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:
[X] Preliminary Proxy Statement [ ]Confidential, For Use of the
[ ] Definitive Proxy Statement Commission Only as permitted
[ ] Definitive Additional Materials by Rule 14a-6(e)(2)
[ ] 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:
- -------------------------------------------------------------------------------
(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):
- -------------------------------------------------------------------------------
(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:
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[AAMES LOGO]
July ___, 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
________, __________, 1999, at _______ p.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").
On December 23, 1998, as amended on February 10, 1999, June 9, 1999 and
July 16, 1999, the Company entered into a Preferred Stock Purchase Agreement
(the "Agreement") with Capital Z pursuant to which Capital Z has agreed to make
an equity investment in the Company of up to $126.5 million (the "Capital Z
Investment"). The initial phase of the Capital Z Investment occurred on February
10, 1999 when a partnership majority-owned by Capital Z (the "Capital Z
Partnership"), and other parties designated by Capital Z, purchased 76,500
shares of Series B Convertible Preferred Stock and Series C Convertible
Preferred Stock for $1,000 per share, for an aggregate investment of $76.5
million. In connection with this investment, the Company restructured its Board
of Directors. The Board was increased to nine directors, five of whom were
nominated by Capital Z pursuant to the terms of the Agreement. In the second
phase, on or about July 30, 1999, the Capital Z Partnership will purchase 25,000
additional shares of Series C Convertible Preferred Stock for $1,000 per share,
for an aggregate additional investment of $25 million (the "Additional
Investment"). Subject to the approval of the amendments to the Company's
Certificate of Incorporation to be considered at the Meeting, the third phase of
the Capital Z Investment will include an offering to holders of the Company's
common stock of non-transferable rights to purchase up to approximately $31
million of Series C Convertible Preferred Stock at $1.00 per share (the "Rights
Offering") and a sale to Capital Z or its designees of up to $25 million of the
Series C Convertible Preferred Stock not otherwise sold in the Rights Offering.
The Board of Directors of the Company determined that the Capital Z
Investment was in the best interests of the Company and its unaffiliated
stockholders. In reaching this conclusion, the Board took into account the
rapidly worsening financial condition of the Company, serious global liquidity
concerns during late 1998 and the continuation of these concerns for the
industry and the Company in 1999, the lack of a viable option to sell the
Company as a going concern or attract other equity or debt capital, and the
economic terms of the Capital Z Investment. In addition, the Board of Directors,
its Strategic Planning Committee and, in the case of the amendment to the
Agreement adopted in July 1999, the directors other than those appointed or
nominated by Capital Z received opinions from its financial advisor, Donaldson,
Lufkin & Jenrette Securities Corporation, subject to and based upon the various
considerations set forth in the opinions, that the Capital Z Investment was
fair, from a financial point of view, to the Company and its unaffiliated
stockholders.
Following the consummation of the Additional Investment and 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
(computed following the completion of the Rights Offering) for an aggregate of
between $126.8 and $132.8 million. The following are the primary effects of the
Capital Z Investment, the Additional Investment and the contemplated 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 37.9% OF THE VOTING POWER OF THE COMPANY.
o THE STOCK PRICE PRIOR TO THE ANNOUNCEMENT OF THE CAPITAL Z INVESTMENT (AS OF
DECEMBEr 23, 1998) WAS $2.50 AS COMPARED TO THE $1.00 PER SHARE PAID BY
CAPITAL Z FOR CONTROL OF AAMES.
o Capital Z will ultimately beneficially own between 61.1% and 78.2% of the
total equity and voting power of the Company (other than the power to elect
directors). 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 closing of the Additional Investment and the
amount of common 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) is $0.64 at December 31, 1998 compared
to the actual book value per share of $3.40 reported at December 31, 1998.
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o 4 of the 9 directors have been appointed and a fifth nominated by Capital Z.
o We have obtained $76.5 million in additional capital from Capital Z and
other parties designated by Capital Z and will obtain an additional $25
million from the Additional Investment and an additional amount between $25
million and approximately $31 million if the Rights Offering is consummated.
The following table describes the dilutive effect of the Capital Z
Investment (assuming the Additional Investment does occur, but the Rights
Offering does not occur):
PERCENT OF VOTING POWER
PRIOR TO
CAPITAL Z AFTER CAPITAL
INVESTMENT Z INVESTMENT*
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Capital Z -- 75.3%
Other stockholders 100% 24.7%
----
* 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.
The following table describes the dilutive effect of the Capital Z
Investment (assuming the Additional Investment and the Rights Offering occur and
only Capital Z and Mr. Kornswiet, President of the Company, who is contractually
obligated to purchase 1.7 million shares in the Rights Offering, purchase shares
in the Rights Offering):
PERCENT OF VOTING POWER
PRIOR TO
CAPITAL Z AFTER RIGHTS
INVESTMENT OFFERING*
---------- -----------
Capital Z 0% 78.2%
Other stockholders 100% 21.8%
- ----
* 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.
The following table describes the dilutive effect of the Capital Z
Investment (assuming the Additional Investment and the Rights Offering occur and
the common stockholders acquire all of the shares in the Rights Offering):
PERCENT OF VOTING POWER
PRIOR TO
CAPITAL Z AFTER RIGHTS
INVESTMENT OFFERING*
---------- -----------
Capital Z 0% 61.1%
Other stockholders 100% 37.9%
- ----
* 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.
At the Meeting, you will be asked to consider and vote upon several
proposals related to the Capital Z Investment. Specifically, you will be asked
to consider proposals to amend the Company's Certificate of Incorporation to (1)
increase the
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authorized amount of the Company's common stock, (2) increase the authorized
amount of the Company's preferred stock, (3) amend the Certificates of
Designation for 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 senior 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 or 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, it 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.
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,
Steven M. Gluckstern
Chairman of the Board
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AAMES FINANCIAL CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ____________, 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
_________, ____________, 1999, at ________ p.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 Certificates of Designation for 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 _______, 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, which was amended on February
10, 1999, June 9, 1999 and July 16, 1999, with Capital Z, pursuant to which a
partnership majority-owned by Capital Z and certain other investors designated
by Capital Z (collectively, the "Preferred Stock Investors") purchased $76.5
million of the Company's Series B Convertible Preferred Stock and Series C
Convertible Preferred Stock and Capital Z or its designees, agreed to purchase
$25 million of additional Series C Convertible Preferred Stock, and 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
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amendments to its 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
Barbara S. Polsky
Secretary
Los Angeles, California July ___, 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 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.
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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 ______________, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
INTRODUCTION................................................................................................9
General................................................................................................9
Summary................................................................................................10
Our Recommendations to Stockholders.................................................................10
Record Date; Voting Power...........................................................................10
Matters to be Considered at the Meeting.............................................................10
Vote Required to Approve the Proposals..............................................................10
Share Ownership of Certain Stockholders and Management..............................................11
The Capital Z Investment............................................................................12
Background of the Capital Z Investment..............................................................12
Certain Effects of the Capital Z Investment.........................................................13
Terms of the Series B and Series C Convertible Preferred Stock......................................14
Fairness Opinion of Financial Advisor...............................................................15
Required Stockholder Approvals......................................................................15
Reasons for Increasing Authorized Capital and Effecting the Stock Split.............................15
Consequences of Failure to Approve Proposed Amendments to Certificate of Incorporation..............15
Consequences of Approval of the Proposed Amendments to the Certificate of
Incorporation.......................................................................................16
1999 Stock Option Plan..............................................................................16
Ratification of Independent Accountants.............................................................16
Revocability of Proxies................................................................................17
Costs of Solicitation of Proxies.......................................................................17
Voting Securities......................................................................................17
STOCK PROPOSALS.............................................................................................19
Introduction...........................................................................................19
The Stock Proposals and the Stock Split................................................................19
Vote Required..........................................................................................20
Reasons for Increasing Authorized Capital, Amending Certificate of Designation and
Effecting the Stock Split..............................................................................21
Background and Purpose of the Stock Proposals and the Stock Split......................................22
Opinions of Financial Advisor..........................................................................27
Factors Considered by the Board of Directors in Approving the Capital Z Transaction....................30
Board of Directors Recommendations.....................................................................31
ELECTION OF SERIES B DIRECTORS..............................................................................32
ELECTION OF CLASS III COMMON STOCK DIRECTOR.................................................................33
Capital Z and the Board of Directors...................................................................33
MANAGEMENT..................................................................................................34
Information with Respect to Nominees, Continuing Directors and Executive Officers......................34
Board Meetings and Committees..........................................................................35
Compensation of Directors..............................................................................36
Certain Relationships and Related Transactions; Employment Agreements..................................36
Compensation Committee Interlocks and Insider Participation............................................40
PRINCIPAL STOCKHOLDERS......................................................................................41
EXECUTIVE COMPENSATION......................................................................................44
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Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Options.............................46
Section 16(b) Beneficial Ownership Reporting Compliance................................................46
Section 401(k) Plan....................................................................................46
Deferred Compensation Plan.............................................................................46
PERFORMANCE GRAPH...........................................................................................47
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION..............................................47
Executive Compensation.................................................................................47
Performance Bonus Plan.................................................................................48
Executive Compensation--Chief Executive Officer........................................................48
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.......................................................................................50
Adjustments Upon Changes in Capitalization.............................................................51
Change in Control......................................................................................51
Market Value...........................................................................................52
Shares Subject to the 1999 Plan........................................................................52
Federal Income Tax Consequences........................................................................52
New Plan Benefits......................................................................................53
Vote Required and Board of Directors Recommendation....................................................53
PROPOSAL TO RATIFY THE APPOINTMENT OF INDEPENDENT AUDITORS..................................................54
PROPOSALS OF STOCKHOLDERS...................................................................................54
OTHER MATTERS...............................................................................................54
ANNUAL REPORT TO STOCKHOLDERS...............................................................................54
REPORT ON FORM 8-K..........................................................................................54
EXHIBIT A - AAMES FINANCIAL CORPORATION 1999 STOCK OPTION PLAN .............................................55
EXHIBIT B - PROPOSED AMENDMENTS TO ARTICLE FOURTH OF THE COMPANY'S CERTIFICATE OF
INCORPORATION...............................................................................................63
EXHIBIT C - PROPOSED AMENDMENTS TO THE CERTIFICATES OF DESIGNATION
OF SERIES B CONVERTIBLE PREFERRED STOCK AND SERIES C CONVERTIBLE
PREFERRED STOCK.............................................................................................66
</TABLE>
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INTRODUCTION
GENERAL
Aames Financial Corporation (the "Company") is furnishing this Proxy
Statement to you to solicit proxies for use by our Board of Directors for use 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 _____
p.m., Los Angeles time, on _________, 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, you must complete and return the enclosed Proxy to
be represented at the Meeting. We anticipate mailing this Proxy Statement and
the accompanying Proxy to you on or about ___________, 1999.
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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 22, 31, 53 and 54.)
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 17 and 18.)
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 and 76,750
shares of preferred stock 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 on 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;
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 as a
separate class.
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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 as a
separate class.
To approve the proposal to change to September 30, 1999 from June 30,
1999 in the Series B Convertible Preferred Stock 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 as a
separate class.
To approve of the 1,000-for-1 forward stock split of the Series B
Convertible Preferred Stock 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 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 entitled to be 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 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
entitled to be 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 as a single class.
SHARE OWNERSHIP OF CERTAIN STOCKHOLDERS AND MANAGEMENT
(See pages 41 through 43.)
The holders of the Series B Convertible Preferred Stock and Series C
Convertible Preferred Stock and our 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 Convertible Preferred Stock and Series C Convertible
Preferred Stock, Cary Thompson, our former Chief Executive Officer of the
Company 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 proposals
to split the Series B Convertible Preferred Stock and the Series C Convertible
Preferred Stock to be presented at the stockholders' meeting. As of the Record
Date, the holders of Series B Convertible Preferred Stock and Series C
Convertible Preferred Stock and our 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 preferred stock voting together as a single class and 100% each of the
Series B Convertible Preferred Stock and Series C Convertible Preferred Stock.
Because the holders of the Series B Convertible Preferred Stock and
Series C Convertible Preferred Stock and our 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 directors in
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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 a partnership majority-owned by Capital Z. The Capital Z
Investment is described on pages 16 through 17 in this Proxy Statement.
In February 1999, 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 (other
than in the election of directors) of the Company after the investment.
Concurrently with this investment, other investors purchased an aggregate of
$1.75 million of the Series C Convertible Preferred Stock.
On or about July 30, 1999, a partnership majority-owned by Capital Z,
will purchase $25 million of additional Series C Convertible Preferred Stock
(the "Additional Investment") which, together with the $75 million invested n
February 1999, represents 75.3% of the total equity and voting power (other than
the election of directors).
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 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 Convertible Preferred Stock 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 up to 25 million of the shares of Series C Convertible
Preferred Stock not purchased by our common stock holders in this Rights
Offering.
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 (other than the
power to elect directors).
As a result of the transactions described above, Capital Z (through a
partnership majority-owned by Capital Z), immediately following the Rights
Offering and assuming the Additional Investment is made, 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 between 61.1% and 75.3% of our
total equity and voting power (other than the power to elect directors and
assuming that all of the shares offered in the Rights Offering are purchased by
the holders of common stock).
BACKGROUND OF THE CAPITAL Z INVESTMENT
[See pages 22 through 30.]
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
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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 July 1999, Capital Z agreed to make the
Additional Investment.
CERTAIN EFFECTS OF THE CAPITAL Z INVESTMENT
(See pages 30 through 31 and 41 through 43.)
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 (other than the power to elect
directors). 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 closing of the Additional Investment and the
amount of common 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 37.9% of the voting power of the Company
(other than the power to elect directors).
o The pro forma book value per share of common stock (assuming full
subscription of the Rights Offering) is $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 will be appointed and a fifth nominated by Capital Z.
o We have obtained $76.5 million in additional capital and will obtain an
additional $25 million from the Additional Investment from Capital Z and
other parties designated by Capital Z and an additional amount between $25
million and approximately $31 million if the Rights Offering is consummated.
The following table describes the dilutive effect of the Capital Z
Investment (assuming the Additional Investment does occur, but the Rights
Offering does not occur):
PERCENT OF VOTING POWER
PRIOR TO
CAPITAL Z AFTER CAPITAL
INVESTMENT Z INVESTMENT*
---------- ------------
Capital Z -- 75.3%
Other stockholders 100% 24.7%
- -------
* 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.
The following table describes the dilutive effect of the Capital Z
Investment (assuming the Additional Investment and the Rights Offering occur and
only Capital Z and Mr. Kornswiet, the President of the Company who is
contractually obligated to purchase 1.7 million shares in the Rights Offering,
purchase shares in the Rights Offering):
PERCENT OF VOTING POWER
PRIOR TO
CAPITAL Z AFTER RIGHTS
INVESTMENT OFFERING*
---------- -----------
Capital Z 0% 78.2%
Other stockholders 100% 21.8%
- -------
* 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.
The following table describes the dilutive effect of the Capital Z
Investment (assuming the Additional Investment and the Rights Offering occur and
the common stockholders acquire all of the shares in the Rights Offering):
PERCENT OF VOTING POWER
PRIOR TO
CAPITAL Z AFTER RIGHTS
INVESTMENT OFFERING*
---------- -------------
Capital Z 0% 61.1%
Other stockholders 100% 37.9%
- -------
* 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.
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
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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. If the proposed amendments to our
Certificate of Incorporation are not adopted prior June 30, 1999, or if the
amendments to the Series B and Series C Preferred Stock are approved, 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 will increase to 15% per annum.
The current holders of the Series B and Series C Preferred Stock have waived
their right to 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, 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 By-Laws 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 amendment 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 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 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 and preferred stock
and authorize a 1000-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 without the vote of the holders of the common stock.
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 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
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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 After the Additional Investment, Capital Z will control 75.3% of the voting
power (other than the election of directors) 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;
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 31 million of the shares offered in the Rights Offering are purchased
by holders of the common stock, Capital Z's voting power (other than the
election of directors) will be reduced from 75.3% to 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 (other than the power to elect
directors) in the Company will increase from 75.3% to 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 page 51.)
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 Directors set forth herein, (iii) for the election of the
nominee for Common Stock Director set forth herein, (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 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 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 proposal to amend the Certificates of Designation for
the Series B Convertible Preferred Stock 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") 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.
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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 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 entitled to be 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 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 entitled to be 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 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 Stock Proposals, 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 of the Company 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 Stock
Proposals and the Stock Split. At the Record Date, the holders of the Series B
and Series C Convertible Preferred Stock and the 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 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 shares
present (in person or by proxy) and entitled to vote, 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 CERTIFICATES OF
DESIGNATION FOR 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 (the
"Investment") in the Company (the "Investment"). The Investment is to be made as
follows: (i) on February 10, 1999 (the "Initial Closing") a partnership majority
controlled 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 or about July 30, 1999, a partnership controlled by Capital Z will
purchase 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 $31 million 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 to the extent not purchased by the Company's common
stockholders in the Rights Offering (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
Certificates of Designation for 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 Stock Proposals.
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 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, preferred stock by 199,000,000 to 200,000,000 shares and amend the
Certificates of Designation for 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. 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
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<PAGE>
to increase the authorized preferred stock is presented to stockholders as the
Preferred Stock Proposal, the amendments to the Certificates of Designation are
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 in each
case 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.
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 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 Stock Proposals 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. The
holders of the Series B and Series C Convertible Preferred Stock hold 100% of
the total voting power of the Series B and Series C Convertible Preferred Stock
and 73.0% of the total voting power of the Series B and Series C Convertible
Preferred Stock and common stock, voting together as a single class (other than
the power to elect directors). 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.
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<PAGE>
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, AMENDING CERTIFICATES OF DESIGNATION
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, amend the Certificates of Designation for the Series B and Series C
Convertible Preferred Stock 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 were insufficient
shares of authorized common stock to provide for the conversion of outstanding
Series B and Series C Convertible Preferred Stock, there are insufficient shares
of authorized preferred stock to provide for the Rights Offering 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 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.
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 by fully
exercising the Subscription Rights to be issued to him based upon the number of
shares of the Company's common stock held by him, 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
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<PAGE>
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 up to 25 million
of the unsubscribed shares of Series C Convertible Preferred Stock for $1.00 per
share.
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 and assuming the
Additional Investment is made, Capital Z will hold Series B and Series C
Convertible Preferred Stock representing 100% of the voting rights entitled to
elect four of the nine members of the Board of Directors of the Company (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 with respect to all
matters other than the election of Common Stock Directors. 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 and assuming the
Additional Investment is made, Capital Z would hold Series B and Series C
Convertible Preferred Stock representing 78.2% of the combined voting power of
the Company with respect to all matters other than the election of Common Stock
Directors.
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.
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 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 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
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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.
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, (ENDED JUNE 30, (ENDED SEPTEMBER 30, (ENDED DECEMBER 31,
1998) 1998) 1998) 1998)
----- ----- ----- -----
<S> <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 Production 570,896 673,902 725,057 550,218
- ----------
</TABLE>
(1) Includes a valuation adjustment of interest only strips of $191,646,000.
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
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<PAGE>
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 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.
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.
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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 economic
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 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
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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 made a financial presentation evaluating the proposed
transaction from a financial point of view and delivered its opinion that the
terms of the proposed investment and the price to be paid for the Series B and
Series C Convertible Preferred Stock were fair to the Company from a financial
point of view. 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.
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
gross 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 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
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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 Certificates of Designation
for 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 defer the increase in the dividend rate from 6.5%
to 15% on the 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, those
directors other than those appointed or nominated by Capital Z (the "Continuing
Directors"), approved the Additional Investment and the issuance of a warrant
for 1.25 million shares. Counsel to the Company reviewed with the Continuing
Directors the terms of the Additional Investment. DLJ made a financial
presentation evaluating the proposed transaction from a financial point of view
and delivered its opinion that the terms of the proposed investment and the
price to be paid by the Preferred Stock Investors for the Additional Investment
were fair to the Company from a financial point of view. 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 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 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 stockholders from a financial
point of view.
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.
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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.
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 other
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 was advised by its advisor that common stockholders would most
likely have retained little or no value for their shares.
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.
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 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 common stockholders' equity would almost
certainly be
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zero. 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
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.
As a result of this analysis, DLJ concluded that relative to the other
available alternatives, the Original Transaction had the following advantages:
it was immediately achievable; it met the Company's immediate liquidity
requirements; it gave sufficient near-term liquidity to the Company and provided
necessary assurances to its creditors; it allowed the Company to avoid immediate
bankruptcy; and it maintained the Company's flexibility to still pursue a sale
of the Company to a party offering superior terms; and it 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. 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, 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
interest-only and residual certificates that it believed to be most comparable.
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 sub-prime 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 $435.2 million
to a high of approximately $528.8 million 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 $705.1 million to a high of approximately $786.7 million. This
compared to estimated outstanding liabilities of approximately $533.7 million at
December 31, 1998 and outstanding liabilities of approximately $893.9 million on
June 30, 1999. 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.
ORDERLY LIQUIDATION ANALYSIS. In connection with the Original
Transaction and the Additional Investment, 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 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, 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 the in the Additional Investment. 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
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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 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 yearlong 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 upon DLJ's research, the
Board of Directors concluded that a voluntary liquidation of the assets of the
Company would result in an aggregate of between approximately $18.9 million and
$25.4 million (or $0.61 and $0.82 per common share) to the holders of the common
stock of the Company, after deducting expenses relating to such liquidation and
payment of outstanding debt. The Board of Directors noted that this strategic
option would not provide the holders of common stock any value on a
going-forward basis and would not provide the holders of common stock with any
cash disbursement
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until July 2003 or with the ability to enjoy the effects of a possible positive
change in the global capital and credit markets, the asset-backed securities
market and the global equity and debt markets.
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. Based on the report of DLJ, the Continuing
Directors noted that although the 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 Opinion of DLJ. DLJ rendered opinions to the Board of Directors
that the proposed investment by Capital Z, as set forth in the Draft Proposal,
and the transactions contemplated by the Preferred Stock Purchase Agreement, and
to the Continuing Directors that the Additional Investment, were fair to the
holders of common stock of the Company.
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 14 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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<PAGE>
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 in 2001. 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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<PAGE>
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 entitled to be 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 as a single class. The
holders of the Series B Convertible Preferred Stock and each of the executive
officers and directors of the Company have indicated that they intend to vote
all shares of common stock and/or Series B Convertible Preferred Stock held by
them in favor of the nominee listed above. 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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<PAGE>
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 2000
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 and President from September 1995 through its
acquisition by the Company in August 1996. Mr. Kornswiet continues to serve as
Chairman, Chief Executive Officer and President of One Stop, now a wholly owned
subsidiary of the Company. Mr. Kornswiet was also named an Executive Vice
President of the Company in September 1996 and President of the Company in May
1997. From 1992 to 1995, Mr. Kornswiet was President of Quality Mortgage, a
privately held mortgage banking company. From 1983 to 1992, Mr. Kornswiet was a
lawyer specializing in consumer credit and other regulatory matters for
financial institutions and mortgage banking companies.
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<PAGE>
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 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. 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.
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 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
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<PAGE>
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. Currently,
the members of the Audit Committee are Messrs. Coombe, Mizel and Rahe, the
members of the Compensation Committee are Messrs. Gluckstern, Mizel and St.
Laurent and the members of the Stock Option Committee are 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 will sell to Capital Z or its designees 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 up to
25 million of the shares of Series C Convertible Preferred Stock not purchased
by the holders of common stock in the Rights Offering for $1.00 per share. 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 intends to issue to Cap Z Management another warrant to
purchase 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).
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<PAGE>
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. 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 and
Equifin Capital. 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."
On January 26, 1998, the Board of Directors approved the Executive and
Director Loan Program under which directors and executive officers of the
Company are entitled to obtain a mortgage loan from the Company at the Company's
cost of funds (plus 25 basis points) as determined by an approved, independent
investment banking firm. All loans made under the Executive and Director Loan
Program are fixed rate, fully amortized, 15- or 30-year loans with no prepayment
penalties and are underwritten to the Company's underwriting guidelines in
effect at the time of the loan. Participants in this program are not charged any
loan fees except for those fees or costs charged by third parties. The following
executive officers and directors have home refinance loans with the Company for
the following principal amount and outstanding balance (as of 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 of the Company 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 Investors 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 Preferred Stock Amendment 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 Stock
Proposals 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
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<PAGE>
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 certain circumstances, a long-term disability policy providing an annual
disability payment equal to 125% of his base salary and coverage for him and the
dependent members of his family under the Company's medical and dental policies.
Pursuant to the Original Thompson Employment Agreement, at the time he was
hired, Mr. Thompson was also granted a bonus in the form of non-qualified
options to purchase 1,125,000 shares of the common stock and additional
non-qualified options to purchase 670,950 shares of the common stock to assist
him in providing for federal and state income taxes payable as a result of such
bonus options and in recognition of the fact that the Company may benefit from
federal and state tax deductions as a result. In the event of a Severance
Termination (as defined in the agreement) or a voluntary termination following a
Change in Control (generally, a 20% change in the voting power of the common
stock, certain changes in Board membership, a merger or complete liquidation or
dissolution of the Company), the Company was obligated to pay Mr. Thompson two
years' base salary plus an amount based on the performance bonuses previously
paid. In addition, all options held by him 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 by the terms of the Thompson Severance and Consulting Agreement (described
below). 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
Page 38
<PAGE>
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 and effective May 13, 1999, Mr. Thompson entered into the Severance and
Consulting Agreement. Under the terms of the Severance and Consulting Agreement,
Mr. Thompson will (i) receive $500,000 payable in bi-monthly installments, (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.
The Company entered into an employment agreement with Neil B. Kornswiet,
the Company's President and One Stop's Chairman, President and Chief Executive
Officer on August 28, 1997 with an original expiration date of August 27, 2002.
The agreement was amended and restated and extended for an additional two years
in August 1998 (as amended, the "Original Kornswiet Employment Agreement").
Under the Original Kornswiet Employment Agreement, Mr. Kornswiet earned a base
salary of $900,000 per year and was entitled to an annual performance bonus
equal to between $1.35 million and $1.65 million depending on the retail and
broker loan production of the Company (the "Performance Bonus"). Mr. Kornswiet
was also entitled to receive, at the expense of the Company, the use of an
automobile (including all maintenance and expenses associated therewith), a
standard term life insurance policy in the amount of $1 million, a standard term
accidental death policy in the amount of $1 million, under certain
circumstances, a long-term disability policy providing an annual disability
payment equal to 125% of his base salary and coverage for him and the dependent
members of his family under the Company's medical and dental policies. In the
event of a Change in Control (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, and (iv) a
loan in the amount of $1,167,000 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, 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)
Page 39
<PAGE>
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 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 $_______ 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, 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. 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.
Page 40
<PAGE>
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 SHAREPERCENT 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) *
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
Page 41
<PAGE>
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%
- ----------
</TABLE>
* 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. 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 3,320,519 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. Capital Z also 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 and, prior to the Recapitalization have voting and dividend
rights, and rights upon liquidation.
(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.
(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.
Page 42
<PAGE>
(12) Includes 3,300 shares of common stock underlying options which are
currently exercisable or which will become exercisable within 60 days of
July 15, 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 Stock Split, Capital Z will own 26,704,000 shares
of Series B Convertible Preferred Stock, which will be 100% of the
Series B Convertible Preferred Stock issued and outstanding. Upon
completion of the Recapitalization, the 26,704,000 shares of Series B
Convertible Preferred Stock held by Capital Z will be convertible into
26,704,000 shares of common stock.
(17) Upon completion of the Stock Split and assuming the Additional
Investment is made, Capital Z will own 73,296,000 shares of Series C
Convertible Preferred Stock, which will be 97.67% of the Series C
Convertible Preferred Stock issued and outstanding. 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 Stock Split, Mr. St. Laurent will own 1,500,000
shares of Series C Convertible Preferred Stock, which will be 2.0% of
the Series C Convertible Preferred Stock issued and outstanding. 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 Stock Split, 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.
Page 43
<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>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
NAME AND CURRENT 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
- ----------
</TABLE>
(1) The aggregate amount of all perquisites and personal benefits received by
each of the Named Executive Officers in each of fiscal years 1996, 1997 and
1998 was not in excess of $50,000 or 10% of the total of annual salary and
bonus reported for such Named Executive Officer.
(2) 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.
(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.
Page 44
<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>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
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
</TABLE>
(1) The potential realizable value is based on the assumption that the common
stock of the Company appreciates at the annual rate shown (compounded
annually) from the date of grant until the expiration of the option term.
These amounts are calculated pursuant to the applicable requirements of the
SEC and do not represent a forecast of the future appreciation of the
Company's common stock. 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.
Page 45
<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.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES (1)
<TABLE>
<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> <C> <C>
Neil B. Kornswiet -- -- 550,000 / -- -- / --
Cary Thompson -- -- 900,303 /719,997 $2,168,494 /$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
</TABLE>
(1) All amounts shown in this table have been adjusted to reflect the
three-for-two split of the common stock effected on February 21, 1997.
(2) Based upon the last reported sale price of the common stock on the NYSE on
June 30, 1998 ($13.75) less the option exercise price.
(3) As of July 15, 1999, none of the options outstanding were in-the-money. The
closing price on July 15, 1999 was $1.625.
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.
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, 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 of 1933, as amended
("Securities Act"), or the Securities Exchange Act of 1934, as amended
("Exchange Act"), that incorporates future Securities Act or Exchange Act
filings in whole or in part by reference.
During the 1998 fiscal year, the Compensation Committee of the Board of
Directors was comprised of Dr. Melvyn Kinder, Georges St. Laurent and Lee
Masters, 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.
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 an employment agreement entered into in connection with the
Company's acquisition of One Stop, a company of which Mr. Kornswiet was the
Chief Executive Officer, President and sole stockholder. Under the initial terms
of the employment agreement, Mr. Kornswiet was appointed Executive Vice
President of the Company and Chief Executive Officer and President of One Stop.
Upon his appointment as President of the Company in May 1997, Mr. Kornswiet's
employment agreement was revised by the Compensation Committee to increase his
annual base salary from $750,000 to $900,000.
Page 47
<PAGE>
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 his then existing 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 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 his then existing employment agreement and enter into a new
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 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 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 OFFICERS
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 an employment agreement entered into in March 1996 and amended in May
1997 and August 1998 with the approval of the Compensation Committee. Under that
agreement, as amended, Mr. Thompson was paid a base salary of $500,000 and
received a performance bonus under the Company's Performance Bonus Plan with a
Payment Amount of $45,000 for each percentage point for
Page 48
<PAGE>
which return on average equity exceeded the Target ROE. The employment agreement
also provided for the grant of stock options covering 1,795,950 shares. The
Compensation Committee believed that the grant of the options to Mr. Thompson
was necessary to attract Mr. Thompson to the Company and provided the
appropriate level of long-term incentive to foster continued strong growth in
stockholder values.
Upon his appointment as Chief Executive Officer in May 1997, Mr.
Thompson's employment agreement was revised by the Compensation Committee to
increase his base salary to $900,000. Further, at Mr. Thompson's request, the
Compensation Committee replaced the performance bonus provisions of his
agreement with a discretionary bonus subject to the approval of the Board or the
stockholders. Considering the number of stock options Mr. Thompson was granted
at the time he became Chief Executive Officer, the Committee believes his
compensation was primarily performance based.
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 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.
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-statutory 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
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<PAGE>
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.
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 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
shareholders 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).
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<PAGE>
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 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 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
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<PAGE>
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 (and 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.
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. 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
under the 1999 Plan to other key employees. Information with respect to
compensation paid and other benefits, including options, granted in respect of
the 1998 fiscal year to the Named Executive Officers is set forth in the Summary
Compensation Table.
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 entitled to 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.
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PROPOSAL TO RATIFY THE APPOINTMENT OF
INDEPENDENT ACCOUNTANTS
The Board of Directors has 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 entitled to 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.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION OF
THE APPOINTMENT OF ERNST & YOUNG LLP.
PROPOSALS OF STOCKHOLDERS
A proper proposal submitted by a stockholder for presentation at the
Meeting and received at the Company's executive offices no later than _______,
1999, will be included in the Company's Proxy Statement and form of Proxy
relating to the 1999 Annual Meeting. In addition, in the event a stockholder
proposal is not received by the Company by _______, 1999, 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. 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. 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.
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 amended Form 10-K/A for the fiscal year ended June 30, 1998 is being
mailed to stockholders concurrently with this Proxy Statement.
REPORT ON FORM 10-K
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/A FOR THE YEAR ENDED JUNE 30, 1998, AS
AMENDED 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: July ____, 1999 ON BEHALF OF THE BOARD
OF DIRECTORS
Barbara S. Polsky
Secretary
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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
"Compensation 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 Compensation 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 Compensation
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 Compensation Committee shall be final and binding on all optionees.
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.
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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.
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.
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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 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.
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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.
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
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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 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.
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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 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 Date, 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 Setember 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 By-Laws, 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.
(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.
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(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
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EXHIBIT "B"
PROPOSED AMENDMENTS TO
ARTICLE FOURTH OF THE COMPANY'S
CERTIFICATE OF INCORPORATION
CURRENT CERTIFICATE OF INCORPORATION
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, 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 451,000,000, 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, 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, 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, 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").
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
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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. From and after the Effective Date the amount of capital represented
by the shares of Post-Split Series B Stock into which and for which the
shares of the Pre-Split Series B Stock are reclassified pursuant to the terms
hereof shall be the same as the amount of capital represented by the shares
of Pre-Split Series B Stock so reclassified, until thereafter reduced or
increased in accordance with applicable law;
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.
From and after the Effective Date the amount of capital represented by the
shares of Post-Split Series C Stock into which and for which the shares of
the Pre-Split Series C Stock are reclassified pursuant to the terms hereof
shall be the same as the amount of capital represented by the shares of
Pre-Split Series C Stock so reclassified, until thereafter reduced or
increased in accordance with applicable law;
The Corporation's Series A Preferred Stock shall not be affected by the
filing of this Amendment."
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, 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
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(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.
From and after the Effective Date the amount of capital represented by the
shares of Post-Split Series B Stock into which and for which the shares of
the Pre-Split Series B Stock are reclassified pursuant to the terms hereof
shall be the same as the amount of capital represented by the shares of
Pre-Split Series B Stock so reclassified, until thereafter reduced or
increased in accordance with applicable law;
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.
From and after the Effective Date the amount of capital represented by the
shares of Post-Split Series C Stock into which and for which the shares of
the Pre-Split Series C Stock are reclassified pursuant to the terms hereof
shall be the same as the amount of capital represented by the shares of
Pre-Split Series C Stock so reclassified, until thereafter reduced or
increased in accordance with applicable law;
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 CERTIFICATES OF DESIGNATIONS OF
SERIES B CONVERTIBLE PREFERRED STOCK AND
SERIES C CONVERTIBLE PREFERRED STOCK
CURRENT SERIES B CERTIFICATE OF DESIGNATIONS
Article III, Subsection D(2) of the Series B Certificate of Designations
current 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 SERIES B CERTIFICATE OF DESIGNATIONS 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 SERIES C CERTIFICATE OF DESIGNATIONS
Article III, Subsection D(2) of the Series C Certificate of Designations
current 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 SERIES C CERTIFICATE OF DESIGNATIONS 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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PROXY
AAMES FINANCIAL CORPORATION
ANNUAL MEETING OF STOCKHOLDERS
___________, 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 ___________, 1999, at ________, 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)
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<PAGE>
COMMON STOCK
Please mark your vote as [X] indicated in this example.
[X]
1. To approve an increase of the Company's authorized Common Stock by
350,000,000 shares, to an aggregate of 400,000,000 shares.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. To approve an increase of the Company's authorized Preferred
Stock by 199,000,000 shares to an aggregate of 200,000,000 shares.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. To approve a change in the date to September 30, 1999 on which the dividend
will increase on the Company's Senior Preferred Stock.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. To approve a 1,000-for-1 forward split of the Company's Senior Preferred
Stock outstanding as of _________.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
5. ELECTION OF DIRECTORS: The election of the following person as a director of
the Company, as provided in the Company's Proxy Statement Statement:
Eric Rahe
FOR the nominee listed (except as marked to the contrary) [ ]
WITHHOLD AUTHORITY (TO VOTE FOR ALL THE NOMINEES 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 fiscal 1999.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
_____ 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 NOMINEE 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.
