proposal
and the Preferred Stock Proposal, the "Stock Proposals").
4. Stock Split. A proposal to approve an amendment to the Company's
Certificate of Incorporation to effect a 1,000-for-1 forward stock
split of the Company's Series B Convertible Preferred Stock and Series
C Convertible Preferred Stock outstanding as of September 13, 1999
(the "Stock Split");
5. Election of Series B Directors. The election of four Series B
Directors to hold office until the 1999 Annual Meeting of Stockholders
and thereafter until such directors' successors are duly elected and
qualified.
6. Election of Class III Common Stock Director. The election of one Class
III Common Stock Director to hold office until the 2001 Annual Meeting
of Stockholders and until such director's successor is duly elected
and qualified;
7. 1999 Stock Option Plan. The adoption of the Company's 1999 Stock
Option Plan;
8. Ratification of Accountants. The ratification of the appointment of
Ernst & Young LLP as the Company's independent accountants for the
fiscal year ending June 30, 1999; and
9. Other Business. Such other business as may properly come before the
Meeting and any adjournment(s) thereof.
The Meeting was originally scheduled for December 18, 1998 (the
"Originally Scheduled Meeting"). Due to ongoing negotiations with Capital Z
Financial Services Fund II, L.P., a Bermuda limited partnership ("Capital Z"),
which the Company believed would lead to an equity investment by Capital Z, the
Company elected to postpone the Originally Scheduled Meeting to avoid the
additional expense of a special meeting of the stockholders of the Company in
connection with a transaction with Capital Z. On December 23, 1998, the Company
entered into a Preferred Stock Purchase Agreement with Capital Z, which was
amended on February 10, 1999, June 9, 1999 and July 16, 1999, pursuant to which
a partnership majority-owned by Capital Z and certain other investors designated
by Capital Z purchased $101.5 million of the Company's Series B and Series C
Convertible Preferred Stock and Capital Z or its designees agreed to purchase up
to $25 million of additional Series C Convertible Preferred Stock to the extent
not purchased by the holders of the Company's common stock in a contemplated
rights offering (discussed in the attached Proxy Statement). Under this
agreement, the Company has agreed to solicit its stockholders' approval of the
amendments to its
<PAGE>
Certificate of Incorporation as more fully described in the attached Proxy
Statement. This notice supersedes and replaces in all respects the notice sent
to stockholders for the Originally Scheduled Meeting.
Only stockholders of record of the Company at the close of business on
July 15, 1999 are entitled to notice of, and to vote at, the Meeting and any
adjournment(s) thereof.
All stockholders are cordially invited to attend the Meeting in person.
However, to ensure your representation at the Meeting, you are urged to
complete, sign, date and return the enclosed Proxy as promptly as possible in
the postage-prepaid envelope enclosed for that purpose. Proxies returned for the
Originally Scheduled Meeting will not be counted for the Meeting and therefore
you must mark, sign and return this new Proxy to ensure your representation at
the Meeting. Any stockholder attending the Meeting may vote in person, even
though he or she has returned a Proxy.
By Order of the Board of Directors
/s/ Barbara S. Polsky
Barbara S. Polsky
Secretary
Los Angeles, California August 6, 1999
IN ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE REQUESTED TO
COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY AS PROMPTLY AS POSSIBLE AND
RETURN IT IN THE ENCLOSED POSTAGE PREPAID ENVELOPE. PROXIES RETURNED FOR THE
ORIGINALLY SCHEDULED MEETING WILL NOT BE COUNTED AS VOTING AT THE MEETING.
YOUR BOARD OF DIRECTORS HAS REVIEWED AND CONSIDERED THE TERMS AND CONDITIONS OF
THE STOCK PROPOSALS AND THE STOCK SPLIT. THE BOARD OF DIRECTORS BELIEVES THAT
THE STOCK PROPOSALS AND THE STOCK SPLIT ARE IN THE BEST INTERESTS OF THE COMPANY
AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE STOCK
PROPOSALS AND THE STOCK SPLIT AND RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THEIR
APPROVAL.
<PAGE>
AAMES FINANCIAL CORPORATION
350 S. Grand Avenue, 52nd Floor
Los Angeles, California 90071
(323) 210-5000
----------------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 7, 1999
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
INTRODUCTION.............................................................................1
General..............................................................................1
Summary..............................................................................2
Our Recommendations to Stockholders................................................2
Record Date; Voting Power..........................................................2
Matters to be Considered at the Meeting............................................2
Vote Required to Approve the Proposals.............................................2
Share Ownership of Certain Stockholders and Management.............................3
The Capital Z Investment...........................................................4
Background of the Capital Z Investment.............................................5
Certain Effects of the Capital Z Investment........................................5
Terms of the Series B and Series C Convertible Preferred Stock.....................6
Fairness Opinion of Financial Advisor..............................................7
Required Stockholder Approvals.....................................................7
Reasons for Increasing Authorized Capital and Effecting the Stock Split............8
Consequences of Failure to Approve Proposed Amendments to Certificate
of Incorporation.....................................................................8
Consequences of Approval of the Proposed Amendments to the Certificate
of Incorporation.....................................................................8
1999 Stock Option Plan.............................................................9
Ratification of Independent Accountants............................................9
Revocability of Proxies.............................................................10
Costs of Solicitation of Proxies....................................................10
Voting Securities...................................................................10
STOCK PROPOSALS.........................................................................13
Introduction........................................................................13
The Stock Proposals and the Stock Split.............................................13
Vote Required.......................................................................14
Reasons for Increasing Authorized Capital, Changing the Date in the
Series B and Series C Convertible Preferred Stock
and Effecting the Stock Split.......................................................15
Background and Purpose of the Stock Proposals and the Stock Split...................17
Opinions of Financial Advisor.......................................................22
Factors Considered by the Board of Directors in Approving the Capital Z
Transaction.........................................................................28
Board of Directors Recommendations..................................................29
ELECTION OF SERIES B DIRECTORS..........................................................30
ELECTION OF CLASS III COMMON STOCK DIRECTOR.............................................31
Capital Z and the Board of Directors................................................31
MANAGEMENT..............................................................................32
Information with Respect to Nominees, Continuing Directors and Executive
Officers............................................................................32
Board Meetings and Committees.......................................................34
Compensation of Directors...........................................................34
Certain Relationships and Related Transactions; Employment Agreements...............34
Compensation Committee Interlocks and Insider Participation.........................40
</TABLE>
Page i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PRINCIPAL STOCKHOLDERS..................................................................40
EXECUTIVE COMPENSATION..................................................................43
Summary Compensation Table..........................................................43
Option Grants in Last Fiscal Year...................................................44
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Options..........45
Section 16(a) Beneficial Ownership Reporting Compliance.............................45
Section 401(k) Plan.................................................................45
Deferred Compensation Plan..........................................................46
PERFORMANCE GRAPH.......................................................................47
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION..........................47
Executive Compensation..............................................................48
Performance Bonus Plan..............................................................48
Executive Compensation--Chief Executive Officer.....................................49
Statement Regarding Tax Policy Compliance...........................................49
PROPOSAL TO APPROVE THE ADOPTION OF THE AAMES FINANCIAL CORPORATION 1999
STOCK OPTION PLAN....................................................................50
Introduction........................................................................50
Purpose.............................................................................50
Effective Date; Duration............................................................50
Administration......................................................................50
Eligibility and Nondiscretionary Grants.............................................50
Terms of Options....................................................................51
Adjustments Upon Changes in Capitalization..........................................51
Change in Control...................................................................52
Market Value........................................................................52
Shares Subject to the 1999 Plan.....................................................52
Amendment and Termination of the 1999 Plan..........................................52
Federal Income Tax Consequences.....................................................52
New Plan Benefits...................................................................52
Vote Required and Board of Directors' Recommendation................................54
PROPOSAL TO RATIFY THE APPOINTMENT OF INDEPENDENT ACCOUNTANTS...........................55
PROPOSALS OF STOCKHOLDERS...............................................................55
OTHER MATTERS...........................................................................55
ANNUAL REPORT TO STOCKHOLDERS...........................................................56
REPORTS ON FORM 10-K AND 10-K/A.........................................................56
</TABLE>
EXHIBIT "A" - AAMES FINANCIAL CORPORATION 1999 STOCK OPTION PLAN
EXHIBIT "B" - PROPOSED AMENDMENTS TO ARTICLE FOURTH OF THE COMPANY'S
CERTIFICATE OF INCORPORATION
EXHIBIT "C" - PROPOSED AMENDMENTS TO THE CERTIFICATE OF INCORPORATION WITH
RESPECT TO SERIES B CONVERTIBLE PREFERRED STOCK AND SERIES C
CONVERTIBLE PREFERRED STOCK
EXHIBIT "D" - DECEMBER 21, 1998 LETTER, DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION TO THE BOARD OF DIRECTORS OF AAMES
FINANCIAL CORPORATION
EXHIBIT "E" - JULY 16, 1999 LETTER, DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION TO THE CONTINUING BOARD OF DIRECTORS OF
THE BOARD OF AAMES FINANCIAL CORPORATION
Page ii
<PAGE>
INTRODUCTION
GENERAL
Aames Financial Corporation (the "Company") is furnishing this Proxy
Statement to you to solicit proxies for use by our Board of Directors at our
1998 Annual Meeting of Stockholders (the "Meeting"), to be held at the Hotel
Inter-Continental, 251 S. Olive Street, Los Angeles, California 90012, at 10:00
a.m., Los Angeles time, on September 13, 1999, and any adjournment(s) of the
Meeting. We elected to postpone the Meeting from its originally scheduled date
of December 18, 1998 (the "Originally Scheduled Meeting") due to our ongoing
negotiations with Capital Z Financial Services Fund II, L.P. ("Capital Z"),
because we believed those discussions would lead to an investment by Capital Z.
By postponing the Originally Scheduled Meeting, we avoided the expense of a
special meeting of the stockholders to consider matters related to the
transaction with Capital Z. Under our agreement with Capital Z, which is
described in greater detail below, we have agreed to solicit your approval of
the amendments to our Certificate of Incorporation, which are described in
detail in this Proxy Statement. This Proxy Statement and the accompanying Proxy
supersede and replace the Proxy Statement and Proxy mailed to you for the
Originally Scheduled Meeting. Even if you completed and returned a Proxy for the
Originally Scheduled Meeting, your vote will not be counted unless you complete
and return the enclosed Proxy to be represented at the Meeting or you attend the
Meeting and vote in person. We anticipate mailing this Proxy Statement and the
accompanying Proxy to you on or about August 9, 1999.
Page 1
<PAGE>
SUMMARY
THIS SUMMARY ONLY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY
STATEMENT AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU.
TO FULLY UNDERSTAND THE PROPOSALS PRESENTED BY THE BOARD OF DIRECTORS FOR
CONSIDERATION BY THE STOCKHOLDERS, YOU SHOULD READ CAREFULLY THIS ENTIRE PROXY
STATEMENT.
OUR RECOMMENDATIONS TO STOCKHOLDERS
(See pages 29, 30, 31, 54 and 55.)
The Board of Directors unanimously recommends that you vote FOR the
approval and adoption of each of the proposals to be presented at the
stockholders' meeting.
RECORD DATE; VOTING POWER
(See pages 9 and 10.)
Only stockholders who hold shares on the Record Date, July 15, 1999, are
entitled to vote at the stockholders' meeting. At the stockholders' meeting, you
are entitled to one vote for each share of common stock you hold of record as of
the Record Date and 1,000 votes for each share of preferred stock you hold of
record as of the Record Date (except that the Series C Convertible Preferred
Stock is not entitled to vote for the election of directors).
On the Record Date, there were 31,016,964 shares of common stock
outstanding and 76,750 shares of preferred stock outstanding consisting of
26,704 shares of Series B Convertible Preferred Stock and 50,046 shares of
Series C Convertible Preferred Stock. All of the shares of common stock and
preferred stock outstanding on July 15, 1999 are entitled to vote at the
stockholders' meeting.
MATTERS TO BE CONSIDERED AT THE MEETING
At the stockholders' meeting, you will be asked to approve the following:
o an increase in the authorized number of shares of our common stock from
50,000,000 to 400,000,000 shares. This requires an amendment to our
Certificate of Incorporation;
o an increase in the authorized number of shares of our preferred stock from
1,000,000 to 200,000,000 shares. This requires an amendment to our
Certificate of Incorporation;
o a change to September 30, 1999 from June 30, 1999 in the Series B and
Series C Preferred Stock the date by which the stockholders must approve
the increase in the authorized common stock and authorized preferred stock.
This requires an amendment to our Certificate of Incorporation.
o a 1,000-for-1 forward stock split of our Series B Convertible Preferred
Stock and our Series C Convertible Preferred Stock. This requires an
amendment to our Certificate of Incorporation;
o the election of four Series B Convertible Preferred Stock directors (the
"Series B Directors") for terms ending at the 1999 annual meeting of
stockholders (if you hold shares of Series B Convertible Preferred Stock);
o the election of one Class III common stock director (the "Common Stock
Director") for a term ending at the 2001 annual meeting of stockholders (if
you hold shares of common stock or Series B Convertible Preferred Stock);
o the 1999 Stock Option Plan;
o the ratification of the appointment of Ernst & Young LLP as our independent
accountants for the fiscal year ending June 30, 1999; and
o such other matters as may properly come before the stockholders' meeting
and any adjournment(s) thereof.
We do not expect to ask our stockholders to vote on any other matters at
the stockholders' meeting. However, if any other matters are properly presented
at the stockholders' meeting for consideration, the persons named by the
stockholders to be their proxies will have discretion to vote on such matters in
accordance with their own judgment.
VOTE REQUIRED TO APPROVE THE PROPOSALS
To approve the proposal to increase the number of authorized shares of
common stock from 50,000,000 to 400,000,000, we must receive:
o the affirmative vote of a majority of the votes entitled to be cast by
holders of all outstanding shares of common stock and all outstanding
shares of preferred stock, voting together as a single class; and
Page 2
<PAGE>
o the affirmative vote of a majority of the votes entitled to be cast by the
holders of all outstanding shares of common stock, voting together as a
separate class.
To approve the proposal to increase the number of authorized shares of
preferred stock from 1,000,000 to 200,000,000, we must receive:
o the affirmative vote of a majority of the votes entitled to be cast by the
holders of all outstanding shares of common stock and all outstanding
shares of preferred stock, voting together as a single class; and
o the affirmative vote of a majority of the votes entitled to be cast by the
holders of all outstanding shares of preferred stock, voting together as a
separate class.
To approve the proposal to change to September 30, 1999 from June 30, 1999
in the Series B and Series C Convertible Preferred Stock the date by which the
stockholders must approve the increase in the authorized common stock and
authorized preferred stock, we must receive:
o the affirmative vote of a majority of the votes entitled to be cast by
holders of all outstanding shares of common stock and all outstanding
shares of preferred stock, voting together as a single class;
o the affirmative vote of a majority of the votes entitled to be cast by the
holders of all outstanding shares of preferred stock, voting together as a
separate class.
To approve of the 1,000-for-1 forward stock split of the Series B and
Series C Convertible Preferred Stock, we must receive:
o the affirmative vote of a majority of the votes entitled to be cast by the
holders of all outstanding shares of common stock and all outstanding
shares of preferred stock, voting together as a single class; and
o the affirmative vote of a majority of the votes entitled to be cast by the
holders of all outstanding shares of preferred stock, voting together as a
separate class.
To elect each of the Series B Directors, we must receive the affirmative
vote of a majority of the votes entitled to be cast by holders of Series B
Convertible Preferred Stock which are present and voting (either in person or by
proxy) at the stockholders' meeting. HOLDERS OF THE COMMON STOCK AND HOLDERS OF
THE SERIES C CONVERTIBLE PREFERRED STOCK ARE NOT ENTITLED TO VOTE IN THE
ELECTION OF THE SERIES B DIRECTORS.
To elect the Common Stock Director, we must receive the affirmative vote of
a majority of the votes cast by holders of common stock and Series B Convertible
Preferred Stock who are present and voting (either in person or by proxy) at the
stockholders' meeting, voting together as a single class. HOLDERS OF THE SERIES
C CONVERTIBLE PREFERRED STOCK ARE NOT ENTITLED TO VOTE IN THE ELECTION OF THE
COMMON STOCK DIRECTOR.
To adopt the 1999 Stock Option Plan and to ratify the appointment of Ernst
& Young LLP as our independent accountants for the fiscal year ending June 30,
1999, we must receive the affirmative vote of a majority of the votes cast by
holders of outstanding shares of common stock and outstanding shares of
preferred stock, which are present and voting (either in person or by proxy) at
the stockholders' meeting, voting together as a single class.
SHARE OWNERSHIP OF CERTAIN STOCKHOLDERS AND MANAGEMENT
(See pages 40 through 42.)
The holders of the Series B and Series C Convertible Preferred Stock
and our executive officers and directors have indicated that they intend to vote
all of their common stock and all of their preferred stock in favor of each of
the proposals to be presented at the stockholders' meeting. In addition, holders
of the Series B and Series C Convertible Preferred Stock, Cary Thompson, our
former Chief Executive Officer and a current director, and Neil Kornswiet, our
President and a director, are contractually obligated to cast their votes in
favor of the proposals to amend the Certificate of Incorporation to increase the
number of shares of capital stock we are authorized to issue and in favor of the
proposal to split the Series B and the Series C Convertible Preferred Stock to
be presented at the stockholders' meeting. As of the Record Date, the holders of
Series B and Series C Convertible Preferred Stock and our executive officers and
directors were entitled to cast an aggregate of 1,890,560 shares of common
stock, 26,704 shares of Series B Convertible Preferred Stock and 50,046 shares
of Series C Convertible Preferred Stock, representing approximately 6.1% of the
common stock, 73.0% of the common stock and pre-
Page 3
<PAGE>
ferred stock voting together as a single class and 100% each of the Series B and
Series C Convertible Preferred Stock.
Because the holders of the Series B and Series C Convertible Preferred
Stock and our executive officers and directors intend to vote their shares of
common stock and preferred stock in favor of each of the proposals presented at
the meeting, adoption of each of the proposals other than the proposal to
approve the increase in the number of authorized shares of common stock from
50,000,000 to 400,000,000, is assured. In addition, if holders of at least 43.9%
of the outstanding shares of common stock join our executive officers and
directors in voting in favor of this latter proposal, this proposal will also be
adopted.
THE CAPITAL Z INVESTMENT
Many of the proposals to be presented at the meeting are in connection
with an investment by Capital Z. The Capital Z Investment is described on pages
11 through 25 in this Proxy Statement.
In February 1999, Capital Z (through a partnership majority owned by
Capital Z) invested $75 million in our Series B Convertible Preferred Stock and
Series C Convertible Preferred Stock, representing 69.6% of the total equity and
voting power of the Company after the investment. Concurrently with this
investment, persons designated by Capital Z purchased 1.5 million, and Cary
Thompson, the former Chief Executive Officer of the Company, purchased $250
thousand of the Series C Convertible Preferred Stock.
On July 16, 1999, Capital Z (through a partnership majority owned by
Capital Z) purchased $25 million of additional Series C Convertible Preferred
Stock (the "Additional Investment") which, together with the $75 million
invested on February 1999, represented 75.3% of the total equity and voting
power.
You should note that you are not being asked to approve the transaction
with Capital Z. Due to a severe liquidity crisis (described below), we
consummated the transaction with Capital Z without seeking approval of our
stockholders. We did this with the prior approval of the New York Stock
Exchange. However, in connection with the Capital Z Investment, we are
requesting that our stockholders approve the proposal in this Proxy Statement to
increase the authorized number of shares of our common stock, to increase the
authorized number of shares of our preferred stock, to amend the outstanding
preferred stock and to effect a 1,000-for-one forward stock split of the Series
B and Series C Convertible Preferred Stock.
We intend to commence a public offering (the "Rights Offering") to the
holders of our common stock of non-transferable subscription rights to purchase
up to approximately 31 million (the exact number representing the number of
shares of our common stock outstanding on the record date for the Rights
Offering) shares of Series C Convertible Preferred Stock for $1.00 per share. We
expect that the total number of shares outstanding on the record date for the
Rights Offering will be approximately 31 million since all of our outstanding
securities convertible or exercisable for common stock have conversion or
exercise prices below our current market price and as of the Record Date for the
Meeting there were 31,016,964 shares of common stock outstanding. Capital Z has
agreed to purchase any amount of stock necessary to bring the total amount sold
in the Rights Offering to $25 million of Series C Convertible Preferred Stock.
Neil Kornswiet, our President and a director, has agreed to purchase
1,667,000 shares of the Series C Convertible Preferred Stock in the Rights
Offering. Mr. Kornswiet will pay for his shares with a note given to the
Company. His promise to pay the note will be secured by the Series C Convertible
Preferred Stock he purchases in the Rights Offering. Following this purchase,
Mr. Kornswiet will beneficially hold 2,407,860 shares of our common stock and
1,667,000 shares of our Series C Convertible Preferred Stock, which will
represent between 2.5% and 2.6% of our combined voting power.
As a result of the transactions described above, Capital Z (through a
partnership majority-owned by Capital Z), immediately following the Rights
Offering, will have invested between $100 million (if at least 25 million of the
shares offered in the Rights Offering are purchased by holders of common stock)
and $123.3 million (if no stockholders other than Neil Kornswiet purchase shares
of common stock in the Rights Offering) and will hold an aggregate of 61.1% of
our total equity and voting power (assuming that all of the shares offered in
the Rights Offering are purchased by the holders of common stock).
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BACKGROUND OF THE CAPITAL Z INVESTMENT
(See pages 17 through 22.)
For a description of the events leading to the Board of Directors' decision
to authorize the Capital Z Investment, see "Stock Proposals Background and
Purpose of the Stock Proposals and the Stock Split").
In June 1997, we engaged Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") to work with us to identify our strategic alternatives. On
our behalf, DLJ contacted over 50 institutions to solicit their interest in
acquiring or investing in us. As part of this engagement, we obtained a $38
million investment on April 27, 1998 from entities controlled by Ronald N.
Perelman and Gerald Ford, Chairman and CEO of Golden State Bancorp Inc.
In October 1998, global conditions in the capital and credit markets
unexpectedly worsened, our access to the debt and equity markets was severely
restricted and the market for our asset-backed securities tightened. These
factors combined to result in a severe liquidity crisis and our Board was
concerned that we would not be able to continue to operate as a going concern.
Our net income for the quarter ended September 30, 1998 was only $448,000, and
we expected a significant net loss for the quarter ended December 31, 1998 (the
net loss for the quarter ended December 31, 1998 was $195,745,000). At that
time, the Board of Directors considered the following options: we could seek
protection under the bankruptcy laws; we could severely downsize our operations
and operate as a much smaller company, or we could seek an equity investment of
the type provided by Capital Z and restructure our operations to effect cost
savings. The Board of Directors determined that the latter course of action was
the course most likely to maximize stockholder value.
Although the conditions in the global capital and credit markets improved
throughout the first two calendar quarters in 1999, weaknesses in those markets
continued to negatively affect the subprime home equity sector generally and the
Company specifically. Recognizing this and in furtherance of its goal to improve
the Company's capital base, in August 1999, Capital Z made the Additional
Investment.
CERTAIN EFFECTS OF THE CAPITAL Z INVESTMENT
(See pages 15 through 17 and 40 through 42.)
The following are the primary effects of the Capital Z Investment and the
contemplated Rights Offering:
o Capital Z will ultimately beneficially own between 61.1% and 78.2% of the
total equity and voting power of the Company. For this position, Capital Z
will have paid between $100 million and $123.3 million. Capital Z's final
ownership percentage and total investment will depend upon the amount of
Series C Convertible Preferred Stock purchased by the holders of the
common stock in the Rights Offering.
o The stockholders existing prior to the Capital Z Investment have suffered
substantial dilution to their stock holdings. As a result of the Capital Z
Investment, these stockholders will be reduced from holding 100% of the
voting power to between 21.8% and 38.9% of the voting power of the Company.
o The pro forma book value per share of common stock (assuming full
subscription of the Rights Offering) was $0.64 at December 31, 1998
compared to the actual book value per share of $3.40 reported at December
31, 1998.
o 4 of the 9 directors have been appointed and a fifth nominated by
Capital Z.
o We have obtained $101.5 million in additional capital from Capital Z and
other parties designated by Capital Z and will obtain an additional amount
between $25 million and approximately $31 million (the exact number
representing the number of shares of our common stock outstanding on the
record date for the Rights Offering) if the Rights Offering is consummated.
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The following table describes the dilutive effect of the Capital Z
Investment (assuming the Rights Offering does not occur):
<TABLE>
PERCENT OF VOTING POWER
-----------------------
<CAPTION>
PRIOR TO CAPITAL Z AFTER CAPITAL Z
INVESTMENT INVESTMENT*
---------- -----------
<S> <C> <C>
Capital Z 0% 75.3%
Other 100% 24.7%
stockholders
</TABLE>
The following table describes the dilutive effect of the Capital Z Investment
(assuming the Rights Offering occurs and only Capital Z and Mr. Kornswiet, the
President of the Company who is contractually obligated to purchase
approximately 1.7 million shares in the Rights Offering, purchase shares in the
Rights Offering):
<TABLE>
PERCENT OF VOTING POWER
-----------------------
<CAPTION>
PRIOR TO CAPITAL Z AFTER RIGHTS
INVESTMENT OFFERING*
---------- ---------
<S> <C> <C>
Capital Z 0% 78.2%
Other 100% 21.8%
stockholders
</TABLE>
The following table describes the dilutive effect of the Capital Z Investment
(assuming the Rights Offering occurs and the common stockholders acquire all of
the shares in the Rights Offering):
<TABLE>
PERCENT OF VOTING POWER
-----------------------
<CAPTION>
PRIOR TO CAPITAL Z AFTER RIGHTS
INVESTMENT OFFERING*
---------- ---------
<S> <C> <C>
Capital Z 0% 61.1%
Other 100% 38.9%
stockholders
- ----
<FN>
* The Series B and Series C Convertible Preferred Stock are entitled to vote
with the holders of the common stock, as a single class, on all matters
presented to the holders of the common stock, except that the Series C
Convertible Preferred Stock may not vote for the election of directors.
</FN>
</TABLE>
TERMS OF THE SERIES B AND SERIES C CONVERTIBLE PREFERRED STOCK
o RANK. For dividends or distribution of assets upon liquidation, dissolution
or winding up of the Company, the Series B and Series C Convertible
Preferred Stock rank senior to each other class or series of preferred
stock and prior to the common stock and all subsequently issued classes and
series of capital stock. The Series B and Series C Convertible Preferred
Stock rank in parity with one another.
o LIQUIDATION (if the proposed amendments to our Certificate of Incorporation
are not adopted at this meeting). In the event of any liquidation,
dissolution or winding up of the Company, the holders of Series B and
Series C Convertible Preferred Stock will receive $1,000 per share plus any
accrued but unpaid dividends and, after such payment, will participate with
the holders of the common stock on an as-converted basis in the remaining
assets of the Company.
o LIQUIDATION (if the proposed amendments to our Certificate of Incorporation
are adopted at the meeting). In the event of any liquidation, dissolution
or winding up of the Company, the holders of Series B and Series C
Convertible Preferred Stock will receive $1.00 per share plus all accrued
but unpaid dividends.
o DIVIDENDS. The holders of Series B and Series C Convertible Preferred Stock
will receive cash dividends at an annual rate of 6.5%, payable quarterly in
cash. We have the option to accrue and not pay dividends for the first two
years after issuance of the shares. Because the proposed amendments to our
Certificate of Incorporation were not adopted prior June 30, 1999, the
dividend rate increased to 15% per annum. However, the current holders of
the Series B and Series C Preferred Stock have waived their right to
receive the dividend increase until the earlier of September 30, 1999 or
the date of this meeting (if, in the latter case, any of the proposed
amendments to the Certificate of Incorporation is defeated at this
meeting).
o RESTRICTIONS ON DIVIDENDS. So long as any shares of Series B or Series C
Convertible Preferred Stock are outstanding, we may not pay any dividends
on or repurchase, redeem or retire any junior securities.
o VOTING RIGHTS. Prior to the adoption of the proposed amendments to our
Certificate of Incorporation, each share of Series B and Series C
Convertible Preferred Stock are entitled to 1,000 votes. After the adoption
of the proposed amendments to our Certificate of Incorporation, each share
of Series B and Series C Convertible Preferred Stock will be entitled to 1
vote. The Series B and Series C Convertible Preferred Stock are entitled to
vote with the holders of the common stock, as a single class, on all
matters presented to the holders of the common stock,
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except that the Series C Convertible Preferred Stock may not vote for the
election of directors.
o SERIES B DIRECTORS. The holders of the Series B Convertible Preferred Stock
will have the right, voting separately as a series, to elect four directors
to our Board of Directors.
o RESTRICTIONS. Without the consent of the holders of the Series B and Series
C Convertible Preferred Stock, voting as a single class, we may not take
any of the following actions:
o authorize, create or issue, or increase the authorized amount of any
senior securities, parity securities or any security convertible into
a class or series of capital stock prior to the mandatory redemption
date of the Series B Convertible Preferred Stock;
o reorganize or reclassify outstanding shares of common stock, enter
into any consolidation or merger, or sell or convey all or
substantially all our property;
o amend, alter or repeal any provisions of our Certificate of
Incorporation or Bylaws to the extent that such action would have a
material adverse effect on the rights of the Series B or the Series C
Convertible Preferred Stock;
o REDEMPTION. On February 10, 2009, we may redeem all outstanding shares of
Series B and Series C Convertible Preferred Stock by paying the stated
value per share ($1,000 per share if the proposed amendments to our
Certificate of Incorporation are not adopted and $1.00 per share if the
proposed amendments to our Certificate of Incorporation are adopted) plus
all accrued but unpaid dividends in cash out of funds legally available for
such purpose.
o CONVERSION. Prior to the adoption of the proposed amendments to our
Certificate of Incorporation and the approval of the proposal to split the
Series C and Series B Convertible Preferred Stock, each share of Series B
and Series C Convertible Preferred Stock will be convertible into 1,000
shares of common stock. This will be the case even though the Company will
not have a sufficient number of authorized shares of common stock to issue
upon conversion. If the proposed amendments to our Certificate of
Incorporation are adopted and the proposal to split the Series C and Series
B Convertible Preferred Stock is approved, each share of Series B and
Series C Convertible Preferred Stock will be convertible into one share of
common stock.
FAIRNESS OPINION OF FINANCIAL ADVISOR
The Board of Directors (with respect to the Preferred Stock Purchase
Agreement, dated December 23, 1998, without giving effect to the subsequent
amendments (the "Original Transaction")) and the directors other than those
appointed or nominated by Capital Z (with respect to the Additional Investment)
received opinions from DLJ to the effect that, as of the date of such opinions
and subject to the assumptions, limitations and qualifications set forth in such
opinions, the consideration to be received from Capital Z in the Original
Transaction, on the one hand, and in the Additional Investment, on the other
hand, was fair to the Company's public stockholders from a financial point of
view. We paid DLJ $2.5 million for advising us in connection with the Original
Transaction (including rendering a fairness opinion) and we paid DLJ $250,000
for rendering a fairness opinion with respect to the Additional Investment. In
addition, over the past two years we have paid DLJ approximately $750,000 for
unrelated engagements, including advising us with respect to the Perelman/Ford
investment.
REQUIRED STOCKHOLDER APPROVALS
The rules of the New York Stock Exchange would ordinarily have required
that we obtain the approval of our stockholders before selling 20% or more of
our capital stock or effecting a change in control. The Audit Committee of our
Board of Directors, however, determined that if we delayed the Capital Z
Investment in order to obtain the approval of our stockholders, it would
seriously jeopardize the viability of our company. In reliance on the Audit
Committee's determination, the New York Stock Exchange waived its rules and the
Board of Directors authorized us to proceed with the Capital Z Investment
without obtaining the approval of our stockholders.
Each of the proposed amendments to our Certificate of Incorporation
requires stockholder approval. These amendments increase the authorized number
of shares of common stock and preferred stock, amend the terms of the Series B
and Series C Convertible Preferred Stock to change to September 30, 1999 the
date by which the stockholders must approve the increase in our authorized
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and preferred stock and authorize a 1,000-for-1 stock split of our Series B
Convertible Preferred Stock and Series C Convertible Preferred Stock. Delaware
law requires these amendments to be approved by the stockholders at the meeting
even though in all cases other than the increase in the authorized number of
shares of common stock, Capital Z and its designees have the ability to approve
these transactions at meeting of stockholders even if all the holders of common
stock voted against the proposals.
REASONS FOR INCREASING AUTHORIZED CAPITAL AND EFFECTING THE STOCK SPLIT
You are urged to consider and approve the increase in authorized capital
and the stock split to be considered at the stockholders' meeting for the
following reasons:
o We need to increase the number of authorized shares of common stock before
we can offer to the holders of our common stock the right to purchase up to
approximately 31 million (the exact number representing the number of
shares of our common stock outstanding on the record date for the Rights
Offering) shares of Series C Convertible Preferred Stock for $1.00 per
share in the Rights Offering;
o If we do not adopt the amendments before the earlier of September 30, 1999
or the date of this meeting (if, in the latter case, any of the proposed
amendments to the Certificate of Incorporation is defeated at this
meeting), the dividend rate on the Series B and Series C Convertible
Preferred Stock held by Capital Z will increase from 6.5% to 15% per annum
and Capital Z will be able to exercise a warrant to purchase up to
3,000,000 additional shares of common stock at an exercise price of $1.00
per share;
o We need to increase the number of authorized shares of common stock in
order to provide for the conversion of outstanding Series B and Series C
Convertible Preferred Stock;
o We need to increase the number of authorized shares of common stock before
we can issue options to officers and other key employees under our 1999
Stock Option Plan (if adopted by the stockholders) which, the Board of
Directors believes, is necessary to obtain and maintain qualified
management; and
o We need to increase the number of authorized shares of common stock and
preferred stock before we can provide additional shares of common stock and
preferred stock to be issued in the future.
CONSEQUENCES OF FAILURE TO APPROVE PROPOSED AMENDMENTS TO CERTIFICATE OF
INCORPORATION
If the stockholders do not approve the proposed amendments to the
Certificate of Incorporation, it will have the following consequences:
o We will not be able to commence the Rights Offering and consequently the
holders of our common stock will not receive rights to purchase up to
approximately 31 million (the exact number representing the number of
shares of our common stock outstanding on the record date for the Rights
Offering) shares of Series C Convertible Preferred Stock at $1.00 per
share;
o The dividend rate on the Series B and Series C Convertible Preferred Stock
will increase from 6.5% to 15% per annum;
o An affiliate of Capital Z will be able to acquire up to an additional
3,000,000 shares of common stock for $1.00 per share (although there will
not be sufficient authorized shares in order to comply with any such
exercise);
o The Series B and Series C Convertible Preferred Stock will continue to be
able to participate in dividends and rights in liquidation on an as
converted basis with holders of the common stock and any remaining assets
after the liquidation preference is paid on the Series B and Series C
Convertible Preferred Stock; and
o Capital Z will control 75.3% of the voting power of the Company.
CONSEQUENCES OF APPROVAL OF THE PROPOSED AMENDMENTS TO THE CERTIFICATE OF
INCORPORATION.
If the stockholders approve the proposed amendments to the Certificate of
Incorporation, it will have the following consequences:
o We will be able to commence the Rights Offering;
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<PAGE>
o We will raise between an additional $25 million and approximately $31
million (or such greater number as the total number of shares of our common
stock outstanding on the record date for the Rights Offering times $1.00)
of equity capital (as a result of the Rights Offering or Capital Z's
standby purchase commitment, as the case may be);
o If all of the approximately 31 million shares offered in the Rights
Offering are purchased by holders of the common stock, Capital Z's voting
power will be 61.1%;
o If none of the holders of the common stock other than Mr. Kornswiet (who is
contractually obligated to do so) purchases shares of common stock in the
Rights Offering, Capital Z's voting power in the Company will be 78.2%; and
o The holders of the Series B and Series C Convertible Preferred Stock will
be able to convert their shares of Series B and Series C Convertible
Preferred Stock at any time into shares of common stock.
1999 STOCK OPTION PLAN
(See pages 50 through 54.)
In addition to the proposal to approve and adopt the amendments to our
Certificate of Incorporation, you will also vote on a separate proposal to
approve and adopt our 1999 Stock Option Plan, which provides that certain of our
officers and other key employees may be granted options to purchase our common
stock. The proposal to approve and adopt the 1999 Stock Option Plan is separate
from, and in no way conditioned upon the outcome of, the proposal to approve and
adopt the amendments to our Certificate of Incorporation. A copy of the 1999
Stock Option Plan is attached as Exhibit "A" to this Proxy Statement and we
encourage you to read the 1999 Stock Option Plan in its entirety.
RATIFICATION OF INDEPENDENT ACCOUNTANTS.
In addition to the proposal to approve and adopt the amendments to our
Certificate of Incorporation and the proposal to approve and adopt our 1999
Stock Option Plan, you will also vote on a separate proposal to ratify the
appointment of Ernst & Young LLP as our independent accountants for the fiscal
year ending June 30, 1999.
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REVOCABILITY OF PROXIES
A Proxy for use at the Meeting is enclosed. The enclosed Proxy supersedes
and replaces in all respects the Proxy materials mailed to the stockholders for
the Originally Scheduled Meeting. Any stockholder who executes and delivers such
Proxy has the right to revoke it at any time before it is exercised by
delivering to the Secretary of the Company an instrument revoking it or a duly
executed Proxy bearing a later date, or by attending the Meeting and voting in
person. Subject to such revocation, all shares represented by a properly
executed Proxy received in time for the Meeting will be voted by the Proxy
holders in accordance with the instructions on the Proxy. Proxies for the
Originally Scheduled Meeting which have been executed and returned will not be
counted as voting at the Meeting. If no instruction is specified with respect to
a matter to be acted upon, the shares represented by the Proxy will be voted (i)
for the approval of each of the proposed amendments to the Certificate of
Incorporation to be acted upon at the Meeting, (ii) for the election of the
nominees for Series B Convertible Preferred Stock Directors set forth herein
(the "Series B Directors"), (iii) for the election of the nominee for Common
Stock Director set forth herein (the "Common Stock Director"), (iv) for the
adoption of the 1999 Stock Option Plan, (v) for the ratification of the
appointment of Ernst & Young LLP as the Company's independent accountants for
the fiscal year ending June 30, 1999 and (vi) if any other business is properly
presented at the Meeting, in accordance with the recommendations of the Board of
Directors.
COSTS OF SOLICITATION OF PROXIES
The expenses of preparing, assembling, printing and mailing this Proxy
Statement and the materials used in the solicitation of Proxies will be borne by
the Company. It is contemplated that the Proxies will be solicited through the
mails but officers, directors and regular employees of the Company may solicit
Proxies personally. Although there is no formal agreement to do so, the Company
may reimburse banks, brokerage houses and other custodians, nominees and
fiduciaries for their reasonable expenses in forwarding the Proxy materials to
stockholders whose stock in the Company is held of record by such entities. In
addition, the Company has engaged the services of Chase Mellon Shareholder
Services and may use the services of other individuals or companies it does not
regularly employ in connection with the solicitation of Proxies if management
determines it advisable.
VOTING SECURITIES
The close of business on July 15, 1999 has been fixed as the record date
for the determination of stockholders entitled to notice of and to vote at the
Meeting and any adjournment(s) thereof (the "Record Date"). As of July 15, 1999,
31,016,964 shares of the Company's common stock, no shares of the Company's
Series A Preferred Stock, 26,704 shares of the Company's Series B Convertible
Preferred Stock and 50,046 shares of the Company's Series C Convertible
Preferred Stock were outstanding.
A majority of the outstanding shares of common stock, a majority of the
outstanding shares of Series B Convertible Preferred Stock and a majority of the
outstanding shares of Series C Convertible Preferred Stock must be represented
in person or by proxy at the Meeting in order to constitute a quorum for the
transaction of business. A stockholder is entitled to cast one vote for each
share of common stock and 1,000 votes for each share of Series B and Series C
Convertible Preferred Stock held on the Record Date for each proposal for which
he or she is entitled to vote.
Approval of the proposal to increase the number of authorized shares of
common stock from 50,000,000 to 400,000,000 (the "Common Stock Proposal")
requires (i) the affirmative vote of a majority of the votes entitled to be cast
by holders of all outstanding shares of common stock and all outstanding shares
of Series B and Series C Convertible Preferred Stock, voting together as a
single class, and (ii) the affirmative vote of a majority of the votes entitled
to be cast by the holders of all outstanding shares of common stock, voting
together as a separate class.
Approval of the proposal to increase the number of authorized shares of
preferred stock from 1,000,000 to 200,000,000 (the "Preferred Stock Proposal")
requires (i) the affirmative vote of a majority of the votes entitled to be cast
by the holders of all outstanding shares of common stock and all outstanding
shares
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of Series B and Series C Convertible Preferred Stock, voting together as a
single class, and (ii) the affirmative vote of a majority of the votes entitled
to be cast by the holders of all outstanding shares of Series B and Series C
Convertible Preferred Stock, voting together as a separate class.
Approval of the proposal to amend the Certificate of Incorporation with
respect to the Series B and Series C Convertible Preferred Stock to change to
September 30, 1999 the date by which the stockholders must approve the Common
Stock Proposal and Preferred Stock Proposal (the "Preferred Stock Amendment
Proposal" and together with the Common Stock Proposal and the Preferred Stock
Proposal, the "Stock Proposals") requires (i) the affirmative vote of a majority
of the votes entitled to be cast by the holders of all outstanding shares of
common stock and all outstanding shares of Series B and Series C Convertible
Preferred Stock, voting together as a single class, and (ii) the affirmative
vote of a majority of the votes entitled to be cast by the holders of all
outstanding shares of Series B and Series C Convertible Preferred Stock, voting
together as a separate class.
Approval of the 1,000-for-1 forward stock split of the Series B and Series
C Convertible Preferred Stock (the "Stock Split") requires (i) the affirmative
vote of a majority of the votes entitled to be cast by the holders of all
outstanding shares of common stock and all outstanding shares of Series B and
Series C Convertible Preferred Stock, voting together as a single class, and
(ii) the affirmative vote of a majority of the votes entitled to be cast by the
holders of all outstanding shares of Series B and Series C Convertible Preferred
Stock, voting together as a separate class.
The election of each of the Series B Directors requires the affirmative
vote of a majority of the votes entitled to be cast by holders of Series B
Convertible Preferred Stock which are present and voting (either in person or by
proxy) at the Meeting. Holders of the common stock and holders of the Series C
Convertible Preferred Stock are not entitled to vote in the election of the
Series B Directors.
The election of the Common Stock Director requires the affirmative vote of
a majority of the votes cast by holders of common stock and Series B Convertible
Preferred Stock who are present and voting (either in person or by proxy) at the
Meeting, voting together as a single class. Holders of the Series C Convertible
Preferred Stock are not entitled to vote in the election of the Common Stock
Director.
Adoption of the 1999 Stock Option Plan and the ratification of the
appointment of Ernst & Young LLP as the Company's independent accountants for
the fiscal year ending June 30, 1999 requires the affirmative vote of a majority
of the votes cast by holders of outstanding shares of common stock and
outstanding shares of Series B and Series C Convertible Preferred Stock, which
are present and voting (either in person or by proxy) at the Meeting, voting
together as a single class.
The holders of the Series B and Series C Convertible Preferred Stock and
each of the executive officers and directors of the Company have indicated that
they intend to vote shares of common stock and Series B and Series C Convertible
Preferred Stock held by them in favor of each of the proposals to be presented
at the Meeting. In furtherance thereof, the holders of the Series B and Series C
Convertible Preferred Stock are contractually obligated to cast their votes in
favor of the Preferred Stock Proposal, the Common Stock Proposal, the Stock
Split, the election of the nominees identified in this Proxy Statement for
election as Series B Directors, the election of the nominee identified in this
Proxy Statement for election as the Common Stock Director and the approval of
the 1999 Stock Option Plan. In addition, Cary Thompson, the former Chief
Executive Officer and a director of the Company, and Neil Kornswiet, the
President and a director of the Company, are contractually obligated to cast
their votes in favor of the Preferred Stock Proposal, the Common Stock Proposal
and the Stock Split. At the Record Date, the holders of the Series B and Series
C Convertible Preferred Stock and the executive officers and directors of the
Company controlled the vote of an aggregate of 1,890,560 shares of the common
stock, 26,704 shares of the Series B Convertible Preferred Stock and 50,046
shares of the Series C Convertible Preferred Stock, constituting in the
aggregate 6.1%, 100% and 100% of the common stock, Series B Convertible
Preferred Stock and Series C Convertible Preferred Stock, respectively, and
73.0% of common stock and preferred stock voting together as a single class.
Accordingly, adoption of each of the proposals to be presented at the Meeting
other than the Common Stock Proposal is assured. In addition, if holders of at
least 43.9% of the outstanding shares of common stock join the directors
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of the Company in voting in favor of the Common Stock Proposal, the Common Stock
Proposal will also be adopted.
In accordance with the laws of the State of Delaware and the Certificate of
Incorporation and Bylaws, for election of directors, only proxies and ballots
indicating votes "For all nominees," "Withhold authority to vote all nominees"
or specifying that votes be withheld from one or more designated nominees are
counted to determine the total number of votes present and entitled to be cast,
and broker non-votes are not counted. Therefore, abstentions and broker
non-votes have no effect on the outcome of the election. For the adoption of the
Stock Proposals and the Stock Split, which are decided by the affirmative vote
of a majority of the votes entitled to be cast by the holders of all outstanding
shares of stock entitled to vote on such proposals, abstentions and broker
non-votes have the same effect as a vote against such proposals. For the
adoption of all other proposals, which are decided by a majority of the votes
cast, only proxies and ballots indicating votes "For," "Against" or "Abstain" on
the proposal or providing the designated proxies with the right to vote in their
judgment and discretion on the proposal are counted to determine the number of
shares present and entitled to vote, and broker non-votes are not counted. Thus,
abstentions have the same effect as a vote against a proposal but broker
non-votes have no effect on the outcome of the proposal.
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<PAGE>
STOCK PROPOSALS
APPROVE THE AMENDMENT OF THE CERTIFICATE OF
INCORPORATION TO INCREASE THE AUTHORIZED
NUMBER OF SHARES OF COMMON STOCK
APPROVE THE AMENDMENT OF THE CERTIFICATE OF
INCORPORATION TO INCREASE THE AUTHORIZED
NUMBER OF SHARES OF PREFERRED STOCK
APPROVE THE AMENDMENT TO THE CERTIFICATE OF
INCORPORATION WITH RESPECT TO THE SERIES B AND SERIES C PREFERRED STOCK
TO CHANGE TO SEPTEMBER 30, 1999 THE DATE BY WHICH
THE OTHER STOCK PROPOSALS MUST BE APPROVED BY STOCKHOLDERS
APPROVE THE AMENDMENT OF THE CERTIFICATE OF
INCORPORATION TO EFFECT A STOCK SPLIT
OF THE PREFERRED STOCK
INTRODUCTION
On December 23, 1998, as amended February 10, 1999, June 9, 1999 and
July 16, 1999, the Company entered into a Preferred Stock Purchase Agreement
with Capital Z (the "Preferred Stock Purchase Agreement"), pursuant to which
Capital Z has agreed to make an equity investment of up to $126.5 million in the
Company (the "Investment"). The Investment is to be made as follows: (i) on
February 10, 1999 (the "Initial Closing") Capital Z (through a partnership
majority owned by Capital Z) and certain other investors designated by Capital Z
purchased 26,704 shares of the Series B Convertible Preferred Stock of the
Company and 49,796 shares of the Series C Convertible Preferred Stock of the
Company for $1,000 per share, or an aggregate purchase price of $76.5 million;
(ii) on August 3, 1999, Capital Z (through a partnership majority owned by
Capital Z) purchased an additional 25,000 shares of Series C Convertible
Preferred Stock of the Company for $1,000 per share, or an aggregate purchase
price of $25 million (the "Additional Investment"); (iii) subject to the
approval of each of the Stock Proposals and the Stock Split, the Company intends
to commence a public offering to the holders of the common stock of the Company
of non-transferable subscription rights (the "Subscription Rights") to purchase
up to approximately 31 million (or such greater number as the total number of
shares of our common stock outstanding on the record date for the Rights
Offering times $1.00) of Series C Convertible Preferred Stock for $1.00 per
share, and (iv) Capital Z has agreed to purchase up to $25 million of additional
shares of Series C Convertible Preferred Stock for $1.00 per share to the extent
not purchased by the Company's common stockholders in the (the
"Standby Commitment").
On February 10, 1999, the Board of Directors approved the proposed
amendments to the Certificate of Incorporation, subject to stockholder approval,
to increase the amount of the Company's authorized capital stock and to effect a
1,000-for-1 forward stock split of the outstanding Preferred Stock. On June 9,
1999, the Board of Directors approved the proposed amendments to the Certificate
of Incorporation with respect to the Series B and Series C Convertible Preferred
Stock, subject to stockholder approval, to change to September 30, 1999 the date
by which stockholders must approve the other proposed amendments to the
Certificate of Incorporation.
THE STOCK PROPOSALS AND THE STOCK SPLIT
The Certificate of Incorporation currently authorizes the issuance of
50,000,000 shares of common stock and 1,000,000 shares of preferred stock. Of
such 50,000,000 presently authorized shares of common stock, 31,016,694 shares
were issued and outstanding on the Record Date. Of such 1,000,000 shares of
presently authorized preferred stock, 26,704 shares of Series B Convertible
Preferred Stock were issued and outstanding on the Record Date and 50,046 shares
of Series C Convertible Preferred Stock were issued and outstanding on the
Record Date. In addition, an aggregate of 18,983,036 shares of common stock have
been reserved for
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<PAGE>
issuance as of the Record Date under outstanding options, warrants and other
rights to purchase common stock of the Company.
A vote for each of the Stock Proposals will approve the proposed amendments
to the Certificate of Incorporation to increase the Company's authorized number
of shares of common stock by 350,000,000 to 400,000,000 shares and the preferred
stock by 199,000,000 to 200,000,000 shares to change to September 30, 1999 in
the Series B and Series C Preferred Stock the date by which the stockholders
must approve the Common Stock Proposal and Preferred Stock Proposal. A vote for
the Stock Split will approve the proposed amendment to the Certificate of
Incorporation to effect the Stock Split. The amendment to increase the
authorized common stock is presented to the stockholders as the Common Stock
Proposal, the amendment to increase the authorized preferred stock is presented
to stockholders as the Preferred Stock Proposal, the amendment to change the
date in the Series B and Series C Preferred Stock Proposals must be adopted is
presented to the stockholders as the Preferred Stock Amendment Proposal, and the
amendment to effect the Stock Split is presented to the stockholders as the
Stock Split. The proposed amendments to the Certificate of Incorporation
described herein are set forth in Exhibit "B" and Exhibit "C" attached hereto.
Upon adoption of the Stock Proposals and the Stock Split, the Company will
file an amendment to the Certificate of Incorporation with the Secretary of
State of the State of Delaware, effect the Stock Split and reserve the number of
shares of common stock necessary for issuance upon conversion of the Series B
and Series C Convertible Preferred Stock and the warrants issued to Capital Z
Management, Inc.
If each of the Stock Proposals is adopted, the additional shares of common
stock and preferred stock could be issued at the discretion of the Board of
Directors without any further action by the stockholders, except as required by
applicable law or regulation, in connection with acquisitions, efforts to raise
additional equity for the Company, and other corporate purposes.
VOTE REQUIRED
Approval of the Common Stock Proposal requires (i) the affirmative vote of
a majority of the votes entitled to be cast by the holders of all outstanding
shares of common stock and all outstanding shares of Series B and Series C
Convertible Preferred Stock, voting together as a single class, and (ii) the
affirmative vote of a majority of the votes entitled to be cast by the holders
of all outstanding shares of common stock, voting as a separate class.
Approval of the Preferred Stock Proposal requires (i) the affirmative vote
of a majority of the votes entitled to be cast by the holders of all outstanding
shares of common stock and all outstanding shares of Series B and Series C
Convertible Preferred Stock, voting together as a single class, and (ii) the
affirmative vote of a majority of the votes entitled to be cast by the holders
of all outstanding shares of Series B and Series C Convertible Preferred Stock,
voting as a separate class.
Approval of the Preferred Stock Amendment Proposal requires (i) the
affirmative vote of a majority of the votes entitled to be cast by the holders
of all outstanding shares of common stock and all outstanding shares of Series B
and Series C Convertible Preferred Stock, voting together as a single class, and
(ii) the affirmative vote of a majority of the votes entitled to be cast by the
holders of all outstanding shares of Series B and Series C Convertible Preferred
Stock, voting as a separate class.
Approval of the Stock Split requires (i) the affirmative vote of a majority
of the votes entitled to be cast by the holders of all outstanding shares of
common stock and all outstanding shares of Series B and Series C Convertible
Preferred Stock, voting together as a single class, and (ii) the affirmative
vote of a majority of the votes entitled to be cast by the holders of the
outstanding Series B and Series C Convertible Preferred Stock, voting as a
separate class.
The holders of the Series B and Series C Convertible Preferred Stock and
each of the executive officers and directors of the Company have indicated that
they intend to vote shares of common stock and Series B and Series C Convertible
Preferred Stock held by them in favor of each of the proposals to be presented
at the Meeting. In furtherance thereof, the holders of the Series B and Series C
Convertible Preferred Stock and
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<PAGE>
Cary Thompson, the former Chief Executive Officer and a director of the Company,
and Neil Kornswiet, the President and a director of the Company, are
contractually obligated to cast their votes in favor of the Preferred Stock
Proposal, the Common Stock Proposal and the Stock Split. At the Record Date, the
holders of the Series B and Series C Convertible Preferred Stock and the
executive officers and directors of the Company controlled the vote of an
aggregate of 1,890,560 shares of the common stock, 26,704 shares of the Series B
Convertible Preferred Stock and 50,046 shares of the Series C Convertible
Preferred Stock, constituting in the aggregate 6.1%, 100% and 100% of the common
stock, Series B Convertible Preferred Stock and Series C Convertible Preferred
Stock, respectively, and 73.0% of the common stock and preferred stock, voting
together as a single class. Each of the shares of Series B and Series C
Convertible Preferred Stock is entitled to 1,000 votes at the Meeting. Because
the holders of Series B and Series C Convertible Preferred Stock have agreed to
vote in favor of the Preferred Stock Proposal, the Preferred Stock Amendment
Proposal and the Stock Split, adoption of each of the Preferred Stock Proposal,
the Preferred Stock Amendment Proposal and the Stock Split is assured. In
addition, if holders of at least 43.9% of the outstanding shares of common stock
join the executive officers and directors of the Company in voting in favor of
the Common Stock Proposal, the Common Stock Proposal will also be adopted.
Approval of the Common Stock Proposal, approval of the Preferred Stock
Proposal and approval of the Preferred Stock Amendment Proposal are not, in any
case, contingent upon approval of the other Stock Proposals. Approval of the
Stock Split is contingent upon the approval of the Stock Proposals.
REASONS FOR INCREASING AUTHORIZED CAPITAL, CHANGING THE DATE IN THE SERIES B AND
SERIES C CONVERTIBLE PREFERRED STOCK AND EFFECTING THE STOCK SPLIT
The stockholders of the Company are urged to consider and approve the
Stock Proposals, which will increase the authorized common stock and preferred
stock, change the date in the Series B and Series C Convertible Preferred Stock
by which the other Stock Proposals must be adopted and effect the Stock Split of
the Series B and Series C Convertible Preferred Stock, for the following
reasons:
Lack of Authorized Shares. The Company has either issued or reserved for
issuance substantially all 50,000,000 shares of common stock currently
authorized by the Certificate of Incorporation. At the Record Date, only
18,983,036 shares of common stock remained available for future issuance, all of
which have been reserved for use. At the Record Date, there are insufficient
shares of authorized preferred stock to provide for the Rights Offering, there
were insufficient shares of authorized common stock to provide for the
conversion of outstanding Series B and Series C Convertible Preferred Stock and
there would have been insufficient shares of authorized common stock for the
1999 Stock Option Plan (if adopted by the stockholders). The Stock Proposals and
the Stock Split must be approved if the Company is to have the ability to (i)
effect the Rights Offering, (ii) provide for the conversion of outstanding
Series B and Series C Convertible Preferred Stock, or (iii) issue additional
shares of common stock or preferred stock.
Agreement with Capital Z. As part of the agreement with Capital Z, the
Company agreed to solicit approval of the stockholders for the Stock Proposals
and the Stock Split, in part to facilitate the Rights Offering. The Rights
Offering may not be consummated unless and until the Stock Proposals and the
Stock Split are adopted and the applicable amendments to the Certificate of
Incorporation are filed with the Secretary of State of the State of Delaware.
Pursuant to the terms of the Series B and Series C Convertible Preferred Stock,
if the Company fails to effect the Stock Proposals and the Stock Split and file
the applicable amendment to the Certificate of Incorporation that are necessary
to complete a recapitalization (the "Recapitalization") of the Company prior to
June 30, 1999 (which was waived by the current holders of the Series B and
Series C Convertible Preferred Stock until the earlier of September 30, 1999 or
the date of the Meeting if, in the latter case, any of the proposed amendments
to the Certificate of Incorporation is defeated at the Meeting), (i) the
dividend rate on the Series B and Series C Convertible Preferred Stock will
increase from 6.5% to 15% per annum, and (ii) a warrant to purchase up to 3
million shares of common stock held by Capital Z Management, Inc., an affiliate
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 Series
B and Series C Convertible Preferred Stock will participate in dividends and
rights in liquidation with holders of the common stock in any remaining assets
of the Company.
Page 15
<PAGE>
Rights Offering. As soon as practicable following the date of this Proxy
Statement, subject to the approval of the proposals to be presented at the
Meeting, the Company intends to distribute the Subscription Rights without
charge as a dividend to record holders of the common stock (the "Record
Holders"). Each of the Record Holders will receive the Subscription Rights, each
of which shall entitle the holder thereof to subscribe during the 30-day period
following commencement of the Rights Offering, for one share of the Series C
Convertible Preferred Stock for each share of the common stock held on the
Record Date. Each whole Subscription Right will entitle the Record Holder to
subscribe for one share of the Series C Convertible Preferred Stock at $1.00 per
share (the "Subscription Price"). The Subscription Rights will not be
transferable by the Record Holders.
All Subscription Rights will cease to be exercisable by Record Holders at
5:00 p.m. eastern time, on that date which is 30 days from the commencement of
the Rights Offering, unless extended by the Company (the "Expiration Date").
Consummation of the Rights Offering will be contingent on stockholder approval
of each of the Stock Proposals and the Stock Split and the filing of the
applicable amendments to the Certificate of Incorporation with the Secretary of
State of the State of Delaware.
Neil Kornswiet, President and a director of the Company, has agreed to
purchase 1,667,000 shares of the Series C Convertible Preferred Stock in the
Rights Offering at the Subscription Price. Unlike other stockholders, Mr.
Kornswiet will pay for his shares purchased in the Rights Offering by delivering
to the Company a five year promissory note. The note will bear interest at 6.5%
per annum and be payable from 25% of any annual cash bonus Mr. Kornswiet
receives. The note accelerates upon Mr. Kornswiet's termination of employment
and is secured by the shares to be purchased. If Mr. Kornswiet is still employed
by the Company on February 10, 2000 or was terminated earlier by the Company for
a reason other than for "cause" (as defined in the note), the note becomes
non-recourse. Immediately following such purchase, Mr. Kornswiet will
beneficially hold an aggregate of 2,407,860 shares common stock of the Company
and 1,667,000 shares of the Series C Convertible Preferred Stock of the Company,
constituting an aggregate of between 2.5% and 2.6% of the combined voting power
of the Company.
Capital Z has agreed to purchase at the Expiration Date any amount of
unsubscribed shares of Series C Convertible Preferred Stock (for $1.00 per
share) necessary to bring the total amount of such stock sold in the Rights
Offering up to 25 million shares.
The Company reserves the right, in its sole discretion, at any time prior
to delivery of the shares of Series C Convertible Preferred Stock offered in the
Rights Offering, to terminate the Rights Offering by giving oral or written
notice thereof to the subscription agent and making a public announcement
thereof. A stockholder who votes in favor of the Stock Proposals (or either of
them) is not committed to purchase shares of Series C Convertible Preferred
Stock in the Rights Offering.
Following the completion of the Rights Offering, Capital Z will hold Series
B and Series C Convertible Preferred Stock representing 100% of the voting
rights entitled to elect the Series B Directors, 46.3% of the voting rights
entitled to elect five of the nine members of the Company's Board of Directors
(the "Common Stock Directors") assuming that all shares of Series C Convertible
Preferred Stock offered in the Rights Offering are purchased by the holders of
the common stock of the Company, and, assuming that all shares of Series C
Convertible Preferred Stock offered in the Rights Offering are purchased by the
holders of the common stock of the Company, 61.1% of the combined voting power
of the Company. If none of the shares of Series C Convertible Preferred Stock
offered in the Rights Offering are purchased by the holders of common stock of
the Company, Capital Z would hold Series B and Series C Convertible Preferred
Stock representing 78.2% of the combined voting power of the Company.
If the Rights Offering is consummated and all of the approximately $31
million of Series C Convertible Preferred Stock is sold in the Rights Offering,
the Company will receive net proceeds from such offering in the approximate
amount of $30 million. The Company intends to use the net proceeds to
recapitalize the Company's equity base and for general corporate purposes.
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<PAGE>
THIS PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION
OF AN OFFER TO BUY THE SERIES C CONVERTIBLE PREFERRED STOCK. AN OFFER IS BEING
MADE ONLY THROUGH A SEPARATE PROSPECTUS.
THE BOARD OF DIRECTORS MAKES NO RECOMMENDATION AS TO WHETHER STOCKHOLDERS
SHOULD EXERCISE THEIR SUBSCRIPTION RIGHTS.
BACKGROUND AND PURPOSE OF THE STOCK PROPOSALS AND THE STOCK SPLIT
The Company has historically operated, and expects to continue at least in
the near term to operate, on a negative cash flow basis. The more significant of
the Company's cash requirements is a result of the Company's use of
securitization as a loan disposition strategy and, prior to September 1998, the
Company's primary loan disposition strategy. As a company that operates on a
negative cash flow basis, it depends upon the credit and capital markets and the
whole loan market for its liquidity.
In June 1997, the Board of Directors determined that operating a negative
cash flow company presented the Company with a unique set of circumstances in
light of capital market and economic uncertainties and the increasingly
competitive environment in the subprime home equity sector. The Board of
Directors engaged Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") to
work with the Company in developing a means to maximize opportunities for the
Company and its stockholders, whether by remaining independent and growing the
Company internally and through acquisition, or selling the Company or entering
into a business combination transaction.
From June 1997 through September 1998, DLJ contacted over 50 institutions
to solicit their interest in acquiring or investing in the Company. These
institutions consisted of a wide range of potential strategic acquirors
including commercial banks, thrifts, insurance companies, diversified consumer
finance companies, credit card companies and other mortgage banks with a cost of
funds substantially lower than the Company's. DLJ also contacted a number of
private equity/leverage buyout funds that focus in the specialty finance sector.
The Company engaged in discussions with several of the parties contacted by DLJ
regarding various business combination transactions. Several of those parties
conducted significant due diligence. As a result of this effort, on April 27,
1998, the Company obtained a $38 million equity investment from private entities
controlled by Ronald N. Perelman and Gerald Ford, Chairman of the Board and
Chief Executive Officer of Golden State Bancorp Inc. (the "Perelman/Ford
Investment"). After the Perelman/Ford Investment, the Company continued to
engage in discussions with various parties, including Golden State Bancorp Inc.,
who had previously conducted due diligence, but no offers to acquire or make
further investments in the Company were made.
In October 1998, global conditions in the capital and credit markets
unexpectedly became extraordinarily negative which had an adverse impact on the
subprime home equity finance sector generally and the Company specifically.
These market conditions severely restricted the Company's access to credit
facilities, precluded access to public equity and debt markets and adversely
affected the premiums received in the whole loan market. The combination of
these factors resulted in a severe liquidity crisis for the Company. The primary
reason for engaging in the discussions with strategic partners was no longer the
maximization of growth opportunities for the Company and its stockholders.
Rather, locating a strategic partner became necessary to avoid a sale of the
Company's strategic assets or the taking of other actions that could jeopardize
the Company's ability to continue to operate as a going concern.
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The effects of the events in the Fall of 1998 on the Company (which are
disclosed more completely below) are illustrated by the following table (dollars
in thousands):
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1999
---------------------------------------------------------------------------------------------------------
Third Quarter Fourth Quarter First Quarter Second Quarter
(ENDED MARCH 31, 1998) (ENDED JUNE 30, 1998) (ENDED SEPTEMBER 30, 1998) (ENDED DECEMBER 31, 1998)
---------------------- --------------------- -------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
Total Revenues $59,538 $72,111 $57,761 ($154.423)(1)
Net Income (Loss) 2,018 6,442 (2,156) (195,745)
Gain on Sale 24,821 38,534 19,677 8,752
Total Loan 570,896 673,902 725,057 550,218
Production
- ----------
<FN>
(1) Includes a valuation adjustment of interest-only strips of $191,646,000.
</FN>
</TABLE>
Set forth below is a more complete discussion of the following conditions
that impacted the Company's liquidity and operations:
Gain on Sale. The Company's gain on sale from its $650 million
securitization completed in September 1998 was significantly reduced due to the
$15.3 million loss on its U.S. Treasury hedge position. The Company has
historically attempted to mitigate interest rate risk between the time of loan
origination and loan securitization primarily by hedging its portfolio of fixed
rate loans through agreements with third parties that sell U. S. Treasury
securities not yet issued and through the purchase of U.S. Treasury Put Options.
Changes in U.S. Treasury rates were generally reflected in the pass-through
rates on asset-backed securities. Beginning in the third calendar quarter of
1998 and continuing into the fourth quarter, both the international and domestic
markets reacted adversely to economic events in the Far East and Russia. As a
consequence of this international economic instability, there was a substantial
break in the traditional hedge correlation as market participants moved quickly
and materially into lower risk, lower yielding U.S. Treasury securities, and
away from higher risk and higher yielding asset-backed securities. Because of
this, the Company incurred hedge losses of $15.3 million during the three months
ended September 30, 1998. This loss included a loss of $10.7 million on a hedge
position having a notional amount of $250 million that expired on September 30,
1998. The position had a market value of $248 million just three months earlier.
The other component of the September 30, 1998 quarterly hedge loss was a $4.6
million charge on a hedge position having a notional amount of $85 million and a
market value of approximately $80.4 million. Due to the lack of correlation at
September 30, 1998, the Company marked each position to market through a charge
to income. The Company later voluntarily terminated the second hedge position on
December 23, 1998, with a modest positive adjustment from the September 30, 1998
mark.
Warehouse Credit Lines. The Company depends on warehouse and other
revolving credit facilities to fund its loan production operations. During the
Fall of 1998, the Company retained access to warehouse and other revolving
credit facilities with borrowing limits aggregating in excess of $1.0 billion.
However, changes in advance rates imposed by some of the lenders effectively
limited the Company to a single committed $300 million warehouse line. The
Company believed that without a change in market conditions or a change in the
Company's liquidity position, it was unlikely that additional or replacement
credit facilities of sufficient size could be arranged. Further, provisions in
the Company's then current warehouse line required the Company to maintain a
minimum level of profitability over two consecutive quarters. The expected loss
in the second fiscal quarter would violate this provision as well as a provision
requiring the Company to maintain a minimum net worth and to maintain a minimum
debt to equity ratio. If the Company were unable to obtain the necessary waivers
it would in such a case be in default under the line and the line could have
been terminated prior to its expiration. In the event of a termination of the
line and if alternative sources of warehouse funds were not obtained, the
Company would have had to terminate its loan production operations. The Company
received the necessary waivers on February 5, 1999. This line expired on April
8, 1999.
Public Equity and/or Debt Markets. Historically, the Company funded
negative cash flow primarily from the sale of its equity and debt securities.
However, the global liquidity crisis during the Fall of 1998 made the capital
markets inaccessible to the Company. Further, the drop in home equity stock
prices and the consequent unavailability of the public equity and debt markets
exacerbated the Company's liquidity
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constraints. Additionally, the Company was concerned that the deteriorating
conditions in its markets could result in the Company violating a leverage ratio
requirement contained in an indenture governing its public debt.
Whole Loan Sales. During the second fiscal quarter of 1999, the Company
attempted to address its liquidity constraints by employing its previously
disclosed strategy of evaluating the market conditions, cash flow and
profitability of whole loan sales relative to the securitization market and
selling its loans in the whole loan market. However, gains associated with whole
loan sales for cash were generally at levels lower than those recognized when
such loans were securitized. Further, prices then being paid by whole loan
purchasers were less than the Company's cost of production. Accordingly, sales
of loans in the whole loan market contributed to the anticipated loss in the
quarter ended December 31, 1998. Additionally, so long as the Company sold whole
loans on a servicing released basis, the Company would no longer grow its
servicing portfolio. Moreover, the weakness in the asset-backed market caused
other subprime lenders to rely on the whole loan market for their loan
disposition strategy. The result was abundance in the supply, and a lowering of
the prices paid, for whole loans and tightening of underwriting guidelines
applied by the whole loan purchasers. The Company raised its prices and modified
its underwriting guidelines for its loan products in response to these changes
which was expected to, and did, have the effect of decreasing loan production in
the second and third fiscal quarters.
Servicing Advances. In the second fiscal quarter of 1999, the Company's
liquidity crisis was further exacerbated by the requirement of the Company, as
servicer of the loans it has securitized, to advance interest on delinquent
loans in the securitized pools on a monthly basis. This short-term cash
requirement arises once each month. Generally, the Company is obligated to make
the servicing payment in the middle of the month. A portion of the cash advances
are then reimbursed from payments received on the related loans. The Company did
not have sufficient funds to make the payment in December 1998. However, an
immediate insolvency crisis was averted when one of the Company's lenders
expanded the Company's credit facility to provide the funds necessary to satisfy
the December obligation. Under the terms of the credit facility, funds were also
available to help satisfy the January advance but only if the agreement with
Capital Z was then in full force and effect, as well as the satisfaction of
other conditions. The lender would not, however commit to fund servicing
advances in subsequent months. If the Company were unable to arrange for funds
necessary to make the servicing payment, the Company would very likely have had
to engage in extraordinary transactions, such as seeking subservicing
arrangements that include the obligation to make servicing advances or strategic
asset sales, to provide the liquidity necessary to operate. Management believed
that any such transaction would have had a material adverse effect on the
Company's results of operation. Further, there could be no assurance that any
such extraordinary transaction could have been consummated. In that event, the
Company would very likely have been terminated as servicer. Any such termination
would have had a material adverse effect on the Company and jeopardized its
ability to continue to operate as a going concern.
As the Company's liquidity position weakened dramatically in the second
fiscal quarter of 1998, the Company's efforts to locate a strategic partner
intensified. In early October 1998, DLJ contacted Capital Z to inquire whether
it would be interested in making an investment in the Company. Capital Z reacted
positively to the inquiry. On or about October 13, 1998, Capital Z presented the
Company with a letter agreement (the "Original Letter Agreement") containing the
terms under which Capital Z would be interested in commencing due diligence.
Under the Original Letter Agreement, the Company granted Capital Z exclusive
access to the Company's books, records and personnel until November 5, 1998 in
order to evaluate whether it was interested in making an equity investment in
the Company. The Company agreed not to solicit offers for alternative
transactions until the earlier of the third business day following the
submission of a proposal by Capital Z, but not later than November 10, 1998 (or
November 5, 1998 if no proposal was submitted by Capital Z on or prior to such
date). The Company agreed to pay a fee of (i) $2.0 million upon the submission
of a proposal, (ii) $1.0 million upon consummation of the investment, and (iii)
$5.5 million if the Company consummated an alternative transaction with a third
party at any time within 12 months of the date of the Original Letter Agreement,
unless Capital Z declined to consummate the investment due to due diligence
concerns, and agreed to reimburse all of Capital Z's expenses.
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On October 13, 1998, the Board of Directors held a special meeting to
discuss the proposed Capital Z transaction as well as whether to permit due
diligence. After careful consideration of the provisions of the Original Letter
Agreement and in light of the Company's then current liquidity position, the
Board of Directors authorized the commencement of due diligence and further
authorized management to enter into the Original Letter Agreement and a related
confidentiality agreement. On October 13, the Company and Capital Z entered into
the Original Letter Agreement setting forth the terms pursuant to which Capital
Z would agree to conduct due diligence in contemplation of a proposed investment
in the Company.
Between October 14, 1998 and November 3, 1998, Capital Z and its
representatives visited the Company's facilities in Los Angeles and Irvine,
California and met with representatives of the Company and DLJ to conduct a
preliminary due diligence examination of the Company and to discuss the
operations, business and prospects of the Company.
On November 3, 1998, the Company received a draft proposal from Capital Z
including the basic terms of the investment (the "Original Draft Proposal"). The
Original Draft Proposal consisted of an investment by Capital Z of up to $100
million in a newly designated series of preferred stock at a price of $1.00 per
share. Under the Original Draft Proposal, Capital Z would fund at least $75
million at closing and would also agree to purchase up to an additional $25
million of preferred stock, based on the results of an offering to existing
holders of common stock of non-transferable rights to purchase up to $25 million
of a newly designated series of preferred stock at the same price and on the
same terms and conditions as Capital Z.
On November 9, 1998, at a regular meeting, the Board of Directors discussed
the status and terms of the Original Draft Proposal. DLJ made a detailed
presentation to the Board of Directors regarding the principal financial terms
of the Original Draft Proposal and DLJ's financial analysis of the proposed
transaction and reviewed with the Board of Directors its other options to either
effect a sale of the Company or alternative debt or equity financing. Because no
serious proposals for a business combination or a financing had been received to
date and because the Company's financial condition was rapidly worsening, the
only other strategic option that was seriously considered was the sale of
strategic assets of the Company and the voluntary liquidation of its assets.
This alternative would have involved the sale of each of the Company's operating
units, the termination of most of its employees and the subsequent liquidation
of the Company following the payment of all of its liabilities. Following the
DLJ presentation, the Board of Directors concluded that the Original Draft
Proposal from Capital Z represented the strategic option that was most likely to
maximize value to the existing stockholders of the Company and appointed three
outside directors to serve on the Strategic Planning Committee (the
"Committee"). The Committee was authorized to negotiate the terms and conditions
of the proposed investment with Capital Z, evaluate and determine whether to
consummate a transaction with Capital Z, review and approve definitive
agreements with respect thereto and take any and all other actions which a Board
of Directors is authorized to take in connection therewith.
On November 11, 1998, the Committee held a special meeting for the purpose
of discussing the Original Draft Proposal in further detail. Between November
11, 1998 and November 16, 1998, management negotiated with Capital Z regarding
the Original Draft Proposal and the terms of a new letter agreement (the "Letter
Agreement").
On November 16, 1998, the Company received the Letter Agreement and a draft
proposal in the form of a term sheet, which contained updated provisions of the
Original Draft Proposal (the "Draft Proposal"). The Letter Agreement contained
provisions that limited the Company's ability to consummate a business
combination transaction or equity infusion with third parties until the sooner
to occur of December 31, 1998 or notification by Capital Z that it did not want
to proceed with the investment, including restrictions on the Company's ability
to solicit, initiate or facilitate any business combination or equity investment
by a third party, subject to the Company's right to send certain confidential
information agreed to by Capital Z and the Company to unsolicited third party
offerees, a right on the part of Capital Z to "match" a competitive offer made
by a third party, and the fees imposed on the Company if an alternative
transaction were consummated. Pursuant to the Letter Agreement, the Company was
obligated to pay Capital Z (i) $2.0 million upon the submission of the term
sheet, (ii) $1.0 million upon consummation of the investment, and (iii) $5.5
million if the Company consummated an alternative transaction with a third party
(subject to certain exceptions) at any
Page 20
<PAGE>
time within 12 months of the date of the Letter Agreement, unless Capital Z
declined to consummate the investment due to due diligence concerns, and agreed
to reimburse all of Capital Z's expenses.
On November 16, 1998, the Committee held a special meeting to discuss the
Letter Agreement and the Draft Proposal. Counsel to the Company reviewed the
terms of the Letter Agreement with the Committee in detail. The Committee
considered the Draft Proposal and discussed the Company's other strategic
options. Because no serious proposals for a business combination or a financing
had been received since the November 9, 1998 meeting and because the Company's
financial condition was rapidly worsening, the only other strategic option that
was seriously considered was the sale of strategic assets of the Company and the
voluntary liquidation of its assets. The Committee concluded that the investment
by Capital Z set forth in the Draft Proposal was the best and the only solution
to the Company's long-term liquidity needs, other than a liquidation of its
assets. The Committee further determined that, based on the results of the
search in the market previously conducted by DLJ and DLJ's report on the state
of the capital markets at that time, it was unlikely that a third party bid
would be presented that could be consummated in time to meet the liquidity
requirements of the Company. Thereafter, the Committee approved the Letter
Agreement.
On December 16, 1998, the Company received an unsolicited contact from a
third party regarding a possible business transaction. The Company informed
Capital Z of the third party contact and, pursuant to the Letter Agreement, the
Company forwarded an Information Package to the third party. The third party did
not conduct any further due diligence and did not make an offer to the Company.
On December 14, 1998, the Company announced that it had postponed the
Originally Scheduled Meeting due to ongoing discussions with Capital Z.
The Board of Directors held a special meeting on December 17, 1998, at
which meeting counsel and management advised the Board of Directors as to the
status of the negotiations. The Board of Directors reviewed, with management and
counsel, drafts of the Preferred Stock Purchase Agreement and the related
ancillary agreement.
Negotiations were completed December 21, 1998. On December 21, 1998, the
Committee met and reviewed the final draft of the Preferred Stock Purchase
Agreement and the ancillary agreements. Counsel to the Company reviewed with the
Committee each of the Preferred Stock Purchase Agreement and other ancillary
agreements. DLJ delivered its fairness opinion regarding the terms of the
Original Transaction as described in "Opinions of Financial Advisor." The
Committee unanimously approved the Preferred Stock Purchase Agreement and the
ancillary agreements. The Committee also recommended necessary amendments to the
Certificate of Incorporation and stockholder rights plan and authorized
management to take all appropriate action with respect to any filings or other
matters necessary to consummate the investment by Capital Z, which were ratified
on February 10, 1999 by the Board of Directors.
Between October 14 and December 23, Capital Z conducted extensive legal
and operational due diligence on the Company and retained an outside consulting
firm to evaluate the Company. On December 23, 1998, the Company and Capital Z
entered into the Preferred Stock Purchase Agreement.
On January 14, 1999, the Company received notification that the New York
Stock Exchange (the "NYSE") would permit the Company to issue the Series B and
Series C Convertible Preferred Stock pursuant to the Preferred Stock Purchase
Agreement without having to seek approval of the stockholders of the Company.
Under the Shareholder Approval Policy (the "Policy") of the NYSE, the issuance
of the Series B and Series C Convertible Preferred Stock would normally require
approval of the stockholders of the Company. However, the Audit Committee of the
Company's Board of Directors determined that the delay necessary to secure
approval of the Company's stockholders would seriously jeopardize the financial
viability of the Company. Based on that determination, the NYSE accepted the
Company's application for an exception to the Policy.
On February 10, 1999, the Company and Capital Z amended the Preferred
Stock Purchase Agreement to provide for the sale of an additional 1,500 shares
of Series C Convertible Preferred Stock, at $1,000 per share, for $1.5 million.
On February 10, 1999, Capital Z informed the Company that it intended to
designate Georges C. St. Laurent, Jr., a director of the Company, to purchase
the additional shares.
Page 21
<PAGE>
The Initial Closing occurred on February 10, 1999, wherein the Company
completed the sale of 26,704 shares of Series B Convertible Preferred Stock to
Capital Z, and the sale of 49,796 shares of Series C Convertible Preferred Stock
to Capital Z and Mr. St. Laurent, a designee of Capital Z, for the aggregate
purchase price of $76.5 million. Also, on February 10, 1999, the Company
completed the sale to Cary H. Thompson of 250 shares of Series C Convertible
Preferred Stock, at $1,000 per share, for $250,000, in satisfaction of Mr.
Thompson's obligations under the Management Investment Agreement, dated as of
December 23, 1998, by and between the Company and Mr. Thompson. Thus, the total
gross proceeds from the sale of Series B and Series C Convertible Preferred
Stock received by the Company at the Initial Closing were $76.75 million.
On February 10, 1999, as a material inducement to Capital Z's investment,
Neil B. Kornswiet, the President and a director of the Company, agreed to
terminate his then existing Employment Agreement with the Company (referred to
herein as the "Original Kornswiet Employment Agreement") and enter into a new
Employment Agreement (referred to herein as the "New Kornswiet Employment
Agreement"). To induce Mr. Kornswiet to agree to terminate the Original
Kornswiet Employment Agreement and to give up his change of control payments
which would otherwise have been triggered by the investment of Capital Z and
valuable ongoing rights to bonuses based on the retail and broker loan
production of the Company (without which Capital Z had informed the Company that
it would be unwilling to proceed with its investment), the Company agreed to pay
to Mr. Kornswiet his bonus of $1.46 million for 1998's fourth fiscal quarter,
the receipt of which Mr. Kornswiet had previously agreed to defer.
At the time of the Initial Closing, the Company and Capital Z had
anticipated that the stockholders would approve the Stock Proposals and Stock
Split, and the Rights Offering would be closed, by June 30, 1999. Due to the
complexities involved in restating the Company's securitization related assets,
time and effort spent in finalizing a servicing advance facility and delays in
receiving the necessary regulatory clearances, the Meeting and the Rights
Offering were delayed. Therefore, on June 9, 1999, Capital Z agreed to amend the
Preferred Stock Purchase Agreement and waive provisions in the Certificate of
Incorporation with respect to the Series B and Series C Convertible Preferred
Stock to change to September 30, 1999 from June 30, 1999 the date by which
stockholders must approve the proposals to increase the Company's authorized
common and preferred stock. The effects of those amendments and waiver were to
postpone the exercisability of a warrant issued to an affiliate of Capital Z for
up to 3 million shares of the Company's common stock and to waive the right to
receive the increase in the dividend rate from 6.5% to 15% on the Series B and
Series C Convertible Preferred Stock to the earlier of September 30, 1999 or the
date of the Meeting (if, in the latter case, any of the proposed amendments to
the Certificate of Incorporation are defeated at the Meeting).
On July 16, 1999, the disinterested members of the Board of Directors,
those directors other than those appointed or nominated by Capital Z (the
"Continuing Directors"), approved the Additional Investment and the issuance of
warrants for 1.25 million shares of common stock. Counsel to the Company
reviewed with the Continuing Directors the terms of the Additional Investment.
DLJ made a financial presentation evaluating the proposed transaction and
delivered its fairness opinion regarding the terms of the Additional Investment
as described in "Opinions of Financial Advisor." The Continuing Directors
unanimously approved the terms of the Additional Investment.
OPINIONS OF FINANCIAL ADVISOR
In its role as financial advisor to the Company, DLJ was asked to render
opinions to the Board of Directors as to the fairness to the public stockholders
of the Company, from a financial point of view, of the consideration to be
received by the Company from Capital Z pursuant to its investment under the
Preferred Stock Purchase Agreement without giving effect to the subsequent
amendments (the "Original Transaction") and pursuant to the Additional
Investment.
On December 21, 1998, DLJ delivered its opinion to the effect that as of
the date of such opinion, and based upon and subject to the assumptions,
limitations and qualifications set forth in such opinion, the consideration to
be received by the Company from Capital Z for its investment under the Preferred
Stock Purchase Agreement in the Original Transaction was fair to the Company's
stockholders from a financial point
Page 22
<PAGE>
of view. On July 16, 1999, DLJ delivered its
opinion to the effect that as of the date of such opinion, and based upon and
subject to the assumptions, limitations and qualifications set forth in such
opinion, the consideration to be received by the Company from Capital Z for the
Additional Investment was fair to the Company's public stockholders from a
financial point of view.
A COPY OF THE DLJ OPINION DATED DECEMBER 21, 1999 IS ATTACHED HERETO AS
EXHIBIT "D" AND A COPY OF THE DLJ OPINION DATED JULY 16, 1999 IS ATTACHED HERETO
AS EXHIBIT "E" AND BOTH OPINIONS ARE INCORPORATED HEREIN BY REFERENCE. THESE
OPINIONS HAVE NOT BEEN, AND WILL NOT BE, UPDATED. STOCKHOLDERS ARE URGED TO READ
THE DLJ OPINIONS CAREFULLY AND COMPLETELY FOR ASSUMPTIONS MADE, PROCEDURES
FOLLOWED, OTHER MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY DLJ.
The December 21, 1999 DLJ opinion was prepared for the Company's Board of
Directors and the July 16, 1999 DLJ opinion was prepared for the Continuing
Directors. The DLJ opinions are directed only to the fairness to the Company's
stockholders from a financial point of view of the consideration received by the
Company from Capital Z in the Original Transaction and the Additional
Investment. THE DLJ OPINIONS DO NOT ADDRESS THE ADVISABILITY OF THE STOCK
PROPOSALS OR THE STOCK SPLIT OR ANY OF THE OTHER MATTERS TO BE CONSIDERED AT THE
MEETING AND SUCH OPINIONS DO NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER
AS TO HOW SUCH STOCKHOLDER SHOULD VOTE ON ANY PROPOSAL PRESENTED AT THE MEETING.
DLJ was not retained as an advisor or agent to the Company's stockholders or any
other person, other than as an advisor to the Company's Board of Directors. As
part of its investment banking business, DLJ is regularly engaged in the
valuation of businesses and securities in connection with mergers, acquisitions,
underwriting, sales and distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes.
The DLJ opinions do not constitute opinions as to the prices at which the
shares of the Company's common stock will actually trade at any time. The terms
and conditions of the Original Transaction and the Additional Investment were
determined in arm's-length negotiations between Capital Z and the Company. No
restrictions or limitations were imposed by the Company upon DLJ with respect to
the investigations made or the procedures followed by DLJ in rendering its
opinions.
In arriving at its opinions, DLJ reviewed the Preferred Stock Purchase
Agreement, including all amendments thereto. DLJ also has reviewed financial and
other information about the Company that was publicly available or furnished to
it by the Company, including information provided during discussions with
management of the Company. Included in the information were certain financial
projections prepared by management of the Company for the periods set forth in
the respective opinions, including the Company's projected weekly cash positions
through the dates set forth in the respective opinions. In addition, DLJ
reviewed certain financial and securities data of the Company and conducted such
other financial studies, analyses and investigations as DLJ deemed appropriate
for purposes of the opinions.
In rendering its opinions, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
it from public sources, that was provided to it by the Company or its
representatives or that was otherwise reviewed by DLJ. With respect to the
financial projections and cash flow analyses supplied to it, DLJ assumed that
they had been reasonably prepared based on the best currently available
estimates and judgments of the management of the Company as to the future
operations, cash flow, financial condition and performance of the Company and
its financial assets. DLJ has not assumed any responsibility for making any
independent evaluation of any assets or liabilities of the Company, or for
making any independent verification of any of the information reviewed by it. In
addition, DLJ has relied as to certain legal matters on advice of counsel to the
Company, including that the Company's Board of Directors at all relevant times
owed its fiduciary duty to the common stockholders of the Company.
The DLJ opinions are necessarily based on economic, market, financial and
other conditions as they existed on, and the information made available to it as
of, the date of each of its opinions. It should be understood that, although
subsequent developments may affect its opinions, DLJ does not have any
obligation to update, revise or reaffirm the DLJ opinions.
Page 23
<PAGE>
The following is a summary of the analyses employed by DLJ in arriving at
its opinions.
ANALYSIS OF ALTERNATIVES. For the Original Transaction, DLJ analyzed the
range of alternatives practicably available to the Company. These consisted of:
do nothing ("null alternative"); access additional capital through the public
debt and equity markets; sell assets to raise cash and meet short-term
obligations; sell the Company; file for bankruptcy or liquidate the Company; or
seek private equity investments.
o The Company advised DLJ that pursuing the null alternative was not a
practical alternative if it intended to continue as a going concern. At
the time that the opinion regarding the Original Transaction was
delivered, the Company projected a cash shortfall in each of the next
three months. Without additional short-term financing or another
extraordinary transaction (such as a sale of strategic assets) to cover
its immediate working capital needs, the Company's creditors would be
unlikely to negotiate standstills, terms or extensions, leading to the
need to file for bankruptcy. If the Company filed for bankruptcy, the
Company's common stockholders would have retained no value for their
shares in a forced sale, which the Company was advised was the most likely
outcome following a bankruptcy filing, and would have retained a per share
value less than the equivalent price per share paid by Capital Z in the
Original Transaction in an orderly liquidation, which the Company was
advised was a less likely outcome following a bankruptcy filing. See
"Forced Sale Analysis" and "Orderly Liquidation Analysis."
o For the past year, the Company sought additional capital through
whatever means was possible. However, because of real and perceived
problems in the home equity industry, the public debt and equity markets
were unavailable. The Company had been unable to find an underwriter
interested in trying to raise additional capital for the Company through
the public markets.
o In light of then current market conditions, a timely sale of assets to
help the upcoming liquidity requirements was unlikely. Furthermore, due to
the influx of available assets from other troubled home equity lenders,
the probable price received for the assets would likely be at a discount.
At the time that DLJ delivered its opinion with respect to the Original
Transaction, the Company's three principal assets were its mortgage loans
held for sale ("LHFS"), mortgage servicing rights ("MSR") and its
interest-only and residual assets. Although the Company was regularly
disposing of its LHFS in the secondary markets, the cash generated from
these sales were not sufficient to meet its operating requirements. For
the three months prior to the delivery of such opinion, the Company had
attempted to sell it LHFS. The offers that the Company had received were
substantially below those under normal market conditions. As such time,
there had been only a limited number of subprime MSR sales and none of
such transactions with characteristics similar to those of the Company's
provided any premium. Moreover, there was not an active and liquid market
for the residual and interest-only assets. The Company advised DLJ that
the combination of unfeasible execution deadlines and unfavorable
economics made piecemeal sales of the Company's assets impractical.
o DLJ contacted over 50 potential purchasers of the Company. Due to the
factors described herein, most of the parties chose not to pursue
discussions with the Company at such time and stated that they required
both financial and operating stability before pursuing an acquisition of
the Company. As a result, the urgency of the Company's liquidity crisis at
the time the opinion was delivered with respect to the Original
Transaction combined with a lack of interest from potential purchasers,
made sale of the entire Company an unlikely alternative.
o Based upon factors such as the Company's inability to procure
debtor-in-possession financing to pursue a restructuring or
recapitalization, the Company believed, based in part on advice of its
counsel, that a voluntary bankruptcy filing would likely have led to a
loss of control and a liquidation of the Company's assets. The Company
believed that the most likely liquidation scenario would have been a
court-administered forced sale of assets. Under this scenario, DLJ's
analysis indicated that the common stockholders would have retained no
value for their shares. See "Forced Sale Analysis" below. Thus, the
bankruptcy alternative would leave little or no value for the common
stockholders of the Company as contrasted to the Original Transaction.
Because of its inability to raise capital through the public markets, the
Company was attempting to secure capital through private channels. For the
12 months
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<PAGE>
previous to the time the DLJ delivered its opinion with respect to the
Original Transaction, the Company had numerous discussions with private
equity investors other than Capital Z. The Company advised DLJ that, based
on such discussions, it believed that it was unlikely to be able to
complete a transaction with such a private equity investor before a
liquidity crisis.
At the time of the Additional Investment, the Company advised DLJ that the
alternatives available to it as such time were substantially similar to the
alternatives available to it at the time of the Original Transaction. As a
result of this analysis, DLJ concluded that relative to the other available
alternatives, the Original Transaction and the Additional Investment had the
following advantages: they were immediately achievable; they met the Company's
immediate liquidity requirements; they gave sufficient near-term liquidity to
the Company and provided necessary assurances to its creditors; they allowed the
Company to avoid immediate bankruptcy; and they maintained the Company's
flexibility to still pursue a sale of the Company to a party offering superior
terms; and they preserved substantial stockholder value relative to other
alternatives. In conclusion, the Capital Z investments under the Original
Transaction and the Additional Investment preserved greater common stockholder
value compared to the other alternatives.
FORCED SALE ANALYSIS. In connection with the Original Transaction and
the Additional Investment, DLJ reviewed the range of proceeds that could
potentially have been realized by common stockholders from the forced sale of
assets of the Company, similar to what would be expected to occur in a Chapter 7
bankruptcy liquidation. DLJ relied on advice from counsel to the Company that a
voluntary bankruptcy filing would most likely lead to a loss of control and a
forced liquidation of assets under Chapter 7. The analysis assumed that (i)
creditors would foreclose on collateral and sell the assets, resulting in
quick-sale value realization of all the Company's assets; (ii) debt would first
be paid off from the asset sale proceeds before any value is realized by the
common stockholders; and (iii) each secured debt line is paid off according to
its lien priority on each respective asset, with unsecured debt sharing in any
remaining proceeds in accordance with its contractual priority. DLJ compared the
book value of the Company's principal assets, consisting of its servicing
portfolio, interest-only and residual assets ("excess servicing receivables"),
current and delinquent loans held for sale and its productions channels, to a
range of estimated sale proceeds for such assets. DLJ prepared an analysis of a
range of recent sales of servicing portfolios and transactions involving excess
servicing receivables that it believed to be most comparable. However, DLJ
indicated that there were very few recent sales of assets with characteristics
similar to those of the Company's assets and that such sales were not comparable
to the proposed transactions in many respects. DLJ arrived at pricing ranges for
each class of asset based on estimates derived from data on prior sales of
similar assets, and from inquires to companies and operators with knowledge of
the market and pricing for subprime assets and servicing rights. Based on such
inquires and comparable transactions analysis, DLJ concluded that, (a) on or
about the time it rendered its opinion with respect to the Original Transaction,
the range of expected proceeds in a forced sale scenario for the Company ranged
from a low of approximately $435.3 million to a high of approximately $528.8
million (see Table 1) and (b) on or about the time it rendered its opinion with
respect to the Additional Investment, the range of expected proceeds in a forced
sale scenario for the Company ranged from a low of approximately $705.2 million
to a high of approximately $786.8 million (see Table 3). This compared to
estimated outstanding liabilities of approximately $533.8 million at December
31, 1998 (see Table 2) and outstanding liabilities of approximately $894.0
million on June 30, 1999 (see Table 4). DLJ's analysis indicated that, at the
time that the DLJ opinions were delivered with respect to the Original
Transaction and the Additional Investment, the Company's outstanding obligations
were in excess of potential amounts available to repay such obligations. As a
result, DLJ's analysis indicated that the Company's common holders would receive
little or no value under the forced sale scenario.
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<PAGE>
<TABLE>
TABLE 1-ESTIMATED PROCEEDS FROM FORCED SALE OF ASSETS: ORIGINAL TRANSACTION
($ in thousands)
<CAPTION>
PREMIUM%/
BOOK VALUE OF MULTIPLE (X) SALE PROCEEDS
ASSETS ASSETS LOW / HIGH LOW CASE HIGH CASE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SERVICING PORTFOLIO $4,081,211 0.25%/0.40% $10,203 $16,325
EXCESS SERVICING RECEIVABLES 592,701 30.00%/40.00% 177,810 237,080
LOANS HELD FOR SALE (CURRENT) 211,805 102.00%/104.00% 216,041 220,278
LOANS HELD FOR SALE (DELINQUENT) 11,148 75.00%/85.00% 8,361 9,476
SALE OF PRODUCTION CHANNELS 22,845 1.00X/2.00X 22,845 45,690
- -----------------------------------------------------------------------------------------------
TOTAL PROCEEDS FROM ASSET SALES $435,260 $528,849
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
TABLE 2-REPAYMENT ANALYSIS SUMMARY: ORIGINAL TRANSACTION
($ in thousands)
<CAPTION>
DECEMBER 31, 1998 REPAYMENT
---------------------------------
LIABILITIES ESTIMATED BALANCE LOW CASE HIGH CASE
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Funding Debt $211,806 $211,806 $211,806
Residual Financing 35,000 35,000 35,000
10.5% Senior Notes 23,000 23,000 23,000
9.125% Senior Notes 150,000 150,000 150,000
Convertible Subordinated Debt 113,990 15,455 109,043
- ------------------------------------------------------------------------------
TOTAL DEBT $533,796 $435,261 $528,849
</TABLE>
<TABLE>
TABLE 3-ESTIMATED PROCEEDS FROM FORCED SALE OF ASSETS: ADDITIONAL INVESTMENT
($ in thousands)
<CAPTION>
PREMIUM%/
BOOK VALUE OF MULTIPLE (X) SALE PROCEEDS
ASSETS ASSETS LOW / HIGH LOW CASE HIGH CASE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SERVICING PORTFOLIO $3,935,922 0.25%/0.35% $9,840 $13,776
EXCESS SERVICING RECEIVABLES 353,683 25.00%/35.00% 88,421 123,789
LOANS HELD FOR SALE (CURRENT) 532,011 102.00%/104.00 542,652 553,292
LOANS HELD FOR SALE (DELINQUENT) 28,001 75.00%/85.00% 21,000 23,801
SALE OF PRODUCTION CHANNELS 14,424 3.00x/5.00x 43,272 72,120
- ---------------------------------------------------------------------------------------------
TOTAL PROCEEDS FROM ASSET SALES $705,185 $786,778
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
TABLE 4-REPAYMENT ANALYSIS SUMMARY: ADDITIONAL INVESTMENT
($ in thousands)
<CAPTION>
JUNE 30, 1999 REPAYMENT
----------------------------------------
LIABILITIES BALANCE LOW CASE HIGH CASE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Funding Debt $535,997 $535,997 $535,997
Residual Financing 17,250 17,250 17,250
10.5% Senior Notes 150,000 150,000 150,000
9.125% Senior Notes 113,990 1,938 83,530
Convertible 76,750 0 0
Subordinated Debt
- ---------------------------------------------------------------------------------
TOTAL DEBT $893,987 $705,185 $786,777
</TABLE>
ORDERLY LIQUIDATION ANALYSIS. In connection with the Original Transaction,
DLJ also analyzed the value that could potentially have been realized by a
common stockholder of the Company if the Company underwent an orderly
liquidation of its assets. An orderly liquidation scenario contemplates that the
Company would cease to conduct substantially all of its business functions
related to originating new assets, would focus
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<PAGE>
solely on collecting and otherwise servicing existing assets and would be able
to sell its current loans held for sale at par or greater. Under this scenario,
it is assumed that the Company's servicing agreements would remain in effect and
that the other parties thereto would take no action in respect of the Company's
default under such agreements. In such a scenario, the Company would terminate
all origination sources and discontinue any new loan origination and
securitization activities. Critical to an orderly liquidation scenario is the
assumption that the Company would retain its servicing rights and service its
existing servicing portfolio and that the creditors of the Company would not
enforce their rights under their respective lending arrangements and would
forbear a forced-sale liquidation, and instead would opt for a longer-term,
orderly liquidation of and pay-out on, the Company's assets. Based on factors,
including its market experience, DLJ believed that the ability to obtain such
critical agreements from creditors would be highly unlikely.
Using discounted cash flows and relying upon estimated cash flows, minimum
servicing payments and expenses and the terms and amount of indebtedness as
provided by the Company, this analysis indicated that under both high and low
case versions of the most likely orderly liquidation scenarios, both at the time
the DLJ opinion was rendered with respect to the Original Transaction and at the
time it was rendered with respect to the Additional Investment, the Company's
stockholders would receive a net present value per share less than the per share
amount paid by Capital Z in the Original Transaction and in the Additional
Investment. The following chart summarizes the analysis of such orderly
liquidation scenarios.
<TABLE>
ORDERLY LIQUIDATION ANALYSIS SUMMARY
<CAPTION>
ORIGINAL TRANSACTION ADDITIONAL INVESTMENT
-------------------- ---------------------
HIGH CASE LOW CASE HIGH CASE LOW CASE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Discount Rate 20.0% 25.0% 25.0% 25.0%
Net Present Value
of Cash Flows
Remaining to $30,660 $22,729 $45,620 $31,920
Stockholders
($ IN THOUSANDS)
Per Share Net $0.82 $0.61 $0.40 $0.28
Present Value
</TABLE>
DLJ also believed, due to factors that would apply to the Company in an
orderly liquidation scenario, that over time the Company's ability to maintain
the cash flow performance contemplated by these scenarios would be significantly
reduced. As a result, DLJ believed that the orderly liquidation scenarios should
be given relatively less weight in the overall analysis.
The summary set forth above does not purport to be a complete description
of the analyses performed by DLJ but describes, in summary form, the principal
elements of the presentations made by DLJ to the Company's Board of Directors in
connection with its fairness opinions delivered with respect to the Original
Transaction and the Additional Investment. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analysis and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Each of the analyses conducted by DLJ was carried out in
order to provide a different perspective on the relevant transactions and add to
the total mix of information available. Other than as specifically stated above
as to the analyses that were not relevant, DLJ did not form a conclusion as to
whether any individual analysis, considered in isolation, supported or failed to
support an opinion as to fairness from a financial point of view. Rather, in
reaching its conclusion, DLJ considered the results of the analyses in light of
each other and ultimately reached its opinion based on the results of all
relevant analyses taken as a whole. DLJ did not place particular reliance or
weight on any individual analysis, but instead concluded that its analyses,
taken as a whole, supported its determinations. Accordingly, notwithstanding the
separate factors summarized above, DLJ believes that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, could
create an incomplete or misleading view of the evaluation process underlying its
opinions. The analyses performed by DLJ are not necessarily indicative of actual
values or future results, which may be significantly more or less favorable than
suggested by such analyses.
The Company agreed to pay DLJ a fee equal to $2.5 million upon consummation
of the Original Transaction and a fee equal to $250,000 upon delivery of the
fairness opinion with respect to the Additional
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Investment The Company has also agreed to reimburse DLJ promptly for all
out-of-pocket expenses (including the reasonable fees and out-of-pocket expenses
of counsel) incurred by DLJ in connection with its engagement and to indemnify
DLJ and certain related persons against certain liabilities in connection with
its engagement, including liabilities under the federal securities laws. The
terms of the fee arrangement with DLJ, which DLJ and the Company believe are
customary in transactions of this nature, were negotiated at arm's length
between the Company and DLJ and the Company's Board of Directors was aware of
such arrangement.
DLJ has performed investment banking and other services for the Company in
the past and has received usual and customary compensation for such services.
Most recently, DLJ acted as financial advisor to the Company in connection with
a $38.0 million equity investment in April 1988 and acted as co-manager of a
$150.0 million senior note offering for the Company in October 1996. DLJ's
asset-backed group has lead-managed or co-managed two and four mortgage-backed
securitizations, respectively, in the past two years. Certain investment funds
affiliated with DLJ and certain employees of DLJ are limited partners of Capital
Z. Such funds and employees have an aggregate investment in Capital Z of
approximately $25.0 million. In the ordinary course of business, DLJ may
actively trade the securities of the Company for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or short
position in such securities.
FACTORS CONSIDERED BY THE BOARD OF DIRECTORS IN APPROVING THE CAPITAL Z
TRANSACTION
The Board of Directors of the Company approved the Letter Agreement and the
Draft Proposal, approved the transactions contemplated by the Preferred Stock
Purchase Agreement, and determined to recommend the transactions set forth in
the Preferred Stock Purchase Agreement to the stockholders of the Company after
carefully considering all available information, including the following:
The Financial Condition of the Company. As set forth in detail above, the
Company was experiencing a severe cash flow and liquidity crisis that resulted
from, in large part, global conditions in the capital and credit markets, hedge
exposure issues, weakness in the asset-backed securities market, increasing
reliance on whole loan sales, and weakness in the public equity and debt
markets. These financial difficulties manifested themselves in the Company's
restricted warehouse availability which resulted in a significant reduction in
loan production. Due to the deteriorating financial condition of the Company,
the Board of Directors determined that a strategic transaction in the form of an
investment or business combination was necessary to sustain the Company as a
going concern. An investment by Capital Z, as set forth in the Draft Proposal,
would present the Company with up to $100 million in working capital in the form
of equity.
Absence of Additional Third Party Offers. Despite over a year-long effort
by DLJ, the Company was not presented with any serious offers for a significant
financing or business combination transaction other than the proposed investment
by Capital Z as set forth in the Draft Proposal.
Liquidation of Assets of the Company. Based in part upon DLJ's analysis as
described in "Opinions of Financial Advisor," the Board of Directors concluded
that a forced sale of assets would likely result in no distribution to the
Company's stockholders and that an orderly liquidation of the assets of the
Company would result in an aggregate distribution to the holders of the common
stock of the Company of an amount with a net present value less than the
equivalent per share amount paid by Capital Z in the Original Transaction and in
the Additional Investment, after deducting expenses relating to such liquidation
and payment of outstanding debt.
Possible Change in Global Market Conditions. The Board of Directors
concluded that the proposed investment by Capital Z, as set forth in the Draft
Proposal, best positioned the Company to continue as a going concern until such
time as a positive change in the capital and credit markets, the asset-backed
securities market and the global equity and debt markets could result in the
strengthening of the Company's financial condition and results of operations.
Continuation of Liquidity Crisis. In July 1999, the Continuing Directors
concluded that the Additional Investment was necessary and appropriate in light
of the continuing weakness in the capital, credit and asset-backed market for
the subprime home equity sector. The Continuing Directors noted that although
the
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liquidity and financial strength of the Company had improved with the
Initial Investment, the Company's ability to access other forms of junior
capital remained hindered in light of current market conditions. Without the
Additional Investment, the Company would likely be unable to support its
operations. Further, the Company's inability to complete a securitization in the
quarter ended June 30, 1999 severely hampered the Company's warehouse capacity.
Fairness Opinions of DLJ. DLJ rendered opinions to the Board of Directors
that consideration to be received from Capital Z in the Original Transaction was
fair to the stockholders of the Company from a financial point of view, and to
the Continuing Directors that the consideration to be received from Capital Z in
the Additional Investment, was fair to the stockholders of the Company from a
financial point of view. See "Opinions of Financial Advisor."
Substantial Dilution to the Existing Stockholders. The Board of Directors
considered the substantial dilutive impact of the Capital Z Investment on
existing stockholders. See "Certain Effects of the Capital Z Investment" on page
5 of the Summary of this Proxy Statement.
BOARD OF DIRECTORS' RECOMMENDATIONS
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE STOCK PROPOSALS AND THE
STOCK SPLIT AND RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY VOTE TO APPROVE
EACH OF THEM.
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ELECTION OF SERIES B DIRECTORS
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 currently consists of
nine directors divided into two groups. The Series B Directors are elected by
the holders of the Series B Convertible Preferred Stock and the other group, the
Common Stock Directors, are elected by the holders of the common stock and the
holders of the Series B Convertible Preferred Stock, voting as a single class.
The Common Stock Directors are further divided into three classes with staggered
terms: Class I, consisting of two directors, with a term expiring in 2000, Class
II, consisting of two directors, with a term expiring in 1999, and Class III,
consisting of one director, with a term expiring at the Meeting. At each annual
meeting of stockholders, all of the Series B Directors are elected for a
one-year term and Common Stock Directors constituting one of the classes with
staggered terms are elected for three-year terms.
The Company has agreed, from and after the Initial Closing, to nominate
four designees of the holders of Series B Convertible Preferred Stock to be
elected as the Series B Directors at each annual meeting of stockholders. The
nominees for election as Series B Directors identified below have been
designated by Capital Z.
At the Meeting, the four Series B Directors will be elected for a term
expiring at the next Annual Meeting of Stockholders. Series B Directors may be
removed without cause by the vote of a majority of the holders of Series B
Convertible Preferred Stock then entitled to vote.
Unless otherwise instructed, the Proxy holders will vote the Proxies
received for the nominees named below. If the nominee(s) are unable or unwilling
to serve as directors at the time of the Meeting or any adjournment thereof, the
Proxies will be voted for such other nominee as shall be designated by the
holders of Series B Convertible Preferred Stock to fill any vacancy. The Company
has no reason to believe that such nominees will be unwilling or unable to serve
if elected as a director.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF THE
NOMINEES LISTED BELOW.
The Board of Directors proposes the election of the following nominees as
Series B Directors:
Steven M. Gluckstern
Mani A. Sadeghi
Adam M. Mizel
David A. Spuria
If elected, the nominees are expected to serve until the next Annual
Meeting of Stockholders. The election of each of the nominees for Series B
Director requires the affirmative vote of a majority of the votes entitled to be
cast by holders of Series B Convertible Preferred Stock who are present (either
in person or by proxy) at the Meeting. The holders of the Series B Convertible
Preferred Stock have agreed to cast their votes in favor of the nominees listed
above. Accordingly, election of each of the nominees is assured.
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ELECTION OF CLASS III COMMON STOCK DIRECTOR
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 currently consists of
nine directors divided into two groups. The Series B Directors are elected by
the holders of the Series B Convertible Preferred Stock and the Common Stock
Directors are elected by the holders of the common stock and the holders of the
Series B Convertible Preferred Stock, voting as a single class. The Common Stock
Directors are further divided into three classes with staggered terms: Class I,
consisting of two directors, with a term expiring in 2000, Class II, consisting
of two directors, with a term expiring in 1999, and Class III, consisting of one
director, with a term expiring at the Meeting. At each annual meeting of
stockholders, all of the Series B Directors are elected for a one-year term and
Common Stock Directors constituting one of the classes with staggered terms are
elected for three-year terms.
The Company has agreed, from and after the Initial Closing, to nominate one
designee of Capital Z to be elected as a Common Stock Director at each annual
meeting of stockholders in which the applicable group is to be elected. The
nominee for election as a Common Stock Director identified below has been
designated by Capital Z.
At the Meeting, the Common Stock Director will be elected for a term
expiring at the 2001 Annual Meeting of Stockholders. The Common Stock Directors
may be removed only for cause with the vote of a majority of the votes entitled
to be cast by the holders of common stock and Series B Convertible Preferred
Stock.
Unless otherwise instructed, the Proxy holders will vote the Proxies
received for the nominee named below. If the nominee is unable or unwilling to
serve as a director at the time of the Meeting or any adjournment thereof, the
Proxies will be voted for such other nominee as shall be designated by the
current Board of Directors to fill any vacancy. The Company has no reason to
believe that such nominee will be unwilling or unable to serve if elected as a
director.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF THE
NOMINEES LISTED BELOW.
The Board of Directors proposes the election of the following nominee as
the Class III Common Stock Director:
Eric C. Rahe
If elected, the nominee is expected to serve until the 2001 Annual Meeting
of Stockholders. The election of the nominee for Common Stock Director requires
the affirmative vote of a majority of votes cast by the holders of common stock
and Series B Convertible Preferred Stock who are present (either in person or by
proxy) at the Meeting, voting together as a single class. The holders of the
Series B Convertible Preferred Stock and Messrs. Thompson and Kornswiet have
indicated their intention to cast their votes in favor of the election of the
nominee identified above. Accordingly, the election of such nominee is assured.
CAPITAL Z AND THE BOARD OF DIRECTORS
If each of the nominees for Series B Directors are elected at the Meeting
(which election is assured), and the nominee for Class III Common Stock Director
is elected at the Meeting, affiliates of Capital Z will occupy five of the nine
positions on the Company's Board of Directors and, thus, will be able to control
the management and operations of the Company.
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MANAGEMENT
INFORMATION WITH RESPECT TO NOMINEES, CONTINUING DIRECTORS AND EXECUTIVE
OFFICERS
The following table sets forth certain information with respect to the
nominees, Continuing Directors and executive officers of the Company as of July
15, 1999:
<TABLE>
<CAPTION>
YEAR TERM
NAME AGE POSITION EXPIRES
NOMINEES:
<S> <C> <C> <C>
Steven M. Gluckstern 48 Chairman of the Board 1998
Adam M. Mizel 29 Director 1998
Eric C. Rahe 30 Director 1998
Mani A. Sadeghi 36 Chief Executive Officer and 1998
Director
David A. Spuria 38 Director 1998
CONTINUING DIRECTORS:
George W. Coombe, Jr. 73 Director 2000
Neil B. Kornswiet 42 President and Director 2000
Georges C. St. Laurent, Jr. 63 Director 1999
Cary H. Thompson 42 Director 1999
OTHER EXECUTIVE OFFICERS:
Mark E. Costello 48 Executive Vice President -
Aames Funding Corporation
Barbara S. Polsky 45 Executive Vice President,
General Counsel and Secretary
David A. Sklar 46 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.
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.
STEVEN M. GLUCKSTERN was elected a director and appointed Chairman of the
Board of Directors of the Company in February 1999. Mr. Gluckstern has served as
a Chairman of the Board of Capital Z Management, Inc. and 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.
NEIL B. KORNSWIET was elected President in May 1999, and has served as a
director since September 1996. Mr. Kornswiet was appointed Co-Chairman of the
Board in November 1997, a position he held until February 1999. Mr. Kornswiet
founded One Stop Mortgage, Inc. ("One Stop") in August 1995 and was its
Chairman, Chief Executive Officer, President and sole stockholder 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.
ADAM M. MIZEL was elected a director in February 1999. Mr. Mizel has served
as a Senior Vice President and director of Capital Z Management, Inc. and
Capital Z Partners, Ltd. since August 1998. From
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April 1994 through August 1998, Mr. Mizel served as Vice President and Managing
Director at Zurich Centre Investments, Inc.
ERIC C. RAHE was elected a director in February 1999. Mr. Rahe has served
as a Vice President of Capital Z Management, Inc. since August 1998. From August
1996 through July 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 1996, Mr. Rahe was an Analyst and an Associate
at DLJ.
MANI A. SADEGHI was elected a director in February 1999 and was appointed
interim Chief Executive Officer in May 1999. Mr. Sadeghi has served as Chief
Executive Officer of Equifin Capital Partners, LLC, which provides private
equity investment management and advisory services, since June 1998. Mr. Sadeghi
has also served as Group President from September 1996 until February 1998 and
as Corporate Development Officer from September 1994 to September 1996 of AT&T
Capital Corporation and as the Director of Strategic Planning and Business
Development at GE Capital Corporation from July 1992 through September 1994.
DAVID A. SPURIA was elected a director in February 1999. Mr. Spuria has
served as General Counsel of Capital Z Partners Ltd. and Capital Z Management,
Inc. since July 1998. Mr. Spuria was as a partner from January 1995 through July
1998 and an associate from March 1991 through December 1994 with the law firm of
Weil, Gotshal & Manges, LLP.
GEORGES C. ST. LAURENT, JR. has served as a director of the Company since
November 1997. Mr. St. Laurent, who held the position of Co-Chairman of the
Board from November 1997 through February 1999, 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 Chief Operating Officer of the Company from March 1996 until May
1997, and Chief Executive Officer of the Company from May 1997 until May 1999.
From May 1994 until joining the Company as Chief Operating Officer, Mr. Thompson
served as Managing Director-Head of United States Financial Institutions and
Media 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 currently Senior Managing Director, Head of
Corporate Finance, Los Angeles at Bear Stearns & Co. Inc. 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, a position he held until February 1999, when he became Executive Vice
President - Loan Production of Aames Funding Corporation, a wholly-owned
subsidiary of the Company. 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.
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.
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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 and a Compensation Committee. After the Initial Closing, the Board of
Directors formed a Stock Option 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 and the Compensation Committee met 7
times 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 officers with the title of Senior Vice President and
above as well as approves and authorizes as to employees, grants under the
Corporation's stock option plans. See "Report of the Compensation Committee on
Executive Compensation." In addition, a Stock Option Committee has been
established with the authority to grant options to the Chief Executive Officer
and to the four highest compensated officers other than the Chief Executive
Officer. Grants made by the Stock Option Committee are subject to ratification
by the Compensation Committee. As of the Initial Closing, the members of the
Audit Committee were Messrs. Coombe, Mizel and Rahe, the members of the
Compensation Committee were Messrs. Gluckstern, Mizel and St. Laurent and the
members of the Stock Option Committee were Messrs. Coombe and St. Laurent.
In November 1998, the Board of Directors also formed a Strategic Planning
Committee which consisted of Messrs. Coombe, Kinder and St. Laurent. The
Strategic Planning Committee was authorized to negotiate the terms and
conditions of the investment by Capital Z, evaluate and determine whether to
consummate the transaction with Capital Z, review and approve definitive
agreements with respect thereto and take any and all other actions which a Board
of Directors is authorized to take in connection therewith. Mr. Kinder resigned
from the Board of Directors of the Company, effective February 10, 1999.
COMPENSATION OF DIRECTORS
Each director who is not an officer of or otherwise employed by the Company
as either an employee or a consultant 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, and $1,000 for each regular or special Board meeting attended by
telephone.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS; EMPLOYMENT AGREEMENTS
On December 23, 1998, as amended on February 10, 1999, June 9, 1999 and
July 16, 1999, the Company and Capital Z entered into the Preferred Stock
Purchase Agreement, providing for an equity investment by Capital Z and its
designees of up to $126.5 million in the Company. Pursuant to the Preferred
Stock Purchase Agreement, the Company issued to Capital Z at the Initial Closing
26,704 shares of Series B Convertible Preferred Stock and 48,296 shares of
Series C Convertible Preferred Stock for $1,000 per share for an aggregate of
$75 million. Georges C. St. Laurent, Jr., a director of the Company, pursuant to
the Preferred Stock Purchase Agreement as a designee of Capital Z, purchased
1,500 shares of Series C Convertible Preferred Stock for $1,000 per share for an
aggregate investment of $1.5 million. Pursuant to the Preferred Stock Purchase
Agreement, the Company sold to Capital Z (through a partnership majority owned
by it) an additional $25 million of Series C Convertible Preferred Stock and as
soon as practicable following adoption of the Stock Proposals and the Stock
Split, will distribute Subscription Rights to the holders of its common stock
providing them the right to purchase, in the aggregate, up to approximately 31
million shares of the Series C Convertible Preferred Stock of the Company for
$1.00 per share for an aggregate of approximately $31 million. Capital Z has
agreed to purchase any amount of unsubscribed shares of Series C Convertible
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<PAGE>
Preferred Stock (for $1.00 per share) necessary to bring the total number of
shares sold in the Rights Offering up to 25 million of the shares of Series C
Convertible Preferred Stock (the "Standby Commitment"). At the Initial Closing,
Capital Z transferred ownership of its Series B Convertible Preferred Stock and
Series C Convertible Preferred Stock to Specialty Finance Partners, a Bermuda
general partnership ("Specialty Partners"), 99.6% of which is owned by Capital Z
and 0.4% of which is owned by Equifin Capital Partners, Ltd. ("Equifin
Capital").
On January 4, 1999, Capital Z Management, Inc. ("Cap Z Management"), an
affiliate of Capital Z, received, as a fee for the Standby Commitment, a warrant
to purchase 1.25 million shares of the Company's common stock at an initial
exercise price of $1.00 per share. On February 10, 1999, the Company paid to Cap
Z Management a $1 million transaction fee in connection with the transactions
contemplated by the Preferred Stock Purchase Agreement and issued to Cap Z
Management an additional warrant (the "Contingent Warrant") to purchase up to 3
million shares of the Company's common stock at an initial exercise price of
$1.00 per share, which is exercisable only if the Recapitalization (as defined
herein) is not completed by the earlier of September 30, 1999 or the date of the
Meeting (if, in the latter case, any of the proposed amendments to the
Certificate of Incorporation is defeated at the Meeting). In connection with the
transactions contemplated by the Preferred Stock Purchase Agreement, the Company
has paid to Cap Z Management aggregate additional fees of $2 million and has
agreed to reimburse Capital Z for all of its expenses incurred in connection
with the negotiation and execution of the Preferred Stock Purchase Agreement and
the transactions contemplated thereby. In connection with the Additional
Investment, the Company issued to designees of Capital Z warrants to purchase in
the aggregate 1.25 million shares of the Company's common stock at an initial
exercise price of $1.00 per share (subject to the availability of authorized
common stock).
On February 10, 1999, pursuant to the Preferred Stock Purchase Agreement,
the Company entered into an Preferred Stock Purchase Agreement For Management
Advisory Services (the "Equifin Agreement") with Equifin Capital Management, LLC
("Equifin Management"), pursuant to which the Company is obligated to pay to
Equifin Management, a quarterly management advisory fee of $250,000 for a period
of five (5) years. Mr. Sadeghi, interim Chief Executive Officer, is Chief
Executive Officer of Equifin Management. On February 10, 1999, pursuant to the
Equifin Agreement, the Company paid to Equifin $250,000 in consideration of
consulting services rendered prior to the execution of the Equifin Agreement and
as an advance for consulting services to be rendered in the quarter ending March
31, 1999. On July 16, 1999, the Company amended the Equifin Agreement to provide
for the payment of an additional quarterly advisory fee of $250,000 for the
period beginning on May 14, 1999 and ending on the date on which the Company
hires a new Chief Executive Officer.
Each of Messrs. Gluckstern, Mizel, Rahe and Spuria, directors of the
Company, has a direct or indirect interest in Capital Z and Cap Z Management.
Mr. Sadeghi, the Chief Executive Officer and a director of the Company, has a
material equity interest in Equifin Management and Equifin Capital. Messrs.
Gluckstern, Mizel and Spuria are members of Capital Z Partners, Ltd., a Bermuda
corporation ("Cap Z Ltd."), which is the general partner of Capital Z Partners,
L.P. ("Cap Z Partners"), which is the general partner of Capital Z. Messrs.
Gluckstern and Mizel are limited partners of Cap Z Partners and shareholders of
Cap Z Management. Messrs. Gluckstern and Mizel are officers of Cap Z Management.
Mr. Rahe is an officer of Cap Z Management and a limited partner of Cap Z
Partners. Mr. Sadeghi is the Chief Executive Officer of Equifin Management. Cap
Z Ltd. is a preferred shareholder of Equifin Capital. Mr. Spuria is General
Counsel of Cap Z Ltd. and Cap Z Management and a limited partner of Cap Z
Partners.
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 President and a director 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 Convertible Preferred Stock in
the Rights Offering for $1.00 per share. Mr. Kornswiet continues to serve as
Chairman of the Board of Directors, Chief Executive Officer and President of One
Stop. See "Executive Compensation."
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On January 26, 1998, the Board of Directors approved the Executive and
Director Loan Program under which directors and executive officers of the
Company were 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. In July 1999, the Board suspended the
program indefinitely. All loans made under the Executive and Director Loan
Program were fixed rate, fully amortized, 15- or 30-year loans with no
prepayment penalties and were underwritten to the Company's underwriting
guidelines in effect at the time of the loan. Participants in this program were
not charged any loan fees except for those fees or costs charged by third
parties. The following executive officers and directors have loans with the
Company for the following principal amount and outstanding balance (as of June
15, 1999) at an interest rate of 6.5% (except where noted otherwise): Mark E.
Costello, officer, $325,000 loan amount, $304,839.55 outstanding balance;
Barbara S. Polsky, executive officer, $400,500 loan amount, $394,858.36
outstanding balance; David A. Sklar, executive officer, $379,300 loan amount,
$374,326.84 outstanding balance; Cary H. Thompson, director, $1,500,000 loan
amount (at an interest rate of 7.375%), $1,500,000 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 former Chief Executive Officer and a director and the
owner of 21,900 shares of the Company's common stock and 250 shares of the
Company's Series C Convertible Preferred Stock, and Neil Kornswiet, the
Company's President and a director and the owner of 1,812,860 shares Company's
common stock (collectively, the "Management Shareholders"), have each entered
into a Management Voting Agreement with Capital Z (the "Management Voting
Agreement") pursuant to which the Management Shareholders have agreed to vote
all of the shares of capital stock beneficially owned by them (the "Management
Shares") in favor of the Common Stock Proposal, the Preferred Stock Proposal,
the Stock Split 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 Preferred Stock Purchase Agreement. In the event
the Preferred Stock Proposal, Common Stock Proposal and the Stock Split (the
"Recapitalization") are not consummated prior to the earlier of September 30,
1999 or the date of the Meeting (if, in the latter case, any of the proposed
amendments to the Certificate of Incorporation is defeated at the Meeting), the
Management Shareholders 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 Shareholders entered into a
Management Investment Agreement with the Company. Pursuant to the Management
Investment Agreements, Cary Thompson purchased 250 shares of Series C
Convertible Preferred 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 is obligated to purchase 1,667,000 shares of Series
C Convertible Preferred Stock in the Rights Offering for $1.00 per share. Mr.
Kornswiet will pay for his shares purchased in the Rights Offering by delivering
to the Company a five-year promissory note. The note will bear interest at 6.5%
per annum and be payable from 25% of any annual cash bonus Mr. Kornswiet
receives. The note accelerates upon Mr. Kornswiet's termination of employment
and is secured by the shares to be purchased. If Mr. Kornswiet is still employed
by the Company on February 10, 2000 or was terminated earlier by the Company for
a reason other than for "cause" (as defined in the note), the note becomes
non-recourse.
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
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<PAGE>
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 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 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 were
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 Preferred Stock Purchase 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 was effective on the date of the Initial
Closing, at which time the Original Thompson Employment Agreement was
terminated. The New Thompson Employment Agreement was terminated on May 13, 1999
when Mr. Thompson resigned as Chief Executive Officer of the Company. The New
Thompson Employment Agreement superceded and invalidated 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 earned
an annual base salary of $600,000 and was entitled to receive cash bonuses after
the 1999 calendar year of between 0-100% of Mr. Thompson's annual base salary.
Mr. Thompson also was 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 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 could 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 was obligated to grant to Mr.
Thompson an option to purchase 2,580,162 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 New Thompson Employment
Agreement or by the Company without "Cause", as defined in the New Thompson
Employment Agreement, Mr. Thompson was 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 occurred within
one year of the Initial Closing, (ii) $1.5 million, if the termination occurred
during the second year, (iii) $1.0 million if the termination occurred in the
third year, and (iv) $0.5 million if the termination occurred after the fourth
anniversary of the Initial Closing, subject to offset for any amounts owed to
the Company by Mr. Thompson and for salary earned by Mr. Thompson from any other
employment during that 12 month period.
On May 13, 1999, Mr. Thompson resigned as Chief Executive Officer of the
Company. The Company and Mr. Thompson have agreed in principle to the terms of a
severance and consulting arrangement pursuant to which Mr. Thompson will (i)
receive $600,000, (ii) receive his automobile, and (iii) be granted 774,049
shares under the Company's 1999 Stock Option Plan, subject to the 1999 Stock
Option Plan being approved by the stockholders at the Meeting.
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<PAGE>
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 a quarterly 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 (as defined 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 Preferred Stock Purchase 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"). To induce Mr. Kornswiet to enter into the New
Kornswiet Employment Agreement, the Company paid to Mr. Kornswiet his June 1998
bonus of $1,460,000, the receipt of which Mr. Kornswiet had previously deferred.
The New Kornswiet Employment Agreement became effective on the date of the
Initial Closing. The New Kornswiet Employment Agreement supersedes and
invalidates 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, upon amendments being adopted, 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 is entitled to receive (i) a guaranteed cash bonus for calendar
year 1999 in the amount of $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, if less than one year, through the date his
employment is terminated by death, disability, by Mr. Kornswiet for "Good
Reason" (as defined in the New Kornswiet Employment Agreement) or by the Company
without "Cause" (as defined in the New Kornswiet Employment Agreement), (ii) 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, (iii) 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 of Directors,
and (iv) a loan in the amount of $1,667,000 to be used to purchase shares of
Series C Convertible Preferred Stock in the Rights Offering 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, if less than one year, termination of employment based
upon death, disability, by Mr. Kornswiet with Good Reason or by the Company
without Cause. Mr. Kornswiet is also entitled to receive,
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<PAGE>
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, or by the Company without Cause,
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, subject to offset for amounts owed to the Company by Mr. Kornswiet and
for any salary earned by Mr. Kornswiet from another employer during that 12
month period. 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 was entitled to a base salary of $200,000 per year
and a quarterly bonus under the Company's performance bonus plan for executive
officers. In connection with the Initial Closing, Mr. Costello waived all of his
rights under his employment agreement and agreed to purchase 100 shares of
Series C Convertible Preferred Stock for $1,000 per share or $100,000, 50% of
which will be paid by delivery to the Company of a 6.5% full recourse promissory
note. As of the Initial Closing, Mr. Costello is receiving an annual base salary
of $200,000 and is entitled to a quarterly bonus based on retail production.
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 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 Series B and Series C
Convertible Preferred Stock issued to Capital Z at the Initial Closing was a
Change in Control as defined in Ms. Polsky's employment agreement which, upon
her voluntary resignation from the Company within two years of the Initial
Closing, entitles Ms. Polsky to receive approximately $1 million. The Company is
currently in discussions with Ms. Polsky regarding the possibility of a waiver
of the Change in Control provision, as well as the salary and bonus provisions
in Ms. Polsky's employment agreement.
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,
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<PAGE>
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.
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 of Directors.
Messrs. Kinder, Masters and St. Laurent who are not, and have never been,
full-time salaried officers or employees of the Company, served as members of
the Compensation Committee during the 1998 fiscal year. The Compensation
Committee currently consists of Messrs. Gluckstern, Mizel and St. Laurent.
PRINCIPAL STOCKHOLDERS
The following table sets forth as of June 30, 1999, certain information
relating to the ownership of the common stock (which includes shares of common
stock issuable upon conversion of Series B and Series C Convertible Preferred
Stock), Series B Convertible Preferred Stock and Series C Convertible Preferred
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, (ii) each of the
Company's directors and nominees, (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.
<TABLE>
<CAPTION>
TITLE OF CLASS NAME AND ADDRESS NUMBER OF SHARES PERCENT OF CLASS
- -------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
Common Stock Specialty Finance Partners
One Chase Manhattan Plaza, 44th Floor
New York, New York 10005................................. 75,000,000(1) 70.74%
Common Stock Thirty-Five East Investments LLC
35 East 62nd Street
New York, New York....................................... 6,388,233(2) 18.16%
Common Stock Turtle Creek Revocable Trust
200 Crescent Court, Suite 1350
Dallas, Texas 75201...................................... 1,597,057(2) 4.98%
Common Stock George W. Coombe, Jr. (3)................................ 4,300(4) *
Common Stock Mark E. Costello (3)..................................... 45,375(5) *
Common Stock Steven M. Gluckstern (6)................................. --(7) *
Common Stock Neil B. Kornswiet (3).................................... 2,407,860(8) 7.62%
Common Stock Joseph A. Magnus (3)(9).................................. -- *
Common Stock Adam M. Mizel (6)........................................ --(7) *
Common Stock Barbara S. Polsky (3).................................... 89,000(10) *
Common Stock Eric C. Rahe (6)......................................... --(7) *
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<PAGE>
TITLE OF CLASS NAME AND ADDRESS NUMBER OF SHARES PERCENT OF CLASS
- -------------- ---------------- ---------------- ----------------
Common Stock Mani A. Sadeghi (6)...................................... --(7) *
Common Stock David A. Sklar (3)....................................... 83,000(11) *
Common Stock David A. Spuria (6)...................................... --(7) *
Common Stock Georges C. St. Laurent, Jr. (3).......................... 1,553,300(12) 4.78%
Common Stock Cary H. Thompson (3)..................................... 1,532,248(13) 4.71%
Common Stock All executive officers, directors and nominees
as a group (13 persons).................................. 5,715,083(14) 16.40%
Series B Convertible Specialty Finance Partners
Preferred Stock (15) One Chase Manhattan Plaza, 44th Floor
New York, New York 10005................................. 26,704(16) 100%
Series C Convertible Specialty Finance Partners
Preferred Stock One Chase Manhattan Plaza, 44th Floor
New York, New York 10005................................. 48,296(17) 96.50%
Series C Convertible Georges C. St. Laurent, Jr. (3).......................... 1,500(18) 3.00%
Preferred Stock
Series C Convertible Cary H. Thompson (3)..................................... 250(19) *
Preferred Stock
Series C Convertible All executive officers, directors and nominees
Preferred Stock as a group (13 persons) (20)............................. 1,750 3.50%
- ----------
<FN>
* Less than one percent.
(1) Consists of 75,000,000 shares of common stock issuable upon conversion of
Series B and Series C Convertible Preferred Stock. Capital Z (through
Specialty Finance Partners) holds 26,704 shares of Series B Convertible
Preferred Stock and 48,296 shares of Series C Convertible Preferred Stock
which, upon completion of the Recapitalization, will be convertible into
75,000,000 shares of common stock. Specialty Finance Partners is a Bermuda
general partnership, 99.6% of which is owned by Capital Z and 0.4% of which
is owned by Equifin Capital. As disclosed in the Schedule 13D filed with the
Securities and Exchange Commission (the "SEC") on January 4, 1999, as a
result of the execution of a Management Voting Agreement, dated as of
December 23, 1998, between Capital Z, Cary H. Thompson, Neil B. Kornswiet,
stockholders and certain executive officers of the Company, Capital Z may,
pursuant to Rule 13d-3 of the Exchange Act, be deemed to be the beneficial
owner of 3,965,083 shares of common stock of the Company. Capital Z has
disclaimed beneficial ownership of these shares. In addition, Capital Z
Management, as a result of the receipt of a warrant to purchase 1,250,000
shares of common stock of the Company, may be deemed to be the beneficial
owner of 1,250,000 shares of common stock of the Company. Capital Z has
disclaimed ownership of these shares.
(2) Includes, in the case of Thirty-Five East Investments LLC ("35 East"),
4,162,368 shares of common stock issuable upon exercise of warrants and, in
the case of Turtle Creek Revocable Trust ("Turtle Creek"), 1,040,591 shares
of common stock issuable upon the exercise of warrants. Reference is made to
the Schedule 13D filed jointly by 35 East and Turtle Creek with the SEC on
March 19, 1998. 35 East and Turtle Creek filed jointly, however each
disclaimed beneficial ownership in any shares of common stock beneficially
owned by the other. The warrants are exercisable at $9.2065 per share.
(3) The address of each individual is in care of the Company at 350 S. Grand
Avenue, 52nd Floor, Los Angeles, California 90071.
(4) Includes 3,300 shares of common stock underlying options which are currently
exercisable or which will become exercisable within 60 days of June 30,
1999.
(5) Includes 40,575 shares of common stock underlying options which are
currently exercisable or which will become exercisable within 60 days of
June 30, 1999.
(6) The address of each individual is in care of Capital Z, One Chase Manhattan
Plaza, 44th Floor, New York, New York 10005.
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<PAGE>
(7) Each of Messrs. Gluckstern, Mizel, Rahe, Sadeghi, and Spuria has disclaimed
beneficial ownership of the Series B and Series C Convertible Preferred
Stock held by Capital Z.
(8) Includes 595,000 shares of common stock underlying options which are
currently exercisable or which will become exercisable within 60 days of
June 30, 1999. If computed excluding options with an exercise price greater
than $2.00 per share, Mr. Kornswiet would own 5.84% of the class.
(9) Joseph A. Magnus resigned as an executive officer of the Company on November
20, 1998.
(10)Represents shares of common stock underlying options which are currently
exercisable or which will become exercisable within 60 days of June 30,
1999.
(11)Represents shares of common stock underlying options which are currently
exercisable or which will become exercisable within 60 days of June 30,
1999.
(12)Includes 3,300 shares of common stock underlying options which are
currently exercisable or which will become exercisable within 60 days of
June 30, 1999, and, assuming the approval of the Recapitalization by the
stockholders, includes 1,500,000 shares of common stock issuable upon
conversion of Series C Convertible Preferred Stock.
(13)Includes 1,260,348 shares of common stock underlying options which are
currently exercisable or which will become exercisable within 60 days of
June 30, 1999 and, assuming the approval of the Recapitalization by the
stockholders, includes 250,000 shares of common stock issuable upon
conversion of Series C Convertible Preferred Stock. If computed excluding
options with an exercise price greater than $2.00 per share, Mr. Thompson
would own less than 1.0% of the class.
(14)Includes 2,074,523 shares of common stock underlying options which are
currently exercisable or which will become exercisable within 60 days of
June 30, 1999 and, assuming the approval of the Recapitalization by the
stockholders, includes 1,750,000 shares of common stock issuable upon
conversion of Series C Convertible Preferred Stock. If computed excluding
options with an exercise price greater than $2.00 per share, all executive
officers, directors and nominees would own 11.11% of the class.
(15)Capital Z holds 100% of the issued and outstanding Series B Convertible
Preferred Stock. None of the directors, nominees and Named Executive
Officers beneficially hold any shares of Series B Convertible Preferred
Stock.
(16)Upon completion of the Recapitalization, Capital Z will own 26,704,000
shares of Series B Convertible Preferred Stock. Upon completion of the
Recapitalization, the 26,704,000 shares of Series B Convertible Preferred
Stock then held by Capital Z will be convertible into 26,704,000 shares of
common stock.
(17)Upon completion of the Recapitalization, Capital Z will own 73,296,000
shares of Series C Convertible Preferred Stock. Upon completion of the
Recapitalization, the 73,296,000 shares of Series C Convertible Preferred
Stock held by Capital Z will be convertible into 73,296,000 shares of common
stock.
(18)Upon completion of the Recapitalization, Mr. St. Laurent will own 1,500,000
shares of Series C Convertible Preferred Stock. Upon completion of the
Recapitalization, the 1,500,000 shares of Series C Convertible Preferred
Stock held by Mr. St. Laurent will be convertible into 1,500,000 shares of
common stock.
(19)Upon completion of the Recapitalization, Mr. Thompson will own 250,000 shares of
Series C Convertible Preferred Stock, which will be less than 1.00% of the
Series C Convertible Preferred Stock issued and outstanding. Upon completion
of the Recapitalization, the 250,000 shares of Series C Convertible
Preferred Stock held by Mr. Thompson will be convertible into 250,000 shares
of common stock.
(20)Other than in the case of Messrs. St. Laurent and Thompson, none of the
directors, nominees or Named Executive Officers beneficially hold any shares
of Series C Convertible Preferred Stock.
</FN>
</TABLE>
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<PAGE>
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 person who served as Chief
Executive Officer of the Company during the 1998 fiscal year and each of the
other four most highly compensated executive officers of the Company who served
in such capacity at the end of the last fiscal year (the "Named Executive
Officers").
<TABLE>
SUMMARY COMPENSATION 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 -- -- $40,800(2)
President(3) 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(4)
Former Chief 1997 634,805 1,073,339 -- -- N/A
Executive Officer(5) 1996 125,000 298,000 -- 1,821,825 N/A
Barbara S. Polsky 1998 $ 300,000 $ 244,000 -- 60,000 $13,000(6)
Executive Vice President, 1997 245,000 318,120 -- 10,000 N/A
General Counsel and 1996 35,538 -- -- 56,350 N/A
Secretary(7)
Mark E. Costello 1998 $ 200,000 $ 224,188 -- 30,000 $12,800(8)
Executive Vice President 1997 165,000 466,968 -- 12,500 4,500(5)
Loan Production 1996 130,000 201,000 -- 11,250 2,438(5)
Joseph Magnus 1998 $ 180,000 $ 220,000 -- 30,000 $10,116(9)
Executive Vice President 1997 69,641 466,968 -- -- N/A
Chief Credit Officer(10) 1996 N/A N/A -- N/A N/A
- ----------
<FN>
(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) 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.
(3) Mr. Kornswiet joined the Company in August 1996.
(4) Consists of employer contributions to the Company's Section 401(k) plan.
(5) Mr. Thompson joined the Company in March 1996 and served as Chief Executive
Officer from May 1997 to May 1999, prior to which time he served as Chief
Operating Officer.
(6) 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.
(7) Ms. Polsky joined the Company in May 1996.
(8) 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.
(9) 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.
(10)Mr. Magnus joined the Company in January 1997 and resigned on November 20,
1998.
</FN>
</TABLE>
Page 43
<PAGE>
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.
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL OPTIONS EXERCISE ANNUAL RATES OF STOCK
SHARES UNDERLYING GRANTED TO OR BASE PRICE APPRECIATION FOR
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION OPTION TERM (1)
NAME GRANTED (2) FISCAL YEAR (3) SHARE (4) DATE 5% 10%
- ---- ----------------- ----------------- ---------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Neil B. Kornswiet -- -- -- -- -- --
Cary H. Thompson(5) -- -- -- -- -- --
Barbara S. Polsky (6) 60,000 6.63% $ 13.44 11/18/2007 $506,896 $1,284,805
Mark E. Costello (6) 30,000 3.32% $ 13.44 11/18/2007 $253,448 $ 642,402
Joseph A. Magnus (6)(7) 30,000 3.32% $ 13.44 11/18/2007 $253,448 $ 642,402
<FN>
(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. Mr. Kornswiet joined the Company in August 1996.
(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) On May 13, 1999, Mr. Thompson resigned as the Chief Executive Officer of
the Company.
(6) 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.
(7) On November 20, 1998, Mr. Magnus resigned as an executive officer of the
Company.
</FN>
</TABLE>
Page 44
<PAGE>
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.
<TABLE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES (1)
<CAPTION>
VALUE OF ALL
NUMBER OF SHARES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
YEAR-END YEAR-END(2)(3)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE 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 -- -- 25,000 / 52,500 $ 2,340/ $ 8,160
<FN>
(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 July 15, 1999, none of the options outstanding were in-the-money. The
closing price on July 15, 1999 was $1.625.
</FN>
</TABLE>
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 15% 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. No discretionary contributions
were made by the Company for the calendar year 1998. 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.
Page 45
<PAGE>
DEFERRED COMPENSATION PLAN
In April 1997, the Company implemented a deferred compensation plan for
highly compensated employees and directors of the Company. In October 1998, the
Company suspended contributions to the Deferred Compensation Plan and
subsequently the Deferred Compensation Plan was terminated. The plan was
unfunded and non-qualified. Eligible participants could defer a portion of their
compensation (including bonuses) and receive a Company matching amount up to 4%
of their annual base salary. The Company could also make discretionary
contributions to the plan. For the 1998 fiscal year, the Company made no
matching or discretionary contributions to the plan.
Page 46
<PAGE>
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 (the "Securities Act"), 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.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
JUN 93 JUN 94 JUN 95 JUN 96 JUN 97 JUN 98
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Aames Financial Corporation 100 87.73 193.01 578.01 449.72 337.35
NY Stock Exchange Index 100 98.43 117.16 144.20 185.64 232.33
Peer Group 100 91.54 128.34 187.59 216.97 243.50
</TABLE>
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 or the 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, none of whom are, or were full-time, salaried officers or employees 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 administered the Company's stock option plans.
The goal of the Company's executive compensation program is 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 consists of three main
components: (1) base salary; (2) bonuses which are 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.
Page 47
<PAGE>
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 were 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 applies
the same criteria. The base salary for Mr. Kornswiet was initially established
under the terms of the Original Kornswiet 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 Original Kornswiet 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, the Original Kornswiet 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) were based on Company performance under the
terms of the Company's performance bonus plan. See -- "Performance Bonus Plan."
Under the terms of the Original Kornswiet Employment Agreement, during the 1998
fiscal year, Mr. Kornswiet was entitled to a cash bonus equal to 7.5% of One
Stop's pre-tax adjusted net income (as defined in the Original Kornswiet
Employment Agreement). In fiscal 1999 and through the Initial Closing, Mr.
Kornswiet was entitled to a quarterly cash bonus equal to between $1.35 million
and $1.65 million depending on the retail and broker loan production of the
Company. Due to the Company's financial position in late 1998, Mr. Kornswiet had
agreed to defer his bonus of $1.46 million due for 1998's fourth fiscal quarter.
However, on February 10, 1999, as a material inducement to Capital Z's
investment, Mr. Kornswiet agreed to terminate the Original Kornswiet Employment
Agreement and enter into the New Kornswiet Employment Agreement. To induce Mr.
Kornswiet to agree to terminate his then existing employment agreement and to
give up his change of control payment which would otherwise have been triggered
by the investment by Capital Z and the valuable ongoing rights to bonuses based
on the retail and broker loan production (without which Capital Z had informed
the Company that it would be unwilling to proceed with its investment), the
Company agreed to pay to Mr. Kornswiet his bonus of $1.46 million for 1998's
fourth fiscal quarter. The other employees were entitled to discretionary
bonuses.
The Compensation Committee believes that it is 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
granted options upon the recommendations of management. As of June 30, 1998, the
Company's six key employees (excluding the Company's then 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 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
Page 48
<PAGE>
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, participated in the New Performance Bonus Plan. Under the New
Performance Bonus Plan, bonuses were paid quarterly and were 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 received the full quarterly bonus in each
quarter where at least seventy percent of the individual and Company performance
goals are met. Where the Company achieved at least seventy percent of its goals,
but the participant achieved 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.
As a consequence of the Initial Closing, executive and employee
performance bonus goals and amounts are currently being revised.
EXECUTIVE COMPENSATION--CHIEF EXECUTIVE OFFICER
From May 7, 1997 to May 13, 1999, Mr. Thompson, served as the Company's
Chief Executive Officer. Prior to May 7, 1997, Mr. Thompson was the Chief
Operating Officer of the Company and his compensation was established under the
terms of the Original Thompson 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, and until May 7, 1997, 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 Original
Thompson 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, the Original
Thompson 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 of
Directors 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. On February
10, 1999, Mr. Thompson agreed to terminate the Original Thompson Employment
Agreement and enter into the New Thompson Employment Agreement. On May 13, 1999,
Mr. Thompson resigned as Chief Executive Officer.
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 $1.0 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 $1.0 million exceeded the deductible limits.
Compensation Committee:
Melvyn Kinder, Chairman
Lee Masters
Georges St. Laurent
Page 49
<PAGE>
PROPOSAL TO APPROVE THE ADOPTION OF THE
AAMES FINANCIAL CORPORATION 1999 STOCK OPTION PLAN
INTRODUCTION
The proposed Aames Financial Corporation 1999 Stock Option Plan (the "1999
Plan") was adopted by the Company's Board of Directors effective as of February
10, 1999, as amended and as subject to the approval of the 1999 Plan by the
stockholders. The 1999 Plan supersedes the Company's 1991 Stock Incentive Plan,
1999 Stock Incentive Plan, 1996 Stock Incentive Plan, 1997 Stock Option Plan and
1997 Non-Qualified Stock Option Plan and provides for the issuance of options to
purchase shares of the Company's common stock ("Shares") to officers, key
employees and consultants of the Company and its subsidiaries. Subject to
adjustment for stock splits, stock dividends and other similar events, the total
number of Shares reserved for issuance under the 1999 Plan shall be 14,612,008
Shares.
Although this Proxy Statement contains a summary of the principal features
of the 1999 Plan, this summary is not intended to be complete and reference
should be made to Exhibit "A" to this Proxy Statement for the complete text of
the 1999 Plan.
PURPOSE
The 1999 Plan is intended as an incentive and to encourage stock ownership
by officers and certain other key employees of the Company in order to increase
their proprietary interest in the Company's success and to encourage them to
remain in the employ of the Company.
EFFECTIVE DATE; DURATION
The 1999 Plan is effective as of the Initial Closing, subject to (i) the
approval by the stockholders of the Company and (ii) the consummation, on or
prior to the earlier of September 30, 1999 or the date of the Meeting (if, in
the latter case, any of the proposed amendments to the Certificate of
Incorporation is defeated at the Meeting), of the Recapitalization. The
expiration date of the 1999 Plan, after which no options may be granted, is
December 31, 2008.
ADMINISTRATION
The 1999 Plan will be administered by the Compensation Committee of the
Company's Board of Directors, which will consist of not less than three members,
two of whom will be appointed by Capital Z during any period that Capital Z
and/or its designated purchasers under the Preferred Stock Purchase Agreement
own at least 25% of the outstanding voting securities of the Company. The
Compensation Committee determines which individuals may participate in the 1999
Plan and the type, extent and terms of the options to be granted. In addition, a
Stock Option Committee has been established with the authority to grant options
to the Chief Executive Officer and to the four highest compensated officers
other than the Chief Executive Officer. Grants made by the Stock Option
Committee are subject to ratification by the Compensation Committee.
ELIGIBILITY AND NONDISCRETIONARY GRANTS
The 1999 Plan provides that options may be granted to officers and other
key employees of the Company (excluding members of the Committee), subject to
the limitations on incentive stock options. In addition, options which are not
incentive stock options may be granted to consultants or other key persons
(excluding members of the Compensation Committee) who the Compensation Committee
determines should receive options under the 1999 Plan. The approximate number of
individuals eligible to participate in the 1999 Plan is fifty.
Page 50
<PAGE>
TERMS OF OPTIONS
The terms of options granted under the 1999 Plan are determined by the
Compensation Committee. In the sole and absolute discretion of the Compensation
Committee, such options may be either "incentive stock options" within the
meaning of Section 422 of the Code ("ISOs"), or non-qualified options. However,
to the extent that the aggregate market value of the Shares with respect to
which ISOs are exercisable for the first time by any individual under the 1999
Plan and all other incentive plans of the Company and any parent or subsidiary
of the Company during any calendar year exceeds $100,000, such options shall not
be treated as ISOs. Each option will be evidenced by an option agreement between
the Company and the optionee to whom such option is granted on such terms and
conditions as shall be determined by the Compensation Committee from time to
time. The terms of the option agreements need not be identical. Each option is,
however, subject to the following terms and conditions:
Exercise of the Option. The Compensation Committee determines when options
granted under the 1999 Plan may be exercisable. Payment for Shares purchased
under an option granted under the 1999 Plan must be made in full upon exercise
of the option, by certified bank or cashier's check payable to the order of the
Company or by any other means acceptable to the Company.
Option Price. Unless otherwise provided by the Compensation Committee in
the option agreement, the option exercise price of each option granted under the
1999 Plan will not be less than the fair market value of the stock at the time
the option is granted. The ISO exercise price shall equal or exceed the fair
market value of the Shares on the date the option is granted. The exercise price
for ISOs granted to individuals beneficially holding at least 10% of the
outstanding securities of the Company shall equal or exceed 110% of the fair
market value of the Shares on the date the option is granted. The Compensation
Committee has determined that initial grants made to certain executive officers
will be at $1.00 per share. Such options granted shall be measured and
recognized as compensation expenses to the Company based upon the per share fair
value of the Company's common stock at the time of grant, net of the $1.00 per
share grant.
Termination of Options. All options granted under the 1999 Plan expire ten
years from the date of grant, or such shorter period as is determined by the
Compensation Committee. No option is exercisable by any person after such
expiration. In the event that any outstanding option under the Plan for any
reason expires, is terminated or is canceled prior to the end of the period
during which options may be granted, the Shares called for by the unexercised
portion of such option may again be subject to an option under the 1999 Plan.
Non-Transferability of Options. No option granted under the 1999 Plan
shall be transferable except by will or the laws of descent and distribution.
During the lifetime of the optionee, the option shall be exercisable only by
him. The Compensation Committee may, however, in its sole discretion, allow for
transfer of options which are not ISOs to other persons or entities, subject to
such conditions or limitations as it may establish.
Non-Transferability of Underlying Stock. Unless otherwise provided in an
option agreement or agreed to by the Compensation Committee at the time of
exercise, all option holders agree not to sell or otherwise transfer more than
25% of the common stock purchased pursuant to an option in any given year and in
the aggregate not to sell or otherwise transfer more than 25% of such stock for
so long as Capital Z or its designated purchasers own at least 25% of the
outstanding voting securities of the Company.
Other Provisions. The option agreement may contain such other terms,
provisions and conditions not inconsistent with the 1999 Plan as may be
determined by the Compensation Committee.
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
The aggregate number of shares of stock which may be purchased pursuant to
options granted under the 1999 Plan, the maximum number of shares for which
options may be granted to any one person, the number of shares of stock covered
by each outstanding option and the price per share thereof in each such option
shall be appropriately adjusted for any increase or decrease in the number of
outstanding shares of stock resulting from a stock split or other subdivision or
consolidation of shares of stock or for other capital adjustments or payments of
stock dividends or distributions or other increases or decreases in the
outstanding shares of stock
Page 51
<PAGE>
without receipt of consideration by the Company. Any adjustment shall be
conclusively determined by the Compensation Committee.
In the event of any change in the outstanding shares of stock by reason of
any recapitalization, merger, consolidation, spin-off, combination or exchange
of shares or other corporate change, or any distributions to common stockholders
other than cash dividends, the Compensation Committee shall make such
substitution or adjustment, if any, as it deems to be equitable, as to the
number or kind of shares of stock or other securities issued or reserved for
issuance pursuant to the 1999 Plan, and the number or kind of shares of stock or
other securities covered by outstanding options, and the option price thereof.
CHANGE IN CONTROL
Except as otherwise provided in a particular option agreement, in the
event of a Change in Control (as defined in the 1999 Plan), all options shall
become immediately exercisable with respect to 100% of the shares subject to
such options. Provided, however, that subject to certain exceptions, no event
shall be treated as a Change in Control unless a Capital Z Realization Event has
occurred (as defined in the 1999 Plan).
MARKET VALUE
The market value of the shares of common stock on the New York Stock
Exchange on July 15, 1999 was $1.625 per share.
SHARES SUBJECT TO THE 1999 PLAN
As noted above, the total number of shares of common stock reserved for
issuance under the 1999 Plan is 14,612,008. No single person may receive options
for more than 7,306,004 shares of common stock during the term of the 1999 Plan.
AMENDMENT AND TERMINATION OF THE 1999 PLAN
The Board of Directors may, without the consent of the Company's
stockholders or optionees under the 1999 Plan, at any time terminate the 1999
Plan entirely and at any time or from time to time amend or modify the 1999
Plan. No such amendment or termination shall adversely affect options already
granted under the 1999 Plan without the optionee's consent. Approval of the
stockholders is required to amend the 1999 Plan for the purpose of (a)
increasing the total number of Shares which may be purchased pursuant to options
granted under the 1999 Plan, except adjustments made for recapitalizations, or
(b) expand the class of employees eligible to receive options under the 1999
Plan.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief description of the federal income tax treatment
which will generally apply to options granted under the 1999 Plan, based on
federal income tax laws in effect on the date of this Proxy Statement. The exact
federal income tax treatment of options will depend on the specific
circumstances of the recipient. No information is provided herein with respect
to estate, inheritance, gift, state or local tax laws, although there may be
certain tax consequences upon the receipt or exercise of an option or the
disposition of any acquired shares under those laws.
Incentive Stock Options. Generally, the optionee is not taxed and the
Company is not entitled to a deduction on the grant or the exercise of an ISO.
If the optionee sells the shares acquired upon the exercise of an ISO ("ISO
Shares") at any time after the later of (i) one year after the date of transfer
of shares to the optionee pursuant to the exercise of such ISO or (ii) two years
after the date of grant of such ISO (the "ISO Holding Period"), then the
optionee will recognize capital gain or loss equal to the difference between the
sales price and the exercise price paid for the ISO Shares, and the Company will
not be entitled to any deduction. If the optionee disposes of the ISO Shares at
any time during the ISO Holding Period, then (i) the optionee will recognize
capital gain in an amount equal to the excess, if any, of the sales price over
the fair market value of the ISO Shares on the date of exercise) the optionee
will recognize ordinary income equal to
Page 52
<PAGE>
the excess, if any, of the lesser of the sales price or the fair market value of
the ISO Shares on the date of exercise, over the exercise price paid for the ISO
Shares, (iii) the optionee will recognize capital loss equal to the excess, if
any, of the exercise price paid for the ISO Shares over the sales price of the
ISO Shares and (iv) the Company will generally be entitled to a deduction in an
amount equal to the amount of ordinary income recognized by the optionee.
For purposes of computing an optionee's "alternative minimum tax," an ISO
is treated as a non-qualified stock option, as discussed below. Thus, the amount
by which the fair market value of ISO Shares on the date of exercise (or such
later date as discussed below under "Special Rules for Insiders") exceeds the
exercise price will be included as a positive adjustment in the calculation of
an optionee's "alternative minimum taxable income" ("AMTI"). The "alternative
minimum tax" imposed on individual taxpayers is generally equal to the amount by
which 26% or 28% (depending on the optionee's AMTI) of the individual's AMTI
(reduced by certain exemption amounts) exceeds his or her regular income tax
liability for the year. A taxpayer's alternative minimum tax attributable to
this spread may be credited against the taxpayer's regular tax liability in
later years to the extent that the regular tax liability exceeds the alternative
minimum tax in any such year.
Non-qualified Stock Options. The grant of a non-qualified stock option is
generally not a taxable event for the optionee. Upon exercise of the option, the
optionee will generally recognize ordinary income in an amount equal to the
excess of the fair market value of the stock acquired upon exercise of the
non-qualified stock option ("Non-Qualified Option Shares") (determined as of the
date of the exercise) over the exercise price of such option, and the Company
will be entitled to a deduction equal to such amount. See "Special Rules for
Insiders," below. A subsequent sale of the Non-Qualified Option Shares generally
will give rise to capital gain or loss equal to the difference between the sales
price and the sum of the exercise price paid for such shares plus the ordinary
income recognized with respect to such shares. Such gain or loss will be treated
as short-term depending on the optionee's holding period for the shares involved
in the disposition. If an optionee receives a non-qualified stock option having
an exercise price that is only a small fraction of the value of the underlying
Non-Qualified Option Shares on the date of grant, such optionee may be required
to include the value of the option in taxable income at the time of grant.
Special Rules for Insiders. If an optionee is a director, officer or
stockholder subject to Section 16 of the Exchange Act (an "Insider") and
exercises an option within six months of the date of grant, the timing of the
recognition of any ordinary income should be deferred until the amount of
ordinary income should be determined based on the fair market value (or sales
price in the case of a disposition) of the common stock upon the earlier of the
following two dates: (i) six months after the date of grant or (ii) a
disposition of the common stock, unless the Insider makes an election under
Section 83(b) of the Code (an "83(b) Election") within 30 days after exercise to
recognize ordinary income based on the value of the common stock on the date of
exercise. In addition, special rules apply to an Insider who exercises an option
having an exercise price greater than the fair market value of the underlying
common stock on the date of exercise.
Miscellaneous Tax Issues. Special rules will apply in cases where an
optionee pays the exercise price of the option or applicable withholding tax
obligations under the 1999 Plan by delivering previously owned common stock or
by reducing the amount of common stock otherwise issuable pursuant to the
option. The surrender or withholding of such shares will in certain
circumstances result in the recognition of income with respect to such shares.
The 1999 Plan provides that, in the event of certain changes in ownership or
control of the Company, the right to exercise options otherwise subject to a
vesting schedule may be accelerated. In the event such acceleration occurs and
depending upon the individual circumstances of the recipient, certain amounts
with respect to such options may constitute "excess parachute payments" under
the "golden parachute" provisions of the Code. Pursuant to these provisions, a
recipient will be subject to a 20% excise tax on any "excess parachute payments"
and the Company will be denied any deduction with respect to such payment. It
should be noted that while the Company's intent is to prevent Section 162(m) of
the Code from limiting the deductibility of options, no advance determination
will be obtained from the Internal Revenue Service in this regard. For this
reason, and because of possible unforeseen future events, it is impossible to
determine the precise extent to which the Company will be entitled to a tax
deduction in connection with the exercise of options.
Page 53
<PAGE>
NEW PLAN BENEFITS
The following table sets forth the grants the Company is currently
obligated under employment or other agreements to provide to the following Named
Executive Officers under the 1999 Plan.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON
NAME AND POSITION STOCK UNDERLYING OPTIONS
- ----------------- ------------------------
<S> <C>
Mark E. Costello
Executive Vice President - Loan Production 400,000
Cary H. Thompson 774,049
Former Chief Executive Officer
Neil B. Kornswiet
President 3,214,642
</TABLE>
All of these options will have an exercise price of $1.00 per share. Such
options granted shall be measured and recognized as compensation expenses to the
Company based upon the per share fair value of the Company's common stock at the
time of grant, net of the $1.00 per share grant. All options will vest and
become exercisable on the ninth anniversary of the date of grant, subject to
earlier vesting based upon the attainment of certain stock price targets. Vested
options may only be exercised, however, upon completion of certain service
requirements. Upon a change of control, all unvested options become vested and
exercisable, subject to certain conditions. The Company intends to grant options
to purchase up to 6,130,000 shares of common stock at $1.00 per share under the
1999 Plan to other key employees.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The Board of Directors has unanimously approved the adoption of the 1999
Plan. The affirmative vote of a majority of votes be cast by the
holders of outstanding shares of common stock and Series B and Series C
Convertible Preferred Stock who are present (either in person or by Proxy) at
the Meeting, voting as a single class, is required for the adoption of the 1999
Plan. Unless marked otherwise, proxies received will be voted for the adoption
of the 1999 Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ADOPTION OF THE
APPROVAL OF THE AAMES FINANCIAL CORPORATION 1999 STOCK OPTION PLAN.
Page 54
<PAGE>
PROPOSAL TO RATIFY THE APPOINTMENT OF
INDEPENDENT ACCOUNTANTS
Effective February 22, 1999, the Company dismissed
PricewaterhouseCoopers LLP ("PwC") as its independent public accountants. The
Audit Committee of the Board of Directors approved this action. During the two
most recent fiscal years and through February 22, 1999, there were no
disagreements with PwC on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope and procedures which
disagreements, if not resolved to the satisfaction of PwC, would have caused PwC
to make reference to the subject matter of the disagreement(s) in their reports.
PwC audited the consolidated balance sheets of the Company at June 30, 1998 and
1997, and the related statement of operations, stockholders' equity and cash
flows, for the fiscal years ended June 30, 1998 and June 30, 1997 (collectively,
the "Financial Statements"). PwC's reports on the Financial Statements did not
contain an adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope or accounting principles.
Effective February 22, 1999, the Board of Directors appointed Ernst &
Young LLP to serve as independent accountants of the Company to audit the
consolidated financial statements of the Company and its subsidiaries for the
fiscal year ending June 30, 1999. Representatives of Ernst & Young LLP are
expected to be present at the Meeting, will have an opportunity to make a
statement if they desire to do so and will respond to appropriate questions from
stockholders.
The ratification of the appointment of Ernst & Young LLP as the
Company's independent accountants will require the affirmative vote of a
majority of the votes cast by the holders of outstanding shares of common stock
and Series B and Series C Convertible Preferred Stock, who are present (either
in person or by Proxy) at the Meeting, voting together as a single class.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION OF
THE APPOINTMENT OF ERNST & YOUNG LLP.
PROPOSALS OF STOCKHOLDERS
SEC rules and regulations provide that if the date of the Company's 1999
Annual Meeting is advanced or delayed more than 30 days from the anniversary
date of the 1998 Annual Meeting, stockholder proposals intended to be included
in the proxy materials for the 1999 Annual Meeting must be received by the
Company within a reasonable time before the Company begins to print and mail the
proxy materials for the 1999 Annual Meeting. In the event a stockholder proposal
is not received by the Company within a reasonable time before the Company
begins to print and mail proxy materials for the 1999 Annual Meeting, the proxy
to be solicited by the Board of Directors for the 1999 Annual Meeting will
confer discretionary authority on the holders of the proxy to vote the shares if
the proposal is presented at the 1999 Annual Meeting without any discussion of
the proposal in the proxy statement for such meeting. Upon determination by the
Company that the date of the 1999 Annual Meeting will be advanced or delayed by
more than 30 days from the anniversary date of the 1998 Annual Meeting, the
Company will disclose such change in the earliest possible quarterly report on
Form 10-Q. Please address your proposals to Aames Financial Corporation, 350 S.
Grand Ave., 52nd Floor, Los Angeles, California 90071, Attention: Corporate
Secretary.
OTHER MATTERS
The Board of Directors is not aware of any matter to be acted upon at the
Meeting other than described in this Proxy Statement. Unless otherwise directed,
all shares represented by the persons named in the accompanying Proxy will be
voted in favor of the proposals described in this Proxy Statement. If any other
matter properly comes before the Meeting, however, the Proxy holders will vote
thereon in accordance with their best judgment.
Page 55
<PAGE>
ANNUAL REPORT TO STOCKHOLDERS
The Company's Annual Report to Stockholders for the fiscal year ended June
30, 1998 was mailed to stockholders on October 14, 1998. A copy of the Company's
Form 10-K/A for the fiscal year ended June 30, 1998 is being mailed to
stockholders concurrently with this Proxy Statement.
REPORTS ON FORM 10-K AND 10-K/A
THE COMPANY UNDERTAKES, UPON WRITTEN REQUEST, TO PROVIDE, WITHOUT CHARGE,
TO EACH PERSON FROM WHOM THE ACCOMPANYING PROXY IS SOLICITED A COPY OF THE
COMPANY'S ANNUAL REPORT ON FORM 10-K AS AMENDED BY 10-K/A FOR THE YEAR ENDED
JUNE 30, 1998, AND AS FILED WITH THE SEC, INCLUDING THE FINANCIAL STATEMENTS AND
SCHEDULES THERETO, BUT EXCLUDING EXHIBITS THERETO. REQUESTS SHOULD BE ADDRESSED
TO AAMES FINANCIAL CORPORATION, 350 S. GRAND AVENUE, LOS ANGELES, CALIFORNIA
90071, ATTN: EXECUTIVE VICE PRESIDENT - FINANCE.
DATED: August 6, 1999 ON BEHALF OF THE BOARD OF DIRECTORS
Barbara S. Polsky
Secretary
Page 56
<PAGE>
EXHIBIT "A"
AAMES FINANCIAL CORPORATION
1999 STOCK OPTION PLAN
ARTICLE I.
PURPOSE
This Stock Option Plan (the "Plan") is intended as an incentive and
to encourage stock ownership by officers and certain other key employees of
Aames Financial Corporation (the "Company") in order to increase their
proprietary interest in the Company's success and to encourage them to remain in
the employ of the Company.
The term "Company," when used in the Plan with reference to
eligibility and employment, shall include the Company and its subsidiaries. The
word "subsidiary," when used in the Plan, shall mean any subsidiary of the
Company within the meaning of Section 424(f) of the Internal Revenue Code of
1986, as amended (the "Code").
It is intended that certain options granted under this Plan will
qualify as "incentive stock options" under Section 422 of the Code. All grants
under the Plan shall be subject to obtaining the approvals required to be
obtained under Article XVIII by September 30, 1999. If either of such approvals
is not obtained on a timely basis, all grants under the Plan shall be void AB
INITIO, and the Plan shall be of no further force or effect.
ARTICLE II.
ADMINISTRATION
The Plan shall be administered by the Compensation Committee (the
"Committee") of the Board of Directors of the Company (the "Board") appointed by
the Board which shall consist of not less than three members, two of whom shall
be appointed by Capital Z Financial Services Fund II, L.P. ("Capital Z") during
any period that Capital Z and/or its designated purchasers under the Preferred
Stock Purchase Agreement by and among the Company and Capital Z, dated as of the
23rd day of December, 1998 (the "Purchase Agreement") own at least 25% of the
outstanding voting securities of the Company (the "Minimum Stock Ownership
Threshold"). However, notwithstanding anything to the contrary in this Section,
only the Stock Option Committee (the "Stock Option Committee") shall have the
authority to grant stock options, to the Chief Executive Officer and to the four
highest compensated officers other than the Chief Executive Officer and all such
grants shall be effective only upon ratification by the Committee. Each of the
members of the Stock Option Committee should be an "outside director" within the
meaning of Section 162(m) of the Code. Subject to the provisions of the Plan,
the Committee shall have sole authority, in its absolute discretion: (a) to
determine which of the eligible employees of the Company shall be granted
options; (b) to authorize the granting of both incentive stock options and
nonqualified options; (c) to determine the times when options shall be granted
and the number of shares to be optioned; (d) to determine the option price of
the shares subject to each option, which price shall be not less than the
minimum specified in ARTICLE V; (e) to determine the time or times when each
option becomes exercisable, the duration of the exercise period and any other
restrictions on the exercise of options issued hereunder; (f) to prescribe the
form or forms of the option agreements under the Plan (which forms shall be
consistent with the terms of the Plan but need not be identical); (g) to adopt,
amend and rescind such rules and regulations as, in its opinion, may be
advisable in the administration of the Plan; and (h) to construe and interpret
the Plan, the rules and regulations and the option agreements under the Plan and
to make all other determinations deemed necessary or advisable for the
administration of the Plan. All decisions, determinations and interpretations of
the Committee shall be final and binding on all optionees.
A-1
<PAGE>
ARTICLE III.
STOCK
The stock to be optioned under the Plan shall be shares of
authorized but unissued Common Stock of the Company, par value $.001 per share,
or previously issued shares of Common Stock reacquired by the Company (the
"Stock"). Under the Plan, the total number of shares of Stock which may be
purchased pursuant to options granted hereunder shall not exceed, in the
aggregate, 14,612,008 shares, except as such number of shares shall be adjusted
in accordance with the provisions of ARTICLE X hereof.
The number of shares of Stock available for grant of options under
the Plan shall be decreased by the sum of the number of shares with respect to
which options have been issued and are then outstanding and the number of shares
issued upon exercise of options. In the event that any outstanding option under
the Plan for any reason expires, is terminated or is canceled prior to the end
of the period during which options may be granted, the shares of Stock called
for by the unexercised portion of such option may again be subject to an option
under the Plan.
ARTICLE IV.
ELIGIBILITY OF PARTICIPANTS
Subject to ARTICLE VII in the case of incentive stock options,
officers and other key employees of the Company (excluding any person who is a
member of the Committee) shall be eligible to receive options under the Plan. In
addition, options which are not incentive stock options may be granted to
consultants or other key persons (excluding any person who is a member of the
Committee) who the Committee determines shall receive options under the Plan. No
person may receive options for more than 7,306,004 shares of Outstanding Stock
during the term of the Plan.
ARTICLE V.
OPTION EXERCISE PRICE
Subject to ARTICLE VII in the case of incentive stock options,
except as otherwise provided by the Committee in the option agreement, the
option exercise price of each option granted under the Plan shall not be less
than the Fair Market Value of stock at the time the option is granted. Fair
Market Value shall in all cases be based on trading days occurring after the
"Initial Closing Date" as such term is defined in the Purchase Agreement. For
purposes of the Plan, the Fair Market Value on a given date means (i) if the
Stock is listed on a national securities exchange, the average of the closing
sale prices reported as having occurred on the primary exchange with which the
Stock is listed and traded during the twenty (20) trading days occurring
immediately prior to such date; (ii) if the Stock is not listed on any national
securities exchange but is quoted in the National Market System of the National
Association of Securities Dealers Automated Quotation System on a last sale
basis, the average between the high bid price and low ask price reported during
the twenty (20) trading days occurring immediately prior to such date; or (iii)
if the Stock is not listed on a national securities exchange nor quoted in the
National Market System of the National Association of Securities Dealers
Automated Quotation System on a last sale basis, the amount determined by the
Committee to be the fair market value based upon a good faith attempt to value
the Stock accurately and computed in accordance with applicable regulations of
the Internal Revenue Service.
ARTICLE VI.
EXERCISE AND TERMS OF OPTIONS
Subject to this ARTICLE VI, the Committee shall determine the dates
after which options may be exercised, in whole or in part. If an option is
exercisable in installments, installments or portions thereof which are
exercisable and not exercised shall remain exercisable.
A-2
<PAGE>
Unless otherwise provided in the option agreement or agreed to by
the Committee at the time of exercise, each optionee shall enter into a binding
agreement with the Company at the time of grant pursuant to which such optionee
agrees (i) not to sell, assign or otherwise transfer more than 25% of the Stock
purchased pursuant to an Option in any given year and (ii) in aggregate not to
sell, assign or otherwise transfer more than 25% of the Stock purchased pursuant
to an Option over a five year period beginning on the effective date of this
Plan. Appropriate legends shall be placed on the stock certificates evidencing
shares issued upon exercise of options to reflect such transfer restrictions.
Any other provision of the Plan to the contrary notwithstanding, but
subject to ARTICLE VII in the case of incentive stock options, no option shall
be exercised after the date ten years from the date of grant of such option (the
"Termination Date").
If prior to the Termination Date, an optionee shall cease to be
employed by the Company by reason of a disability, as defined in Section
22(e)(3) of the Code, or by reason of retirement on or after age 65
("Retirement") the option shall remain exercisable until the earlier of the
Termination Date or one year after the date of cessation of employment to the
extent the option was exercisable at the time of cessation of employment.
In the event of the death of an optionee prior to the Termination
Date and while employed by the Company, or while entitled to exercise an option
pursuant to the preceding paragraph or the next to last sentence of the
subsequent paragraph, the option shall remain exercisable until the earlier of
the Termination Date or one year after the date of death, by the person or
person to whom the optionee's rights under the option pass by will or the
applicable laws of descent and distribution, to the extent that the optionee was
entitled to exercise it on the date of death.
Unless otherwise provided in the option agreement, if an optionee
voluntarily terminates employment with the Company for reasons other than (i)
death, (ii) disability, (iii) Retirement, or (iv) Good Reason (as hereinafter
defined), or if an optionee's employment with the Company is terminated for
Cause (as hereinafter defined), all options previously granted to such optionee
which have not been exercised prior to such termination shall lapse and be
canceled. If the Company terminates an optionee's employment without Cause, or
if an optionee terminates his employment for Good Reason, all options previously
granted to such optionee which were vested and satisfied all conditions to
exercisability immediately prior to such termination shall continue to be vested
and exercisable for a period not extending beyond the earlier of the Termination
Date or one year after the date of such termination. In addition, if a Change in
Control (as defined in Article XI hereof) occurs within six months from the date
of termination of employment of an optionee referred to in the preceding
sentence, unvested options shall become vested and exercisable to the same
extent as if the Change in Control had occurred on the date of his termination
of employment, and any such options shall continue to be exercisable until the
earlier of the Termination Date or the first anniversary of optionee's
termination of employment.
In the case of any optionee who has an employment agreement with the
Company, it shall be a condition to exercise of an option that the optionee not
have engaged in any material and knowing or intentional breach of his employment
agreement. After the expiration of the exercise period described in any of the
preceding four paragraphs hereof, options shall terminate together with all of
the optionee's rights thereunder, to the extent not previously exercised.
For purposes of the Plan, the Company shall have "Cause" to
terminate an optionee's employment if the Company has cause to terminate the
optionee's employment under any existing employment agreement between the
optionee and the Company or, in the absence of an employment agreement between
the optionee and the Company, if the Company terminates the optionee after the
Company reasonably determines that the optionee: (1) shall have been determined
by a court of law to have committed any felony including, but not limited to, a
felony involving fraud, theft, misappropriation, dishonesty, embezzlement, or
any other crime involving moral turpitude, or if the optionee shall have been
arrested or indicted for violation of any criminal statute constituting a
felony, provided the Company reasonably determines that the continuation of the
optionee's employment after such event would have an adverse impact on the
operation or reputation of the Company or its affiliates (subsequent references
to the "Company" in this paragraph shall be deemed to refer
A-3
<PAGE>
to the Company or its affiliates); (2) shall have committed one or more acts or
gross negligence or willful misconduct that, in the good faith opinion of the
Company, materially impair the goodwill or business of the Company or cause
material damage to its property, goodwill, or business, or would, if known,
subject the Company to public ridicule; (3) shall have refused or failed to a
material degree to perform his duties hereunder (continuing without cure for ten
(10) days after receipt of written notice of need to cure); (4) shall have
violated any material written Company policy provided to the Executive during or
prior to the Term (continuing without cure for ten (10) days after receipt of
written notice of need to cure) and that has caused material harm to the
Company; or (5) knew, or should have known, that the Company materially, and
knowingly or intentionally breached any representation, warranty, or covenant
under the Purchase Agreement or, if the optionee has an employment agreement
with the Company, the optionee shall have materially and intentionally or
knowingly breached any provision of such employment agreement.
For purposes of the Plan, in the case of an optionee who is not an
employee of the Company, references to employment herein shall be deemed to
refer to such person's relationship to the Company.
Upon any merger or reorganization or other business combination in
which the Company shall not be the surviving corporation, or a dissolution or
liquidation of the Company, or a sale of all or substantially all of the
Company's assets, all outstanding options shall terminate; PROVIDED, HOWEVER,
that the Company shall cause either (i) the optionees to be paid an amount equal
to the difference between (A) the aggregate fair market value (determined in
accordance with ARTICLE V of the Plan) of the Stock subject to options held by
the optionees at the time of such transaction that have become vested and
exercisable by the terms of the Plan and the applicable option agreements
(either as a result of or prior to such transaction) and (B) the aggregate
exercise price of such options, or (ii) the surviving or resulting corporation
to grant the optionees substitute options to purchase its shares on such terms
and conditions, both as to the number of shares and otherwise, which the
Committee shall deem appropriate.
Notwithstanding the foregoing provisions of this ARTICLE VI or the
terms of any option agreement, the Committee may in its sole discretion
accelerate the exercisability of any option granted hereunder. Any such
acceleration shall not affect the terms and conditions of any such option other
than with respect to exercisability.
ARTICLE VII.
SPECIAL PROVISIONS APPLICABLE
TO INCENTIVE STOCK OPTIONS ONLY
To the extent the aggregate fair market value (determined as of the
time the option is granted) of the Stock with respect to which any options
granted hereunder which are intended to be incentive stock options may be
exercisable for the first time by the optionee in any calendar year (under this
Plan or any other stock option plan of the Company or any parent or subsidiary
thereof) exceeds $100,000, such options shall not be considered incentive stock
options.
No incentive stock option may be granted to an individual who, at
the time the option is granted, owns directly, or indirectly within the meaning
of Section 424(d) of the Code, stock possessing more than 10 percent of the
total combined voting power of all classes of stock of the Company or of any
parent or subsidiary thereof, unless such option (i) has an option price of at
least 110 percent of the fair market value of the Stock on the date of the grant
of such option; and (ii) cannot be exercised more than five years after the date
it is granted.
Each optionee who receives an incentive stock option must agree to
notify the Company in writing immediately after the optionee makes a
disqualifying disposition of any Stock acquired pursuant to the exercise of an
incentive stock option. A disqualifying disposition is any disposition
(including any sale) of such Stock before the later of (a) two years after the
date the optionee was granted the incentive stock option or (b) one year after
the date the optionee acquired Stock by exercising the incentive stock option.
A-4
<PAGE>
ARTICLE VIII.
PAYMENT FOR SHARES
Payment for shares of Stock purchased under an option granted
hereunder shall be made in full upon exercise of the option, by certified or
bank cashier's check payable to the order of the Company or by any other means
acceptable to the Company. The Stock purchased shall thereupon be promptly
delivered; PROVIDED, HOWEVER, that the Company may, in its discretion, require
that an optionee pay to the Company, at the time of exercise, such amount as the
Company deems necessary to satisfy its obligation to withhold Federal, state or
local income or other taxes incurred by reason of the exercise or the transfer
of shares thereupon.
ARTICLE IX.
NON-TRANSFERABILITY OF OPTION RIGHTS
No option shall be transferable except by will or the laws of
descent and distribution. During the lifetime of the optionee, the option shall
be exercisable only by him. The Committee may, however, in its sole discretion,
allow for transfer of options which are not incentive stock options to other
persons or entities, subject to such conditions or limitations as it may
establish.
ARTICLE X.
ADJUSTMENT FOR RECAPITALIZATION, MERGER, ETC.
The aggregate number of shares of Stock which may be purchased
pursuant to options granted hereunder, the maximum number of shares for which
options may be granted to any one person, the number of shares of Stock covered
by each outstanding option and the price per share thereof in each such option
shall be appropriately adjusted for any increase or decrease in the number of
outstanding shares of stock resulting from a stock split or other subdivision or
consolidation of shares of Stock or for other capital adjustments or payments of
stock dividends or distributions or other increases or decreases in the
outstanding shares of Stock without receipt of consideration by the Company. Any
adjustment shall be conclusively determined by the Committee.
In the event of any change in the outstanding shares of Stock by
reason of any recapitalization, merger, consolidation, spin-off, combination or
exchange of shares or other corporate change, or any distributions to common
shareholders other than cash dividends, the Committee shall make such
substitution or adjustment, if any, as it deems to be equitable, as to the
number or kind of shares of Stock or other securities issued or reserved for
issuance pursuant to the Plan, and the number or kind of shares of Stock or
other securities covered by outstanding options, and the option price thereof.
In instances where another corporation or other business entity is being
acquired by the Company, and the Company has assumed outstanding employee option
grants and/or the obligation to make future or potential grants under a prior
existing plan of the acquired entity, similar adjustments are permitted at the
discretion of the Committee. The Committee shall notify optionees of any
intended sale of all or substantially all of the Company's assets within a
reasonable time prior to such sale.
The foregoing adjustments and the manner of application of the
foregoing provisions shall be determined by the Committee in its sole
discretion. Any such adjustment may provide for the elimination of any
fractional share which might otherwise become subject to an option.
ARTICLE XI.
EFFECT OF CHANGE IN CONTROL
(a) Except to the extent otherwise provided in a particular option
agreement or in paragraph (c) below, in the event of a "Change in Control,"
notwithstanding any unsatisfied service requirement established in the
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<PAGE>
option agreement, such option shall become immediately exercisable with
respect to 100 percent of the shares subject to such option.
(b) For purposes of the Plan, a Change in Control shall, subject to
subsection (c) below, be deemed to occur if, after the date the conditions
of Article XVIII have been satisfied (i) any "person" (as that term is used
in Sections 13 and 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), other than Capital Z or any of its
affiliates, is or becomes the beneficial owner (as that term is used in
Section 13(d) of the Exchange Act), directly or indirectly, of 50% or more
of either the outstanding shares of Common Stock or the combined voting
power of the Company's then outstanding voting securities entitled to vote
generally, (ii) the Company is merged, consolidated or reorganized into or
with another corporation or another legal entity and, as a result of such
merger, consolidation or reorganization, less than 50% of the combined
voting power of the then-outstanding securities of such corporation or
entity immediately after such transaction is held in the aggregate by the
holders of the combined voting power of the securities of the Company
entitled to generally in the election of directors of the Company
immediately prior to such transaction, (iii) individuals who constitute the
Board at the beginning of such period cease for any reason to constitute at
least a majority thereof, unless the election or the nomination for
election by the Company's shareholders of each new director was approved by
a vote of at least three-quarters of the directors then still in office who
were directors at the beginning of the period or (iv) the Company undergoes
a liquidation or dissolution or a sale of all or substantially all of the
assets of the Company. No merger, consolidation or corporate reorganization
in which the owners of the combined voting power of the Company's then
outstanding voting securities entitled to vote generally prior to said
combination, own 50% or more of the resulting entity's outstanding voting
securities shall, by itself, be considered a Change in Control.
(c) Notwithstanding any other provision of this Plan, unless (i) an
optionee terminates his employment for Good Reason, or (ii) is terminated
by the Company without Cause, in either case within one year after a Change
in Control (as defined in subsection (b) above), no event shall be treated
as a Change in Control unless all equity securities of the Company then
held by Capital Z are contemporaneously exchanged for cash or other liquid
assets, which Capital Z is free to sell on a basis reasonably likely to
result in receipt of cash proceeds equal to or greater than the price
payable to shareholders upon a Change in Control (such event is referred to
as a "Capital Z Realization Event" and such price is referred to as the
"Change in Control Price"). If an optionee's employment is terminated by
the Company without Cause or by the optionee for Good Reason within one
year after a Change in Control (as defined in subsection (b) above), the
event shall be treated as both a Change in Control and a Capital Z
Realization Event with respect to such optionee and acceleration of vesting
shall occur to the extent the performance conditions established in the
option agreement were satisfied as of the date of the Change in Control.
ARTICLE XII.
NO OBLIGATION TO EXERCISE OPTION
Granting of an option shall impose no obligation on the recipient to
exercise such option.
ARTICLE XIII.
USE OF PROCEEDS
The proceeds received from the sale of Stock pursuant to the Plan
shall be used for general corporate purposes.
ARTICLE XIV.
RIGHTS AS A STOCKHOLDER
An optionee or a transferee of an option shall have no rights as a
stockholder with respect to any share covered by his option until he shall have
become the holder of record of such share, and he shall not be
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entitled to any dividends or distributions or other rights in respect of such
share for which the record date is prior to the date on which he shall have
become the holder of record thereof.
Notwithstanding anything herein to the contrary, the Committee, in
its sole discretion, may restrict the transferability of all or any number of
shares issued under the Plan upon the exercise of an option by legending the
stock certificate as it deems appropriate.
ARTICLE XV.
EMPLOYMENT RIGHTS
Nothing in the Plan or in any option granted hereunder shall confer
on any optionee any right to continue in the employ of the Company or any of its
subsidiaries, or to interfere in any way with the right of the Company or any of
its subsidiaries to terminate the optionee's employment at any time for any
reason, whether or not for Cause.
ARTICLE XVI.
COMPLIANCE WITH LAW
The Company is relieved from any liability for the nonissuance or
non-transfer or any delay in issuance or transfer of any shares of Stock subject
to options under the Plan which results from the inability of the Company to
obtain or in any delay in obtaining from any regulatory body having
jurisdiction, all requisite authority to issue or transfer shares of Stock of
the Company either upon exercise of the options under the Plan or shares of
Stock issued as a result of such exercise if counsel for the Company deems such
authority necessary for lawful issuance or transfer of any such shares.
Appropriate legends may be placed on the stock certificates evidencing shares
issued upon exercise of options to reflect such transfer restrictions.
Each option granted under the Plan is subject to the requirement
that if at any time the Committee determines, in its discretion, that the
listing, registration or qualification of shares of Stock issuable upon exercise
of options is required by any securities exchange or under any state or Federal
law, or that the consent or approval of any governmental regulatory body is
necessary or desirable as a condition of, or in connection with, the grant of
options or the issuance of shares of Stock, no shares of Stock shall be issued,
in whole or in part, unless such listing, registration, qualification, consent
or approval has been effected or obtained free of any conditions or with such
conditions as are acceptable to the Committee.
ARTICLE XVII.
CANCELLATION OF OPTIONS
The Committee, in its discretion, may, with the consent of any
optionee, cancel any outstanding option hereunder.
ARTICLE XVIII.
EFFECTIVE DATE AND EXPIRATION DATE OF PLAN
The Plan is effective as of the "Initial Closing ", as such term
is defined in the Purchase Agreement, subject to (i) approval by the
stockholders of the Company in a manner which complies with Section 162(m) and
Section 422(b)(1) of the Code and the Treasury Regulations thereunder, such
approval to occur at the next meeting of stockholders of the Company, and (ii)
the consummation, on or prior to September 30, 1999, of the "Recapitalization,"
as such term is defined in the Purchase Agreement. The expiration date of the
Plan, after which no option may be granted hereunder, shall be December 31,
2008.
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ARTICLE XIX.
AMENDMENT OR DISCONTINUANCE OF PLAN
The Board may, without the consent of the Company's stockholders or
optionees under the Plan, at any time terminate the Plan entirely and at any
time or from time to time amend or modify the Plan, provided that no such action
shall adversely affect options theretofore granted hereunder without the
optionee's consent, and provided further that no such action by the Board,
without approval of the stockholders, may (a) increase the total number of
shares of Stock which may be purchased pursuant to options granted under the
Plan, except as contemplated in ARTICLE X, or (b) expand the class of employees
eligible to receive options under the Plan.
ARTICLE XX.
MISCELLANEOUS
(a) Options shall be evidenced by option agreements (which need not
be identical) in such forms as the Committee may from time to time approve.
Such agreements shall conform to the terms and conditions of the Plan and
may provide that the grant of any option under the Plan and Stock acquired
pursuant to the Plan shall also be subject to such other conditions
(whether or not applicable to the option or Stock received by any other
optionee) as the Committee determines appropriate, including, without
limitation, provisions to assist the optionee in financing the purchase of
Stock through the exercise of options, provisions for the forfeiture of, or
restrictions on, resale or other disposition of shares under the Plan, and
provisions to comply with Federal and state securities laws and Federal and
state income tax withholding requirements.
(b) If the Committee shall find that any person to whom any amount
is payable under the Plan is unable to care for his affairs because of
illness or accident, or is a minor, or has died, then any payment due to
such person or his estate (unless a prior claim therefor has been made by a
duly appointed legal representative) may, if the Committee so directs the
Company, be paid to his spouse, child, relative, an institution maintaining
or having custody of such person, or any other person deemed by the
Committee to be a proper recipient on behalf of such person otherwise
entitled to payment. Any such payment shall be a complete discharge of the
liability of the Committee and the Company therefor.
(c) No member of the Committee shall be personally liable by reason
of any contract or other instrument executed by such member or on his
behalf in his capacity as a member of the Committee nor for any mistake of
judgment made in good faith, and the Company shall indemnify and hold
harmless each member of the Committee and each other employee, officer or
director of the Company to whom any duty or power relating to the
administration or interpretation of the Plan may be allocated or delegated,
against any cost or expense (including counsel fees) or liability
(including any sum paid in settlement of a claim) arising out of any act or
omission to act in connection with the Plan unless arising out of such
person's own fraud or bad faith; PROVIDED, HOWEVER, that approval of the
Company's Board of Directors shall be required for the payment of any
amount in settlement of a claim against any such person. The foregoing
right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company's
Certificate of Incorporation or Bylaws, as a matter of law, or otherwise,
or any power that the Company may have to indemnify them or hold them
harmless.
(d) The Plan shall be governed by and construed in accordance with
the internal laws of the State of Delaware without reference to the
principles of conflicts of law thereof.
(e) No provision of the Plan shall require the Company, for the
purpose of satisfying any obligations under the Plan, to purchase assets or
place any assets in a trust or other entity to which contributions are made
or otherwise to segregate any assets, nor shall the Company maintain
separate bank accounts, books, records or other evidence of the existence
of a segregated or separately maintained or administered fund for such
purposes. Optionees shall have no rights under the Plan other than as
unsecured general creditors of the Company, except that insofar as they may
have become entitled to payment of additional compensation by performance
of services, they shall have the same rights as other employees under
general law.
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(f) Each member of the Committee and each member of the Company's
Board of Directors shall be fully justified in relaying, acting or failing
to act, and shall not be liable for having so relied, acted or failed to
act in good faith, upon any report made by the independent public
accountant of the Company and upon any other information furnished in
connection with the Plan by any person or persons other than such member.
(g) References to "Good Reason" as used herein shall relate only to
optionees who have employment agreements with the Company, and in such
cases, shall have the same meaning as set forth in such employment
agreement. If the optionee does not have an employment agreement with the
Company, or has an employment agreement that does not use the term Good
Reason, then provisions relating to such term shall not apply.
(h) Except as otherwise specifically provided in the relevant plan
document, no payment under the Plan shall be taken into account in
determining any benefits under any pension, retirement, profit-sharing,
group insurance or other benefit plan of the Company.
(i) The expenses of administering the Plan shall be borne by the
Company.
Masculine pronouns and other words of masculine gender shall
refer to both men and women.
* * *
As adopted by the Board of Directors of
Aames Financial Corporation as of June 9, 1999
A-9
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EXHIBIT "B"
PROPOSED AMENDMENTS TO
ARTICLE FOURTH OF THE COMPANY'S
CERTIFICATE OF INCORPORATION
CURRENT CERTIFICATE OF INCORPORATION
The first paragraph of Article Fourth of the Certificate of Incorporation
currently reads as follows:
"FOURTH: The total number of shares which the Corporation shall have the
authority to issue is 51,000,000, consisting of 50,000,000 shares of common
stock, par value $0.001 per share (the "Common Stock") and 1,000,000 shares
of preferred stock, par value $0.001 per share (the "Preferred Stock")."
AMENDMENT UPON APPROVAL OF THE COMMON STOCK PROPOSAL
Upon approval of the Common Stock Proposal, without consideration of the
Preferred Stock Proposal, the Preferred Stock Amendment Proposal or the Stock
Split, the first paragraph of Article Fourth of the Certificate of Incorporation
would be amended to read as follows:
"FOURTH: The total number of shares which the Corporation shall have the
authority to issue is 401,000,000, consisting of 400,000,000 shares of common
stock, par value $0.001 per share (the "Common Stock") and 1,000,000 shares
of preferred stock, par value $0.001 per share (the "Preferred Stock").
AMENDMENT UPON APPROVAL OF THE PREFERRED STOCK PROPOSAL
Upon approval of the Preferred Stock Proposal, without consideration of the
Common Stock Proposal, the Preferred Stock Amendment Proposal and the Stock
Split, the first paragraph of Article Fourth of the Certificate of Incorporation
would be amended to read as follows:
"FOURTH: The total number of shares which the Corporation shall have the
authority to issue is 250,000,000, consisting of 50,000,000 shares of common
stock, par value $0.001 per share (the "Common Stock") and 200,000,000 shares
of preferred stock, par value $0.001 per share (the "Preferred Stock").
AMENDMENT UPON APPROVAL OF THE COMMON STOCK PROPOSAL AND THE PREFERRED STOCK
PROPOSAL
Upon approval of the Common Stock Proposal and the Preferred Stock Proposal,
without consideration of the Preferred Stock Amendment Proposal and the Stock
Split, the first paragraph of Article Fourth of the Certificate of Incorporation
would be amended to read as follows:
"FOURTH: The total number of shares which the Corporation shall have the
authority to issue is 600,000,000, consisting of 400,000,000 shares of common
stock, par value $0.001 per share (the "Common Stock") and 200,000,000 shares
of preferred stock, par value $0.001 per share (the "Preferred Stock").
AMENDMENT UPON APPROVAL OF THE PREFERRED STOCK PROPOSAL AND THE STOCK SPLIT
Upon approval of the Preferred Stock Proposal and the Stock Split, without
consideration of the Common Stock Proposal and the Preferred Stock Amendment
Proposal, the first paragraph of Article Fourth of the Certificate of
Incorporation would be amended to read as follows:
"FOURTH: The total number of shares which the Corporation shall have the
authority to issue is 250,000,000, consisting of 50,000,000 shares of common
stock, par value $0.001 per share (the "Common Stock") and 200,000,000 shares
of preferred stock, par value $0.001 per share (the "Preferred Stock").
B-1
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Simultaneously with the effective date of this amendment (the "EFFECTIVE
DATE"), each share of the Corporation's Series B Convertible Preferred Stock
having a par value of $0.001 per share issued and outstanding immediately
prior to the Effective Date (the "PRE-SPLIT SERIES B PREFERRED STOCK") shall
automatically and without any action on the part of the holder thereof be
reclassified as and changed into one thousand (1,000) shares of Series B
Convertible Preferred Stock, par value of $0.001 per share (the "POST-SPLIT
SERIES B STOCK"). Each holder of a certificate or certificates which
immediately prior to the Effective Date represented outstanding shares of
Pre-Split Series B Convertible Preferred Stock (the "PRE-SPLIT SERIES B
CERTIFICATES," whether one or more) shall be entitled to receive upon
surrender of such Pre-Split Series B Certificates to the Corporation's
Secretary for cancellation, a certificate or certificates (the "POST-SPLIT
SERIES B CERTIFICATES," whether one or more) representing the number of
whole shares of Post-Split Series B Convertible Preferred Stock into which
and for which the shares of Pre-Split Series B Convertible Preferred Stock
formerly represented by such Pre-Split Series B Certificates so surrendered,
are reclassified pursuant to the terms hereof. From and after the Effective
Date, Pre-Split Series B Certificates shall represent only the right to
receive Post-Split Series B Certificates pursuant to the provisions hereof.
If more than one Pre-Split Series B Certificate shall be surrendered at one
time for the account of the same stockholder, the number of full shares of
Post-Split Series B Convertible Preferred Stock for which the Post-Split
Series B Certificates shall be issued shall be computed on the basis of the
aggregate number of shares represented by the Pre-Split Series B
Certificates so surrendered. If any Post-Split Series B Certificate is to be
issued in a name other than that in which the Pre-Split Series B Certificate
surrendered for exchange are issued, the Pre-Split Series B Certificates so
surrendered shall be properly endorsed and otherwise in proper form for
transfer, and the person or persons requesting such exchange shall affix any
requisite stock transfer tax stamps to the Pre-Split Series B Certificates
surrendered, or provide funds for their purchase, or establish to the
satisfaction of the Corporation's Secretary that such taxes are not payable;
Simultaneously with the Effective Date, each share of the Corporation's
Series C Convertible Preferred Stock having a par value of $0.001 per share
issued and outstanding immediately prior to the Effective Date (the
"PRE-SPLIT SERIES C PREFERRED STOCK") shall automatically and without any
action on the part of the holder thereof be reclassified as and changed into
one thousand (1,000) shares of Series C Convertible Preferred Stock, par
value of $0.001 per share (the "POST-SPLIT SERIES C STOCK"). Each holder of
a certificate or certificates which immediately prior to the Effective Date
represented outstanding shares of Pre-Split Series C Convertible Preferred
Stock (the "PRE-SPLIT SERIES C CERTIFICATES," whether one or more) shall be
entitled to receive upon surrender of such Pre-Split Series C Certificates
to the Corporation's Secretary for cancellation, a certificate or
certificates (the "POST-SPLIT SERIES C CERTIFICATES," whether one or more)
representing the number of whole shares of Post-Split Series C Convertible
Preferred Stock into which and for which the shares of Pre-Split Series C
Convertible Preferred Stock formerly represented by such Pre-Split Series C
Certificates so surrendered, are reclassified pursuant to the terms hereof.
From and after the Effective Date, Pre-Split Series C Certificates shall
represent only the right to receive Post-Split Series C Certificates
pursuant to the provisions hereof. If more than one Pre-Split Series C
Certificate shall be surrendered at one time for the account of the same
stockholder, the number of full shares of Post-Split Series C Convertible
Preferred Stock for which the Post-Split Series C Certificates shall be
issued shall be computed on the basis of the aggregate number of shares
represented by the Pre-Split Series C Certificates so surrendered. If any
Post-Split Series C Certificate is to be issued in a name other than that in
which the Pre-Split Series C Certificate surrendered for exchange are
issued, the Pre-Split Series C Certificates so surrendered shall be properly
endorsed and otherwise in proper form for transfer, and the person or
persons requesting such exchange shall affix any requisite stock transfer
tax stamps to the Pre-Split Series C Certificates surrendered, or provide
funds for their purchase, or establish to the satisfaction of the
Corporation's Secretary that such taxes are not payable;
The Corporation's Series A Preferred Stock shall not be affected by the
filing of this Amendment."
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<PAGE>
AMENDMENT UPON APPROVAL OF THE COMMON STOCK PROPOSAL, THE PREFERRED STOCK
PROPOSAL AND THE STOCK SPLIT
Upon approval of the Common Stock Proposal, the Preferred Stock Proposal and
the Stock Split, the first paragraph of Article Fourth of the Certificate of
Incorporation would be amended to read as follows:
"FOURTH: The total number of shares which the Corporation shall have the
authority to issue is 600,000,000, consisting of 400,000,000 shares of common
stock, par value $0.001 per share (the "Common Stock") and 200,000,000 shares
of preferred stock, par value $0.001 per share (the "Preferred Stock").
Simultaneously with the effective date of this amendment (the "EFFECTIVE
DATE"), each share of the Corporation's Series B Convertible Preferred Stock
having a par value of $0.001 per share issued and outstanding immediately
prior to the Effective Date (the "PRE-SPLIT SERIES B PREFERRED STOCK") shall
automatically and without any action on the part of the holder thereof be
reclassified as and changed into one thousand (1,000) shares of Series B
Convertible Preferred Stock, par value of $0.001 per share (the "POST-SPLIT
SERIES B STOCK"). Each holder of a certificate or certificates which
immediately prior to the Effective Date represented outstanding shares of
Pre-Split Series B Convertible Preferred Stock (the "PRE-SPLIT SERIES B
CERTIFICATES," whether one or more) shall be entitled to receive upon
surrender of such Pre-Split Series B Certificates to the Corporation's
Secretary for cancellation, a certificate or certificates (the "POST-SPLIT
SERIES B CERTIFICATES," whether one or more) representing the number of whole
shares of Post-Split Series B Convertible Preferred Stock into which and for
which the shares of Pre-Split Series B Convertible Preferred Stock formerly
represented by such Pre-Split Series B Certificates so surrendered, are
reclassified pursuant to the terms hereof. From and after the Effective Date,
Pre-Split Series B Certificates shall represent only the right to receive
Post-Split Series B Certificates pursuant to the provisions hereof. If more
than one Pre-Split Series B Certificate shall be surrendered at one time for
the account of the same stockholder, the number of full shares of Post-Split
Series B Convertible Preferred Stock for which the Post-Split Series B
Certificates shall be issued shall be computed on the basis of the aggregate
number of shares represented by the Pre-Split Series B Certificates so
surrendered. If any Post-Split Series B Certificate is to be issued in a name
other than that in which the Pre-Split Series B Certificate surrendered for
exchange are issued, the Pre-Split Series B Certificates so surrendered shall
be properly endorsed and otherwise in proper form for transfer, and the
person or persons requesting such exchange shall affix any requisite stock
transfer tax stamps to the Pre-Split Series B Certificates surrendered, or
provide funds for their purchase, or establish to the satisfaction of the
Corporation's Secretary that such taxes are not payable;
Simultaneously with the Effective Date, each share of the Corporation's
Series C Convertible Preferred Stock having a par value of $0.001 per share
issued and outstanding immediately prior to the Effective Date (the
"PRE-SPLIT SERIES C PREFERRED STOCK") shall automatically and without any
action on the part of the holder thereof be reclassified as and changed into
one thousand (1,000) shares of Series C Convertible Preferred Stock, par
value of $0.001 per share (the "POST-SPLIT SERIES C STOCK"). Each holder of a
certificate or certificates which immediately prior to the Effective Date
represented outstanding shares of Pre-Split Series C Convertible Preferred
Stock (the "PRE-SPLIT SERIES C CERTIFICATES," whether one or more) shall be
entitled to receive upon surrender of such Pre-Split Series C Certificates to
the Corporation's Secretary for cancellation, a certificate or certificates
(the "POST-SPLIT SERIES C CERTIFICATES," whether one or more) representing
the number of whole shares of Post-Split Series C Convertible
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<PAGE>
Preferred Stock into which and for which the shares of Pre-Split Series C
Convertible Preferred Stock formerly represented by such Pre-Split Series C
Certificates so surrendered, are reclassified pursuant to the terms hereof.
From and after the Effective Date, Pre-Split Series C Certificates shall
represent only the right to receive Post-Split Series C Certificates pursuant
to the provisions hereof. If more than one Pre-Split Series C Certificate
shall be surrendered at one time for the account of the same stockholder, the
number of full shares of Post-Split Series C Convertible Preferred Stock for
which the Post-Split Series C Certificates shall be issued shall be computed
on the basis of the aggregate number of shares represented by the Pre-Split
Series C Certificates so surrendered. If any Post-Split Series C Certificate
is to be issued in a name other than that in which the Pre-Split Series C
Certificate surrendered for exchange are issued, the Pre-Split Series C
Certificates so surrendered shall be properly endorsed and otherwise in
proper form for transfer, and the person or persons requesting such exchange
shall affix any requisite stock transfer tax stamps to the Pre-Split Series C
Certificates surrendered, or provide funds for their purchase, or establish
to the satisfaction of the Corporation's Secretary that such taxes are not
payable;
The Corporation's Series A Preferred Stock shall not be affected by the
filing of this Amendment."
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<PAGE>
EXHIBIT "C"
PROPOSED AMENDMENTS TO
THE CERTIFICATE OF INCORPORATINO WITH RESPECT TO THE
SERIES B CONVERTIBLE PREFERRED STOCK AND
SERIES C CONVERTIBLE PREFERRED STOCK
CURRENT CERTIFICATE OF INCORPORATION WITH RESPECT TO THE SERIES B CONVERTIBLE
PREFERRED STOCK
Article III, Subsection D(2) of the Series B Certificate of Designations
currently reads as follows:
"2. If the Recapitalization is not consummated prior to June 30, 1999, the
Dividend Rate shall be deemed to be 15% per annum during the period
commencing on such date and ending on the date the Recapitalization is
consummated."
AMENDMENT OF THE CERTIFICATE OF INCORPORATION WITH RESPECT TO THE SERIES B
CONVERTIBLE PREFERRED STOCK UPON APPROVAL OF THE PREFERRED STOCK AMENDMENT
PROPOSAL
"2. If the Recapitalization is not consummated prior to the earlier to
occur of September 30, 1999 and the date of a meeting of the stockholders
of the Company at which any proposal necessary to consummate the
Recapitalization is defeated, the Dividend Rate shall be deemed to be 15%
per annum during the period commencing on such date and ending on the date
the Recapitalization is consummated."
CURRENT CERTIFICATE OF INCORPORATION WITH RESPECT TO THE SERIES C CONVERTIBLE
PREFERRED STOCK
Article III, Subsection D(2) of the Series C Certificate of Designations
currently reads as follows:
"2. If the Recapitalization is not consummated prior to June 30, 1999, the
Dividend Rate shall be deemed to be 15% per annum during the period
commencing on such date and ending on the date the Recapitalization is
consummated."
AMENDMENT OF THE CERTIFICATE OF INCORPORATION WITH RESPECT TO THE SERIES C
CONVERTIBLE PREFERRED STOCK UPON APPROVAL OF THE PREFERRED STOCK AMENDMENT
PROPOSAL
"2. If the Recapitalization is not consummated prior to the earlier to
occur of September 30, 1999 and the date of a meeting of the stockholders
of the Company at which any proposal necessary to consummate the
Recapitalization is defeated, the Dividend Rate shall be deemed to be 15%
per annum during the period commencing on such date and ending on the date
the Recapitalization is consummated."
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EXHIBIT "D"
December 21, 1998
PRIVATE AND CONFIDENTIAL
The Board of Directors
Aames Financial Corporation
350 South Grand Avenue
Los Angeles, CA 90071
Dear Sirs:
You have requested our opinion as to the fairness from a financial point
of view to the stockholders of Aames Financial Corporation (the "Company") of
the consideration to be received by the Company from Capital Z Financial
Services Fund II, L.P. ("Capital Z") for its investment in the Company pursuant
to a Preferred Stock Purchase Agreement dated as of December 21, 1998 (the
"Preferred Stock Purchase Agreement") by and between the Company and Capital Z.
The Preferred Stock Purchase Agreement provides, among other things, for: (i)
the investment of $75.0 million through the purchase by Capital Z or its
designees of newly designated Series B Convertible Preferred Stock of the
Company (the "Series B Preferred Stock") and newly designated Series C
Convertible Preferred Stock of the Company (the "Series C Preferred Stock" and,
together with the Series B Preferred Stock, the "Preferred Stock") in a private
placement transaction (the "Initial Closing"); (ii) after the Initial Closing
and completion of a recapitalization of the Company, an offering (the "Rights
Offering") to the Company's common stockholders of non-transferable rights to
purchase up to $25.0 million of Series C Preferred Stock; and (iii) the sale to
Capital Z or its designees of any and all shares of Series C Preferred Stock not
purchased by the Company's common stockholders in such Rights Offering (the
transactions referred to in clauses (i), (ii) and (iii) are collectively
referred to as the "Preferred Stock Issuance").
Under the Preferred Stock Purchase Agreement, Capital Z will, on the date
of Initial Closing, subject to the satisfaction or waiver of certain conditions,
purchase shares of Preferred Stock with an aggregate purchase price of $75.0
million. Pursuant to the Rights Offering, the common stockholders of the Company
will have the opportunity to purchase non-transferable rights to purchase shares
of Series C Preferred Stock for an aggregate purchase price of $25.0 million.
Capital Z will act as standby purchaser with respect to the Rights Offering,
will purchase all shares of Series C Preferred Stock that are not purchased by
the Company's stockholders at the same per share purchase price offered to the
common stockholders and will be paid a standby commitment fee of warrants to
purchase 1.25 million shares of the Company's common stock, par value $.001 per
share (the "Common Stock"), at an exercise price of $1.00 per share. The Company
will also pay Capital Z a $2.0 million financial advisory fee in connection with
the transactions under the Preferred Stock Purchase Agreement.
The Preferred Stock will be convertible at any time after the date of
issuance into shares of Common Stock at a ratio of one share of Common Stock for
each $1.00 liquidation preference of Preferred Stock. The Preferred Stock will
accrue dividends at a rate of 6.5% per annum, payable quarterly, which the
Company has the option of accruing for the first two years. The Preferred Stock
will be redeemable by the Company at its option on the tenth anniversary of its
issuance. The terms of the Series B Preferred Stock and the Series C Preferred
Stock will be identical, except that the Series C Preferred Stock will have no
rights to vote to elect directors of the Company. If the Company does not obtain
stockholder approval of certain amendments to its certificate of incorporation
(the "Recapitalization"), and complete such Recapitalization, by June 30, 1999,
then (i) the dividend rate on the Preferred Stock will increase to 15.0% per
annum; and (ii) the Preferred Stock will become mandatorily redeemable on the
sixth anniversary of its issuance; and (iii) the Company will issue to Capital Z
additional warrants to purchase 2.5 million shares of Common Stock at an
exercise price of $1.00 per share.
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After completion of the transactions under the Preferred Stock Purchase
Agreement, Capital Z will own Preferred Stock convertible into Common Stock: (i)
constituting approximately 57.2% of the fully-diluted Common Stock if the Rights
Offering is fully subscribed by the Company's common stockholders and (ii)
constituting approximately 76.3% of the fully-diluted Common Stock if the common
stockholders of the Company do not purchase any Preferred Stock in the Rights
Offering.
As more fully reflected in the Company's quarterly report on Form 10-Q for
the first quarter ending September 30, 1998, the Company's operating performance
and overall financial position have been materially adversely affected by global
conditions in the capital and credit markets, which conditions have particularly
affected companies in the subprime home equity finance sector. These market
conditions have negatively impacted the Company's ability to securitize its
mortgage loans and to achieve securitization gains, severely restricted the
Company's access to credit facilities, precluded access to public equity and
debt markets and adversely affected the premiums received in the whole loan
market. The Company has advised us that under current conditions and at the
present rate it is using cash, without the infusion of capital provided by the
Preferred Stock Purchase Agreement or from another comparable transaction, the
Company's current assets may be insufficient to satisfy its funding requirements
and to allow it to continue to originate loans and to operate its business
through the end of its fiscal quarter ending March 31, 1999.
In arriving at our opinion, we reviewed the Preferred Stock Purchase
Agreement as well as certain financial and other information that was publicly
available or furnished to us by the Company, including information provided
during discussions with management. Included in the information provided during
such discussions were certain financial projections prepared by management of
the Company for the period from January 1, 1998 to December 31, 2000, including
the Company's weekly cash position through March 31, 1999. We also reviewed an
orderly liquidation analysis prepared by management based on the Company's
projections regarding cash flow from the Company's residual assets. In addition,
we reviewed certain financial and securities data of the Company and conducted
such other financial studies, analyses and investigations as we deemed
appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company or its
representatives, or that was otherwise reviewed by us. With respect to the
financial projections and the liquidation analysis supplied to us, we have
assumed that they have been reasonably prepared on the basis reflecting the best
currently available estimates and judgments of the management of the Company as
to the future operating and financial performance of the Company and its
financial assets. We have not assumed any responsibility for making an
independent evaluation of the Company's assets or liabilities or for making any
independent verification of any of the information reviewed by us. In addition,
we have relied as to certain legal matters on advice of counsel to the Company,
including that, the Company's Board of Directors owed and continues to owe its
fiduciary duty to the Common Stockholders of the Company.
The Company has considered various alternative transactions and courses of
action other than the transactions under the Preferred Stock Purchase Agreement,
including other potential private placements or public offerings of equity,
securitizations, additional bank and warehouse financing, strategic joint
ventures, asset sales, mergers and other business combinations. The Company's
management has advised us that, based on time constraints and other factors, it
does not believe that there are alternative transactions or courses of action,
other than the transactions under the Preferred Stock Purchase Agreement,
practically available to the Company that would effectively address the
Company's liquidity and capital concerns.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although
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subsequent developments may affect this opinion, we do not have any obligation
to update, revise or reaffirm this opinion. We are expressing no opinion herein
as to the prices at which the Preferred Stock or the Common Stock will actually
trade at any time. Our opinion does not address the relative merits of the
transactions under the Preferred Stock Purchase Agreement and the other business
strategies that might exist for the Company. Our opinion does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
amendments required to effectuate the transactions under the Preferred Stock
Purchase Agreement.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of
its investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes. DLJ
has performed investment banking and other services for the Company in the past
and has received usual and customary compensation for such services. Most
recently, DLJ (i) acted as financial advisor to the Company in connection with a
$38.0 million equity investment in April 1998 and (ii) acted as co-manager of a
$150.0 million senior note offering for the Company in October 1996. DLJ's
asset-backed group has lead and co- managed 2 and 4 mortgaged-backed
securitizations, respectively, for the Company during the past two years.
Certain investment funds affiliated with DLJ and certain employees of DLJ are
limited partners of Capital Z. Such funds and employees have an aggregate
investment in Capital Z of approximately $25 million.
Based upon the foregoing and such other factors as we deem relevant,
we are of the opinion that the consideration to be received by the Company from
Capital Z for its investment under the Preferred Stock Purchase Agreement is
fair to the Company's stockholders from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
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EXHIBIT "E"
July 16, 1999
PRIVATE AND CONFIDENTIAL
Continuing Directors of the Board
Aames Financial Corporation
350 South Grand Avenue
Los Angeles, CA 90071
Dear Sirs:
You have requested our opinion as to the fairness from a financial point
of view to the stockholders of Aames Financial Corporation (the "Company") of
the consideration to be received by the Company from Capital Z Financial
Services Fund II, L.P. ("Capital Z") for its additional investment in the
Company pursuant to Amendment No. 3, dated as of July 16, 1999 (the
"Amendment"), to the Preferred Stock Purchase Agreement, dated as of December
23, 1998 (as amended, including Amendment No. 3, the "Preferred Stock Purchase
Agreement") by and between the Company and Capital Z. The Amendment provides,
among other things, that (i) Capital Z will purchase from the Company 25,000
shares (the "Additional Shares") of Series C Convertible Preferred Stock, par
value $0.001 per share (the "Series C Preferred Stock"), with an aggregate
liquidation preference of $25 million for an aggregate purchase price of $25
million (the "Additional Investment") and (ii) the Company will pay a fee to
Capital Z consisting of warrants to purchase 1.25 million shares of the
Company's common stock, par value $0.001 per share (the "Common Stock"), at an
exercise price of $1.00 per share. Pursuant to the Preferred Stock Purchase
Agreement, among other things, Capital Z and certain other investors designated
by it invested $76.5 million to purchase a combination of Series C Preferred
Stock and Series B Convertible Preferred Stock, par value $0.001 per share (the
"Series B Preferred Stock" and together with the Series C Preferred Stock, the
"Preferred Stock") (the "Original Transaction").
After the closing of the Additional Investment and completion of the
Recapitalization (as defined below) of the Company, the Company will make an
offering (the "Right Offering") to the Company's common stockholders of
non-transferable rights to purchase up to approximately $31 million aggregate
liquidation preference of the Series C Preferred Stock at the same price per
share as the Additional Investment. Capital Z will act as standby purchaser with
respect to the up to $25 million aggregate liquidation preference of Series C
Preferred Stock that are not purchased by the Company's stockholders at the same
per share purchase price offered to the common stockholders. For acting as
standby underwriter in the Rights Offering, the Company will pay Capital Z a
standby commitment fee consisting of warrants to purchase 1.25 million shares of
Common Stock, at an exercise price of $1.00 per share.
The Preferred Stock will be convertible at any time after the date of
issuance into shares of Common Stock at a ratio of one share of Common Stock for
each $1.00 liquidation preference of Preferred Stock. The Preferred Stock will
accrue dividends at a rate of 6.5% per annum, payable quarterly, which the
Company has the option of accruing for the first two years. The Preferred Stock
will be redeemable by the Company at its option on the tenth anniversary of its
issuance. The Series C Preferred Stock will have no rights to vote to elect
directors of the Company. If the Company does not obtain stockholder approval of
certain amendments to its certificate of incorporation (the "Recapitalization"),
and complete such Recapitalization, by September 30, 1999, then (i) the dividend
rate on the Preferred Stock will increase to 15.0% per annum; and (ii) the
Preferred Stock will become mandatorily redeemable on the sixth anniversary of
its issuance; and (iii) the Company will issue to Capital Z additional warrants
to purchase 3.0 million shares of Common Stock at an exercise price of $1.00 per
share.
After completion of the transactions under the Preferred Stock Purchase
Agreement (including the Additional Investment), Capital Z will own Preferred
Stock convertible into Common Stock: (i) constituting approximately 64.9% of the
diluted Common Stock if the Rights Offering is fully subscribed by the
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<PAGE>
Company's common stockholders and (ii) constituting approximately 80.5% of the
diluted Common Stock if the common stockholders of the Company do not purchase
any Preferred Stock in the Rights Offering.
As more fully reflected in the Company's quarterly reports to the SEC
during the past year, the Company's operating performance and overall financial
position have been materially adversely affected by global conditions in the
capital and credit markets, which conditions have particularly affected
companies in the subprime home equity finance sector. These market conditions
have negatively impacted the Company's ability to securitize its mortgage loans
and to achieve securitization gains, severely restricted the Company's access to
credit facilities, precluded access to public equity and debt markets and
adversely affected the premiums received in the whole loan market. The Company
has advised us that under current conditions and at the present rate it is using
cash, without the infusion of capital provided by the Preferred Stock Purchase
Agreement or from another comparable transaction, the Company will have to
operate at very low levels of liquidity which may be insufficient to satisfy its
funding requirements and to allow it to continue to originate loans and to
operate its business through the end of its fiscal quarter ending September 30,
1999.
In arriving at our opinion, we reviewed the Amendment and the original
Preferred Stock Purchase Agreement, as amended, as well as certain financial and
other information that was publicly available or furnished to us by the Company,
including information provided during discussions with management. Included in
the information provided during such discussions were certain financial
projections prepared by management of the Company for the period from July 1,
1998 to December 31, 2000, including the Company's weekly cash position through
August 31, 1999. We also reviewed an orderly liquidation analysis prepared by
management based on the Company's projections regarding cash flow from the
Company's residual assets. In addition, we reviewed certain financial and
securities data of the Company and conducted such other financial studies,
analyses and investigations as we deemed appropriate for purposes of this
opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company or its
representatives, or that was otherwise reviewed by us. With respect to the
financial projections and the liquidation analysis supplied to us, we have
assumed that they have been reasonably prepared on the basis reflecting the best
currently available estimates and judgments of the management of the Company as
to the future operating and financial performance of the Company and its
financial assets. We have not assumed any responsibility for making an
independent evaluation of the Company's assets or liabilities or for making any
independent verification of any of the information reviewed by us. In addition,
we have relied as to certain legal matters on advice of counsel to the Company,
including that the Company's Board of Directors owed and continues to owe its
fiduciary duty to the common stockholders of the Company.
The Company has considered various alternative transactions and courses of
action other than the transactions under the Amendment, including other
potential private placements or public offerings of equity, securitizations,
additional bank and warehouse financing, strategic joint ventures, asset sales,
mergers and other business combinations. The Company's management has advised us
that, based on time constraints and other factors, it does not believe that
there are alternative transactions or courses of action, other than the
transactions under the Amendment, practically available to the Company that
would effectively address the Company's liquidity and capital concerns. We were
not requested to, nor did we, assist the Company in considering such
alternatives or advise the Company in its negotiation of the Amendment. We
understand that the Amendment and the terms and conditions thereof have been
approved by non-interested directors of the Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm
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<PAGE>
this opinion. We are expressing no opinion herein as to the prices at which the
Preferred Stock or the Common Stock will actually trade at any time. Our opinion
does not address the relative merits of the transactions under the Amendment and
the other business strategies that might exist for the Company. Our opinion does
not constitute a recommendation to any stockholder as to how such stockholder
should vote on the amendments required to effectuate the transactions under the
Amendment.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of
its investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes. DLJ
has performed investment banking and other services for the Company in the past
and has received usual and customary compensation for such services. Most
recently, DLJ (i) acted as financial advisor to the Company in connection with a
$38.0 million equity investment in April 1998 (ii) acted as co-manager of a
$150.0 million senior note offering for the Company in October 1996 and (iii)
acted as exclusive advisor to the Company relating to the Original Transaction.
DLJ's asset-backed group has lead and co- managed two and four mortgaged-backed
securitizations, respectively, for the Company during the past two years.
Certain investment funds affiliated with DLJ and certain employees of DLJ are
limited partners of Capital Z. Such funds and employees have an aggregate
investment in Capital Z of approximately $25 million.
Based upon the foregoing and such other factors as we deem relevant, we
are of the opinion that the consideration to be received by the Company from
Capital Z for the Additional Investment under the Amendment is fair to the
Company's stockholders from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
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<PAGE>
PROXY
AAMES FINANCIAL CORPORATION
ANNUAL MEETING OF STOCKHOLDERS
September 13, 1999
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned holder(s) of common stock of Aames Financial Corporation, a
Delaware corporation (the "Company"), hereby acknowledge(s) receipt of the Proxy
Statement and the Notice of the Annual Meeting of Stockholders of the Company
(the "Annual Meeting") to be held on September 13, 1999, at 10:00 a.m., Los
Angeles time, at the Hotel Inter-Continental, 251 S. Olive Street, Los Angeles,
California, and hereby further revokes all previous proxies and appoints Barbara
S. Polsky, David A. Sklar and Ralph W. Flick as proxies of the undersigned, with
full power of substitution for and in the name of the undersigned, at the Annual
Meeting and any adjournment(s) thereof with the same effect as if the
undersigned were present, for the following purposes:
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK Please mark your vote as [X]
indicated in this example.
<C> <S> <S> <S>
1. To approve an increase of the Company's authorized FOR AGAINST ABSTAIN
common stock by 350,000,000 shares, to an aggregate of [ ] [ ] [ ]
400,000,000 shares.
2. To approve an increase of the Company's authorized FOR AGAINST ABSTAIN
preferred stock by 199,000,000 shares to an aggregate of [ ] [ ] [ ]
200,000,000 shares.
3. To approve a change to September 30, 1999, the date FOR AGAINST ABSTAIN
on which Proposals 1, 2 and 4 must be approved. [ ] [ ] [ ]
4. To approve a 1,000-for-1 forward split of the FOR AGAINST ABSTAIN
Company's Series B and Series C Convertible Preferred [ ] [ ] [ ]
Stock outstanding as of September 13, 1999.
5. ELECTION OF DIRECTORS: The election of the following FOR the nominee WITHHOLD AUTHORITY
person as a director of the Company, as provided in the listed (except as (TO VOTE FOR
Company's Proxy Statement: Eric Rahe marked to the ALL THE NOMINEES
contrary) [ ] LISTED) [ ]
Instruction: To vote against any one nominee, write that
nominee's name in the space provided below:
- ----------------------------
6. The adoption of the Company's 1999 Stock Option Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
7. The ratification of the appointment of Ernst & Young
LLP as the independent accountants of the Company for FOR AGAINST ABSTAIN
fiscal 1999. [ ] [ ] [ ]
</TABLE>
_____THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS YOU HAVE
INDICATED ABOVE. IF NO INDICATION HAS BEEN MADE, THE SHARES
REPRESENTED BY THIS PROXY WILL BE VOTED FOR THE ABOVE NOMINEES AND IN
FAVOR OF THE PROPOSALS AND, AS THE PROXY DEEMS ADVISABLE, ON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING.
YOUR VOTE IS IMPORTANT TO THE COMPANY
PLEASE SIGN AND RETURN YOUR PROXY BY TEARING OFF THE TOP .PORTION OF
THIS SHEET AND RETURNING IT IN THE ENCLOSED POSTAGE- PAID ENVELOPE.
Signature(s) __________________________________, Signature, if held jointly
_____________________ Date________________________, 1999 (Please sign exactly as
your name appears on your stock certificate.) When signing as attorney,
executor, administrator, trustee or guardian, please give full title. If more
than one trustee, all should sign. All joint owners should sign. If a
corporation, sign in full corporation name by President or other authorized
officer. If a partnership, sign in partnership name by authorized person.
Persons signing in a fiduciary capacity should indicate their full title in such
capacity.
