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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _____to _____
COMMISSION FILE NUMBER 0-19604
AAMES FINANCIAL CORPORATION
[Exact name of Registrant as specified in its charter]
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<S> <C>
DELAWARE 95-4340340
[State or other jurisdiction of [I.R.S. Employer
incorporation or organization] Identification No.]
</TABLE>
350 SOUTH GRAND AVENUE, LOS ANGELES, CA 90071-3459
[Address of Registrant's principal
executive offices including zip code]
(323) 210-5000
[Registrant's telephone number,
including area code]
NO CHANGES
[Former name, former address and former fiscal year,
if changed since last report]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
At February 3, 1999, Registrant had 31,015,893 shares of common stock
outstanding.
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TABLE OF CONTENTS
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<CAPTION>
ITEM NO. PAGE NO.
- -------- --------
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheet at December 31, 1998 and
June 30, 1998 (Restated) 3
Condensed Consolidated Statement of Operations for the three and six
months ended December 31, 1998 and 1997 (Restated) 4
Condensed Consolidated Statement of Cash Flows for the six months
ended December 31, 1998 and 1997 (Restated) 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-43
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 43
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 44
Signature Page 46
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2
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AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
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<CAPTION>
DECEMBER 31, 1998 JUNE 30, 1998
----------------- ----------------
(Restated)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 11,790,000 12,322,000
Loans held for sale, at lower of cost or market 271,324,000 198,202,000
Accounts receivable 48,844,000 51,072,000
Interest-only strips, estimated at fair market value 323,246,000 490,542,000
Mortgage servicing rights, net 34,504,000 32,090,000
Equipment and improvements, net 14,730,000 13,939,000
Prepaid and other 17,210,000 17,020,000
----------------- ----------------
Total assets $ 721,648,000 815,187,000
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings $ 306,990,000 286,990,000
Revolving warehouse facilities 249,500,000 141,012,000
Accounts payable and accrued expenses 45,003,000 49,964,000
Income taxes payable 14,792,000 33,170,000
----------------- ----------------
Total liabilities 616,285,000 511,136,000
----------------- ----------------
Stockholders' equity:
Preferred Stock, par value $.001 per
share, 1,000,000 shares authorized;
none outstanding - -
Common Stock, par value $.001 per share
50,000,000 shares authorized;
31,015,900 and 30,962,600 shares outstanding 31,000 31,000
Additional paid-in capital 250,096,000 249,851,000
Retained earnings (deficit) (144,764,000) 54,169,000
----------------- ----------------
Total stockholders' equity 105,363,000 304,051,000
----------------- ----------------
Total liabilities and stockholders' equity $ 721,648,000 815,187,000
================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
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AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------- -------------------------------
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
--------------- --------------- --------------- --------------
(Restated) (Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue:
Gain on sale of loans $ 8,752,000 35,130,000 28,429,000 66,438,000
Net gain (loss) on valuation of interest-only
strips and mortgage servicing rights (191,646,000) 5,726,000 (186,451,000) 10,755,000
Commissions 7,758,000 7,161,000 17,746,000 13,016,000
Loan servicing 11,629,000 10,362,000 20,854,000 20,144,000
Fees and other 9,084,000 11,962,000 22,760,000 24,487,000
-------------- --------------- --------------- --------------
Total revenue including valuation adjustment (154,423,000) 70,341,000 (96,662,000) 134,840,000
-------------- --------------- --------------- --------------
Expenses:
Compensation 19,907,000 24,561,000 43,701,000 46,320,000
Production 10,559,000 7,541,000 21,489,000 13,338,000
General and administrative 13,784,000 9,580,000 27,172,000 17,665,000
Interest 9,403,000 10,819,000 22,285,000 20,917,000
-------------- --------------- --------------- --------------
Total expenses 53,653,000 52,501,000 114,647,000 98,240,000
-------------- --------------- --------------- --------------
Income (loss) before income taxes (208,076,000) 17,840,000 (211,309,000) 36,600,000
Provision (benefit) for income taxes (12,331,000) 8,670,000 (13,408,000) 17,497,000
-------------- --------------- --------------- --------------
Net income (loss) $ (195,745,000) 9,170,000 (197,901,000) 19,103,000
============== =============== =============== ==============
Net income (loss) per share:
Basic $ (6.31) 0.33 (6.39) 0.69
Diluted (6.27) 0.29 (6.34) 0.59
Dividends per share - 0.03 0.03 0.07
Weighted average number shares outstanding:
Basic 31,007,000 27,799,000 30,992,000 27,784,000
============== =============== =============== ==============
Diluted 31,211,000 34,949,000 31,239,000 35,272,000
============== =============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
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AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(Unaudited)
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<CAPTION>
SIX MONTHS ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
--------------------- ------------------
(Restated) (Restated)
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Operating activities:
Net income (loss) $ (197,901,000) $ 19,103,000
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 2,469,000 1,845,000
Gain on sale of loans (35,716,000) (72,564,000)
Net loss (gain) on valuation of interest-only strips and
mortgage servicing rights 186,451,000 (10,755,000)
Amortization (accretion) of interest-only strips 14,386,000 (3,523,000)
Mortgage servicing rights originated (6,194,000) (10,664,000)
Mortgage servicing rights amortized 5,955,000 4,087,000
Changes in assets and liabilities:
Loans originated or purchased (1,275,276,000) (1,138,802,000)
Proceeds from sale of loans 1,202,154,000 1,165,928,000
Increased (decrease) in:
Accounts receivable 2,228,000 17,762,000
Prepaid and other (190,000) (751,000)
Increase in (decrease) in:
Accounts payable and accrued expenses (4,961,000) 9,008,000
Income taxes payable (18,378,000) 12,700,000
---------------------- ------------------
Net cash used in operating activities (124,973,000) (6,626,000)
---------------------- ------------------
Investing activities:
Purchases of equipment and property improvements (3,260,000) (1,995,000)
--------------------- ------------------
Net cash used in investing activities (3,260,000) (1,995,000)
--------------------- ------------------
Financing activities:
Proceeds from sale of stock or exercise of options 235,000 244,000
Proceeds from borrowings 20,000,000 --
Net proceeds under revolving warehouse facilities 108,488,000 (8,000,000)
Dividends paid (1,022,000) (1,834,000)
--------------------- ------------------
Net cash provided by (used in) financing activities 127,701,000 (9,590,000)
--------------------- ------------------
Net decrease in cash and cash equivalents (532,000) (18,211,000)
Cash and cash equivalents at beginning of period 12,322,000 26,902,000
--------------------- ------------------
Cash and cash equivalents at end of period $ 11,790,000 $ 8,691,000
===================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
5
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AAMES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The condensed consolidated financial statements of Aames Financial
Corporation, a Delaware corporation, and its subsidiaries (collectively, the
"Company") included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted.
The condensed consolidated financial statements include the accounts
of the Company and all of its subsidiaries after eliminating all significant
intercompany transactions and reflect all normal, recurring adjustments which
are, in the opinion of management, necessary to present a fair statement of the
results of operations of the Company for the interim periods reported. The
results of operations for the Company for the three and six months ended
December 31, 1998 are not necessarily indicative of the results expected for the
full fiscal year.
Additionally, certain amounts related to fiscal year 1998 have been
reclassified to conform to the fiscal year 1999 presentation.
NOTE 2: RESTATEMENT OF PRIOR PERIOD RESULTS
In December 1998, the FASB issued, in question and answer format, "A
Guide to Implementation of Statement 125 on Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, Questions and
Answers, Second Edition" (the "Special Report"). The Special Report indicates
that two methods have arisen in practice for accounting for credit enhancements
relating to securitization. These methods are the cash-in method and the
cash-out method. The cash-in method treats credit enhancements (pledged loans or
cash) as belonging to the Company. As such, these assets are recorded at their
face value as of the time they are received by the trust. The cash-out method
treats credit enhancements as assets owned by the related securitization trust.
As such, these assets are treated as part of the interest-only strips and are
recorded at a discounted value for the period between when collected by the
trust and released to the Company. The Special Report indicates that if no true
market exists for credit enhancement assets, the cash-out method should be used
to measure the fair value of credit enhancements.
The Company has historically used the cash-in method to account for
its interest-only strips. However, during the three months ended December 31,
1998, the Company retroactively changed its practice of measuring and accounting
for its interest-only strips to the cash-out
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method in response to the FASB's Special Report and to public comments from the
Securities and Exchange Commission released on December 8, 1998.
Under the cash-in method previously used by the Company, the assumed
discount period for measuring the present value of the interest-only strips
ended when the cash flows were received by the securitization trust; and, the
initial deposits to overcollateralization accounts were recorded at face value.
Under the cash-out method now required by the FASB and Securities and Exchange
Commission, the assumed discount period for measuring the present value of the
interest-only strips ends when cash, including the return of any initial
deposits, is distributed to the Company on an unrestricted basis. The change to
the cash-out method results only in a difference in the timing of revenue
recognition from a securitization and has no effect on the total cash flows of
securitization transactions. While the total amount of revenue recognized over
the term of a securitization is the same under either method, the cash-out
method results in lower initial gains on the sale of loans due to the longer
discount period, and higher subsequent loan servicing revenue resulting from the
impact of discounting cash flows.
Accordingly, the Company's condensed consolidated results of
operations of all periods prior to December 31, 1998 as presented herein have
been restated. Results for the three months and six months ended December 31,
1998 also reflect the cash-out method.
The Company's financial results for all prior periods will be
restated to reflect the cash- out method of accounting and reporting for its
interest-only strips. The aggregate pretax amount of this change in accounting
is $67.1 million.
As used throughout this document, interest-only strips includes
overcollateralization amounts.
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The restatement resulted in the following changes to prior financial
information (Unaudited. Dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Six
Months Months
Ended Ended Year Ended June 30,
------------ ------------- -------------------------------------------------------
December 31, 1997 1998 1997 1996 1995
----------------------------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Previous $ 76,761 146,103 286,110 238,578 141,840 54,939
As restated 70,341 134,840 266,489 214,531 128,428 48,400
Net income:
Previous 13,343 26,424 40,317 17,109 29,791 10,034
As restated 9,170 19,103 27,563 1,478 21,073 5,784
Earnings per share:
Basic:
Previous 0.48 0.95 1.41 0.65 1.37 0.74
As restated 0.33 0.69 0.97 0.06 0.97 0.43
Diluted:
Previous 0.41 0.80 1.23 0.60 1.14 0.74
As restated 0.29 0.59 0.89 0.05 0.82 0.43
Interest-only strips:
(end of period)
Previous 481,354 481,354 554,161 383,249 173,789 56,960
As restated 426,093 426,093 490,542 339,251 153,838 50,421
Stockholders' equity:
(end of period)
Previous 293,188 293,188 345,403 268,354 133,429 80,047
As restated 257,268 257,268 304,051 239,755 120,461 75,797
</TABLE>
NOTE 3: SUBSIDIARY GUARANTORS
In October 1996, the Company completed an offering of its 9.125%
Senior Notes due 2003 which were guaranteed by all of the Company's operating
subsidiaries, all of which are wholly-owned. The guarantees are joint and
several, full, complete and unconditional. There are no restrictions on the
ability of such subsidiaries to transfer funds to the Company in the form of
cash dividends, loans or advances. The Company is a holding company with limited
assets or operations other than its investments in its subsidiaries. Separate
financial statements of the guarantors are not presented because the aggregate
total assets, net earnings and net equity of such subsidiaries are substantially
equivalent to the total assets, net earnings and net equity of the Company on a
consolidated basis.
NOTE 4: SUBSEQUENT EVENT - ISSUANCE OF PREFERRED STOCK
On February 10, 1999, the Company issued 26,704 shares of Series B
Convertible Preferred Stock and 49,796 shares of Series C Convertible Preferred
Stock to Capital Z Financial Services Fund II, L.P. (and certain investors
designated by it) and received in return proceeds of $70.6 million, which were
net of $5.9 million of issuance related expenses.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
Company's Condensed Consolidated Financial Statements included in Item 1 of this
Form 10-Q.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Report contains statements that constitute "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934 and Section 27A of the Securities Act of 1933. The words "expect,"
"estimate," "anticipate," "predict," "believe," and similar expressions and
variations thereof are intended to identify forward-looking statements. Such
statements appear in a number of places in this filing and include statements
regarding the intent, belief or current expectations of the Company, its
directors or officers with respect to, among other things (a) market conditions
in the securitization, capital, credit and whole loan markets and their future
impact on the Company's operations, (b) trends affecting the Company's liquidity
position, including, but not limited to, its access to warehouse and other
credit facilities and its ability to effect whole loan sales, (c) the impact of
the various cash savings plans and other restructuring strategies being
considered by the Company, (d) the Company's on-going efforts in improving its
equity position, (e) trends affecting the Company's financial condition and
results of operations, (f) the Company's plans to address the Year 2000 problem
and (g) the Company's business and liquidity strategies. The stockholders of the
Company are cautioned not to put undue reliance on such forward-looking
statements. Such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual results may differ
materially from those projected in this Report, for the reasons, among others,
discussed under the captions, "Overview-Market Conditions," "- Recent Events,"
and "- Risk Factors." The Company undertakes no obligation to publicly revise
these forward-looking statements to reflect events or circumstances that arise
after the date hereof. Readers should carefully review the factors referred to
above and the other documents the Company files from time to time with the
Securities and Exchange Commission, including the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1998, the quarterly reports on Form
10-Q filed by the Company during the remainder of fiscal 1999, and any current
reports on Form 8-K filed by the Company.
RECENT EVENTS
On December 23, 1998 the Company entered into a Preferred Stock
Purchase Agreement (the "Stock Purchase Agreement") with Capital Z Financial
Services Fund II, L.P., a Bermuda limited partnership ("Capital Z"), providing
for an equity investment of up to $100 million in the Company. The investment is
to be made in three stages, as follows: (i) on February 10, 1999 (the "Initial
Closing"), Capital Z and certain other investors designated by it purchased
26,704 shares of the Series B Convertible Preferred Stock ("Series B Preferred
Stock") of the Company and 49,796 shares of the Series C Convertible Preferred
Stock ("Series C Preferred Stock") of the Company for $1,000
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per share, or an aggregate purchase price of $76.5 million (the "Initial
Investment"); (ii) as soon as practicable following the Initial Investment,
subject to the receipt of stockholder approval of an increase in the Company's
authorized common and preferred stock (together with a 1000 to 1 stock split of
the preferred stock (the "Recapitalization")), the Company intends to make a
distribution in the form of a dividend to the common stockholders of the Company
of nontransferable subscription rights to purchase up to $25 million of Series C
Preferred Stock for $1.00 per share (the "Rights Offering"), and (iii) Capital Z
has agreed to purchase any shares of the Series C Preferred Stock which are not
purchased by common stockholders in the Rights Offering. In addition, certain
members of the Company's management team have agreed to purchase 920 shares of
the Series C Preferred Stock for $1,000 per share, and other members of the
Management team have agreed to exercise their rights to purchase $1,667,000
shares of Series C Preferred Stock in the Rights Offering for $1.00 per share.
On January 4, 1999, a designee of Capital Z received, as a standby commitment
fee, warrants to purchase 1,250,000 of the Common Stock at an exercise price of
$1.00 per share. In addition, at the time of the Initial Closing, the Company
paid a designee of Capital Z a $1,000,000 transaction fee in connection with the
transactions contemplated by the Stock Purchase Agreement and Capital Z received
an additional warrant (the "Contingent Warrant") to purchase up to 3,000,000
shares of the common stock at an exercise price of $1.00 per share, which is
exercisable only if the Recapitalization is not completed by June 30, 1999. In
addition, in connection with the transactions contemplated by the Stock Purchase
Agreement, the Company has paid Capital Z aggregate additional fees of
$2,000,000 and has agreed to reimburse Capital Z for all of its expenses
incurred in connection with the negotiation and execution of the Stock Purchase
Agreement and the transactions contemplated thereby.
Pursuant to the terms of the Series B Preferred Stock and Series C
Preferred Stock, if the Company fails to effect the Recapitalization prior to
June 30, 1999, (i) the dividend rate on the Series B Preferred Stock and Series
C Preferred Stock will increase from 6.5% to 15% per annum and (ii) the
Contingent Warrant will become exercisable. 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 Preferred Stock
and Series C Preferred Stock will participate in dividends and rights in
liquidation with holders of the common stock in any remaining assets of the
Company.
The Board of Directors of the Company, effective as of the Initial
Closing, consists of nine Directors divided into two classes. One class,
consisting of four Directors (the "Series B Directors") are elected by the
holders of the Series B Preferred Stock, voting as a single class, annually and
the other class of Directors, consisting of five Directors (the "Common Stock
Directors"), one of whom is nominated by Capital Z, are elected by the holders
of the common stock and the holders of the Series B Preferred Stock, voting
together as a single class, for staggered three year terms. The holders of the
Series C Preferred Stock are not entitled to vote with respect to the election
of Directors. As of February 10, 1999, Capital Z holds Series B Preferred Stock
and Series C Preferred Stock representing 100% of the voting rights entitled to
elect the Series B Directors, 46.3% of the voting rights entitled to elect the
Common Stock Directors and 69.8% of the voting rights entitled to vote with
respect to all other matters. Moreover, the investment by Capital Z results in a
change in control for income tax purposes thereby limiting future net operating
loss and certain other future deductions.
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OVERVIEW - MARKET CONDITIONS
The results of operations for the quarter ended December 31, 1998
reflect the negative market conditions that existed in the quarter. While the
U.S. capital and credit markets stabilized in December from the global economic
crises of the previous months, the subprime home equity sector generally and the
Company specifically continued to feel the adverse effects of restricted access
to the capital and credit markets. As previously disclosed, the negative market
conditions resulted in an operational loss for the quarter. Further, these
negative market conditions caused the Company to record a net loss in valuation
of its interest-only strips for the quarter in the amount of $192 million (the
"Write-Down"). The Write-Down reflects the impact of these market conditions on
the prepayment, loss and discount rate assumptions applied by the Company in
estimating the fair value of its interest-only strips. See "- Certain Accounting
Considerations -- Accounting for Securitizations."
As has been previously disclosed, during the quarter, the Company was
dependent upon one committed warehouse line in the amount of $300 million.
Throughout the quarter, the Company attempted to obtain additional lines.
However, the Company was unable to obtain such lines. In conjunction with the
Initial Closing under the Stock Purchase Agreement, effective February 10, 1999,
the Company obtained an additional $400 million in committed repurchase
facilities and an additional $100 million in an uncommitted facility. Further,
the Company is in negotiations with respect to additional warehouse and
repurchase lines. However, there can be no assurance that such negotiations will
be successful or that any additional warehouse or repurchase lines will be
obtained.
The Company was precluded from completing a securitization during the
second fiscal quarter due to the negative cash flows associated with a
securitization and the weak asset-backed market. Foregoing the higher gains of
the securitization market had an adverse impact on the Company's profitability
as it was forced to rely upon less profitable whole loan sales as a means of
disposing of its loan production. Constraints upon the Company's access to
warehouse funding sources contributed to the Company's need to expedite its
whole loan sales putting further downward pressure on the whole loan prices.
Moreover, the weakness in the asset-based market caused other subprime lenders
to rely on the whole loan market for their loan disposition strategy. The result
was an abundance in the supply, and a lowering of the prices paid (in some cases
to prices lower than the Company's cost of producing loans), for whole loans and
tightening of underwriting guidelines applied by the whole loan purchasers. The
Company attempted to mitigate these effects by raising its prices and tightening
its underwriting guidelines for its loan products which had the effect of
decreasing loan production in the second quarter. See "- General." As previously
disclosed, sales of loans in the whole loan market contributed to the loss in
the quarter ended December 31, 1998. Additionally, the Company's sale of whole
loans during the quarter on a servicing released basis precluded the growth of
its servicing portfolio.
Recent improvements in the asset-backed market and a reduction in the
number of whole loan sellers have lessened the over-supply of loan product in
that market and resulted in an increase in whole loan prices. Nevertheless, the
profitability of the whole loan market is significantly lower
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than the securitization market. In the quarter ended March 31, 1999, the Company
expects to record a loss as it will continue to rely solely on the whole loan
market for its loan dispositions and will not yet have realized the benefits
from its cost savings plan. See "- Expenses." The Company will monitor market
conditions and cash flow to determine the optimal time to re-enter the
securitization market. Management currently expects that it will re-enter the
securitization market in the June 1999 quarter. However, no assurance can be
given that market conditions will not change or other events will not occur that
would preclude or inhibit the Company's ability to complete a securitization in
the June 1999 quarter.
The Company's liquidity crisis was further exacerbated during the
quarter ended December 31, 1998 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. The cash advances are then reimbursed from
payments received on performing loans in the pools, typically within 10 days.
Under its then existing credit facilities, 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. Management believes that this lender was willing to expand the
facility due to the Company's then- advanced discussions with Capital Z.
Advances under the facility were secured by certain of the Company's
interest-only strips. Under the terms of the credit facility, funds were also
available to help satisfy the January 1999 servicing advance conditioned on the
Stock Purchase Agreement being in full force and effect, as well as the
satisfaction of other conditions. If the Company would have been unable to
arrange for funds necessary to make the servicing advances, the Company would
very likely have had to engage in extraordinary transactions, such as seeking
subservicing arrangements that included the obligation to make servicing
advances or strategic asset sales, to provide the liquidity necessary to
operate. 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.
Management believes that the capital from the Initial Investment will
assist the Company in satisfying its servicing advance obligations. See "-
Liquidity." However, management is seeking to implement plans to reduce the
burden of these advances on its available cash. These plans may include
establishing working lines of credit secured by interest-only strips,
credit-enhancing servicing advances to efficiently borrow against them, entering
into sub-servicing arrangements (including the obligation to make servicing
advances) with respect to certain pools of loans with the highest percentage of
delinquencies or other financing arrangements.
GENERAL
The Company is a consumer finance company primarily engaged, through
its subsidiaries, in the business of originating, purchasing, selling, and
servicing home equity mortgage loans secured by single family residences. Upon
its formation in 1991, the Company acquired Aames Home Loan,
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a home equity lender founded in 1954. In August 1996, the Company acquired One
Stop Mortgage, Inc. ("One Stop") which originates mortgage loans primarily
through a broker network. In March 1998, the Company augmented its retail
production by establishing One Stop Retail Direct ("Retail Direct"). Unlike the
Company's traditional retail network, which uses a centralized marketing
approach, Retail Direct uses a decentralized marketing approach at the branch
level.
The Company's principal market is borrowers whose financing needs are
not being met by traditional mortgage lenders for a variety of reasons,
including the need for specialized loan products or credit histories that may
limit such borrowers' access to credit. The Company believes these borrowers
continue to represent an underserved niche of the home equity loan market and
present an opportunity to earn a superior return for the risk assumed. The
residential mortgage loans originated and purchased by the Company, which
include fixed and adjustable rate loans, are generally used by borrowers to
consolidate indebtedness or to finance other consumer needs rather than to
purchase homes.
The Company originates and purchases loans nationally through three
production channels - retail, broker and correspondent. In recent quarters, the
Company has emphasized its core retail and broker loan production channels and
decreased its reliance on correspondent purchases. During the three and six
months ended December 31, 1998, the Company originated and purchased $550
million and $1.28 billion, respectively, of mortgage loans. The Company
underwrites and appraises every loan it originates and generally reviews
appraisals and re-underwrites all loans it purchases. Included in the $1.28
billion of loans originated during the six months ended December 31, 1998 is
$14.4 million of commercial loans originated through the Company's commercial
loan division which ceased operations in January 1999.
The Company retains the servicing on the loans it originates or
purchases and securitizes. The Company completed the transfer in-house of $1.64
billion of loans previously subserviced for the Company by third parties in the
18 month period ending December 31, 1998, $1.32 billion of which was transferred
between December 1997 and March 1998. At December 31, 1998, the Company serviced
100% of its $4.43 billion servicing portfolio as compared to 75% of the $3.75
billion servicing portfolio at December 31, 1997. See "- Revenue."
As a fundamental part of its business and financing strategy, the
Company sells its loans to third party investors in the secondary market. The
Company maximizes opportunities in its loan disposition transactions by selling
its loan production through a combination of securitizations and whole loan
sales, depending on market conditions, profitability and cash flows. For a
discussion of the impact of current market conditions on the Company's loan
disposition strategies, see "Overview - Market Conditions." The Company sold
$501 million and $606 million of loans during the three months ended December
31, 1998 and 1997, respectively, and $1.20 billion and $1.15 billion of loans
during the six months ended December 31, 1998 and 1997, respectively. Of the
total amount of loans sold during the six months ended December 31, 1998 and
1997, $650 million and $1.10 billion were sold in securitizations, respectively.
The Company did not complete a securitization during the quarter ended December
31, 1998.
13
<PAGE> 14
The following table presents the volume of loans originated and
purchased by the Company and the portfolio serviced by the Company during the
periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Broker network $ 289,492 273,756 640,293 (1) 535,590
Retail (2) 197,937 157,292 426,114 290,838
Correspondent 62,789 184,615 208,868 312,374
----------- ------- ---------- --------
Total $ 550,218 615,663 1,275,275 1,138,802
=========== ======= ========== =========
Servicing portfolio at period end $4,429,000 (3) 3,751,000
</TABLE>
- ------------------
(1) Includes $14.4 million of commercial loans.
(2) Includes loans brokered to institutional investors for 1997.
(3) Includes $248 million of loans subserviced for others by the Company
on an interim basis.
Total originations decreased 11% from $616 million for the quarter
ended December 31, 1997 to $550 million for the quarter ended December 31, 1998.
More dramatic, however, was the $175 million, or 24%, decline in originations
from the previous fiscal quarter. The decline in originations resulted from a
combination of the Company's limited warehouse capacity and price and
underwriting changes implemented to permit the Company to access the whole loan
market and stay within its liquidity constraints. See "- Overview - Market
Conditions." Despite the decrease in total loan production on a sequential
quarterly basis, the Company's core operations, retail and broker, increased 13%
to $487 million for the quarter ended December 31, 1998 from $431 million for
the quarter ended December 31, 1997. The growth in core originations was due
primarily to the increase in retail and broker branches during the second fiscal
quarter of 1998 over those operating in the comparable period in 1997. The
Company's retail originations were $198 million for the quarter ended December
31, 1998 compared to $158 million for the quarter ended December 31, 1997.
Origination volume for the broker network reached $289 million for the quarter
ended December 31, 1998 compared to $274 million for the quarter ended December
31, 1997. Correspondent purchases were $63 million for the quarter ended
December 31, 1998 compared to $185 million for the quarter ended December 31,
1997. The decline in the second fiscal quarter of 1998 in correspondent loan
purchases reflects pricing changes implemented by the Company in response to the
Company's liquidity constraints and the emphasis on core operation loan
origination.
Total loan production for the six months ended December 31, 1998
increased 12% to $1.28 billion from $1.14 billion for the six months ended
December 31, 1997. The Company's retail originations increased 46% to $426
million for the six months ended December 31, 1998 compared to $291 million for
the six months ended December 31, 1997. Origination volume for the broker
network reached $640 million for the six months ended December 31, 1998, up 19%
compared to $536 million for the six months ended December 31, 1997.
Correspondent volume decreased 33%
14
<PAGE> 15
from $312 million in the six months ended December 31, 1997 to $209 million for
the six months ended December 31, 1998. See "- Overview - Market Conditions."
In February 1999, the Company changed its pricing levels in its core
loan production and correspondent loan production channels. Management expects
that these changes will increase loan production from the December quarter's
volumes.
At February 9, 1999, the Company operated 89 retail loan offices
serving 33 states (including the District of Columbia), compared to 73 offices
serving 30 states at December 31, 1997. At February 9, 1999, the broker division
operated 40 branches serving 46 states (including the District of Columbia),
compared to 41 branches serving 39 states at December 31, 1997. At February 9,
1999, Retail Direct operated 21 offices serving 12 states. See "- Expenses."
15
<PAGE> 16
CERTAIN ACCOUNTING CONSIDERATIONS
New Accounting Development. In December 1998, the FASB issued, in
question and answer format, "A Guide to Implementation of Statement 125 on
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, Questions and Answers, Second Edition" (the "Special Report").
The Special Report indicates that two methods have arisen in practice for
accounting for credit enhancements relating to securitization. These methods are
the cash-in method and the cash-out method. The cash-in method treats credit
enhancements (pledged loans or cash) as belonging to the Company. As such, these
assets are recorded at their face value as of the time they are received by the
trust. The cash-out method treats credit enhancements as assets owned by the
related securitization trust. As such, these assets are treated as part of the
interest-only strips and are recorded at a discounted value for the period
between when collected by the trust and released to the Company. The Special
Report indicates that if no true market exists for credit enhancement assets,
the cash-out method should be used to measure the fair value of credit
enhancements.
Restatement of Prior Period Results. The Company has historically
used the cash-in method to account for its interest-only strips. However, during
the three months ended December 31, 1998, the Company retroactively changed its
practice of measuring and accounting for its interest-only strips to the
cash-out method in response to the FASB's Special Report and to public comments
from the Securities and Exchange Commission released on December 8, 1998.
Under the cash-in method previously used by the Company, the assumed
discount period for measuring the present value of the interest-only strips
ended when the cash flows were received by the securitization trust; and, the
initial deposits to overcollateralization accounts were recorded at face value.
Under the cash-out method now required by the FASB and Securities and Exchange
Commission, the assumed discount period for measuring the present value of the
interest-only strips ends when cash, including the return of any initial
deposits, is distributed to the Company on an unrestricted basis.
The change to the cash-out method results only in a difference in the
timing of revenue recognition from a securitization and has no effect on the
total cash flows of securitization transactions. While the total amount of
revenue recognized over the term of a securitization is the same under either
method, the cash-out method results in lower initial gains on the sale of loans
due to the longer discount period, and higher subsequent loan service revenue
resulting from the impact of discounting cash flows. See "- Revenue."
To quantify the impact of the change in accounting, the Company
measured the difference between the face value of its residual assets and the
value of its residual assets when measured on a discounted basis. Further, the
Company used the same assumptions for prepayment, loss and discount rates as
were used in the periods affected. The impact of moving to the cash-out method
was approximately 11.5% of the interest-only strips asset (excluding the effects
of the Write-Down). The use of such a percentage was deemed reasonable for
purposes of restating prior period consolidated financial statements.
16
<PAGE> 17
As a result, the Company's consolidated results of operations for all
prior periods have been restated. The aggregate pretax amount of this change in
accounting is $67.1 million. Results for the three months and six months ended
December 31, 1998 also reflect the cash-out method.
The restatement resulted in the following changes to prior financial
information (Unaudited. Dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Six
Months Months
Ended Ended Year Ended June 30,
---------- ----------- ------------------------------------------------------
December 31, 1997 1998 1997 1996 1995
------------------------------- --------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Previous $ 76,761 146,103 286,110 238,578 141,840 54,939
As restated 70,341 134,840 266,489 214,531 128,428 48,400
Net income:
Previous 13,343 26,424 40,317 17,109 29,791 10,034
As restated 9,170 19,103 27,563 1,478 21,073 5,784
Earnings per share:
Basic:
Previous 0.48 0.95 1.41 0.65 1.37 0.74
As restated 0.33 0.69 0.97 0.06 0.97 0.43
Diluted:
Previous 0.41 0.80 1.23 0.60 1.14 0.74
As restated 0.29 0.59 0.89 0.05 0.82 0.43
Interest-only strips:
(end of period)
Previous 481,354 481,354 554,161 383,249 173,789 56,960
As restated 426,093 426,093 490,542 339,251 153,838 50,421
Stockholders' equity:
(end of period)
Previous 293,188 293,188 345,403 268,354 133,429 80,047
As restated 257,268 257,268 304,051 239,755 120,461 75,797
</TABLE>
Accounting for Securitizations. Although the Company's loan
disposition strategy relies on a combination of securitization transactions and
whole loan sales, the Company relied solely on whole loan sales during the
quarter ended December 31, 1998. The following discusses certain accounting
considerations which arise only in the context of securitization transactions.
In a securitization, the Company conveys loans that it has originated
or purchased to a separate entity (such as a trust or trust estate) in exchange
for cash proceeds and an interest in the loans securitized represented by the
non-cash gain on sale of loans. The cash proceeds are raised through an offering
of the pass-through certificates or bonds evidencing the right to receive
principal payments on the securitized loans and the interest rate on the
certificate balance or on the bonds. The non-cash gain on sale of loans
represents the difference between the proceeds (including premiums) from the
sale, net of related transaction costs, and the allocated carrying amount of the
loans sold. The allocated carrying amount is determined by allocating the
original amount of loans (including premiums paid on loans purchased) between
the portion sold and any retained interests (interest-only strip), based on
their relative fair values at the date of transfer. The interest-only strip
17
<PAGE> 18
represents, over the estimated life of the loans, the present value of the
estimated cash flows. These cash flows are determined by the excess of the
weighted average coupon on each pool of loans sold over the sum of the interest
rate paid to investors, the contractual servicing fee (currently .50%), a
monoline insurance fee, if any, and an estimate for loan losses. In quarters
where the Company engaged in a securitization transaction, net gains or losses
in valuation of interest-only strips and mortgage servicing rights include the
recognition of a gain or loss which represents the initial difference between
the allocated carrying amount and the fair market value of the interest-only
strip at the date of sale. Additionally, increases or decreases in valuation of
the interest-only strips are also recognized as net gains or losses. Each
agreement that the Company has entered into in connection with its
securitizations requires either the overcollateralization of the trust or the
establishment of a reserve account that may initially be funded by cash
deposited by the Company.
The Company determines the present value of the cash flows at the
time each securitization transaction closes using certain estimates made by
management at the time the loans are sold. These estimates include: (i) future
rate of prepayment; (ii) discount rate used to calculate present value; and
(iii) credit losses on loans sold. There can be no assurance of the accuracy of
management's estimates.
Rate of Prepayment. The estimated life of the securitized
loans depends on the assumed annual prepayment rate which
is a function of estimated voluntary (full and partial)
and involuntary (liquidations) prepayments. The prepayment
rate represents management's expectations of future
prepayment rates based on prior and expected loan
performance, the type of loans in the relevant pool (fixed
or adjustable rate), the production channel which produced
the loan, prevailing interest rates, the presence of
prepayment penalties, the loan-to-value ratios and the
credit grades of the loans included in the securitization
and other industry data. The rate of prepayment may be
affected by a variety of economic and other factors.
Discount Rate. In order to determine the fair value of the
cash flow from the interest-only strips, the Company
discounts the cash flows based upon rates prevalent in the
market.
Credit Losses. In determining the estimate for credit
losses on loans securitized, the Company uses assumptions
that it believes are reasonable based on information from
its prior securitizations, the loan-to-value ratios,
credit grades of the loans included in the current
securitizations and other industry data.
The interest-only strips are recorded at estimated fair value and are
marked to market through a charge (or credit) to earnings. On a quarterly basis,
the Company reviews the fair value of the interest-only strips by analyzing its
prepayment, discount rate and loss assumptions in relation to its actual
experience and current rates of prepayment and loss prevalent in the industry
and may adjust or take a charge to earnings through an adjustment to net gain or
loss on valuation of interest-only strips.
18
<PAGE> 19
In its regular quarterly review of its interest-only strip, the
Company considered the historical performance of its securitized loan pools, the
recent prepayment experience of those pools, the credit performance of
previously securitized loans and other industry data and determined that it
should adjust each of its assumptions (rate of prepayment, discount rate and
credit loss) to reflect current market conditions. This change in estimates
resulted in the Write-Down in the quarter ended December 31, 1998. The
components of this adjustment are as follows:
Rate of Prepayment. In its valuation analysis of prepayment speeds,
the Company considered the relationship between the rate paid on the
certificates or bonds issued in the securitization and the weighted average
coupons on the mortgages outstanding in each securitization pool from time to
time. Additionally, For the quarters up to and including September 30, 1998,
prepayment rates used by the Company were held constant, e.g. flat, over the
life of the pool. The estimates used by the Company for the quarters up to and
including September 30, 1998 were flat prepayment rates ranging from 26% for
fixed to 30.5% for adjustable and hybrid loan products. These rates represented
a weighted average loan life of approximately 2.6 to 3.8 years. During the
quarter ended December 31, 1998, the Company finalized the development of an
enhanced analytical model which more precisely reflected the performance of the
securitized loans. This analytical model enabled the Company to refine its
estimate of the prepayment rates associated with the performance of its
securitized loans. Additionally, data and information received from market
participants (credit and capital providers) assisted the Company in its
assessment of current market conditions which resulted in the Company applying a
more precise valuation estimate to its prepayment assumptions. The Company
incorporated this new information in developing its improved judgment as to
prepayment speeds and changed its estimate of prepayment rates from a flat
constant prepayment rate to a vectored rate, which more closely approximates the
performance of the securitized loans. These revised prepayment rates resulted in
a weighted average life of 2.86 years. The impact of the change in prepayment
speeds amounted to approximately $62 million, which is included in the
Write-Down recorded for the quarter ended December 31, 1998.
Discount Rate. For the quarters up to and including September 30,
1998, the Company used the weighted average interest rates of the loans included
in the pool as the best estimate available as an appropriate discount rate to
determine fair value. As the market deteriorated in the quarter ended December
31, 1998, it became apparent that a change in discount rate would be required in
order for the estimate of fair value to be consistent with market conditions. To
determine the appropriate discount rate, the Company reviewed general market
conditions as reflected by market sales of senior tranche asset-backed
securities. Management believed that the pass-through rate on senior tranche
securities should be lower than the discount rate applied to the subordinate,
and higher risk, interest-only strips. However, the adversity of the market
during the quarter ended December 31, 1998 was so severe that, in some
instances, transactions of senior tranche asset-backed securities could not even
be completed. Accordingly, the Company incorporated this current market
information in developing its judgment as to the appropriate risk adjusted rate
of return in establishing its change in estimate of the discount rate to be used
in estimating the fair value of the interest-only strips. For the quarter ended
December 31, 1998, the Company increased its discount rate to 15% to reflect
current market conditions. The impact of this change in discount rate
19
<PAGE> 20
amounted to approximately $65 million, which is included in the Write-Down
recorded for the quarter ended December 31, 1998.
Credit Losses. For the quarter up to and including September 30,
1998, the Company used a prospective cumulative loan loss estimate of 1.4% of
the balance of the loans in the securitization pools as an appropriate estimate
to determine fair value. This estimate was developed through a review of the
credit performance of securitized loans in the aggregate. In conjunction with
its previous quarterly review of loss estimates, the Company considered the
level of delinquency of securitized loans and the percentage of annualized
losses to securitized loans in the aggregate. As market conditions deteriorated
in the quarter ended December 31, 1998, the Company refined its estimate of
credit losses by expanding the factors it considers in developing its credit
loss estimates to include loss and delinquency information by channel, credit
grade and product, and information available from other market participants such
as investment bankers, credit providers and credit agencies. For the quarter
ended December 31, 1998, the percentage of losses to average servicing portfolio
amounted to 1.08%, a significant increase from the previous quarter's level of
.80%. The Company had seen levels spike to .96% in the quarter ended June 30,
1998 but then subside to the .80% previously noted. This trend was in line with
the Company's assumption that losses were being realized as the servicing
portfolio was transferred in-house from sub-servicers. See "-General."
Management believes the increase in losses in the December 1998 quarter
reflected general market conditions rather than the continuing effects of the
transfer of servicing in-house. Publicly available information from investment
banking firms and credit agencies began to indicate a market expectation that
credit losses within the sub-prime home equity sector would rise. Those
indications, in part, arise from the impact of the adverse market conditions on
severely delinquent borrowers who, in a more favorable market, would avoid
default by refinancing with other lenders. In the current market, with
competition lessening and underwriting guidelines tightening, these borrowers
are much more likely to default. Accordingly, the Company increased its
prospective cumulative loan loss estimate to 2.7% of the balance of the loans in
the securitization pools at December 31, 1998. This change in credit loss
estimate resulted in a valuation adjustment of $67 million, which is included in
the Write-Down recorded for the quarter ended December 31, 1998.
Additionally, upon sale or securitization of servicing retained
mortgages, the Company capitalizes the fair value of originated mortgage
servicing rights ("OMSRs") assets separate from the loan. The Company determines
fair value based on the present value of estimated net future cash flows related
to servicing income. The cost allocated to the servicing rights is amortized
over the period of estimated net future servicing fee income. The Company
periodically reviews the valuation of capitalized servicing fees receivable.
This review is performed on a disaggregated basis for the predominant risk
characteristics of the underlying loans which are loan type and origination
date.
20
<PAGE> 21
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(RESTATED
AND UNAUDITED)
The following table sets forth information regarding the components
of the Company's revenue and expenses for the three and six months ended
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands)
Revenue:
<S> <C> <C> <C> <C>
Gain on sale of loans $ 8,752 35,130 28,429 66,438
Net gain (loss) on valuation of
interest-only strips (191,646) 5,726 (186,451) 10,755
Commissions 7,758 7,161 17,746 13,016
Loan servicing:
Servicing spread 5,458 5,251 8,827 11,421
Prepayment fees 3,649 3,263 7,149 5,618
Late charge and other servicing fees 2,522 1,848 4,878 3,105
Fees and other:
Closing 572 670 1,190 1,257
Appraisal 770 634 1,717 1,135
Underwriting 384 294 837 540
Interest income 7,208 10,078 18,722 21,109
Other 150 286 294 446
---------- ------ -------- -------
Total revenue including
valuation adjustments (154,423) 70,341 (96,662) 134,840
---------- ------ -------- -------
Expense:
Compensation 19,907 24,561 43,701 46,320
Production 10,559 7,541 21,489 13,338
General and administrative 13,784 9,580 27,172 17,665
Interest 9,403 10,819 22,285 20,917
---------- ------ -------- -------
Total expense 53,653 52,501 114,647 98,240
---------- ------ -------- -------
Income (loss) before income taxes (208,076) 17,840 (211,309) 36,600
Provision (benefit) for income taxes (12,331) 8,670 (13,408) 17,497
---------- ------ -------- -------
Net income (loss) $ (195,745) 9,170 (197,901) 19,103
========== ====== ======== =======
</TABLE>
REVENUE
Total revenue for the three and six months ended December 31, 1998
was $(154) million and $(96.7) million, as compared to $70.3 million and $135
million for the three and six months ended December 31, 1997, respectively. The
1998 period revenues include the Write-Down. Excluding the Write-Down, revenues
for the three and six months ended December 31, 1998 were $37.2 million and
$89.8 million, a 47.1% and 33.3% decrease from 1997's comparable periods.
Excluding
21
<PAGE> 22
the Write-Down, the decrease in total revenue during the quarter ended December
31, 1998 from the amount reported in the comparable period in 1997 primarily
reflects the Company's reliance on whole loan sales for cash during the quarter.
Gains associated with whole loans for cash are generally lower than those
recognized when such loans are securitized. This disparity was exacerbated
during the December 31, 1998 quarter as a consequence of the over-supply of
product for sale in the marketplace due to weaknesses in the asset-backed market
during the same period, as well as the Company's limited warehouse capacity
during the quarter which necessitated the expedited sale of loans. See "-
Overview - Market Conditions." During the three months ended December 31, 1997,
the Company relied almost completely on the securitization market for its loan
disposition strategy. In contrast, during the three months ended December 31,
1998, the Company relied exclusively on the whole loan market for its loan
disposition strategy. Further contributing to the results for the three months
ended December 31, 1998 was the 10.6% decrease in total loan production, from
$616 million during the December 1997 quarter to $550 million during the 1998
comparable quarter. The decrease in total revenue during the six months ended
December 31, 1998 from amounts reported in the comparable 1997 period was due
primarily to lower premiums on whole loan sales, lower gains on sale resulting
from hedge losses and lower than historical spreads on the Company's $650
million securitization closed in the quarter ended September 30, 1998. During
the first fiscal quarter, the Company, as it had historically, hedged its fixed
rate pipeline by purchasing hedges against U.S. Treasuries. In the past, changes
in Treasury rates were generally reflected in the pass-through rates of the
fixed rate portion of the Company's securitization. During fiscal 1999's first
quarter, unsettled market conditions resulted in a $15.3 million loss on the
Company's hedge position without an equivalent benefit from reductions in the
pass-through rate paid on certificates sold in the fixed rate portion of the
Company's securitization.
Gain on sale for the three months ended December 31, 1998 declined
$26.4, or 75.1%, from $35.1 million gain on sale recorded for the three months
ended December 31, 1997. Gain on sale for the three months ended December 31,
1998 reflects the Company's reliance solely on the whole loan market for its
loan disposition strategy. During 1997's comparable quarter, the Company relied
almost completely on the securitization market for its loan disposition
strategy. The gains associated with the whole loan sales were substantially less
than the gains associated with the earlier quarter's securitization. Gain on
sale for the six month period ended December 31, 1998, which decreased $38.0
million, or 57.2%, from 1997's comparable period, was also adversely affected by
the $13.5 million hedge loss recorded in the period. (See above.) The lower
prices paid in the whole loan market also reflect the Company's need to sell
loans on an expedited basis to free up the limited warehouse capacity that
existed during the quarter ended December 31, 1998. In that regard, during the
quarter ended December 31, 1998, the Company entered into a forward commitment
to sell $500 million, subsequently amended to $750 million, of loans to an
affiliate of one of the Company's lenders. The commitment, which expires in May
1999, reflects the lower whole loan prices that existed during the quarter. As
of January 31, 1999, the Company had satisfied $379 million of its commitment.
Failure to satisfy the commitment subjects the Company to a substantial penalty.
This commitment is expected to adversely impact the gain on sale recognized by
the Company in subsequent quarters at least until the commitment is satisfied.
Accordingly, the Company expects to record a loss in the quarter ended March 31,
1999, as it will continue to rely solely on the whole
22
<PAGE> 23
loan market for its loan dispositions and will not yet have realized the
benefits from its cost savings plan.
Net gain (loss) on valuation of interest-only strips and mortgage
servicing rights for the three months and six months ended December 31, 1998
primarily reflects the impact of the Write-Down recorded in the three month
period ended December 31, 1998. The Company determines the fair value of the
interest-only strips by applying certain assumptions as to prepayments, losses
and discount rate to the future cash flows from prior securitizations. The
negative market conditions that existed during the quarter, as well as the
performance of the Company's pools of securitized loans, caused management to
adjust these assumptions which resulted in the Write-Down. See "Certain
Accounting Considerations -- Accounting for Securitizations." Net gain (loss) on
valuation of interest-only strips and mortgage servicing rights for the three
and six months ended December 31, 1997 in the amounts of $5.7 million and $10.8
million, respectively, represents the initial difference between the allocated
carrying amount and the fair value of the interest-only strip at the date of the
closing of the related securitization transaction.
Commission revenue during the three and six month period ended
December 31, 1998 was $7.76 million and $17.7 million, an 8.4% and 36.2%
increase, respectively, from $7.16 million and $13.0 million during the three
and six months ended December 31, 1997. The increase in commissions for the
three and six months ended December 31, 1998 over the comparable 1997 periods
was due to higher retail loan volume and higher commission rates earned on loan
originations in the Company's retail and broker loan production channels.
Loan servicing revenue for the three and six months ended December
31, 1998 increased to $11.6 million and $20.9 million, an increase of 11.5% and
4.0%, respectively, from $10.4 million and $20.1 million reported for the
comparable periods in 1997. Loan servicing revenue consists of net servicing
spread earned on the principal balances of the loans in the Company's loan
servicing portfolio, prepayment fees, late charges and other fees retained by
the Company in connection with the servicing of loans, increased by the
accretion of the interest-only strips and reduced by the amortization of the
OMSRs. The increase in loan servicing revenues for the three and six months
ended December 31, 1998 was due primarily to higher balances of loans being
serviced currently as compared to levels being serviced in the prior year.
The Company's loan servicing portfolio at December 31, 1998 increased
to $4.43 billion, up 18.1% from $3.75 billion at December 31, 1997. At December
31, 1998, 100% of the Company's $4.43 billion servicing portfolio was serviced
in-house, compared to 75% at December 31, 1997. The growth of the Company's
servicing portfolio will be negatively impacted by the Company's reliance on
sales of whole loans on a servicing released basis. Nevertheless, management
believes that the business of loan servicing provides a more consistent revenue
stream and is less cyclical than the business of loan origination and
purchasing. See "- Risk Factors -- Delinquencies and Losses in Securitization
Trusts; Right to Terminate Mortgage Servicing; Negative Impact on Cash Flow."
23
<PAGE> 24
The Company has historically experienced delinquency rates that are
higher than those prevailing in its industry due to its origination of lower
credit grade loans. At the end of calendar year 1996, the Company started to
focus more on higher credit grade loans which should cause delinquencies in the
Company's servicing portfolio to decrease in the future. See "- Revenue."
However, by selling loans in the whole loan market on a servicing released
basis, which the Company intends to do in the current quarter as it did in the
preceding fiscal quarter, the Company will not be adding new loans to the
servicing portfolio. The seasoning of the old portfolio without the addition of
new loans could cause delinquency rates to rise. The delinquency rate for
December 31, 1998 was 16.3% compared to 14.9% at December 31, 1997.
In some cases, the Company has determined that the proceeds from the
disposal of REO and foreclosed properties are maximized by accelerating
disposition of REO properties rather than holding such properties until market
conditions improve. During the six months ended December 31, 1998, losses
increased to $20.6 million from $9.95 million in the comparable prior period
due, in part, to a loss mitigation strategy adopted during the 1997 fiscal year
of minimizing the REO holding period, thereby reducing carrying costs. This
strategy was implemented in conjunction with the transfer in-house of a portion
of its servicing portfolio that was previously subserviced by third parties. See
"- General." It is the Company's goal to reduce the REO holding period to
maximize the economics of liquidation transactions. Current loss levels have
also increased due to the seasoning of the lower credit grade loans purchased in
bulk and included in the Company's earlier trusts. The Company has reduced
significantly its bulk purchase program and the purchase in bulk of lower credit
grade loans. While the accelerated efforts to sell properties is expected to
have a short-term impact on loss levels, the seasoning of the lower credit grade
bulk portfolio may contribute to an increase in losses over time. Further, the
adverse market conditions that existed in the quarter ended December 31, 1998
resulted in the tightening in underwriting guidelines by purchasers of whole
loans and the insolvency of several large subprime home equity lenders. These
factors have had the effect of decreasing the availability of credit to
delinquent lower credit grade borrowers who in the past had avoided default by
refinancing. Management believes that this will increase the Company's level of
losses in future periods.
The following table sets forth delinquency, foreclosure, and loss
information of the Company's servicing portfolio for the periods indicated:
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<PAGE> 25
<TABLE>
<CAPTION>
Year Ended Six Months Ended
June 30, December 31,
--------------------------------------- --------------------------
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Percentage of dollar amount of delinquent loans
to loans serviced (period end) (1)(2)(3)(4)
One month 3.8% 4.3 4.9 4.0 4.0
Two months 1.3 1.9 1.8 1.2 1.4
Three or more months:
Not foreclosed (4)(5) 9.0 8.1 8.0 9.4 8.3
Foreclosed (6) 1.5 1.0 1.0 1.7 1.2
------------ --------- ---------- ---------- ----------
Total 15.6% 15.3 15.7 16.3 14.9
============ ========= ========== ========== ==========
Percentage of dollar amount of loans foreclosed to
loans serviced (period end)(2)(4) 2.0% 1.5 1.1 1.3 1.1
Number of loans foreclosed(7) 1,125 560 221 785 519
Principal amount of foreclosed loans(7) $ 84,613 48,029 14,349 57,814 41,975
Net losses on liquidations(8) 26,488 5,470 931 20,575 9,947
Percentage of annualized losses to average
servicing portfolio(4) 0.72% 0.24 0.09 0.96 0.57
Servicing portfolio (period end) $ 4,147,000 3,174,000 1,370,000 4,429,000 3,751,000
</TABLE>
- ------------
(1) Delinquent loans are loans for which more than one payment is due.
(2) The delinquency and foreclosure percentages are calculated on the basis of
the total dollar amount of mortgage loans originated or purchased by the
Company and, in each case, serviced by the Company, and any subservicers
as of the end of the periods indicated. Percentages for fiscal year 1996
have not been restated to include delinquencies on loans originated by One
Stop. The Company believes any such adjustment would not be material.
(3) At December 31, 1998, the dollar volume of loans delinquent more than 90
days in ten of the Company's REMIC trusts, five of which, plus one
additional, also exceeded certain loss limits, formed in December 1992 and
during the period from March 1995 to March 1997 exceeded the permitted
limit in the related pooling and servicing agreements. See "-- Capital
Resources" and "- Risk Factors -- Delinquencies and Losses in
Securitizations; Trusts Right to Terminate Mortgage Servicing; Negative
Impact on Cash Flow."
(4) The servicing portfolio used in the percentage calculations includes $248
million of loans subserviced for others by the Company on an interim basis
at December 31, 1998.
(5) Represents loans which are in foreclosure but as to which foreclosure
proceedings have not concluded.
(6) Represents properties acquired following a foreclosure sale and still
serviced by the Company.
(7) The increase in the number of loans foreclosed and principal amount of
loans foreclosed in the periods presented is due to the larger, more
seasoned servicing portfolio.
(8) Represents losses, net of gains, on foreclosed properties in pools sold
during the period indicated.
Fee and other revenue, which consist of fees received by the Company
through its retail loan office network in the form of closing, appraisal,
underwriting and other fees, and interest income, for the three and six months
ended December 31, 1998 decreased 24.3% and 6.9% to $9.08 million and $22.8
million from $12.0 million and $24.5 million, respectively, when compared to the
comparable 1997 periods. The dollar amount of fees and other revenue decreased
during the three months ended December 31, 1998 from the comparable 1997 periods
due to interest earned on lower
25
<PAGE> 26
amounts of loans held by the Company during the period from origination or
purchase of the loans until the date sold by the Company, offset by increasing
weighted average interest rates on loans held. Interest income should continue
to decline so long as the Company relies on whole loan sales which decreases the
average number of days loans are held by the Company prior to sale. See
"Overview - Market Conditions."
EXPENSES
Compensation expense for the three and six months ended December 31,
1998 decreased 19.1% and 5.6% from $24.6 million and $46.3 million for the three
and six months ended December 31, 1997, respectively, to $19.9 million and $43.7
million for the three and six months ended December 31, 1998, respectively. This
decrease was primarily due to employee attrition brought about by declines in
branch expansion, a decrease in compensation incentives as a consequence of the
decline in loan origination during the three and six months ended December 31,
1998 and the absence of incentive compensation due to the Company's results of
operations. Compensation as a percentage of total loan originations and
purchases decreased to 3.6% and 3.4% for the three and six months ended December
31, 1998, respectively, from 4.0% and 4.1% for the three and six months ended
December 31, 1997, respectively. Also contributing to decreased compensation
expenses was the waiver by Neil Kornswiet, President of the Company, of his
quarterly bonus due for the quarters ended September 30, 1998 and December 31,
1998 in the aggregate amount of $3.1 million. In mid-February, 1999 and
subsequent to the Initial Closing, management commenced a cost savings program
designed to reduce the Company's operating expenses. The implementation of this
recent cost savings plan initially included personnel reductions on a
Company-wide basis. The effects of these reductions are expected to reduce
compensation costs on an annualized basis in a pretax amount of approximately
$6.7 million. The estimated pretax savings in compensation expense during the
remainder of fiscal 1999 are expected to approximate $2.0 million. Severance
costs, estimated at the pretax amount of approximately $500 thousand, will be
recognized in the quarter ended March 31, 1999.
Production expense, primarily advertising, outside appraisal costs,
travel and entertainment, and credit reporting fees, increased 41.3% and 61.7%
to $10.6 million and $21.5 million during the three and six months ended
December 31, 1998, respectively, from $7.5 million and $13.3 million in the
comparable periods last year. The increase in production expenses during the
three and six months ended December 31, 1998 from amounts reported during the
comparable periods in 1997 was due, in part, to the increase in retail loan
volume, the rise in advertising costs and the additional cost of outsourcing
appraisal work. Production costs as a percentage of total loan originations and
purchases for the three and six months ended December 31, 1998 were 1.9% and
1.7%, respectively, compared to 1.2% for both of the three and six months ended
December 31, 1997, respectively. This was due to the constriction of loan
production after advertising expenses had already been incurred.
General and administrative expense for the three and six months
ended December 31, 1998 increased 43.8% and 53.7% to $13.8 million and $27.2
million, respectively, from $9.6 million and $17.7 million for the three and six
months ended December 31, 1997, respectively. The increase was
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<PAGE> 27
primarily the result of increased occupancy, communication and technology costs
related to the Company's core origination channel expansion and increased
origination volumes and, to a lesser extent, increases in legal and other
professional costs. As part of the costs savings program implemented in
February, 1999, the Company ceased activities in certain retail and broker
branches that were deemed unprofitable by management. The office space for such
branches remains subject to operating leases that management has yet to sublease
or terminate. If such office space is subleased at lease rates less than
existing base lease terms or if the lease commitments are bought-out as a
consequence of a negotiated lease termination, occupancy expense in future
periods will increase for these effects.
Interest expense during the three months ended December 31, 1998
decreased 13.0% to $9.4 million from $10.8 million in the comparable three month
period in 1997. During the six months ended December 31, 1998, interest expense
increased 6.7% to $22.3 million from $20.9 million during the six months ended
December 31, 1997. The decrease in interest expense during the three months
ended December 31, 1998 was due to lower borrowings used to fund lower loan
originations relative to the comparable 1997 quarter. The increase in interest
expense during the six months ended December 31, 1998 reflects the Company's
recent increased reliance on external financing to fund loan originations and
operations when compared to the comparable period in 1997.
INCOME TAXES
During the three and six months ended December 31, 1999, the Company
recorded an estimated tax benefit of $12.3 million and $13.4 million,
respectively, due to its net operating losses during those periods. The tax
benefits reflect effective rates of (5.9%) and (6.3%), respectively, and are net
of tax valuation adjustments recorded to account for estimated nonrealizable
deferred tax assets. The investment in the Company by Capital Z results in a
change in control for income tax purposes thereby limiting future net operating
loss and certain other future deductions. During the three and six months ended
December 31, 1997, the Company's provisions for taxes were $8.7 million and
$17.5 million, respectively, reflecting effective estimated tax rates of 48.5%
and 47.8%, respectively.
FINANCIAL CONDITION
Loans Held for Sale. The Company's portfolio of loans held for sale
increased to $271 million at December 31, 1998, from $198 million at June 30,
1998. This increase is directly related to production volume and the size and
timing of the Company's securitization and sales in the secondary market during
the fiscal periods ended on such dates. During January 1999, the Company sold
$127 million of the $271 million held for sale at December 31, 1998 in whole
loan sales for cash.
Accounts Receivable. Accounts receivable, representing servicing
fees and advances and other receivables, decreased to $48.8 million at December
31, 1998, from $51.1 million at June 30, 1998. The level of servicing related
advances, in any given period, is dependent on portfolio delinquencies and the
timing of cash collections.
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<PAGE> 28
Interest-Only Strips. Interest-only strips decreased to $323 million
at December 31, 1998 from $490 million at June 30, 1998 reflecting the
Write-Down in the December quarter, offset by the non-cash gain recognized on
the Company's securitization in the quarter ended September 30, 1998, net of
amortization.
Mortgage Servicing Rights, net. Mortgage servicing rights, net
increased to $34.5 million at December 31, 1998 from $32.1 million at June 30,
1998 reflecting the capitalization of mortgage servicing rights on the
securitization in the quarter ended September 30, 1998, net of amortization.
Equipment and Improvements, net. Equipment and improvements, net,
increased slightly to $14.7 million at December 31, 1998 from $13.9 million at
June 30, 1998.
Prepaid and Other Assets. Prepaid and other assets increased to
$17.2 million at December 31, 1998 from $17.0 million at June 30, 1998.
Borrowings. Borrowings at December 31, 1998 increased to $307
million from $287 million at June 30, 1998 due to advances on the Company's
residual financing line completed in September 1998 which the Company used to
fund its negative cash flow.
Revolving Warehouse Facilities. Amounts outstanding under warehouse
facilities increased to $250 million at December 31, 1998 from $141 million at
June 30, 1998, primarily as a result of the increase in mortgage loans held for
sale and from the negative cash flow from operations during the six months ended
December 31, 1998 and the resulting decrease in equity capital. Proceeds from
the Company's whole loan sales and securitizations are used to pay down the
Company's warehouse facilities.
LIQUIDITY
The Company's operations require continued access to short-term and
long-term sources of cash. The Company's primary operating cash requirements
include the funding of: (i) mortgage loan originations and purchases prior to
their securitization and sale, (ii) fees, expenses and hedging costs, if any,
incurred in connection with the securitization and sale of loans, (iii) cash
reserve accounts or overcollateralization requirements in connection with the
securitization and sale of mortgage loans, (iv) tax payments due on recognition
of non-cash gain on sale other than in a debt-for-tax securitization structure,
(v) ongoing administrative and other operating expenses, (vi) interest and
principal payments under the Company's warehouse credit facilities and other
existing indebtedness, (vii) advances in connection with the Company's servicing
portfolio and (viii) costs associated with expanding the Company's core
production units.
Historically, the Company funded its negative operating cash flow
principally through borrowings from financial institutions, sales of equity
securities and sales of senior and subordinated notes, among other sources. The
deterioration of the credit and capital markets severely restricted
28
<PAGE> 29
the Company's access to these markets during the quarter ended December 31, 1998
and in the current quarter until the Initial Closing on February 10, 1999. The
$76.5 million ($70.6 million net of issuance expenses) in equity capital from
the Initial Investment will help fund the Company's negative operating cash
until additional working capital lines are established. The Company is currently
in negotiations regarding establishing those lines. However, there can be no
assurance that the Company will be able to establish those lines. There is a
working capital sublimit in the Company's $300 million warehouse facility with a
syndicate of banks. See "- Capital Resources." As previously disclosed,
provisions in that line required the Company to maintain a certain level of
profitability over two consecutive quarters. The loss incurred in the December
31, 1998 quarter caused the Company to violate this provision, as well as
provisions requiring the Company to maintain a certain level of net worth and to
satisfy certain debt to equity ratios. The Company received a waiver from the
syndicate for those violations (the "Waiver"). This line, therefore, remains in
place. It expires on April 8, 1999. See "- Overview - Market Conditions" and "-
Recent Events."
Under the terms of the Company's Indenture, dated October 21, 1996
with respect to its 9.125% Senior Notes due 2003, the Company's ability to incur
certain additional indebtedness, including residual financing, is limited to two
times adjusted stockholders' equity. In February 1999, the Company received a
waiver from the holders of the Senior Notes, the effect of which was to permit
the Company to record the Write-Down without violating the Indenture's
limitations on indebtedness and conditioned upon the Initial Investment being
made. Warehouse indebtedness is not included in the indebtedness limitations.
The Company's new repurchase facilities contain similar limits on the Company's
ability to incur additional indebtedness. Further, until the Company receives
investment grade ratings for the notes issued under the Indenture, the amount of
residual financing the Company may incur on its interest-only strips allocable
to post-September 1996 securitizations is limited to 75% of the difference
between such post-September 1996 residuals and $225 million. Under the Company's
warehouse line which expires on April 8, 1999, the Company is currently limited
to $50 million of indebtedness secured by its interest-only strips.
Although the Company's loan disposition strategy consists of a
combination of securitizations and whole loan sales, whole loan sales were the
sole disposition method during the second fiscal quarter and will be the sole
disposition method during the third fiscal quarter. The Company will continue to
monitor market conditions and cash flow to determine the optimal time to
re-enter the securitization market. Management currently anticipates that it
will complete a securitization transaction during 1999's fourth fiscal quarter.
However, no assurance can be given that market conditions will not change or
other events will not occur that would preclude or inhibit the Company's ability
to complete a securitization in the June 1999 quarter. During the three and six
months ended December 31, 1998, the Company securitized -0- and $650 million,
respectively, compared to $605 million and $1.1 billion, respectively, in the
comparable 1997 periods. In connection with securitization transactions
completed during these periods, the Company was required to provide credit
enhancements in the form of overcollateralization amounts or reserve accounts.
In addition, during the life of the related securitization trusts, the Company
subordinates a portion of the excess cash flow otherwise due it to the rights of
holders of senior interests as a credit enhancement to support the sale of the
senior interests. The terms of the securitization trusts
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<PAGE> 30
generally require that all excess cash flow otherwise payable to the Company
during the early months of the trusts be used to increase the cash reserve
accounts or to repay the senior interests in order to increase
overcollateralization to specified maximums. Overcollateralization requirements
increase up to approximately twice the level otherwise required when the
delinquency rates exceed the specified limit. At December 31, 1998, the Company
was required to maintain an additional $85.0 million in overcollateralization
amounts as a result of the level of its delinquency rates above that which would
have been required to be maintained if the applicable delinquency rates had been
below the specified limit. Of this amount, at December 31, 1998, $54.2 million
remains to be added to the overcollateralization amounts from future spread
income on the loans held by these trusts. See "Risk Factors -- Delinquencies and
Losses in Securitization Trusts; Right to Terminate Mortgage Servicing; Negative
Impact on Cash Flow."
In the Company's securitizations structured as a REMIC, the
recognition of non-cash gain on sale has a negative impact on the cash flow of
the Company since the Company is required to pay federal and state taxes on a
portion of these amounts in the period recognized although it does not receive
the cash representing the gain until later periods as the related service fees
are collected and applicable reserve or overcollateralization requirements are
met.
The Company's primary sources of liquidity are expected to be cash
from the Initial Investment and the Rights Offering, fundings under warehouse
facilities, working capital facilities and whole loan sales. See "- Overview -
Market Conditions."
The Company's primary and potential sources of liquidity as
described in the paragraph above (assuming access to working capital financing,
completion of the Rights Offering and implementation of the cash savings plans
which by no means can be assured) are expected to be sufficient to fund the
Company's liquidity requirements through at least the next 12 months if the
Company's future operations are consistent with management's current growth
expectations. If available at all, the type, timing and terms of financing
selected by the Company will be dependent upon the Company's cash needs, the
availability of other financing sources, limitations under debt covenants and
the prevailing conditions in the financial markets. Further, the $100 million
committed and $100 million uncommitted repurchase lines obtained on February 10,
1999 require the Company to obtain an additional working capital facility by no
later than March 26, 1999. See "Capital Resources -- Warehouse, Repurchase and
Working Capital Facilities." There can be no assurance that any such sources
will be available to the Company at any given time or that favorable terms will
be available. As a result of the limitations described above, the Company may be
restricted in the amount of loans that it will be able to produce and dispose
of.
CAPITAL RESOURCES
The Company has historically financed its operating cash
requirements primarily through (i) warehouse facilities and working capital
lines of credit, (ii) the securitization and sale of mortgage loans, and (iii)
the issuance of debt and equity securities. Market conditions severely limited
the
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<PAGE> 31
Company's ability to access the credit, securitization and capital markets
during the quarter ended December 31, 1998. See "- Overview - Market
Conditions."
Warehouse, Repurchase and Working Capital Facilities. At December
31, 1998, the Company retained access to warehouse and other credit facilities
with borrowing limits aggregating in excess of $1.0 billion. Changes in advance
rates imposed by lenders effectively limited the Company to a single $300
million committed warehouse line during the December 31, 1998 quarter. The
warehouse line includes a working capital line of credit with a syndicate of ten
commercial banks. This facility is secured by loans originated and purchased by
the Company, as well as certain servicing receivables. The loss reported for the
December 31, 1998 quarter would have caused the Company to be in violation of
certain financial covenants contained in the line. In February 1999, the Company
received the Waiver. This line is currently scheduled to expire on April 8,
1999. The Company is engaging in efforts to establish a new syndicate. On
February 10, 1999, and conditioned upon the Initial Closing occurring, the
Company entered into two committed repurchase facilities aggregating $400
million and one uncommitted repurchase facility in the amount of $100 million.
These facilities are each secured by the Company's home equity mortgage loans.
One of the committed facilities, in the amount of $300 million, bears interest
at a rate of 1.25% over one month LIBOR and expires on February 9, 2000, subject
to different interest rates for selected sublimits under the facility. The other
committed facility in the amount of $100 million bears interest at a rate of
1.50% over one month LIBOR and expires on February 9, 2000. The uncommitted
facility bears interest at 1.50% over one month LIBOR and expires on February 9,
2000. The Company's ability to continue to draw under these three facilities is
conditioned upon the Rights Offering closing on or prior to June 30, 1999. The
Company will continue to require short-term warehouse facilities. If the Company
is unable to maintain existing warehouse or repurchase lines, it would have to
cease loan production operations which would negatively impact profitability and
jeopardize the Company's ability to continue to operate as a going concern.
In September 1998, the Company entered into a revolving line of
credit with a maximum borrowing capacity of $50 million secured by certain of
the Company's interest-only strips. The collateral is subject to mark-to-market
valuation, or may otherwise be deemed unacceptable, in the sole discretion of
the lender. To the extent such provisions result in a shortfall, the line
provides for the term out of the loan or the delivery of additional collateral
to bring the line back to compliance. Access to this line originally depended
upon the Company completing a new securitization and pledging the related
interest-only strips. However, during each of the months of December 1998 and
January and February 1999, the lender allowed the Company to borrow $20 million
on a short-term basis to satisfy the Company's obligation as servicer of the
loans it securitizes to advance interest on delinquent loans. See "- Overview -
Market Conditions." This line had $20 million outstanding at December 31, 1998
and expires on September 3, 1999. The Company is currently in negotiations with
this line's lender for an additional repurchase facility. Management expects
that any such repurchase facility will be conditioned, in part, on the
prepayment and accelerated expiration of the revolving line of credit. See "-
Risk Factors -- Dependence on Funding Sources."
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<PAGE> 32
Loan Sales. The Company's ability to sell loans originated and
purchased by it in the secondary market is necessary to generate cash proceeds
to pay down its warehouse and repurchase facilities and fund new originations
and purchases. The ability of the Company to sell loans in the secondary market
on acceptable terms is essential for the continuation of the Company's loan
origination and purchase operations. Current market conditions have restricted
access to the asset- backed market and adversely impacted the availability of,
and pricing in, the whole loan market. See "- Overview - Market Conditions," and
"- Risk Factors -- Risk of Adverse Changes in the Secondary Market for Mortgage
Loans."
Other Capital Resources. The Company has historically funded
negative cash flow primarily from the sale of its equity and debt securities.
However, current market conditions have restricted the Company's ability to
access its traditional public equity and debt sources. In December 1991, July
1993, June 1995, October 1996 and April 1998, the Company effected public
offerings of its common stock with net proceeds to the Company aggregating $217
million. In March 1995, the Company completed an offering of its 10.5% Senior
Notes due 2002 with net proceeds to the Company of $22.2 million. In February
1996, the Company completed an offering of its 5.5% Convertible Subordinated
Debentures due 2006 with net proceeds to the Company of $112 million. In October
1996, the Company completed an offering of its 9.125% Senior Notes due 2003 with
net proceeds to the Company of $145 million. Under the agreements relating to
these debt issuances, the Company is required to comply with various operating
and financial covenants including covenants which may restrict the Company's
ability to pay certain distributions, including dividends. At December 31, 1998,
the Company had no money available for the payment of such distributions under
the most restrictive of such covenants.
On April 27, 1998, the Company issued 2.78 million shares of its
common stock, or 9.9% of the Company's outstanding shares, to private entities
controlled by Ronald Perelman and Gerald Ford, at an aggregate purchase price of
approximately $38 million. The Company also issued warrants to these entities to
purchase an aggregate additional 5.3 million shares (as adjusted) of the
Company's common stock at an exercise price of $9.06 (as adjusted), subject to
customary anti-dilution provisions. The warrants are exercisable only upon a
change in control of the Company and expire in three years.
On February 10, 1999, the Company raised an additional $76.5 million
($70.6 million net of issuance expenses) in the Initial Investment by Capital Z.
Subsequent to receiving stockholder approval of the Recapitalization, the
Company will commence the Rights Offering. Capital Z has agreed to purchase any
shares of the Series C Preferred Stock which are not purchased by the common
stockholders in the Rights Offering.
The Company had cash and cash equivalents of approximately $11.8
million at December 31, 1998. See "- Risk Factors -- Negative Cash Flow and
Capital Needs."
YEAR 2000 COMPLIANCE AND TECHNOLOGICAL ENHANCEMENT
32
<PAGE> 33
Readers are cautioned that forward-looking statements contained in
this Year 2000 disclosure should be read in conjunction with the Company's
disclosures under the heading, "Special Note on Forward-looking Statements,"
beginning on page 9 above. Readers should understand that the dates on which the
Company believes the Year 2000 project will be completed are based upon
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, or that there will not be a delay in, or
increased costs associated with, the implementation of the Company's Year 2000
Compliance Project. A delay in specific factors that might cause differences
between the estimates and actual results include, but are not limited to, the
availability and cost of personnel trained in these areas, the ability of
locating and correcting all relevant computer codes, timely responses to and
corrections by third parties and suppliers, the ability to implement interfaces
between the new systems and the systems not being replaced, and similar
uncertainties. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of third
parties and the inter-connection of national and international businesses, the
Company cannot ensure its ability to timely and cost effectively resolve
problems associated with the Year 2000 issue that may effect its operations and
business, or expose it to third party liability.
The Company's year 2000 compliance program consists of four
phases--inventory, risk assessment process, corrective action and testing. The
Company has completed the inventory phase which included the identification of
all computer hardware and software, electronic data exchanges, operating
systems, communications systems and non-information items. As a corollary to the
inventory phase, the Company has made inquiries of its significant vendors as to
their year 2000 readiness.
The Company has also completed the risk assessment process of
assigning risk factors to each system used by the Company to determine the
priority and resource allocation of its year 2000 efforts. The Company expects
to complete the corrective action and testing phases with respect to mission
critical systems by September 1999. The Company will complete any remaining
testing and compliance by the end of 1999.
Costs to Address the Company's Year 2000 Issues. The Company
anticipates that costs relating to year 2000 issues are not expected to be
material since the Company primarily relies on third party software for its
primary information technology systems and does not require significant internal
reprogramming resources to change program codes. The Company is in the process
of converting or is scheduled to convert its major computer systems, including
the loan origination system and the financial system from in-house to
vendor-supported systems. These conversions were planned to upgrade and improve
functionality rather than as a result of year 2000 issues.
Risks of the Company's Year 2000 Issues. The most significant risk
associated with the Company's year 2000 compliance would result from the loss of
the Company's vendor supported servicing system and the inability to maintain
the ongoing loan service operations, including payment processing, collections
and investor remittance processing. The Company's servicing platform uses
33
<PAGE> 34
software supplied by a subsidiary of Fiserv, Inc. To reduce the risk of
non-compliance, the Company intends to rely on the vendor's representations
regarding year 2000 compliance, the Company's testing efforts, as well as the
testing results of other companies that use the same software. The testing and
other costs relating to the Company's year 2000 compliance program are not
expected to be material.
Another year 2000 risk relates to the Company's vendor supported
loan origination system. In the event of year 2000 issues with respect to the
software used with such system (also supplied by a subsidiary of Fiserv, Inc.),
the Company's ability to originate loans would be diminished and may result in
reduced loan production until the problem is resolved. The Company intends to
rely on the vendor's assurances and Company testing to minimize the risk of
non-compliance of this system.
Contingency Plans. The Company has not developed a contingency plan.
The Company has no reason to believe that its most significant systems will not
be year 2000 compliant. If testing indicates any of the systems are not
compliant, the Company will develop appropriate contingency plans.
RISK MANAGEMENT
The Company is currently re-evaluating its current hedging policy,
and currently has no effective hedge in place. While the Company monitors the
interest rate environment and employs fixed rate hedging strategies, there can
be no assurance that the earnings of the Company would not be adversely affected
during any period of unexpected changes in interest rates or prepayment rates.
RISK FACTORS
Negative Cash Flow and Capital Needs. The Company has historically
operated, and expects to continue to operate, on a negative cash flow basis. The
Company's primary cash requirements include the funding of: (i) mortgage loan
originations and purchases pending their securitization and sale; (ii) fees,
expenses and hedging costs, if any, incurred in connection with the
securitization of loans; (iii) cash reserve accounts or overcollateralization
requirements in connection with the securitization and sale of the loans; (iv)
tax payments due on recognition of non-cash gain on sale, other than in a
debt-for-tax securitization structure; (v) ongoing administrative and other
operating expenses; (vi) interest and principal payments under the Company's
warehouse credit facilities and other existing indebtedness; (vii) advances in
connection with the Company's servicing portfolio; and (viii) costs associated
with expanding the Company's core production units. The more significant of
these cash requirements is a result of the Company's use of securitization as a
loan disposition strategy. In a securitization, the Company recognizes a
non-cash gain on sale of the loans securitized upon the closing of the
securitization, but does not receive the cash representing such gain until it
receives the excess cash flow, which in general is payable over the actual life
of the loans securitized after overcollateralization requirements are met. The
Company incurs significant expense in connection with a securitization and
generally incurs both current and deferred tax liabilities as a result of the
gain on sale. Although the Company will not execute a securitization during the
quarter
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ended March 31, 1999 and will rely on whole loan sales for cash, the cash
received upon such sales will not be sufficient to eliminate the Company's
negative cash flow. Further, the Company has implemented, is in the process of
implementing or has under discussion various cash savings plans. However, there
can be no assurance that such plans will be successfully implemented or if
successfully implemented will provide liquidity sufficient to eliminate the
Company's negative cash flow. Therefore, the Company requires continued access
to short- and long-term external sources of cash to fund its operations.
The Company's primary sources of liquidity are expected to be cash
from the Initial Investment and the Rights Offering, fundings under warehouse
facilities, working capital facilities and whole loan sales. See "- Overview -
Market Conditions."
The Company's primary and potential sources of liquidity as
described in the paragraph above (assuming access to working capital financing,
completion of the Rights Offering and implementation of the cash savings plans
which by no means can be assured) are expected to be sufficient to fund the
Company's liquidity requirements through at least the next 12 months if the
Company's future operations are consistent with management's current growth
expectations. If available at all, the type, timing and terms of financing
selected by the Company will be dependent upon the Company's cash needs, the
availability of other financing sources, limitations under debt covenants and
the prevailing conditions in the financial markets. There can be no assurance
that any such sources will be available to the Company at any given time or that
favorable terms will be available. As a result of the limitations described
above, the Company may be restricted in the amount of loans that it will be able
to produce and dispose of.
Delinquencies and Losses in Securitization Trusts; Right to
Terminate Mortgage Servicing; Negative Impact on Cash Flow. A substantial
majority of the Company's servicing portfolio consists of loans securitized by
the Company and sold to REMIC or owner trusts in securitization transactions.
Generally, the form of agreement entered into in connection with these
securitizations contains specified limits on delinquencies (i.e., loans past due
90 days or more) and losses that may be incurred in each trust. Losses occur
when the liquidation proceeds from disposal of foreclosed properties, less
liquidation expenses, are less than the principal balances of the loans
previously secured by such properties and related interest and servicing
advances (see below). If, at any measuring date, the delinquencies or losses
with respect to any trust credit-enhanced by monoline insurance were to exceed
the limits applicable to such trust, provisions of the agreements permit the
monoline insurance company to terminate the Company's servicing rights to the
affected trust.
At December 31, 1998, the dollar volume of loans delinquent more
than 90 days in the Company's 10 securitization trusts formed in December 1992
and during the period from March 1995 to March 1997 exceeded the permitted limit
in the related pooling and servicing agreements. The higher delinquency rates
negatively affect the Company's cash flows by increasing the required
overcollateralization levels, thereby deferring the Company's receipt of cash
and by obligating the Company, as servicer, to advance past due interest. Higher
delinquency levels leading to higher loss levels also adversely influence the
Company's assumptions underlying the gain on sale in a
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<PAGE> 36
securitization transaction. Additionally, the higher delinquency rates permit
the monoline insurance company to terminate the Company's servicing rights with
respect to the affected trusts. The Company has implemented various plans to
lower the delinquency rates in its future trusts, including diversifying the
loans it originates and purchases to include higher credit grade loans. The
delinquency rate at December 31, 1998 was 16.3% and at June 30, 1998 was 15.6%.
Five of the ten trusts referred to above plus one additional trust
(representing in the aggregate 16% of the dollar volume of the Company's
servicing portfolio) exceeded one of two loss limits at December 31, 1998. The
limit that has been exceeded provides that losses may not exceed a certain
threshold (which ranges from .50% to .94% of the original pool balances in the
relevant securitization trusts) on a rolling 12 month basis. The other limit,
which was not exceeded, provides that losses may not exceed a certain cumulative
threshold (which ranges from 1.8% to 2.0% of the original pool balances in the
relevant securitization trusts) since the inception of the trust.
Management believes that current loss levels have increased in part
due to a loss mitigation strategy of minimizing the real estate owned ("REO")
holding period, thereby reducing carrying costs, which accelerated the volume of
liquidated properties in the recent period. It is the Company's goal to reduce
the REO holding period to maximize the economics of liquidation transactions.
Current loss levels have also increased due to the seasoning of the lower credit
grade loans purchased in bulk and included in the Company's earlier trusts. The
Company has reduced significantly purchases in bulk of lower credit grade loans.
While the accelerated efforts to sell properties is expected to have a
short-term impact on loss levels, the seasoning of the lower credit grade bulk
portfolio and the current origination of higher credit grade loans may
contribute to an increase in losses over time. Further, the adverse market
conditions that existed in the quarter ended December 31, 1998 resulted in the
tightening in underwriting guidelines by purchasers of whole loans and the
insolvency of several large subprime home equity lenders. These factors have had
the effect of decreasing the availability of credit to delinquent lower credit
grade borrowers who in the past had avoided default by refinancing. Management
believes that this will increase the Company's level of losses.
Although the monoline insurance company has the right to terminate
servicing with respect to the trusts referred to above, no servicing rights have
been terminated and the Company believes that the likelihood of such an event is
remote. There can be no assurance, however, that the Company's servicing rights
with respect to the mortgage loans in such trusts, or any other trusts which
exceeds the specified delinquency or loss limits in future periods, will not be
terminated.
The Company's cash flow is also adversely impacted by high
delinquency rates in its trusts. Generally, provisions in the agreements have
the effect of requiring the overcollateralization account, which is funded
primarily by the excess spread on the loans held in the trust, to be increased
when the delinquency rates exceed the specified limit up to approximately twice
the level otherwise required when the delinquency rates do not exceed the
specified limit. As of December 31, 1998, the Company was required to maintain
an additional $85 million in overcollateralization amounts as a result of the
level of its delinquency rates above that which would have been required to be
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<PAGE> 37
maintained if the applicable delinquency rates had been below the specified
limit. Of this amount, at December 31, 1998, $54.2 million remains to be added
to the overcollateralization amounts from future spread income on the loans held
by these trusts.
Risk of Changes in Interest Rate Environment. A substantial and
sustained increase in long-term interest rates could, among other things: (i)
decrease the demand for consumer credit; (ii) adversely affect the ability of
the Company to originate or purchase loans; and (iii) reduce the average size of
loans underwritten by the Company. A significant decline in long-term interest
rates could decrease the size of the Company's loan servicing portfolio by
increasing the level of loan prepayments, thereby shortening the life and
reducing the value of the Company's interest-only strips and also reduce the
gains on loan dispositions. A substantial and sustained increase in short-term
interest rates could, among other things, (i) increase the Company's borrowing
cost and (ii) reduce the gains recognized by the Company upon their
securitization and sale of loans.
Year 2000 Compliance and Technology Enhancements. As part of the
Company's overall systems enhancement program, the Company is utilizing both
internal and external resources to identify, correct, reprogram or replace, and
test its systems for year 2000 compliance. It is anticipated that all of the
Company's year 2000 compliance efforts will be completed on time. There can be
no assurance, however, that the systems of other companies on which the
Company's systems rely will be timely reprogrammed for year 2000 compliance.
The Company has recently installed and is testing a year 2000
compliant loan origination system that is expected to add approximately $2.0
million per year to the Company's technology costs over the next three years.
Other technology enhancements are being reviewed but, to date, the costs for
such enhancements have not been determined.
Prepayment Risk. If actual prepayments occur more quickly than was
projected at the time loans were sold, the carrying value of the interest-only
strips may have to be adjusted through a charge to earnings in the period of
adjustment. Non-cash gain on sale on securitizations has historically been the
most significant component of the Company's reported revenues. Gain on sale
represents the recognition of the present value of the excess cash flow on
securitized loans, which is based on certain estimates made by management at the
time loans are sold, including estimates regarding prepayment rates. The rate of
prepayment of loans may be affected by a variety of economic and other factors,
as discussed above. Estimates of prepayment rates are made based on management's
expectations of future prepayment rates, which are based, in part, on the
historic performance of the Company's loans and other considerations. See "-
Certain Accounting Considerations." There can be no assurance of the accuracy of
management's estimates.
Credit Risk. Loans made to borrowers in the lower credit grades have
historically resulted in a higher risk of delinquency and loss than loans made
to borrowers who utilize conventional mortgage sources. While the Company
believes that the underwriting criteria and collection methods it employs enable
it to mitigate the higher risks inherent in loans made to these borrowers, no
assurance can be given that such criteria or methods will afford adequate
protection against such risks.
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In the event that loans originated and purchased by the Company experience
higher delinquencies, foreclosures or losses than anticipated, the Company's
results of operations or financial condition could be adversely affected.
Collateral securing the Company's loans may not be sufficient to
cover the principal amount of the loans in the event of liquidation. Losses not
covered by the underlying properties, if in excess of the Company's provision
for such losses, could have a material adverse effect on the Company's results
of operations and financial condition. In addition, historical loss rates affect
the assumptions used by the Company in computing its non-cash gain on sale.
Adjustable rate loans account for a substantial portion of the
mortgage loans originated or purchased by the Company. Substantially all such
adjustable rate mortgages include a "teaser" rate, i.e., an initial interest
rate significantly below the fully indexed interest rate at origination.
Although these loans are underwritten at the indexed rate as of the first
adjustment date, credit-impaired borrowers may encounter financial difficulties
as a result of increases in the interest rate over the life of the loan.
Basis Risk. The value of the Company's interest-only strips created
as a result of the securitization of adjustable rate mortgage ("ARM") loans is
subject to so-called basis risk. Basis risk arises when the ARM (including fixed
initial rate mortgage) loans in a securitization trust bear interest based on an
index or adjustment period that is different from the mortgage-backed securities
issued by the trust. Accordingly, in the absence of effective hedging
strategies, in a period of increasing interest rates, the value of the
interest-only strips would be adversely affected because the interest rates on
the mortgage-backed securities issued by a securitization trust could adjust
faster than the interest rates on the Company's ARMs in the trust. Moreover,
ARMs are typically subject to periodic and lifetime interest rate caps, which
limit the amount an ARM's interest rate can change during any given period.
Hence, in a period of rapidly increasing interest rates, the value of the
interest-only strips could be adversely affected in the absence of effective
hedging strategies because the interest rates on the mortgage-backed securities
issued by a securitization trust could increase without limitation by caps,
while the interest rates on the Company's ARMs would be so limited.
Dependence on Funding Sources. The Company is dependent upon its
access to warehouse and other credit facilities in order to fund new
originations and purchases of mortgage loans pending securitization or sale. At
December 31, 1998, the Company effectively was limited to one $300 million
committed warehouse line. This line expires in April 1999 and will most likely
not be renewed. Effective February 10, 1999 and conditioned upon the Initial
Closing occurring, the Company obtained two additional committed repurchase
lines with aggregate borrowing capacity of $400 million and one $100 million
uncommitted repurchase line. In September 1998, the Company entered into a $50
million revolving line of credit secured by its interest-only strips which
expires on September 3, 1999. The Company currently has $20 million outstanding
on this line. The Company is currently in negotiations with this line's lender
for an additional repurchase facility. Management expects that any such
repurchase facility will be conditioned, in part, on the prepayment and
accelerated expiration of the revolving line of credit. The Company is currently
negotiating with
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various financial institutions and investment banks to obtain additional credit
facilities. There can be no assurance that the Company will be able to secure
such financing. Further, there can be no assurance that such financing will be
obtainable on favorable terms. To the extent that the Company is unable to
maintain existing facilities, arrange new warehouse or other credit facilities
or obtain additional forward commitments, the Company may have to curtail loan
origination and purchasing activities, which would have a material adverse
effect on the Company's financial position and results of operations and
jeopardize the Company's ability to continue to operate as a going concern.
Risk of Adverse Changes in the Secondary Market for Mortgage Loans.
The Company's ability to sell loans originated and purchased by it in the
secondary market is necessary to generate cash proceeds to pay down its
warehouse facilities and fund new originations and purchases. See "-- Dependence
on Funding Sources." The ability of the Company to sell loans in the secondary
market on acceptable terms is essential for the continuation of the Company's
loan origination and purchase operations. The value of and market for the
Company's loans are dependent upon a number of factors, including general
economic conditions, interest rates and governmental regulations. Adverse
changes in such factors may affect the Company's ability to securitize or sell
whole loans for acceptable prices within a reasonable period of time. Adverse
changes in the global markets severely weakened the asset-backed market.
Although the asset-backed market has shown some recent improvement, many
subprime lenders have continued to rely more heavily on the whole loan market
for liquidity. This has resulted in an abundant supply of loans in the whole
loan market thereby putting downward pressure on the price for loans so sold and
tightening underwriting guidelines for loans to be purchased. In response to
these conditions, the Company increased its prices and modified its underwriting
guidelines. There can be no assurance, however, that these changes will make the
whole loan market more profitable for, or more accessible to, the Company.
The Company has in the past sold a substantial portion of its loans
through securitizations, and will again securitize a significant portion of its
loans. In order to gain access to the secondary market in securitization
transactions, the Company has utilized monoline insurance companies to provide
financial guarantee insurance on the senior interests in loans sold in the
secondary market in order to obtain ratings for such interests. Although the
Company has used the senior/subordinated structure, which relies on the internal
credit enhancements of the pool rather than monoline insurance, the Company
expects to utilize monoline insurance companies for at least a portion of its
future securitizations. Any substantial reduction in the size or availability of
the secondary market for the Company's loans, or the unwillingness of the
monoline insurance companies to provide financial guarantee insurance for the
senior interests in loans sold in the secondary market, or other accounting, tax
or regulatory changes adversely affecting the Company's securitization program,
could have a material adverse effect on the Company's financial position and
results of operations.
With its strategy of selling a portion of its loans on a whole loan
basis in the secondary market, the Company relies on institutional purchasers,
such as investment banks, financial institutions and other mortgage lenders, to
purchase loans directly from the Company. There can be no assurance that such
purchasers will be willing to purchase loans on terms satisfactory to the
Company or that the market for such loans will continue. To the extent the
Company cannot
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successfully identify whole loan purchasers or negotiate favorable terms for
loan purchases, the Company's results of operations and financial condition
could be materially adversely affected.
Dependence on Broker Network. The Company depends on independent
mortgage brokers for the origination and purchase of its broker loans, which
constitute a significant portion of the Company's loan production. These
independent mortgage brokers negotiate with multiple lenders for each
prospective borrower. The Company competes with these lenders for the
independent brokers' business on pricing, service, loan fees, costs and other
factors. The Company's competitors also seek to establish relationships with
such brokers, who are not obligated by contract or otherwise to do business with
the Company. The Company's future results of operations and financial condition
may be vulnerable to changes in the volume and cost of its broker loans
resulting from, among other things, competition from other lenders and
purchasers of such loans.
Competition. The Company faces intense competition in the business
of originating, purchasing and selling mortgage loans. Competition among
industry participants can take many forms, including convenience in obtaining a
loan, customer service, marketing and distribution channels, amount and term of
the loan, loan origination fees and interest rates. Many of the Company's
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than the Company. The Company's competitors in
the industry include other consumer finance companies, mortgage banking
companies, commercial banks, investment banks, credit unions, thrift
institutions, credit card issuers and insurance companies. In the future, the
Company may also face competition from government-sponsored entities, such as
FNMA and FHLMC. These government-sponsored entities may enter the subprime
mortgage market and target potential customers in the Company's highest credit
grades, who constitute a significant portion of the Company's customer base.
The historical level of gains realized by the Company and its
competitors on the sale of non-conforming mortgage loans could attract
additional competitors into this market. Certain large finance companies and
conforming mortgage originators have announced their intention to originate, or
have purchased companies that originate and purchase, non-conforming mortgage
loans, and some of these large mortgage companies, thrifts and commercial banks
have begun offering non-conforming loan products to customers similar to the
borrowers targeted by the Company. In addition, establishing a broker-sourced
loan business requires a substantially smaller commitment of capital and human
resources than a direct-sourced loan business. This relatively low barrier to
entry permits new competitors to enter this market quickly and compete with the
Company's wholesale lending business.
Additional competition may lower the rates the Company can charge
borrowers and increase the cost to purchase loans, thereby potentially lowering
the gain on future loan sales or securitizations. Increased competition may also
reduce the volume of the Company's loan origination and loan sales and increase
the demand for the Company's experienced personnel and the potential that such
personnel will leave the Company for the Company's competitors.
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Competitors with lower costs of capital have a competitive advantage
over the Company. During periods of declining rates, competitors may solicit the
Company's customers to refinance their loans. In addition, during periods of
economic slowdown or recession, the Company's borrowers may face financial
difficulties and be more receptive to the offers of the Company's competitors to
refinance their loans.
The Company's correspondent and broker programs depend largely on
independent mortgage bankers and brokers and other financial institutions for
the purchases of new loans. The Company's competitors also seek to establish
relationships with the same sources. The Company's future results may become
more exposed to fluctuations in the volume and cost of the Company's purchases
resulting from competition from other purchasers of such loans, market
conditions and other factors.
Concentration of Operations in California. At December 31, 1998, a
significant portion of the loans serviced by the Company were secured by
properties located in California. Because the Company's servicing portfolio is
currently 21.5% concentrated in California, the Company's financial position and
results of operations have been and are expected to continue to be influenced by
general trends in the California economy and its residential real estate market.
Residential real estate market declines may adversely affect the values of the
properties securing loans such that the principal balances of such loans,
together with any primary financing on the mortgaged properties, will equal or
exceed the value of the mortgaged properties. In addition, California
historically has been vulnerable to certain natural disaster risks, such as
earthquakes and erosion-caused mudslides, which are not typically covered by the
standard hazard insurance policies maintained by borrowers. Uninsured disasters
may adversely impact the Company's ability to recover losses on properties
affected by such disasters and adversely impact the Company's results of
operations.
Timing of Loan Sales. The Company's loan disposition strategy calls
for substantially all of its production to be sold in the secondary market each
quarter. However, market and other considerations, including the conformity of
loan pools to monoline insurance company and rating agency requirements, could
affect the timing of such transactions. Any delay in the sale of a significant
portion of the Company's loan production beyond a quarter-end would postpone the
recognition of gain on sale related to such loans until their sale and would
likely result in losses for such quarter being reported by the Company.
Economic Conditions. The risks associated with the Company's
business become more acute in any economic slowdown or recession. Periods of
economic slowdown or recession may be accompanied by decreased demand for
consumer credit and declining real estate values. Any material decline in real
estate values reduces the ability of borrowers to use home equity to support
borrowings and increases the current combined loan-to-value ratios of loans
previously made by the Company, thereby weakening collateral coverage and
increasing the possibility of a loss in the event of liquidation. Further,
delinquencies, foreclosures and losses generally increase during economic
slowdowns or recessions. Because of the Company's focus on credit-impaired
borrowers, the actual rates of delinquencies, foreclosures and losses on such
loans could be higher than those generally experienced in the mortgage lending
industry. In addition, in an economic slowdown or recession,
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the Company's servicing costs may increase. Any sustained period of increased
delinquencies, foreclosure, losses or increased costs could adversely affect the
Company's ability to securitize or sell loans in the secondary market and could
increase the cost of these transactions. See "-- Credit Risk" and "-- Risk of
Adverse Changes in the Secondary Market for Mortgage Loans."
Contingent Risks. Although the Company sells substantially all the
mortgage loans which it originates or purchases, the Company retains some degree
of credit risk on substantially all loans sold on a servicing retained basis.
During the period of time that loans are held pending sale, the Company is
subject to the various business risks associated with the lending business
including the risk of borrower default, the risk of foreclosure and the risk
that a rapid increase in interest rates would result in a decline in the value
of loans to potential purchasers. The documents governing the Company's
securitization program require the Company to establish deposit accounts or
build overcollateralization levels through retention of excess cash flow
distributions in such accounts or application of excess cash flow distributions
to reduce the principal balances of the senior interests issued by the related
trust, respectively. Such amounts serve as credit enhancement for the related
trust and are therefore available to fund losses realized on loans held by such
trust. The Company continues to be subject to the risks of default and
foreclosure following securitization and the sale of loans to the extent of
excess cash flow distributions required to be retained or applied to reduce
principal from time-to-time. Such amounts are a condition to obtaining the
requisite rating on the related interests in each trust. In addition, documents
governing the Company's securitization program and whole loan sales require the
Company to commit to repurchase or replace loans which do not conform to the
representations and warranties made by the Company at the time of sale.
When borrowers are delinquent in making monthly payments on loans
included in a securitization trust, the Company is required to advance interest
payments with respect to such delinquent loans. These advances require funding
from the Company's capital resources but have priority of repayment from
collections or recoveries on the loans in the related pool in the succeeding
month.
In the ordinary course of its business, the Company is subject to
claims made against it by borrowers and private investors arising from, among
other things, losses that are claimed to have been incurred as a result of
alleged breaches of fiduciary obligations, misrepresentations, errors and
omissions of employees and officers of the Company, incomplete documentation and
failures by the Company to comply with various laws and regulations applicable
to its business. The Company believes that liability with respect to any
currently asserted claims or legal actions is not likely to be material to the
Company's financial position or results of operations; however, any claims
asserted in the future may result in legal expenses or liabilities which could
have a material adverse effect on the Company's financial position and results
of operations.
Government Regulation. The Company's operations are subject to
extensive regulation, supervision and licensing by federal, state and local
governmental authorities and are subject to various laws and judicial and
administrative decisions imposing requirements and restrictions on part or all
of its operations. The Company's consumer lending activities are subject to the
Federal Truth-
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in-Lending Act and Regulation Z (including the Home Ownership and Equity
Protection Act of 1994), the Federal Equal Credit Opportunity Act, as amended,
and Regulation B, the Fair Credit Reporting Act of 1970, as amended, the Federal
Real Estate Settlement Procedures Act and Regulation X, the Home Mortgage
Disclosure Act, the Federal Debt Collection Practices Act and the National
Housing Act of 1934, as well as other federal and state statutes and regulations
affecting the Company's activities. The Company is also subject to the rules and
regulations of, and examinations by, state regulatory authorities with respect
to originating, processing, underwriting, selling, securitizing and servicing
loans. These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, govern inspections and appraisals of properties and
credit reports on loan applicants, regulate assessment, collection, foreclosure
and claims handling, investment and interest payments on escrow balances and
payment features, mandate certain disclosures and notices to borrowers and, in
some cases, fix maximum interest rates, fees and mortgage loan amounts. Failure
to comply with these requirements can lead to loss of approved status, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement action.
Members of Congress and government officials have from time-to-time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Company's loans are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, the competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for loans of the
kind offered by the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Securitizations - Hedging Interest Rate Risk. The most significant
variable in the determination of gain on sale in a securitization is the spread
between the weighted average coupon on the securitized loans and the
pass-through interest rate. In the interim period between loan origination or
purchase and securitization of such loans, the Company is exposed to interest
rate risk. The majority of loans are securitized or sold within 90 days of
origination or purchase. However, a portion of the loans are held for sale or
securitization for as long as 12 months (or longer, in very limited
circumstances) prior to securitization. If interest rates rise during the period
that the mortgage loans are held, in the case of a securitization, the spread
between the weighted average interest rate on the loans to be securitized and
the pass-through interest rates on the securities to be sold (the latter having
increased as a result of market rate movements) would narrow. Upon
securitization, this would result in a reduction of the Company's related gain
on sale. During the three and six months ended December 31,1998, gain on sale
included a hedge gain of $1.8 million and a hedge loss of $13.5 million,
respectively.
Interest-Only Strips and OMSRs. The Company had interest-only strips
of $323 million and $490 million outstanding at December 31, 1998 and June 30,
1998, respectively. The Company also
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had OMSRs outstanding at December 31, 1998 and June 30, 1998 in the amount of
$34.5 million and $32.1 million, respectively. Both of these instruments are
valued at market at December 31, 1998 and June 30, 1998. The Company values
these assets based on the present value of future cash flow streams net of
expenses using various assumptions. See "Certain Accounting Considerations --
Accounting for Securitizations."
These assets are subject to risk of accelerated mortgage prepayment or
losses in excess of assumptions used in valuation. Ultimate cash flows realized
from these assets would be reduced should prepayments or losses exceed
assumptions used in the valuation. Conversely, cash flows realized would be
greater should prepayments or losses be below expectations.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<S> <C>
(a) Exhibits
3.3 Certificate of Designation for Registrant's Series B Convertible Preferred Stock
3.4 Certificate of Designation for Registrant's Series C Convertible Preferred Stock
4.2(c) Amendment to Rights Agreement, dated as of December 23, 1998 (1)
4.7 Registration Rights Agreement, dated as of December 23, 1998 between Registrant
and Capital Z Financial Services Fund II, L.P., and certain designated investors
10.22(b) First Amendment to Residuals Financing Agreement, dated as of October 6, 1998
between Registrant and NationsBank, N.A.
10.22(c) Second Amendment to Residual Financing Agreement, dated as of December 10,
1998 between Registrant and NationsBank, N.A.
10.23(a) Employment Agreement between Registrant and Cary H. Thompson
10.23(b) Amendment No. 1 to the Employment Agreement between the Registrant and
Cary H. Thompson.
10.24 Management Investment Agreement between Registrant and Cary H. Thompson,
dated as of February 10, 1999.
10.25 Employment Agreement between Registrant and Neil B. Kornswiet
10.26 Management Investment Agreement between Registrant and Neil B. Kornswiet,
dated as of February 10, 1999.
10.27 Management Voting Agreement between Registrant, Cary H. Thompson and
Neil B. Kornswiet, dated as of February 10, 1999.
</TABLE>
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<TABLE>
<S> <C>
10.28(a) Preferred Stock Purchase Agreement, dated as of December 23, 1998 between
Registrant and Capital Z Financial Services Fund II, L.P. (1)
10.28(b) Amendment No. 1 to Preferred Stock Purchase Agreement, dated as of February 10,
1999 between Registrant and Capital Z Financial Services Fund II, L.P.
10.29 Second Supplemental Indenture, dated as of February 10, 1999, between Registrant,
The Chase Manhattan Bank and certain wholly owned subsidiaries of Registrant,
relating to Registrant's 9.125% Senior Notes due 2003.
11 Computation of Per Share Earnings (Loss)
27 Financial Disclosure Schedule
</TABLE>
------------
(1) Incorporated by reference from Registrant's Current Report on Form
8-K dated December 31, 1998
(b) Reports on Form 8-K: During the fiscal quarter ended December 31,
1998, the Company filed (i) a Current Report on Form 8-K dated
November 17, 1998 (earliest event reported November 16, 1998),
reporting information under Item 5 with respect to discussions with a
strategic partner for an equity infusion in the Company, first quarter
earnings, production volume, the execution of a forward commitment, a
loss on the Company's hedge position and cancellation of the Company's
regular quarterly dividend; (ii) a Current Report on Form 8-K dated
December 15, 1998 (earliest event reported December 14, 1998),
reporting information under Item 5 with respect to the execution of
the Second Amendment to the Residuals Financing Agreement by and among
the Company and NationsBank, N.A. and the postponement of the
Company's 1998 Annual Meeting; and (iii) a Current Report on Form 8-K
dated December 31, 1998 (earliest event reported December 23, 1998),
reporting information under Item 5 with respect to the execution of
the Preferred Stock Purchase Agreement by and between the Company and
Capital Z Financial Services Fund II, L.P. and an amendment of the
Company's Rights Agreement.
45
<PAGE> 46
AAMES FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this Report on Form 10-Q to be signed
on its behalf by the undersigned, thereunto duly authorized.
AAMES FINANCIAL CORPORATION
Date: February 22, 1999 By: /s/ David A. Sklar
----------------------
David A. Sklar
Executive Vice President-Finance
and Chief Financial and
Accounting Officer
46
<PAGE> 47
AAMES FINANCIAL CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.3 Certificate of Designation for Registrant's Series B Convertible Preferred Stock
3.4 Certificate of Designation for Registrant's Series C Convertible Preferred Stock
4.2(c) Amendment to Rights Agreement, dated as of December 23, 1998 (1)
4.7 Registration Rights Agreement, dated as of December 23, 1998 between Registrant
and Capital Z Financial Services Fund II, L.P., and certain designated investors
10.22(b) First Amendment to Residuals Financing Agreement, dated as of October 6, 1998
between Registrant and NationsBank, N.A.
10.22(c) Second Amendment to Residual Financing Agreement, dated as of December 10,
1998 between Registrant and NationsBank, N.A.
10.23(a) Employment Agreement between Registrant and Cary H. Thompson
10.23(b) Amendment No. 1 to the Employment Agreement between the Registrant and
Cary H. Thompson.
10.24 Management Investment Agreement between Registrant and Cary H. Thompson,
dated as of February 10, 1999.
10.25 Employment Agreement between Registrant and Neil B. Kornswiet
10.26 Management Investment Agreement between Registrant and Neil B. Kornswiet,
dated as of February 10, 1999.
10.27 Management Voting Agreement between Registrant, Cary H. Thompson and
Neil B. Kornswiet, dated as of February 10, 1999.
10.28(a) Preferred Stock Purchase Agreement, dated as of December 23, 1998 between
Registrant and Capital Z Financial Services Fund II, L.P. (1)
10.28(b) Amendment No. 1 to Preferred Stock Purchase Agreement, dated as of February 10,
1999 between Registrant and Capital Z Financial Services Fund II, L.P.
10.29 Second Supplemental Indenture, dated as of February 10, 1999, between Registrant,
The Chase Manhattan Bank and certain wholly owned subsidiaries of Registrant,
relating to Registrant's 9.125% Senior Notes due 2003.
11 Computation of Per Share Earnings (Loss)
27 Financial Disclosure Schedule
</TABLE>
------------
(1) Incorporated by reference from Registrant's Current Report on Form
8-K dated December 31, 1998
<PAGE> 1
EXHIBIT 3.3
- --------------------------------------------------------------------------------
CERTIFICATE OF THE VOTING POWERS, DESIGNATIONS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
OR OTHER SPECIAL RIGHTS, AND QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS THEREOF, OF
SERIES B CONVERTIBLE PREFERRED STOCK OF
AAMES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
AAMES FINANCIAL CORPORATION, a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies that the following resolutions were adopted by the Board of
Directors of the Corporation (the "Board of Directors") pursuant to authority of
the Board of Directors as required by Section 151 of the Delaware General
Corporation Law:
RESOLVED, that pursuant to the authority granted to and vested in
the Board of Directors in accordance with the provisions of the Certificate of
Incorporation of the Corporation, as amended (the "Certificate of
Incorporation"), the Board of Directors hereby creates a series of the
Corporation's previously authorized preferred stock, par value $0.001 per share
(the "Preferred Stock"), and hereby states the designation and number thereof,
and fixes the voting powers, preferences and relative, participating, optional
and other special rights, and the qualifications, limitations and restrictions
thereof, as follows:
SERIES B CONVERTIBLE PREFERRED STOCK:
I. DESIGNATION AND AMOUNT
The designation of this series of shares shall be "Series B
Convertible Preferred Stock" (the "Series B Preferred Stock") par value $0.001
per share; the initial stated value per share shall be $1,000.00 (the "Initial
Stated Value"); and the number of shares constituting such series shall be
100,000. The number of shares of the Series B Preferred Stock may be decreased
from time to time by a resolution or resolutions of the Board of Directors;
provided, however, that such number shall not be decreased below the aggregate
number of shares of the Series B Preferred Stock then outstanding.
II. RANK
A. With respect to dividends, the Series B Preferred Stock shall
rank (i) senior to each other class or series of Preferred Stock, except for the
Series C Convertible Preferred Stock, par value $0.001 per share, of the
Corporation (the "Series C Preferred Stock"); (ii) on a parity with the Series C
Preferred Stock; and (iii) senior to the Corporation's Common Stock, par value
$.001 per share (the "Common Stock"), and, except as specified above, all other
classes and series of capital stock of the Corporation hereafter issued by the
Corporation. With respect to dividends, all equity securities of the Corporation
to which the Series B Preferred Stock ranks senior, including the Common Stock,
are collectively referred to herein as the
<PAGE> 2
"Junior Dividend Securities"; all equity securities of the Corporation with
which the Series B Preferred Stock ranks on a parity, including the Series C
Preferred Stock, are collectively referred to herein as the "Parity Dividend
Securities"; and all equity securities of the Corporation (other than
convertible debt securities) to which the Series B Preferred Stock ranks junior,
with respect to dividends, are collectively referred to herein as the "Senior
Dividend Securities."
B. With respect to the distribution of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the Series B Preferred Stock shall rank (i) senior to each other class or series
of Preferred Stock of the Corporation, except for the Series C Preferred Stock;
(ii) on a parity with the Series C Preferred Stock; and (iii) senior to the
Common Stock, and, except as specified above, all other classes and series of
capital stock of the Corporation hereafter issued by the Corporation. With
respect to the distribution of assets upon liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, all equity securities
of the Corporation to which the Series B Preferred Stock ranks senior, including
the Common Stock, are collectively referred to herein as "Junior Liquidation
Securities"; all equity securities of the Corporation (other than convertible
debt securities) to which the Series B Preferred Stock ranks on parity,
including the Series C Preferred Stock, are collectively referred to herein as
"Parity Liquidation Securities"; and all equity securities of the Corporation to
which the Series B Preferred Stock ranks junior are collectively referred to
herein as "Senior Liquidation Securities."
C. The Series B Preferred Stock shall be subject to the creation
of Junior Dividend Securities and Junior Liquidation Securities (collectively,
"Junior Securities"), but no Parity Dividend Securities or Parity Liquidation
Securities (collectively, "Parity Securities") (other than the Series C
Preferred Stock) or Senior Dividend Securities or Senior Liquidation Securities
(collectively, "Senior Securities") shall be created except in accordance with
the terms hereof.
III. DIVIDENDS
A. DIVIDENDS. Subject to the terms of paragraph D below, shares
of Series B Preferred Stock shall accumulate dividends at a rate of 6.5% per
annum (the "Dividend Rate"), which dividends shall be paid quarterly in cash, in
four equal quarterly installments on the last day of March, June, September and
December of each year, or if any such date is not a Business Day, the Business
Day next preceding such day (each such date, regardless of whether any dividends
have been paid or declared and set aside for payment on such date, a "Dividend
Payment Date"), to holders of record (the "Registered Holders") as they appear
on the stock record books of the Corporation on the fifteenth day prior to the
relevant Dividend Payment Date; provided, however, that during the Accrual
Period (as defined in Article IX hereof) the Corporation shall have the option
to accrue such dividends, which dividends, to the extent so accrued, shall
compound quarterly. Prior to the consummation of the Recapitalization, dividends
shall accrue and accumulate on the Initial Stated Value of each share of Series
B Preferred Stock. Following the consummation of the Recapitalization, dividends
shall accrue and accumulate on the Post-Recapitalization Stated Value of each
share of Series B Preferred Stock. Dividends shall be paid only when, as and if
declared by the Board of Directors out of funds at the time
2
<PAGE> 3
legally available for the payment of dividends. Dividends shall begin to
accumulate on outstanding shares of Series B Preferred Stock from the date of
issuance and shall be deemed to accumulate from day to day whether or not earned
or declared until paid. Dividends shall accumulate on the basis of a 360-day
year consisting of twelve 30-day months (four 90-day quarters) and the actual
number of days elapsed in the period for which payable.
B. ACCUMULATION. Dividends on the Series B Preferred Stock shall
be cumulative, and from and after (i) any Dividend Payment Date on which any
dividend that has accumulated or been deemed to have accumulated through such
date has not been paid in full (other than by reason of the election of the
Corporation to accrue dividends during the Accrual Period); or (ii) any payment
date set for a redemption on which such redemption payment has not been paid in
full, additional dividends shall accumulate in respect of the amount of such
unpaid dividends or unpaid redemption payment (the "Arrearage") at 125% of the
stated dividend rate (or such lesser rate as may be the maximum rate that is
then permitted by applicable law). Such additional dividends in respect of any
Arrearage shall be deemed to accumulate from day to day whether or not earned or
declared until the Arrearage is paid, shall be calculated as of such successive
Dividend Payment Date, and shall constitute an additional Arrearage from and
after any Dividend Payment Date to the extent not paid on such Dividend Payment
Date. References in any Article herein to dividends that have accumulated or
that have been deemed to have accumulated with respect to the Series B Preferred
Stock shall include the amount, if any, of any Arrearage together with any
dividends accumulated or deemed to have accumulated on such Arrearage pursuant
to the immediately preceding two sentences. Additional dividends in respect of
any Arrearage may be declared and paid at any time, in whole or in part, without
reference to any regular Dividend Payment Date, to Registered Holders as they
appear on the stock record books of the Corporation on such record date as may
be fixed by the Board of Directors (which record date shall be no less than 10
days prior to the corresponding payment date). Dividends in respect of any
Arrearage shall be paid in cash.
C. METHOD OF PAYMENT. Dividends paid on the shares of Series B
Preferred Stock in an amount less than the total amount of such dividends at the
time accumulated and payable on all outstanding shares of Series B Preferred
Stock shall be allocated pro rata on a share-by-share basis among all such
shares then outstanding. After the Second Anniversary Date, dividends that are
declared and paid in an amount less than the full amount of dividends
accumulated on the Series B Preferred Stock (and on any Arrearage) shall be
applied first to the earliest dividend which has not theretofore been paid. All
cash payments of dividends on the shares of Series B Preferred Stock shall be
made in such coin or currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts.
D. SPECIAL DIVIDEND RIGHTS.
1. In addition to the dividend rights set forth in paragraph A
above, prior to the consummation of the Recapitalization, the holders of shares
of Series B Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for such
purpose, cash dividends in an amount per whole share (rounded to the nearest
cent) equal to the Formula Number then in effect times the aggregate per share
amount of all
3
<PAGE> 4
cash dividends declared or paid on the Common Stock. If, prior to the
consummation of the Recapitalization, the Corporation shall pay any dividend or
make any distribution on the Common Stock payable in assets, securities or other
forms of non-cash consideration, then, in each such case, the Corporation shall
simultaneously pay or make on each whole outstanding share of the Series B
Preferred Stock a dividend or distribution in like kind equal to the Formula
Number then in effect times such dividend or distribution on each share of the
Common Stock. The dividends and distributions on the Series B Preferred Stock
pursuant to this paragraph are hereinafter referred to as "Participating
Dividends." The Corporation shall declare each Participating Dividend
immediately prior to or at the same time it declares any cash or non-cash
dividend or distribution on the Common Stock in respect of which a Participating
Dividend is required to be paid. No cash or non-cash dividend or distribution on
the Common Stock in respect of which a Participating Dividend is required shall
be paid or set aside for payment on the Common Stock unless a Participation
Dividend in respect of such dividend shall be have been paid. Nothing contained
in this paragraph D shall obligate the Company to declare or pay any dividend or
other distribution on the Common Stock or (except pursuant to paragraph A of
this Article III or in connection with a dividend or distribution on the Common
Stock as provided in this paragraph D) the Series B Preferred Stock.
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.
IV. LIQUIDATION PREFERENCE
A. PRIOR TO THE RECAPITALIZATION. In the event of a liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
occurring prior to the consummation of the Recapitalization, the holders of
then-outstanding shares of Series B Preferred Stock shall be entitled to receive
out of the assets of the Corporation, whether such assets are capital or surplus
of any nature, an amount per share equal to the sum of (i) the dividends, if
any, accumulated or deemed to have accumulated thereon, to the date of final
distribution to such holders, whether or not such dividends are declared; and
(ii) the Initial Stated Value thereof, before any payment shall be made or any
assets distributed to the holders of any Junior Liquidation Securities (the
"Initial Preferred Distribution"). After the Initial Preferred Distribution has
been made, the holders of Series B Preferred Stock shall be entitled to share
pro rata with the holders of Common Stock in the distribution of any remaining
assets of the Corporation on the basis of each whole outstanding share of the
Series B Preferred Stock receiving an amount equal to the Formula Number then in
effect times such distribution on each share of the Common Stock. The
distributions on the Series B Preferred Stock pursuant to the immediately
preceding sentence of this paragraph A are hereinafter referred to as
"Participating Liquidation Distributions." No distribution on the Common Stock
in respect of which a Participating Liquidation Distribution is required shall
be paid or set aside for payment on the Common Stock unless a Participating
Liquidation Distribution in respect of such distribution is concurrently paid.
4
<PAGE> 5
B. AFTER THE RECAPITALIZATION. Subsequent to the consummation of
the Recapitalization, the holders of the outstanding shares of Series B
Preferred Stock shall be entitled to receive out of the assets of the
Corporation, whether such assets are capital or surplus of any nature, an amount
per share equal to the sum of (i) the dividends, if any, accumulated or deemed
to have accumulated thereon to the date of final distribution to such holders,
whether or not such dividends are declared; and (ii) the Post-Recapitalization
Stated Value thereof, before any payment shall be made or any assets distributed
to the holders of any Junior Liquidation Securities. After any such payment in
full after the consummation of the Recapitalization, the holders of Series B
Preferred Stock shall not, as such, be entitled to any further participation in
any distribution of assets of the Corporation.
C. PARITY SECURITIES. All the assets of the Corporation available
for distribution to stockholders after the liquidation preferences of any Senior
Liquidation Securities shall be distributed ratably (in proportion to the full
distributable amounts to which holders of Series B Preferred Stock and Parity
Liquidation Securities, if any, are respectively entitled upon such dissolution,
liquidation or winding up) among the holders of the then-outstanding shares of
Series B Preferred Stock and Parity Liquidation Securities, if any, when such
assets are not sufficient to pay in full the aggregate amounts payable thereon.
D. MERGER NOT A LIQUIDATION. Neither a consolidation or merger of
the Corporation with or into any other Person or Persons, nor a sale,
conveyance, lease, exchange or transfer of all or part of the Corporation's
assets for cash, securities or other property to a Person or Persons shall be
deemed to be a liquidation, dissolution or winding up of the Corporation for
purposes of this Article IV, but the holders of shares of Series B Preferred
Stock shall nevertheless be entitled from and after any such consolidation,
merger or sale, conveyance, lease, exchange or transfer of all or part of the
Corporation's assets to the rights provided by this Article IV following any
such transaction. Notice of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, stating the payment date or dates
when, and the place or places where, the amounts distributable to each holder of
shares of Series B Preferred Stock in such circumstances shall be payable, shall
be given by first-class mail, postage prepaid, mailed not less than 30 days
prior to any payment date stated therein, to holders of record as they appear on
the stock record books of the Corporation as of the date such notices are first
mailed.
V. REDEMPTION
A. INTENTIONALLY OMITTED
B. OPTIONAL REDEMPTION. Commencing on the earlier to occur of (x)
the tenth anniversary of the Issue Date and (y) the date on which fewer than 25%
of the shares of Series B Preferred Stock issued on the Issue Date remain
outstanding, and at all times thereafter, the Corporation may, at its option,
redeem all (but not less than all) outstanding shares of Series B Preferred
Stock on a date specified by the Corporation (the "Optional Redemption Date") by
paying the Redemption Price therefor in cash out of funds legally available for
such purpose.
C. NOTICE AND REDEMPTION PROCEDURES. Notice of the redemption of
shares of Series B Preferred Stock pursuant to paragraph B of this Article V (a
"Notice of Redemption")
5
<PAGE> 6
shall be sent to the holders of record of the shares of Series B Preferred Stock
to be redeemed by first class mail, postage prepaid, at each such holder's
address as it appears on the stock record books of the Corporation not more than
120 nor fewer than 90 days prior to the Optional Redemption Date, which date
shall be set forth in such notice (the "Redemption Date"); provided that failure
to give such Notice of Redemption to any holder, or any defect in such Notice of
Redemption to any holder shall not affect the validity of the proceedings for
the redemption of any shares of Series B Preferred Stock held by any other
holder. In order to facilitate the redemption of shares of Series B Preferred
Stock, the Board of Directors may fix a record date for the determination of the
holders of shares of Series B Preferred Stock to be redeemed not more than 30
days prior to the date the Notice of Redemption is mailed. On or after the
Optional Redemption Date, each holder of the shares called for redemption shall
surrender the certificate evidencing such shares to the Corporation at the place
designated in such notice and shall thereupon be entitled to receive payment of
the Redemption Price for such shares. From and after the Optional Redemption
Date, all dividends on shares of Series B Preferred Stock shall cease to
accumulate and all rights of the holders thereof as holders of Series B
Preferred Stock shall cease and terminate, except to the extent the Corporation
shall default in payment thereof on the Optional Redemption Date.
D. DEPOSIT OF FUNDS. The Corporation shall, on or prior to the
Optional Redemption Date, pursuant to paragraph C of this Article V, deposit
with its transfer agent or other redemption agent in the Borough of Manhattan,
The City of New York having a capital and surplus of at least $500,000,000
selected by the Board of Directors, as a trust fund for the benefit of the
holders of the shares of Series B Preferred Stock to be redeemed, cash that is
sufficient in amount to redeem the shares to be redeemed in accordance with the
Notice of Redemption, with irrevocable instructions and authority to such
transfer agent or other redemption agent to pay to the respective holders of
such shares, as evidenced by a list of such holders certified by an officer of
the Corporation, the Redemption Price for such shares upon surrender of their
respective share certificates. Such deposit shall be deemed to constitute full
payment of the Redemption Price for such shares to the holders, and from and
after the date of such deposit, all rights of the holders of the shares of
Series B Preferred Stock that are to be redeemed as stockholders of the
Corporation with respect to such shares, except the right to receive the
Redemption Price upon the surrender of their respective certificates, shall
cease and terminate. No dividends shall accumulate on any shares of Series B
Preferred Stock after the Optional Redemption Date for such shares (unless the
Corporation shall fail to deposit cash sufficient to redeem all such shares). In
case holders of any shares of Series B Preferred Stock called for redemption
shall not, within two years after such deposit, claim the cash deposited for
redemption thereof, such transfer agent or other redemption agent shall, upon
demand, pay over to the Corporation the balance so deposited. Thereupon, such
transfer agent or other redemption agent shall be relieved of all responsibility
to the holders thereof and the sole right of such holders, with respect to
shares to be redeemed, shall be to receive the Redemption Price as general
creditors of the Corporation. Any interest accrued on any funds so deposited
shall belong to the Corporation, and shall be paid to it from time to time on
demand.
6
<PAGE> 7
VI. RESTRICTIONS ON DIVIDENDS
So long as any shares of the Series B Preferred Stock are
outstanding, the Board of Directors shall not declare, and the Corporation shall
not pay or set apart for payment any dividend on any Junior Securities or make
any payment on account of, or set apart for payment money for a sinking or other
similar fund for, the repurchase, redemption or other retirement of, any Junior
Securities or Parity Securities or any warrants, rights or options exercisable
for or convertible into any Junior Securities or Parity Securities (other than
the repurchase, redemption or other retirement of debentures or other debt
securities that are convertible or exchangeable into any Junior Securities or
Parity Securities), or make any distribution in respect of the Junior
Securities, either directly or indirectly, and whether in cash, obligations or
shares of the Corporation or other property (other than distributions or
dividends in Junior Securities to the holders of Junior Securities), and shall
not permit any corporation or other entity directly or indirectly controlled by
the Corporation to purchase or redeem any Junior Securities or Parity Securities
or any warrants, rights, calls or options exercisable for or convertible into
any Junior Securities or Parity Securities (other than the repurchase,
redemption or other retirement of debentures or other debt securities that are
convertible or exchangeable into any Junior Securities or Parity Securities or
the repurchase, redemption or other retirement of Junior Securities or Parity
Securities in exchange for Junior Securities or Parity Securities) unless prior
to or concurrently with such declaration, payment, setting apart for payment,
repurchase, redemption or other retirement or distribution, as the case may be,
all accumulated and unpaid dividends on shares of the Series B Preferred Stock
not paid on the dates provided for in paragraph A of Article III hereof
(including Arrearages and accumulated dividends thereon) shall have been paid,
except that when dividends are not paid in full as aforesaid upon the shares of
Series B Preferred Stock, all dividends declared on the Series B Preferred Stock
and any series of Parity Dividend Securities shall be declared and paid pro rata
so that the amount of dividends so declared and paid on Series B Preferred Stock
and such series of Parity Dividend Securities shall in all cases bear to each
other the same ratio that accumulated dividends (including interest accrued on
or additional dividends accumulated in respect of such accumulated dividends) on
the shares of Series B Preferred Stock and such Parity Dividend Securities bear
to each other.
VII. VOTING RIGHTS
A. On or prior to the consummation of the Recapitalization, the
holders of Series B Preferred Stock shall be entitled to one thousand (1,000)
votes per share of Series B Preferred Stock at each meeting of stockholders of
the Corporation with respect to any and all matters presented to the
stockholders of the Corporation for their action and consideration. After the
consummation of the Recapitalization, the holders of Series B Preferred Stock
shall be entitled to the number of votes per share of Series B Preferred Stock
equal to the number of shares of Common Stock for which such share of Series B
Preferred Stock is then convertible pursuant to Article VIII at each meeting of
stockholders of the Corporation with respect to any and all matters presented to
the stockholders of the Corporation for their action and consideration.
7
<PAGE> 8
B. So long as any shares of the Series B Preferred Stock are
outstanding, (i) each share of Series B Preferred Stock shall entitle the holder
thereof to vote on all matters voted on by holders of Common Stock; and (ii) the
shares of Series B Preferred Stock shall vote together with shares of Common
Stock (and any shares of Series C Preferred Stock entitled to vote) as a single
class.
C. At each annual meeting of the stockholders of the Corporation,
the holders of Series B Preferred Stock, voting as a separate class, shall have
the right to elect, by the written consent (if action by written consent is
permitted) or affirmative vote of the holders of a majority of the outstanding
shares of Series B Preferred Stock, four members of a separate class of
directors, each of whom shall serve until the next annual meeting of the
stockholders of the Corporation or until his or her successor is elected and
qualified. Such vote or consent shall be taken in accordance with the procedures
specified in paragraph F below. The initial directors shall be Steven M.
Gluckstern, Adam M. Mizel, Mani Sadeghi and David Spuria.
D. Without the written consent (if action by written consent is
permitted) or affirmative vote of the holders of a majority of the outstanding
shares of Series B Preferred Stock and Series C Preferred Stock, voting together
as a single class, the Corporation shall not (i) authorize, create or issue, or
increase the authorized amount of, (x) any Senior Securities or Parity
Securities or (y) any class or series of capital stock or any security
convertible into or exercisable for any class or series of capital stock,
redeemable mandatorily or redeemable at the option of the holder thereof or (ii)
enter into any Transaction (as defined in paragraph H of Article VIII). Such
vote or consent shall be taken in accordance with the procedures specified in
paragraph F below.
E. Without the written consent (if action by written consent is
permitted) or affirmative vote of the holders of at least a majority of the
outstanding shares of Series B Preferred Stock and Series C Preferred Stock,
voting together as a single class, the Corporation shall not (i) amend, alter or
repeal any provision of the Certificate of Incorporation or the Bylaws, if the
amendment, alteration or repeal alters or changes the powers, preferences or
special rights of the Series B Preferred Stock so as to affect them materially
and adversely or (ii) authorize or take any other action if such action alters
or changes any of the rights of the Series B Preferred Stock in any respect or
otherwise would be inconsistent with the provisions of this Certificate of
Designations and the holders of any class or series of the capital stock of the
Corporation is entitled to vote thereon. Such vote or consent shall be taken in
accordance with the procedures specified in paragraph F below.
F. The foregoing rights of holders of shares of Series B
Preferred Stock to take any actions as provided in this Article VII may be
exercised at any annual meeting of stockholders or at a special meeting of
stockholders held for such purpose as hereinafter provided or at any adjournment
thereof, or by the written consent, delivered to the Secretary of the
Corporation, of the holders of the minimum number of shares required to take
such action, if action by written consent of stockholders of the Corporation is
then permitted.
8
<PAGE> 9
The Chairman of the Board of the Corporation may call, and upon
written request of holders of record of 35% of the outstanding shares of Series
B Preferred Stock, if the holders of Series B Preferred Stock are to vote
separately as a single class, or the holders of record of 35% of the outstanding
shares of Series B Preferred Stock and Series C Preferred Stock, if the holders
of shares of Series B Preferred Stock are to vote as a class with the holders of
shares of any Series C Preferred Stock, addressed to the Secretary of the
Corporation at the principal office of the Corporation shall call, a special
meeting of the holders of shares entitled to vote as provided herein. Such
meeting shall be held within 30 days after delivery of such request to the
Secretary, at the place and upon the notice provided by law and in the By-laws
of the Corporation for the holding of meetings of stockholders.
At each meeting of stockholders at which the holders of shares of
Series B Preferred Stock shall have the right, voting separately as a single
class or as a class with the holders of shares of any Series C Preferred Stock,
to elect directors of the Corporation as provided in paragraph C above or to
take any action, the presence in person or by proxy of the holders of record of
one-third of the total number of shares of Series B Preferred Stock, if the
holders of shares of Series B Preferred Stock are to vote separately as a single
class, or the holders of record of one-third of the total number of shares of
Series B Preferred Stock and Series C Preferred Stock, if the holder of shares
of Series B Preferred Stock are to vote as a class with the holders of shares of
Series C Preferred Stock, then outstanding and entitled to vote on the matter
shall be necessary and sufficient to constitute a quorum. At any such meeting or
at any adjournment thereof:
(A) the absence of a quorum of the holders of shares of Series B
Preferred Stock, if the holders of Series B Preferred Stock are to vote
separately as a single class, shall not prevent the election of
directors other than those to be elected by the holders of shares of
Series B Preferred Stock, and the absence of a quorum of the holders of
shares of any other class or series of capital stock shall not prevent
the election of directors to be elected by the holders of shares of
Series B Preferred Stock or the taking of any action as provided in this
Article VII; and
(B) in the absence of a quorum of the holders of shares of Series
B Preferred Stock, if the holders of Series B Preferred Stock are to
vote separately as a single class, or the holders of shares of Series B
Preferred Stock and Series C Preferred Stock, if the holders of Series B
Preferred Stock are to vote as a class with the holders of shares of
Series C Preferred Stock, a majority of the holders of such shares
present in person or by proxy shall have the power to adjourn the
meeting as to the actions to be taken by the holders of shares of Series
B Preferred Stock or the holders of Series B Preferred Stock and Series
C Preferred Stock, as the case may be, from time to time and place to
place without notice other than announcement at the meeting until a
quorum shall be present.
For taking of any action as provided in this Article VII by the
holders of shares of Series B Preferred Stock voting separately as a single
class or together with the holders of shares of Series B Preferred Stock and
Series C Preferred Stock as a single class, as the case may be, each such holder
shall have one vote for each share of such stock standing in his name on the
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<PAGE> 10
transfer books of the Corporation as of any record dated fixed for such purpose
or, if no such date be fixed, at the close of business on the Business Day next
preceding the day on which notice is given, or if notice if waived, at the close
of business on the Business Day next preceding the day on which the meeting is
held.
In case any vacancy shall occur among the directors elected by
the holders of shares of Series B Preferred Stock, as provided in paragraph C
above, such vacancy may be filled for the unexpired portion of the term by vote
of the remaining directors theretofore elected by such holders (if there is a
remaining director), or the last remaining director's successor in office. If
any such vacancy is not so filled within 20 days after the creation thereof or
if all directors so elected by the holders of Series B Preferred Stock shall
cease to serve as directors before their terms shall expire, the holders of the
Series B Preferred Stock then outstanding and entitled to vote for such
directors may, by written consent as herein provided (if action by written
consent is permitted), or at a special meeting of such holders called as
provided herein, elect successors to hold office for the unexpired terms of the
directors whose places shall be vacant.
Any director elected by the holders of shares of Series B
Preferred Stock voting separately as a single class may be removed from office
with or without cause by the vote or written consent (if action by written
consent is permitted) of the holders of at least a majority of the outstanding
shares of Series B Preferred Stock. A special meeting of the holders of shares
of Series B Preferred Stock may be called in accordance with the procedures set
forth in this paragraph F.
G. The Corporation shall not enter into any agreement or issue
any security that prohibits, conflicts or is inconsistent with, or would be
breached by, the Corporation's performance of its obligations hereunder.
VIII. CONVERSION
The holders of the Series B Preferred Stock shall have conversion
rights as follows:
A. Each share of Series B Preferred Stock shall be convertible at
the direction of, and by notice to the Corporation from, the
holders of a majority of the outstanding shares of Series B
Preferred Stock, at any time, at the office of the Corporation or
any transfer agent for such Series, into one thousand (1,000)
fully paid and nonassessable shares of Common Stock subject (x)
to adjustment from time to time as provided below (as so
adjusted, the "conversion ratio") and (y) (prior to the
consummation of the Recapitalization) to limitations resulting
from the available number of shares of Common Stock which may be
reserved for issuance upon such conversion, provided ,that any
conversion pursuant to this paragraph A of less than all of the
outstanding shares of Series B Preferred Stock shall be on a pro
rata basis amongst all holders of Series B Preferred Stock. After
consummation of the Recapitalization, the number "1,000" in this
paragraph shall be "1", subject to adjustment as provided in
paragraph VIII.G.
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B. If the holders of a majority of the outstanding shares of Series
B Preferred Stock give notice of conversion under paragraph A
above, the Corporation shall notify all other record holders of
Series B Preferred Stock (a "Conversion Notice"). Following
receipt of a Conversion Notice, the holders of Series B Preferred
Stock shall surrender the certificate or certificates therefor
duly endorsed, at the office of the Corporation or of any
transfer agent for such Series, and shall state therein the name
or names in which the certificate or certificates for shares of
Common Stock are to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such
holder, or to the nominee or nominees of such holder, a
certificate or certificates for the number of shares of Common
Stock to which such holder shall be entitled as aforesaid. Such
conversion shall be deemed to have been made immediately prior to
the close of business on the date of such Conversion Notice and
the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all
purposes as the recordholder or holders of such shares of Common
Stock as of such date. The issuance of certificates or shares of
Common Stock upon conversion of shares of Series B Preferred
Stock shall be made without charge for any issue, stamp or other
similar tax in respect of such issuance.
C. No fractional shares shall be issued upon conversion of any
shares of Series B Preferred Stock and the number of shares of
Common Stock to be issued shall be rounded down to the nearest
whole share, and the holder of Series B Preferred Stock shall be
paid in cash for any fractional share.
D. In case at any time or from time to time the Corporation shall
pay any dividend or make any other distribution to the holders of
its Common Stock or other class of securities, or shall offer for
subscription pro rata to the holders of its Common Stock or other
class of securities any additional shares of stock of any class
or any other right, or there shall be any capital reorganization
or reclassification of the Common Stock of the Corporation or
consolidation or merger of the Corporation with or into another
corporation, or any sale or conveyance to another corporation of
the property of the Corporation as an entirety or substantially
as an entirety, or there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Corporation, then,
in any one or more of said cases the Corporation shall give at
least 20 days' prior written notice (the time of mailing of such
notice shall be deemed to be the time of giving thereof) to the
registered holders of the Series B Preferred Stock at the
addresses of each as shown on the books of the Corporation
maintained by the Transfer Agent thereof of the date on which (i)
the books of the Corporation shall close or a record shall be
taken for such stock dividend,
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distribution or subscription rights or (ii) such reorganization,
reclassification, consolidation, merger, sale or conveyance,
dissolution, liquidation or winding up shall take place, as the
case may be, provided that in the case of any Transaction to
which paragraph H applies the Corporation shall give at least 30
days' prior written notice as aforesaid. Such notice shall also
specify the date as of which the holders of the Common Stock of
record shall participate in said dividend, distribution or
subscription rights or shall be entitled to exchange their Common
Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale or
conveyance or participate in such dissolution, liquidation or
winding up, as the case may be. Failure to give such notice shall
not invalidate any action so taken.
E. From and after the Recapitalization, the Corporation shall at all
times reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of Series B Preferred
Stock, such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all
outstanding shares of Series B Preferred Stock, and if at any
time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then
outstanding shares of Series B Preferred Stock, then in addition
to such other remedies as shall be available to the holder of
Series B Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for
such purposes.
F. Any notice required by the provisions of paragraph D to be given
the holders of shares of Series B Preferred Stock shall be deemed
given if sent by facsimile transmission, by telex, or if
deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his, her or its address
appearing on the books of the Corporation.
G. The conversion ratio shall be subject to adjustment from time to
time as follows:
(i) In case the Corporation shall at any time or from time
to time after the Issue Date (A) pay a dividend or make a
distribution, on the outstanding shares of Common Stock in shares
of Common Stock, (B) subdivide the outstanding shares of Common
Stock into a larger number of shares of Common Stock, (C) combine
the outstanding shares of Common Stock into a smaller number of
shares or (D) issue by reclassification of the shares of Common
Stock any shares of capital stock of the Corporation, then, and
in each such case, the conversion ratio in effect immediately
prior to such event or the record date therefor, whichever is
earlier, shall be adjusted so that the holder of any shares of
Series B Preferred Stock thereafter surrendered for conversion
shall be entitled to receive the number of shares of Common Stock
or other securities of the Corporation which such holder would
have owned or have been entitled to receive after the happening
of any of the events described above, had such shares of Series B
Preferred Stock been surrendered for conversion immediately prior
to the happening of such event or the record date therefor,
whichever is earlier. An adjustment made pursuant to this clause
(i) shall become effective (x) in the case of any such dividend
or distribution, immediately after the close of business on the
record date for the determination of holders of shares of Common
Stock
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<PAGE> 13
entitled to receive such dividend or distribution, or (y) in the
case of any such subdivision, reclassification or combination, at
the close of business on the day upon which such corporate action
becomes effective.
(ii) In the case the Corporation shall, after the Issue
Date, issue shares of Common Stock at a price per share, or
securities convertible into or exchangeable for shares of Common
Stock ("Convertible Securities") having a "Conversion Price" (as
defined below) less than the Current Market Price (for a period
of 15 consecutive trading days prior to such date), then, and in
each such case, the conversion ratio shall be adjusted so that
the holder of each share of Series B Preferred Stock shall be
entitled to receive, upon the conversion thereof, the number of
shares of Common Stock determined by multiplying (A) the
applicable conversion ratio on the day immediately prior to such
date by (B) a fraction, the numerator of which shall be the sum
of (1) the number of shares of Common Stock outstanding on the
date on which such shares or Convertible Securities are issued
and (2) the number of additional shares of Common Stock issued,
or into which the Convertible Securities may convert, and the
denominator of which shall be the sum of (x) the number of shares
of Common Stock outstanding on such date and (y) the number of
shares of Common Stock which the aggregate consideration
receivable by the Corporation for the total number of shares of
Common Stock so issued, or the number of shares of Common Stock
which the aggregate of the Conversion Price of such Convertible
Securities so issued, would purchase at such Current Market price
on such date. An adjustment made pursuant to this clause (ii)
shall be made on the next Business Day following the date on
which any such issuance is made and shall be effective
retroactively immediately after the close of business on such
date. For purposes of this clause (ii), the aggregate
consideration receivable by the Corporation in connection with
the issuance of any securities shall be deemed to be the sum of
the aggregate offering price to the public (before deduction of
underwriting discounts or commissions and expenses payable to
third parties), and the "Conversion Price" of any Convertible
Securities is the total amount received or receivable by the
Corporation as consideration for the issue or sale of such
Convertible Securities (before deduction of underwriting
discounts or commissions and expenses payable to third parties)
plus the minimum aggregate amount of additional consideration, if
any, payable to the Corporation upon the conversion, exchange or
exercise of any such Convertible Securities. Neither (A) the
issuance of any shares of Common Stock (whether treasury shares
or newly issued shares) pursuant to a dividend or distribution
on, or subdivision, combination or reclassification of, the
outstanding shares of Common Stock requiring an adjustment in the
conversion ratio pursuant to clause (i) of this paragraph G, or
pursuant to any employee benefit plan or program of the
Corporation or pursuant to any option, warrant, right, or
Convertible Security outstanding as of the date hereof
(including, but not limited to, the Rights, the Series B
Preferred Stock, the Series C Preferred Stock and the Warrants)
nor (B) the issuance of shares of Common Stock pursuant thereto
shall be deemed to
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<PAGE> 14
constitute an issuance of Common Stock or Convertible Securities
by the Corporation to which this clause (ii) applies. Upon
expiration of any Convertible Securities which shall not have
been exercised or converted and for which an adjustment shall
have been made pursuant to this clause (ii), the Conversion Price
computed upon the original issue thereof shall upon expiration be
recomputed as if the only additional shares of Common Stock
issued were such shares of Common Stock (if any) actually issued
upon exercise or conversion of such Convertible Securities and
the consideration received therefor was the consideration
actually received by the Corporation for the issue of such
Convertible Securities (whether or not exercised or converted)
plus the consideration actually received by the Corporation upon
such exercise of conversion.
(iii) In case the Corporation shall at any time or from
time to time after the Issue Date declare, order, pay or make a
dividend or other distribution (including, without limitation,
any distribution of stock or other securities or property or
rights or warrants to subscribe for securities of the Corporation
or any of its Subsidiaries by way of dividend or spin-off), on
its Common Stock, other than (A) regular quarterly dividends
payable in cash in an aggregate amount not to exceed 15% of net
income from continuing operations before extraordinary items of
the Corporation, determined in accordance with generally accepted
accounting principles, during the period (treated as one
accounting period) commencing on July 1, 1998, and ending on the
date such dividend is paid or (B) dividends or distributions of
shares of Common Stock which are referred to in clause (i) of
this paragraph G, then, and in each such case, the conversion
ratio shall be adjusted so that the holder of each share of
Series B Preferred Stock shall be entitled to receive, upon the
conversion thereof, the number of shares of Common Stock
determined by multiplying (1) the applicable conversion ratio on
the day immediately prior to the record date fixed for the
determination of stockholders entitled to receive such dividend
or distribution by (2) a fraction, the numerator of which shall
be the then Current Market Price per share of Common Stock for
the period of 20 Trading Days preceding such record date, and the
denominator of which shall be such Current Market Price per share
of Common Stock for the period of 20 Trading Days preceding such
record date, less the Fair Market Value (as defined in Article
IX) per share of Common Stock (as determined in good faith by the
Board of Directors of the Corporation, a certified resolution
with respect to which shall be mailed to each holder of shares of
Series B Preferred Stock) of such dividend or distribution;
provided, however, that in the event of a distribution of shares
of capital stock of a Subsidiary of the Corporation (a
"Spin-Off") made to holders of shares of Common Stock, the
numerator of such fraction shall be the sum of the Current Market
Price per share of Common Stock for the period of 20 Trading Days
preceding the 35th Trading Day after the effective date of such
Spin-Off and the Current Market Price of the number of shares (or
the fraction of a share) of capital stock of the Subsidiary which
is
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<PAGE> 15
distributed in such Spin-Off in respect of one share of Common
Stock for the period of 20 Trading Days preceding such 35th
Trading Day and the denominator of which shall be the current
market price per share of the Common Stock for the period of 20
Trading Days proceeding such 35th Trading Day. An adjustment made
pursuant to this clause (iii) shall be made upon the opening of
business on the next Business Day following the date on which any
such dividend or distribution is made and shall be effective
retroactively immediately after the close of business on the
record date fixed for the determination of stockholders entitled
to receive such dividend or distribution; provided, however, if
the proviso to the preceding sentence applies, then such
adjustment shall be made and be effective as of such 35th Trading
Day after the effective date of such Spin-Off.
(iv) For purposes of this paragraph G, the number of shares
of Common Stock at any time outstanding shall not include any
shares of Common Stock then owned or held by or for the account
of the Corporation.
(v) The term "dividend", as used in this paragraph G shall
mean a dividend or other distribution upon stock of the
Corporation except pursuant to the Rights Agreement (as defined
in Article IX). Notwithstanding anything in this Article VIII to
the contrary, the conversion ratio shall not be adjusted as a
result of any dividend, distribution or issuance of securities of
the Corporation pursuant to the Rights Agreement.
(vi) Anything in this paragraph G to the contrary
notwithstanding, the Corporation shall not be required to give
effect to any adjustment in the conversion ratio unless and until
the net effect of one or more adjustments (each of which shall be
carried forward), determined as above provided, shall have
resulted in a change of the conversion ratio by at least
one-hundredth of one share of Common Stock, and when the
cumulative net effect of more than one adjustment so determined
shall be to change the conversion ratio by at least one-hundredth
of one share of Common Stock, such change in conversion ratio
shall thereupon be given effect.
(vii) The certificate of any firm of independent public
accountants of recognized standing selected by the Board of
Directors of the Corporation (which may be the firm of
independent public accountants regularly employed by the
Corporation) shall be presumptively correct for any computation
made under this paragraph G.
(viii) If the Corporation shall take a record of the
holders of its Common Stock for the purpose of entitling them to
receive a dividend or other distribution, and shall thereafter
and before the distribution to stockholders thereof legally
abandon its plan to pay or deliver such dividend or distribution,
then thereafter no adjustment in the number of shares of Common
Stock issuable upon exercise of
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<PAGE> 16
the right of conversion granted by this paragraph G or in the
conversion ratio then in effect shall be required by reason of
the taking of such record.
(ix) There shall be no adjustment of the conversion ratio
in case of the issuance of any stock of the Corporation in a
merger, reorganization, acquisition or other similar transaction
except as set forth in paragraph G(i), G(ii) and H of this
Article VIII.
H. In case of any reorganization or reclassification of outstanding
shares of Common Stock (other than a reclassification covered by
paragraph G(i) of this Article VIII, or in case of any
consolidation or merger of the Corporation with or into another
corporation, or in the case of any sale or conveyance to another
corporation of the property of the Corporation as an entirety or
substantially as an entirety (each of the foregoing being
referred to as a "Transaction"), each share of Series B Preferred
Stock then outstanding shall thereafter be convertible into, in
lieu of the Common Stock issuable upon such conversion prior to
consummation of such Transaction, the kind and amount of shares
of stock and other securities and property receivable (including
cash) upon the consummation of such Transaction by a holder of
that number of shares of Common Stock into which one share of
Series B Preferred Stock was convertible immediately prior to
such Transaction (including, on a pro rata basis, the cash,
securities or property received by holders of Common Stock in any
tender or exchange offer that is a step in such Transaction). In
case securities or property other than Common Stock shall be
issuable or deliverable upon conversion as aforesaid, then all
reference in this paragraph H shall be deemed to apply, so far as
appropriate and as nearly as may be, to such other securities or
property.
I. Upon any adjustment of the conversion ratio then in effect and
any increase or decrease in the number of shares of Common Stock
issuable upon the operation of the conversion set forth in
Article VIII, then, and in each such case, the Corporation shall
promptly deliver to the registered holders of the Series B
Preferred and Common Stock, a certificate signed by the President
or a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the
Corporation setting forth in reasonable detail the event
requiring the adjustment and the method by which such adjustment
was calculated and specifying the conversion ratio then in effect
following such adjustment and the increased or decreased number
of shares issuable upon the conversion set forth in this Article
VIII.
IX. ADDITIONAL DEFINITIONS
For the purposes of this Certificate of Designations of Series B
Preferred Stock, the following terms shall have the meanings indicated:
"Accrual Period" means the end of the first quarterly period
following the Second Anniversary Date.
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"Beneficially Own" with respect to any securities means having
"beneficial ownership" of such securities (as determined pursuant to Rule 13d-3
under the Exchange Act as in effect on the date hereof, except that a Person
shall be deemed to Beneficially Own all such securities that such Person has the
right to acquire whether such right is exercisable immediately or after the
passage of time). The terms "Beneficial Ownership" and "Beneficial Owner" have
correlative meanings.
"Business Day" means any day, other than a Saturday, Sunday or a
day on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Bylaws" means the Bylaws of the Corporation, as amended.
"Current Market Price", when used with reference to shares of
Common Stock or other securities on any date, shall mean the closing price per
share of Common Stock or such other securities on such date and, when used with
reference to shares of Common Stock or other securities for any period shall
mean the average of the daily closing prices per share of Common Stock or such
other securities for such period. The closing price for each day shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Common Stock or such other securities are not listed or admitted to
trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Common Stock or such
other securities are listed or admitted to trading or, if the Common Stock is
not listed or admitted to trading on any national securities exchange, the last
quoted sale price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. National Market System or such other
securities are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Common Stock or such other securities selected by the Board of Directors
of the Corporation. If the Common Stock or such other securities are not
publicly held or so listed or publicly traded, "Current Market Price" shall mean
the Fair Market Value per share of Common Stock or of such other securities as
determined in good faith by the Board of Directors of the Corporation based on
an opinion of an independent investment banking firm with an established
national reputation as a valuer of securities, which opinion may be based on
such assumption as such firm shall deem to be necessary and appropriate.
"Equity Securities" of any Person means any and all common stock,
preferred stock and any other class of capital stock of, and any partnership or
limited liability company interests of such Person or any other similar
interests of any Person that is not a corporation, partnership or limited
liability company.
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder, from time to
time.
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"Fair Market Value" shall mean the amount which a willing buyer
would pay a willing seller in an arm's-length transaction.
"Formula Number" shall mean one thousand (1,000) prior to
consummation of the Recapitalization, provided, however, that if at any time
prior to the consummation of the Recapitalization, the Corporation shall (i)
declare or pay any dividend or make any distribution on the Common Stock,
payable in shares of Common Stock; (ii) subdivide (by a stock split or
otherwise) the outstanding shares of Common Stock into a larger number of shares
of Common Stock; or (iii) combine (by a reverse stock split or otherwise) the
outstanding shares of Common Stock into a smaller number of shares of Common
Stock, then in each such case the Formula Number in effect immediately prior to
such event shall be adjusted to a number determined by multiplying the Formula
Number then in effect by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event (and rounding the result to the
nearest whole number); and provided further, that, if prior to the consummation
of the Recapitalization the Corporation shall issue any shares of its capital
stock in a merger, reclassification, or change of the outstanding shares of
Common Stock, then in each such event the Formula Number shall be appropriately
adjusted to reflect such merger, reclassification, or change so that each share
of Series B Preferred Stock continues to be the economic equivalent of a Formula
Number of shares of Common Stock immediately prior to such merger,
reclassification, or change.
"Group" has the meaning set forth in Rule 13d-5 under the
Exchange Act.
"Issue Date" shall mean the first date on which shares of Series
B Preferred Stock are issued.
"Person" means any individual, corporation, company, association,
partnership, joint venture, trust or unincorporated organization, or a
government or any agency or political subdivision thereof.
"Post-Recapitalization Stated Value" shall be equal to $1.00.
"Recapitalization" means the amendment of the Corporation's
Certificate of Incorporation to increase the authorized shares of Common Stock
from 50,000,000 to 400,000,000, and the authorized shares of Preferred Stock
from 1,000,000 to 200,000,000, and the subsequent one thousand-for-one split of
Series B Preferred Stock and Series C Preferred Stock.
"Redemption Price" of a share of Class B Preferred Stock shall
mean the sum of (a) the dividends, if any, accumulated or deemed to have
accumulated thereon to the Optional Redemption Date, whether or not such
dividends are declared plus (b) either (i) the Initial Stated Value thereof (if
the Recapitalization has not been consummated prior to June 30, 1999) or (ii)
the Post-Recapitalization Stated Value thereof (if the Recapitalization has been
consummated prior to June 30, 1999), in each case subject to adjustment for
splits, reclassifications, recombinations or other similar events.
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"Rights" shall mean any rights to purchase securities of the
Corporation issued pursuant to any Rights Agreement.
"Rights Agreement" shall mean the Rights Agreement, dated as of
June 21, 1996, between the Company and Wells Fargo Bank as rights agent, and all
amendments, supplements and replacements thereof.
"Second Anniversary Date" means the second anniversary of the
Issue Date.
"Subsidiary" means, as to any Person, any other Person of which
more than 50% of the shares of the Voting Securities or other voting interests
are owned or controlled, or the ability to select or elect 50% or more of the
directors or similar managers is held, directly or indirectly, by such first
Person and one or more of its Subsidiaries.
"Trading Day" means a day on which the principal national
securities exchange on which the Common Stock is listed or admitted to trading
is open for the transaction of business or, if the Common Stock is not listed or
admitted to trading on any national securities exchange a Business Day.
"Voting Securities" means, (i) with respect to the Company, the
Equity Securities of the Company entitled to vote generally for the election of
directors of the Company, and (ii) with respect to any other Person, any
securities of or interests in such Person entitled to vote generally for the
election of directors or any similar managing person of such Person.
X. MISCELLANEOUS
A. NOTICES. Any notice referred to herein shall be in writing
and, unless first-class mail shall be specifically permitted for such notices
under the terms hereof, shall be deemed to have been given upon personal
delivery thereof, upon transmittal of such notice by telecopy (with confirmation
of receipt by telecopy or telex) or five days after transmittal by registered or
certified mail, postage prepaid, addressed as follows:
(i) if to the Corporation, to its office at 2 California
Plaza, 350 South Grand Avenue, Los Angeles, California
90071 (Attention: General Counsel) or to the transfer
agent for the Series B Preferred Stock;
(ii) if to a holder of the Series B Preferred Stock, to such
holder at the address of such holder as listed in the
stock record books of the Corporation (which may
include the records of any transfer agent for the
Series B Preferred Stock); or
(iii) to such other address as the Corporation or such
holder, as the case may be, shall have designated by
notice similarly given.
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B. REACQUIRED SHARES. Any shares of Series B Preferred Stock
redeemed, purchased or otherwise acquired by the Corporation, directly or
indirectly, in any manner whatsoever shall be retired and canceled promptly
after the acquisition thereof (and shall not be deemed to be outstanding for any
purpose) and, if necessary to provide for the lawful redemption or purchase of
such shares, the capital represented by such shares shall be reduced in
accordance with the Delaware General Corporation Law. All such shares of Series
B Preferred Stock shall upon their cancellation and upon the filing of an
appropriate certificate with the Secretary of State of the State of Delaware,
become authorized but unissued shares of Preferred Stock, par value $0.001 per
share, of the Corporation and may be reissued as part of another series of
Preferred Stock, par value $0.001 per share, of the Corporation subject to the
conditions or restrictions on issuance set forth herein.
C. ENFORCEMENT. Any registered holder of shares of Series B
Preferred Stock may proceed to protect and enforce its rights and the rights of
such holders by any available remedy by proceeding at law or in equity to
protect and enforce any such rights, whether for the specific enforcement of any
provision in this Certificate of Designations or in aid of the exercise of any
power granted herein, or to enforce any other proper remedy.
D. TRANSFER TAXES. Except as otherwise agreed upon pursuant to
the terms of this Certificate of Designations, the Corporation shall pay any and
all documentary, stamp or similar issue or transfer taxes and other governmental
charges that may be imposed under the laws of the United States of America or
any political subdivision or taxing authority thereof or therein in respect of
any issue or delivery of Common Stock on conversion of, or other securities or
property issued on account of, shares of Series B Preferred Stock pursuant
hereto or certificates representing such shares or securities. The Corporation
shall not, however, be required to pay any such tax or other charge that may be
imposed in connection with any transfer involved in the issue or transfer and
delivery of any certificate for Common Stock or other securities or property in
a name other than that in which the shares of Series B Preferred Stock so
exchanged, or on account of which such securities were issued, were registered
and no such issue or delivery shall be made unless and until the Person
requesting such issue has paid to the Corporation the amount of any such tax or
has established to the satisfaction of the Corporation that such tax has been
paid or is not payable.
E. TRANSFER AGENT. The Corporation may appoint, and from time to
time discharge and change, a transfer agent for the Series B Preferred Stock.
Upon any such appointment or discharge of a transfer agent, the Corporation
shall send notice thereof by first-class mail, postage prepaid, to each holder
of record of shares of Series B Preferred Stock.
F. RECORD DATES. In the event that the Series B Preferred Stock
shall be registered under either the Securities Act of 1933, as amended, or the
Exchange Act, the Corporation shall establish appropriate record dates with
respect to payments and other actions to be made with respect to the Series B
Preferred Stock.
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IN WITNESS WHEREOF, this Certificate of Designations is executed
on behalf of the Corporation by its Executive vice President, General Counsel
and Secretary and attested by its Assistant Secretary, this 10th day of February
, 1999.
AAMES FINANCIAL CORPORATION
By: /s/ Barbara S. Polsky
---------------------------------
Name: Barbara S. Polsky
Title: Executive Vice President, General
Counsel and Secretary
[Corporate Seal]
ATTEST:
/s/ John F. Madden, Jr.
- ---------------------------------
John F. Madden Jr.
Assistant Secretary
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EXHIBIT 3.4
- --------------------------------------------------------------------------------
CERTIFICATE OF THE VOTING POWERS, DESIGNATIONS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
OR OTHER SPECIAL RIGHTS, AND QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS THEREOF, OF
SERIES C CONVERTIBLE PREFERRED STOCK OF
AAMES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
AAMES FINANCIAL CORPORATION, a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies that the following resolutions were adopted by the Board of
Directors of the Corporation (the "Board of Directors") pursuant to authority of
the Board of Directors as required by Section 151 of the Delaware General
Corporation Law:
RESOLVED, that pursuant to the authority granted to and vested in
the Board of Directors in accordance with the provisions of the Certificate of
Incorporation of the Corporation, as amended (the "Certificate of
Incorporation"), the Board of Directors hereby creates a series of the
Corporation's previously authorized preferred stock, par value $0.001 per share
(the "Preferred Stock"), and hereby states the designation and number thereof,
and fixes the voting powers, preferences and relative, participating, optional
and other special rights, and the qualifications, limitations and restrictions
thereof, as follows:
SERIES C CONVERTIBLE PREFERRED STOCK:
I. DESIGNATION AND AMOUNT
The designation of this series of shares shall be "Series C
Convertible Preferred Stock" (the "Series C Preferred Stock") par value $0.001
per share; the initial stated value per share shall be $1,000.00 (the "Initial
Stated Value"); and the number of shares constituting such series shall be
100,000. The number of shares of the Series C Preferred Stock may be decreased
from time to time by a resolution or resolutions of the Board of Directors;
provided, however, that such number shall not be decreased below the aggregate
number of shares of the Series C Preferred Stock then outstanding.
II. RANK
A. With respect to dividends, the Series C Preferred Stock shall
rank (i) senior to each other class or series of Preferred Stock, except for the
Series B Convertible Preferred Stock, par value $0.001 per share, of the
Corporation (the "Series B Preferred Stock"); (ii) on a parity with the Series B
Preferred Stock; and (iii) senior to the Corporation's Common Stock, par value
$.001 per share (the "Common Stock"), and, except as specified above, all other
classes and series of capital stock of the Corporation hereafter issued by the
Corporation. With respect to dividends, all equity securities of the Corporation
to which the Series C Preferred Stock ranks senior, including the Common Stock,
are collectively referred to herein as the
<PAGE> 2
"Junior Dividend Securities"; all equity securities of the Corporation with
which the Series C Preferred Stock ranks on a parity, including the Series B
Preferred Stock, are collectively referred to herein as the "Parity Dividend
Securities"; and all equity securities of the Corporation (other than
convertible debt securities) to which the Series C Preferred Stock ranks junior,
with respect to dividends, are collectively referred to herein as the "Senior
Dividend Securities."
B. With respect to the distribution of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the Series C Preferred Stock shall rank (i) senior to each other class or series
of Preferred Stock, except for the Series B Preferred Stock; (ii) on a parity
with the Series B Preferred Stock; and (iii) senior to the Common Stock, and,
except as specified above, all other classes and series of capital stock of the
Corporation hereafter issued by the Corporation. With respect to the
distribution of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, all equity securities of the
Corporation to which the Series C Preferred Stock ranks senior, including the
Common Stock, are collectively referred to herein as "Junior Liquidation
Securities"; all equity securities of the Corporation (other than convertible
debt securities) to which the Series C Preferred Stock ranks on parity,
including the Series B Preferred Stock, are collectively referred to herein as
"Parity Liquidation Securities"; and all equity securities of the Corporation to
which the Series C Preferred Stock ranks junior are collectively referred to
herein as "Senior Liquidation Securities."
C. The Series C Preferred Stock shall be subject to the creation
of Junior Dividend Securities and Junior Liquidation Securities (collectively,
"Junior Securities"), but no Parity Dividend Securities or Parity Liquidation
Securities (collectively, "Parity Securities") (other than the Series B
Preferred Stock) or Senior Dividend Securities or Senior Liquidation Securities
(collectively, "Senior Securities") shall be created except in accordance with
the terms hereof.
III. DIVIDENDS
A. DIVIDENDS. Subject to the terms of paragraph D below, shares
of Series C Preferred Stock shall accumulate dividends at a rate of 6.5% per
annum (the "Dividend Rate"), which dividends shall be paid quarterly in cash, in
four equal quarterly installments on the last day of March, June, September and
December of each year, or if any such date is not a Business Day, the Business
Day next preceding such day (each such date, regardless of whether any dividends
have been paid or declared and set aside for payment on such date, a "Dividend
Payment Date"), to holders of record (the "Registered Holders") as they appear
on the stock record books of the Corporation on the fifteenth day prior to the
relevant Dividend Payment Date; provided, however, that during the Accrual
Period (as defined in Article IX hereof) the Corporation shall have the option
to accrue such dividends, which dividends, to the extent so accrued, shall
compound quarterly. Prior to the consummation of the Recapitalization, dividends
shall accrue and accumulate on the Initial Stated Value of each share of Series
B Preferred Stock. Following the consummation of the Recapitalization, dividends
shall accrue and accumulate on the Post-Recapitalization Stated Value of each
share of Series B Preferred Stock. Dividends shall be paid only when, as and if
declared by the Board of Directors out of funds at the time
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<PAGE> 3
legally available for the payment of dividends. Dividends shall begin to
accumulate on outstanding shares of Series C Preferred Stock from the date of
issuance and shall be deemed to accumulate from day to day whether or not earned
or declared until paid. Dividends shall accumulate on the basis of a 360-day
year consisting of twelve 30-day months (four 90-day quarters) and the actual
number of days elapsed in the period for which payable.
B. ACCUMULATION. Dividends on the Series C Preferred Stock shall
be cumulative, and from and after (i) any Dividend Payment Date on which any
dividend that has accumulated or been deemed to have accumulated through such
date has not been paid in full (other than by reason of the election of the
Corporation to accrue dividends during the Accrual Period); or (ii) any payment
date set for a redemption on which such redemption payment has not been paid in
full, additional dividends shall accumulate in respect of the amount of such
unpaid dividends or unpaid redemption payment (the "Arrearage") at 125% of the
stated dividend rate (or such lesser rate as may be the maximum rate that is
then permitted by applicable law). Such additional dividends in respect of any
Arrearage shall be deemed to accumulate from day to day whether or not earned or
declared until the Arrearage is paid, shall be calculated as of such successive
Dividend Payment Date, and shall constitute an additional Arrearage from and
after any Dividend Payment Date to the extent not paid on such Dividend Payment
Date. References in any Article herein to dividends that have accumulated or
that have been deemed to have accumulated with respect to the Series C Preferred
Stock shall include the amount, if any, of any Arrearage together with any
dividends accumulated or deemed to have accumulated on such Arrearage pursuant
to the immediately preceding two sentences. Additional dividends in respect of
any Arrearage may be declared and paid at any time, in whole or in part, without
reference to any regular Dividend Payment Date, to Registered Holders as they
appear on the stock record books of the Corporation on such record date as may
be fixed by the Board of Directors (which record date shall be no less than 10
days prior to the corresponding payment date). Dividends in respect of any
Arrearage shall be paid in cash.
C. METHOD OF PAYMENT. Dividends paid on the shares of Series C
Preferred Stock in an amount less than the total amount of such dividends at the
time accumulated and payable on all outstanding shares of Series C Preferred
Stock shall be allocated pro rata on a share-by-share basis among all such
shares then outstanding. After the Second Anniversary Date, dividends that are
declared and paid in an amount less than the full amount of dividends
accumulated on the Series C Preferred Stock (and on any Arrearage) shall be
applied first to the earliest dividend which has not theretofore been paid. All
cash payments of dividends on the shares of Series C Preferred Stock shall be
made in such coin or currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts.
D. SPECIAL DIVIDEND RIGHTS.
1. In addition to the dividend rights set forth in paragraph A
above, prior to the consummation of the Recapitalization, the holders of shares
of Series C Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for such
purpose, cash dividends in an amount per whole share (rounded to the nearest
cent) equal to the Formula Number then in effect times the aggregate per share
amount of all
3
<PAGE> 4
cash dividends declared or paid on the Common Stock. If, prior to the
consummation of the Recapitalization, the Corporation shall pay any dividend or
make any distribution on the Common Stock payable in assets, securities or other
forms of non-cash consideration, then, in each such case, the Corporation shall
simultaneously pay or make on each whole outstanding share of the Series C
Preferred Stock a dividend or distribution in like kind equal to the Formula
Number then in effect times such dividend or distribution on each share of the
Common Stock. The dividends and distributions on the Series C Preferred Stock
pursuant to this paragraph D are hereinafter referred to as "Participating
Dividends." The Corporation shall declare each Participating Dividend
immediately prior to or at the same time it declares any cash or non-cash
dividend or distribution on the Common Stock in respect of which a Participating
Dividend is required to be paid. No cash or non-cash dividend or distribution on
the Common Stock in respect of which a Participating Dividend is required shall
be paid or set aside for payment on the Common Stock unless a Participation
Dividend in respect of such dividend shall be have been paid. Nothing contained
in this paragraph D shall obligate the Company to declare or pay any dividend or
other distribution on the Common Stock or (except pursuant to paragraph A of
this Article III or in connection with a dividend or distribution on the Common
Stock as provided in this paragraph D) the Series B Preferred Stock.
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.
IV. LIQUIDATION PREFERENCE
A. PRIOR TO THE RECAPITALIZATION. In the event of a liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
occurring prior to the consummation of the Recapitalization, the holders of
then-outstanding shares of Series C Preferred Stock shall be entitled to receive
out of the assets of the Corporation, whether such assets are capital or surplus
of any nature, an amount per share equal to the sum of (i) the dividends, if
any, accumulated or deemed to have accumulated thereon, to the date of final
distribution to such holders, whether or not such dividends are declared; and
(ii) the Initial Stated Value thereof, before any payment shall be made or any
assets distributed to the holders of any Junior Liquidation Securities (the
"Initial Preferred Distribution"). After the Initial Preferred Distribution has
been made, the holders of Series C Preferred Stock shall be entitled to share
pro rata with the holders of Common Stock in the distribution of any remaining
assets of the Corporation on the basis of each whole outstanding share of the
Series C Preferred Stock receiving an amount equal to the Formula Number then in
effect times such distribution on each share of the Common Stock. The
distributions on the Series C Preferred Stock pursuant to the immediately
preceding sentence of this paragraph A are hereinafter referred to as
"Participating Liquidation Distributions." No distribution on the Common Stock
in respect of which a Participating Liquidation Distribution is required shall
be paid or set aside for payment on the Common Stock unless a Participating
Liquidation Distribution in respect of such distribution is concurrently paid.
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<PAGE> 5
B. AFTER THE RECAPITALIZATION. Subsequent to the consummation of
the Recapitalization, the holders of the outstanding shares of Series C
Preferred Stock shall be entitled to receive out of the assets of the
Corporation, whether such assets are capital or surplus of any nature, an amount
per share equal to the sum of (i) the dividends, if any, accumulated or deemed
to have accumulated thereon to the date of final distribution to such holders,
whether or not such dividends are declared; and (ii) the Post-Recapitalization
Stated Value thereof, before any payment shall be made or any assets distributed
to the holders of any Junior Liquidation Securities. After any such payment in
full after the consummation of the Recapitalization, the holders of Series C
Preferred Stock shall not, as such, be entitled to any further participation in
any distribution of assets of the Corporation.
C. PARITY SECURITIES. All the assets of the Corporation available
for distribution to stockholders after the liquidation preferences of any Senior
Liquidation Securities shall be distributed ratably (in proportion to the full
distributable amounts to which holders of Series C Preferred Stock and Parity
Liquidation Securities, if any, are respectively entitled upon such dissolution,
liquidation or winding up) among the holders of the then-outstanding shares of
Series C Preferred Stock and Parity Liquidation Securities, if any, when such
assets are not sufficient to pay in full the aggregate amounts payable thereon.
D. MERGER NOT A LIQUIDATION. Neither a consolidation or merger of
the Corporation with or into any other Person or Persons, nor a sale,
conveyance, lease, exchange or transfer of all or part of the Corporation's
assets for cash, securities or other property to a Person or Persons shall be
deemed to be a liquidation, dissolution or winding up of the Corporation for
purposes of this Article IV, but the holders of shares of Series C Preferred
Stock shall nevertheless be entitled from and after any such consolidation,
merger or sale, conveyance, lease, exchange or transfer of all or part of the
Corporation's assets to the rights provided by this Article IV following any
such transaction. Notice of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, stating the payment date or dates
when, and the place or places where, the amounts distributable to each holder of
shares of Series C Preferred Stock in such circumstances shall be payable, shall
be given by first-class mail, postage prepaid, mailed not less than 30 days
prior to any payment date stated therein, to holders of record as they appear on
the stock record books of the Corporation as of the date such notices are first
mailed.
V. REDEMPTION
A. INTENTIONALLY OMITTED
B. OPTIONAL REDEMPTION. Commencing on the earlier to occur of (x)
the tenth anniversary of the Issue Date and (y) the date on which fewer than 25%
of the shares of Series C Preferred Stock issued on the Issue Date remain
outstanding, and at all times thereafter, the Corporation may, at its option,
redeem all (but not less than all) outstanding shares of Series C Preferred
Stock on a date specified by the Corporation (the "Optional Redemption Date") by
paying the Redemption Price therefor in cash out funds legally available for
such purpose.
C. NOTICE AND REDEMPTION PROCEDURES. Notice of the redemption of
shares of Series C Preferred Stock pursuant to paragraph B of this Article V (a
"Notice of Redemption")
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<PAGE> 6
shall be sent to the holders of record of the shares of Series C Preferred Stock
to be redeemed by first class mail, postage prepaid, at each such holder's
address as it appears on the stock record books of the Corporation not more than
120 nor fewer than 90 days prior to the Optional Redemption Date, which date
shall be set forth in such notice (the "Redemption Date"); provided that failure
to give such Notice of Redemption to any holder, or any defect in such Notice of
Redemption to any holder shall not affect the validity of the proceedings for
the redemption of any shares of Series C Preferred Stock held by any other
holder. In order to facilitate the redemption of shares of Series C Preferred
Stock, the Board of Directors may fix a record date for the determination of the
holders of shares of Series C Preferred Stock to be redeemed not more than 30
days prior to the date the Notice of Redemption is mailed. On or after the
Optional Redemption Date, each holder of the shares called for redemption shall
surrender the certificate evidencing such shares to the Corporation at the place
designated in such notice and shall thereupon be entitled to receive payment of
the Redemption Price for such shares. From and after the Optional Redemption
Date, all dividends on shares of Series C Preferred Stock shall cease to
accumulate and all rights of the holders thereof as holders of Series C
Preferred Stock shall cease and terminate, except to the extent the Corporation
shall default in payment thereof on the Optional Redemption Date.
D. DEPOSIT OF FUNDS. The Corporation shall, on or prior to the
Optional Redemption Date, pursuant to paragraph C of this Article V, deposit
with its transfer agent or other redemption agent in the Borough of Manhattan,
The City of New York having a capital and surplus of at least $500,000,000
selected by the Board of Directors, as a trust fund for the benefit of the
holders of the shares of Series C Preferred Stock to be redeemed, cash that is
sufficient in amount to redeem the shares to be redeemed in accordance with the
Notice of Redemption, with irrevocable instructions and authority to such
transfer agent or other redemption agent to pay to the respective holders of
such shares, as evidenced by a list of such holders certified by an officer of
the Corporation, the Redemption Price upon surrender of their respective share
certificates. Such deposit shall be deemed to constitute full payment of the
Redemption Price for such shares to the holders, and from and after the date of
such deposit, all rights of the holders of the shares of Series C Preferred
Stock that are to be redeemed as stockholders of the Corporation with respect to
such shares, except the right to receive the Redemption Price upon the surrender
of their respective certificates, shall cease and terminate. No dividends shall
accumulate on any shares of Series C Preferred Stock after the Optional
Redemption Date, for such shares (unless the Corporation shall fail to deposit
cash sufficient to redeem all such shares). In case holders of any shares of
Series C Preferred Stock called for redemption shall not, within two years after
such deposit, claim the cash deposited for redemption thereof, such transfer
agent or other redemption agent shall, upon demand, pay over to the Corporation
the balance so deposited. Thereupon, such transfer agent or other redemption
agent shall be relieved of all responsibility to the holders thereof and the
sole right of such holders, with respect to shares to be redeemed, shall be to
receive the Redemption Price as general creditors of the Corporation. Any
interest accrued on any funds so deposited shall belong to the Corporation, and
shall be paid to it from time to time on demand.
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<PAGE> 7
VI. RESTRICTIONS ON DIVIDENDS
So long as any shares of the Series C Preferred Stock are
outstanding, the Board of Directors shall not declare, and the Corporation shall
not pay or set apart for payment any dividend on any Junior Securities or make
any payment on account of, or set apart for payment money for a sinking or other
similar fund for, the repurchase, redemption or other retirement of, any Junior
Securities or Parity Securities or any warrants, rights or options exercisable
for or convertible into any Junior Securities or Parity Securities (other than
the repurchase, redemption or other retirement of debentures or other debt
securities that are convertible or exchangeable into any Junior Securities or
Parity Securities), or make any distribution in respect of the Junior
Securities, either directly or indirectly, and whether in cash, obligations or
shares of the Corporation or other property (other than distributions or
dividends in Junior Securities to the holders of Junior Securities), and shall
not permit any corporation or other entity directly or indirectly controlled by
the Corporation to purchase or redeem any Junior Securities or Parity Securities
or any warrants, rights, calls or options exercisable for or convertible into
any Junior Securities or Parity Securities (other than the repurchase,
redemption or other retirement of debentures or other debt securities that are
convertible or exchangeable into any Junior Securities or Parity Securities or
the repurchase, redemption or other retirement of Junior Securities or Parity
Securities in exchange for Junior Securities or Parity Securities) unless prior
to or concurrently with such declaration, payment, setting apart for payment,
repurchase, redemption or other retirement or distribution, as the case may be,
all accumulated and unpaid dividends on shares of the Series C Preferred Stock
not paid on the dates provided for in paragraph A of Article III hereof
(including Arrearages and accumulated dividends thereon) shall have been paid,
except that when dividends are not paid in full as aforesaid upon the shares of
Series C Preferred Stock, all dividends declared on the Series C Preferred Stock
and any series of Parity Dividend Securities shall be declared and paid pro rata
so that the amount of dividends so declared and paid on Series C Preferred Stock
and such series of Parity Dividend Securities shall in all cases bear to each
other the same ratio that accumulated dividends (including interest accrued on
or additional dividends accumulated in respect of such accumulated dividends) on
the shares of Series C Preferred Stock and such Parity Dividend Securities bear
to each other.
VII. VOTING RIGHTS
A. On or prior to the consummation of the Recapitalization, the
holders of Series C Preferred Stock shall be entitled to one thousand (1,000)
votes per share of Series C Preferred Stock at each meeting of stockholders of
the Corporation with respect to any and all matters presented to the
stockholders of the Corporation for their action and consideration, other than
the election of directors. After the consummation of the Recapitalization, the
holders of Series C Preferred Stock shall be entitled to the number of votes per
share of Series C Preferred Stock equal to the number of shares of Common Stock
for which such share of Series C Preferred Stock is then convertible pursuant to
Article VIII at each meeting of stockholders of the Corporation with respect to
any and all matters presented to the stockholders of the Corporation for their
action and consideration, other than the election of directors.
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B. So long as any shares of the Series C Preferred Stock are
outstanding, (i) each share of Series C Preferred Stock shall entitle the holder
thereof to vote on all matters voted on by holders of Common Stock, other than
the election of directors; and (ii) the shares of Series C Preferred Stock shall
vote together with shares of Common Stock and shares of Series B Preferred Stock
as a single class.
C. Without the written consent (if action by written consent is
permitted) or affirmative vote of the holders of a majority of the outstanding
shares of Series C Preferred Stock and Series B Preferred Stock, voting together
as a single class, the Corporation shall not (i) authorize, create or issue, or
increase the authorized amount of, (x) any Senior Securities or Parity
Securities or (y) any class or series of capital stock or any security
convertible into or exercisable for any class or series of capital stock,
redeemable mandatorily or redeemable at the option of the holder thereof or (ii)
enter into any Transaction (as defined in paragraph H of Article VIII). Such
vote or consent shall be taken in accordance with the procedures specified in
paragraph E below.
D. Without the written consent (if action by written consent is
permitted) or affirmative vote of the holders of at least a majority of the
outstanding shares of Series C Preferred Stock and Series B Preferred Stock,
voting together as a single class, the Corporation shall not (i) amend, alter or
repeal any provision of the Certificate of Incorporation or the Bylaws, if the
amendment, alteration or repeal alters or changes the powers, preferences or
special rights of the Series C Preferred Stock so as to affect them materially
and adversely or (ii) authorize or take any other action if such action alters
or changes any of the rights of the Series C Preferred Stock in any respect or
otherwise would be inconsistent with the provisions of this Certificate of
Designations and the holders of any class or series of the capital stock of the
Corporation is entitled to vote thereon. Such vote or consent shall be taken in
accordance with the procedures specified in paragraph E below.
E. The foregoing rights of holders of shares of Series C
Preferred Stock to take any actions as provided in this Article VII may be
exercised at any annual meeting of stockholders or at a special meeting of
stockholders held for such purpose as hereinafter provided or at any adjournment
thereof, or by the written consent, delivered to the Secretary of the
Corporation, of the holders of the minimum number of shares required to take
such action, if action by written consent of stockholders of the Corporation is
then permitted.
The Chairman of the Board of the Corporation may call, and upon
written request of holders of record of 35% of the outstanding shares of Series
C Preferred Stock and Series B Preferred Stock, addressed to the Secretary of
the Corporation at the principal office of the Corporation shall call, a special
meeting of the holders of shares entitled to vote as provided herein. Such
meeting shall be held within 30 days after delivery of such request to the
Secretary, at the place and upon the notice provided by law and in the By-laws
of the Corporation for the holding of meetings of stockholders.
At each meeting of stockholders at which the holders of shares of
Series C Preferred Stock shall have the right to take any action, the presence
in person or by proxy of the
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<PAGE> 9
holders of record of one-third of the total number of shares of Series C
Preferred Stock and Series B Preferred Stock then outstanding and entitled to
vote on the matter shall be necessary and sufficient to constitute a quorum. At
any such meeting or at any adjournment thereof:
(A) the absence of a quorum of the holders of shares of Series C
Preferred Stock shall not prevent the election of directors to be
elected by the holders of shares of Series B Preferred Stock or the
taking of any action as provided in this Article VII; and
(B) in the absence of a quorum of the holders of shares of Series
C Preferred Stock and Series B Preferred Stock, a majority of the
holders of such shares present in person or by proxy shall have the
power to adjourn the meeting as to the actions to be taken by the
holders of shares of Series C Preferred Stock and Series B Preferred
Stock, from time to time and place to place without notice other than
announcement at the meeting until a quorum shall be present.
For taking of any action as provided in this Article VII by the
holders of shares of Series C Preferred Stock and Series B Preferred Stock, each
such holder shall have one vote for each share of such stock standing in his
name on the transfer books of the Corporation as of any record dated fixed for
such purpose or, if no such date be fixed, at the close of business on the
Business Day next preceding the day on which notice is given, or if notice if
waived, at the close of business on the Business Day next preceding the day on
which the meeting is held.
F. The Corporation shall not enter into any agreement or issue
any security that prohibits, conflicts or is inconsistent with, or would be
breached by, the Corporation's performance of its obligations hereunder.
VIII. CONVERSION
The holders of the Series C Preferred Stock shall have conversion
rights as follows:
A. Each share of Series C Preferred Stock shall be convertible at
the direction of, and by notice to the Corporation from, (i) the
holder thereof or (ii) the holders of a majority of the
outstanding shares of Series C Preferred Stock, at any time, at
the office of the Corporation or any transfer agent for such
Series, into one thousand (1,000) fully paid and nonassessable
shares of Common Stock subject (x) to adjustment from time to
time as provided below (as so adjusted, the "conversion ratio")
and (y) (prior to the consummation of the Recapitalization) to
limitations resulting from the available number of shares of
Common Stock which may be reserved for issuance upon such
conversion, provided, that any conversion pursuant to clause (ii)
above of less than all of the outstanding shares of Series C
Preferred Stock shall be on a pro rata basis amongst all holders
of Series C Preferred Stock. After consummation of the
Recapitalization, the number "1,000" in this paragraph shall be
"1", subject to adjustment as provided in paragraph VIII.G.
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<PAGE> 10
B. If a holder of Series C Preferred Stock gives notice (an
"Optional Conversion Notice") of conversion under paragraph A
above, such holder shall surrender with such Optional Conversion
Notice the duly endorsed certificate or certificates for the
Series C Preferred Stock being converted, at the office of the
Corporation or of any transfer agent for such Series, and shall
state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. If the
holders of a majority of the outstanding shares of Series C
Preferred Stock give notice of conversion under paragraph A
above, the Corporation shall notify all other record holders of
Series C Preferred Stock (a "Mandatory Conversion Notice").
Following receipt of a Mandatory Conversion Notice, the holders
of Series C Preferred Stock shall surrender the certificate or
certificates therefor duly endorsed, at the office of the
Corporation or of any transfer agent for such Series, and shall
state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. The
Corporation shall, as soon as practicable after the surrender of
a Series C Preferred Stock certificate or certificates pursuant
to an Optional Conversion Notice or Mandatory Conversion Notice,
issue and deliver at such office to such holder, or to the
nominee or nominees of such holder, a certificate or certificates
for the number of shares of Common Stock to which such holder
shall be entitled as aforesaid. Such conversion shall be deemed
to have been made immediately prior to the close of business on
the date of such Optional Conversion Notice or Mandatory
Conversion Notice, as applicable, and the person or persons
entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the recordholder
or holders of such shares of Common Stock as of such date. The
issuance of certificates or shares of Common Stock upon
conversion of shares of Series C Preferred Stock shall be made
without charge for any issue, stamp or other similar tax in
respect of such issuance.
C. No fractional shares shall be issued upon conversion of any
shares of Series C Preferred Stock and the number of shares of
Common Stock to be issued shall be rounded down to the nearest
whole share, and the holder of Series C Preferred Stock shall be
paid in cash for any fractional share.
D. In case at any time or from time to time the Corporation shall
pay any dividend or make any other distribution to the holders of
its Common Stock or other class of securities, or shall offer for
subscription pro rata to the holders of its Common Stock or other
class of securities any additional shares of stock of any class
or any other right, or there shall be any capital reorganization
or reclassification of the Common Stock of the Corporation or
consolidation or merger of the Corporation with or into another
corporation, or any sale or conveyance to another corporation of
the property of the Corporation as an entirety or substantially
as an entirety, or there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Corporation, then,
in any one or more of said cases the Corporation shall give at
least 20 days' prior written notice (the time of mailing of such
notice shall be deemed to be the time of giving thereof) to the
registered holders of the Series C
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<PAGE> 11
Preferred Stock at the addresses of each as shown on the books of
the Corporation maintained by the Transfer Agent thereof of the
date on which (i) the books of the Corporation shall close or a
record shall be taken for such stock dividend, distribution or
subscription rights or (ii) such reorganization,
reclassification, consolidation, merger, sale or conveyance,
dissolution, liquidation or winding up shall take place, as the
case may be, provided that in the case of any Transaction to
which paragraph H applies the Corporation shall give at least 30
days' prior written notice as aforesaid. Such notice shall also
specify the date as of which the holders of the Common Stock of
record shall participate in said dividend, distribution or
subscription rights or shall be entitled to exchange their Common
Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale or
conveyance or participate in such dissolution, liquidation or
winding up, as the case may be. Failure to give such notice shall
not invalidate any action so taken.
E. From and after the Recapitalization, the Corporation shall at all
times reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of Series C Preferred
Stock, such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all
outstanding shares of Series C Preferred Stock, and if at any
time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then
outstanding shares of Series C Preferred Stock, then in addition
to such other remedies as shall be available to the holder of
Series C Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for
such purposes.
F. Any notice required by the provisions of paragraph D to be given
the holders of shares of Series C Preferred Stock shall be deemed
given if sent by facsimile transmission, by telex, or if
deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his, her or its address
appearing on the books of the Corporation.
G. The conversion ratio shall be subject to adjustment from time to
time as follows:
(i) In case the Corporation shall at any time or from time
to time after the Issue Date (A) pay a dividend or make a
distribution, on the outstanding shares of Common Stock in shares
of Common Stock, (B) subdivide the outstanding shares of Common
Stock into a larger number of shares of Common Stock, (C) combine
the outstanding shares of Common Stock into a smaller number of
shares or (D) issue by reclassification of the shares of Common
Stock any shares of capital stock of the Corporation, then, and
in each such case, the conversion ratio in effect immediately
prior to such event or the record date therefor, whichever is
earlier, shall be adjusted so that the holder of any shares of
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<PAGE> 12
Series C Preferred Stock thereafter surrendered for conversion
shall be entitled to receive the number of shares of Common Stock
or other securities of the Corporation which such holder would
have owned or have been entitled to receive after the happening
of any of the events described above, had such shares of Series C
Preferred Stock been surrendered for conversion immediately prior
to the happening of such event or the record date therefor,
whichever is earlier. An adjustment made pursuant to this clause
(i) shall become effective (x) in the case of any such dividend
or distribution, immediately after the close of business on the
record date for the determination of holders of shares of Common
Stock entitled to receive such dividend or distribution, or (y)
in the case of any such subdivision, reclassification or
combination, at the close of business on the day upon which such
corporate action becomes effective.
(ii) In the case the Corporation shall, after the Issue
Date, issue shares of Common Stock at a price per share, or
securities convertible into or exchangeable for shares of Common
Stock ("Convertible Securities") having a "Conversion Price" (as
defined below) less than the Current Market Price (for a period
of 15 consecutive trading days prior to such date), then, and in
each such case, the conversion ratio shall be adjusted so that
the holder of each share of Series C Preferred Stock shall be
entitled to receive, upon the conversion thereof, the number of
shares of Common Stock determined by multiplying (A) the
applicable conversion ratio on the day immediately prior to such
date by (B) a fraction, the numerator of which shall be the sum
of (1) the number of shares of Common Stock outstanding on the
date on which such shares or Convertible Securities are issued
and (2) the number of additional shares of Common Stock issued,
or into which the Convertible Securities may convert, and the
denominator of which shall be the sum of (x) the number of shares
of Common Stock outstanding on such date and (y) the number of
shares of Common Stock which the aggregate consideration
receivable by the Corporation for the total number of shares of
Common Stock so issued, or the number of shares of Common Stock
which the aggregate of the Conversion Price of such Convertible
Securities so issued, would purchase at such Current Market price
on such date. An adjustment made pursuant to this clause (ii)
shall be made on the next Business Day following the date on
which any such issuance is made and shall be effective
retroactively immediately after the close of business on such
date. For purposes of this clause (ii), the aggregate
consideration receivable by the Corporation in connection with
the issuance of any securities shall be deemed to be the sum of
the aggregate offering price to the public (before deduction of
underwriting discounts or commissions and expenses payable to
third parties), and the "Conversion Price" of any Convertible
Securities is the total amount received or receivable by the
Corporation as consideration for the issue or sale of such
Convertible Securities (before deduction of underwriting
discounts or commissions and expenses payable to third parties)
plus the minimum aggregate amount of additional consideration, if
any, payable to the Corporation upon the conversion, exchange or
exercise of any such Convertible Securities. Neither (A)
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<PAGE> 13
the issuance of any shares of Common Stock (whether treasury
shares or newly issued shares) pursuant to a dividend or
distribution on, or subdivision, combination or reclassification
of, the outstanding shares of Common Stock requiring an
adjustment in the conversion ratio pursuant to clause (i) of this
paragraph G, or pursuant to any employee benefit plan or program
of the Corporation or pursuant to any option, warrant, right, or
Convertible Security outstanding as of the date hereof
(including, but not limited to, the Rights, the Series B
Preferred Stock, the Series C Preferred Stock and the Warrants)
nor (B) the issuance of shares of Common Stock pursuant thereto
shall be deemed to constitute an issuance of Common Stock or
Convertible Securities by the Corporation to which this clause
(ii) applies. Upon expiration of any Convertible Securities which
shall not have been exercised or converted and for which an
adjustment shall have been made pursuant to this clause (ii), the
Conversion Price computed upon the original issue thereof shall
upon such expiration be recomputed as if the only additional
shares of Common Stock issued were such shares of Common Stock
(if any) actually issued upon exercise of such Convertible
Securities and the consideration received therefor was the
consideration actually received by the Corporation for the issue
of such Convertible Securities (whether or not exercised or
converted) plus the consideration actually received by the
Corporation upon such exercise of conversion.
(iii) In case the Corporation shall at any time or from
time to time after the Issue Date declare, order, pay or make a
dividend or other distribution (including, without limitation,
any distribution of stock or other securities or property or
rights or warrants to subscribe for securities of the Corporation
or any of its Subsidiaries by way of dividend or spin-off), on
its Common Stock, other than (A) regular quarterly dividends
payable in cash in an aggregate amount not to exceed 15% of net
income from continuing operations before extraordinary items of
the Corporation, determined in accordance with generally accepted
accounting principles, during the period (treated as one
accounting period) commencing on July 1, 1998, and ending on the
date such dividend is paid or (B) dividends or distributions of
shares of Common Stock which are referred to in clause (i) of
this paragraph G, then, and in each such case, the conversion
ratio shall be adjusted so that the holder of each share of
Series C Preferred Stock shall be entitled to receive, upon the
conversion thereof, the number of shares of Common Stock
determined by multiplying (1) the applicable conversion ratio on
the day immediately prior to the record date fixed for the
determination of stockholders entitled to receive such dividend
or distribution by (2) a fraction, the numerator of which shall
be the then Current Market Price per share of Common Stock for
the period of 20 Trading Days preceding such record date, and the
denominator of which shall be such Current Market Price per share
of Common Stock for the period of 20 Trading Days preceding such
record date less the Fair Market Value (as defined in Article IX)
per share of Common Stock (as determined in good faith by the
Board of Directors of the Corporation, a certified resolution
with
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<PAGE> 14
respect to which shall be mailed to each holder of shares of
Series C Preferred Stock) of such dividend or distribution;
provided, however, that in the event of a distribution of shares
of capital stock of a Subsidiary of the Corporation (a
"Spin-Off") made to holders of shares of Common Stock, the
numerator of such fraction shall be the sum of the Current Market
Price per share of Common Stock for the period of 20 Trading Days
preceding the 35th Trading Day after the effective date of such
Spin-Off and the Current Market Price of the number of shares (or
the fraction of a share) of capital stock of the Subsidiary which
is distributed in such Spin-Off in respect of one share of Common
Stock for the period of 20 Trading Days preceding such 35th
Trading Day and the denominator of which shall be the current
market price per share of the Common Stock for the period of 20
Trading Days proceeding such 35th Trading Day. An adjustment made
pursuant to this clause (iii) shall be made upon the opening of
business on the next Business Day following the date on which any
such dividend or distribution is made and shall be effective
retroactively immediately after the close of business on the
record date fixed for the determination of stockholders entitled
to receive such dividend or distribution; provided, however, if
the proviso to the preceding sentence applies, then such
adjustment shall be made and be effective as of such 35th Trading
Day after the effective date of such Spin-Off.
(iv) For purposes of this paragraph G, the number of shares
of Common Stock at any time outstanding shall not include any
shares of Common Stock then owned or held by or for the account
of the Corporation.
(v) The term "dividend", as used in this paragraph G shall
mean a dividend or other distribution upon stock of the
Corporation except pursuant to the Rights Agreement (as defined
in Article IX). Notwithstanding anything in this Article VIII to
the contrary, the conversion ratio shall not be adjusted as a
result of any dividend, distribution or issuance of securities of
the Corporation pursuant to the Rights Agreement.
(vi) Anything in this paragraph G to the contrary
notwithstanding, the Corporation shall not be required to give
effect to any adjustment in the conversion ratio unless and until
the net effect of one or more adjustments (each of which shall be
carried forward), determined as above provided, shall have
resulted in a change of the conversion ratio by at least
one-hundredth of one share of Common Stock, and when the
cumulative net effect of more than one adjustment so determined
shall be to change the conversion ratio by at least one-hundredth
of one share of Common Stock, such change in conversion ratio
shall thereupon be given effect.
(vii) The certificate of any firm of independent public
accountants of recognized standing selected by the Board of
Directors of the Corporation (which may be the firm of
independent public accountants regularly employed by the
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<PAGE> 15
Corporation) shall be presumptively correct for any computation
made under this paragraph G.
(viii) If the Corporation shall take a record of the
holders of its Common Stock for the purpose of entitling them to
receive a dividend or other distribution, and shall thereafter
and before the distribution to stockholders thereof legally
abandon its plan to pay or deliver such dividend or distribution,
then thereafter no adjustment in the number of shares of Common
Stock issuable upon exercise of the right of conversion granted
by this paragraph G or in the conversion ratio then in effect
shall be required by reason of the taking of such record.
(ix) There shall be no adjustment of the conversion ratio
in case of the issuance of any stock of the Corporation in a
merger, reorganization, acquisition or other similar transaction
except as set forth in paragraph G(i), G(ii) and H of this
Article VIII.
H. In case of any reorganization or reclassification of outstanding
shares of Common Stock (other than a reclassification covered by
paragraph G(i) of this Article VIII), or in case of any
consolidation or merger of the Corporation with or into another
corporation, or in the case of any sale or conveyance to another
corporation of the property of the Corporation as an entirety or
substantially as an entirety (each of the foregoing being
referred to as a "Transaction"), each share of Series C Preferred
Stock then outstanding shall thereafter be convertible into, in
lieu of the Common Stock issuable upon such conversion prior to
consummation of such Transaction, the kind and amount of shares
of stock and other securities and property receivable (including
cash) upon the consummation of such Transaction by a holder of
that number of shares of Common Stock into which one share of
Series C Preferred Stock was convertible immediately prior to
such Transaction (including, on a pro rata basis, the cash,
securities or property received by holders of Common Stock in any
tender or exchange offer that is a step in such Transaction). In
case securities or property other than Common Stock shall be
issuable or deliverable upon conversion as aforesaid, then all
reference in this paragraph H shall be deemed to apply, so far as
appropriate and as nearly as may be, to such other securities or
property.
I. Upon any adjustment of the conversion ratio then in effect and
any increase or decrease in the number of shares of Common Stock
issuable upon the operation of the conversion set forth in
Article VIII, then, and in each such case, the Corporation shall
promptly deliver to the registered holders of the Series C
Preferred and Common Stock, a certificate signed by the President
or a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the
Corporation setting forth in reasonable detail the event
requiring the adjustment and the method by which such adjustment
was calculated and specifying the conversion ratio then in effect
following such adjustment and
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<PAGE> 16
the increased or decreased number of shares issuable upon the
conversion set forth in this Article VIII.
IX. ADDITIONAL DEFINITIONS
For the purposes of this Certificate of Designations of Series C
Preferred Stock, the following terms shall have the meanings indicated:
"Accrual Period" means the end of the first quarterly period
following the Second Anniversary Date.
"Beneficially Own" with respect to any securities means having
"beneficial ownership" of such securities (as determined pursuant to Rule 13d-3
under the Exchange Act as in effect on the date hereof, except that a Person
shall be deemed to Beneficially Own all such securities that such Person has the
right to acquire whether such right is exercisable immediately or after the
passage of time). The terms "Beneficial Ownership" and "Beneficial Owner" have
correlative meanings.
"Business Day" means any day, other than a Saturday, Sunday or a
day on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Bylaws" means the Bylaws of the Corporation, as amended.
"Current Market Price", when used with reference to shares of
Common Stock or other securities on any date, shall mean the closing price per
share of Common Stock or such other securities on such date and, when used with
reference to shares of Common Stock or other securities for any period shall
mean the average of the daily closing prices per share of Common Stock or such
other securities for such period. The closing price for each day shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Common Stock or such other securities are not listed or admitted to
trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Common Stock or such
other securities are listed or admitted to trading or, if the Common Stock is
not listed or admitted to trading on any national securities exchange, the last
quoted sale price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. National Market System or such other
securities are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Common Stock or such other securities selected by the Board of Directors
of the Corporation. If the Common Stock or such other securities are not
publicly held or so listed or publicly traded, "Current Market Price" shall mean
the Fair Market Value per share of Common Stock or of such other securities as
determined in good faith by the Board of Directors of the
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<PAGE> 17
Corporation based on an opinion of an independent investment banking firm with
an established national reputation as a valuer of securities, which opinion may
be based on such assumption as such firm shall deem to be necessary and
appropriate.
"Equity Securities" of any Person means any and all common stock,
preferred stock and any other class of capital stock of, and any partnership or
limited liability company interests of such Person or any other similar
interests of any Person that is not a corporation, partnership or limited
liability company.
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder, from time to
time.
"Fair Market Value" shall mean the amount which a willing buyer
would pay a willing seller in an arm's-length transaction.
"Formula Number" shall mean one thousand (1,000) prior to
consummation of the Recapitalization; provided, however, that if at any time
prior to the consummation of the Recapitalization, the Corporation shall (i)
declare or pay any dividend or make any distribution on the Common Stock,
payable in shares of Common Stock; (ii) subdivide (by a stock split or
otherwise) the outstanding shares of Common Stock into a larger number of shares
of Common Stock; or (iii) combine (by a reverse stock split or otherwise) the
outstanding shares of Common Stock into a smaller number of shares of Common
Stock, then in each such case the Formula Number in effect immediately prior to
such event shall be adjusted to a number determined by multiplying the Formula
Number then in effect by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event (and rounding the result to the
nearest whole number); and provided further, that, if prior to the consummation
of the Recapitalization the Corporation shall issue any shares of its capital
stock in a merger, reclassification, or change of the outstanding shares of
Common Stock, then in each such event the Formula Number shall be appropriately
adjusted to reflect such merger, reclassification, or change so that each share
of Series C Preferred Stock continues to be the economic equivalent of a Formula
Number of shares of Common Stock immediately prior to such merger,
reclassification, or change.
"Group" has the meaning set forth in Rule 13d-5 under the
Exchange Act.
"Issue Date" shall mean the first date on which shares of Series
C Preferred Stock are issued. "Person" means any individual, corporation,
company, association, partnership, joint venture, trust or unincorporated
organization, or a government or any agency or political subdivision thereof.
"Post-Recapitalization Stated Value" shall be equal to $1.00.
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<PAGE> 18
"Recapitalization" means the amendment of the Corporation's
Certificate of Incorporation to increase the authorized shares of Common Stock
from 50,000,000 to 400,000,000, and the authorized shares of Preferred Stock
from 1,000,000 to 200,000,000, and the subsequent one thousand-for-one split of
Series C Preferred Stock and Series B Preferred Stock.
"Redemption Price" of a share of Series C Preferred Stock shall
mean the sum of (a) the dividends, if any, accumulated or deemed to have
accumulated thereon to the Optional Redemption Date, whether or not such
dividends are declared plus (b) either (i) the Initial Stated Value thereof (if
the Recapitalization has not been consummated prior to June 30, 1999) or (ii)
the Post-Recapitalization Stated Value thereof (if the Recapitalization has been
consummated prior to June 30, 1999), in each case subject to adjustment for
splits, reclassifications, recombinations or similar events.
"Rights" shall mean any rights to purchase securities of the
Corporation issued pursuant to any Rights Agreement.
"Rights Agreement" shall mean the Rights Agreement, dated as of
June 21, 1996, between the Company and Wells Fargo Bank as rights agent, and all
amendments, supplements and replacements thereof.
"Second Anniversary Date" means the second anniversary of the
Issue Date.
"Subsidiary" means, as to any Person, any other Person of which
more than 50% of the shares of the Voting Securities or other voting interests
are owned or controlled, or the ability to select or elect 50% or more of the
directors or similar managers is held, directly or indirectly, by such first
Person and one or more of its Subsidiaries.
"Trading Day" means a day on which the principal national
securities exchange on which the Common Stock is listed or admitted to trading
is open for the transaction of business or, if the Common Stock is not listed or
admitted to trading on any national securities exchange a Business Day.
"Voting Securities" means, (i) with respect to the Company, the
Equity Securities of the Company entitled to vote generally for the election of
directors of the Company, and (ii) with respect to any other Person, any
securities of or interests in such Person entitled to vote generally for the
election of directors or any similar managing person of such Person.
X. MISCELLANEOUS
A. NOTICES. Any notice referred to herein shall be in writing
and, unless first-class mail shall be specifically permitted for such notices
under the terms hereof, shall be deemed to have been given upon personal
delivery thereof, upon transmittal of such notice by telecopy (with confirmation
of receipt by telecopy or telex) or five days after transmittal by registered or
certified mail, postage prepaid, addressed as follows:
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(i) if to the Corporation, to its office at 2 California
Plaza, 350 South Grand Avenue, Los Angeles, California
90071 (Attention: General Counsel)
or to the transfer agent for the Series C
Preferred Stock;
(ii) if to a holder of the Series C Preferred Stock, to such
holder at the address of such holder as listed in the
stock record books of the Corporation (which may
include the records of any transfer agent for the
Series C Preferred Stock); or
(iii) to such other address as the Corporation or such
holder, as the case may be, shall have designated by
notice similarly given.
B. REACQUIRED SHARES. Any shares of Series C Preferred Stock
redeemed, purchased or otherwise acquired by the Corporation, directly or
indirectly, in any manner whatsoever shall be retired and canceled promptly
after the acquisition thereof (and shall not be deemed to be outstanding for any
purpose) and, if necessary to provide for the lawful redemption or purchase of
such shares, the capital represented by such shares shall be reduced in
accordance with the Delaware General Corporation Law. All such shares of Series
C Preferred Stock shall upon their cancellation and upon the filing of an
appropriate certificate with the Secretary of State of the State of Delaware,
become authorized but unissued shares of Preferred Stock, par value $0.001 per
share, of the Corporation and may be reissued as part of another series of
Preferred Stock, par value $0.001 per share, of the Corporation subject to the
conditions or restrictions on issuance set forth herein.
C. ENFORCEMENT. Any registered holder of shares of Series C
Preferred Stock may proceed to protect and enforce its rights and the rights of
such holders by any available remedy by proceeding at law or in equity to
protect and enforce any such rights, whether for the specific enforcement of any
provision in this Certificate of Designations or in aid of the exercise of any
power granted herein, or to enforce any other proper remedy.
D. TRANSFER TAXES. Except as otherwise agreed upon pursuant to
the terms of this Certificate of Designations, the Corporation shall pay any and
all documentary, stamp or similar issue or transfer taxes and other governmental
charges that may be imposed under the laws of the United States of America or
any political subdivision or taxing authority thereof or therein in respect of
any issue or delivery of Common Stock on conversion of, or other securities or
property issued on account of, shares of Series C Preferred Stock pursuant
hereto or certificates representing such shares or securities. The Corporation
shall not, however, be required to pay any such tax or other charge that may be
imposed in connection with any transfer involved in the issue or transfer and
delivery of any certificate for Common Stock or other securities or property in
a name other than that in which the shares of Series C Preferred Stock so
exchanged, or on account of which such securities were issued, were registered
and no such issue or delivery shall be made unless and until the Person
requesting such issue has paid to the Corporation the amount of any such tax or
has established to the satisfaction of the Corporation that such tax has been
paid or is not payable.
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E. TRANSFER AGENT. The Corporation may appoint, and from time to
time discharge and change, a transfer agent for the Series C Preferred Stock.
Upon any such appointment or discharge of a transfer agent, the Corporation
shall send notice thereof by first-class mail, postage prepaid, to each holder
of record of shares of Series C Preferred Stock.
F. RECORD DATES. In the event that the Series C Preferred Stock
shall be registered under either the Securities Act of 1933, as amended, or the
Exchange Act, the Corporation shall establish appropriate record dates with
respect to payments and other actions to be made with respect to the Series C
Preferred Stock.
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<PAGE> 21
IN WITNESS WHEREOF, this Certificate of Designations is executed
on behalf of the Corporation by its Executive Vice President, General Counsel
and Secretary and attested by its Assistant Secretary, this 10th day of
February , 1999.
AAMES FINANCIAL CORPORATION
By: /s/ Barbara S. Polsky
---------------------------------
Name: Barbara S. Polsky
Title: Executive Vice President, General
Counsel and Secretary
[Corporate Seal]
ATTEST:
/s/ John F. Madden, Jr.
- ---------------------------------
John F. Madden Jr.
Assistant Secretary
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<PAGE> 1
EXHIBIT 4.7
AAMES FINANCIAL CORPORATION
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of December 23, 1998,
among Capital Z Financial Services Fund II, L.P. ("Capital Z"), together with
the other investors listed on Schedule I hereto (collectively, the "Investors"),
and Aames Financial Corporation, a Delaware corporation (the "Company").
R E C I T A L S
WHEREAS, the Investors, pursuant to the terms of a Preferred
Stock Purchase Agreement, dated as of the date hereof, between Capital Z and the
Company (the "Purchase Agreement"), (i) have agreed to purchase shares of Series
B Convertible Preferred Stock, par value $0.001 per share, of the Company (the
"Series B Preferred Stock") and Series C Convertible Preferred Stock, par value
$0.001 per share, of the Company (the "Series C Preferred Stock" and, together
with the Series B Preferred Stock, the "Preferred Stock"), (ii) have received on
the date hereof warrants (the "Warrants") to purchase an aggregate of 1,250,000
shares of Common Stock, par value $0.001 per share (the "Common Stock"), of the
Company, and (iii) are to receive additional Common Stock purchase warrants (the
"Contingent Warrants" and, together with the Warrants, the "Investor Warrants")
on the Initial Closing Date (as defined in the Purchase Agreement); and
WHEREAS, the Company has agreed, as a condition precedent to
Capital Z's obligations under the Purchase Agreement to grant the Investors
certain registration rights; and
WHEREAS, the Company and the Investors desire to define the
registration rights of the Investors on the terms and subject to the conditions
herein set forth.
NOW, THEREFORE, in consideration of the foregoing premises and
for other good and valuable consideration, the parties hereby agree as follows:
1. DEFINITIONS
As used in this Agreement, the following terms have the respective
meanings set forth below:
Commission: shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act;
<PAGE> 2
Conversion Shares: shall mean the shares of Common Stock for
which the Preferred Stock has been, or may be, converted.
Exchange Act: shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder;
Holder: shall mean any holder of Registrable Securities;
Initiating Holder: shall mean (a) Capital Z or (b) any Holder or
Holders of Registrable Securities aggregating at least 35% of (i) the aggregate
number of shares of Preferred Stock held by all Holders, in the case of any
registration of Preferred Stock, or (ii) the aggregate number of Conversion
Shares and Warrant Shares held by all Holders, in the case of any registration
of Conversion Shares or Warrant Shares (x) held by such Holders or (y) issued or
issuable upon conversion of the Preferred Stock or exercise of the Investor
Warrants;
Person: shall mean an individual, partnership, joint-stock
company, corporation, limited liability company, trust or unincorporated
organization, and a government or agency or political subdivision thereof;
register, registered and registration: shall mean a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act (and any post-effective amendments filed or required to be filed)
and the declaration or ordering of effectiveness of such registration statement;
Registrable Securities: (A) the shares of Preferred Stock issued
to the Investors pursuant to the Purchase Agreement, (B) the Warrant Shares, (C)
the Conversion Shares, (D) any additional shares of Common Stock or Preferred
Stock acquired by the Investors (but not their assignees, unless any such
assignee shall have acquired at least a number of Preferred Stock or Conversion
Shares equal to 15% of the shares of Preferred Stock or Conversion Shares
originally issued to the Investors pursuant to the Purchase Agreement, adjusted
for splits, combinations, and similar events), (E) any capital stock of the
Company issued as a dividend or other distribution with respect to, or in
exchange for or in replacement of, the shares of Preferred Stock or Common Stock
referred to in clauses (A), (B), (C) or (D) above, until, in the case of any
such securities, (i) a registration statement covering such securities has been
declared effective by the Commission and such securities have been disposed of
pursuant to such effective Registration Statement or (ii) such securities have
been disposed of in open market transactions pursuant to Rule 144 under the
Securities Act (or similar rule then in effect);
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Registration Expenses: shall mean (x) all expenses incurred by
the Company in compliance with Sections 2(a) and (b) hereof, excluding Selling
Expenses, but including, without limitation, all registration and filing fees,
printing expenses, blue sky fees and expenses and the expense of any special
audits incident to or required by any such registration (but excluding the
compensation of regular employees of the Company, which shall be paid in any
event by the Company) and (y) all reasonable fees and disbursements of one
counsel retained by the Holders of a majority of the Registrable Securities to
be included in a particular registration;
Security, Securities: shall have the meaning set forth in Section
2(1) of the Securities Act;
Securities Act: shall mean the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder;
Selling Expenses: shall mean all underwriting and selling
discounts, fees and commissions applicable to the sale of Registrable
Securities; and
Warrant Shares: shall mean the shares of Common Stock for which
the Investor Warrants have been, or may be, exercised.
2. REGISTRATION RIGHTS
(a) Requested Registration.
(i) Request for Registration. If the Company shall receive
from an Initiating Holder, at any time, a written request that the
Company effect any registration with respect to all or a part of the
Registrable Securities, the Company will:
(A) promptly give written notice of the proposed
registration, qualification or compliance to all other Holders;
and
(B) as soon as reasonably practicable, use its reasonable
best efforts to effect such registration (including, without
limitation, the execution of an undertaking to file
post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under
the Securities Act) as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of
such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities
of any Holder or Holders joining in such request as are specified
in a written request received by the Company within 10 business
days after written notice from the Company is given under
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Section 2(a)(i)(A) above; provided that the Company shall not be
obligated to effect, or take any action to effect, any such
registration pursuant to this Section 2(a):
(v) in any particular jurisdiction in which the Company
would be required to execute a general consent to service of
process in effecting such registration, qualification or
compliance, unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities
Act or applicable rules or regulations thereunder;
(w) (i) with respect to a request for registration of
Warrant Shares or Conversion Shares, after the Company has
effected five (5) such registrations pursuant to this Section
2(a) requested by an Initiating Holder and (ii) with respect to a
request for registration of shares of Preferred Stock, after the
Company has effected five (5) such registrations pursuant to this
Section 2(a) requested by an Initiating Holder, and, in each
case, such registrations have been declared or ordered effective
and the sales of such Registrable Securities shall have closed;
(x) if the Registrable Securities requested by all
Holders to be registered pursuant to such request do not have an
anticipated aggregate public offering price (before any
underwriting discounts and commissions) of at least $10,000,000;
or
(y) if at the time of any request to register Registrable
Securities, the Company is engaged or intends to engage in an
acquisition, financing or other material transaction which, in
the good faith determination of the Board of Directors of the
Company, would be adversely affected by the requested
registration to the material detriment of the Company, or the
Board of Directors of the Company determines in good faith that
the registration would require the disclosure of material
information that the Company has a bona fide business purpose for
preserving as confidential, and that the Company is not otherwise
required by applicable securities laws or regulations to
disclose, in which event, the Company may, at its option, direct
that such request be delayed for a period not in excess of ninety
days from the date of the determination by the Board of
Directors, as the case may be, such right to delay a request to
be exercised by the Company not more than once in any
twelve-month period.
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(z) with respect to Holders who are officers, directors
or employees of the Company, if at the time of any request to
register Registrable Securities, directors, officers, or
employees of the Company are not permitted to offer or sell
securities in accordance with the Company's policies.
The registration statement filed pursuant to the request of an
Initiating Holder may, subject to the provisions of Section 2(a)(ii) below,
include other securities, other than Registrable Securities, of the Company
which are held by the other stockholders ("Other Stockholders") of the Company.
The Holders holding a majority of the Registrable Securities
requested to be registered may, at any time prior to the effective date of the
registration statement relating to such registration, revoke such request,
without liability to the Company, such Holders, any of the other Holders or the
Other Stockholders, by providing a written notice to the Company revoking such
request, provided that such revoked request shall count against the
registrations available to the Holders pursuant to Section 2(a)(x) unless such
Holders pay the costs and expenses associated with such revoked request.
Notwithstanding the foregoing provisions of this Section 2(a)(i),
if the Initial Closing (as defined in the Purchase Agreement) does not take
place for any reason whatsoever, the holder or holders of a majority of the
Warrants shall be entitled to one demand registration right with respect to the
Warrant Shares, subject to the other provisions of this Agreement.
(ii) Underwriting. If the Initiating Holders intend to
distribute the Registrable Securities covered by their request by means
of an underwriting, they shall so advise the Company as a part of their
request made pursuant to Section 2(a). If shares held by Other
Stockholders are requested by such Other Stockholders to be included in
any registration pursuant to this Section 2, the Company shall condition
such inclusion on their acceptance of the further applicable provisions
of this Section 2. The Initiating Holders whose Registrable Securities
are to be included in such registration and the Company shall (together
with all Other Stockholders proposing to distribute their securities
through such underwriting) enter into an underwriting agreement in
customary form with the representative of the underwriter or
underwriters selected for such underwriting by such Initiating Holders
and reasonably acceptable to the Company. Notwithstanding any other
provision of this Section 2(a), if the representative advises the
Holders in writing that marketing factors (including, without
limitation, pricing considerations) require a limitation on the number
of shares to be underwritten or a limitation on the inclusion of shares
held by directors and officers of
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the Company, the securities of the Company held by Other Stockholders
shall be excluded from such registration to the extent so required by
such limitation. If, after the exclusion of such shares, further
reductions are still required, the Registrable Securities of the Company
held by each Holder other than the Initiating Holders shall be excluded
from such registration to the extent so required by such limitation.
Thereafter, if still further reductions are required, the number of
Registrable Securities included in the registration by each Initiating
Holder shall be reduced on a pro rata basis (based on the number of
Registrable Securities held by such Initiating Holder), by such minimum
number of Registrable Securities as is necessary to comply with such
request. No Registrable Securities or any other securities excluded from
the underwriting by reason of the underwriter's marketing limitation
shall be included in such registration. If any Other Stockholder who has
requested inclusion in such registration as provided above disapproves
of the terms of the underwriting, such person may elect to withdraw
therefrom by written notice to the Company, the underwriter and the
Initiating Holders. The securities so withdrawn shall also be withdrawn
from registration. If the underwriter has not limited the number of
Registrable Securities or other securities to be underwritten, the
Company and officers and directors of the Company (including
representatives and designees of Capital Z or the Series B Preferred
Stock holders) may include its or their securities for its or their own
account in such registration if the representative so agrees and if the
number of Registrable Securities and other securities which would
otherwise have been included in such registration and underwriting will
not thereby be limited.
(iii) Other Registration Rights. The Company shall not
grant any registration rights inconsistent with the provisions of this
Section 2(a) and in granting any demand registration rights hereafter
shall provide that the Holders shall have the right to notice of the
exercise of any such demand registration right and to participate in
such registration on a pro rata basis.
(b) Company Registration.
(i) If the Company shall determine to register any of its
equity securities either for its own account or any Other Stockholders,
other than a registration relating solely to employee benefit plans, or
a registration relating solely to a Commission Rule 145 transaction, or
a registration on any registration form which does not permit secondary
sales or does not include substantially the same information as would be
required to be included in a registration statement covering the sale of
Registrable Securities, the Company will:
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(A) promptly give to each of the Holders a written notice
thereof; and
(B) include in such registration (and any related
qualification under blue sky laws or other compliance), and in
any underwriting involved therein, all the Registrable Securities
specified in a written request or requests, made by the Holders
within fifteen (15) days after receipt of the written notice from
the Company described in clause (A) above, except as set forth in
Section 2(b)(ii) below.
The Company may terminate, in its sole and absolute discretion, any
registration described in this Section 2(b) at any time prior to the
effectiveness of the applicable registration statement. Upon such
termination, the Company's obligations under this Section 2(b) with
respect to such terminated registration shall terminate.
(ii) Underwriting. If the registration of which the
Company gives notice is for a registered public offering involving an
underwriting, the Company shall so advise each of the Holders as a part
of the written notice given pursuant to Section 2(b)(i)(A). In such
event, the right of each of the Holders to registration pursuant to this
Section 2(b) shall be conditioned upon such Holders' participation in
such underwriting and the inclusion of such Holders' Registrable
Securities in the underwriting to the extent provided herein. The
Holders whose shares are to be included in such registration shall
(together with the Company and the Other Stockholders distributing their
securities through such underwriting) enter into an underwriting
agreement in customary form with the representative of the underwriter
or underwriters selected for underwriting by the Company.
Notwithstanding any other provision of this Section 2(b), if the
representative determines that marketing factors require a limitation on
the number of shares to be underwritten or a limitation on the inclusion
of shares held by directors and officers of the Company, the
representative may (subject to the allocation priority set forth below)
limit the number of Registrable Securities to be included in the
registration and underwriting to not less than twenty five percent (25%)
of the total number of shares to be included in such underwritten
offering, subject to the Company's compliance with any registration
obligations to any Demanding Holders (as hereinafter defined)
participating in such registration. The Company shall so advise all
holders of securities requesting registration, and the number of shares
of securities that are entitled to be included in the registration and
underwriting shall be allocated in the following manner: The securities
of the Company held by officers, directors (including representatives
and designees
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<PAGE> 8
of Capital Z or the Series B Preferred Stock holders) and Other
Stockholders (other than Registrable Securities and other than
securities held by holders who by contractual right demanded such
registration ("Demanding Holders")) shall be excluded from such
registration and underwriting to the extent required by such limitation,
and, if a limitation on the number of shares is still required, the
number of shares that may be included in the registration and
underwriting by each of the Holders other than the Demanding Holders
shall be excluded from such registration to the extent so required by
such limitation. Thereafter, if still further reductions are required,
the number of shares included in the registration by each of the
Demanding Holders shall be reduced, on a pro rata basis (based on the
number of shares held by such Demanding Holders), by such minimum number
of shares as is necessary to comply with such limitation. If any of the
Holders or any officer, director or Other Stockholder disapproves of the
terms of any such underwriting, he may elect to withdraw therefrom by
written notice to the Company and the underwriter. Any Registrable
Securities or other securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration.
(iii) Number and Transferability. Each of the Holders
shall be entitled to have its shares included in an unlimited number of
registrations pursuant to this Section 2(b).
(c) Shelf Registration.
(i) If requested by the Initiating Holder at any time
after the date hereof, the Company shall file a "shelf" registration
statement pursuant to Rule 415 (if then available) under the Securities
Act (the "Shelf Registration") with respect to the resale of all or any
portion of the Registrable Securities, as requested by the Initiating
Holder. If such request is made, the Company shall (A) use its
reasonable best efforts to have the Shelf Registration declared
effective as promptly as practicable and (B) use its reasonable best
efforts to keep the Shelf Registration continuously effective from the
date such Shelf Registration is declared effective until the date
specified in Section 2(i) in order to permit the prospectus forming a
part thereof to be usable by Holders during such period. The Shelf
Registration may not include other securities of the Company which are
held by Other Stockholders.
(ii) The Company shall supplement or amend the Shelf
Registration, (A) as required by the registration form utilized by the
Company or by the instructions applicable to such registration form or
by the Securities Act or the rules and regulations promulgated
thereunder, (B) to include in such Shelf Registration any additional
securities that become Registrable Securities by operation of the
definition
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<PAGE> 9
thereof and (C) following the written request of an Initiating Holder
pursuant to Section 2(c)(iii) below, to cover offers and sales of all or
a part of the Registrable Securities by means of an underwriting
including the incorporation of any information required pursuant to
Section 2(e)(x) below. The Company shall furnish to the Holders of the
Registrable Securities to which the Shelf Registration relates copies of
any such supplement or amendment sufficiently in advance (but in no
event less than five business days in advance) of its use and/or filing
with the Commission to allow the Holders a meaningful opportunity to
comment thereon.
(iii) The Holders may, at their election and upon written
notice by the Initiating Holders to the Company, effect offers and sales
under the Shelf Registration by means of one or more underwritten
offerings, in which case the provisions of Section 2(a)(ii) above shall
apply to any such underwritten distribution of securities under the
Shelf Registration and such underwriting shall, if sales of Registrable
Securities pursuant thereto shall have closed, be regarded as the
exercise of one of the registration rights contemplated by Section 2(a)
hereof.
(iv) The rights of the Holders to request and effect a
Shelf Registration hereunder and the Company's obligations to keep a
Shelf Registration effective shall be subject to the restrictions and
limitations set forth in Section 2(a)(x), (y) and (z).
(d) Expenses of Registration. All Registration Expenses incurred
in connection with any registration, qualification or compliance pursuant to
this Section 2 (including all Registration Expenses incurred in connection with
the Shelf Registration and any supplements or amendments thereto, whether or not
it becomes effective, and whether all, none or some of the Registrable
Securities are sold pursuant to the Shelf Registration) shall be borne by the
Company, and all Selling Expenses shall be borne by the Holders of the
securities so registered pro rata on the basis of the number of their shares so
registered; provided, however, that if, as a result of the withdrawal of a
request for registration by any of the Holders, as applicable, the registration
statement does not become effective, the Holders and Other Stockholders
requesting registration may elect to bear the Registration Expenses (pro rata on
the basis of the number of their shares so included in the registration request,
or on such other basis as such Holders and Other Stockholders may agree), in
which case such registration shall not be counted as a registration pursuant to
Section 2(a)(i)(B)(x).
(e) Registration Procedures. In the case of each registration
effected by the Company pursuant to this Section 2, the Company will keep the
Holders holding Registrable Securities
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requested to be included in such registration ("Participating Holders")
advised in writing as to the initiation of each registration and as to
the completion thereof. At its expense, the Company will:
(i) other than the Shelf Registration, the obligations in
respect of which are set forth in Section 2(c)(i)(B) above, keep such
registration effective for a period of one hundred eighty (180) days or
until the Participating Holders, as applicable, have completed the
distribution described in the registration statement relating thereto,
whichever first occurs;
(ii) furnish to each Participating Holder, and to any
underwriter before filing with the Commission, copies of any
registration statement (including all exhibits) and any prospectus
forming a part thereof and any amendments and supplements thereto
(including, upon request, all documents incorporated or deemed
incorporated by reference therein) prior to the effectiveness of such
registration statement and including each preliminary prospectus, any
summary prospectus or any term sheet (as such term is used in Rule 434
under the Securities Act)) and any other prospectus filed under Rule 424
under the Securities Act, which documents, other than exhibits and
documents incorporated or deemed incorporated by reference, will be
subject the review of the Participating Holders and any such underwriter
for a period of at least five business days, and the Company shall not
file any such registration statement or such prospectus or any amendment
or supplement to such registration statement or prospectus to which any
Participating Holder or any such underwriter shall reasonably object
within five business days after the receipt thereof; a Participating
Holder or such underwriter(s), if any, shall be deemed to have
reasonably objected to such filing only if the registration statement,
amendment, prospectus or supplement, as applicable, as proposed to be
filed, contains a material misstatement or omission;
(iii) furnish to each Participating Holder and to any
underwriter, such number of conformed copies of the applicable
registration statement and of each amendment and supplement thereto (in
each case including all exhibits) and such number of copies of the
prospectus forming a part of such registration statement (including each
preliminary prospectus, any summary prospectus or any term sheet (as
such term is used in Rule 434 under the Securities Act)) and any other
prospectus filed under Rule 424 under the Securities Act, in conformity
with the requirements of the Securities Act, and such other documents,
including without limitation documents incorporated or deemed to be
incorporated by reference prior to the effectiveness of such
registration, as each of the Participating Holders or any such
underwriter, from time to time may reasonably request;
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(iv) to the extent practicable, promptly prior to the
filing of any document that is to be incorporated by reference into any
registration statement or prospectus forming a part thereof subsequent
to the effectiveness thereof, and in any event no later than the date
such document is filed with the Commission, provide copies of such
document to the Participating Holders, if requested, and to any
underwriter, make representatives of the Company available for
discussion of such document and other customary due diligence matters;
(v) make available at reasonable times for inspection by
the Participating Holders, any underwriter participating in any
disposition pursuant to such registration and any attorney or accountant
retained by the Holders or any such underwriter, all financial and other
records, pertinent corporate documents and properties of the Company and
cause the officers, directors and employees of the Company to supply all
information reasonably requested by the Participating Holders and any
such underwriters, attorneys or accountants in connection with such
registration subsequent to the filing of the applicable registration
statement and prior to the effectiveness of the applicable registration
statement, subject to the execution of a customary confidentiality
agreement;
(vi) use its reasonable best efforts (x) to register or
qualify all Registrable Securities and other securities covered by such
registration under such other securities or blue sky laws of such States
of the United States of America where an exemption is not available and
as the sellers of Registrable Securities covered by such registration
shall reasonably request, (y) to keep such registration or qualification
in effect for so long as the applicable registration statement remains
in effect, and (z) to take any other action which may be reasonably
necessary or advisable to enable such sellers to consummate the
disposition in such jurisdictions of the securities to be sold by such
sellers, except that the Company shall not for any such purpose be
required to qualify generally to do business as a foreign corporation in
any jurisdiction where it is not so qualified, or to subject itself to
taxation in any such jurisdiction, or to execute a general consent to
service of process in effecting such registration, qualification or
compliance, unless the Company is already subject to service in such
jurisdiction and except as may be required by the Securities Act or
applicable rules or regulations thereunder;
(vii) use its reasonable best efforts to cause all
Registrable Securities covered by such registration statement to be
registered with or approved by such other federal or state governmental
agencies or authorities as may be necessary in the opinion of counsel to
the Company and
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counsel to the Participating Holders of Registrable Securities to enable
the Holders thereof to consummate the disposition of such Registrable
Securities in accordance with the plan of distribution described in the
applicable registration statement;
(viii) subject to Section 2(i) hereof, promptly notify
each Holder of Registrable Securities covered by a registration
statement (A) upon discovery that, or upon the happening of any event as
a result of which, the prospectus forming a part of such registration
statement, as then in effect, includes an untrue statement of a material
fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, (B) of the
issuance by the Commission of any stop order suspending the
effectiveness of such registration statement or the initiation of
proceedings for that purpose, (C) of any request by the Commission for
(1) amendments to such registration statement or any document
incorporated or deemed to be incorporated by reference in any such
registration statement, (2) supplements to the prospectus forming a part
of such registration statement or (3) additional information, (D) of the
receipt by the Company of any notification with respect to the
suspension of the qualification or exemption from qualification of any
of the Registrable Securities for sale in any jurisdiction or the
initiation of any proceeding for such purpose, and at the request of any
such Holder promptly prepare and furnish to it a reasonable number of
copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such
securities, such prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ix) use its reasonable best efforts to obtain the
withdrawal of any order suspending the effectiveness of any such
registration, or the lifting of any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for
sale in any jurisdiction;
(x) if requested by a Participating Holder, or any
underwriter, subject to receipt of any required information from such
Holder or underwriter, promptly incorporate in such registration
statement or prospectus, pursuant to a supplement or post-effective
amendment if necessary, such information as the Participating Holder and
any underwriter may reasonably request to have included therein,
including, without limitation, information relating to the "plan of
distribution" of the Registrable Securities, information with respect to
the number of shares of
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Registrable Securities being sold to such underwriter, the purchase
price being paid therefor and any other terms of the offering of the
Registrable Securities to be sold in such offering and make all required
filings of any such prospectus supplement or post-effective amendment as
soon as practicable after the Company is notified of the matters to be
incorporated in such prospectus supplement or post-effective amendment;
(xi) furnish to the Participating Holders, addressed to
them, an opinion of counsel for the Company, dated the date of the
closing under the underwriting agreement, if any, or the date of
effectiveness of the registration statement if such registration is not
an underwritten offering, and use its reasonable best efforts to furnish
to the Participating Holders, addressed to them, a "cold comfort" letter
signed by the independent certified public accountants who have
certified the Company's financial statements included in such
registration, covering substantially the same matters with respect to
such registration (and the prospectus included therein) and, in the case
of such accountants' letter, with respect to events subsequent to the
date of such financial statements, as are customarily covered in
opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities and such
other matters as the Participating Holders may reasonably request;
(xii) provide promptly to the Participating Holders upon
request any document filed by the Company with the Commission pursuant
to the requirements of Section 13 and Section 15 of the Exchange Act;
and
(xiii) use its reasonable best efforts to cause all
Registrable Securities included in any registration pursuant hereto to
be listed on each securities exchange on which securities of the same
class are then listed or, if not then listed on any securities exchange,
to be eligible for trading in any over-the-counter market or trading
system in which securities of the same class are then traded.
(f) Indemnification.
(i) The Company will indemnify each of the Holders, as
applicable, each of its officers, directors and partners, and each
person controlling each of the Holders (within the meaning of the
Securities Act), with respect to each registration which has been
effected pursuant to this Section 2, and each underwriter, if any, and
each person who controls any underwriter, against all claims, losses,
damages and liabilities (or actions in respect thereof) arising out of
or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any preliminary, final or summary prospectus,
offering circular
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or other document (including any related registration statement,
notification or the like, or any amendment or supplement to any of the
foregoing) incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, or any violation (or alleged
violation) by the Company of the Securities Act or the Exchange Act or
any rule or regulation thereunder or of any applicable state or common
law applicable to the Company and relating to action or inaction
required of the Company in connection with any such registration,
qualification or compliance, and (subject to Section 2(f)(iii)) will
reimburse each of the Holders, each of its officers, directors and
partners, and each person controlling each of the Holders, each such
underwriter and each person who controls any such underwriter, for any
legal and any other expenses reasonably incurred in connection with
investigating and defending any such claim, loss, damage, liability or
action, provided that the Company will not be liable in any such case to
the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission based upon
and in conformity with written information furnished to the Company by
the Holders or underwriter and stated to be specifically for use
therein. The foregoing indemnification shall remain in effect regardless
of any investigation by any indemnified party and shall survive any
transfer or assignment by a Holder of its Registrable Securities or of
its rights pursuant to this Agreement.
(ii) Each of the Holders will, if Registrable Securities
held by it are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify on a several,
but not joint basis, the Company, each of its directors and officers and
each underwriter, if any, of the Company's securities covered by such a
registration statement, each person who controls the Company or such
underwriter, each Other Stockholder and each of their officers,
directors, and partners, and each person controlling such Other
Stockholder against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue
statement (or alleged untrue statement) made by such Holder of a
material fact contained in any such registration statement, prospectus,
offering circular or other document, or any omission (or alleged
omission) made by such Holder to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company and such directors, officers,
partners, persons, underwriters or control persons for any legal or any
other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each
case to the
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extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document
in reliance upon and in conformity with written information furnished to
the Company by such Holder and stated to be specifically for use
therein; provided, however, that the obligations of each of the Holders
hereunder shall be limited to an amount equal to the net proceeds to
such Holder of securities sold pursuant to such registration statement
or prospectus.
(iii) Each party entitled to indemnification under this
Section 2(f) (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party") promptly
after such Indemnified Party has actual knowledge of any claim as to
which indemnity may be sought, and shall permit the Indemnifying Party
to assume the defense of any such claim or any litigation resulting
therefrom; provided that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or any litigation resulting therefrom,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld) and the Indemnified Party may participate in
such defense at such party's expense (unless the Indemnified Party shall
have reasonably concluded upon advice from counsel that there may be a
conflict of interest between the Indemnifying Party and the Indemnified
Party in such action, in which case the reasonable fees and expenses of
one firm of counsel (and one local counsel) shall be at the expense of
the Indemnifying Party), and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve
the Indemnifying Party of its obligations under this Section 2 except to
the extent the Indemnifying Party is materially prejudiced thereby. No
Indemnifying Party, in the defense of any such claim or litigation
shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in
respect to such claim or litigation. Each Indemnified Party shall
promptly furnish such information regarding itself or the claim in
question as an Indemnifying Party may reasonably request in writing and
as shall be reasonably required in connection with the defense of such
claim and litigation resulting therefrom.
(iv) If the indemnification provided for in this Section
2(f) is held by a court of competent jurisdiction to be unavailable to
an Indemnified Party with respect to any loss, liability, claim, damage
or expense referred to herein, then the Indemnifying Party, in lieu of
indemnifying such Indemnified Party hereunder, shall contribute to the
amount paid or payable by such Indemnified Party as a result
15
<PAGE> 16
of such loss, liability, claim, damage or expense in such proportion as
is appropriate to reflect the relative fault of the Indemnifying Party
on the one hand and of the Indemnified Party on the other in connection
with the statements or omissions which resulted in such loss, liability,
claim, damage or expense, as well as any other relevant equitable
considerations, provided, however, that no Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any Person who was not
guilty of any such fraudulent misrepresentation. The relative fault of
the Indemnifying Party and of the Indemnified Party shall be determined
by reference to, among other things, whether the untrue (or alleged
untrue) statement of a material fact or the omission (or alleged
omission) to state a material fact relates to information supplied by
the Indemnifying Party or by the Indemnified Party and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. Notwithstanding the
foregoing, no Holder will be required to contribute any amount pursuant
to this paragraph (f) in excess of the total price at which the
Registrable Securities of such Holder were offered to the public (less
underwriting discounts and commissions, if any). Each Holder's
obligations to contribute pursuant to this paragraph are several in the
proportion that the proceeds of the offering received by such Holder
bears to the total proceeds of the offering received by all the
applicable Holders and not joint.
(v) The foregoing indemnity agreement of the Company and
Holders is subject to the condition that, insofar as they relate to any
loss, claim, liability or damage made in a prospectus, preliminary
prospectus or other offering document but eliminated or remedied in an
amended prospectus, preliminary prospectus or other offering document
delivered to an underwriter or Holder, as applicable (the "Final
Prospectus"), such indemnity agreement shall not inure to the benefit of
(A) any underwriter if a copy of the Final Prospectus was furnished to
the underwriter and was not furnished to the person asserting the loss,
liability, claim or damage at or prior to the time such action is
required by the Securities Act or (B) in circumstances where no
underwriter is acting as such in the offer and sale in question, any
Holder who (1) either directly or through its agent provided the
preliminary prospectus to the Person asserting the loss, liability,
claim or damage, (2) was furnished with a copy of the Final Prospectus,
and (3) did not furnish or cause to be furnished the Final Prospectus to
the Person asserting the loss, liability, claim or damage at or prior to
the time such action is required by the Securities Act.
16
<PAGE> 17
(vi) Any indemnification payments required to be made to
an Indemnified Party under this Section 2(f) shall be made as the
related claims, losses, damages, liabilities or expenses are incurred.
(g) Information by the Holders. Each of the Holders holding
securities included in any registration shall furnish to the Company such
information regarding such Holder and the distribution proposed by such Holder
as the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification or compliance
referred to in this Section 2. No Investor shall be required, in connection with
any underwriting agreements entered into in connection with any registration, to
provide any information, representations or warranties, or covenants with
respect to the Company, its business or its operations, and such Investors shall
not be required to provide any indemnification with respect to any registration
statement except as specifically provided for in Section 2(f)(ii) hereof.
(h) Rule 144 Reporting.
With a view to making available the benefits of certain rules and
regulations of the Commission which may permit the sale of restricted securities
to the public without registration, the Company agrees to:
(i) make and keep public information available as those
terms are understood and defined in Rule 144 under the Securities Act
("Rule 144"), at all times;
(ii) use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company
under the Securities Act and the Exchange Act; and
(iii) so long as the Holder owns any Registrable
Securities, furnish to the Holder upon request, a written statement by
the Company as to its compliance with the reporting requirements of Rule
144 and of the Securities Act and the Exchange Act, a copy of the most
recent annual or quarterly report of the Company, and such other reports
and documents so filed as the Holder may reasonably request in availing
itself of any rule or regulation of the Commission allowing the Holder
to sell any such securities without registration.
(i) Termination. The registration rights set forth in this
Section 2 shall not be available to any Holder if, in the opinion of counsel to
the Company, all of the Registrable Securities then owned by such Holder could
be sold in any 90-day period pursuant to Rule 144 (without giving effect to the
provisions of Rule 144(k)) or at such time that no Registrable Securities are
outstanding. The Company will arrange for a
17
<PAGE> 18
provision to the transfer agent for such shares of an opinion of counsel in
connection with any such sale under Rule 144.
(j) Assignment. The registration rights set forth in Section 2
hereof may be assigned, in whole or in part, to any transferee of Registrable
Securities (who shall be considered thereafter to be a Holder and shall be bound
by all obligations and limitations of this Agreement).
(k) The Holders agree that, upon receipt of any notice from the
Company pursuant to Section 2(e)(viii), they shall immediately discontinue the
disposition of Registrable Securities pursuant to the registration statement
applicable to such Registrable Securities until they have received copies of the
amended or supplemented prospectus as described in Section 2(e)(viii). The
Holders shall destroy all copies in their possession of the registration
statement and related materials covering such Registrable Securities at the time
of receipt of the Company's notice.
3. MISCELLANEOUS
(a) Directly or Indirectly. Where any provision in this Agreement
refers to action to be taken by any Person, or which such Person is prohibited
from taking, such provision shall be applicable whether such action is taken
directly or indirectly by such Person.
(b) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed entirely within such State.
(c) Section Headings. The headings of the sections and
subsections of this Agreement are inserted for convenience only and shall not be
deemed to constitute a part thereof.
(d) Notices.
(i) All communications under this Agreement shall be in
writing and shall be delivered by hand or by facsimile or mailed by
overnight courier or by registered or certified mail, postage prepaid:
(A) if to the Company, to Aames Financial Corporation, 2
California Plaza, 350 South Grand Avenue, Los Angeles, California
90071, facsimile no. (323) 210-4537 or at such other address or
facsimile number as it may have furnished in writing to the
Investors;
(B) if to the Investors, at the address or facsimile
number listed on Schedule I hereto, or at
18
<PAGE> 19
such other address or facsimile number as may have been furnished in
writing to the Company.
(ii) Any notice so addressed shall be deemed to be given: if
delivered by hand or facsimile, on the date of such delivery; if mailed
by courier, on the first business day following the date of such
mailing; and if mailed by registered or certified mail, on the third
business day after the date of such mailing.
(e) Reproduction of Documents. This Agreement and all documents
relating thereto, including, without limitation, any consents, waivers and
modifications which may hereafter be executed may be reproduced by the parties
hereto by any photographic, photostatic, microfilm, microcard, miniature
photographic or other similar process and the parties hereto may destroy any
original document so reproduced. The parties hereto agree and stipulate that any
such reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding (whether or not the original is in
existence and whether or not such reproduction was made by the Investors in the
regular course of business) and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
(f) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties.
(g) Entire Agreement; Amendment and Waiver. This Agreement
constitutes the entire understanding of the parties hereto and supersedes all
prior understanding among such parties. This Agreement may be amended, and the
observance of any term of this Agreement may be waived, with (and only with) the
written consent of the Company and the Investors holding a majority of the then
outstanding Registrable Securities.
(h) Severability. In the event that any part or parts of this
Agreement shall be held illegal or unenforceable by any court or administrative
body of competent jurisdiction, such determination shall not effect the
remaining provisions of this Agreement which shall remain in full force and
effect.
(i) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
19
<PAGE> 20
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first set forth above.
AAMES FINANCIAL CORPORATION
By /s/ Barbara S. Polsky
----------------------------------------
Name: Barbara S. Polsky
Title: Executive Vice President
INVESTORS:
CAPITAL Z FINANCIAL SERVICES FUND II, L.P.,
By its General Partner
CAPITAL Z PARTNERS, L.P.,
By its General Partner
CAPITAL Z PARTNERS, LTD.
By: /s/ Adam M. Mizel
------------------------------------
Name: Adam M. Mizel
Title: Partner
CAPITAL Z MANAGEMENT, INC.
By: /s/ Adam M. Mizel
----------------------------------------
Name: Adam M. Mizel
Title: Partner
20
<PAGE> 21
SCHEDULE I
NAME AND ADDRESS OF INVESTORS:
Capital Z Financial Services Fund, L.P.
One Chase Manhattan Plaza
New York, New York 10005
Attention: David Spuria, Esq.
Capital Z Management Inc.
One Chase Manhattan Plaza
New York, New York 10005
Attention: David Spuria, Esq.
This schedule will be amended to include (i) Designated Purchasers under the
Preferred Stock Purchase Agreement and (ii) the designees of Capital Z who will
receive any of the Warrants.
<PAGE> 1
EXHIBIT 10.22(b)
FIRST AMENDMENT TO
RESIDUALS FINANCING AGREEMENT
THIS FIRST AMENDMENT TO RESIDUALS FINANCING AGREEMENT (this
"Amendment") is made and dated as of the 6th day of October, 1998, by and among
AAMES CAPITAL CORPORATION, a California corporation (the "Company"), AAMES
FINANCIAL CORPORATION, a Delaware corporation and the sole shareholder of the
Company (the "Parent"); and NATIONSBANK, N.A., a national banking association
(the "Lender").
RECITALS
A. Pursuant to that certain Residuals Financing Agreement dated as of
September 4, 1998 among the Company, the Parent and the Lender (as amended,
extended and replaced from time to time, the "Agreement" and with capitalized
terms used herein and not otherwise defined herein used with the meanings given
such terms in the Agreement), the Lender agreed to extend credit to the Company
on the terms and subject to the conditions set forth therein.
B. The parties hereto have agreed to amend the Agreement in certain
respects, as set forth more particularly below.
NOW, THEREFORE, in consideration of the above Recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. OTHER NATIONSBANK OBLIGATIONS. To reflect the agreement of the
parties to use the Collateral to secure certain other obligations from time to
time owed by the Company to the Lender, effective as of the Effective Date (as
such term is defined in Paragraph 3 below):
(a) A new definition of the term "Other NationsBank
Obligations" is hereby added to Paragraph 11 of the Agreement, in correct
alphabetical order, to read in its entirety as follows:
"'OTHER NATIONSBANK OBLIGATIONS' shall mean any and
all debts, obligations and liabilities of the Company to the Lender
(whether now existing or hereafter arising, voluntary or involuntary,
whether or not jointly owed with others, direct or indirect, absolute
or contingent, liquidated or unliquidated, and whether or not from time
to time decreased or extinguished and later increased,
<PAGE> 2
created or incurred), other than the Obligations and any and all debts,
obligations and liabilities of the Company to the Lender pursuant to
the Warehousing Agreement."
(b) Paragraph 1(a) of the Agreement is hereby amended to read
in its entirety as follows:
"1(a) REVOLVING CREDIT LIMIT. On the terms and
subject to the conditions set forth herein, the Lender agrees that it
shall from time to time to but not including the earlier to occur of
the Conversion Date and the Maturity Date (as such terms and
capitalized terms not otherwise defined herein are defined in Paragraph
11 below) make loans (the "Revolving Loans" or a "Revolving Loan") to
the Company in an amount not to exceed, in the aggregate at any one
time outstanding, the lesser of:
(1) The Revolving Credit Limit; and
(2) The Collateral Value of the Residuals
Borrowing Base;
minus, in each case, the aggregate amount of all outstanding Other
NationsBank Obligations."
(c) Paragraph 3(d)(1) of the Agreement is hereby amended to
read in its entirety as follows:
"(1) In the event the Lender shall determine on any
date that the Collateral Value of the Residuals Borrowing Base is less
than the sum of (i) the aggregate principal amount of Revolving Loans
outstanding on such date, plus (ii) the aggregate amount of all Other
NationsBank Obligations outstanding on such date, the Lender may, in
its sole discretion, elect to deliver to the Company (which delivery
may be by facsimile transmission) a Collateral Valuation Report so
demonstrating. Upon receipt of such a Collateral Valuation Report, the
Company shall, no later than thirty (30) days thereafter and subject to
the right of the Company to exercise the Term-Out Option as provided in
Paragraph 1(c) above, pay to the Lender an amount to prepay the
Revolving Loans (a "Required Principal Prepayment") equal to the amount
by which the sum of (i) the aggregate principal amount of Revolving
Loans outstanding ON THE DATE OF PAYMENT by the Company, plus (ii) the
aggregate amount of all Other NationsBank Obligations outstanding ON
THE DATE OF PAYMENT by the Company exceeds the Collateral Value of the
Residuals Borrowing Base ON THE DATE OF PAYMENT by the Company."
(d) Paragraph 3(d)(2) of the Agreement is hereby amended to
read in its entirety as follows:
"(2) If, but only if, at such time as the Company
shall be required to prepay Revolving Loans under subparagraph (1) of
this Paragraph 3(d)
2
<PAGE> 3
there shall not have occurred and be continuing an Event of Default or
Potential Default, in lieu of making a Required Principal Prepayment
thereunder or exercising the Term-Out Option, the Company may deliver
to the Lender additional Eligible Residual Securities with an
Established Collateral Value such that the sum of (i) the aggregate
principal balance of Revolving Loans outstanding, and (ii) the
aggregate amount of all Other NationsBank Obligations outstanding, does
not exceed the Collateral Value of the Residuals Borrowing Base, it
being expressly acknowledged and agreed by the Company that such
additional Eligible Residual Securities must be delivered to the Lender
no later than ten Business Days prior to the date on which the Required
principal Prepayment is due to permit a timely determination as to
eligibility to be made by the Lender."
(e) Paragraph 1 of the Security Agreement is hereby amended to
read in its entirety as follows:
"1. GRANT OF SECURITY INTEREST. The Company hereby
pledges and grants to the Lender a first priority, perfected security
interest in the collateral described more particularly in Paragraph 2
below (collectively and severally, the "Collateral") to secure payment
and performance of the Obligations and the Other NationsBank
Obligations."
2. REAFFIRMATION OF LOAN DOCUMENTS. Each of the Company and the Parent
hereby affirms and agrees that (a) except as expressly amended hereby, the
execution and delivery by the Company and the Parent of and the performance of
their obligations under this Amendment shall not in any way amend, impair,
invalidate or otherwise affect any of the obligations of the Company or the
Parent or the rights of the Lender under the Agreement, the Security Agreement,
the Guaranty or any other Loan Document, (b) the term "Obligations" as used in
the Loan Documents includes, without limitation, the Obligations of the Company
under the Agreement as amended hereby.
3. EFFECTIVE DATE. This Amendment shall be effective as of the date
(the "Effective Date") on which the Company has duly executed and delivered to
the Lender this Amendment, as well as such corporate resolutions, incumbency
certificates and other authorizing documentation as the Lender may reasonably
request.
4. REPRESENTATIONS AND WARRANTIES. Each of the Company and the Parent
hereby represents and warrants to the Lender as follows:
(a) Each of the Company and the Parent has the corporate power
and authority and the legal right to execute, deliver and perform this Amendment
and has taken all necessary corporate action to authorize the execution,
delivery and performance of this Amendment. This Amendment has been duly
executed and delivered on behalf of the Company and the Parent and constitutes
the legal, valid and binding obligations of each, enforceable against each in
accordance with its terms.
3
<PAGE> 4
(b) At and as of the date of execution hereof and at and as of
the effective date of this Amendment and both prior to and after giving effect
hereto: (i) the representations and warranties of the Company and the Parent
contained in the Agreement and the other Loan Documents are accurate and
complete in all respects, and (ii) there has not occurred an Event of Default or
Potential Default.
5. NO OTHER AMENDMENT. Except as expressly amended hereby, the Loan
Documents shall remain in full force and effect as written and amended to date.
6. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first above written.
AAMES CAPITAL CORPORATION, a
California corporation
By: /S/ DAVID A. SKLAR
----------------------------------
Name: David A. Sklar
---------------------------------
Title: EVP & CFO
--------------------------------
AAMES FINANCIAL CORPORATION, a
Delaware corporation
By: /S/ BARBARA S. POLSKY
----------------------------------
Name: Barbara S. Polsky
--------------------------------
Title: EVP & General Counsel
-------------------------------
NATIONSBANK, N.A., a national banking
association
By: /S/ CAROLYN WARREN
----------------------------------
Name: Carolyn Warren
--------------------------------
Title: Senior Vice President
-------------------------------
4
<PAGE> 1
EXHIBIT 10.22(c)
SECOND AMENDMENT TO
RESIDUALS FINANCING AGREEMENT
THIS SECOND AMENDMENT TO RESIDUALS FINANCING AGREEMENT (this
"Amendment") is made and dated as of the 10th day of December, 1998, by and
among AAMES CAPITAL CORPORATION, a California corporation (the "Company"), AAMES
FINANCIAL CORPORATION, a Delaware corporation and the sole shareholder of the
Company (the "Parent"), and NATIONSBANK, N.A., a national banking association
(the "Lender").
RECITALS
A. Pursuant to that certain Residuals Financing Agreement dated as of
September 4, 1998 among the Company, the Parent and the Lender (as amended,
extended and replaced from time to time, the "Agreement" and with capitalized
terms used herein and not otherwise defined herein used with the meanings given
such terms in the Agreement), the Lender agreed to extend credit to the Company
on the terms and subject to the conditions set forth therein.
B. The Company wishes to pledge additional Collateral to create
additional availability in the credit facility under the Agreement for a limited
time period and the Lender has agreed to permit the creation of such temporary
availability on certain terms and conditions, all as set forth more particularly
below.
NOW, THEREFORE, in consideration of the above Recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. DELIVERY OF ADDITIONAL COLLATERAL FOR TEMPORARY AVAILABILITY. On or
before the Second Amendment Effective Date (as such term is defined in Paragraph
3 below), the Company shall deliver to The Chase Manhattan Bank, as custodian on
behalf of the Lender (the "Custodian"), the certificates representing the
Residual Mortgage-Backed Securities set forth on SCHEDULE I hereto, properly
endorsed in blank for transfer (collectively, as so endorsed, the "Additional
Collateral"), under cover of a letter addressed to the Lender requesting the
Additional Collateral to be identified as Collateral for the Obligations
pursuant to the Security Agreement.
The parties hereto hereby agree that:
(a) As of the Second Amendment Effective Date, the Additional
Collateral shall constitute Eligible Residual Securities identified as
Collateral pursuant to the
<PAGE> 2
Security Agreement with an aggregate Established Collateral Value of
$20,000,000.00. The Lender agrees that, on the terms and subject to the
conditions set forth in the Agreement, it shall from time to time from and
including the Second Amendment Effective Date to but not including the Temporary
Availability Termination Date (as defined in Paragraph 1(b) below) make
Revolving Loans under the Agreement on account of the increased availability
under the Residuals Borrowing Base resulting from the delivery of the Additional
Collateral (all such Revolving Loans, collectively, the "New Advances").
(b) On the earlier of December 31, 1998 and the date on which all
outstanding New Advances have been repaid in full (as such date may be
reinstated and extended pursuant to Paragraph 1(e) below, the "Temporary
Availability Termination Date"):
(i) The Additional Collateral shall automatically cease to
constitute Eligible Residual Securities;
(ii) The Collateral Value of the Residuals Borrowing Base
shall be automatically reduced accordingly; and
(iii) The New Advances shall become immediately due and
payable in full.
(c) If, but only if, the New Advances are paid in full in strict
compliance with the requirement of Paragraph 1(d) below on or before the
Temporary Availability Termination Date out of the Company's own funds (and not
as a result of the sale or other disposition of any Collateral and application
of funds therefrom), the Lender shall promptly release the Additional Collateral
from the Lien under the Security Agreement and shall notify the Custodian to
deliver the Additional Collateral to such Persons as the Company may direct. The
parties hereto acknowledge and agree the Lender shall have no obligation to
release the Additional Collateral except pursuant to the immediately preceding
sentence, notwithstanding any circumstance which would prohibit the Company, or
cause the Company to be unable, to timely repay the New Advances in accordance
with Paragraph 1(d), including, without limitation, in the event the Company
becomes involved in a bankruptcy or similar proceeding. The Lender acknowledges
and agrees that in the event all Obligations under the Agreement are repaid in
full, the Lender shall release all Collateral, including the Additional
Collateral, in accordance with applicable laws.
(d) Subject to the prepayment requirements under the Agreement and
under Paragraphs 1(b)(iii) above and 1(f) below, the Company shall pay the
principal amount of each New Advance no later than the earlier of (i) the tenth
(10th) Business Day after the date such Revolving Loan is made and (ii) the
Temporary Availability Termination Date. The Term-Out Option shall not be
available with respect to any such Revolving Loan.
2
<PAGE> 3
(e) In the event each of the following conditions shall have been
satisfied on or before January 5, 1999 (the earliest date on which all such
conditions shall have been satisfied being the "Reinstatement Date"):
(i) The Company has delivered to the Lender evidence that a
definitive agreement, in form and substance satisfactory to the Lender in its
sole discretion, has been duly executed by Capital Z Partners Ltd. ("Capital
Z"), pursuant to which agreement Capital Z is committed and obligated to make a
capital investment in the Company in an amount not less than $100,000,000.00
subject to customary terms and conditions in such agreement;
(ii)There exists no Event of Default or Potential Default
other than any which has been waived by the Lender in its sole discretion; and
(iii) The Company has re-delivered to the Lender (or the
Custodian on behalf of the Lender) the Additional Collateral, under cover of a
letter addressed to the Lender requesting the Additional Collateral to be
identified as Collateral pursuant to the Security Agreement;
then the Temporary Availability Termination Date shall be reinstated and
extended to the earlier of January 31, 1999 and the date on which all
outstanding New Advances advanced on and after the Reinstatement Date have been
repaid in full. As of the Reinstatement Date, the Additional Collateral shall
once again constitute Eligible Residual Securities identified as Collateral
pursuant to the Security Agreement with an aggregate Established Collateral
Value of $20,000,000.00, and the Lender agrees that, on the terms and subject to
the conditions set forth in the Agreement, it shall from time to time from and
including the Reinstatement Date to but not including the Temporary Availability
Termination Date make New Advances.
(f) The Company shall immediately prepay any outstanding Revolving
Loans advanced pursuant to this Amendment from cash available to the Company for
general corporate purposes. Notwithstanding the previous sentence, the Lender
acknowledges that before such cash is applied to the prepayment of such
Revolving Loans such cash will first be applied (i) to repay any outstanding
"Tranche B Loans" to the extent required (and as such term is defined) under the
terms of the Warehousing Agreement, (ii) to make payroll and payroll-related
payments of the consolidated Parent as they become due, (iii) to pay net
operating costs of the consolidated Parent not to exceed $1,000,000.00 on any
one day, and (iv) to make payments to the State of California on account of
escheat payments due pursuant to any notice received by the Parent.
(g) The Lender hereby agrees that with respect to any Revolving Loan to
be funded pursuant to this Amendment, the Lender shall not cite as grounds for
refusing to fund such Revolving Loans pursuant to the terms of the Agreement the
occurrence of events that have been disclosed and reported to the Lender in (i)
the press release of the Company dated November 16, 1998, (ii) the Company's
Form 10-Q filing for the quarter
3
<PAGE> 4
ended September 30, 1998, and (iii) the cash flow projections delivered by the
Company to the Lender concurrently herewith. Notwithstanding the foregoing, the
Lender has not, and shall not be deemed to have, waived any Event of Default
which does exist, has in the past existed, or at any time in the future may
exist under the Agreement, and the Lender hereby reserves all rights, powers and
remedies available to it under the Agreement and the other Loan Documents and
under applicable law.
2. REAFFIRMATION OF LOAN DOCUMENTS. Each of the Company and the Parent
hereby affirms and agrees that (a) except as expressly amended hereby, the
execution and delivery by the Company and the Parent of and the performance of
their obligations under this Amendment shall not in any way amend, impair,
invalidate or otherwise affect any of the obligations of the Company or the
Parent or the rights of the Lender under the Agreement, the Security Agreement,
the Guaranty or any other Loan Document, (b) the term "Obligations" as used in
the Loan Documents includes, without limitation, the Obligations of the Company
under the Agreement as amended hereby.
3. SECOND AMENDMENT EFFECTIVE DATE. This Amendment shall be effective
as of the earliest date (the "Second Amendment Effective Date") on which each of
the following events shall have occurred:
(a) Each of the Company and the Parent has duly executed and
delivered to the Lender this Amendment;
(b) The Company has duly delivered to the Custodian the Additional
Collateral pursuant to Paragraph 1 above; and
(c) Each of the Custodian, the Lender and the Company has duly
executed a custody agreement in the form of EXHIBIT A attached hereto.
4. REPRESENTATIONS AND WARRANTIES. Each of the Company and the Parent
hereby represents and warrants to the Lender that it has the corporate power and
authority and the legal right to execute, deliver and perform this Amendment and
has taken all necessary corporate action to authorize the execution, delivery
and performance of this Amendment, and that this Amendment has been duly
executed and delivered on behalf of the Company and the Parent and constitutes
the legal, valid and binding obligations of each, enforceable against each in
accordance with its terms.
5. NO OTHER AMENDMENT. Except as expressly amended hereby, the Loan
Documents shall remain in full force and effect as written and amended to date.
6. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
agreement.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
as of the day and year first above written.
AAMES CAPITAL CORPORATION, a
California corporation
By: /S/ BARBARA S. POLSKY
----------------------------------
Name: Barbara S. Polsky
--------------------------------
Title: EVP & CFO
-------------------------------
AAMES FINANCIAL CORPORATION, a
Delaware corporation
By: /S/ BARBARA S. POLSKY
----------------------------------
Name: Barbara S. Polsky
--------------------------------
Title: EVP & General Counsel
-------------------------------
NATIONSBANK, N.A., a national banking
association
By: /S/ CAROLYN WARREN
----------------------------------
Name: Carolyn Warren
--------------------------------
Title: Senior Vice President
-------------------------------
5
<PAGE> 6
SCHEDULE I
SCHEDULE OF ADDITIONAL COLLATERAL
Aames Mortgage Trust 1995-C Mortgage Pass-Through Certificate, Series 1995-C,
Class R, Certificate No.: R02
Aames Mortgage Trust 1995-D Mortgage Pass-Through Certificate, Series 1995-D,
Class R, Certificate No.: R02
Aames Mortgage Trust 1996-A Mortgage Pass-Through Certificate, Series 1996-A,
Class R, Certificate No.: R02
Aames Mortgage Trust 1996-B Mortgage Pass-Through Certificate, Series 1996-B,
Class R, Certificate No.: R02
Aames Mortgage Trust 1996-C Mortgage Pass-Through Certificate, Series 1996-C,
Class R, Certificate No.: R02
6
<PAGE> 1
EXHIBIT 10.23(a)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "AGREEMENT") is between Aames Financial
Corporation, a Delaware corporation (the "COMPANY"), and Cary H. Thompson (the
"EXECUTIVE"). This Agreement shall become effective (the "EFFECTIVE DATE") on
the "Initial Closing Date," as such term is defined in the Purchase Agreement
(defined below).
BACKGROUND
A. As of the Effective Date, the Company is or will be engaged
primarily in originating, selling and servicing home mortgage loans.
B. The Executive is currently a stockholder and officer of the
Company, and as part of the closing (the "Closing") under the Preferred Stock
Purchase Agreement by and among the Company and Capital Z Financial Services
Fund II, L.P. ("Purchaser"), dated the 23rd day of December, 1998 (the "PURCHASE
AGREEMENT"), the Company has agreed that, after the Effective Date, the Company
will continue to employ the Executive to provide services for the benefit of the
Company on the terms of this Agreement. If the Closing does not occur, this
Agreement shall have no force or effect and the Employment Agreement dated May
8, 1997 shall remain in force.
C. In exchange for the benefits provided for under this
Agreement, except as otherwise specifically provided in this Agreement or in
Exhibit A hereto, as of the Effective Date, the Executive hereby waives any and
all rights and benefits accruing under all other employment, change in control,
stock option and any and all other agreements (except for benefits provided
under the Company's 401(k) plan or continued pursuant to Section 3C hereof, and
stock options granted under the Aames Financial Corporation 1997 Non-Qualified
Stock Option Plan, as Amended and Restated Effective May 22, 1998, the Aames
Financial Corporation 1997 Stock Option Plan, the Aames Financial Corporation
1996 Stock Incentive Plan, as amended, the Aames Financial Corporation 1995
Stock Incentive Plan the Aames Financial Corporation 1991 Stock Incentive Plan
and under the Stock Option Agreement between the Company and the Executive dated
June 21, 1996, as amended August 26, 1998 (all of which shall be preserved)),
between Executive and the Company and its subsidiaries that provide for the
payment of compensation or benefits to Executive.
In consideration of the foregoing and the mutual agreements set forth below, the
parties agree as follows:
<PAGE> 2
AGREEMENT - PRINCIPAL TERMS
1. Employment and Duties. The Company shall employ the Executive as its
Chief Executive Officer, and the Executive accepts such employment on the terms
and conditions of the Agreement. The Executive shall, while this Agreement
remains in effect, have the duties, responsibilities, powers, and authority
customarily associated with such position. The Executive shall report to, and
follow the direction of, the Board of Directors of the Company (the "BOARD").
During each year of the Term (as hereinafter defined), the Company shall
nominate the Executive for election as a member of the Board. In addition, the
Executive also shall perform such other and unrelated services and duties as the
Board may assign to him. The Executive shall diligently, competently, and
faithfully perform all duties, and shall devote his entire business time,
energy, attention, and skill to the performance of duties for the Company and
its affiliates and will use his best efforts to promote the interests of the
Company and its affiliates.
2. Term of Employment. Unless sooner terminated as provided in this
Agreement, the initial term under this Agreement shall be five (5) years,
starting on the Effective Date (the "INITIAL TERM"). The term of employment
shall be renewed automatically for successive periods of one (1) year each (a
"RENEWAL TERM") after the expiration of the Initial Term and any subsequent
Renewal Term, unless the Board provides the Executive, or the Executive provides
the Board, with written notice to the contrary at least one hundred twenty (120)
days prior to the end of the Initial Term or any Renewal Term. The Initial Term
and the Renewal Terms are referred to collectively as "TERMS."
3. Compensation.
A. Salary. The Company shall pay the Executive an annual salary
of $600,000 (the "BASE SALARY"), payable in substantially equal installments in
accordance with the Company's payroll policy. The amount of Base Salary payable
to Executive shall be reviewed at least annually; provided, however, that
Executive's Base Salary shall not be reduced below $600,000 per annum during the
term of this Agreement.
B. Performance Bonus; Other Limitations. The Executive shall be
entitled to an annual cash bonus on the basis outlined in Exhibit A. The
covenants set forth in Exhibit A shall be binding upon the parties to the same
extent as if set forth herein.
C. Automobile. The Company's current policy with regard to the
provision of an automobile to the Executive shall be maintained during the Term
until such time as the Compensation Committee of the Board determines otherwise
and provides other benefits not materially less favorable to Executive.
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<PAGE> 3
D. Vacation. Executive shall be entitled to 5 weeks of paid
vacation each year of employment with the Company for the term of this
Agreement. In each case, such entitlement shall accrue pro rata over the
contract year and shall be taken at such time or times as shall not unreasonably
interfere with the operations of the Company.
E. Insurance. During the Term, the Company shall maintain, at no
cost to Executive, directors and officers liability insurance that covers the
Executive in an amount of not less than $45,000,000.
F. Stock Options. The Company shall grant to the Executive on the
Effective Date an option to purchase 2,630,162 shares of the Company's common
stock pursuant to and subject to the provisions of the Company's 1999 Stock
Option Plan. Such option shall be subject to the terms of an option agreement
substantially in the form annexed hereto as Exhibit B.
G. Other Benefits. While this Agreement remains in effect, the
Company shall continue to provide the Executive with (i) not less than
$2,000,000 of standard term life insurance; (ii) medical and dental benefits for
the Executive and his dependents substantially comparable to that provided
immediately prior to the execution of this Agreement; (iii) a long-term
disability policy providing for payments in an amount equal to 60% of the
Executive's Base Salary, provided such a policy may be obtained at reasonable
cost; and (iv) the Executive shall participate in such other savings, pension
and retirement plans and other benefit plans or programs maintained by the
Company for the benefit of its executives.
4. Expenses. The Company shall reimburse the Executive for all
reasonable business expenses, that are incurred in accordance with the Company's
policies as in effect from time to time, provided the Executive submits
appropriate receipts or other documentation acceptable to the Company and as
required by the Internal Revenue Service to qualify as ordinary and necessary
business expenses under the Internal Revenue Code of 1986, as amended.
5. Termination. Notwithstanding anything in Paragraph 2 of this
Agreement to the contrary, the term of this Agreement and Executive's services
under this Agreement shall terminate upon the first to occur of the following
events:
A. At the end of the applicable Term of this Agreement, including
any Renewal Terms.
B. Upon the Executive's date of death or the date the Executive
is given written notice that the Company has properly determined that he is
disabled. For purposes of this Agreement, the Executive shall be properly deemed
to be disabled if the Executive, as a result of illness or incapacity, shall be
unable
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<PAGE> 4
to perform substantially his required duties for a period of 120 consecutive
days or for any aggregate period of 183 days in any twelve (12) month period.
The Company shall notify the Executive that his employment has been terminated
by written notice. The termination shall be effective on the tenth (10th)
business day after the Executive receives the notice, unless the Executive
returns to full-time performance of his duties before such tenth (10th) business
day.
C. On the date the Company provides the Executive with written
notice that he is being terminated for "cause." For purposes of this Agreement,
and as reasonably determined by the Company, the Executive shall be deemed
terminated for cause if the Company terminates the Executive after finding that
the Executive: (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 Executive 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 Executive'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 5C shall be deemed to refer to the Company or its affiliates); (2)
shall have committed one or more acts of gross negligence or willful misconduct,
either within or outside the scope of his employment that, in the good faith
opinion of the Board, 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 that the Executive shall have materially and
knowingly or intentionally breached any provision this Agreement; provided,
however, that no termination of Executive's employment for Cause shall be deemed
to have occurred unless Executive is given notice of the reason therefore
including the allegations which may constitute reason for such termination and
after (a) Executive is provided an opportunity to be heard by the Board or the
Executive Committee thereof, and (b) such decision has been upheld by the Board
or Executive Committee.
D. On the date the Executive terminates his employment for "Good
Reason." For purposes of this Agreement,
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<PAGE> 5
"GOOD REASON" shall mean termination by the Executive within ninety (90) days of
learning of the acts which are the basis for alleging Good Reason, because of
the occurrence of any of the following acts, without the Executive's consent:
(1) he has been demoted to a position of materially less stature or importance
within the Company than the position described in Paragraph 1, (2) he has been
assigned to duties that are of materially less importance than those required to
be performed pursuant to Paragraph 1 of this Agreement, (3) the Company has
failed to pay or provide material compensation or benefits that are required to
be provided in this Agreement, or (4) the Company's principal executive offices
have been relocated to any county other than Los Angeles County, CA or Orange
County, CA., provided that no such termination shall be treated as for Good
Reason unless the Executive shall have given the Company thirty (30) days
advance written notice of his intention to terminate his employment for Good
Reason, and the Company shall have failed to cure such acts within such thirty
(30) day period.
E. On the date the Executive terminates his employment for any
reason, other than Good Reason, provided that the Executive shall give the
Company thirty (30) days written notice prior to such date of his intention to
terminate this Agreement.
F. On the date the Company terminates the Executive's employment
for any reason, other than a reason otherwise set forth in this Paragraph 5. Any
purported termination of the Executive's employment for Cause which is finally
determined to be without Cause shall be treated for all purposes of this
Agreement as a termination pursuant to this Paragraph 5F.
6. Compensation Upon Termination. If the Executive's services are
terminated pursuant to Paragraph 5, the Executive shall be entitled to the Base
Salary through his final date of active employment, plus any accrued but unused
vacation pay. If the Executive's services are terminated pursuant to Paragraph
5D or 5F, the Executive shall in addition be entitled to receive severance
benefits for a period of 12 months payable in substantially equal installments
in accordance with the Company's payroll policy, in an amount equal to (i) $2
million, if such termination occurs within one year from the Effective Date,
(ii) $1.5 million, if such termination occurs after the first and on or before
the second anniversary of the Effective Date, (iii) $1.0 million, if such
termination occurs after the second and on or before the third anniversary of
the Effective Date, (iv) $0.5 million, if such termination occurs after the
fourth anniversary of the Effective Date, and (v) plus an amount, if any,
(regardless of the date of termination) necessary to reimburse the Executive on
a net after-tax basis for any applicable federal excise tax, provided in each
case the Executive signs an agreement that releases the Company from actions,
suits, claims, proceedings, and demands related to the period of employment
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<PAGE> 6
and/or termination of employment. Executive agrees that if his employment is
terminated for any reason, he shall immediately resign from all officer and
director positions he then holds with the Company and each of its parents,
affiliates and subsidiaries.
7. Offset. In the event severance benefits become payable to the
Executive pursuant to Paragraph 6 above, such benefits, to the extent not
theretofore paid, shall be reduced, on a dollar-for-dollar basis, by (i) any
outstanding amounts owed by Executive to the Company and (ii) the amount of any
compensation for services earned by Executive on account of his employment or
consulting services with another business or on account of his self employment,
from any source, whether paid currently or deferred. In such event, Executive
shall cooperate with the Company and shall provide such information to the
Company as it may reasonably require in order to calculate the amount of the
reduction described above.
8. COBRA. If the Executive's services are terminated pursuant to
Paragraph 5, the Executive shall also be entitled to any benefits mandated under
the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") or required
under the terms of any death, insurance, or retirement plan, program, or
agreement provided by the Company and to which the Executive is a party or in
which the Executive is a participant, including, but not limited to, any
short-term or long-term disability plan or program, if applicable. If the
Executive elects COBRA continuation coverage, the Company shall pay for such
health insurance coverage for the shorter of 12 months or the remaining Term at
the same rate as it pays for health insurance coverage for its active employees
(with the Executive required to pay for any employee-paid portion of such
coverage). After the expiration of the period set forth in the prior sentence
concludes, the Executive shall be responsible for the payment of all further
premiums attributable to COBRA continuation coverage at the same rate as the
Company charges all COBRA beneficiaries. However, no provision of this Agreement
shall be construed to extend the period of time over which such COBRA
continuation coverage is required to be provided to the Executive and/or his
dependents.
9. Arbitration. Any dispute between the parties hereto respecting the
meaning and intent of this Agreement or any of its terms and provisions shall be
submitted for expedited arbitration in Los Angeles, California, in accordance
with the National Rules of the American Arbitration Association for the
Resolution of Employment Disputes then in effect, and the arbitration
determination resulting from any such submission shall be final and binding upon
the parties hereto. Judgment upon any arbitration award may be entered in any
court of competent jurisdiction. The parties further agree that either party may
at any time seek provisional relief, including, but not limited to a temporary
restraining order or a preliminary injunction from
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<PAGE> 7
any state or federal court in California, in connection with any dispute being
submitted for arbitration.
10. Exclusive Employment; Confidentiality; Non-Solicitation.
A. Executive agrees to perform his duties, responsibilities and
obligations hereunder efficiently and to the best of his ability. Executive also
agrees that he will not engage in any other business activities, pursued for
gain, profit or other pecuniary advantage, that are competitive with the
activities of the Company. Executive agrees that all of his activities as an
employee of the Company shall be in conformity with all present and future
policies, rules and regulations and directions of the Company not inconsistent
with this Agreement.
B. Executive acknowledges that his employment by the Company
will bring him into close contact with many trade secrets and other confidential
affairs of the Company and its clients and customers, including, without
limitation, non-public information pertaining to ideas, knowledge, operations,
computer hardware and software, systems, costs, profits, markets, sales,
products, programs, interfaces, networks, protocols, data bases, key personnel,
pricing policies, operational methods, concepts, data, equipment, models,
compensation, suppliers, servicing, broker lists, customer lists, customers,
potential customers, rate sheets, plans, concepts, strategies, or products,
advertising, technical processes and applications and other business affairs and
methods, plans for future developments and other information not readily
available to the public or the Company's competitors or clients (collectively
referred to hereinafter as "Information"). In consideration of the foregoing,
the Executive agrees that he: (1) will keep secret and confidential all
Information and will not use it for his own benefit or disclose it to, or use it
for the benefit of, anyone other than the Company, either during or after his
employment by the Company, except with the prior written consent of the Company;
(2) will take all reasonable action that the Company deems necessary or
appropriate to prevent unauthorized use or disclosure of or to protect the
Company's interest in Information; (3) will deliver promptly to the Company upon
termination of his employment by the Company or at any other time the Company
may so request, all memoranda, notes, documentation, equipment, files,
flowcharts, program listings, data listings, records, reports and other tangible
manifestations of the Information (and all copies thereof), that he may then
possess or have under his control; and (4) will, unless the Company otherwise
agrees in writing, and without additional compensation, promptly disclose and,
upon request, assign to the Company all rights to work product and business
opportunities related to the present or, to the extent presented to the Board of
Directors prior to termination of employment, contemplated business of the
Company.
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<PAGE> 8
C. Executive further agrees that if his employment is terminated
during the three year period beginning on the Effective Date, he will abide by
the limitations set forth in the following sentence (i) for a period of six
months from the date of termination, if his employment is terminated pursuant to
Paragraph 5B, 5D or 5F, and (ii) for a period of one year from the date of
termination, if his employment is terminated by the Company pursuant to
Paragraph 5C or if his employment is terminated by the Executive without Good
Reason (the applicable period is referred to below as the "Nonsolicitation
Period"). During the Nonsolicitation Period, the Executive agrees that he will
not, without the Company's express written consent, himself or through any
organization with which he is associated: (i) hire any person who was employed
by the Company on the Executive's date of termination of employment or at any
time within six months prior thereto or hire any agent, consultant, or
independent contractor of the Company, or of any organization with respect to
which the Company has agreed to a similar prohibition and of which the Employee
has knowledge, or induce or attempt to induce any such person to discontinue
such employment or affiliation with the Company or such organization, as the
case may be, or (ii) induce or attempt to induce any client or customer of the
Company on the date of termination to discontinue any business relationship or
to refrain from entering into a new business relationship with the Company.
D. Executive confirms and acknowledges that (i) he was represented by
counsel of his own choosing during the negotiation of the limitations set forth
in Paragraphs 10 and 11 of this Agreement, (ii) his strict adherence to the
limitations imposed upon him thereunder, or under any agreement referenced
therein, was a material factor in Purchaser's entering into the Purchase
Agreement and agreeing to consummate the transactions contemplated thereby, and
to pay the Executive the cash and equity-based compensation called for in this
Agreement, (iii) the Company's ability to maintain continuing relationships with
its employees without disruption was a material factor in Purchaser's entering
into the Purchase Agreement and agreeing to consummate the transactions
contemplated thereby, (iv) his failure to adhere to the obligations imposed by
Paragraphs 10 and 11 of this Agreement will expose such Purchaser to substantial
and irreparable harm. Accordingly, Executive agrees that the remedy at law for
any breach by him of the covenants and agreements set forth in this Paragraph 10
or in Paragraph 11 below may be inadequate and that in the event of any such
breach, the Company or its respective subsidiaries may, in addition to the other
remedies that may be available to it at law, seek injunctive relief prohibiting
him (together with all those persons associated with him) from breach of such
covenants and agreements.
11. Non-Competition. The Company's obligation to provide the
compensation due upon termination pursuant to the last sentence of Paragraph 6
hereof shall be contingent upon his not,
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<PAGE> 9
directly or indirectly, owning, managing, operating, joining or controlling,
becoming employed by or participating in the ownership, management, operation or
control of, or becoming a consultant to or connected in any other manner with,
any business, firm or corporation which is materially similar to or materially
competes with the Company, provided, however, that the foregoing shall not
preclude the Executive from providing investment banking services not involving
the Company. For these purposes, Executive's ownership of securities of a public
company not in excess of one percent of any class of such securities shall not
be considered to be competition with the Company.
AGREEMENT - MISCELLANEOUS
12. Entire Agreement. This Agreement sets forth the entire and final
agreement and understanding of the Company and the Executive and contains all of
the agreements made between them with respect to the subject matter hereof. This
Agreement supersedes any and all other agreements, either oral or in writing,
between the Company and the Executive with respect to Executive's provision of
services to the Company. No change or modification of this Agreement shall be
valid unless in writing and signed by the Company and the Executive.
13. Enforcement; Severability. Should a decision be entered by a court
of competent jurisdiction that the character, duration or geographical scope of
any provision of this Agreement is unreasonable, or that any provision of this
Agreement is invalid or unenforceable for any reason, in whole or in part, then
the Company and the Executive agree that such provision shall be construed by
the court in such a manner as to impose all those restrictions on the
Executive's conduct that are reasonable in light of the circumstances and as are
necessary to assure to the Company the benefits of this Agreement and to render
the provision valid and enforceable, and this Agreement shall be construed and
enforced to the maximum extent permitted by law, as if such provision had been
originally incorporated in this Agreement as so modified, restricted, or
reformulated or as if such provision had not been originally included in this
Agreement, as the case may be. The parties further agree to seek a lawful
substitute for any provision found to be unlawful; provided, that, if the
parties are unable to agree upon a lawful substitute, the parties desire and
request that the arbitrator or other authority called upon to decide the
enforceability of this Agreement modify those provisions such that, once
modified, this Agreement will be enforceable to the maximum extent permitted by
the law in existence at the time of the requested enforcement.
14. Miscellaneous.
D. Notices. All notices required in connection with this
Agreement shall be sufficiently given only if transmitted in writing and (i)
personally delivered, or sent by first class, registered or certified mail,
return receipt requested, postage
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prepaid, or by recognized overnight courier, (ii) sent by facsimile, provided a
hard copy is mailed on that date to the party for whom such notices are
intended, or (iii) sent by other means at least as fast and reliable as first
class mail. A written notice shall be deemed to have been given to the recipient
party on the earliest of (1) the date it shall be delivered to the address
required by this Agreement; (2) the date delivery shall have been refused at the
address required by this Agreement; (3) with respect to notices sent by mail or
overnight courier, the date as of which the Postal Service or overnight courier,
as the case may be, shall have indicated such notice to be undeliverable at the
address required by this Agreement; or (4) with respect to a facsimile, the date
on which the facsimile is sent and receipt is confirmed. Any and all notices
referred to in this Agreement, or which either party desires to give to the
other shall, in the case of the Executive, be addressed to his residence address
given to the Company by the Executive in writing for this purpose, or failing
receipt of such notice, to the last residence address on the Company's records,
or in the case of the Company, to its principal office with a copy to Capital
Z's principal office.
E. Waiver of Breach. A waiver by the Company of a breach of any
provision of this Agreement by the Executive shall not operate or be construed
as a waiver of any subsequent breach by the Executive. No waiver shall be valid
unless it is in writing and signed by an authorized officer of the Company
(other than the Executive).
F. Assignment. The Executive acknowledges that the services he
is to render are unique and personal. Accordingly, the Executive may not assign
any of his rights or delegate any of his duties or obligations under this
Agreement. The rights and obligations of the Company under this Agreement shall
inure to the benefit of and shall be binding upon the successors and assigns of
the Company.
G. Construction. The heading in this Agreement are inserted for
convenience only and are not to be considered a construction of the provisions
hereof. The Background recitals are incorporated in this Agreement as an
integral part hereof and shall be considered as substantive and not precatory
language.
H. Execution of Agreement. This Agreement may be executed in
several counterparts, each of which shall be considered an original, but which
when taken together, shall constitute one agreement.
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I. Governing Law. This Agreement shall be construed in
accordance with the laws of the State of California.
COMPANY: EXECUTIVE:
o By: /s/ Barbara S. Polsky /s/ Cary H. Thompson
-------------------------- --------------------------
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EXHIBIT A
- - For bonuses after the 1999 calendar year, Executive shall receive a cash
bonus paid annually on a calendar year basis ranging from 0-100% of total
Base Salary, with an expected bonus of $400,000 and a bonus in excess of
100% of Base Salary for extraordinary performance. Bonuses shall be paid
according to a budget approved by the Board of Directors of the Company and
the achievement of other non-financial goals adopted by such Board.
- - For so long as Capital Z and/or its Designated Purchasers under the Purchase
Agreement own at least 25% of the voting securities of the Company,
Executive covenants and agrees not to sell, assign or otherwise transfer, in
any one twelve month period, more than 25% of the aggregate amount of shares
of Company stock which the Executive owned immediately prior to the
Effective Date. The Company, by action of its Board of Directors, agrees to
consider whether to waive all or part of such limitation in the event of
extraordinary hardship, which consent shall not be unreasonably withheld.
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EXHIBIT 10.23(b)
AMENDMENT NO. 1 TO THE
EMPLOYMENT AGREEMENT
BETWEEN CARY H. THOMPSON AND AAMES FINANCIAL CORPORATION
The Employment Agreement (the "Agreement") between Cary H. Thompson (the
"Executive") and Aames Financial Corporation, a Delaware corporation (the
"Company"), to become effective immediately prior to the "Initial Closing Date,"
as such term is defined in the Preferred Stock Purchase Agreement by and among
the Company and Capital Z Financial Services Fund II, L.P., dated the 23rd day
of December, 1998, is hereby amended as follows:
1. Section 3F of the Agreement shall be amended by replacing "2,630,162"
with "2,580,162" in each place that it appears in the Section.
2. Capitalized terms herein shall have the meanings ascribed to them in
the Agreement. Except as amended hereby, the remaining provisions of the
Agreement, as amended to date, shall remain in full force and effect.
IN WITNESS WHEREOF, the Executive and the undersigned duly authorized
officer of the Company have executed and delivered this amendment as of February
10, 1999.
AAMES FINANCIAL CORPORATION
By: /s/ Barbara S. Polsky
------------------------------
Cary H. Thompson
/s/ Cary H. Thompson
----------------------------------
<PAGE> 1
EXHIBIT 10.24
MANAGEMENT INVESTMENT AGREEMENT
(CARY THOMPSON)
MANAGEMENT INVESTMENT AGREEMENT (this "Agreement") dated as of
December 23, 1998, between Aames Financial Corporation, a Delaware corporation
(the "Company"), and Cary Thompson, an individual residing at 1944 Fairburn
Avenue, Los Angeles, California, 09925 (the "Management Investor").
WHEREAS, on the date hereof, the Company and Capital Z Financial
Services Fund II, L.P., a Bermuda limited partnership ("Capital Z"), are
entering into a Preferred Stock Purchase Agreement (the "Purchase Agreement"),
pursuant to which Capital Z has agreed to purchase, together with Capital Z
Affiliates and co-investors as designated by Capital Z, shares of the Company's
Series B Convertible Preferred Stock, par value $0.001 per share ("Series B
Preferred Stock") and Series C Convertible Preferred Stock, par value $0.001 per
share ("Series C Preferred Stock," and, together with the Series B Preferred
Stock, "Senior Preferred Stock"), in the amounts and subject to the conditions
set forth in the Purchase Agreement; and
WHEREAS, the Management Investor is a senior management employee
of the Company and, as a condition precedent to the closing of the transactions
contemplated by the Purchase Agreement, certain senior management employees of
the Company, including the Management Investor, are required to purchase Series
C Preferred Stock from the Company; and
WHEREAS, the Management Investor desires to purchase from the
Company, and the Company desires to sell to the Management Investor, Series C
Preferred Stock under the terms and conditions set forth in this Agreement.
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement, and other good and valuable
consideration, the sufficiency of which is hereby acknowledged, the parties
hereto agree as follows:
SECTION 1. Defined Terms. Capitalized terms used and not
otherwise defined in this Agreement shall have the respective meanings assigned
to them in the Purchase Agreement.
SECTION 2. Sale and Delivery.
(a) Upon the terms and subject to the conditions set forth
herein, and conditioned upon the consummation of the Initial Closing, in
reliance upon the representations and warranties of the Management Investor
hereinafter set forth, and for the purchase price described in Section 2(b), at
the Initial
<PAGE> 2
Closing, the Company shall issue, sell and deliver to the Management Investor,
and the Management Investor shall purchase from the Company, two hundred and
fifty (250) shares of Series C Preferred Stock (such shares of Series C
Preferred Stock are referred to collectively herein as the "Shares"). The number
"250" in the preceding sentence shall be two hundred and fifty thousand
(250,000) if the Recapitalization has been consummated prior to the Initial
Closing Date).
(b) The purchase price per share of Series C Preferred Stock
shall be equal to the Purchase Price (as such term is defined in the Purchase
Agreement) (as used herein, the "Purchase Price") and shall be paid in cash at
the Initial Closing.
(c) The purchase and sale of Shares shall occur on the Initial
Closing Date and, at the Initial Closing:
(i) the Company shall deliver to the Management Investor
certificates representing the Shares, duly endorsed for transfer,
transferring to the Management Investor good and marketable title to
such Shares, free and clear of all liens and encumbrances; and
(ii) the Management Investor shall deliver to the Company the
Purchase Price, in immediately available funds to the account specified
by the Company at least two Business Days prior to the Initial Closing
Date;
SECTION 3. Representations and Warranties of the Management
Investor. The Management Investor hereby represents and warrants to the Company
as follows:
(a) The Shares (and the Underlying Common Shares) to be purchased
by such Management Investor will be acquired for investment for the Management
Investor's own account and not with a view to the resale or distribution of any
part thereof, except in compliance with the provisions of the Securities Act of
1933, as amended (the "Securities Act"), or an exemption therefrom, and in
compliance with the terms of this Agreement. The Management Investor is a senior
management employee of the Company and is fully familiar with the business of
the Company and with the risks associated with the purchase of the Shares
pursuant to this Agreement. The Management Investor is an accredited investor as
defined under Rule 501(a) under the Securities Act.
(b) The Management Investor understands that the Shares and the
Underlying Common Shares are characterized as "restricted securities" under the
federal securities laws inasmuch as they are being acquired from the Company in
a transaction not involving a public offering and that under such laws and
applicable regulations such Shares (and the Underlying Common Shares) may be
resold without registration under the Securities Act only in certain limited
circumstances.
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<PAGE> 3
(c) The Management Investor further agrees that each certificate
representing the Shares (and the Underlying Common Shares) shall be stamped or
otherwise imprinted with a legend substantially in the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS SUCH SECURITIES HAVE
BEEN REGISTERED UNDER THAT ACT OR AN EXEMPTION FROM REGISTRATION
IS AVAILABLE.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER AND TO THE OTHER TERMS SET FORTH IN THAT
CERTAIN MANAGEMENT INVESTMENT AGREEMENT, DATED AS OF DECEMBER 23,
1998, A COPY OF WHICH AGREEMENT HAS BEEN FILED WITH THE SECRETARY
OF THE COMPANY AND ARE AVAILABLE UPON REQUEST."
SECTION 4. Restrictions on Transfer of Shares. For a period
commencing on the Initial Closing Date and ending on the fifth anniversary of
the Initial Closing Date, the Management Investor may not sell, transfer,
assign, pledge, hypothecate or otherwise dispose of (each, a "transfer") any of
the Shares (or the Underlying Common Shares), without the prior express written
consent of the Company, provided, however, that the foregoing restriction on
transfer shall not apply (i) if Capital Z Beneficially Owns less than (A) fifty
percent (50%) of the number of shares of Senior Preferred Stock purchased by
Capital Z on the Initial Closing Date (the "Original Preferred Shares") or (B)
if any Original Preferred Shares shall thereafter have been converted into
Common Stock, fifty percent (50%) of the sum of (x) the aggregate number of
shares Common Stock owned by Capital Z as a result of such conversion(s) plus
(y) the aggregate number of shares Common Stock into which any remaining
Original Preferred Shares owned by Capital Z may be converted (determined
without regard to any limitations on conversion of such shares prior to the
Recapitalization), in each case subject to adjustment for splits, combinations,
reclassifications and similar events; (ii) if the Management Employee dies,
retires, is terminated by the Company, or terminates his employment with the
Company, subject to the provisions of Section 5 hereof; or (iii) a Change of
Control (as defined in the New Option Plan) has occurred, but only if a Capital
Z Realization Event (as defined in the New Option Plan) has also occurred on or
prior to such Change of Control, and provided, further, that notwithstanding the
foregoing restriction on transfer, the Management Investor may transfer, during
the twelve-month period ending on the first anniversary of the Initial Closing
Date and during each succeeding twelve-month period, up to 25% of the total
number of Underlying Common Shares (whether structured as a transfer of Shares,
Underlying Shares or a combination thereof) acquired hereunder (subject to
adjustment for splits, combinations, reclassifications and similar events), it
being further agreed that the Management Investor may request the Company's
Board of
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<PAGE> 4
Directors to allow the Management Investor to transfer Shares (or Underlying
Common Shares) in excess of the 25% limitation described in this proviso if
extraordinary liquidity needs have arisen with respect to the Management
Investor, and, in such event, the Company (through its Board of Directors) will
consider such request in good faith and will not unreasonably withhold its
consent to a waiver of such limitation.
SECTION 5. Company's Option to Purchase Shares.
(a) In the event of the death or retirement from, or termination
of employment for any reason with, the Company of the Management Investor (a
"Termination Date"), the Company shall have the option, but not the obligation,
to purchase all, or any portion, of the Shares (and any Underlying Common Shares
that may have been acquired upon conversion of the Shares) then owned by the
Management Investor at the Fair Market Value (as hereinafter defined) per Share
and/or Underlying Common Share on the Business Day immediately prior to the date
on which the Company exercises its option to purchase in accordance with the
this Section 5. The Company may exercise the foregoing option at any time within
30 days after the Termination Date, by written notice to the Management
Investor, or his legal representative in the case of death, stating a date and
time for consummation of the purchase no less than 10 nor more than 30 days
after giving of such notice. "Fair Market Value" per Share or per Underlying
Common Share, as of any particular date, shall mean (a) in the case of a Share,
the product obtained by multiplying (I) the Formula Number (as defined in the
Certificate of Designations for the Senior Preferred Stock) in effect as of such
date by (II) the Current Market Price (as defined in the Certificate of
Designations for the Senior Preferred Stock) for the period of 15 consecutive
Trading Days (as defined in the Certificate of Designations for the Senior
Preferred Stock) prior to such date, or (b) in the case of an Underlying Share,
the Current Market Price for the period of 15 consecutive Trading Days prior to
such date.
(b) At the closing of the purchase of Shares (and any Underlying
Common Shares) by the Company pursuant to Section 4(a), the Management Investor
will deliver the Shares (and any Underlying Common Shares) to the Company
against payment by the Company to the Management Investor of the purchase price
for such Shares (and any Underlying Common Shares). Such purchase price shall be
paid in cash.
SECTION 5. Termination. All rights and obligations of the parties
hereunder shall terminate upon the date upon which the Purchase Agreement is
terminated in accordance with its terms, provided, that any such termination
that results from the breach by a party of his or its obligations hereunder
shall not relieve such party from any liability for breach of this Agreement.
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<PAGE> 5
SECTION 6. Further Assurances. The Management Investor shall,
upon request of the Company, execute and deliver any additional documents and
take such further actions as may reasonably be deemed by the Company to be
necessary or desirable to carry out the provisions hereof.
SECTION 7. Notices. All notices, requests, claims, demands and
other communications under this Agreement shall be sufficiently given if sent by
registered or certified mail, postage prepaid, or overnight air courier service,
or telecopy or facsimile transmission (with hard copy to follow) to the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice): (i) if to the Company, to the address set forth in
Section 7.3 of the Purchase Agreement; and (ii) if to the Management Investor,
to the address set forth for the Management Investor in the preamble to this
Agreement or by telecopy to (323) 210-5253.
SECTION 8. Headings. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 9. Counterparts; Effectiveness. This Agreement may be
executed in two or more counterparts, all of which shall be considered one and
the same agreement and shall become effective when one or more counterparts have
been signed by each of the Company and the Management Investor and delivered to
the Company and the Management Investor.
SECTION 10. Entire Agreement. This Agreement (including the
documents and instruments referred to herein) constitutes the entire agreement,
and supersedes all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof.
SECTION 11. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Delaware, without
regard to any applicable conflicts of law principles of such State.
SECTION 12. Successors and Assigns. Neither this Agreement nor
any of the rights, interests or obligations under this Agreement shall be
assigned, in whole or in part, by operation of law or otherwise, by any of the
parties without the prior written consent of the other parties. Any assignment
in violation of the foregoing shall be void.
SECTION 13. Enforcement. Each party agrees that irreparable
damage would occur and that the other party hereto would not have any adequate
remedy at law in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that each party shall be entitled to an injunction or
injunctions to prevent breaches by the other party
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<PAGE> 6
hereto of this Agreement and to enforce specifically the terms and provisions of
this Agreement in any court of the United States located in the State of
Delaware or in Delaware State court, this being in addition to any other remedy
to which they are entitled at law or in equity. In addition, each of the parties
hereto (i) consents to submit such party to the personal jurisdiction of any
Federal court located in the State of Delaware or any Delaware State court in
the event any dispute arises out of this Agreement or any of the transactions
contemplated hereby, (ii) agrees that such party will not attempt to deny or
defeat such personal jurisdiction by motion or other request for leave from any
such court and (iii) agrees that such party will not bring any action relating
to this Agreement or any of the transactions contemplated hereby in any court
other than a Federal court sitting in the State of Delaware of in Delaware State
court.
SECTION 14. Severability. If any term or provision hereof, or the
application thereof to any circumstance, shall, to any extent, be held by a
court of competent jurisdiction to be invalid or unenforceable with respect to
such jurisdiction, and only to such extent, and the remainder of the terms and
provisions hereof, and the application thereof to any other circumstance, shall
remain in full force and effect, shall not in any way be affected, impaired or
invalidated, and shall be enforced to the fullest extent permitted by law, and
the parties hereto shall reasonably negotiate in good faith a substitute term or
provision that comes as close as possible to the invalidated or unenforceable
term or provision, and that puts each party in a position as nearly comparable
as possible to the position each such party would have been in but for the
finding of invalidity or unenforceability, while remaining valid and
enforceable.
SECTION 15. Amendment; Modification; Waiver. No amendment,
modification or waiver in respect of this Agreement shall be effective against
any party unless it shall be in writing and signed by such party.
SECTION 16. Expenses. The Company and the Management Investor
shall each bear their own legal fees and other costs and expenses with respect
to the negotiation, execution and delivery of this Agreement and consummation of
the transactions contemplated hereby.
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<PAGE> 7
IN WITNESS WHEREOF, the Company and the Management Investor have
caused this Agreement to be duly executed and delivered as of the date first
written above.
AAMES FINANCIAL CORPORATION
By: /s/ Barbara S. Polsky
-------------------------------
Name: Barbara S. Polsky
Title: Executive Vice President
MANAGEMENT INVESTOR:
/s/ Cary H. Thompson
--------------------------------------
Cary Thompson
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<PAGE> 1
EXHIBIT 10.25
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "AGREEMENT") is between Aames Financial
Corporation, a Delaware corporation (the "COMPANY"), and Neil B. Kornswiet (the
"EXECUTIVE"). This Agreement shall become effective (the "EFFECTIVE DATE") on
the "Initial Closing Date," as such term is defined in the Purchase Agreement
(defined below).
BACKGROUND
A. As of the Effective Date, the Company is or will be engaged
primarily in originating, selling and servicing home mortgage loans.
B. The Executive is currently a stockholder and officer of the
Company, and as part of the closing (the "Closing") under the Preferred Stock
Purchase Agreement by and among the Company and Capital Z Financial Services
Fund II, L.P. ("Purchaser"), dated the 23rd day of December, 1998 (the "PURCHASE
AGREEMENT"), the Company has agreed that, after the Effective Date, the Company
will continue to employ the Executive to provide services for the benefit of the
Company on the terms of this Agreement. If the Closing does not occur, this
Agreement shall have no force or effect and the Employment Agreement dated
August 26, 1998 shall remain in force.
C. In exchange for the benefits provided for under this
Agreement, except as otherwise specifically provided in this Agreement or in
Exhibit A hereto, as of the Effective Date, the Executive hereby waives any and
all rights and benefits accruing under all other employment, change in control,
and any and all other agreements between Executive and the Company and its
subsidiaries that provide for the payment of compensation or benefits to
Executive, other than (i) benefits provided under the Company's 401(k) plan,
(ii) benefits continued pursuant to Section 3C hereof, and (iii) stock options
granted under the Aames Financial Corporation 1997 Non-Qualified Stock Option
Plan, as Amended and Restated Effective May 22, 1998, the Aames Financial
Corporation 1997 Stock Option Plan, the Aames Financial Corporation 1996 Stock
Incentive Plan, as amended, the Aames Financial Corporation 1995 Stock Incentive
Plan, the Aames Financial Corporation 1991 Stock Incentive Plan and under those
certain assumption option agreements entered into by the Company in connection
with its acquisition of One Stop Mortgage, Inc., pursuant to an Agreement dated
August 12, 1996, which, to the extent practicable, will be modified to provide
for transfer to the Executive in the event they are forfeited by the original
grantees after August 12, 1996, provided that the Executive shall in no event
acquire greater rights under such assumption options than those held by the
optionees to whom they were originally issued, all of which options shall be
preserved.
<PAGE> 2
In consideration of the foregoing and the mutual agreements set forth below, the
parties agree as follows:
AGREEMENT - PRINCIPAL TERMS
1. Employment and Duties. The Company shall employ the Executive as its
President responsible for day to day operation of the Company and its
subsidiaries, and the Executive accepts such employment on the terms and
conditions of the Agreement. The Executive shall, while this Agreement remains
in effect, have the duties, responsibilities, powers, and authority customarily
associated with such position. The Executive shall report to, and follow the
direction of, the Board of Directors of the Company (the "BOARD"). During each
year of the Term (as hereinafter defined), the Company shall nominate the
Executive for election as a member of the Board. In addition, the Executive also
shall perform such other and unrelated services and duties as the Board may
assign to him. The Executive shall diligently, competently, and faithfully
perform all duties, and shall devote his entire business time, energy,
attention, and skill to the performance of duties for the Company and its
affiliates and will use his best efforts to promote the interests of the Company
and its affiliates.
2. Term of Employment. Unless sooner terminated as provided in this
Agreement, the initial term under this Agreement shall be five (5) years,
starting on the Effective Date (the "INITIAL TERM"). The term of employment
shall be renewed automatically for successive periods of one (1) year each (a
"RENEWAL TERM") after the expiration of the Initial Term and any subsequent
Renewal Term, unless the Board provides the Executive, or the Executive provides
the Board, with written notice to the contrary at least one hundred twenty (120)
days prior to the end of the Initial Term or any Renewal Term. The Initial Term
and the Renewal Terms are referred to collectively as "TERMS."
3. Compensation.
A. Salary. The Company shall pay the Executive an annual salary
of $600,000 (the "BASE SALARY"), payable in substantially equal installments in
accordance with the Company's payroll policy. The amount of Base Salary payable
to Executive shall be reviewed at least annually; provided, however, that
Executive's Base Salary shall not be reduced below $600,000 per annum during the
term of this Agreement.
B. Performance Bonus; Other Limitations. The Executive shall be
entitled to annual cash bonuses, and other extraordinary compensation and
benefits on the basis outlined in Exhibit A. The covenants set forth in Exhibit
A shall be binding upon the parties to the same extent as if set forth herein.
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<PAGE> 3
C. Automobile. The Company's current policy with regard to the
provision of an automobile to the Executive shall be maintained during the Term
until such time as the Compensation Committee of the Board determines otherwise
and provides other benefits not materially less favorable to Executive.
D. Vacation. Executive shall be entitled to 5 weeks of paid
vacation each year of employment with the Company for the term of this
Agreement. In each case, such entitlement shall accrue pro rata over the
contract year and shall be taken at such time or times as shall not unreasonably
interfere with the operations of the Company.
E. Insurance. During the Term, the Company shall maintain, at no
cost to Executive, directors and officers liability insurance that covers the
Executive in an amount of not less than $45,000,000.
F. Stock Options. The Company shall grant to the Executive on
the Effective Date an option to purchase 3,214,642 million shares of the
Company's common stock pursuant to and subject to the provisions of the
Company's 1999 Stock Option Plan. Such option shall be subject to the terms of
an option agreement substantially in the form annexed hereto as Exhibit B.
G. Other Benefits. While this Agreement remains in effect, the
Company shall continue to provide the Executive with (i) not less than
$2,000,000 of standard term life insurance; (ii) medical and dental benefits for
the Executive and his dependents substantially comparable to that provided
immediately prior to the execution of this Agreement; (iii) a long-term
disability policy providing for payments in an amount equal to 60% of the
Executive's Base Salary, provided such a policy may be obtained at reasonable
cost; and (iv) the Executive shall participate in such other savings, pension
and retirement plans and other benefit plans or programs maintained by the
Company for the benefit of its executives.
4. Expenses. The Company shall reimburse the Executive for all
reasonable business expenses, that are incurred in accordance with the Company's
policies as in effect from time to time, provided the Executive submits
appropriate receipts or other documentation acceptable to the Company and as
required by the Internal Revenue Service to qualify as ordinary and necessary
business expenses under the Internal Revenue Code of 1986, as amended.
5. Termination. Notwithstanding anything in Paragraph 2 of this
Agreement to the contrary, the term of this Agreement and Executive's services
under this Agreement shall terminate upon the first to occur of the following
events:
A. At the end of the applicable Term of this Agreement,
including any Renewal Terms.
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<PAGE> 4
B. Upon the Executive's date of death or the date the Executive
is given written notice that the Company has properly determined that he is
disabled. For purposes of this Agreement, the Executive shall be properly deemed
to be disabled if the Executive, as a result of illness or incapacity, shall be
unable to perform substantially his required duties for a period of 120
consecutive days or for any aggregate period of 183 days in any twelve (12)
month period. The Company shall notify the Executive that his employment has
been terminated by written notice. The termination shall be effective on the
tenth (10th) business day after the Executive receives the notice, unless the
Executive returns to full-time performance of his duties before such tenth
(10th) business day.
C. On the date the Company provides the Executive with written
notice that he is being terminated for "cause." For purposes of this Agreement,
and as reasonably determined by the Company, the Executive shall be deemed
terminated for cause if the Company terminates the Executive after finding that
the Executive: (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 Executive 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 Executive'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 5C shall be deemed to refer to the Company or its affiliates); (2)
shall have committed one or more acts of gross negligence or willful misconduct,
either within or outside of the scope of his employment that, in the good faith
opinion of the Board, 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 that the Executive shall have materially and
knowingly or intentionally breached any provision this Agreement; provided,
however, that no termination of Executive's employment for Cause shall be deemed
to have occurred unless Executive is given notice of the reason therefore
including the allegations which may constitute reason for such termination and
after (a) Executive is provided an opportunity to be heard by the Board or the
Executive Committee thereof, and (b)
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<PAGE> 5
such decision has been upheld by the Board or Executive Committee.
D. On the date the Executive terminates his employment for "Good
Reason." For purposes of this Agreement, "GOOD REASON" shall mean termination by
the Executive within ninety (90) days of learning of the acts which are the
basis for alleging Good Reason, because of the occurrence of any of the
following acts, without the Executive's consent: (1) he has been demoted to a
position of materially less stature or importance within the Company than the
position described in Paragraph 1, (2) he has been assigned to duties that are
of materially less importance than, or materially inconsistent with, those
required to be performed pursuant to Paragraph 1 of this Agreement, (3) the
Company has failed to pay or provide material compensation or benefits that are
required to be provided by this Agreement, or (4) the Company's principal
executive offices have been relocated to any county other than Los Angeles
County, CA or Orange County, CA., provided that no such termination shall be
treated as for Good Reason unless the Executive shall have given the Company
thirty (30) days advance written notice of his intention to terminate his
employment for Good Reason, and the Company shall have failed to cure such acts
within such thirty (30) day period.
E. On the date the Executive terminates his employment for any
reason, other than Good Reason, provided that the Executive shall give the
Company thirty (30) days written notice prior to such date of his intention to
terminate this Agreement.
F. On the date the Company terminates the Executive's employment
for any reason, other than a reason otherwise set forth in this Paragraph 5. Any
purported termination of the Executive's employment for Cause which is finally
determined to be without Cause shall be treated for all purposes of this
Agreement as a termination pursuant to this Paragraph 5F.
6. Compensation Upon Termination. If the Executive's services are
terminated pursuant to Paragraph 5, the Executive shall be entitled to the Base
Salary through his final date of active employment, plus any accrued but unused
vacation pay. If the Executive's services are terminated pursuant to Paragraph
5D or 5F, the Executive shall in addition be entitled to receive severance
benefits for a period of 12 months payable in substantially equal installments
in accordance with the Company's payroll policy, in an amount equal to (i) $2
million, if such termination occurs within one year from the Effective Date,
(ii) $1.5 million, if such termination occurs after the first and on or before
the second anniversary of the Effective Date, (iii) $1.0 million, if such
termination occurs after the second and on or before the third anniversary of
the Effective Date, (iv) $0.5 million, if such termination occurs after the
fourth anniversary of the Effective Date, and (v), plus an amount, if any,
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<PAGE> 6
(regardless of the date of termination) necessary to reimburse the Executive on
a net after-tax basis for any applicable federal excise tax, provided in each
case the Executive signs an agreement that releases the Company from actions,
suits, claims, proceedings, and demands related to the period of employment
and/or termination of employment. Executive agrees that if his employment is
terminated for any reason, he shall immediately resign from all officer and
director positions he then holds with the Company and each of its parents,
affiliates and subsidiaries.
7. Offset. In the event that severance benefits become payable to the
Executive pursuant to Paragraph 6 above, such benefits, to the extent not
theretofore paid, shall be reduced, on a dollar-for-dollar basis, by (i) any
outstanding amounts owed by Executive to the Company and (ii) the amount of any
compensation for services earned by Executive on account of his employment or
consulting services with another business or on account of his self employment,
from any source, whether paid currently or deferred. In such event, Executive
shall cooperate with the Company and shall provide such information to the
Company as it may reasonably require in order to calculate the amount of the
reduction described above.
8. COBRA. If the Executive's services are terminated pursuant to
Paragraph 5, the Executive shall also be entitled to any benefits mandated under
the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") or required
under the terms of any death, insurance, or retirement plan, program, or
agreement provided by the Company and to which the Executive is a party or in
which the Executive is a participant, including, but not limited to, any
short-term or long-term disability plan or program, if applicable. If the
Executive elects COBRA continuation coverage, the Company shall pay for such
health insurance coverage for the shorter of 12 months or the remaining Term at
the same rate as it pays for health insurance coverage for its active employees
(with the Executive required to pay for any employee-paid portion of such
coverage). After the expiration of the period set forth in the prior sentence
concludes, the Executive shall be responsible for the payment of all further
premiums attributable to COBRA continuation coverage at the same rate as the
Company charges all COBRA beneficiaries. However, no provision of this Agreement
shall be construed to extend the period of time over which such COBRA
continuation coverage is required to be provided to the Executive and/or his
dependents.
9. Arbitration. Any dispute between the parties hereto respecting the
meaning and intent of this Agreement or any of its terms and provisions shall be
submitted for expedited arbitration in Los Angeles, California, in accordance
with the National Rules of the American Arbitration Association for the
Resolution of Employment Disputes then in effect, and the arbitration
determination resulting from any such submission shall be final
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<PAGE> 7
and binding upon the parties hereto. Judgment upon any arbitration award may be
entered in any court of competent jurisdiction. The parties further agree that
either party may at any time seek provisional relief, including, but not limited
to a temporary restraining order or a preliminary injunction, from any state or
federal court in California, in connection with any dispute being submitted for
arbitration.
10. Exclusive Employment; Confidentiality; Non-Solicitation.
A. Executive agrees to perform his duties, responsibilities and
obligations hereunder efficiently and to the best of his ability. Executive also
agrees that he will not engage in any other business activities, pursued for
gain, profit or other pecuniary advantage, that are competitive with the
activities of the Company. Executive agrees that all of his activities as an
employee of the Company shall be in conformity with all present and future
policies, rules and regulations and directions of the Company not inconsistent
with this Agreement.
B. Executive acknowledges that his employment by the Company
will bring him into close contact with many trade secrets and other confidential
affairs of the Company and its clients and customers, including, without
limitation, non-public information pertaining to ideas, knowledge, operations,
computer hardware and software, systems, costs, profits, markets, sales,
products, programs, interfaces, networks, protocols, data bases, key personnel,
pricing policies, operational methods, concepts, data, equipment, models,
compensation, suppliers, servicing, broker lists, customer lists, customers,
potential customers, rate sheets, plans, concepts, strategies, or products,
advertising, technical processes and applications and other business affairs and
methods, plans for future developments and other information not readily
available to the public or the Company's competitors or clients (collectively
referred to hereinafter as "Information"). In consideration of the foregoing,
the Executive agrees that he: (1) will keep secret and confidential all
Information and will not use it for his own benefit or disclose it to, or use it
for the benefit of, anyone other than the Company, either during or after his
employment by the Company, except with the prior written consent of the Company;
(2) will take all reasonable action that the Company deems necessary or
appropriate to prevent unauthorized use or disclosure of or to protect the
Company's interest in Information; (3) will deliver promptly to the Company upon
termination of his employment by the Company or at any other time the Company
may so request, all memoranda, notes, documentation, equipment, files,
flowcharts, program listings, data listings, records, reports and other tangible
manifestations of the Information (and all copies thereof), that he may then
possess or have under his control; and (4) will, unless the Company otherwise
agrees in writing, and without additional compensation, promptly disclose and,
upon request, assign to the Company all rights to work product and
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<PAGE> 8
business opportunities related to the present or, to the extent presented to the
Board of Directors prior to termination of employment, contemplated business of
the Company.
C. Executive further agrees that if his employment is terminated
during the three year period beginning on the Effective Date, he will abide by
the limitations set forth in the following sentence (i) for a period of six
months from the date of termination, if his employment is terminated pursuant to
Paragraph 5B, 5D or 5F, and (ii) for a period of one year from the date of
termination, if his employment is terminated by the Company pursuant to
Paragraph 5C or if his employment is terminated by the Executive without Good
Reason (the applicable period is referred to below as the "Nonsolicitation
Period"). During the Nonsolicitation Period, the Executive agrees that he will
not, without the Company's express written consent, himself or through any
organization with which he is associated: (i) hire any person who was employed
by the Company on the Executive's date of termination of employment or at any
time within six months prior thereto, or hire any agent, consultant, or
independent contractor of the Company, or of any organization with respect to
which the Company has agreed to a similar prohibition and of which the Employee
has knowledge, or induce or attempt to induce any such person to discontinue
such employment or affiliation with the Company or such organization, as the
case may be, or (ii) induce or attempt to induce any client or customer of the
Company on the date of termination to discontinue any business relationship or
to refrain from entering into a new business relationship with the Company.
D. Executive confirms and acknowledges that (i) he was
represented by counsel of his own choosing during the negotiation of the
limitations set forth in Paragraphs 10 and 11 of this Agreement, (ii) his strict
adherence to the limitations imposed upon him thereunder, or under any agreement
referenced therein, was a material factor in Purchaser's entering into the
Purchase Agreement and agreeing to consummate the transactions contemplated
thereby, and to pay the Executive the cash and equity-based compensation called
for in this Agreement, (iii) the Company's ability to maintain continuing
relationships with its employees without disruption was a material factor in
Purchaser's entering into the Purchase Agreement and agreeing to consummate the
transactions contemplated thereby, (iv) his failure to adhere to the obligations
imposed by Paragraphs 10 and 11 of this Agreement will expose such Purchaser to
substantial and irreparable harm. Accordingly, Executive agrees that the remedy
at law for any breach by him of the covenants and agreements set forth in this
Paragraph 10 or in Paragraph 11 below may be inadequate and that in the event of
any such breach, the Company or its respective subsidiaries may, in addition to
the other remedies that may be available to it at law, seek injunctive relief
prohibiting him (together with all those persons associated with him) from
breach of such covenants and agreements.
- 8 -
<PAGE> 9
11. Non-Competition. Executive reconfirms and acknowledges his duties
and obligations under the Non-Compete Agreement dated August 28th, 1996. The
Company agrees to release him from such obligations on the earlier to occur of
(x) the expiration of any Nonsolicitation Period referred to in Section 10(c)
hereof, and (y) the third anniversary of the Effective Date.
AGREEMENT - MISCELLANEOUS
12. Entire Agreement. This Agreement sets forth the entire and final
agreement and understanding of the Company and the Executive and contains all of
the agreements made between them with respect to the subject matter hereof. This
Agreement supersedes any and all other agreements, either oral or in writing,
between the Company and the Executive with respect to Executive's provision of
services to the Company. No change or modification of this Agreement shall be
valid unless in writing and signed by the Company and the Executive.
13. Enforcement; Severability. Should a decision be entered by a court
of competent jurisdiction that the character, duration or geographical scope of
any provision of this Agreement is unreasonable, or that any provision of this
Agreement is invalid or unenforceable for any reason, in whole or in part, then
the Company and the Executive agree that such provision shall be construed by
the court in such a manner as to impose all those restrictions on the
Executive's conduct set forth in this Agreement or in the Non-Compete Agreement
dated August 28, 1996 that are reasonable in light of the circumstances and as
are necessary to assure to the Company the benefits of this Agreement and to
render the provision valid and enforceable, and this Agreement shall be
construed and enforced to the maximum extent permitted by law, as if such
provision had been originally incorporated in this Agreement as so modified,
restricted, or reformulated or as if such provision had not been originally
included in this Agreement, as the case may be. The parties further agree to
seek a lawful substitute for any provision found to be unlawful; provided, that,
if the parties are unable to agree upon a lawful substitute, the parties desire
and request that the arbitrator or other authority called upon to decide the
enforceability of this Agreement modify those provisions such that, once
modified, this Agreement will be enforceable to the maximum extent permitted by
the law in existence at the time of the requested enforcement.
14. Miscellaneous.
A. Notices. All notices required in connection with this
Agreement shall be sufficiently given only if transmitted in writing and (i)
personally delivered, or sent by first class, registered or certified mail,
return receipt requested, postage prepaid, or by recognized overnight courier,
(ii) sent by facsimile, provided a hard copy is mailed on that date to the party
for whom such notices are intended, or (iii) sent by other
- 9 -
<PAGE> 10
means at least as fast and reliable as first class mail. A written notice shall
be deemed to have been given to the recipient party on the earliest of (1) the
date it shall be delivered to the address required by this Agreement; (2) the
date delivery shall have been refused at the address required by this Agreement;
(3) with respect to notices sent by mail or overnight courier, the date as of
which the Postal Service or overnight courier, as the case may be, shall have
indicated such notice to be undeliverable at the address required by this
Agreement; or (4) with respect to a facsimile, the date on which the facsimile
is sent and receipt is confirmed. Any and all notices referred to in this
Agreement, or which either party desires to give to the other shall, in the case
of the Executive, be addressed to the residence address given to the Company by
the Executive in writing for this purpose, or failing receipt of such notice, to
the last residence address on the Company's records, or in the case of the
Company, to its principal office with a copy to Capital Z's principal office.
B. Waiver of Breach. A waiver by the Company of a breach of any
provision of this Agreement by the Executive shall not operate or be construed
as a waiver of any subsequent breach by the Executive. No waiver shall be valid
unless it is in writing and signed by an authorized officer of the Company
(other than the Executive).
C. Assignment. The Executive acknowledges that the services he
is to render are unique and personal. Accordingly, the Executive may not assign
any of his rights or delegate any of his duties or obligations under this
Agreement. The rights and obligations of the Company under this Agreement shall
inure to the benefit of and shall be binding upon the successors and assigns of
the Company.
D. Construction. The heading in this Agreement are inserted for
convenience only and are not to be considered a construction of the provisions
hereof. The Background recitals are incorporated in this Agreement as an
integral part hereof and shall be considered as substantive and not precatory
language.
E. Execution of Agreement. This Agreement may be executed in
several counterparts, each of which shall be considered an original, but which
when taken together, shall constitute one agreement.
F. Governing Law. This agreement shall be construed in
accordance with the laws of the State of California.
COMPANY: EXECUTIVE:
By: /s/ David Sklar /s/ Neil B. Kornswiet
--------------------------- ---------------------------
- 10 -
<PAGE> 11
EXHIBIT A
- - Within two weeks of the Effective Date, Company shall pay Executive
$1,460,000, such amount being in full and complete satisfaction of all
amounts owed Executive in respect of his June 1998 bonus accrued by the
Company.
- - Subject to execution by the Executive of the promissory note attached hereto
as Exhibit C, the Company shall pay Executive a guaranteed cash bonus for
the 1999 calendar year (the "1999 Bonus"), such bonus to be paid within two
weeks following the Effective Date, in an amount equal to $540,000. The 1999
Bonus shall be paid in the form of a recourse loan, which shall be forgiven
and treated as paid in full so long as Executive remains employed by the
Company through the first anniversary of the Effective Date, or through the
date of any earlier termination of Executive's employment under Paragraphs
5B, 5D or 5F of the Employment Agreement. Executive to receive a cash
supplemental bonus for his first year of employment of $300,000, such bonus
to be paid within 2-1/2 months after the first anniversary of the Effective
Date, subject to the Board's determination that the Company has completed a
satisfactory program of cost reductions by such anniversary date (the "1999
Supplemental Bonus").
- - For bonuses after the 1999 calendar year, Executive shall receive a cash
bonus paid annually on a calendar year basis ranging from 0-100% of total
Base Salary, with an expected bonus of $400,000, and a bonus in excess of
100% of Base Salary for extraordinary performance. Bonuses shall be paid
according to a budget approved by the Board of Directors of the Company and
the achievement of other non-financial goals adopted by such Board.
- - Subject to execution by the Executive of the promissory note attached hereto
as Exhibit I-2 to the Management Investment Agreement, the Company shall
loan Executive an amount equal to the purchase price of 100% of his pro-rata
ownership position in the shareholders rights offering (the "Rights Offering
Advance"). The Rights Offering Advance shall be in the form of a loan, which
shall be nonrecourse provided Executive remains employed by the Company
through the first anniversary of the Effective Date, or through the date of
any earlier termination of Executive's employment under Paragraph 5B, 5D or
5F of the Employment Agreement.
- - For so long as Capital Z and/or its Designated Purchasers under the Purchase
Agreement own at least 25% of the outstanding voting securities of the
Company, Executive covenants and agrees not to sell, assign or otherwise
transfer, during his employment with the Company, in any one twelve month
period, more than 25% of the aggregate amount of shares of Company stock
which the Executive owned immediately
A-1
<PAGE> 12
prior to the Effective Date. The Company, by action of its Board of Directors,
agrees to consider whether to waive all or part of such limitation in the event
of extraordinary hardship, which consent shall not be unreasonably withheld.
A-2
<PAGE> 13
EXHIBIT B
MODEL OPTION AGREEMENT
NON-QUALIFIED
STOCK OPTION AGREEMENT
UNDER THE
1999 AAMES FINANCIAL CORPORATION
STOCK OPTION PLAN
THIS AGREEMENT, made this day of , , by and between
Aames Financial Corporation, a Delaware corporation (the "Company"), and
(the "Optionee")
W I T N E S S E T H:
WHEREAS, the Optionee is now employed by the Company in a key
capacity, and the Company desires to have him remain in such employment and to
afford him the opportunity to acquire, or enlarge, his ownership of the
Company's Common Stock, par value $.01 per share ("Stock"), so that he may have
a direct proprietary interest in the Company's success;
WHEREAS, all capitalized terms not otherwise defined herein shall
have the same meaning as set forth in the Company's Stock Option Plan;
NOW, THEREFORE, in consideration of the covenants and agreements
herein contained, the parties hereto hereby agree as follows:
B-1
<PAGE> 14
1. GRANT OF OPTION. Subject to the terms and conditions set forth
herein and in the Company's Stock Option Plan (the "Plan"), the Company hereby
grants to the Optionee, during the period commencing on the date of this
Agreement and ending ten years from the date hereof (the "Termination Date"),
the right and option (the right to purchase any one share of Stock hereunder
being an "Option") to purchase from the Company, at a price of $1.00 per share,
an aggregate of shares of Stock.
2. LIMITATIONS ON EXERCISE OF OPTION. (a) Subject to the terms
and conditions set forth herein, all Options shall vest and become exercisable
on the ninth anniversary of the date of grant (the "Grant Date"), provided that
Optionee remains an employee of the Company on such date, subject to earlier
vesting, based upon the Company's attainment of the following share price
values: (i) 25% of the Options shall vest at such time as the Stock's Fair
Market Value is first, while the Optionee is employed by the Company and after
the Grant Date, at or above $1.30 per share; (ii) an additional 25% of the
Options shall vest at such time as the Stock's Fair Market Value is first, while
the Optionee is employed by the Company and after the Grant Date, at or above
$1.75 per share; and (iii) an additional 50% of the Options shall vest at such
time as the Stock's Fair Market Value is first, while the Optionee is employed
by the Company and after the Grant Date, at or above $2.50 per share; provided,
however, that any such acceleration shall be limited according to the following
schedule: not more than 15% of the Options that have become vested based upon
performance shall become exercisable before the first anniversary of the Grant
Date; not more than an additional 15% of the Options that have become vested
based upon performance shall become exercisable before the second anniversary of
the Grant Date; not more than an additional 20% of the Options that have become
vested based upon performance shall become exercisable before each of the third
and fourth anniversaries of the Grant Date; and the remaining 30% of the Options
that have become vested based upon performance shall not become exercisable
before the fifth anniversary of the Grant Date; and further provided, that if
the Optionee is terminated without Cause or the Optionee terminates his
employment for Good Reason, after a date when any of the performance thresholds
set forth in clause (i), (ii) or (iii) of this paragraph 2(a) has been
satisfied, then , in computing the exercisability limitation set forth in the
preceding proviso, an additional 15% of the Options that have become vested
based upon performance shall be exercisable over and above the Options that
become exercisable without regard to this proviso.
(b) Any provision of paragraph 2(a) hereof to the contrary
notwithstanding, but subject to Article XI(c) of the Plan, upon a Change in
Control, 100% of the Options shall vest and
B-2
<PAGE> 15
become exercisable, provided, however, that no such exercise rights shall arise
unless (i) if a Change in Control occurs within 12 months of the consummation of
the transactions contemplated by the Purchase Agreement (the "Closing Date"),
the Change in Control Price is at or above $1.50 per share or (ii) if a Change
in Control occurs more than twelve months from the Closing Date, the Change in
Control Price is at or above $2.50 per share (or if the Change in Control Price
is less than $2.50 but above $1.30 or $1.75 per share the acceleration of
vesting shall result, but only to the extent such acceleration would have
resulted pursuant to paragraph 2(a)(i) or 2(a)(ii) above, without regard to
service requirements).
3. TERMINATION OF EMPLOYMENT. An Optionee's rights upon
termination of employment shall be as set forth in Article VI of the Plan.
4. METHOD OF EXERCISING OPTION. (a) The Optionee may exercise any
or all of the Options by delivering to the Company a written notice signed by
the Optionee stating the number of Options that the Optionee has elected to
exercise at that time and full payment of the purchase price of the shares to be
thereby purchased from the Company. Payment of the purchase price of the shares
may be made (a) by certified or bank cashier's check payable to the order of the
Company, (b) by surrender or delivery to the Company of shares of Stock or other
property acceptable to the Committee in its sole discretion, which Stock or
other property shall have a value equal to the purchase price or (c) by delivery
to the Committee of a copy of irrevocable instructions to a stockbroker to
deliver promptly to the Company an amount of sale or loan proceeds sufficient to
pay the purchase price.
(b) At the time of exercise, the Optionee shall pay to the
Company 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.
B-3
<PAGE> 16
5. ISSUANCE OF SHARES. As promptly as practical after receipt of
such written notification and full payment of such purchase price and any
required income tax withholding amount, the Company shall issue or transfer to
the Optionee the number of shares with respect to which Options have been so
exercised, and shall deliver to the Optionee a certificate or certificates
therefor, registered in the Optionee's name.
6. COMPANY; OPTIONEE. (a) The term "Company" as used in this
Agreement with reference to employment shall include the Company and its
subsidiaries. The term "subsidiary" as used in this Agreement shall mean any
subsidiary of the Company as defined in Section 424(f) of the Code.
(b) Whenever the word "Optionee" is used in any provision of this
Agreement under circumstances where the provision should logically be construed
to apply to the executors, the administrators, or the person or persons to whom
the Options may be transferred by will or by the laws of descent and
distribution, the word "Optionee" shall be deemed to include such person or
persons.
7. NON-TRANSFERABILITY. The Options are not transferable by the
Optionee otherwise than by will or the laws of descent and distribution and are
exercisable during the Optionee's lifetime only by him. No assignment or
transfer of the Options, or of the rights represented thereby, whether voluntary
or involuntary, by operation of law or otherwise (except by will or the laws of
descent and distribution), shall vest in the assignee or transferee any interest
or right herein whatsoever, but immediately upon such assignment or transfer the
Options shall terminate and become of no further effect. Unless otherwise
provided by the Committee at the time of exercise, Optionee shall enter into a
binding agreement with the Company at the time of grant pursuant to which
Optionee agrees, during any period when the Minimum Stock Ownership Threshold is
met or exceeded, (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 the Plan. Appropriate legends shall be placed on the stock
certificates evidencing shares issued upon exercise of options to reflect such
transfer restrictions.
B-4
<PAGE> 17
8. RIGHTS AS STOCKHOLDER. The Optionee or a transferee of the
Options shall have no rights as a stockholder with respect to any share covered
by the Options until he shall have become the holder of record of such share,
and no adjustment shall be made for dividends or distributions or other rights
in respect of such share for which the record date is prior to the date upon
which he shall become the holder or record thereof.
9. RECAPITALIZATIONS, REORGANIZATIONS, ETC. (a) The existence of
the Options shall not affect in any way the right or power of the Company or its
stockholders to make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidation of the Company, or any issue of stock
or of options, warrants or rights to purchase stock or of bonds, debentures,
preferred or prior preference stocks ahead of or affecting the Stock or the
rights thereof or convertible into or exchangeable for Stock, or the dissolution
or liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
(b) The shares with respect to which the Options are granted are
shares of Stock of the Company as presently constituted, but if, and whenever,
prior to the delivery by the Company of all of the shares of the Stock with
respect to which the Options are granted, the Company shall effect a subdivision
or consolidation of shares of the Stock outstanding, without receiving
compensation therefor in money, services or property, the number and price of
shares remaining under the Options shall be appropriately adjusted. Such
adjustment shall be made by the Committee, whose determination as to what
adjustment shall be made, and the extent thereof, shall be final, binding and
conclusive. Any such adjustment may provide for the elimination of any
fractional share which might otherwise become subject to the Options.
(c) 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 or shares of Stock or other securities covered by the Options and
the option price thereof. The Committee shall notify the Optionee of any
intended sale of
B-5
<PAGE> 18
all or substantially all of the Company's assets within a reasonable time prior
to such sale.
(d) Except as hereinbefore expressly provided, the issue by the
Company of shares of stock of any class, or securities convertible into or
exchangeable for shares of stock of any class, for cash or property, or for
labor or services, either upon direct sale or upon the exercise of options,
rights or warrants to subscribe therefore, or to purchase the same, or upon
conversion of shares or obligation of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Stock subject to the
Options.
10. COMPLIANCE WITH LAW. Notwithstanding any of the provisions
hereof, the Optionee hereby agrees that he will not exercise the Options, and
that the Company will not be obligated to issue or transfer any shares to the
Optionee hereunder, if the exercise hereof or the issuance or transfer of such
shares shall constitute a violation by the Optionee or the Company of any
provisions of any law or regulation of any governmental authority. Any
determination in this connection by the Committee shall be final, binding and
conclusive. The Company shall in no event be obliged to register any securities
pursuant to the Securities Act of 1933 (as now in effect or as hereafter
amended) or to take any other affirmative action in order to cause the exercise
of the Options or the issuance or transfer of shares pursuant thereto to comply
with any law or regulation of any governmental authority.
11. NOTICE. Every notice or other communication relating to this
Agreement shall be in writing, and shall be mailed to or delivered to the party
for whom it is intended at such address as may from time to time be designated
by it in a notice mailed or delivered to the other party as herein provided,
provided that, unless and until some other address be so designated, all notices
or communications by the Optionee to the Company shall be mailed or delivered to
the Company at its principal executive office, and all notices or communications
by the Company to the Optionee may be given to the Optionee personally or may be
mailed to him at the address shown below his signature to this Agreement.
12. NON-QUALIFIED OPTIONS. The Options granted hereunder are not
intended to be incentive stock options within the meaning of Section 422 of the
Code.
B-6
<PAGE> 19
13. BINDING EFFECT. Subject to Section 7 hereof, this Agreement
shall be binding upon the heirs, executors, administrators and successors of the
parties hereto.
14. GOVERNING LAW. This Agreement shall be construed and
interpreted in accordance with the laws of the State of Delaware.
15. PLAN. The terms and provisions of the Plan are incorporated
herein by reference. In the event of a conflict or inconsistency between
discretionary terms and provisions of the Plan and the express provisions of
this Agreement, this Agreement shall govern and control. In all other instances
of conflicts or inconsistencies or omissions, the terms and provisions of the
Plan shall govern and control.
B-7
<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
AAMES FINANCIAL CORPORATION
By: _______________________________
Optionee
B-8
<PAGE> 21
EXHIBIT C
PROMISSORY NOTE AND WAIVER
$540,000 LOS ANGELES, CALIFORNIA
January __, 1999
FOR VALUE RECEIVED, the undersigned Neil B. Kornswiet
(hereinafter "Kornswiet") hereby promises to pay to the order of Aames Financial
Corporation, 350 S. Grand Avenue, Los Angeles, California 90071 (hereinafter
called the "Company") the principal amount of FIVE HUNDRED AND FORTY THOUSAND
DOLLARS ($540,000) together with the interest on the unpaid balance of such
principal amount from the date hereof at the lowest rate of interest prescribed
by Section 7872 of the Internal Revenue Code of 1986 that would permit
imputation of interest under such section to be avoided.
This Note and the indebtedness evidenced hereby are being
provided pursuant to the terms of the agreement effective as of January , 1999
between Kornswiet and the Company (the "Employment Agreement").
Subject to the terms and conditions herein, if Kornswiet is
employed by the Company for the full period from January __, 1999 through the
first anniversary of the "Effective Date", as such term is defined in
Kornswiet's Employment Agreement (the "Effective Date") or through the date of
any earlier termination of Executive's employment by the Company pursuant to
Paragraphs 5A, B, or F of the Employment Agreement or by the Executive pursuant
to Paragraph 5D of the Employment Agreement, the principal on this Note,
together with the interest accrued on such principal shall be forgiven by the
Company in full and this Note shall be marked canceled. The Company shall also
reimburse Kornswiet on a net after-tax basis for any tax liability attributable
to the forgiveness of interest.
In the event Kornswiet's employment with the Company is
terminated prior to the first anniversary of the Effective Date, pursuant to
Paragraph 5C of the Employment Agreement or in the event that Kornswiet
terminates his employment with the Company prior to the first anniversary of the
Effective Date for other than "good reason" (as defined in the Paragraph 5D of
the Employment Agreement), Kornswiet shall repay the full principal amount
evidenced by this Note, together with the interest accrued on such principal,
within fourteen (14) days of such termination date.
Unless this note is forgiven by the Company pursuant to the third
paragraph hereof, the Company shall have the right to set off any amounts which
Kornswiet owes the Company hereunder
C-1
<PAGE> 22
against any monies which the Company or any of its subsidiaries may owe to
Kornswiet, of any nature whatsoever, including without limitation, any
compensation and any severance owed under the Employment Agreement or any other
benefit owed to or held by Kornswiet as an employee of the Company or any of its
subsidiaries, and Kornswiet hereby agrees to and authorizes any such setoff.
If payment of the principal, together with the interest accrued
on such principal, on this Note is not paid in accordance with the terms
aforementioned, then this Note shall be deemed to be in default and if suit is
brought to collect this Note, the Company shall be entitled to collect, in
addition to any principal outstanding, together with the interest accrued on
such Note, all reasonable costs and expenses to include, but not necessarily be
limited to, reasonable attorneys' fees and expenses.
Presentment, notice of dishonor and protest are hereby waived by
Kornswiet. This Note shall be binding upon Kornswiet and his heirs, executors,
administrators, and legal representatives.
No delay or omission on the part of the Company in exercising any
rights hereunder shall operate as a waiver of such rights or of any other right
of the Company, nor shall any delay, omission or waiver on any one occasion be
deemed as a bar to or waiver of the same or any other right on any future
occasion. This Note may not be changed or terminated orally.
Kornswiet shall have the right to prepay the principal of this
Note, together with the accrued and unpaid interest on such principal, in whole
or in part, at any time or times, without penalty.
Regardless of whether this Note is forgiven, Kornswiet
acknowledges having received the entire principal amount of this Note from the
Company and hereby waives all rights, if any, to his 1999 Bonus (as defined in
Exhibit A of the Employment Agreement).
All rights and obligations hereunder shall be governed by, and
construed and enforced in accordance with, the substantive laws of the State of
Delaware, and this Note is executed as, and shall have effect of, a sealed
instrument. If any provision of this transaction is inconsistent with the laws
and statutes of the State of Delaware, the rest of the transaction shall not be
affected, and that part that is not in accord with the said laws shall be
adjusted to so comply.
C-2
<PAGE> 23
IN WITNESS WHEREOF, the undersigned has executed this Note as an
instrument under seal this ____ day of January, 1999.
------------------------
C-3
<PAGE> 1
EXHIBIT 10.26
MANAGEMENT INVESTMENT AGREEMENT
(NEIL KORNSWIET)
MANAGEMENT INVESTMENT AGREEMENT (this "Agreement") dated as of
December 23, 1998, between Aames Financial Corporation, a Delaware corporation
(the "Company"), and Neil Kornswiet, an individual residing at 16105 Whitecap
Lane, Huntington Beach, California, 96249 (the "Management Investor").
WHEREAS, on the date hereof, the Company and Capital Z Financial
Services Fund II, L.P., a Bermuda limited partnership ("Capital Z"), are
entering into a Preferred Stock Purchase Agreement (the "Purchase Agreement"),
pursuant to which Capital Z has agreed to purchase, together with Capital Z
Affiliates and co-investors as designated by Capital Z, shares of the Company's
Series B Convertible Preferred Stock, par value $0.001 per share ("Series B
Preferred Stock") and Series C Convertible Preferred Stock, par value $0.001 per
share ("Series C Preferred Stock," and, together with the Series B Preferred
Stock, "Senior Preferred Stock"), in the amounts and subject to the conditions
set forth in the Purchase Agreement; and
WHEREAS, the Management Investor is a senior management employee
of the Company and, as a condition precedent to the closing of the transactions
contemplated by the Purchase Agreement, certain senior management employees of
the Company, including the Management Investor, are required to purchase Series
C Preferred Stock from the Company; and
WHEREAS, the Management Investor desires to purchase from the
Company, and the Company desires to sell to the Management Investor, Series C
Preferred Stock under the terms and conditions set forth in this Agreement.
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement, and other good and valuable
consideration, the sufficiency of which is hereby acknowledged, the parties
hereto agree as follows:
SECTION 1. Defined Terms. Capitalized terms used and not
otherwise defined in this Agreement shall have the respective meanings assigned
to them in the Purchase Agreement.
SECTION 2. Sale and Delivery.
(a) Upon the terms and subject to the conditions set forth
herein, and conditioned upon the consummation of the Initial Closing, in
reliance upon the representations and warranties of the Management Investor
hereinafter set forth, and
-1-
<PAGE> 2
for the purchase price described in Section 2(b), the Company shall issue, sell
and deliver to the Management Investor pursuant to the Rights Offering, and the
Management Investor shall purchase from the Company pursuant to the Rights
Offer, an aggregate of $1,667,000 in stated value (at $1.00 per share) of Series
C Preferred Stock (such shares of Series C Preferred Stock are referred to
collectively herein as the "Shares") at the price per share at which Series C
Preferred Stock is offered in the Rights Offer, subject to the terms and
conditions of the Rights Offering.
(b) The purchase price for the Shares purchased by the Management
Investor shall be paid by delivery by the Management Investor to the Company of
a 6.5% promissory note having an original principal amount equal to such amount
(the "Note"), the form of which Note is attached hereto as Exhibit A.
(c) The purchase and sale of Shares by the Management Investor
shall occur at the time and place provided for in the Rights Offer, and at the
closing of such purchase and sale of Shares by the Management Investor:
(i) the Company shall deliver to the Management Investor
certificates representing the Shares, duly endorsed for transfer,
transferring to the Management Investor good and marketable title to
such Shares, free and clear of all liens and encumbrances; and
(ii) the Management Investor shall deliver to the Company:
(A) any documents required to be submitted by a Company
shareholder desiring to participate in the Rights Offer;
(B) the Note; and
(C) a pledge agreement (the "Pledge Agreement")
substantially in the form attached hereto as Exhibit B, pursuant
to which Pledge Agreement, among other things, the Management
Investor's obligations under the Note shall be secured by a
pledge of (i) the Shares, (ii) the shares of Common Stock that
may be acquired upon conversion of the Shares (the "Underlying
Common Shares"), and (iii) certain other collateral described
therein.
SECTION 3. Representations and Warranties of the Management
Investor. The Management Investor hereby represents and warrants to the Company
as follows:
(a) The Shares (and the Underlying Common Shares) to be purchased
by such Management Investor will be acquired for investment for the Management
Investor's own account and not with
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a view to the resale or distribution of any part thereof, except in compliance
with the provisions of the Securities Act of 1933, as amended (the "Securities
Act"), or an exemption therefrom, and in compliance with the terms of this
Agreement. The Management Investor is a senior management employee of the
Company and is fully familiar with the business of the Company and with the
risks associated with the purchase of the Shares pursuant to this Agreement. The
Management Investor is an accredited investor as defined under Rule 501(a) under
the Securities Act.
(b) The Management Investor understands that the Shares and the
Underlying Common Shares are characterized as "restricted securities" under the
federal securities laws inasmuch as they are being acquired from the Company in
a transaction not involving a public offering and that under such laws and
applicable regulations such Shares (and the Underlying Common Shares) may be
resold without registration under the Securities Act only in certain limited
circumstances.
(c) The Management Investor further agrees that each certificate
representing the Shares (and the Underlying Common Shares) shall be stamped or
otherwise imprinted with a legend substantially in the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS SUCH SECURITIES HAVE
BEEN REGISTERED UNDER THAT ACT OR AN EXEMPTION FROM REGISTRATION
IS AVAILABLE.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER AND TO THE OTHER TERMS SET FORTH IN THAT
CERTAIN MANAGEMENT INVESTMENT AGREEMENT, DATED AS OF DECEMBER 23,
1998, AND BY A CERTAIN RELATED PLEDGE AGREEMENT, BETWEEN THE
COMPANY AND NEIL KORNSWIET, A COPY OF WHICH AGREEMENTS HAVE BEEN
FILED WITH THE SECRETARY OF THE COMPANY AND ARE AVAILABLE UPON
REQUEST."
SECTION 4. Restrictions on Transfer of Shares. For a period
commencing on the Initial Closing Date and ending on the fifth anniversary of
the Initial Closing Date, the Management Investor may not sell, transfer,
assign, pledge, hypothecate or otherwise dispose of (each, a "transfer") any of
the Shares (or the Underlying Common Shares), without the prior express written
consent of the Company, provided, however, that the foregoing restriction on
transfer shall not apply (i) if Capital Z Beneficially Owns less than (A) fifty
percent (50%) of the number of shares of Senior Preferred Stock purchased by
Capital Z on the Initial Closing Date (the "Original Preferred Shares") or (B)
if any Original Preferred Shares shall thereafter have been converted into
Common Stock, fifty percent (50%) of the sum of (x) the aggregate number
of shares Common Stock owned by Capital Z as a result of such conversion(s) plus
(y) the aggregate number
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of shares Common Stock into which any remaining Original Preferred Shares owned
by Capital Z may be converted (determined without regard to any limitations on
conversion of such shares prior to the Recapitalization), in each case subject
to adjustment for splits, combinations, reclassifications and similar events;
(ii) if the Management Employee dies, retires, is terminated by the Company, or
terminates his employment with the Company, subject to the provisions of Section
5 hereof; or (iii) a Change of Control (as defined in the New Option Plan) has
occurred, but only if a Capital Z Realization Event (as defined in the New
Option Plan) has also occurred on or prior to such Change of Control, and
provided, further, that notwithstanding the foregoing restriction on transfer,
the Management Investor may transfer, during the twelve-month period ending on
the first anniversary of the Initial Closing Date and during each succeeding
twelve-month period, up to 25% of the total number of Underlying Common Shares
(whether structured as a transfer of Shares, Underlying Shares or a combination
thereof) acquired hereunder (subject to adjustment for splits, combinations,
reclassifications and similar events), it being further agreed that the
Management Investor may request the Company's Board of Directors to allow the
Management Investor to transfer Shares (or Underlying Common Shares) in excess
of the 25% limitation described in this proviso if extraordinary liquidity needs
have arisen with respect to the Management Investor, and, in such event, the
Company (through its Board of Directors) will consider such request in good
faith and will not unreasonably withhold its consent to a waiver of such
limitation.
SECTION 5. Company's Option to Purchase Shares.
(a) In the event of the death or retirement from, or termination
of employment for any reason with, the Company of the Management Investor (a
"Termination Date"), the Company shall have the option, but not the obligation,
to purchase all, or any portion, of the Shares (and any Underlying Common Shares
that may have been acquired upon conversion of the Shares) then owned by the
Management Investor at the Fair Market Value (as hereinafter defined) per Share
and/or Underlying Common Share on the Business Day immediately prior to the date
on which the Company exercises its option to purchase in accordance with the
this Section 5. The Company may exercise the foregoing option at any time within
30 days after the Termination Date, by written notice to the Management
Investor, or his legal representative in the case of death, stating a date and
time for consummation of the purchase no less than 10 nor more than 30 days
after giving of such notice. "Fair Market Value" per Share or per Underlying
Common Share, as of any particular date, shall mean (a) in the case of a Share,
the product obtained by multiplying (I) the Formula Number (as defined in the
Certificate of Designations for the Senior Preferred Stock) in effect as of such
date by (II) the Current Market Price (as defined in the Certificate of
Designations for the Senior Preferred Stock) for the period of 15 consecutive
Trading Days (as defined in the Certificate of Designations for
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<PAGE> 5
the Senior Preferred Stock) prior to such date, or (b) in the case of an
Underlying Share, the Current Market Price for the period of 15 consecutive
Trading Days prior to such date.
(b) At the closing of the purchase of Shares (and any Underlying
Common Shares) by the Company pursuant to Section 4(a), the Management Investor
will deliver the Shares (and any Underlying Common Shares) to the Company
against payment by the Company to the Management Investor of the purchase price
for such Shares (and any Underlying Common Shares). Such purchase price shall be
paid in cash, provided that if any principal or accrued but unpaid interest is
then outstanding under the Note, the cash portion of the purchase price shall be
reduced by the amount of such outstanding principal and accrued interest on the
Note (with such reduction being applied first to any accrued interest and then
to principal), and, if no principal or accrued interest is then remaining on the
Note, the Note shall be canceled.
SECTION 5. Termination. All rights and obligations of the parties
hereunder shall terminate upon the date upon which the Purchase Agreement is
terminated in accordance with its terms, provided, that any such termination
that results from the breach by a party of his or its obligations hereunder
shall not relieve such party from any liability for breach of this Agreement.
SECTION 6. Further Assurances. The Management Investor shall,
upon request of the Company, execute and deliver any additional documents and
take such further actions as may reasonably be deemed by the Company to be
necessary or desirable to carry out the provisions hereof.
SECTION 7. Notices. All notices, requests, claims, demands and
other communications under this Agreement shall be sufficiently given if sent by
registered or certified mail, postage prepaid, or overnight air courier service,
or telecopy or facsimile transmission (with hard copy to follow) to the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice): (i) if to the Company, to the address set forth in
Section 7.3 of the Purchase Agreement; and (ii) if to the Management Investor,
to the address set forth for the Management Investor in the preamble to this
Agreement or by telecopy to (323) 210-4537.
SECTION 8. Headings. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 9. Counterparts; Effectiveness. This Agreement may be
executed in two or more counterparts, all of which shall be considered one and
the same agreement and shall become effective when one or more counterparts have
been signed by each of the Company and the Management Investor and delivered to
the Company and the Management Investor.
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<PAGE> 6
SECTION 10. Entire Agreement. This Agreement (including the
documents and instruments referred to herein) constitutes the entire agreement,
and supersedes all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof.
SECTION 11. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Delaware, without
regard to any applicable conflicts of law principles of such State.
SECTION 12. Successors and Assigns. Neither this Agreement nor
any of the rights, interests or obligations under this Agreement shall be
assigned, in whole or in part, by operation of law or otherwise, by any of the
parties without the prior written consent of the other parties. Any assignment
in violation of the foregoing shall be void.
SECTION 13. Enforcement. Each party agrees that irreparable
damage would occur and that the other party hereto would not have any adequate
remedy at law in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that each party shall be entitled to an injunction or
injunctions to prevent breaches by the other party hereto of this Agreement and
to enforce specifically the terms and provisions of this Agreement in any court
of the United States located in the State of Delaware or in Delaware State
court, this being in addition to any other remedy to which they are entitled at
law or in equity. In addition, each of the parties hereto (i) consents to submit
such party to the personal jurisdiction of any Federal court located in the
State of Delaware or any Delaware State court in the event any dispute arises
out of this Agreement or any of the transactions contemplated hereby, (ii)
agrees that such party will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court and (iii)
agrees that such party will not bring any action relating to this Agreement or
any of the transactions contemplated hereby in any court other than a Federal
court sitting in the State of Delaware of in Delaware State court.
SECTION 14. Severability. If any term or provision hereof, or the
application thereof to any circumstance, shall, to any extent, be held by a
court of competent jurisdiction to be invalid or unenforceable with respect to
such jurisdiction, and only to such extent, and the remainder of the terms and
provisions hereof, and the application thereof to any other circumstance, shall
remain in full force and effect, shall not in any way be affected, impaired or
invalidated, and shall be enforced to the fullest extent permitted by law, and
the parties hereto shall reasonably negotiate in good faith a substitute term or
provision that comes as close as possible to the invalidated or unenforceable
term or provision, and that puts each party in a
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<PAGE> 7
position as nearly comparable as possible to the position each such party would
have been in but for the finding of invalidity or unenforceability, while
remaining valid and enforceable.
SECTION 15. Amendment; Modification; Waiver. No amendment,
modification or waiver in respect of this Agreement shall be effective against
any party unless it shall be in writing and signed by such party.
SECTION 16. Expenses. The Company and the Management Investor
shall each bear their own legal fees and other costs and expenses with respect
to the negotiation, execution and delivery of this Agreement and consummation of
the transactions contemplated hereby.
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<PAGE> 8
IN WITNESS WHEREOF, the Company and the Management Investor have
caused this Agreement to be duly executed and delivered as of the date first
written above.
AAMES FINANCIAL CORPORATION
By /s/ Barbara S. Polsky
---------------------------------
Name: Barbara S. Polsky
Title: Executive Vice President
MANAGEMENT INVESTOR:
/s/ Neil B. Kornswiet
----------------------------------------
Neil Kornswiet
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<PAGE> 9
EXHIBIT A TO
MANAGEMENT INVESTMENT AGREEMENT
(NEIL KORNSWIET)
FORM OF
SECURED PROMISSORY NOTE
$ , 1999
---------- --------
FOR VALUE RECEIVED, Neil Kornswiet (the "Maker"), hereby promises to pay
to the order of Aames Financial Corporation, a Delaware corporation ("Aames"), 2
California Plaza, 350 South Grand Avenue, Los Angeles, CA 90071 or such address
as Aames shall have given to the Maker, the principal sum of DOLLARS and 00/100
($_______), plus interest, which shall accrue from the date hereof, on the
unpaid principal balance of this Note at such address, at the rate of 6.5% per
annum (computed on the basis of a 360-day year) until the principal amount
hereof has been repaid in full, on ________, 2004.
The Maker shall have the option to prepay the principal amount and
accrued interest on this Note, in whole or in part, at any time, without payment
of premium or penalty. During the period in which this Note is outstanding, the
Maker shall make an annual mandatory prepayment against the outstanding
principal balance of, and accrued interest on, this Note an amount equal to 25%
of the aggregate cash bonuses (if any) paid to Maker in respect of the fiscal
year ended immediately prior to such payment date, net of income taxes payable
thereon, such payments to be made within two business days after receipt of the
cash bonus paid at the end of such fiscal year and to be applied first, against
any accrued and unpaid interest on this Note and then, to the outstanding
principal balance of this Note. In addition, upon receipt by the Maker of any
proceeds from the transfer of the securities pledged under the Pledge Agreement
(as defined below) or dividends, interest payments or other distributions of
cash in respect of such pledged securities, the Maker shall make an immediate
prepayment in respect of the Note in an amount equal to the after tax amount of
such proceeds, dividends, payments or distributions, with such prepayments to be
applied first to the payment of all interest accrued on, and then to the payment
of unpaid principal of, this Note.
Payments of principal and interest shall be made in such currency of the
United States as at the time of payment shall be legal tender for the payment of
public and private debts.
Aames and the Maker have entered into a pledge agreement dated the date
hereof (the "Pledge Agreement") providing, among
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other things, for the securing of this Note by a pledge of the Pledged
Collateral (as defined in the Pledge Agreement).
If any of the following events (each, an "Event of Default") shall occur:
(a) the Maker shall default in the payment of any part of
the principal or interest on this Note when the same shall become due and
payable, whether at maturity, by acceleration or otherwise and such default
continues for more than 10 days after receipt of notice from Aames;
(b) the Maker's employment with Aames shall have ceased
for any reason whatsoever or for no reason, whether such cessation is voluntary
or involuntary, and regardless of whether the Maker may claim such cessation of
employment constitutes a wrongful termination of employment;
(c) the Maker shall (i) become insolvent or be unable, or
admit in writing his inability, to pay his debts as they mature; (ii) make a
general assignment for the benefit of creditors; (iii) be adjudicated as
bankrupt or insolvent or file a voluntary petition in bankruptcy; (iv) file a
petition or an answer seeking an arrangement with creditors to take advantage of
any insolvency law; or (v) file an answer admitting to the material obligations
or consent to, or default in answering, or fail to have dismissed within 60 days
after the filing thereof, a petition filed against him in any bankruptcy or
insolvency proceeding; or
(d) any breach of the Maker's obligations under the
Pledge Agreement shall have occurred and be continuing or any representation or
warranty made thereunder shall be false in any material respect,
then, the holder of this Note may at any time by written notice to the
Maker, declare the entire unpaid principal of and the interest accrued on this
Note through the date of such Event of Default to be forthwith due and payable,
without other notices or demands of any kind, all of which are hereby waived by
the Maker.
Subject to the terms and conditions herein, if Maker is employed by
Aames for the full period from the date hereof through the first anniversary of
the Effective Date, as such term is defined in Maker's current Employment
Agreement with Aames (the "Employment Agreement"), or through the date of any
earlier termination of Maker's employment by Aames pursuant to Paragraphs 5A, B,
or F of the Employment Agreement or by the Maker pursuant to Paragraph 5D of the
Employment Agreement, the indebtedness evidenced by this Note shall be
nonrecourse (i.e., Aames shall not have recourse to any assets of Maker for any
liability under or in connection with the Pledge Agreement other than the
Pledged Collateral and, Aames shall not be liable for any deficiency
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owing in respect of such liabilities in the event the proceeds derived from the
sale of such Pledged Collateral are insufficient to pay such liabilities.
The Maker agrees to pay to the holder hereof all expenses incurred by
such holder, including reasonable attorneys' fees, in enforcing and collecting
this Note.
The Maker hereby forever waives presentment, demand, presentment for
payment, protest, notice of protest, notice of dishonor of this Note and all
other demands and notices in connection with the delivery, acceptance,
performance and enforcement of this Note.
This Note shall be paid without deduction by reason of any set-off,
defense or counterclaim of the Maker.
This Note shall be governed by and construed in accordance with the laws
of the State of Delaware, without giving effect to conflicts of law principles
thereof, shall be binding upon the heirs or legal representatives of the Maker
and shall inure to the benefits of the successors and assigns of Aames.
---------------------------------
Neil Kornswiet
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<PAGE> 12
EXHIBIT B TO MANAGEMENT INVESTMENT AGREEMENT
(NEIL KORNSWIET)
FORM OF PLEDGE AGREEMENT
PLEDGE AGREEMENT ("Agreement"), dated as of _____, 1999, made by
Neil Kornswiet, an individual residing at 16105 Whitecap Lane, Huntington Beach,
CA, 92649 (the "Pledgor"), to Aames Financial Corporation, a Delaware
corporation ("Aames").
WHEREAS, on the date hereof, the Pledgor is purchasing shares of
Aames' Series C Convertible Preferred Stock, par value $0.001 per share ("Series
C Preferred Stock"), pursuant to a Management Investment Agreement, dated the
date hereof, between Pledgor and Aames (the "Management Investment Agreement");
and
WHEREAS, as part of the transactions contemplated by the
Management Investment Agreement, the Pledgor is executing and delivering to
Aames a Secured Promissory Note dated as of the date hereof in favor of Aames
(the "Aames Note") as part of the purchase price for the Series C Preferred
Stock, and (ii) in accordance with the terms and conditions set forth herein,
pledge the Series C Preferred Stock, together with any shares of Aames' common
stock, par value $0.001 per share that may be acquired upon conversion of the
Series C Preferred Stock (the "Underlying Common Shares, and, together with the
shares of Series C Preferred Stock, the "Pledged Shares").
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement, and in order to induce Aames to accept
the Aames Note, the Pledgor hereby agrees as follows:
SECTION 1. Pledge. The Pledgor hereby pledges to Aames, and
grants to Aames a security interest in, the following (the "Pledged
Collateral"):
(i) the Pledged Shares and the certificates representing the
Pledged Shares, and all dividends, cash,
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instruments and other property of any character whatsoever (including, without
limitation, shares of Common Stock) from time to time received, receivable or
otherwise distributed or distributable in respect of or in exchange for any or
all of the Pledged Shares; and
(ii) all proceeds of any and all of the foregoing collateral
(including, without limitation, proceeds that constitute property of the types
described above).
SECTION 2. Security for Obligations. This Agreement secures the
payment of all obligations, whether for principal, interest, fees, expenses or
otherwise, now or hereafter existing, of the Pledgor under the Aames Note and
under this Agreement (all such obligations of the Pledgor being the
"Obligations"). Without limiting the generality of the foregoing, this Agreement
secures the payment of all amounts which constitute part of the Obligations and
would be owed by the Pledgor to Aames under the Aames Note or this Agreement but
for the fact that they are unenforceable or not allowable due to the existence
of a bankruptcy, reorganization or similar proceeding involving the Pledgor.
SECTION 3. Delivery of Pledged Collateral. All certificates or
instruments representing or evidencing the Pledged Collateral shall be delivered
to and held by or on behalf of Aames pursuant hereto and shall be in suitable
form for transfer by delivery, or shall be accompanied by duly executed
instruments of transfer or assignment in blank, all in form and substance
satisfactory to Aames. Aames shall have the right, at any time in its discretion
and without notice to the Pledgor, to transfer to or to have registered in the
name of Aames or any of its nominees any or all of the Pledged Collateral,
subject only to the revocable rights specified in Section 6(a). For the better
perfection of Aames's rights in and to the Pledged Collateral, the Pledgor shall
forthwith, upon the pledge of any Pledged Collateral hereunder, cause such
Pledged Collateral to be registered in the name of Aames or such nominee or
nominees of Aames as Aames shall direct, subject only to the revocable rights
specified in Section 6(a). In addition, Aames shall have the right at any time
to exchange certificates or instruments representing or evidencing Pledged
Collateral for certificates or instruments of smaller or larger denominations.
SECTION 4. Representations and Warranties. The Pledgor represents
and warrants as follows:
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<PAGE> 14
(a) Neither the execution nor the delivery by the Pledgor of this
Agreement nor the consummation by the Pledgor of the transactions
contemplated hereby, nor compliance with nor fulfillment by the Pledgor
of the terms and provisions hereof, will conflict with or result in a
breach of the terms, conditions or provisions of or constitute a default
under any lease, contract, instrument, mortgage, deed of trust, trust
deed or deed to secure debt evidencing or securing indebtedness for
borrowed money, financing lease, law, rule, regulation, judgment, order,
award, decree or other restriction of any kind to which the Pledgor is a
party or by which he is bound.
(b) This Agreement has been duly executed and delivered by the
Pledgor and is the legal, valid and binding obligation of the Pledgor,
enforceable against the Pledgor in accordance with its terms.
(c) There is no action, lawsuit, claim, counterclaim, proceeding,
or investigation (or group of related actions, lawsuits, claims,
proceedings or investigations) pending or, to the knowledge of the
Pledgor, threatened, relating to or challenging the Pledgor's
obligations under this Agreement or the pledge of the Pledged Collateral
hereunder.
(d) The Pledgor is the legal and beneficial owner of the Pledged
Collateral free and clear of any lien, security interest, option or
other charge or encumbrance except for the security interest created by
this Agreement.
(e) The pledge of the Pledged Shares pursuant to this Agreement
creates a valid and perfected first priority security interest in the
Pledged Collateral, securing the payment of the Obligations.
(f) No consent of any other person or entity and no
authorization, approval, or other action by, and no notice to or filing
with, any governmental authority or regulatory body is required (i) for
the pledge by the Pledgor of the Pledged Collateral pursuant to this
Agreement or for the execution, delivery or performance of this
Agreement by the Pledgor, (ii) for the perfection or maintenance of the
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<PAGE> 15
security interest created hereby (including the first priority nature of
such security interest) or (iii) for the exercise by Aames of the voting
or other rights provided for in this Agreement or the remedies in
respect of the Pledged Collateral pursuant to this Agreement (except as
may be required in connection with any disposition of any portion of the
Pledged Collateral by laws affecting the offering and sale of securities
generally).
(g) There are no conditions precedent to the effectiveness of the
Pledgor's obligations under this Agreement that have not been satisfied
or waived.
SECTION 5. Further Assurances. (a) The Pledgor agrees that at any
time and from time to time, at the expense of the Pledgor, the Pledgor will
promptly execute and deliver all further instruments and documents, and take all
further action, that may be necessary or desirable, or that Aames may reasonably
request, in order to perfect and protect any security interest granted or
purported to be granted hereby or to enable Aames to exercise and enforce its
rights and remedies hereunder with respect to any Pledged Collateral.
(b) The Pledgor hereby authorizes Aames to file one or more
financing or continuation statements, and amendments thereto, relating to all or
any part of the Pledged Collateral without the signature of the Pledgor where
permitted by law. A photocopy or other reproduction of this Agreement or any
financing statement covering the Pledged Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law.
SECTION 6. Voting Rights; Dividends, Etc. (a) so long as no Event
of Default (as defined in the Aames Note) or event which, with the giving of
notice or the lapse of time, or both, would become such an Event of Default
shall have occurred and be continuing:
(i) The Pledgor shall be entitled to exercise or refrain from
exercising any and all voting and other consensual rights pertaining to
the Pledged Collateral or any part thereof for any purpose not
inconsistent with the terms of this Agreement or the Aames Note;
provided, however, that the Pledgor shall not exercise or refrain from
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<PAGE> 16
exercising any such right if, in Aames's judgment, such action would
have a material adverse effect on the value of the Pledged Collateral or
any part thereof.
(ii) The Pledgor shall be entitled to any and all dividends paid
in respect of the Pledged Collateral; provided, however, that any and
all dividends paid or payable other than in cash in respect of, and
instruments and other property received, receivable or otherwise
distributed in respect of or in exchange for, any Pledged Collateral,
shall be, and shall be forthwith delivered to Aames to hold as, Pledged
Collateral and shall, if received by the Pledgor, be received in trust
for the benefit of Aames, be segregated from the other property or funds
of the Pledgor, and be forthwith delivered to Aames as Pledged
Collateral in the same form as so received (with any necessary
endorsement or assignment); and provided, further, that the after tax
amount of any cash dividends, proceeds, or other distributions paid in
respect of the Pledged Collateral shall be applied as an immediate
prepayment in respect of the Aames Note, with such prepayments to be
applied first to the payment of all interest accrued on, and then to the
payment of unpaid principal of, the Aames Note.
(iii) Aames shall execute and deliver (or cause to be executed
and delivered) to the Pledgor all such proxies and other instruments as
the Pledgor may reasonably request for the purpose of enabling the
Pledgor to exercise the voting and other rights which it is entitled to
exercise pursuant to paragraph (i) above and to receive the dividends
which it is authorized to receive and retain pursuant to paragraph (ii)
above.
(b) Upon the occurrence and during the continuance of an Event of
Default or an event which, with the giving of notice or the lapse of time, or
both, would become an Event of Default:
(i) All rights of the Pledgor (x) to exercise or refrain from
exercising the voting and other consensual rights which it would
otherwise be entitled to exercise pursuant to Section 6(a)(i) shall,
upon notice to the Pledgor by Aames, cease and (y) to receive the
dividends payments which it would otherwise be authorized to receive and
retain pursuant to Section 6(a)(ii) shall automatically cease, and all
such rights shall thereupon become vested in Aames (or its designee),
who shall thereupon have the sole
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right to exercise or refrain from exercising such voting and other
consensual rights and to receive and hold as Pledged Collateral such
dividends.
(ii) All dividends which are received by the Pledgor contrary to
the provisions of paragraph (i) of this Section 6(b) shall be received
in trust for the benefit of Aames, shall be segregated from other funds
of the Pledgor and shall be forthwith paid over to Aames as Pledged
Collateral in the same form as so received (with any necessary
endorsement).
SECTION 7. Transfers and Other Liens. The Pledgor agrees that it
will not (i) sell, assign (by operation of law or otherwise) or otherwise
dispose of, or grant any option with respect to, any of the Pledged Collateral
or (ii) create or permit to exist any lien, security interest, option or other
charge or encumbrance upon or with respect to any of the Pledged Collateral,
except for the security interest under this Agreement and except for any such
sale the proceeds from which are used to repay all unpaid principal of, and
accrued interest on, the Aames Note (with such proceeds first being applied to
accrued interest and then to principal).
SECTION 8. Appointment of Attorney-in-Fact. The Pledgor hereby
appoints [_______] the Pledgor's attorney-in-fact, with full authority in the
place and stead of the Pledgor and in the name of the Pledgor or otherwise, from
time to time in Aames's discretion to take any action and to execute any
instrument that Aames may deem necessary or advisable to accomplish the purposes
of this Agreement (subject to the rights of the Pledgor under Section 6),
including, without limitation, to receive, indorse and collect all instruments
made payable to the Pledgor representing any dividend or other distribution in
respect of the Pledged Collateral or any part thereof and to give full discharge
for the same.
SECTION 9. Aames May Perform. If the Pledgor fails to perform any
agreement contained herein and does not cure such failure within 10 days after
its receipt of written notice from Aames, Aames may itself perform, or cause
performance of, such agreement, and the expenses of Aames incurred in connection
therewith shall be payable by the Pledgor under Section 12.
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SECTION 10. Aames' Duties. The powers conferred on Aames
hereunder are solely to protect its interest in the Pledged Collateral and shall
not impose any duty upon it to exercise any such powers. Except for the safe
custody of any Pledged Collateral in its possession and the accounting for
moneys actually received by it hereunder, Aames shall have no duty as to any
Pledged Collateral as to ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, tenders or other matters relative to any
Pledged Collateral, whether or not Aames has or is deemed to have knowledge of
such matters, or as to the taking of any necessary steps to preserve rights
against any parties or any other rights pertaining to any Pledged Collateral.
Aames shall be deemed to have exercised reasonable care in the custody and
preservation of any Pledged Collateral in its possession if such Pledged
Collateral is accorded treatment substantially equal to that which Aames accords
its own property.
SECTION 11. Remedies upon Default. If any Event of Default shall
have occurred and be continuing:
(a) Aames may exercise in respect of the Pledged Collateral, in
addition to other rights and remedies provided for herein or otherwise
available to it, all the rights and remedies of a secured party on
default under the Uniform Commercial Code in effect in the State of
Delaware at that time (the "Code") (whether or not the Code applies to
the affected Collateral), and may also, without notice except as
specified below, sell the Pledged Collateral or any part thereof in one
or more parcels at public or private sale, at any exchange or broker's
board or elsewhere, for cash, on credit or for future delivery, and upon
such other terms as Aames may deem commercially reasonable. The Pledgor
agrees that, to the extent notice of sale shall be required by law, at
least ten days' notice to the Pledgor of the time and place of any
public sale or the time after which any private sale is to be made shall
constitute reasonable notification. Aames shall not be obligated to make
any sale of Pledged Collateral regardless of notice of sale having been
given. Aames may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale may,
without further notice, be made at the time and place to which it was so
adjourned.
(b) Any cash held by Aames as Pledged Collateral and all cash
proceeds received by Aames in respect of any sale of, collection from or
other realization upon all or any part of the Pledged Collateral may, in
the discretion of
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<PAGE> 19
Aames, be held by Aames as collateral for, and/or then or at any time
thereafter be applied (after payment of any amounts payable to Aames
pursuant to Section 12) in whole or in part by Aames against, all or any
part of the Obligations in such order as Aames shall elect. Any surplus
of such cash or cash proceeds held by Aames and remaining after payment
in full of all the Obligations shall be paid over to the Pledgor or to
whomsoever may be lawfully entitled to receive such surplus.
SECTION 12. Expenses. The Pledgor will upon demand pay to Aames
the amount of any and all reasonable expenses, including the reasonable fees and
expenses of its counsel and of any experts and agents, which Aames may incur in
connection with (i) the exercise or enforcement of any of the rights of Aames
hereunder or (ii) the failure by the Pledgor to perform or observe any of the
provisions hereof.
SECTION 13. Security Interest Absolute. The obligations of the
Pledgor under this Agreement are independent of the Obligations, and a separate
action or actions may be brought and prosecuted against the Pledgor to enforce
this Agreement. All rights of Aames and security interests hereunder, and all
obligations of the Pledgor hereunder, shall be absolute and unconditional
irrespective of:
(i) any lack of validity or enforceability of the Aames Note any
other agreement or instrument relating thereto;
(ii) any change in the time, manner or place of payment of, or in
any other term of, all or any of the obligations, or any other amendment
or waiver of or any consent to any departure from the Aames Note;
(iii) any taking, exchange, release or nonperfection of any other
collateral, or any taking, release or amendment or waiver of or consent
to departure from any guaranty, for all or any of the Obligations;
(iv) any manner of application of collateral, or proceeds
thereof, to all or any of the Obligations, or any
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<PAGE> 20
manner of sale or other disposition of any collateral for all or any of
the Obligations or any other assets of the Pledgor;
(v) any other circumstance which might otherwise constitute a
defense available to, or a discharge of, the Pledgor.
SECTION 14. Amendments, Etc. No amendment or waiver of any
provision of this Agreement shall in any event be effective unless the same
shall be in writing and signed by the parties hereto, and no consent to any
departure by one party herefrom, shall in any event be effective unless the same
shall be in writing and signed by the other party, and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.
SECTION 15. Notices, Etc. All notices and other communications
provided for hereunder shall be in writing (including telecopier, telegraphic or
telex communication) and sent by express courier, telecopied, telegraphed,
telexed or hand-delivered, if to the Pledgor, at his address first set forth
above; and, if to Aames, at its address at 2 California Plaza, 350 South Grand
Avenue, Los Angeles, CA 90071, Attention: Cary Thompson; or, as to each party,
at such other address as shall be designated by such party in a written notice
to the other party. All such notices and communications shall, when sent by
express courier, be effective three days after being sent, when telecopied,
telegraphed, telexed or hand-delivered, be effective when telecopied, delivered
to the telegraph company, confirmed by telex answerback or delivered,
respectively.
SECTION 16. Continuing Security Interest; Assignments Under Aames
Note. This Agreement shall create a continuing security interest in the Pledged
Collateral and shall (i) remain in full force and effect until the payment in
full of the Obligations and all other amounts payable under this Agreement, (ii)
be binding upon the Pledgor, its successors and assigns and (iii) inure to the
benefit of, and be enforceable by, Aames and its successors, transferees and
assigns. Without limiting the generality of the foregoing clause (iii), Aames
may assign or otherwise transfer all or any portion of its rights and
obligations under the Aames Note to any other person or entity, and such other
person or entity shall thereupon become vested with all the benefits in respect
thereof granted to Aames herein or otherwise. Upon the payment in full of the
Obligations and
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<PAGE> 21
all other amounts payable under this Agreement, the security interest
granted hereby shall terminate and all rights to the Pledged Collateral shall
revert to the Pledgor. Upon any such termination, Aames will, at the Pledgor's
expense, return to the Pledgor such of the Pledged Collateral as shall not have
been sold or otherwise applied pursuant to the terms hereof and execute and
deliver to the Pledgor such documents as the Pledgor shall reasonably request to
evidence such termination.
SECTION 17. Governing Law; Terms. THIS AGREEMENT SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE
EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST
HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED
COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF
DELAWARE. Unless otherwise defined herein or in the Aames Note, terms defined in
Article 9 of the Code are used herein as therein defined.
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<PAGE> 22
IN WITNESS WHEREOF, the Pledgor has caused this Agreement to be
duly executed and delivered by its officer thereunto duly authorized as of the
date first above written.
------------------------------
Neil Kornswiet
ACKNOWLEDGED AND AGREED:
AAMES FINANCIAL CORPORATION
By:
-------------------------
Name:
Title:
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<PAGE> 1
EXHIBIT 10.27
MANAGEMENT VOTING AGREEMENT
MANAGEMENT VOTING AGREEMENT dated as of December 23, 1998, among
Capital Z Financial Services Fund II, L.P., a Bermuda limited partnership
("Capital Z"), and Cary Thompson and Neil Kornswiet (collectively, the
"Shareholders").
WHEREAS, the Shareholders desire that the Aames Financial
Corporation, a Delaware corporation (the "Company"), and Capital Z enter into a
Preferred Stock Purchase Agreement dated as of the date hereof (as the same may
be amended from time to time, the "Purchase Agreement"), which provides, among
other things, that Capital Z, together with certain Capital Z affiliates and
co-investors as provided therein, will purchase shares of the Company's Series B
Convertible Preferred Stock, par value $0.001 per share ("Series B Preferred
Stock") and Series C Convertible Preferred Stock, par value $0.001 per share
("Series C Preferred Stock," and, together with the Series B Preferred Stock,
"Senior Preferred Stock"), in the amounts and subject to the conditions set
forth in the Purchase Agreement; and
WHEREAS, the Shareholders are executing this Agreement as an
inducement to the Company and Capital Z to execute and deliver the Purchase
Agreement.
NOW THEREFORE, in consideration of the execution and delivery by
the Company and Capital Z of the Purchase Agreement and the mutual covenants,
conditions and agreements contained therein and herein, the parties hereto agree
as follows:
SECTION 1. Representations and Warranties. Each of the
Shareholders severally and not jointly represents and warrants to the Company
and Capital Z as to himself (and not as to any other Shareholder) as follows:
(a) Such Shareholder is the record and beneficial owner of the
number of shares of the Company's common stock, par value $0.001 per share
("Common Stock") (together with any shares of Common Stock or other voting
securities of the Company, including, without limitation, Senior Preferred
Stock, with respect to which the Shareholder obtains voting power after the
<PAGE> 2
date hereof, the "Shares"), as set forth on Exhibit A hereto (which Exhibit
shall be amended after the date hereof to include any voting securities of the
Company with respect to which the Shareholder obtains voting power after the
date hereof). Except for such number of Shares and except for Shares, if any,
(i) issuable in connection with options outstanding as of the date hereof or
(ii) which such Shareholder has agreed to purchase in connection with the
transactions contemplated by the Purchase Agreement, such Shareholder is not the
record or beneficial owner of any shares of Common Stock.
(b) Such Shareholder has the authority to execute, deliver and
perform this Agreement without the necessity of obtaining any third party
consent, approval, authorization or waiver, or giving of any notice or
otherwise, except for such consents as have been obtained, are unconditional and
are in full force and effect.
(c) This Agreement has been duly executed and delivered by such
Shareholder and, assuming due execution and delivery thereof by the Company and
Capital Z, constitutes the legal, valid, and binding obligation of such
Shareholder enforceable against the Shareholder in accordance with its terms,
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity (whether
enforcement is sought by proceedings in equity or at law).
(d) The execution, delivery, and performance of this Agreement by
such Shareholder will not (i) result in the breach of or constitute a default
under any contract to which such Shareholder is subject, (ii) constitute a
violation of any Law applicable or relating to such Shareholder or (iii) result
in the creation of any Lien.
(e) Except for this Agreement, there are no voting trusts or
other agreements or understandings, including, without limitation, any proxies,
in effect governing the voting of the Shares.
(f) Such Shareholder does not hold, and has not issued, any
proxies, or securities convertible into or exchangeable for or any options,
warrants, or other rights to purchase or subscribe for any shares of Common
Stock.
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<PAGE> 3
(g) The Shares and the certificates representing such Shares are
now and until the earlier to occur of June 30, 1999 and consummation of the
Recapitalization will be held by such Shareholder, or by a nominee or custodian
for the benefit of such Shareholder, free and clear of all Liens, proxies,
voting trusts or agreements, understandings or arrangements or any other
encumbrances whatsoever other than as created by this Agreement.
(h) Such Shareholder understands and acknowledges that the
Company and Capital Z are entering into the Purchase Agreement in reliance upon
such Shareholder's execution and delivery of this Agreement.
(i) There are no undertakings, agreements, arrangements or
understandings of the type required to be disclosed by the Company pursuant to
Item 404 of Regulation S-K under the Securities Act in filings by the Company
with the Securities and Exchange Commission in effect between such Shareholder,
or any of his or her affiliates, on the one hand, and the Company or any of its
subsidiaries, on the other hand, which have not been fully and completely
disclosed, in writing, to Capital Z.
SECTION 2. Voting Agreement. Each Shareholder agrees with, and
covenants to, Capital Z as follows:
(a) At the Shareholders' Meeting or at any adjournment thereof or
in any other circumstances upon which a vote, consent or other approval will be
held or solicited with respect to the increase of the authorized capital stock
of the Company as contemplated by the Purchase Agreement (the "Charter
Amendment"), such Shareholder shall vote (or cause to be voted) or shall
consent, execute a consent or cause to be executed a consent in respect of the
Shares in favor of the Charter Amendment and the Stock Split.
(b) At any meeting of shareholders of the Company or at any
adjournment thereof or in any other circumstances upon which their vote, consent
or other approval is sought while the Purchase Agreement remains in effect, such
Shareholder shall vote (or cause to be voted) the Shares against (i) any
Alternative Transaction or any action which is a component of any Alternative
Transaction or would be a component of an Alternative Transaction if it were
contained in a proposal, or (ii) any other matter submitted to the shareholders
of the Company, including, without
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<PAGE> 4
limitation, any amendment of the Company's Certificate of Incorporation or
By-Laws, which matter would in any manner partially or wholly prevent or
materially impede, interfere with or delay any of the transactions contemplated
by the Purchase Agreement, as determined in good faith by Purchaser and with
respect to which Purchaser provides written notice to the Shareholder.
(c) In the event that the Recapitalization (as defined in the
Purchase Agreement) is not consummated prior to June 30, 1999, each Shareholder
agrees to vote all Shares for which he has or shares the power to vote, or grant
a consent for approval in respect of such Shares in any manner permitted by the
DGCL, as such Shareholder is directed by the board of directors of the Company,
on any matters submitted to the shareholders of the Company, other than the
election of directors. The foregoing agreement shall terminate automatically
upon the termination of this Agreement with respect to any Shares owned by such
person upon transfer of such Shares pursuant to Section 7. The Company shall be
a third party beneficiary of this Agreement for the purposes of this Section
2(c).
(d) Each Shareholder represents and warrants to the Company and
Capital Z that any proxies heretofore given in respect of the Shares are not
irrevocable, and that any such proxies are hereby revoked, to the extent in
conflict with Section 2(c) hereof.
(e) Each Shareholder hereby affirms that the irrevocable proxy
set forth in this Section 2 is given in connection with the execution of the
Purchase Agreement, and that such irrevocable proxy is given to secure the
performance of the duties of such Shareholder under this Agreement. Each
Shareholder hereby further affirms that the irrevocable proxy is coupled with an
interest and may under no circumstances be revoked. Each Shareholder hereby
ratifies and confirms all that such irrevocable proxy may lawfully do or cause
to be done by virtue hereof. Such irrevocable proxy is executed and intended to
be irrevocable in accordance with the provisions of Section 212(e) of the DGCL.
SECTION 3. Covenants of the Shareholder. Each Shareholder agrees
with, and covenants to, Capital Z that such Shareholder shall not on or prior to
the earlier to occur of June 30, 1999 or the consummation of the
Recapitalization, (i)
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<PAGE> 5
transfer (which term shall include, without limitation, for the purposes of this
Agreement, any sale, gift, pledge, encumbrance (other than an unforeclosed
pledge or encumbrance for financing purposes where the Shareholder retains sole
voting power with respect to all pledged securities), or other disposition), or
consent to any transfer of, any or all the Shares or any interest therein,
unless the transferee(s) of such Shares agrees in writing to be bound by the
provisions of this Agreement applicable to such Shareholder, (ii) grant any
proxy, power-of-attorney or other authorization in or with respect to such
Shares, except under or in accordance or not in conflict with this Agreement, or
(iii) deposit such Shares into a voting trust, enter into a voting agreement or
arrangement with respect to such Shares or otherwise limit such Shareholder's
power to vote his or her Shares in a manner that conflicts with this Agreement.
SECTION 4. Certain Events. In the event of any stock split, stock
dividend, merger, reorganization, recapitalization or other change in the
capital structure of the Company affecting the Common Stock, or the acquisition
of additional shares of Common Stock or other voting securities of the Company
by such Shareholder, the number of Shares set forth in Section 1(a) hereof shall
be adjusted appropriately and this Agreement and the obligations hereunder shall
attach to any additional shares of Common Stock or other voting securities of
the Company issued to or acquired by such Shareholder.
SECTION 5. Shareholder Capacity. No person executing this
Agreement who is or becomes a director of the Company makes any agreement or
understanding herein in his or her capacity as such director. Each Shareholder
signs solely in such Shareholder's capacity as the record and beneficial owner
of the Shares.
SECTION 6. Further Assurances. Each Shareholder shall, upon
request of Capital Z, execute and deliver any additional documents and take such
further actions as may reasonably be deemed by Capital Z to be necessary or
desirable to carry out the provisions hereof.
SECTION 7. Termination. This Agreement, and all rights and
obligations of the parties hereunder, shall terminate upon the date upon which
the Recapitalization has been consummated and the Shareholder Approval has been
obtained or the Purchase Agreement is earlier terminated in accordance with its
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<PAGE> 6
terms, except that no Shareholder shall be relieved of any liability for breach
of this Agreement by such Shareholder prior to such termination. Further, this
Agreement shall terminate with respect to any Shares which are transferred as
permitted by Section 3 hereof.
SECTION 8. Defined Terms. Capitalized terms used and not
otherwise defined in this Agreement shall have the respective meanings assigned
to them in the Purchase Agreement.
SECTION 9. Notices. All notices, requests, claims, demands and
other communications under this Agreement shall be sufficiently given if sent by
registered or certified mail, postage prepaid, or overnight air courier service,
or telecopy or facsimile transmission (with hard copy to follow) to the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice): (i) if to Capital Z, to the address set forth in
Section 7.3 of the Purchase Agreement; and (ii) if to any Shareholder, to the
address set forth opposite such Shareholder's name on Exhibit A hereto.
SECTION 10. Headings. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 11. Counterparts; Effectiveness. This Agreement may be
executed in two or more counterparts, all of which shall be considered one and
the same agreement and shall become effective as to any Shareholder when one or
more counterparts have been signed by Capital Z and such Shareholder and
delivered to Capital Z and such Shareholder.
SECTION 12. Entire Agreement. This Agreement (including the
documents and instruments referred to herein) constitutes the entire agreement,
and supersedes all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof.
SECTION 13. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Delaware, without
regard to any applicable conflicts of law principles of such State.
SECTION 14. Successors and Assigns. Neither this Agreement nor
any of the rights, interests or obligations under this Agreement shall be
assigned, in whole or in part, by
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<PAGE> 7
operation of law or otherwise, by any of the parties without the prior written
consent of the other parties, except as expressly contemplated by Section 3(a),
and except that Capital Z may assign its rights under this Agreement to any
transferee of any of the Company's securities acquired by it under the Purchase
Agreement (and any such transferee may similarly assign its rights in connection
with any further transfer of such securities, in whole or in part). Any
assignment in violation of the foregoing shall be void.
SECTION 15. Enforcement. Each party agrees that irreparable
damage would occur and that the other party hereto would not have any adequate
remedy at law in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that each party shall be entitled to an injunction or
injunctions to prevent breaches by the other party hereto of this Agreement and
to enforce specifically the terms and provisions of this Agreement in any court
of the United States located in the State of Delaware or in Delaware State
court, this being in addition to any other remedy to which they are entitled at
law or in equity. In addition, each of the parties hereto (i) consents to submit
such party to the personal jurisdiction of any Federal court located in the
State of Delaware or any Delaware State court in the event any dispute arises
out of this Agreement or any of the transactions contemplated hereby, (ii)
agrees that such party will not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court and (iii)
agrees that such party will not bring any action relating to this Agreement or
any of the transactions contemplated hereby in any court other than a Federal
court sitting in the State of Delaware or a Delaware State court.
SECTION 16. Severability. If any term or provision hereof, or the
application thereof to any circumstance, shall, to any extent, be held by a
court of competent jurisdiction to be invalid or unenforceable with respect to
such jurisdiction, and only to such extent, and the remainder of the terms and
provisions hereof, and the application thereof to any other circumstance, shall
remain in full force and effect, shall not in any way be affected, impaired or
invalidated, and shall be enforced to the fullest extent permitted by law, and
the parties hereto shall reasonably negotiate in good faith a substitute term or
provision that comes as close as possible to the invalidated
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<PAGE> 8
or unenforceable term or provision, and that puts each party in a position as
nearly comparable as possible to the position each such party would have been in
but for the finding of invalidity or unenforceability, while remaining valid and
enforceable.
SECTION 17. Amendment; Modification; Waiver. No amendment,
modification or waiver in respect of this Agreement shall be effective against
any party unless it shall be in writing and signed by such party.
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<PAGE> 9
IN WITNESS WHEREOF, Capital Z and the Shareholders have caused
this Agreement to be duly executed and delivered as of the date first written
above.
CAPITAL Z FINANCIAL SERVICES FUND II, L.P.,
By its General Partner
CAPITAL Z PARTNERS, L.P.,
By its General Partner
CAPITAL Z PARTNERS, LTD.
By: /s/ Adam M. Mizel
--------------------------------
Name: Adam M. Mizel
Title: Partner
SHAREHOLDERS:
/s/ Cary H. Thompson
-------------------------------------
Cary Thompson
/s/ Neil B. Kornswiet
-------------------------------------
Neil Kornswiet
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<PAGE> 1
EXHIBIT 10.28(b)
AMENDMENT NO. 1
TO
PREFERRED STOCK PURCHASE AGREEMENT
This AMENDMENT, dated as of February 10, 1999, to that certain Preferred
Stock Purchase Agreement dated as of December 23, 1998, is made and entered into
between Aames Financial Corporation, a Delaware corporation (the "Company"), and
Capital Z Financial Services Fund II, L.P., a Bermuda limited partnership
("Capital Z").
RECITALS
WHEREAS, the parties hereto have entered into a Preferred Stock Purchase
Agreement dated as of December 23, 1998 (the "Stock Purchase Agreement"); and
WHEREAS, such parties desire to amend the Stock Purchase Agreement as
set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I.
DEFINITIONS
Section 1.1. Definitions. Capitalized terms used herein that are defined
in the Stock Purchase Agreement are used herein as so defined.
ARTICLE II.
AMENDMENTS
The Stock Purchase Agreement is hereby amended as follows:
(a) Section 2.2 is amended in its entirety by replacing such section
with the following:
"Section 2.2. Issuance, Sale and Purchase of Senior Preferred
Stock. (a) Upon the terms and subject to the conditions set forth in
this Agreement, and in reliance upon the representations and warranties
hereinafter set forth, at the Initial Closing, the Company will issue,
sell, and deliver to the Purchaser (including the Designated
Purchasers), and the Purchaser will purchase from the Company, (i)
26,704 shares of Series B Preferred Stock and (ii) 49,796 shares of
Series C Preferred Stock. The purchase price per share of Senior
Preferred Stock shall equal $1,000.00 (the "Purchase Price").
<PAGE> 2
(b) The Senior Preferred Stock shall be issued to Capital Z and
to its Designated Purchaser as follows:
26,704 shares of Series B Preferred Stock to Capital Z;
48,296 shares of Series C Preferred Stock to Capital Z; and
1,500 shares of Series C Preferred Stock to Georges St. Laurent."
(b) Section 2.5(b) is amended by deleting the last sentence thereof and
replacing such sentence with the following:
"At the earlier to occur of (i) the day the Recapitalization is
consummated and (ii) June 30, 1999, the Purchaser may, at its option,
(I) if on the day the Recapitalization is consummated, exchange up to
3,000,000 shares of Series C Preferred Stock acquired at the Initial
Closing or (II) if on June 30, 1999, exchange up to 3,000 shares of
Series C Preferred Stock acquired at the Initial Closing, in either case
for an equivalent number of shares of Series B Preferred Stock;
provided, that, immediately following such exchange, the total number of
outstanding shares of Series B Preferred Stock do not represent more
than 49.99% of the total voting power of the Company entitled to vote
for the election of directors of the Company."
(c) Section 4.4 is amended by adding the following sentences at the end
of such section:
"Notwithstanding the prior sentence, in the event that the Company is
unable to cause the Existing Rights Agreement to be amended by the
Initial Closing, the Company shall cause the Existing Rights Agreement
to be so amended promptly after the Initial Closing Date. At the request
of Capital Z, the Company will promptly take all actions necessary to
redeem the Existing Rights."
(d) The Series B Certificate of Designations (Exhibit A to the Stock
Purchase Agreement) is amended in its entirety by replacing such Series B
Certificate of Designations with the Series B Certificate of Designations
attached to this Amendment as Exhibit A.
(e) The Series C Certificate of Designations (Exhibit B to the Stock
Purchase Agreement) is amended in its entirety by replacing such Series C
Certificate of Designations with the Series C Certificate of Designations
attached to this Amendment as Exhibit B.
(f) The Contingent Warrant (Exhibit E to the Stock Purchase Agreement)
is amended in its entirety by replacing such
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<PAGE> 3
Contingent Warrant with the Contingent Warrant attached to this Amendment as
Exhibit C.
ARTICLE III.
MISCELLANEOUS PROVISIONS
Section 3.1. Counterparts. For the convenience of the parties, any
number of counterparts of this Amendment may be executed by any one or more of
the parties hereto, and each such executed counterpart shall be, and shall be
deemed to be, an original, but all of which together shall constitute one and
the same instrument.
Section 3.2. Ratification. The Stock Purchase Agreement, as amended
hereby, is hereby ratified and confirmed.
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<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed to be effective as of the 10th day of February, 1999.
AAMES FINANCIAL CORPORATION
By: /s/ Cary H. Thompson
----------------------------------------
Name: Cary H. Thompson
Title: Chief Executive Officer
CAPITAL Z FINANCIAL SERVICES FUND II, L.P.,
By its General Partner
CAPITAL Z PARTNERS, L.P.,
By its General Partner
CAPITAL Z PARTNERS, LTD.
By: /s/ Adam M. Mizel
----------------------------------
Name: Adam M. Mizel
Title: Partner
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<PAGE> 5
EXHIBIT A
- --------------------------------------------------------------------------------
CERTIFICATE OF THE VOTING POWERS, DESIGNATIONS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
OR OTHER SPECIAL RIGHTS, AND QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS THEREOF, OF
SERIES B CONVERTIBLE PREFERRED STOCK OF
AAMES FINANCIAL CORPORATION
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AAMES FINANCIAL CORPORATION, a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), hereby
certifies that the following resolutions were adopted by the Board of Directors
of the Corporation (the "Board of Directors") pursuant to authority of the Board
of Directors as required by Section 151 of the Delaware General Corporation Law:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors in accordance with the provisions of the Certificate of
Incorporation of the Corporation, as amended (the "Certificate of
Incorporation"), the Board of Directors hereby creates a series of the
Corporation's previously authorized preferred stock, par value $0.001 per share
(the "Preferred Stock"), and hereby states the designation and number thereof,
and fixes the voting powers, preferences and relative, participating, optional
and other special rights, and the qualifications, limitations and restrictions
thereof, as follows:
SERIES B CONVERTIBLE PREFERRED STOCK:
I. DESIGNATION AND AMOUNT
The designation of this series of shares shall be "Series B Convertible
Preferred Stock" (the "Series B Preferred Stock") par value $0.001 per share;
the initial stated value per share shall be $1,000.00 (the "Initial Stated
Value"); and the number of shares constituting such series shall be 100,000. The
number of shares of the Series B Preferred Stock may be decreased from time to
time by a resolution or resolutions of the Board of Directors; provided,
however, that such number shall not be decreased below the aggregate number of
shares of the Series B Preferred Stock then outstanding.
II. RANK
A. With respect to dividends, the Series B Preferred Stock shall rank
(i) senior to each other class or series of Preferred Stock, except for the
Series C Convertible Preferred Stock, par value $0.001 per share, of the
Corporation (the "Series C Preferred Stock"); (ii) on a parity with the Series C
Preferred Stock; and (iii) senior to the Corporation's Common Stock, par value
$.001 per share (the "Common Stock"), and, except as specified above, all other
classes and series of capital stock of the Corporation hereafter issued by the
Corporation. With respect to dividends, all equity securities of the Corporation
to which the Series B Preferred Stock ranks senior, including the Common Stock,
are collectively referred to herein as the
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"Junior Dividend Securities"; all equity securities of the Corporation with
which the Series B Preferred Stock ranks on a parity, including the Series C
Preferred Stock, are collectively referred to herein as the "Parity Dividend
Securities"; and all equity securities of the Corporation (other than
convertible debt securities) to which the Series B Preferred Stock ranks junior,
with respect to dividends, are collectively referred to herein as the "Senior
Dividend Securities."
B. With respect to the distribution of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the Series B Preferred Stock shall rank (i) senior to each other class or series
of Preferred Stock of the Corporation, except for the Series C Preferred Stock;
(ii) on a parity with the Series C Preferred Stock; and (iii) senior to the
Common Stock, and, except as specified above, all other classes and series of
capital stock of the Corporation hereafter issued by the Corporation. With
respect to the distribution of assets upon liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, all equity securities
of the Corporation to which the Series B Preferred Stock ranks senior, including
the Common Stock, are collectively referred to herein as "Junior Liquidation
Securities"; all equity securities of the Corporation (other than convertible
debt securities) to which the Series B Preferred Stock ranks on parity,
including the Series C Preferred Stock, are collectively referred to herein as
"Parity Liquidation Securities"; and all equity securities of the Corporation to
which the Series B Preferred Stock ranks junior are collectively referred to
herein as "Senior Liquidation Securities."
C. The Series B Preferred Stock shall be subject to the creation of
Junior Dividend Securities and Junior Liquidation Securities (collectively,
"Junior Securities"), but no Parity Dividend Securities or Parity Liquidation
Securities (collectively, "Parity Securities") (other than the Series C
Preferred Stock) or Senior Dividend Securities or Senior Liquidation Securities
(collectively, "Senior Securities") shall be created except in accordance with
the terms hereof.
III. DIVIDENDS
A. DIVIDENDS. Subject to the terms of paragraph D below, shares of
Series B Preferred Stock shall accumulate dividends at a rate of 6.5% per annum
(the "Dividend Rate"), which dividends shall be paid quarterly in cash, in four
equal quarterly installments on the last day of March, June, September and
December of each year, or if any such date is not a Business Day, the Business
Day next preceding such day (each such date, regardless of whether any dividends
have been paid or declared and set aside for payment on such date, a "Dividend
Payment Date"), to holders of record (the "Registered Holders") as they appear
on the stock record books of the Corporation on the fifteenth day prior to the
relevant Dividend Payment Date; provided, however, that during the Accrual
Period (as defined in Article IX hereof) the Corporation shall have the option
to accrue such dividends, which dividends, to the extent so accrued, shall
compound quarterly. Prior to the consummation of the Recapitalization, dividends
shall accrue and accumulate on the Initial Stated Value of each share of Series
B Preferred Stock. Following the consummation of the Recapitalization, dividends
shall accrue and accumulate on the Post-Recapitalization Stated Value of each
share of Series B Preferred Stock. Dividends shall be paid only when, as and if
declared by the Board of Directors out of funds at the time
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legally available for the payment of dividends. Dividends shall begin to
accumulate on outstanding shares of Series B Preferred Stock from the date of
issuance and shall be deemed to accumulate from day to day whether or not earned
or declared until paid. Dividends shall accumulate on the basis of a 360-day
year consisting of twelve 30-day months (four 90-day quarters) and the actual
number of days elapsed in the period for which payable.
B. ACCUMULATION. Dividends on the Series B Preferred Stock shall be
cumulative, and from and after (i) any Dividend Payment Date on which any
dividend that has accumulated or been deemed to have accumulated through such
date has not been paid in full (other than by reason of the election of the
Corporation to accrue dividends during the Accrual Period); or (ii) any payment
date set for a redemption on which such redemption payment has not been paid in
full, additional dividends shall accumulate in respect of the amount of such
unpaid dividends or unpaid redemption payment (the "Arrearage") at 125% of the
stated dividend rate (or such lesser rate as may be the maximum rate that is
then permitted by applicable law). Such additional dividends in respect of any
Arrearage shall be deemed to accumulate from day to day whether or not earned or
declared until the Arrearage is paid, shall be calculated as of such successive
Dividend Payment Date, and shall constitute an additional Arrearage from and
after any Dividend Payment Date to the extent not paid on such Dividend Payment
Date. References in any Article herein to dividends that have accumulated or
that have been deemed to have accumulated with respect to the Series B Preferred
Stock shall include the amount, if any, of any Arrearage together with any
dividends accumulated or deemed to have accumulated on such Arrearage pursuant
to the immediately preceding two sentences. Additional dividends in respect of
any Arrearage may be declared and paid at any time, in whole or in part, without
reference to any regular Dividend Payment Date, to Registered Holders as they
appear on the stock record books of the Corporation on such record date as may
be fixed by the Board of Directors (which record date shall be no less than 10
days prior to the corresponding payment date). Dividends in respect of any
Arrearage shall be paid in cash.
C. METHOD OF PAYMENT. Dividends paid on the shares of Series B Preferred
Stock in an amount less than the total amount of such dividends at the time
accumulated and payable on all outstanding shares of Series B Preferred Stock
shall be allocated pro rata on a share-by-share basis among all such shares then
outstanding. After the Second Anniversary Date, dividends that are declared and
paid in an amount less than the full amount of dividends accumulated on the
Series B Preferred Stock (and on any Arrearage) shall be applied first to the
earliest dividend which has not theretofore been paid. All cash payments of
dividends on the shares of Series B Preferred Stock shall be made in such coin
or currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts.
D. SPECIAL DIVIDEND RIGHTS.
1. In addition to the dividend rights set forth in paragraph A above,
prior to the consummation of the Recapitalization, the holders of shares of
Series B Preferred Stock shall be entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available for such purpose, cash
dividends in an amount per whole share (rounded to the nearest cent) equal to
the Formula Number then in effect times the aggregate per share amount of all
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cash dividends declared or paid on the Common Stock. If, prior to the
consummation of the Recapitalization, the Corporation shall pay any dividend or
make any distribution on the Common Stock payable in assets, securities or other
forms of non-cash consideration, then, in each such case, the Corporation shall
simultaneously pay or make on each whole outstanding share of the Series B
Preferred Stock a dividend or distribution in like kind equal to the Formula
Number then in effect times such dividend or distribution on each share of the
Common Stock. The dividends and distributions on the Series B Preferred Stock
pursuant to this paragraph are hereinafter referred to as "Participating
Dividends." The Corporation shall declare each Participating Dividend
immediately prior to or at the same time it declares any cash or non-cash
dividend or distribution on the Common Stock in respect of which a Participating
Dividend is required to be paid. No cash or non-cash dividend or distribution on
the Common Stock in respect of which a Participating Dividend is required shall
be paid or set aside for payment on the Common Stock unless a Participation
Dividend in respect of such dividend shall be have been paid. Nothing contained
in this paragraph D shall obligate the Company to declare or pay any dividend or
other distribution on the Common Stock or (except pursuant to paragraph A of
this Article III or in connection with a dividend or distribution on the Common
Stock as provided in this paragraph D) the Series B Preferred Stock.
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.
IV. LIQUIDATION PREFERENCE
A. PRIOR TO THE RECAPITALIZATION. In the event of a liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
occurring prior to the consummation of the Recapitalization, the holders of
then-outstanding shares of Series B Preferred Stock shall be entitled to receive
out of the assets of the Corporation, whether such assets are capital or surplus
of any nature, an amount per share equal to the sum of (i) the dividends, if
any, accumulated or deemed to have accumulated thereon, to the date of final
distribution to such holders, whether or not such dividends are declared; and
(ii) the Initial Stated Value thereof, before any payment shall be made or any
assets distributed to the holders of any Junior Liquidation Securities (the
"Initial Preferred Distribution"). After the Initial Preferred Distribution has
been made, the holders of Series B Preferred Stock shall be entitled to share
pro rata with the holders of Common Stock in the distribution of any remaining
assets of the Corporation on the basis of each whole outstanding share of the
Series B Preferred Stock receiving an amount equal to the Formula Number then in
effect times such distribution on each share of the Common Stock. The
distributions on the Series B Preferred Stock pursuant to the immediately
preceding sentence of this paragraph A are hereinafter referred to as
"Participating Liquidation Distributions." No distribution on the Common Stock
in respect of which a Participating Liquidation Distribution is required shall
be paid or set aside for payment on the Common Stock unless a Participating
Liquidation Distribution in respect of such distribution is concurrently paid.
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B. AFTER THE RECAPITALIZATION. Subsequent to the consummation of the
Recapitalization, the holders of the outstanding shares of Series B Preferred
Stock shall be entitled to receive out of the assets of the Corporation, whether
such assets are capital or surplus of any nature, an amount per share equal to
the sum of (i) the dividends, if any, accumulated or deemed to have accumulated
thereon to the date of final distribution to such holders, whether or not such
dividends are declared; and (ii) the Post-Recapitalization Stated Value thereof,
before any payment shall be made or any assets distributed to the holders of any
Junior Liquidation Securities. After any such payment in full after the
consummation of the Recapitalization, the holders of Series B Preferred Stock
shall not, as such, be entitled to any further participation in any distribution
of assets of the Corporation.
C. PARITY SECURITIES. All the assets of the Corporation available for
distribution to stockholders after the liquidation preferences of any Senior
Liquidation Securities shall be distributed ratably (in proportion to the full
distributable amounts to which holders of Series B Preferred Stock and Parity
Liquidation Securities, if any, are respectively entitled upon such dissolution,
liquidation or winding up) among the holders of the then-outstanding shares of
Series B Preferred Stock and Parity Liquidation Securities, if any, when such
assets are not sufficient to pay in full the aggregate amounts payable thereon.
D. MERGER NOT A LIQUIDATION. Neither a consolidation or merger of the
Corporation with or into any other Person or Persons, nor a sale, conveyance,
lease, exchange or transfer of all or part of the Corporation's assets for cash,
securities or other property to a Person or Persons shall be deemed to be a
liquidation, dissolution or winding up of the Corporation for purposes of this
Article IV, but the holders of shares of Series B Preferred Stock shall
nevertheless be entitled from and after any such consolidation, merger or sale,
conveyance, lease, exchange or transfer of all or part of the Corporation's
assets to the rights provided by this Article IV following any such transaction.
Notice of any voluntary or involuntary liquidation, dissolution or winding up of
the Corporation, stating the payment date or dates when, and the place or places
where, the amounts distributable to each holder of shares of Series B Preferred
Stock in such circumstances shall be payable, shall be given by first-class
mail, postage prepaid, mailed not less than 30 days prior to any payment date
stated therein, to holders of record as they appear on the stock record books of
the Corporation as of the date such notices are first mailed.
V. REDEMPTION
A. INTENTIONALLY OMITTED
B. OPTIONAL REDEMPTION. Commencing on the earlier to occur of (x) the
tenth anniversary of the Issue Date and (y) the date on which fewer than 25% of
the shares of Series B Preferred Stock issued on the Issue Date remain
outstanding, and at all times thereafter, the Corporation may, at its option,
redeem all (but not less than all) outstanding shares of Series B Preferred
Stock on a date specified by the Corporation (the "Optional Redemption Date") by
paying the Redemption Price therefor in cash out of funds legally available for
such purpose.
C. NOTICE AND REDEMPTION PROCEDURES. Notice of the redemption of shares
of Series B Preferred Stock pursuant to paragraph B of this Article V (a "Notice
of Redemption")
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shall be sent to the holders of record of the shares of Series B Preferred Stock
to be redeemed by first class mail, postage prepaid, at each such holder's
address as it appears on the stock record books of the Corporation not more than
120 nor fewer than 90 days prior to the Optional Redemption Date, which date
shall be set forth in such notice (the "Redemption Date"); provided that failure
to give such Notice of Redemption to any holder, or any defect in such Notice of
Redemption to any holder shall not affect the validity of the proceedings for
the redemption of any shares of Series B Preferred Stock held by any other
holder. In order to facilitate the redemption of shares of Series B Preferred
Stock, the Board of Directors may fix a record date for the determination of the
holders of shares of Series B Preferred Stock to be redeemed not more than 30
days prior to the date the Notice of Redemption is mailed. On or after the
Optional Redemption Date, each holder of the shares called for redemption shall
surrender the certificate evidencing such shares to the Corporation at the place
designated in such notice and shall thereupon be entitled to receive payment of
the Redemption Price for such shares. From and after the Optional Redemption
Date, all dividends on shares of Series B Preferred Stock shall cease to
accumulate and all rights of the holders thereof as holders of Series B
Preferred Stock shall cease and terminate, except to the extent the Corporation
shall default in payment thereof on the Optional Redemption Date.
D. DEPOSIT OF FUNDS. The Corporation shall, on or prior to the Optional
Redemption Date, pursuant to paragraph C of this Article V, deposit with its
transfer agent or other redemption agent in the Borough of Manhattan, The City
of New York having a capital and surplus of at least $500,000,000 selected by
the Board of Directors, as a trust fund for the benefit of the holders of the
shares of Series B Preferred Stock to be redeemed, cash that is sufficient in
amount to redeem the shares to be redeemed in accordance with the Notice of
Redemption, with irrevocable instructions and authority to such transfer agent
or other redemption agent to pay to the respective holders of such shares, as
evidenced by a list of such holders certified by an officer of the Corporation,
the Redemption Price for such shares upon surrender of their respective share
certificates. Such deposit shall be deemed to constitute full payment of the
Redemption Price for such shares to the holders, and from and after the date of
such deposit, all rights of the holders of the shares of Series B Preferred
Stock that are to be redeemed as stockholders of the Corporation with respect to
such shares, except the right to receive the Redemption Price upon the surrender
of their respective certificates, shall cease and terminate. No dividends shall
accumulate on any shares of Series B Preferred Stock after the Optional
Redemption Date for such shares (unless the Corporation shall fail to deposit
cash sufficient to redeem all such shares). In case holders of any shares of
Series B Preferred Stock called for redemption shall not, within two years after
such deposit, claim the cash deposited for redemption thereof, such transfer
agent or other redemption agent shall, upon demand, pay over to the Corporation
the balance so deposited. Thereupon, such transfer agent or other redemption
agent shall be relieved of all responsibility to the holders thereof and the
sole right of such holders, with respect to shares to be redeemed, shall be to
receive the Redemption Price as general creditors of the Corporation. Any
interest accrued on any funds so deposited shall belong to the Corporation, and
shall be paid to it from time to time on demand.
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VI. RESTRICTIONS ON DIVIDENDS
So long as any shares of the Series B Preferred Stock are outstanding,
the Board of Directors shall not declare, and the Corporation shall not pay or
set apart for payment any dividend on any Junior Securities or make any payment
on account of, or set apart for payment money for a sinking or other similar
fund for, the repurchase, redemption or other retirement of, any Junior
Securities or Parity Securities or any warrants, rights or options exercisable
for or convertible into any Junior Securities or Parity Securities (other than
the repurchase, redemption or other retirement of debentures or other debt
securities that are convertible or exchangeable into any Junior Securities or
Parity Securities), or make any distribution in respect of the Junior
Securities, either directly or indirectly, and whether in cash, obligations or
shares of the Corporation or other property (other than distributions or
dividends in Junior Securities to the holders of Junior Securities), and shall
not permit any corporation or other entity directly or indirectly controlled by
the Corporation to purchase or redeem any Junior Securities or Parity Securities
or any warrants, rights, calls or options exercisable for or convertible into
any Junior Securities or Parity Securities (other than the repurchase,
redemption or other retirement of debentures or other debt securities that are
convertible or exchangeable into any Junior Securities or Parity Securities or
the repurchase, redemption or other retirement of Junior Securities or Parity
Securities in exchange for Junior Securities or Parity Securities) unless prior
to or concurrently with such declaration, payment, setting apart for payment,
repurchase, redemption or other retirement or distribution, as the case may be,
all accumulated and unpaid dividends on shares of the Series B Preferred Stock
not paid on the dates provided for in paragraph A of Article III hereof
(including Arrearages and accumulated dividends thereon) shall have been paid,
except that when dividends are not paid in full as aforesaid upon the shares of
Series B Preferred Stock, all dividends declared on the Series B Preferred Stock
and any series of Parity Dividend Securities shall be declared and paid pro rata
so that the amount of dividends so declared and paid on Series B Preferred Stock
and such series of Parity Dividend Securities shall in all cases bear to each
other the same ratio that accumulated dividends (including interest accrued on
or additional dividends accumulated in respect of such accumulated dividends) on
the shares of Series B Preferred Stock and such Parity Dividend Securities bear
to each other.
VII. VOTING RIGHTS
A. On or prior to the consummation of the Recapitalization, the holders
of Series B Preferred Stock shall be entitled to one thousand (1,000) votes per
share of Series B Preferred Stock at each meeting of stockholders of the
Corporation with respect to any and all matters presented to the stockholders of
the Corporation for their action and consideration. After the consummation of
the Recapitalization, the holders of Series B Preferred Stock shall be entitled
to the number of votes per share of Series B Preferred Stock equal to the number
of shares of Common Stock for which such share of Series B Preferred Stock is
then convertible pursuant to Article VIII at each meeting of stockholders of the
Corporation with respect to any and all matters presented to the stockholders of
the Corporation for their action and consideration.
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B. So long as any shares of the Series B Preferred Stock are
outstanding, (i) each share of Series B Preferred Stock shall entitle the holder
thereof to vote on all matters voted on by holders of Common Stock; and (ii) the
shares of Series B Preferred Stock shall vote together with shares of Common
Stock (and any shares of Series C Preferred Stock entitled to vote) as a single
class.
C. At each annual meeting of the stockholders of the Corporation, the
holders of Series B Preferred Stock, voting as a separate class, shall have the
right to elect, by the written consent (if action by written consent is
permitted) or affirmative vote of the holders of a majority of the outstanding
shares of Series B Preferred Stock, four members of a separate class of
directors, each of whom shall serve until the next annual meeting of the
stockholders of the Corporation or until his or her successor is elected and
qualified. Such vote or consent shall be taken in accordance with the procedures
specified in paragraph F below. The initial directors shall be Steven M.
Gluckstern, Adam M. Mizel, Mani Sadeghi and David Spuria.
D. Without the written consent (if action by written consent is
permitted) or affirmative vote of the holders of a majority of the outstanding
shares of Series B Preferred Stock and Series C Preferred Stock, voting together
as a single class, the Corporation shall not (i) authorize, create or issue, or
increase the authorized amount of, (x) any Senior Securities or Parity
Securities or (y) any class or series of capital stock or any security
convertible into or exercisable for any class or series of capital stock,
redeemable mandatorily or redeemable at the option of the holder thereof or (ii)
enter into any Transaction (as defined in paragraph H of Article VIII). Such
vote or consent shall be taken in accordance with the procedures specified in
paragraph F below.
E. Without the written consent (if action by written consent is
permitted) or affirmative vote of the holders of at least a majority of the
outstanding shares of Series B Preferred Stock and Series C Preferred Stock,
voting together as a single class, the Corporation shall not (i) amend, alter or
repeal any provision of the Certificate of Incorporation or the Bylaws, if the
amendment, alteration or repeal alters or changes the powers, preferences or
special rights of the Series B Preferred Stock so as to affect them materially
and adversely or (ii) authorize or take any other action if such action alters
or changes any of the rights of the Series B Preferred Stock in any respect or
otherwise would be inconsistent with the provisions of this Certificate of
Designations and the holders of any class or series of the capital stock of the
Corporation is entitled to vote thereon. Such vote or consent shall be taken in
accordance with the procedures specified in paragraph F below.
F. The foregoing rights of holders of shares of Series B Preferred Stock
to take any actions as provided in this Article VII may be exercised at any
annual meeting of stockholders or at a special meeting of stockholders held for
such purpose as hereinafter provided or at any adjournment thereof, or by the
written consent, delivered to the Secretary of the Corporation, of the holders
of the minimum number of shares required to take such action, if action by
written consent of stockholders of the Corporation is then permitted.
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The Chairman of the Board of the Corporation may call, and upon written
request of holders of record of 35% of the outstanding shares of Series B
Preferred Stock, if the holders of Series B Preferred Stock are to vote
separately as a single class, or the holders of record of 35% of the outstanding
shares of Series B Preferred Stock and Series C Preferred Stock, if the holders
of shares of Series B Preferred Stock are to vote as a class with the holders of
shares of any Series C Preferred Stock, addressed to the Secretary of the
Corporation at the principal office of the Corporation shall call, a special
meeting of the holders of shares entitled to vote as provided herein. Such
meeting shall be held within 30 days after delivery of such request to the
Secretary, at the place and upon the notice provided by law and in the By-laws
of the Corporation for the holding of meetings of stockholders.
At each meeting of stockholders at which the holders of shares of Series
B Preferred Stock shall have the right, voting separately as a single class or
as a class with the holders of shares of any Series C Preferred Stock, to elect
directors of the Corporation as provided in paragraph C above or to take any
action, the presence in person or by proxy of the holders of record of one-third
of the total number of shares of Series B Preferred Stock, if the holders of
shares of Series B Preferred Stock are to vote separately as a single class, or
the holders of record of one-third of the total number of shares of Series B
Preferred Stock and Series C Preferred Stock, if the holder of shares of Series
B Preferred Stock are to vote as a class with the holders of shares of Series C
Preferred Stock, then outstanding and entitled to vote on the matter shall be
necessary and sufficient to constitute a quorum. At any such meeting or at any
adjournment thereof:
(A) the absence of a quorum of the holders of shares of Series B
Preferred Stock, if the holders of Series B Preferred Stock are to vote
separately as a single class, shall not prevent the election of
directors other than those to be elected by the holders of shares of
Series B Preferred Stock, and the absence of a quorum of the holders of
shares of any other class or series of capital stock shall not prevent
the election of directors to be elected by the holders of shares of
Series B Preferred Stock or the taking of any action as provided in this
Article VII; and
(B) in the absence of a quorum of the holders of shares of
Series B Preferred Stock, if the holders of Series B Preferred Stock are
to vote separately as a single class, or the holders of shares of Series
B Preferred Stock and Series C Preferred Stock, if the holders of Series
B Preferred Stock are to vote as a class with the holders of shares of
Series C Preferred Stock, a majority of the holders of such shares
present in person or by proxy shall have the power to adjourn the
meeting as to the actions to be taken by the holders of shares of Series
B Preferred Stock or the holders of Series B Preferred Stock and Series
C Preferred Stock, as the case may be, from time to time and place to
place without notice other than announcement at the meeting until a
quorum shall be present.
For taking of any action as provided in this Article VII by the holders
of shares of Series B Preferred Stock voting separately as a single class or
together with the holders of shares of Series B Preferred Stock and Series C
Preferred Stock as a single class, as the case may be, each such holder shall
have one vote for each share of such stock standing in his name on the
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transfer books of the Corporation as of any record dated fixed for such purpose
or, if no such date be fixed, at the close of business on the Business Day next
preceding the day on which notice is given, or if notice if waived, at the close
of business on the Business Day next preceding the day on which the meeting is
held.
In case any vacancy shall occur among the directors elected by the
holders of shares of Series B Preferred Stock, as provided in paragraph C above,
such vacancy may be filled for the unexpired portion of the term by vote of the
remaining directors theretofore elected by such holders (if there is a remaining
director), or the last remaining director's successor in office. If any such
vacancy is not so filled within 20 days after the creation thereof or if all
directors so elected by the holders of Series B Preferred Stock shall cease to
serve as directors before their terms shall expire, the holders of the Series B
Preferred Stock then outstanding and entitled to vote for such directors may, by
written consent as herein provided (if action by written consent is permitted),
or at a special meeting of such holders called as provided herein, elect
successors to hold office for the unexpired terms of the directors whose places
shall be vacant.
Any director elected by the holders of shares of Series B Preferred
Stock voting separately as a single class may be removed from office with or
without cause by the vote or written consent (if action by written consent is
permitted) of the holders of at least a majority of the outstanding shares of
Series B Preferred Stock. A special meeting of the holders of shares of Series B
Preferred Stock may be called in accordance with the procedures set forth in
this paragraph F.
G. The Corporation shall not enter into any agreement or issue any
security that prohibits, conflicts or is inconsistent with, or would be breached
by, the Corporation's performance of its obligations hereunder.
VIII. CONVERSION
The holders of the Series B Preferred Stock shall have conversion rights
as follows:
A. Each share of Series B Preferred Stock shall be convertible at
the direction of, and by notice to the Corporation from, the
holders of a majority of the outstanding shares of Series B
Preferred Stock, at any time, at the office of the Corporation
or any transfer agent for such Series, into one thousand (1,000)
fully paid and nonassessable shares of Common Stock subject (x)
to adjustment from time to time as provided below (as so
adjusted, the "conversion ratio") and (y) (prior to the
consummation of the Recapitalization) to limitations resulting
from the available number of shares of Common Stock which may be
reserved for issuance upon such conversion, provided ,that any
conversion pursuant to this paragraph A of less than all of the
outstanding shares of Series B Preferred Stock shall be on a pro
rata basis amongst all holders of Series B Preferred Stock.
After consummation of the Recapitalization, the number "1,000"
in this paragraph shall be "1", subject to adjustment as
provided in paragraph VIII.G.
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B. If the holders of a majority of the outstanding shares of Series
B Preferred Stock give notice of conversion under paragraph A
above, the Corporation shall notify all other record holders of
Series B Preferred Stock (a "Conversion Notice"). Following
receipt of a Conversion Notice, the holders of Series B
Preferred Stock shall surrender the certificate or certificates
therefor duly endorsed, at the office of the Corporation or of
any transfer agent for such Series, and shall state therein the
name or names in which the certificate or certificates for
shares of Common Stock are to be issued. The Corporation shall,
as soon as practicable thereafter, issue and deliver at such
office to such holder, or to the nominee or nominees of such
holder, a certificate or certificates for the number of shares
of Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such
Conversion Notice and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall
be treated for all purposes as the recordholder or holders of
such shares of Common Stock as of such date. The issuance of
certificates or shares of Common Stock upon conversion of shares
of Series B Preferred Stock shall be made without charge for any
issue, stamp or other similar tax in respect of such issuance.
C. No fractional shares shall be issued upon conversion of any
shares of Series B Preferred Stock and the number of shares of
Common Stock to be issued shall be rounded down to the nearest
whole share, and the holder of Series B Preferred Stock shall be
paid in cash for any fractional share.
D. In case at any time or from time to time the Corporation shall
pay any dividend or make any other distribution to the holders
of its Common Stock or other class of securities, or shall offer
for subscription pro rata to the holders of its Common Stock or
other class of securities any additional shares of stock of any
class or any other right, or there shall be any capital
reorganization or reclassification of the Common Stock of the
Corporation or consolidation or merger of the Corporation with
or into another corporation, or any sale or conveyance to
another corporation of the property of the Corporation as an
entirety or substantially as an entirety, or there shall be a
voluntary or involuntary dissolution, liquidation or winding up
of the Corporation, then, in any one or more of said cases the
Corporation shall give at least 20 days' prior written notice
(the time of mailing of such notice shall be deemed to be the
time of giving thereof) to the registered holders of the Series
B Preferred Stock at the addresses of each as shown on the books
of the Corporation maintained by the Transfer Agent thereof of
the date on which (i) the books of the Corporation shall close
or a record shall be taken for such stock dividend, distribution
or subscription rights or (ii) such reorganization,
reclassification, consolidation, merger, sale or conveyance,
dissolution, liquidation or winding up shall take place, as the
case may be, provided that in the case of any Transaction to
which paragraph H applies the Corporation shall give at least 30
days' prior written notice as aforesaid. Such notice shall also
specify the date as of which the holders of the Common Stock of
record shall participate in said dividend,
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<PAGE> 16
distribution or subscription rights or shall be entitled to
exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification,
consolidation, merger, sale or conveyance or participate in such
dissolution, liquidation or winding up, as the case may be.
Failure to give such notice shall not invalidate any action so
taken.
E. From and after the Recapitalization, the Corporation shall at
all times reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of Series B Preferred
Stock, such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all
outstanding shares of Series B Preferred Stock, and if at any
time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all
then outstanding shares of Series B Preferred Stock, then in
addition to such other remedies as shall be available to the
holder of Series B Preferred Stock, the Corporation will take
such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for
such purposes.
F. Any notice required by the provisions of paragraph D to be given
the holders of shares of Series B Preferred Stock shall be
deemed given if sent by facsimile transmission, by telex, or if
deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his, her or its address
appearing on the books of the Corporation.
G. The conversion ratio shall be subject to adjustment from time to
time as follows:
(i) In case the Corporation shall at any time or from
time to time after the Issue Date (A) pay a dividend or make a
distribution, on the outstanding shares of Common Stock in
shares of Common Stock, (B) subdivide the outstanding shares of
Common Stock into a larger number of shares of Common Stock, (C)
combine the outstanding shares of Common Stock into a smaller
number of shares or (D) issue by reclassification of the shares
of Common Stock any shares of capital stock of the Corporation,
then, and in each such case, the conversion ratio in effect
immediately prior to such event or the record date therefor,
whichever is earlier, shall be adjusted so that the holder of
any shares of Series B Preferred Stock thereafter surrendered
for conversion shall be entitled to receive the number of shares
of Common Stock or other securities of the Corporation which
such holder would have owned or have been entitled to receive
after the happening of any of the events described above, had
such shares of Series B Preferred Stock been surrendered for
conversion immediately prior to the happening of such event or
the record date therefor, whichever is earlier. An adjustment
made pursuant to this clause (i) shall become effective (x) in
the case of any such dividend or distribution, immediately after
the close of business on the record date for the determination
of holders of shares of Common Stock
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<PAGE> 17
entitled to receive such dividend or distribution, or (y) in the
case of any such subdivision, reclassification or combination,
at the close of business on the day upon which such corporate
action becomes effective.
(ii) In the case the Corporation shall, after the Issue
Date, issue shares of Common Stock at a price per share, or
securities convertible into or exchangeable for shares of Common
Stock ("Convertible Securities") having a "Conversion Price" (as
defined below) less than the Current Market Price (for a period
of 15 consecutive trading days prior to such date), then, and in
each such case, the conversion ratio shall be adjusted so that
the holder of each share of Series B Preferred Stock shall be
entitled to receive, upon the conversion thereof, the number of
shares of Common Stock determined by multiplying (A) the
applicable conversion ratio on the day immediately prior to such
date by (B) a fraction, the numerator of which shall be the sum
of (1) the number of shares of Common Stock outstanding on the
date on which such shares or Convertible Securities are issued
and (2) the number of additional shares of Common Stock issued,
or into which the Convertible Securities may convert, and the
denominator of which shall be the sum of (x) the number of
shares of Common Stock outstanding on such date and (y) the
number of shares of Common Stock which the aggregate
consideration receivable by the Corporation for the total number
of shares of Common Stock so issued, or the number of shares of
Common Stock which the aggregate of the Conversion Price of such
Convertible Securities so issued, would purchase at such Current
Market price on such date. An adjustment made pursuant to this
clause (ii) shall be made on the next Business Day following the
date on which any such issuance is made and shall be effective
retroactively immediately after the close of business on such
date. For purposes of this clause (ii), the aggregate
consideration receivable by the Corporation in connection with
the issuance of any securities shall be deemed to be the sum of
the aggregate offering price to the public (before deduction of
underwriting discounts or commissions and expenses payable to
third parties), and the "Conversion Price" of any Convertible
Securities is the total amount received or receivable by the
Corporation as consideration for the issue or sale of such
Convertible Securities (before deduction of underwriting
discounts or commissions and expenses payable to third parties)
plus the minimum aggregate amount of additional consideration,
if any, payable to the Corporation upon the conversion, exchange
or exercise of any such Convertible Securities. Neither (A) the
issuance of any shares of Common Stock (whether treasury shares
or newly issued shares) pursuant to a dividend or distribution
on, or subdivision, combination or reclassification of, the
outstanding shares of Common Stock requiring an adjustment in
the conversion ratio pursuant to clause (i) of this paragraph G,
or pursuant to any employee benefit plan or program of the
Corporation or pursuant to any option, warrant, right, or
Convertible Security outstanding as of the date hereof
(including, but not limited to, the Rights, the Series B
Preferred Stock, the Series C Preferred Stock and the Warrants)
nor (B) the issuance of shares of Common Stock pursuant thereto
shall be deemed to
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<PAGE> 18
constitute an issuance of Common Stock or Convertible Securities
by the Corporation to which this clause (ii) applies. Upon
expiration of any Convertible Securities which shall not have
been exercised or converted and for which an adjustment shall
have been made pursuant to this clause (ii), the Conversion
Price computed upon the original issue thereof shall upon
expiration be recomputed as if the only additional shares of
Common Stock issued were such shares of Common Stock (if any)
actually issued upon exercise or conversion of such Convertible
Securities and the consideration received therefor was the
consideration actually received by the Corporation for the issue
of such Convertible Securities (whether or not exercised or
converted) plus the consideration actually received by the
Corporation upon such exercise of conversion.
(iii) In case the Corporation shall at any time or from
time to time after the Issue Date declare, order, pay or make a
dividend or other distribution (including, without limitation,
any distribution of stock or other securities or property or
rights or warrants to subscribe for securities of the
Corporation or any of its Subsidiaries by way of dividend or
spin-off), on its Common Stock, other than (A) regular quarterly
dividends payable in cash in an aggregate amount not to exceed
15% of net income from continuing operations before
extraordinary items of the Corporation, determined in accordance
with generally accepted accounting principles, during the period
(treated as one accounting period) commencing on July 1, 1998,
and ending on the date such dividend is paid or (B) dividends or
distributions of shares of Common Stock which are referred to in
clause (i) of this paragraph G, then, and in each such case, the
conversion ratio shall be adjusted so that the holder of each
share of Series B Preferred Stock shall be entitled to receive,
upon the conversion thereof, the number of shares of Common
Stock determined by multiplying (1) the applicable conversion
ratio on the day immediately prior to the record date fixed for
the determination of stockholders entitled to receive such
dividend or distribution by (2) a fraction, the numerator of
which shall be the then Current Market Price per share of Common
Stock for the period of 20 Trading Days preceding such record
date, and the denominator of which shall be such Current Market
Price per share of Common Stock for the period of 20 Trading
Days preceding such record date, less the Fair Market Value (as
defined in Article IX) per share of Common Stock (as determined
in good faith by the Board of Directors of the Corporation, a
certified resolution with respect to which shall be mailed to
each holder of shares of Series B Preferred Stock) of such
dividend or distribution; provided, however, that in the event
of a distribution of shares of capital stock of a Subsidiary of
the Corporation (a "Spin-Off") made to holders of shares of
Common Stock, the numerator of such fraction shall be the sum of
the Current Market Price per share of Common Stock for the
period of 20 Trading Days preceding the 35th Trading Day after
the effective date of such Spin-Off and the Current Market Price
of the number of shares (or the fraction of a share) of capital
stock of the Subsidiary which is
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<PAGE> 19
distributed in such Spin-Off in respect of one share of Common
Stock for the period of 20 Trading Days preceding such 35th
Trading Day and the denominator of which shall be the current
market price per share of the Common Stock for the period of 20
Trading Days proceeding such 35th Trading Day. An adjustment
made pursuant to this clause (iii) shall be made upon the
opening of business on the next Business Day following the date
on which any such dividend or distribution is made and shall be
effective retroactively immediately after the close of business
on the record date fixed for the determination of stockholders
entitled to receive such dividend or distribution; provided,
however, if the proviso to the preceding sentence applies, then
such adjustment shall be made and be effective as of such 35th
Trading Day after the effective date of such Spin-Off.
(iv) For purposes of this paragraph G, the number of
shares of Common Stock at any time outstanding shall not include
any shares of Common Stock then owned or held by or for the
account of the Corporation.
(v) The term "dividend", as used in this paragraph G
shall mean a dividend or other distribution upon stock of the
Corporation except pursuant to the Rights Agreement (as defined
in Article IX). Notwithstanding anything in this Article VIII to
the contrary, the conversion ratio shall not be adjusted as a
result of any dividend, distribution or issuance of securities
of the Corporation pursuant to the Rights Agreement.
(vi) Anything in this paragraph G to the contrary
notwithstanding, the Corporation shall not be required to give
effect to any adjustment in the conversion ratio unless and
until the net effect of one or more adjustments (each of which
shall be carried forward), determined as above provided, shall
have resulted in a change of the conversion ratio by at least
one-hundredth of one share of Common Stock, and when the
cumulative net effect of more than one adjustment so determined
shall be to change the conversion ratio by at least
one-hundredth of one share of Common Stock, such change in
conversion ratio shall thereupon be given effect.
(vii) The certificate of any firm of independent public
accountants of recognized standing selected by the Board of
Directors of the Corporation (which may be the firm of
independent public accountants regularly employed by the
Corporation) shall be presumptively correct for any computation
made under this paragraph G.
(viii) If the Corporation shall take a record of the
holders of its Common Stock for the purpose of entitling them to
receive a dividend or other distribution, and shall thereafter
and before the distribution to stockholders thereof legally
abandon its plan to pay or deliver such dividend or
distribution, then thereafter no adjustment in the number of
shares of Common Stock issuable upon exercise of
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<PAGE> 20
the right of conversion granted by this paragraph G or in the
conversion ratio then in effect shall be required by reason of
the taking of such record.
(ix) There shall be no adjustment of the conversion
ratio in case of the issuance of any stock of the Corporation in
a merger, reorganization, acquisition or other similar
transaction except as set forth in paragraph G(i), G(ii) and H
of this Article VIII.
H. In case of any reorganization or reclassification of outstanding
shares of Common Stock (other than a reclassification covered by
paragraph G(i) of this Article VIII, or in case of any
consolidation or merger of the Corporation with or into another
corporation, or in the case of any sale or conveyance to another
corporation of the property of the Corporation as an entirety or
substantially as an entirety (each of the foregoing being
referred to as a "Transaction"), each share of Series B
Preferred Stock then outstanding shall thereafter be convertible
into, in lieu of the Common Stock issuable upon such conversion
prior to consummation of such Transaction, the kind and amount
of shares of stock and other securities and property receivable
(including cash) upon the consummation of such Transaction by a
holder of that number of shares of Common Stock into which one
share of Series B Preferred Stock was convertible immediately
prior to such Transaction (including, on a pro rata basis, the
cash, securities or property received by holders of Common Stock
in any tender or exchange offer that is a step in such
Transaction). In case securities or property other than Common
Stock shall be issuable or deliverable upon conversion as
aforesaid, then all reference in this paragraph H shall be
deemed to apply, so far as appropriate and as nearly as may be,
to such other securities or property.
I. Upon any adjustment of the conversion ratio then in effect and
any increase or decrease in the number of shares of Common Stock
issuable upon the operation of the conversion set forth in
Article VIII, then, and in each such case, the Corporation shall
promptly deliver to the registered holders of the Series B
Preferred and Common Stock, a certificate signed by the
President or a Vice President and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary
of the Corporation setting forth in reasonable detail the event
requiring the adjustment and the method by which such adjustment
was calculated and specifying the conversion ratio then in
effect following such adjustment and the increased or decreased
number of shares issuable upon the conversion set forth in this
Article VIII.
IX. ADDITIONAL DEFINITIONS
For the purposes of this Certificate of Designations of Series B
Preferred Stock, the following terms shall have the meanings indicated:
"Accrual Period" means the end of the first quarterly period following
the Second Anniversary Date.
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<PAGE> 21
"Beneficially Own" with respect to any securities means having
"beneficial ownership" of such securities (as determined pursuant to Rule 13d-3
under the Exchange Act as in effect on the date hereof, except that a Person
shall be deemed to Beneficially Own all such securities that such Person has the
right to acquire whether such right is exercisable immediately or after the
passage of time). The terms "Beneficial Ownership" and "Beneficial Owner" have
correlative meanings.
"Business Day" means any day, other than a Saturday, Sunday or a day on
which banking institutions in the State of New York are authorized or obligated
by law or executive order to close.
"Bylaws" means the Bylaws of the Corporation, as amended.
"Current Market Price", when used with reference to shares of Common
Stock or other securities on any date, shall mean the closing price per share of
Common Stock or such other securities on such date and, when used with reference
to shares of Common Stock or other securities for any period shall mean the
average of the daily closing prices per share of Common Stock or such other
securities for such period. The closing price for each day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Common Stock or such other securities are not listed or admitted to
trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Common Stock or such
other securities are listed or admitted to trading or, if the Common Stock is
not listed or admitted to trading on any national securities exchange, the last
quoted sale price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. National Market System or such other
securities are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Common Stock or such other securities selected by the Board of Directors
of the Corporation. If the Common Stock or such other securities are not
publicly held or so listed or publicly traded, "Current Market Price" shall mean
the Fair Market Value per share of Common Stock or of such other securities as
determined in good faith by the Board of Directors of the Corporation based on
an opinion of an independent investment banking firm with an established
national reputation as a valuer of securities, which opinion may be based on
such assumption as such firm shall deem to be necessary and appropriate.
"Equity Securities" of any Person means any and all common stock,
preferred stock and any other class of capital stock of, and any partnership or
limited liability company interests of such Person or any other similar
interests of any Person that is not a corporation, partnership or limited
liability company.
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder, from time to
time.
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<PAGE> 22
"Fair Market Value" shall mean the amount which a willing buyer would
pay a willing seller in an arm's-length transaction.
"Formula Number" shall mean one thousand (1,000) prior to consummation
of the Recapitalization, provided, however, that if at any time prior to the
consummation of the Recapitalization, the Corporation shall (i) declare or pay
any dividend or make any distribution on the Common Stock, payable in shares of
Common Stock; (ii) subdivide (by a stock split or otherwise) the outstanding
shares of Common Stock into a larger number of shares of Common Stock; or (iii)
combine (by a reverse stock split or otherwise) the outstanding shares of Common
Stock into a smaller number of shares of Common Stock, then in each such case
the Formula Number in effect immediately prior to such event shall be adjusted
to a number determined by multiplying the Formula Number then in effect by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event (and rounding the result to the nearest whole number); and provided
further, that, if prior to the consummation of the Recapitalization the
Corporation shall issue any shares of its capital stock in a merger,
reclassification, or change of the outstanding shares of Common Stock, then in
each such event the Formula Number shall be appropriately adjusted to reflect
such merger, reclassification, or change so that each share of Series B
Preferred Stock continues to be the economic equivalent of a Formula Number of
shares of Common Stock immediately prior to such merger, reclassification, or
change.
"Group" has the meaning set forth in Rule 13d-5 under the Exchange Act.
"Issue Date" shall mean the first date on which shares of Series B
Preferred Stock are issued.
"Person" means any individual, corporation, company, association,
partnership, joint venture, trust or unincorporated organization, or a
government or any agency or political subdivision thereof.
"Post-Recapitalization Stated Value" shall be equal to $1.00.
"Recapitalization" means the amendment of the Corporation's Certificate
of Incorporation to increase the authorized shares of Common Stock from
50,000,000 to 400,000,000, and the authorized shares of Preferred Stock from
1,000,000 to 200,000,000, and the subsequent one thousand-for-one split of
Series B Preferred Stock and Series C Preferred Stock.
"Redemption Price" of a share of Class B Preferred Stock shall mean the
sum of (a) the dividends, if any, accumulated or deemed to have accumulated
thereon to the Optional Redemption Date, whether or not such dividends are
declared plus (b) either (i) the Initial Stated Value thereof (if the
Recapitalization has not been consummated prior to June 30, 1999) or (ii) the
Post-Recapitalization Stated Value thereof (if the Recapitalization has been
consummated prior to June 30, 1999), in each case subject to adjustment for
splits, reclassifications, recombinations or other similar events.
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<PAGE> 23
"Rights" shall mean any rights to purchase securities of the Corporation
issued pursuant to any Rights Agreement.
"Rights Agreement" shall mean the Rights Agreement, dated as of June 21,
1996, between the Company and Wells Fargo Bank as rights agent, and all
amendments, supplements and replacements thereof.
"Second Anniversary Date" means the second anniversary of the Issue
Date.
"Subsidiary" means, as to any Person, any other Person of which more
than 50% of the shares of the Voting Securities or other voting interests are
owned or controlled, or the ability to select or elect 50% or more of the
directors or similar managers is held, directly or indirectly, by such first
Person and one or more of its Subsidiaries.
"Trading Day" means a day on which the principal national securities
exchange on which the Common Stock is listed or admitted to trading is open for
the transaction of business or, if the Common Stock is not listed or admitted to
trading on any national securities exchange a Business Day.
"Voting Securities" means, (i) with respect to the Company, the Equity
Securities of the Company entitled to vote generally for the election of
directors of the Company, and (ii) with respect to any other Person, any
securities of or interests in such Person entitled to vote generally for the
election of directors or any similar managing person of such Person.
X. MISCELLANEOUS
A. NOTICES. Any notice referred to herein shall be in writing and,
unless first-class mail shall be specifically permitted for such notices under
the terms hereof, shall be deemed to have been given upon personal delivery
thereof, upon transmittal of such notice by telecopy (with confirmation of
receipt by telecopy or telex) or five days after transmittal by registered or
certified mail, postage prepaid, addressed as follows:
(i) if to the Corporation, to its office at 2 California
Plaza, 350 South Grand Avenue, Los Angeles, California
90071 (Attention: General Counsel)
or to the transfer agent for the Series B Preferred
Stock;
(ii) if to a holder of the Series B Preferred Stock, to such
holder at the address of such holder as listed in the
stock record books of the Corporation (which may include
the records of any transfer agent for the Series B
Preferred Stock); or
(iii) to such other address as the Corporation or such holder,
as the case may be, shall have designated by notice
similarly given.
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<PAGE> 24
B. REACQUIRED SHARES. Any shares of Series B Preferred Stock redeemed,
purchased or otherwise acquired by the Corporation, directly or indirectly, in
any manner whatsoever shall be retired and canceled promptly after the
acquisition thereof (and shall not be deemed to be outstanding for any purpose)
and, if necessary to provide for the lawful redemption or purchase of such
shares, the capital represented by such shares shall be reduced in accordance
with the Delaware General Corporation Law. All such shares of Series B Preferred
Stock shall upon their cancellation and upon the filing of an appropriate
certificate with the Secretary of State of the State of Delaware, become
authorized but unissued shares of Preferred Stock, par value $0.001 per share,
of the Corporation and may be reissued as part of another series of Preferred
Stock, par value $0.001 per share, of the Corporation subject to the conditions
or restrictions on issuance set forth herein.
C. ENFORCEMENT. Any registered holder of shares of Series B Preferred
Stock may proceed to protect and enforce its rights and the rights of such
holders by any available remedy by proceeding at law or in equity to protect and
enforce any such rights, whether for the specific enforcement of any provision
in this Certificate of Designations or in aid of the exercise of any power
granted herein, or to enforce any other proper remedy.
D. TRANSFER TAXES. Except as otherwise agreed upon pursuant to the terms
of this Certificate of Designations, the Corporation shall pay any and all
documentary, stamp or similar issue or transfer taxes and other governmental
charges that may be imposed under the laws of the United States of America or
any political subdivision or taxing authority thereof or therein in respect of
any issue or delivery of Common Stock on conversion of, or other securities or
property issued on account of, shares of Series B Preferred Stock pursuant
hereto or certificates representing such shares or securities. The Corporation
shall not, however, be required to pay any such tax or other charge that may be
imposed in connection with any transfer involved in the issue or transfer and
delivery of any certificate for Common Stock or other securities or property in
a name other than that in which the shares of Series B Preferred Stock so
exchanged, or on account of which such securities were issued, were registered
and no such issue or delivery shall be made unless and until the Person
requesting such issue has paid to the Corporation the amount of any such tax or
has established to the satisfaction of the Corporation that such tax has been
paid or is not payable.
E. TRANSFER AGENT. The Corporation may appoint, and from time to time
discharge and change, a transfer agent for the Series B Preferred Stock. Upon
any such appointment or discharge of a transfer agent, the Corporation shall
send notice thereof by first-class mail, postage prepaid, to each holder of
record of shares of Series B Preferred Stock.
F. RECORD DATES. In the event that the Series B Preferred Stock shall be
registered under either the Securities Act of 1933, as amended, or the Exchange
Act, the Corporation shall establish appropriate record dates with respect to
payments and other actions to be made with respect to the Series B Preferred
Stock.
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<PAGE> 25
IN WITNESS WHEREOF, this Certificate of Designations is executed on
behalf of the Corporation by its Executive vice President, General Counsel and
Secretary and attested by its Assistant Secretary, this 10th day of February ,
1999.
AAMES FINANCIAL CORPORATION
By:
--------------------------------------
Name:
Title:
[Corporate Seal]
ATTEST:
- -----------------------------------
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<PAGE> 26
EXHIBIT B
- --------------------------------------------------------------------------------
CERTIFICATE OF THE VOTING POWERS, DESIGNATIONS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
OR OTHER SPECIAL RIGHTS, AND QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS THEREOF, OF
SERIES C CONVERTIBLE PREFERRED STOCK OF
AAMES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
AAMES FINANCIAL CORPORATION, a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), hereby
certifies that the following resolutions were adopted by the Board of Directors
of the Corporation (the "Board of Directors") pursuant to authority of the Board
of Directors as required by Section 151 of the Delaware General Corporation Law:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors in accordance with the provisions of the Certificate of
Incorporation of the Corporation, as amended (the "Certificate of
Incorporation"), the Board of Directors hereby creates a series of the
Corporation's previously authorized preferred stock, par value $0.001 per share
(the "Preferred Stock"), and hereby states the designation and number thereof,
and fixes the voting powers, preferences and relative, participating, optional
and other special rights, and the qualifications, limitations and restrictions
thereof, as follows:
SERIES C CONVERTIBLE PREFERRED STOCK:
I. DESIGNATION AND AMOUNT
The designation of this series of shares shall be "Series C Convertible
Preferred Stock" (the "Series C Preferred Stock") par value $0.001 per share;
the initial stated value per share shall be $1,000.00 (the "Initial Stated
Value"); and the number of shares constituting such series shall be 100,000. The
number of shares of the Series C Preferred Stock may be decreased from time to
time by a resolution or resolutions of the Board of Directors; provided,
however, that such number shall not be decreased below the aggregate number of
shares of the Series C Preferred Stock then outstanding.
II. RANK
A. With respect to dividends, the Series C Preferred Stock shall rank
(i) senior to each other class or series of Preferred Stock, except for the
Series B Convertible Preferred Stock, par value $0.001 per share, of the
Corporation (the "Series B Preferred Stock"); (ii) on a parity with the Series B
Preferred Stock; and (iii) senior to the Corporation's Common Stock, par value
$.001 per share (the "Common Stock"), and, except as specified above, all other
classes and series of capital stock of the Corporation hereafter issued by the
Corporation. With respect to dividends, all equity securities of the Corporation
to which the Series C Preferred Stock ranks senior, including the Common Stock,
are collectively referred to herein as the
<PAGE> 27
"Junior Dividend Securities"; all equity securities of the Corporation with
which the Series C Preferred Stock ranks on a parity, including the Series B
Preferred Stock, are collectively referred to herein as the "Parity Dividend
Securities"; and all equity securities of the Corporation (other than
convertible debt securities) to which the Series C Preferred Stock ranks junior,
with respect to dividends, are collectively referred to herein as the "Senior
Dividend Securities."
B. With respect to the distribution of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the Series C Preferred Stock shall rank (i) senior to each other class or series
of Preferred Stock, except for the Series B Preferred Stock; (ii) on a parity
with the Series B Preferred Stock; and (iii) senior to the Common Stock, and,
except as specified above, all other classes and series of capital stock of the
Corporation hereafter issued by the Corporation. With respect to the
distribution of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, all equity securities of the
Corporation to which the Series C Preferred Stock ranks senior, including the
Common Stock, are collectively referred to herein as "Junior Liquidation
Securities"; all equity securities of the Corporation (other than convertible
debt securities) to which the Series C Preferred Stock ranks on parity,
including the Series B Preferred Stock, are collectively referred to herein as
"Parity Liquidation Securities"; and all equity securities of the Corporation to
which the Series C Preferred Stock ranks junior are collectively referred to
herein as "Senior Liquidation Securities."
C. The Series C Preferred Stock shall be subject to the creation of
Junior Dividend Securities and Junior Liquidation Securities (collectively,
"Junior Securities"), but no Parity Dividend Securities or Parity Liquidation
Securities (collectively, "Parity Securities") (other than the Series B
Preferred Stock) or Senior Dividend Securities or Senior Liquidation Securities
(collectively, "Senior Securities") shall be created except in accordance with
the terms hereof.
III. DIVIDENDS
A. DIVIDENDS. Subject to the terms of paragraph D below, shares of
Series C Preferred Stock shall accumulate dividends at a rate of 6.5% per annum
(the "Dividend Rate"), which dividends shall be paid quarterly in cash, in four
equal quarterly installments on the last day of March, June, September and
December of each year, or if any such date is not a Business Day, the Business
Day next preceding such day (each such date, regardless of whether any dividends
have been paid or declared and set aside for payment on such date, a "Dividend
Payment Date"), to holders of record (the "Registered Holders") as they appear
on the stock record books of the Corporation on the fifteenth day prior to the
relevant Dividend Payment Date; provided, however, that during the Accrual
Period (as defined in Article IX hereof) the Corporation shall have the option
to accrue such dividends, which dividends, to the extent so accrued, shall
compound quarterly. Prior to the consummation of the Recapitalization, dividends
shall accrue and accumulate on the Initial Stated Value of each share of Series
B Preferred Stock. Following the consummation of the Recapitalization, dividends
shall accrue and accumulate on the Post-Recapitalization Stated Value of each
share of Series B Preferred Stock. Dividends shall be paid only when, as and if
declared by the Board of Directors out of funds at the time
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legally available for the payment of dividends. Dividends shall begin to
accumulate on outstanding shares of Series C Preferred Stock from the date of
issuance and shall be deemed to accumulate from day to day whether or not earned
or declared until paid. Dividends shall accumulate on the basis of a 360-day
year consisting of twelve 30-day months (four 90-day quarters) and the actual
number of days elapsed in the period for which payable.
B. ACCUMULATION. Dividends on the Series C Preferred Stock shall be
cumulative, and from and after (i) any Dividend Payment Date on which any
dividend that has accumulated or been deemed to have accumulated through such
date has not been paid in full (other than by reason of the election of the
Corporation to accrue dividends during the Accrual Period); or (ii) any payment
date set for a redemption on which such redemption payment has not been paid in
full, additional dividends shall accumulate in respect of the amount of such
unpaid dividends or unpaid redemption payment (the "Arrearage") at 125% of the
stated dividend rate (or such lesser rate as may be the maximum rate that is
then permitted by applicable law). Such additional dividends in respect of any
Arrearage shall be deemed to accumulate from day to day whether or not earned or
declared until the Arrearage is paid, shall be calculated as of such successive
Dividend Payment Date, and shall constitute an additional Arrearage from and
after any Dividend Payment Date to the extent not paid on such Dividend Payment
Date. References in any Article herein to dividends that have accumulated or
that have been deemed to have accumulated with respect to the Series C Preferred
Stock shall include the amount, if any, of any Arrearage together with any
dividends accumulated or deemed to have accumulated on such Arrearage pursuant
to the immediately preceding two sentences. Additional dividends in respect of
any Arrearage may be declared and paid at any time, in whole or in part, without
reference to any regular Dividend Payment Date, to Registered Holders as they
appear on the stock record books of the Corporation on such record date as may
be fixed by the Board of Directors (which record date shall be no less than 10
days prior to the corresponding payment date). Dividends in respect of any
Arrearage shall be paid in cash.
C. METHOD OF PAYMENT. Dividends paid on the shares of Series C Preferred
Stock in an amount less than the total amount of such dividends at the time
accumulated and payable on all outstanding shares of Series C Preferred Stock
shall be allocated pro rata on a share-by-share basis among all such shares then
outstanding. After the Second Anniversary Date, dividends that are declared and
paid in an amount less than the full amount of dividends accumulated on the
Series C Preferred Stock (and on any Arrearage) shall be applied first to the
earliest dividend which has not theretofore been paid. All cash payments of
dividends on the shares of Series C Preferred Stock shall be made in such coin
or currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts.
D. SPECIAL DIVIDEND RIGHTS.
1. In addition to the dividend rights set forth in paragraph A above,
prior to the consummation of the Recapitalization, the holders of shares of
Series C Preferred Stock shall be entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available for such purpose, cash
dividends in an amount per whole share (rounded to the nearest cent) equal to
the Formula Number then in effect times the aggregate per share amount of all
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cash dividends declared or paid on the Common Stock. If, prior to the
consummation of the Recapitalization, the Corporation shall pay any dividend or
make any distribution on the Common Stock payable in assets, securities or other
forms of non-cash consideration, then, in each such case, the Corporation shall
simultaneously pay or make on each whole outstanding share of the Series C
Preferred Stock a dividend or distribution in like kind equal to the Formula
Number then in effect times such dividend or distribution on each share of the
Common Stock. The dividends and distributions on the Series C Preferred Stock
pursuant to this paragraph D are hereinafter referred to as "Participating
Dividends." The Corporation shall declare each Participating Dividend
immediately prior to or at the same time it declares any cash or non-cash
dividend or distribution on the Common Stock in respect of which a Participating
Dividend is required to be paid. No cash or non-cash dividend or distribution on
the Common Stock in respect of which a Participating Dividend is required shall
be paid or set aside for payment on the Common Stock unless a Participation
Dividend in respect of such dividend shall be have been paid. Nothing contained
in this paragraph D shall obligate the Company to declare or pay any dividend or
other distribution on the Common Stock or (except pursuant to paragraph A of
this Article III or in connection with a dividend or distribution on the Common
Stock as provided in this paragraph D) the Series B Preferred Stock.
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.
IV. LIQUIDATION PREFERENCE
A. PRIOR TO THE RECAPITALIZATION. In the event of a liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
occurring prior to the consummation of the Recapitalization, the holders of
then-outstanding shares of Series C Preferred Stock shall be entitled to receive
out of the assets of the Corporation, whether such assets are capital or surplus
of any nature, an amount per share equal to the sum of (i) the dividends, if
any, accumulated or deemed to have accumulated thereon, to the date of final
distribution to such holders, whether or not such dividends are declared; and
(ii) the Initial Stated Value thereof, before any payment shall be made or any
assets distributed to the holders of any Junior Liquidation Securities (the
"Initial Preferred Distribution"). After the Initial Preferred Distribution has
been made, the holders of Series C Preferred Stock shall be entitled to share
pro rata with the holders of Common Stock in the distribution of any remaining
assets of the Corporation on the basis of each whole outstanding share of the
Series C Preferred Stock receiving an amount equal to the Formula Number then in
effect times such distribution on each share of the Common Stock. The
distributions on the Series C Preferred Stock pursuant to the immediately
preceding sentence of this paragraph A are hereinafter referred to as
"Participating Liquidation Distributions." No distribution on the Common Stock
in respect of which a Participating Liquidation Distribution is required shall
be paid or set aside for payment on the Common Stock unless a Participating
Liquidation Distribution in respect of such distribution is concurrently paid.
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B. AFTER THE RECAPITALIZATION. Subsequent to the consummation of the
Recapitalization, the holders of the outstanding shares of Series C Preferred
Stock shall be entitled to receive out of the assets of the Corporation, whether
such assets are capital or surplus of any nature, an amount per share equal to
the sum of (i) the dividends, if any, accumulated or deemed to have accumulated
thereon to the date of final distribution to such holders, whether or not such
dividends are declared; and (ii) the Post-Recapitalization Stated Value thereof,
before any payment shall be made or any assets distributed to the holders of any
Junior Liquidation Securities. After any such payment in full after the
consummation of the Recapitalization, the holders of Series C Preferred Stock
shall not, as such, be entitled to any further participation in any distribution
of assets of the Corporation.
C. PARITY SECURITIES. All the assets of the Corporation available for
distribution to stockholders after the liquidation preferences of any Senior
Liquidation Securities shall be distributed ratably (in proportion to the full
distributable amounts to which holders of Series C Preferred Stock and Parity
Liquidation Securities, if any, are respectively entitled upon such dissolution,
liquidation or winding up) among the holders of the then-outstanding shares of
Series C Preferred Stock and Parity Liquidation Securities, if any, when such
assets are not sufficient to pay in full the aggregate amounts payable thereon.
D. MERGER NOT A LIQUIDATION. Neither a consolidation or merger of the
Corporation with or into any other Person or Persons, nor a sale, conveyance,
lease, exchange or transfer of all or part of the Corporation's assets for cash,
securities or other property to a Person or Persons shall be deemed to be a
liquidation, dissolution or winding up of the Corporation for purposes of this
Article IV, but the holders of shares of Series C Preferred Stock shall
nevertheless be entitled from and after any such consolidation, merger or sale,
conveyance, lease, exchange or transfer of all or part of the Corporation's
assets to the rights provided by this Article IV following any such transaction.
Notice of any voluntary or involuntary liquidation, dissolution or winding up of
the Corporation, stating the payment date or dates when, and the place or places
where, the amounts distributable to each holder of shares of Series C Preferred
Stock in such circumstances shall be payable, shall be given by first-class
mail, postage prepaid, mailed not less than 30 days prior to any payment date
stated therein, to holders of record as they appear on the stock record books of
the Corporation as of the date such notices are first mailed.
V. REDEMPTION
A. INTENTIONALLY OMITTED
B. OPTIONAL REDEMPTION. Commencing on the earlier to occur of (x) the
tenth anniversary of the Issue Date and (y) the date on which fewer than 25% of
the shares of Series C Preferred Stock issued on the Issue Date remain
outstanding, and at all times thereafter, the Corporation may, at its option,
redeem all (but not less than all) outstanding shares of Series C Preferred
Stock on a date specified by the Corporation (the "Optional Redemption Date") by
paying the Redemption Price therefor in cash out funds legally available for
such purpose.
C. NOTICE AND REDEMPTION PROCEDURES. Notice of the redemption of shares
of Series C Preferred Stock pursuant to paragraph B of this Article V (a "Notice
of Redemption")
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shall be sent to the holders of record of the shares of Series C Preferred Stock
to be redeemed by first class mail, postage prepaid, at each such holder's
address as it appears on the stock record books of the Corporation not more than
120 nor fewer than 90 days prior to the Optional Redemption Date, which date
shall be set forth in such notice (the "Redemption Date"); provided that failure
to give such Notice of Redemption to any holder, or any defect in such Notice of
Redemption to any holder shall not affect the validity of the proceedings for
the redemption of any shares of Series C Preferred Stock held by any other
holder. In order to facilitate the redemption of shares of Series C Preferred
Stock, the Board of Directors may fix a record date for the determination of the
holders of shares of Series C Preferred Stock to be redeemed not more than 30
days prior to the date the Notice of Redemption is mailed. On or after the
Optional Redemption Date, each holder of the shares called for redemption shall
surrender the certificate evidencing such shares to the Corporation at the place
designated in such notice and shall thereupon be entitled to receive payment of
the Redemption Price for such shares. From and after the Optional Redemption
Date, all dividends on shares of Series C Preferred Stock shall cease to
accumulate and all rights of the holders thereof as holders of Series C
Preferred Stock shall cease and terminate, except to the extent the Corporation
shall default in payment thereof on the Optional Redemption Date.
D. DEPOSIT OF FUNDS. The Corporation shall, on or prior to the Optional
Redemption Date, pursuant to paragraph C of this Article V, deposit with its
transfer agent or other redemption agent in the Borough of Manhattan, The City
of New York having a capital and surplus of at least $500,000,000 selected by
the Board of Directors, as a trust fund for the benefit of the holders of the
shares of Series C Preferred Stock to be redeemed, cash that is sufficient in
amount to redeem the shares to be redeemed in accordance with the Notice of
Redemption, with irrevocable instructions and authority to such transfer agent
or other redemption agent to pay to the respective holders of such shares, as
evidenced by a list of such holders certified by an officer of the Corporation,
the Redemption Price upon surrender of their respective share certificates. Such
deposit shall be deemed to constitute full payment of the Redemption Price for
such shares to the holders, and from and after the date of such deposit, all
rights of the holders of the shares of Series C Preferred Stock that are to be
redeemed as stockholders of the Corporation with respect to such shares, except
the right to receive the Redemption Price upon the surrender of their respective
certificates, shall cease and terminate. No dividends shall accumulate on any
shares of Series C Preferred Stock after the Optional Redemption Date, for such
shares (unless the Corporation shall fail to deposit cash sufficient to redeem
all such shares). In case holders of any shares of Series C Preferred Stock
called for redemption shall not, within two years after such deposit, claim the
cash deposited for redemption thereof, such transfer agent or other redemption
agent shall, upon demand, pay over to the Corporation the balance so deposited.
Thereupon, such transfer agent or other redemption agent shall be relieved of
all responsibility to the holders thereof and the sole right of such holders,
with respect to shares to be redeemed, shall be to receive the Redemption Price
as general creditors of the Corporation. Any interest accrued on any funds so
deposited shall belong to the Corporation, and shall be paid to it from time to
time on demand.
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VI. RESTRICTIONS ON DIVIDENDS
So long as any shares of the Series C Preferred Stock are outstanding,
the Board of Directors shall not declare, and the Corporation shall not pay or
set apart for payment any dividend on any Junior Securities or make any payment
on account of, or set apart for payment money for a sinking or other similar
fund for, the repurchase, redemption or other retirement of, any Junior
Securities or Parity Securities or any warrants, rights or options exercisable
for or convertible into any Junior Securities or Parity Securities (other than
the repurchase, redemption or other retirement of debentures or other debt
securities that are convertible or exchangeable into any Junior Securities or
Parity Securities), or make any distribution in respect of the Junior
Securities, either directly or indirectly, and whether in cash, obligations or
shares of the Corporation or other property (other than distributions or
dividends in Junior Securities to the holders of Junior Securities), and shall
not permit any corporation or other entity directly or indirectly controlled by
the Corporation to purchase or redeem any Junior Securities or Parity Securities
or any warrants, rights, calls or options exercisable for or convertible into
any Junior Securities or Parity Securities (other than the repurchase,
redemption or other retirement of debentures or other debt securities that are
convertible or exchangeable into any Junior Securities or Parity Securities or
the repurchase, redemption or other retirement of Junior Securities or Parity
Securities in exchange for Junior Securities or Parity Securities) unless prior
to or concurrently with such declaration, payment, setting apart for payment,
repurchase, redemption or other retirement or distribution, as the case may be,
all accumulated and unpaid dividends on shares of the Series C Preferred Stock
not paid on the dates provided for in paragraph A of Article III hereof
(including Arrearages and accumulated dividends thereon) shall have been paid,
except that when dividends are not paid in full as aforesaid upon the shares of
Series C Preferred Stock, all dividends declared on the Series C Preferred Stock
and any series of Parity Dividend Securities shall be declared and paid pro rata
so that the amount of dividends so declared and paid on Series C Preferred Stock
and such series of Parity Dividend Securities shall in all cases bear to each
other the same ratio that accumulated dividends (including interest accrued on
or additional dividends accumulated in respect of such accumulated dividends) on
the shares of Series C Preferred Stock and such Parity Dividend Securities bear
to each other.
VII. VOTING RIGHTS
A. On or prior to the consummation of the Recapitalization, the holders
of Series C Preferred Stock shall be entitled to one thousand (1,000) votes per
share of Series C Preferred Stock at each meeting of stockholders of the
Corporation with respect to any and all matters presented to the stockholders of
the Corporation for their action and consideration, other than the election of
directors. After the consummation of the Recapitalization, the holders of Series
C Preferred Stock shall be entitled to the number of votes per share of Series C
Preferred Stock equal to the number of shares of Common Stock for which such
share of Series C Preferred Stock is then convertible pursuant to Article VIII
at each meeting of stockholders of the Corporation with respect to any and all
matters presented to the stockholders of the Corporation for their action and
consideration, other than the election of directors.
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B. So long as any shares of the Series C Preferred Stock are
outstanding, (i) each share of Series C Preferred Stock shall entitle the holder
thereof to vote on all matters voted on by holders of Common Stock, other than
the election of directors; and (ii) the shares of Series C Preferred Stock shall
vote together with shares of Common Stock and shares of Series B Preferred Stock
as a single class.
C. Without the written consent (if action by written consent is
permitted) or affirmative vote of the holders of a majority of the outstanding
shares of Series C Preferred Stock and Series B Preferred Stock, voting together
as a single class, the Corporation shall not (i) authorize, create or issue, or
increase the authorized amount of, (x) any Senior Securities or Parity
Securities or (y) any class or series of capital stock or any security
convertible into or exercisable for any class or series of capital stock,
redeemable mandatorily or redeemable at the option of the holder thereof or (ii)
enter into any Transaction (as defined in paragraph H of Article VIII). Such
vote or consent shall be taken in accordance with the procedures specified in
paragraph E below.
D. Without the written consent (if action by written consent is
permitted) or affirmative vote of the holders of at least a majority of the
outstanding shares of Series C Preferred Stock and Series B Preferred Stock,
voting together as a single class, the Corporation shall not (i) amend, alter or
repeal any provision of the Certificate of Incorporation or the Bylaws, if the
amendment, alteration or repeal alters or changes the powers, preferences or
special rights of the Series C Preferred Stock so as to affect them materially
and adversely or (ii) authorize or take any other action if such action alters
or changes any of the rights of the Series C Preferred Stock in any respect or
otherwise would be inconsistent with the provisions of this Certificate of
Designations and the holders of any class or series of the capital stock of the
Corporation is entitled to vote thereon. Such vote or consent shall be taken in
accordance with the procedures specified in paragraph E below.
E. The foregoing rights of holders of shares of Series C Preferred Stock
to take any actions as provided in this Article VII may be exercised at any
annual meeting of stockholders or at a special meeting of stockholders held for
such purpose as hereinafter provided or at any adjournment thereof, or by the
written consent, delivered to the Secretary of the Corporation, of the holders
of the minimum number of shares required to take such action, if action by
written consent of stockholders of the Corporation is then permitted.
The Chairman of the Board of the Corporation may call, and upon written
request of holders of record of 35% of the outstanding shares of Series C
Preferred Stock and Series B Preferred Stock, addressed to the Secretary of the
Corporation at the principal office of the Corporation shall call, a special
meeting of the holders of shares entitled to vote as provided herein. Such
meeting shall be held within 30 days after delivery of such request to the
Secretary, at the place and upon the notice provided by law and in the By-laws
of the Corporation for the holding of meetings of stockholders.
At each meeting of stockholders at which the holders of shares of Series
C Preferred Stock shall have the right to take any action, the presence in
person or by proxy of the
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holders of record of one-third of the total number of shares of Series C
Preferred Stock and Series B Preferred Stock then outstanding and entitled to
vote on the matter shall be necessary and sufficient to constitute a quorum. At
any such meeting or at any adjournment thereof:
(A) the absence of a quorum of the holders of shares of Series C
Preferred Stock shall not prevent the election of directors to be
elected by the holders of shares of Series B Preferred Stock or the
taking of any action as provided in this Article VII; and
(B) in the absence of a quorum of the holders of shares of
Series C Preferred Stock and Series B Preferred Stock, a majority of the
holders of such shares present in person or by proxy shall have the
power to adjourn the meeting as to the actions to be taken by the
holders of shares of Series C Preferred Stock and Series B Preferred
Stock, from time to time and place to place without notice other than
announcement at the meeting until a quorum shall be present.
For taking of any action as provided in this Article VII by the holders
of shares of Series C Preferred Stock and Series B Preferred Stock, each such
holder shall have one vote for each share of such stock standing in his name on
the transfer books of the Corporation as of any record dated fixed for such
purpose or, if no such date be fixed, at the close of business on the Business
Day next preceding the day on which notice is given, or if notice if waived, at
the close of business on the Business Day next preceding the day on which the
meeting is held.
F. The Corporation shall not enter into any agreement or issue any
security that prohibits, conflicts or is inconsistent with, or would be breached
by, the Corporation's performance of its obligations hereunder.
VIII. CONVERSION
The holders of the Series C Preferred Stock shall have conversion rights
as follows:
A. Each share of Series C Preferred Stock shall be convertible at
the direction of, and by notice to the Corporation from, (i) the
holder thereof or (ii) the holders of a majority of the
outstanding shares of Series C Preferred Stock, at any time, at
the office of the Corporation or any transfer agent for such
Series, into one thousand (1,000) fully paid and nonassessable
shares of Common Stock subject (x) to adjustment from time to
time as provided below (as so adjusted, the "conversion ratio")
and (y) (prior to the consummation of the Recapitalization) to
limitations resulting from the available number of shares of
Common Stock which may be reserved for issuance upon such
conversion, provided, that any conversion pursuant to clause
(ii) above of less than all of the outstanding shares of Series
C Preferred Stock shall be on a pro rata basis amongst all
holders of Series C Preferred Stock. After consummation of the
Recapitalization, the number "1,000" in this paragraph shall be
"1", subject to adjustment as provided in paragraph VIII.G.
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B. If a holder of Series C Preferred Stock gives notice (an
"Optional Conversion Notice") of conversion under paragraph A
above, such holder shall surrender with such Optional Conversion
Notice the duly endorsed certificate or certificates for the
Series C Preferred Stock being converted, at the office of the
Corporation or of any transfer agent for such Series, and shall
state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. If the
holders of a majority of the outstanding shares of Series C
Preferred Stock give notice of conversion under paragraph A
above, the Corporation shall notify all other record holders of
Series C Preferred Stock (a "Mandatory Conversion Notice").
Following receipt of a Mandatory Conversion Notice, the holders
of Series C Preferred Stock shall surrender the certificate or
certificates therefor duly endorsed, at the office of the
Corporation or of any transfer agent for such Series, and shall
state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. The
Corporation shall, as soon as practicable after the surrender of
a Series C Preferred Stock certificate or certificates pursuant
to an Optional Conversion Notice or Mandatory Conversion Notice,
issue and deliver at such office to such holder, or to the
nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid. Such conversion
shall be deemed to have been made immediately prior to the close
of business on the date of such Optional Conversion Notice or
Mandatory Conversion Notice, as applicable, and the person or
persons entitled to receive the shares of Common Stock issuable
upon such conversion shall be treated for all purposes as the
recordholder or holders of such shares of Common Stock as of
such date. The issuance of certificates or shares of Common
Stock upon conversion of shares of Series C Preferred Stock
shall be made without charge for any issue, stamp or other
similar tax in respect of such issuance.
C. No fractional shares shall be issued upon conversion of any
shares of Series C Preferred Stock and the number of shares of
Common Stock to be issued shall be rounded down to the nearest
whole share, and the holder of Series C Preferred Stock shall be
paid in cash for any fractional share.
D. In case at any time or from time to time the Corporation shall
pay any dividend or make any other distribution to the holders
of its Common Stock or other class of securities, or shall offer
for subscription pro rata to the holders of its Common Stock or
other class of securities any additional shares of stock of any
class or any other right, or there shall be any capital
reorganization or reclassification of the Common Stock of the
Corporation or consolidation or merger of the Corporation with
or into another corporation, or any sale or conveyance to
another corporation of the property of the Corporation as an
entirety or substantially as an entirety, or there shall be a
voluntary or involuntary dissolution, liquidation or winding up
of the Corporation, then, in any one or more of said cases the
Corporation shall give at least 20 days' prior written notice
(the time of mailing of such notice shall be deemed to be the
time of giving thereof) to the registered holders of the Series
C
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Preferred Stock at the addresses of each as shown on the books
of the Corporation maintained by the Transfer Agent thereof of
the date on which (i) the books of the Corporation shall close
or a record shall be taken for such stock dividend, distribution
or subscription rights or (ii) such reorganization,
reclassification, consolidation, merger, sale or conveyance,
dissolution, liquidation or winding up shall take place, as the
case may be, provided that in the case of any Transaction to
which paragraph H applies the Corporation shall give at least 30
days' prior written notice as aforesaid. Such notice shall also
specify the date as of which the holders of the Common Stock of
record shall participate in said dividend, distribution or
subscription rights or shall be entitled to exchange their
Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger,
sale or conveyance or participate in such dissolution,
liquidation or winding up, as the case may be. Failure to give
such notice shall not invalidate any action so taken.
E. From and after the Recapitalization, the Corporation shall at
all times reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of Series C Preferred
Stock, such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all
outstanding shares of Series C Preferred Stock, and if at any
time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all
then outstanding shares of Series C Preferred Stock, then in
addition to such other remedies as shall be available to the
holder of Series C Preferred Stock, the Corporation will take
such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for
such purposes.
F. Any notice required by the provisions of paragraph D to be given
the holders of shares of Series C Preferred Stock shall be
deemed given if sent by facsimile transmission, by telex, or if
deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his, her or its address
appearing on the books of the Corporation.
G. The conversion ratio shall be subject to adjustment from time to
time as follows:
(i) In case the Corporation shall at any time or from
time to time after the Issue Date (A) pay a dividend or make a
distribution, on the outstanding shares of Common Stock in
shares of Common Stock, (B) subdivide the outstanding shares of
Common Stock into a larger number of shares of Common Stock, (C)
combine the outstanding shares of Common Stock into a smaller
number of shares or (D) issue by reclassification of the shares
of Common Stock any shares of capital stock of the Corporation,
then, and in each such case, the conversion ratio in effect
immediately prior to such event or the record date therefor,
whichever is earlier, shall be adjusted so that the holder of
any shares of
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<PAGE> 37
Series C Preferred Stock thereafter surrendered for conversion
shall be entitled to receive the number of shares of Common
Stock or other securities of the Corporation which such holder
would have owned or have been entitled to receive after the
happening of any of the events described above, had such shares
of Series C Preferred Stock been surrendered for conversion
immediately prior to the happening of such event or the record
date therefor, whichever is earlier. An adjustment made pursuant
to this clause (i) shall become effective (x) in the case of any
such dividend or distribution, immediately after the close of
business on the record date for the determination of holders of
shares of Common Stock entitled to receive such dividend or
distribution, or (y) in the case of any such subdivision,
reclassification or combination, at the close of business on the
day upon which such corporate action becomes effective.
(ii) In the case the Corporation shall, after the Issue
Date, issue shares of Common Stock at a price per share, or
securities convertible into or exchangeable for shares of Common
Stock ("Convertible Securities") having a "Conversion Price" (as
defined below) less than the Current Market Price (for a period
of 15 consecutive trading days prior to such date), then, and in
each such case, the conversion ratio shall be adjusted so that
the holder of each share of Series C Preferred Stock shall be
entitled to receive, upon the conversion thereof, the number of
shares of Common Stock determined by multiplying (A) the
applicable conversion ratio on the day immediately prior to such
date by (B) a fraction, the numerator of which shall be the sum
of (1) the number of shares of Common Stock outstanding on the
date on which such shares or Convertible Securities are issued
and (2) the number of additional shares of Common Stock issued,
or into which the Convertible Securities may convert, and the
denominator of which shall be the sum of (x) the number of
shares of Common Stock outstanding on such date and (y) the
number of shares of Common Stock which the aggregate
consideration receivable by the Corporation for the total number
of shares of Common Stock so issued, or the number of shares of
Common Stock which the aggregate of the Conversion Price of such
Convertible Securities so issued, would purchase at such Current
Market price on such date. An adjustment made pursuant to this
clause (ii) shall be made on the next Business Day following the
date on which any such issuance is made and shall be effective
retroactively immediately after the close of business on such
date. For purposes of this clause (ii), the aggregate
consideration receivable by the Corporation in connection with
the issuance of any securities shall be deemed to be the sum of
the aggregate offering price to the public (before deduction of
underwriting discounts or commissions and expenses payable to
third parties), and the "Conversion Price" of any Convertible
Securities is the total amount received or receivable by the
Corporation as consideration for the issue or sale of such
Convertible Securities (before deduction of underwriting
discounts or commissions and expenses payable to third parties)
plus the minimum aggregate amount of additional consideration,
if any, payable to the Corporation upon the conversion, exchange
or exercise of any such Convertible Securities. Neither (A)
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<PAGE> 38
the issuance of any shares of Common Stock (whether treasury
shares or newly issued shares) pursuant to a dividend or
distribution on, or subdivision, combination or reclassification
of, the outstanding shares of Common Stock requiring an
adjustment in the conversion ratio pursuant to clause (i) of
this paragraph G, or pursuant to any employee benefit plan or
program of the Corporation or pursuant to any option, warrant,
right, or Convertible Security outstanding as of the date hereof
(including, but not limited to, the Rights, the Series B
Preferred Stock, the Series C Preferred Stock and the Warrants)
nor (B) the issuance of shares of Common Stock pursuant thereto
shall be deemed to constitute an issuance of Common Stock or
Convertible Securities by the Corporation to which this clause
(ii) applies. Upon expiration of any Convertible Securities
which shall not have been exercised or converted and for which
an adjustment shall have been made pursuant to this clause (ii),
the Conversion Price computed upon the original issue thereof
shall upon such expiration be recomputed as if the only
additional shares of Common Stock issued were such shares of
Common Stock (if any) actually issued upon exercise of such
Convertible Securities and the consideration received therefor
was the consideration actually received by the Corporation for
the issue of such Convertible Securities (whether or not
exercised or converted) plus the consideration actually received
by the Corporation upon such exercise of conversion.
(iii) In case the Corporation shall at any time or from
time to time after the Issue Date declare, order, pay or make a
dividend or other distribution (including, without limitation,
any distribution of stock or other securities or property or
rights or warrants to subscribe for securities of the
Corporation or any of its Subsidiaries by way of dividend or
spin-off), on its Common Stock, other than (A) regular quarterly
dividends payable in cash in an aggregate amount not to exceed
15% of net income from continuing operations before
extraordinary items of the Corporation, determined in accordance
with generally accepted accounting principles, during the period
(treated as one accounting period) commencing on July 1, 1998,
and ending on the date such dividend is paid or (B) dividends or
distributions of shares of Common Stock which are referred to in
clause (i) of this paragraph G, then, and in each such case, the
conversion ratio shall be adjusted so that the holder of each
share of Series C Preferred Stock shall be entitled to receive,
upon the conversion thereof, the number of shares of Common
Stock determined by multiplying (1) the applicable conversion
ratio on the day immediately prior to the record date fixed for
the determination of stockholders entitled to receive such
dividend or distribution by (2) a fraction, the numerator of
which shall be the then Current Market Price per share of Common
Stock for the period of 20 Trading Days preceding such record
date, and the denominator of which shall be such Current Market
Price per share of Common Stock for the period of 20 Trading
Days preceding such record date less the Fair Market Value (as
defined in Article IX) per share of Common Stock (as determined
in good faith by the Board of Directors of the Corporation, a
certified resolution with
13
<PAGE> 39
respect to which shall be mailed to each holder of shares of
Series C Preferred Stock) of such dividend or distribution;
provided, however, that in the event of a distribution of shares
of capital stock of a Subsidiary of the Corporation (a
"Spin-Off") made to holders of shares of Common Stock, the
numerator of such fraction shall be the sum of the Current
Market Price per share of Common Stock for the period of 20
Trading Days preceding the 35th Trading Day after the effective
date of such Spin-Off and the Current Market Price of the number
of shares (or the fraction of a share) of capital stock of the
Subsidiary which is distributed in such Spin-Off in respect of
one share of Common Stock for the period of 20 Trading Days
preceding such 35th Trading Day and the denominator of which
shall be the current market price per share of the Common Stock
for the period of 20 Trading Days proceeding such 35th Trading
Day. An adjustment made pursuant to this clause (iii) shall be
made upon the opening of business on the next Business Day
following the date on which any such dividend or distribution is
made and shall be effective retroactively immediately after the
close of business on the record date fixed for the determination
of stockholders entitled to receive such dividend or
distribution; provided, however, if the proviso to the preceding
sentence applies, then such adjustment shall be made and be
effective as of such 35th Trading Day after the effective date
of such Spin-Off.
(iv) For purposes of this paragraph G, the number of
shares of Common Stock at any time outstanding shall not include
any shares of Common Stock then owned or held by or for the
account of the Corporation.
(v) The term "dividend", as used in this paragraph G
shall mean a dividend or other distribution upon stock of the
Corporation except pursuant to the Rights Agreement (as defined
in Article IX). Notwithstanding anything in this Article VIII to
the contrary, the conversion ratio shall not be adjusted as a
result of any dividend, distribution or issuance of securities
of the Corporation pursuant to the Rights Agreement.
(vi) Anything in this paragraph G to the contrary
notwithstanding, the Corporation shall not be required to give
effect to any adjustment in the conversion ratio unless and
until the net effect of one or more adjustments (each of which
shall be carried forward), determined as above provided, shall
have resulted in a change of the conversion ratio by at least
one-hundredth of one share of Common Stock, and when the
cumulative net effect of more than one adjustment so determined
shall be to change the conversion ratio by at least
one-hundredth of one share of Common Stock, such change in
conversion ratio shall thereupon be given effect.
(vii) The certificate of any firm of independent public
accountants of recognized standing selected by the Board of
Directors of the Corporation (which may be the firm of
independent public accountants regularly employed by the
14
<PAGE> 40
Corporation) shall be presumptively correct for any computation
made under this paragraph G.
(viii) If the Corporation shall take a record of the
holders of its Common Stock for the purpose of entitling them to
receive a dividend or other distribution, and shall thereafter
and before the distribution to stockholders thereof legally
abandon its plan to pay or deliver such dividend or
distribution, then thereafter no adjustment in the number of
shares of Common Stock issuable upon exercise of the right of
conversion granted by this paragraph G or in the conversion
ratio then in effect shall be required by reason of the taking
of such record.
(ix) There shall be no adjustment of the conversion
ratio in case of the issuance of any stock of the Corporation in
a merger, reorganization, acquisition or other similar
transaction except as set forth in paragraph G(i), G(ii) and H
of this Article VIII.
H. In case of any reorganization or reclassification of outstanding
shares of Common Stock (other than a reclassification covered by
paragraph G(i) of this Article VIII), or in case of any
consolidation or merger of the Corporation with or into another
corporation, or in the case of any sale or conveyance to another
corporation of the property of the Corporation as an entirety or
substantially as an entirety (each of the foregoing being
referred to as a "Transaction"), each share of Series C
Preferred Stock then outstanding shall thereafter be convertible
into, in lieu of the Common Stock issuable upon such conversion
prior to consummation of such Transaction, the kind and amount
of shares of stock and other securities and property receivable
(including cash) upon the consummation of such Transaction by a
holder of that number of shares of Common Stock into which one
share of Series C Preferred Stock was convertible immediately
prior to such Transaction (including, on a pro rata basis, the
cash, securities or property received by holders of Common Stock
in any tender or exchange offer that is a step in such
Transaction). In case securities or property other than Common
Stock shall be issuable or deliverable upon conversion as
aforesaid, then all reference in this paragraph H shall be
deemed to apply, so far as appropriate and as nearly as may be,
to such other securities or property.
I. Upon any adjustment of the conversion ratio then in effect and
any increase or decrease in the number of shares of Common Stock
issuable upon the operation of the conversion set forth in
Article VIII, then, and in each such case, the Corporation shall
promptly deliver to the registered holders of the Series C
Preferred and Common Stock, a certificate signed by the
President or a Vice President and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary
of the Corporation setting forth in reasonable detail the event
requiring the adjustment and the method by which such adjustment
was calculated and specifying the conversion ratio then in
effect following such adjustment and
15
<PAGE> 41
the increased or decreased number of shares issuable upon the
conversion set forth in this Article VIII.
IX. ADDITIONAL DEFINITIONS
For the purposes of this Certificate of Designations of Series C
Preferred Stock, the following terms shall have the meanings indicated:
"Accrual Period" means the end of the first quarterly period following
the Second Anniversary Date.
"Beneficially Own" with respect to any securities means having
"beneficial ownership" of such securities (as determined pursuant to Rule 13d-3
under the Exchange Act as in effect on the date hereof, except that a Person
shall be deemed to Beneficially Own all such securities that such Person has the
right to acquire whether such right is exercisable immediately or after the
passage of time). The terms "Beneficial Ownership" and "Beneficial Owner" have
correlative meanings.
"Business Day" means any day, other than a Saturday, Sunday or a day on
which banking institutions in the State of New York are authorized or obligated
by law or executive order to close.
"Bylaws" means the Bylaws of the Corporation, as amended.
"Current Market Price", when used with reference to shares of Common
Stock or other securities on any date, shall mean the closing price per share of
Common Stock or such other securities on such date and, when used with reference
to shares of Common Stock or other securities for any period shall mean the
average of the daily closing prices per share of Common Stock or such other
securities for such period. The closing price for each day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Common Stock or such other securities are not listed or admitted to
trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Common Stock or such
other securities are listed or admitted to trading or, if the Common Stock is
not listed or admitted to trading on any national securities exchange, the last
quoted sale price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. National Market System or such other
securities are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Common Stock or such other securities selected by the Board of Directors
of the Corporation. If the Common Stock or such other securities are not
publicly held or so listed or publicly traded, "Current Market Price" shall mean
the Fair Market Value per share of Common Stock or of such other securities as
determined in good faith by the Board of Directors of the
16
<PAGE> 42
Corporation based on an opinion of an independent investment banking firm with
an established national reputation as a valuer of securities, which opinion may
be based on such assumption as such firm shall deem to be necessary and
appropriate.
"Equity Securities" of any Person means any and all common stock,
preferred stock and any other class of capital stock of, and any partnership or
limited liability company interests of such Person or any other similar
interests of any Person that is not a corporation, partnership or limited
liability company.
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder, from time to
time.
"Fair Market Value" shall mean the amount which a willing buyer would
pay a willing seller in an arm's-length transaction.
"Formula Number" shall mean one thousand (1,000) prior to consummation
of the Recapitalization; provided, however, that if at any time prior to the
consummation of the Recapitalization, the Corporation shall (i) declare or pay
any dividend or make any distribution on the Common Stock, payable in shares of
Common Stock; (ii) subdivide (by a stock split or otherwise) the outstanding
shares of Common Stock into a larger number of shares of Common Stock; or (iii)
combine (by a reverse stock split or otherwise) the outstanding shares of Common
Stock into a smaller number of shares of Common Stock, then in each such case
the Formula Number in effect immediately prior to such event shall be adjusted
to a number determined by multiplying the Formula Number then in effect by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event (and rounding the result to the nearest whole number); and provided
further, that, if prior to the consummation of the Recapitalization the
Corporation shall issue any shares of its capital stock in a merger,
reclassification, or change of the outstanding shares of Common Stock, then in
each such event the Formula Number shall be appropriately adjusted to reflect
such merger, reclassification, or change so that each share of Series C
Preferred Stock continues to be the economic equivalent of a Formula Number of
shares of Common Stock immediately prior to such merger, reclassification, or
change.
"Group" has the meaning set forth in Rule 13d-5 under the Exchange Act.
"Issue Date" shall mean the first date on which shares of Series C
Preferred Stock are issued. "Person" means any individual, corporation, company,
association, partnership, joint venture, trust or unincorporated organization,
or a government or any agency or political subdivision thereof.
"Post-Recapitalization Stated Value" shall be equal to $1.00.
17
<PAGE> 43
"Recapitalization" means the amendment of the Corporation's Certificate
of Incorporation to increase the authorized shares of Common Stock from
50,000,000 to 400,000,000, and the authorized shares of Preferred Stock from
1,000,000 to 200,000,000, and the subsequent one thousand-for-one split of
Series C Preferred Stock and Series B Preferred Stock.
"Redemption Price" of a share of Series C Preferred Stock shall mean the
sum of (a) the dividends, if any, accumulated or deemed to have accumulated
thereon to the Optional Redemption Date, whether or not such dividends are
declared plus (b) either (i) the Initial Stated Value thereof (if the
Recapitalization has not been consummated prior to June 30, 1999) or (ii) the
Post-Recapitalization Stated Value thereof (if the Recapitalization has been
consummated prior to June 30, 1999), in each case subject to adjustment for
splits, reclassifications, recombinations or similar events.
"Rights" shall mean any rights to purchase securities of the Corporation
issued pursuant to any Rights Agreement.
"Rights Agreement" shall mean the Rights Agreement, dated as of June 21,
1996, between the Company and Wells Fargo Bank as rights agent, and all
amendments, supplements and replacements thereof.
"Second Anniversary Date" means the second anniversary of the Issue
Date.
"Subsidiary" means, as to any Person, any other Person of which more
than 50% of the shares of the Voting Securities or other voting interests are
owned or controlled, or the ability to select or elect 50% or more of the
directors or similar managers is held, directly or indirectly, by such first
Person and one or more of its Subsidiaries.
"Trading Day" means a day on which the principal national securities
exchange on which the Common Stock is listed or admitted to trading is open for
the transaction of business or, if the Common Stock is not listed or admitted to
trading on any national securities exchange a Business Day.
"Voting Securities" means, (i) with respect to the Company, the
Equity Securities of the Company entitled to vote generally for the election of
directors of the Company, and (ii) with respect to any other Person, any
securities of or interests in such Person entitled to vote generally for the
election of directors or any similar managing person of such Person.
X. MISCELLANEOUS
A. NOTICES. Any notice referred to herein shall be in writing and,
unless first-class mail shall be specifically permitted for such notices under
the terms hereof, shall be deemed to have been given upon personal delivery
thereof, upon transmittal of such notice by telecopy (with confirmation of
receipt by telecopy or telex) or five days after transmittal by registered or
certified mail, postage prepaid, addressed as follows:
18
<PAGE> 44
(i) if to the Corporation, to its office at 2 California
Plaza, 350 South Grand Avenue, Los Angeles, California
90071 (Attention: General Counsel)
or to the transfer agent for the Series C Preferred
Stock;
(ii) if to a holder of the Series C Preferred Stock, to such
holder at the address of such holder as listed in the
stock record books of the Corporation (which may include
the records of any transfer agent for the Series C
Preferred Stock); or
(iii) to such other address as the Corporation or such holder,
as the case may be, shall have designated by notice
similarly given.
B. REACQUIRED SHARES. Any shares of Series C Preferred Stock redeemed,
purchased or otherwise acquired by the Corporation, directly or indirectly, in
any manner whatsoever shall be retired and canceled promptly after the
acquisition thereof (and shall not be deemed to be outstanding for any purpose)
and, if necessary to provide for the lawful redemption or purchase of such
shares, the capital represented by such shares shall be reduced in accordance
with the Delaware General Corporation Law. All such shares of Series C Preferred
Stock shall upon their cancellation and upon the filing of an appropriate
certificate with the Secretary of State of the State of Delaware, become
authorized but unissued shares of Preferred Stock, par value $0.001 per share,
of the Corporation and may be reissued as part of another series of Preferred
Stock, par value $0.001 per share, of the Corporation subject to the conditions
or restrictions on issuance set forth herein.
C. ENFORCEMENT. Any registered holder of shares of Series C Preferred
Stock may proceed to protect and enforce its rights and the rights of such
holders by any available remedy by proceeding at law or in equity to protect and
enforce any such rights, whether for the specific enforcement of any provision
in this Certificate of Designations or in aid of the exercise of any power
granted herein, or to enforce any other proper remedy.
D. TRANSFER TAXES. Except as otherwise agreed upon pursuant to the terms
of this Certificate of Designations, the Corporation shall pay any and all
documentary, stamp or similar issue or transfer taxes and other governmental
charges that may be imposed under the laws of the United States of America or
any political subdivision or taxing authority thereof or therein in respect of
any issue or delivery of Common Stock on conversion of, or other securities or
property issued on account of, shares of Series C Preferred Stock pursuant
hereto or certificates representing such shares or securities. The Corporation
shall not, however, be required to pay any such tax or other charge that may be
imposed in connection with any transfer involved in the issue or transfer and
delivery of any certificate for Common Stock or other securities or property in
a name other than that in which the shares of Series C Preferred Stock so
exchanged, or on account of which such securities were issued, were registered
and no such issue or delivery shall be made unless and until the Person
requesting such issue has paid to the Corporation the amount of any such tax or
has established to the satisfaction of the Corporation that such tax has been
paid or is not payable.
19
<PAGE> 45
E. TRANSFER AGENT. The Corporation may appoint, and from time to time
discharge and change, a transfer agent for the Series C Preferred Stock. Upon
any such appointment or discharge of a transfer agent, the Corporation shall
send notice thereof by first-class mail, postage prepaid, to each holder of
record of shares of Series C Preferred Stock.
F. RECORD DATES. In the event that the Series C Preferred Stock shall be
registered under either the Securities Act of 1933, as amended, or the Exchange
Act, the Corporation shall establish appropriate record dates with respect to
payments and other actions to be made with respect to the Series C Preferred
Stock.
20
<PAGE> 46
IN WITNESS WHEREOF, this Certificate of Designations is executed on
behalf of the Corporation by its Executive Vice President, General Counsel and
Secretary and attested by its Assistant Secretary, this 10th day of February ,
1999.
AAMES FINANCIAL CORPORATION
By:
--------------------------------------
Name:
Title:
[Corporate Seal]
ATTEST:
21
<PAGE> 47
EXHIBIT C
THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY
STATE AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND UNDER ANY SUCH
APPLICABLE STATE LAWS, OR IN VIOLATION OF THE PROVISIONS OF THIS WARRANT.
FORM OF
CONTINGENT WARRANT
To Purchase Common Stock of
AAMES FINANCIAL CORPORATION
<PAGE> 48
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1. DEFINITIONS...............................................................1
ARTICLE 2. EXERCISE OF WARRANT.......................................................4
Section 2.1. Manner of Exercise...............................................4
Section 2.2. Payment of Taxes.................................................6
Section 2.3. Fractional Shares................................................6
ARTICLE 3. TRANSFER, DIVISION AND COMBINATION........................................6
Section 3.1. Transfer.........................................................6
Section 3.2. Division and Combination.........................................7
Section 3.3. Expenses.........................................................7
Section 3.4. Maintenance of Books.............................................7
ARTICLE 4. ADJUSTMENTS...............................................................7
Section 4.1. Stock Dividends, Subdivisions, Combinations and
Reclassifications................................................7
Section 4.2. Issuance of Additional Shares of Common Stock or
Convertible Securities...........................................8
Section 4.3. Certain Other Distributions......................................9
Section 4.4. Other Provisions Applicable to Adjustments Under This
Section.........................................................10
Section 4.5. Reorganization, Reclassification, Merger, Consolidation
or Disposition of Assets........................................12
Section 4.6. Notices.........................................................12
Section 4.7. Certificates....................................................13
ARTICLE 5. NO IMPAIRMENT............................................................13
ARTICLE 6. RESERVATION AND AUTHORIZATION OF COMMON STOCK; REGISTRATION WITH OR
APPROVAL OF ANY GOVERNMENTAL AUTHORITY...................................14
ARTICLE 7. STOCK AND WARRANT TRANSFER BOOKS.........................................14
ARTICLE 8. RESTRICTIONS ON TRANSFERABILITY...........................................14
Section 8.1. Restrictive Legend..............................................15
Section 8.2. Transfers.......................................................15
Section 8.3. Termination of Restrictions.....................................16
ARTICLE 9. SUPPLYING INFORMATION....................................................16
ARTICLE 10. LOSS OR MUTILATION.......................................................16
ARTICLE 11. OFFICE OF THE COMPANY....................................................17
ARTICLE 12. REGISTRATION RIGHTS......................................................17
ARTICLE 13. LIMITATION OF LIABILITY..................................................17
</TABLE>
i
<PAGE> 49
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 14. REPRESENTATION OF HOLDER.................................................17
ARTICLE 15. MISCELLANEOUS............................................................17
Section 15.1. Nonwaiver and Expenses.........................................17
Section 15.2. No Rights As Stockholder.......................................18
Section 15.3. Notice Generally...............................................18
Section 15.4. Successors and Assigns.........................................19
Section 15.5. Amendment......................................................19
Section 15.6. Severability...................................................19
Section 15.7. Headings.......................................................19
Section 15.8. Governing Law..................................................19
Section 15.9. Mutual Waiver of Jury Trial....................................19
</TABLE>
ii
<PAGE> 50
THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY
STATE AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND UNDER ANY SUCH
APPLICABLE STATE LAWS, OR IN VIOLATION OF THE PROVISIONS OF THIS WARRANT.
WARRANT
To Purchase 3,000,000 Shares of Common Stock of
AAMES FINANCIAL CORPORATION
THIS IS TO CERTIFY THAT Capital Z Management, Inc., or its registered
assigns, is entitled, subject to the provisions of the last sentence of this
paragraph, at any time after June 30, 1999 and prior to December 31, 2004 (the
"Expiration Date"), to purchase from Aames Financial Corporation, a Delaware
corporation (the "Company"), 3,000,000 shares of common stock, par value $0.001
per share, of the Company (the "Common Stock"), subject to adjustment as
provided herein, in whole or in part, including fractional parts, at a purchase
price of $1.00 per share (the "Exercise Price"), subject to adjustment as set
forth herein, all on the terms and conditions and pursuant to the provisions
hereinafter set forth. Capitalized terms not otherwise defined herein are used
as defined in the Preferred Stock Purchase Agreement. Notwithstanding anything
to the contrary set forth in this Warrant, (i) this Warrant shall not be
exercisable by the holder hereof if the Recapitalization is completed prior to
June 30, 1999 and (ii) if the Recapitalization is not completed prior to June
30, 1999, this Warrant shall be exercisable by the holder hereof into the
greater of (x) 1,221,398 shares of Common Stock and (y) such number of shares of
Common Stock as may be available for issuance by the Company, up to a maximum of
3,000,000 shares of Common Stock.
ARTICLE 1.
DEFINITIONS
As used in this Warrant, the following terms have the respective
meanings set forth below:
"Additional Shares of Common Stock" shall mean all shares of Common
Stock issued by the Company after the Issue Date, other than Warrant Stock.
<PAGE> 51
"Business Day" shall mean any day that is not a Saturday or Sunday or a
day on which banks are required or permitted to be closed in the State of New
York.
"Capital Z" shall have the meaning set forth in the first paragraph
hereof.
"Commission" shall mean the Securities and Exchange Commission.
"Common Stock" shall have the meaning set forth in the first paragraph
hereof.
"Company" shall have the meaning set forth in the first paragraph
hereof.
"Conversion Price" shall have the meaning set forth in Section 4.2
hereof.
"Convertible Securities" shall mean evidences of indebtedness, shares of
stock or other securities which are convertible into or exchangeable, with or
without payment of additional consideration in cash or property, for Additional
Shares of Common Stock, either immediately or upon the occurrence of a specified
date or a specified event.
"Current Market Price" shall mean, when used with reference to shares of
Common Stock or other securities on any date, the closing price per share of
Common Stock or such other securities on such date and, when used with reference
to shares of Common Stock or other securities for any period shall mean the
average of the daily closing prices per share of Common Stock or such other
securities for such period. The closing price for each day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Common Stock or such other securities are not listed or admitted to
trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Common Stock or such
other securities are listed or admitted to trading or, if the Common Stock is
not listed or admitted to trading on any national securities exchange, the last
quoted sale price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. National Market System or such other
securities are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Common Stock or such other securities selected by the Board of Directors
of the Corporation. If the Common Stock or such other
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securities are not publicly held or so listed or publicly traded, "Current
Market Price" shall mean the Fair Market Value per share of Common Stock or of
such other securities as determined in good faith by the Board of Directors of
the Corporation based on an opinion of an independent investment banking firm
with an established national reputation as a valuer of securities, which opinion
may be based on such assumption as such firm shall deem to be necessary and
appropriate.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission thereunder.
"Exercise Price" shall have the meaning set forth in the first paragraph
hereof.
"Expiration Date" shall have the meaning set forth in the first
paragraph hereof.
"Fair Market Value" shall mean the amount which a willing buyer would
pay a willing seller in an arm's-length transaction.
"GAAP" shall mean generally accepted accounting principles in the United
States of America as from time to time in effect.
"holder" shall mean, as the context requires, the Person in whose name
this Warrant is registered on the books of the Company maintained for such
purpose and/or the Person holding any Warrant Stock.
"Issue Date" shall mean the date on which this Warrant is issued.
"Person" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, corporation or other entity and shall include any
successor (by merger or otherwise) of such entity.
"Preferred Stock Purchase Agreement" shall mean the Preferred Stock
Purchase Agreement, dated as of December 23, between the Company and Capital Z,
as amended.
"Registration Rights Agreement" shall mean the Registration Rights
Agreement, dated as of the date hereof, between the Company and Capital Z, as
amended.
"Restricted Common Stock" shall mean shares of Common Stock which are,
or which upon their issuance on the exercise of this Warrant would be, evidenced
by a certificate bearing the restrictive legend set forth in Section 8.1(a).
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"Securities Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder.
"Series B Preferred Stock" shall mean the Series B Convertible Preferred
Stock, par value $0.001 per share, to be issued pursuant to the Preferred Stock
Purchase Agreement.
"Series C Preferred Stock" shall mean the Series C Convertible Preferred
Stock, par value $0.001 per share, to be issued pursuant to the Preferred Stock
Purchase Agreement.
"Subsidiary" shall mean any corporation of which an aggregate of more
than 50% of the outstanding stock having ordinary voting power to elect a
majority of the board of directors of such corporation (irrespective of whether,
at the time, stock of any other class or classes of such corporation shall have
or might have voting power by reason of the happening of any contingency) is at
the time, directly or indirectly, owned legally or beneficially by the Company
and/or one or more Subsidiaries of the Company.
"Trading Day" means a day on which the principal national securities
exchange on which the Common Stock is listed or admitted to trading is open for
the transaction of business or, if the Common Stock is not listed or admitted to
trading on any national securities exchange, a Business Day.
"Transaction" shall have the meaning set forth in Section 4.5 hereof.
"transfer" shall mean any transfer, sale, encumbrance, hypothecation or
other disposition of this Warrant or any Warrant Stock or of any interest in
either thereof.
"Transfer Notice" shall have the meaning set forth in Section 8.2.
"Warrant Price" shall mean an amount equal to (i) the number of shares
of Common Stock being purchased upon exercise of this Warrant pursuant to
Section 2.1, multiplied by (ii) the Exercise Price as of the date of such
exercise.
"Warrant Stock" shall mean the shares of Common Stock purchased by the
holder of this Warrant upon the exercise thereof.
ARTICLE 2.
EXERCISE OF WARRANT
Section 2.1. Manner of Exercise. From and after the date hereof and
until 5:00 P.M., New York time, on the Expiration Date, the holder may exercise
this Warrant for all or any part of the number of shares of Common Stock
purchasable hereunder.
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In order to exercise this Warrant, in whole or in part, the holder shall
deliver to the Company at its office at 2 California Plaza, 350 South Grand
Avenue, Los Angeles, California 90071, or at the office or agency designated by
the Company pursuant to Section 11, (i) a written notice of the holder's
election to exercise this Warrant, which notice shall specify the number of
shares of Common Stock to be purchased, (ii) payment of the Warrant Price in the
manner provided below, and (iii) this Warrant. Such notice shall be
substantially in the form of the subscription form appearing at the end of this
Warrant as Exhibit A, duly executed by or on behalf of the holder. Upon receipt
thereof, the Company shall, as promptly as practicable, and in any event within
five (5) Business Days thereafter, execute or cause to be executed and deliver
or cause to be delivered to the holder a certificate or certificates
representing the aggregate number of full shares of Common Stock issuable upon
such exercise, together with cash in lieu of any fraction of a share, as
hereinafter provided. The stock certificate or certificates so delivered shall
be, to the extent possible, in such denomination or denominations as such holder
shall request in the notice and shall be registered in the name of the holder
or, subject to Section 8, such other name as shall be designated in the notice.
This Warrant shall be deemed to have been exercised and such certificate or
certificates shall be deemed to have been issued, and the holder or any other
Person so designated to be named therein shall be deemed to have become a holder
of record of such shares for all purposes, as of the date the notice, together
with the cash, check or checks and/or securities, if any, and this Warrant, are
received by the Company as described above and all taxes required to be paid by
the holder, if any, pursuant to Section 2.2 prior to the issuance of such shares
have been paid. If this Warrant shall have been exercised in part, the Company
shall, at the time of delivery of the certificate or certificates representing
Warrant Stock, deliver to the holder a new Warrant evidencing the rights of the
holder to purchase the unpurchased shares of Common Stock called for by this
Warrant, which new Warrant shall in all other respects be identical with this
Warrant, or, at the request of the holder, appropriate notation may be made on
this Warrant and the same returned to the holder.
Payment of the Warrant Price shall be made at the option of the holder
by cash, wire transfer to an account in a bank located in the United States
designated for such purpose by the Company, or certified or official bank check,
or by transfer to the Company of shares of Series B Preferred Stock or Series C
Preferred Stock, or any combination thereof. In the event of the application
shares of Series B Preferred Stock or Series C Preferred Stock to the payment of
the Warrant Price, the amount to be credited to the payment of the Warrant Price
shall be the Initial Stated Value per share, in the case of any such application
prior to the consummation of the Recapitalization, or the Post-Recapitalization
Stated Value per share, in the case of any such application after the
consummation of the
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Recapitalization, in each case, plus an amount per share equal to all accrued
and unpaid dividends thereon, whether or not declared, to the date of such
exercise, provided that no such credit shall be made with respect to any such
dividends if the holder of such shares held such shares on the record date
therefor.
Section 2.2. Payment of Taxes. The Company shall pay all expenses in
connection with, and all taxes and other governmental charges that may be
imposed with respect to, the issue or delivery of the Warrant Shares, unless
such tax or charge is imposed by law upon the holder, in which case such taxes
or charges shall be paid by the holder. The Company shall not be required,
however, to pay any tax or other charge imposed in connection with any transfer
involved in the issue of any certificate for shares of Common Stock issuable
upon exercise of this Warrant in any name other than that of the holder, and in
such case the Company shall not be required to issue or deliver any stock
certificate until such tax or other charge has been paid or it has been
established to the satisfaction of the Company that no such tax or other charge
is due.
Section 2.3. Fractional Shares. The Company shall not be required to
issue a fractional share of Common Stock upon exercise of this Warrant. As to
any fraction of a share which the holder of this Warrant would otherwise be
entitled to purchase upon such exercise, the Company shall pay a cash adjustment
in respect of such final fraction in an amount equal to the same fraction of the
Current Market Price per share of Common Stock on the date of exercise.
ARTICLE 3.
TRANSFER, DIVISION AND COMBINATION
Section 3.1. Transfer. Subject to compliance with Section 8, transfer of
this Warrant and all rights hereunder, in whole or in part, shall be registered
on the books of the Company to be maintained for such purpose, upon surrender of
this Warrant at the principal office of the Company referred to in Section 2.1
or the office or agency designated by the Company pursuant to Section 11,
together with a written assignment of this Warrant substantially in the form of
Exhibit B hereto duly executed by the holder or its agent or attorney and funds
sufficient to pay any transfer taxes payable upon the making of such transfer.
Upon such surrender and, if required, such payment, the Company shall, subject
to Section 8, execute and deliver a new Warrant or Warrants in the name(s) of
the assignee or assignees and in the denomination(s) specified in such
instrument of assignment, and shall issue to the assignor a new Warrant
evidencing the portion of this Warrant not so assigned, and this Warrant shall
promptly be canceled. A Warrant, if properly assigned in compliance with Section
8, may be exercised by a new holder for the purchase of shares of Common Stock
without having a new Warrant issued.
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Section 3.2. Division and Combination. Subject to Section 8, this
Warrant may be divided or combined with other Warrants upon presentation hereof
at the aforesaid office or agency of the Company, together with a written notice
specifying the names and denominations in which new Warrants are to be issued,
signed by the holder or its agent or attorney. Subject to compliance with
Section 3.1 and with Section 8, as to any transfer which may be involved in such
division or combination, the Company shall execute and deliver a new Warrant or
Warrants in exchange for the Warrant or Warrants to be divided or combined in
accordance with such notice.
Section 3.3. Expenses. The Company shall prepare, issue and deliver at
its own expense (other than transfer taxes) the new Warrant or Warrants under
this Section 3.
Section 3.4. Maintenance of Books. The Company agrees to maintain, at
its aforesaid office or agency, books for the registration and the registration
of transfer of the Warrants.
ARTICLE 4.
ADJUSTMENTS
The number of shares of Common Stock for which this Warrant is
exercisable, or the price at which such shares may be purchased upon exercise of
this Warrant, shall be subject to adjustment from time to time as set forth in
this Section 4. The Company shall give the holder notice of any event described
below which requires an adjustment pursuant to this Section 4 at the time of
such event.
Section 4.1. Stock Dividends, Subdivisions, Combinations and
Reclassifications. If the Company shall at any time or from time to time after
the Issue Date:
(a) pay a dividend or make a distribution, on the outstanding
shares of Common Stock in Additional Shares of Common Stock,
(b) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock,
(c) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock, or
(d) issue by reclassification of its shares of Common Stock any
shares of capital stock of the Company,
then, and in each such case, the number of shares of Common Stock issuable upon
exercise of the Warrants evidenced hereby immediately prior to such event or the
record date therefor, whichever is earlier, shall be adjusted so that the holder
of any Warrant evidenced hereby thereafter exercised shall be entitled to
receive the number of shares of Common Stock or other
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securities of the Company which such holder would have owned or have been
entitled to receive after the happening of any of the events described above,
had such Warrant been exercised immediately prior to the happening of such event
or the record date therefor, whichever is earlier. An adjustment made pursuant
to this Section 4.1 shall become effective (x) in the case of any such dividend
or distribution, immediately after the close of business on the record date for
the determination of holders of shares of Common Stock entitled to receive such
dividend or distribution, or (y) in the case of any such subdivision,
reclassification or combination, at the close of business on the day upon which
such corporate action becomes effective.
Section 4.2. Issuance of Additional Shares of Common Stock or
Convertible Securities. In the case the Corporation shall, after the Issue Date,
issue or sell:
(a) Additional Shares of Common Stock at a price per share, or
(b) Convertible Securities having a Conversion Price per share,
less than the Current Market Price (for a period of 15 consecutive Trading Days
prior to such date), then, and in each such case, the number of shares of Common
Stock issuable upon exercise of the Warrants evidenced hereby shall be adjusted
so that the holder of each Warrant evidenced hereby shall be entitled to
receive, upon the exercise thereof, the number of shares of Common Stock
determined by multiplying (A) the number of shares of Common Stock issuable upon
exercise of the Warrants evidenced hereby on the day immediately prior to such
date by (B) a fraction, the numerator of which shall be the sum of (1) the
number of shares of Common Stock outstanding on the date on which such shares or
Convertible Securities are issued and (2) the number of Additional Shares of
Common Stock issued, or into which the Convertible Securities may convert, and
the denominator of which shall be the sum of (x) the number of shares of Common
Stock outstanding on such date and (y) the number of shares of Common Stock
which the aggregate consideration receivable by the Company for the total number
of shares of Common Stock so issued, or the number of shares of Common Stock
which the aggregate of the Conversion Price of such Convertible Securities so
issued, would purchase at the Current Market Price on such date.
An adjustment made pursuant to this Section 4.2 shall be made on the
next Business Day following the date on which any such issuance is made and
shall be effective retroactively immediately after the close of business on such
date. For purposes of this Section 4.2, the aggregate consideration receivable
by the Company in connection with the issuance of any securities shall be deemed
to be the sum of the aggregate offering price to the public (before deduction of
underwriting
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discounts or commissions and expenses payable to third parties), and the
"Conversion Price" of any Convertible Securities is the total amount received or
receivable by the Company as consideration for the issue or sale of such
Convertible Securities (before deduction of underwriting discounts or
commissions and expenses payable to third parties) plus the minimum aggregate
amount of additional consideration, if any, payable to the Corporation upon the
conversion, exchange or exercise of any such Convertible Securities.
Neither (A) the issuance of any shares of Common Stock (whether treasury
shares or newly issued shares) pursuant to a dividend or distribution on, or
subdivision, combination or reclassification of, the outstanding shares of
Common Stock requiring an adjustment in the number of shares of Common Stock
issuable upon exercise of the Warrants evidenced hereby pursuant to Section 4.1,
or pursuant to any employee benefit plan or program of the Company or pursuant
to any option, warrant, right, or Convertible Security outstanding as of the
date hereof (including, but not limited to, the Rights, the Series B Preferred
Stock, the Series C Preferred Stock and the Warrants) nor (B) the issuance of
shares of Common Stock pursuant thereto shall be deemed to constitute an
issuance of Common Stock or Convertible Securities by the Company to which this
Section 4.2 applies.
Upon expiration of any Convertible Securities which shall not have been
exercised or converted and for which an adjustment shall have been made pursuant
to this Section 4.2, the Conversion Price computed upon the original issue
thereof shall upon expiration be recomputed as if the only additional shares of
Common Stock issued were such shares of Common Stock (if any) actually issued
upon exercise or conversion of such Convertible Securities and the consideration
received therefor was the consideration actually received by the Corporation for
the issue of such Convertible Securities (whether or not exercised or converted)
plus the consideration actually received by the Corporation upon such exercise
of conversion.
Section 4.3. Certain Other Distributions. In case the Company shall at
any time or from time to time after the Issue Date declare, order, pay or make a
dividend or other distribution (including, without limitation, any distribution
of stock or other securities or property or rights or warrants to subscribe for
securities of the Company or any of its Subsidiaries by way of dividend or
spin-off), on its Common Stock, other than:
(a) regular quarterly dividends payable in cash in an aggregate
amount not to exceed 15% of net income from continuing operations before
extraordinary items of the Company, determined in accordance with GAAP,
during the period (treated as one accounting period) commencing on July
1, 1998, and ending on the date such dividend is paid, or
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(b) dividends or distributions of shares of Common Stock which
are referred to in Section 4.1,
then, and in each such case, the number of shares of Common Stock issuable upon
exercise of the Warrants evidenced hereby shall be adjusted so that the holder
of each share of each Warrant evidenced thereby shall be entitled to receive,
upon the exercise thereof, the number of shares of Common Stock determined by
multiplying (1) the number of shares of Common Stock issuable upon exercise of
the Warrants evidenced hereby on the day immediately prior to the record date
fixed for the determination of stockholders entitled to receive such dividend or
distribution by (2) a fraction, the numerator of which shall be the then Current
Market Price per share of Common Stock for the period of 20 Trading Days
preceding such record date, and the denominator of which shall be the Current
Market Price per share of Common Stock for the period of 20 Trading Days
preceeding such record date, less the Fair Market Value per share of Common
Stock (as determined in good faith by the Board of Directors of the Company, a
certified resolution with respect to which shall be mailed to the holder of the
Warrants evidenced hereby) of such dividend or distribution; provided, however,
that in the event of a distribution of shares of capital stock of a Subsidiary
of the Company (a "Spin-Off") made to holders of shares of Common Stock, the
numerator of such fraction shall be the sum of the Current Market Price per
share of Common Stock for the period of 20 Trading Days preceding the 35th
Trading Day after the effective date of such Spin-Off and the Current Market
Price of the number of shares (or the fraction of a share) of capital stock of
the Subsidiary which is distributed in such Spin-Off in respect of one share of
Common Stock for the period of 20 Trading Days preceding such 35th Trading Day
and the denominator of which shall be the Current Market Price per share of the
Common Stock for the period of 20 Trading Days proceeding such 35th Trading Day.
An adjustment made pursuant to this Section 4.3 shall be made upon the opening
of business on the next Business Day following the date on which any such
dividend or distribution is made and shall be effective retroactively
immediately after the close of business on the record date fixed for the
determination of stockholders entitled to receive such dividend or distribution;
provided, however, if the proviso to the preceding sentence applies, then such
adjustment shall be made and be effective as of such 35th Trading Day after the
effective date of such Spin-Off.
Section 4.4. Other Provisions Applicable to Adjustments Under This
Section. The following provisions shall be applicable to the making of
adjustments provided for in this Section 4:
(a) For purposes of this Section 4, the number of shares of
Common Stock at any time outstanding shall not
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include any shares of Common Stock then owned or held by or for the
account of the Company.
(b) The term "dividend", as used in this Section 4 shall mean a
dividend or other distribution upon stock of the Company except pursuant
to the Rights Agreement. Notwithstanding anything in this Section 4 to
the contrary, the number of shares of Common Stock issuable upon
exercise of the Warrants evidenced hereby shall not be adjusted as a
result of any dividend, distribution or issuance of securities of the
Company pursuant to the Rights Agreement.
(c) Notwithstanding anything in this Section 4 to the contrary,
the Company shall not be required to give effect to any adjustment in
the number of shares of Common Stock issuable upon exercise of the
Warrants evidenced hereby unless and until the net effect of one or more
adjustments (each of which shall be carried forward), determined as
above provided, shall have resulted in a change in the number of shares
of Common Stock issuable upon exercise of the Warrants evidenced hereby
by at least one-hundredth of one share of Common Stock, and when the
cumulative net effect of more than one adjustment so determined shall be
to change the number of shares of Common Stock issuable upon exercise of
the Warrants evidenced hereby by at least one-hundredth of one share of
Common Stock, such change in the number of shares of Common Stock
issuable upon exercise of the Warrants evidenced hereby shall thereupon
be given effect.
(d) The certificate of any firm of independent public
accountants of recognized standing selected by the Board of Directors of
the Company (which may be the firm of independent public accountants
regularly employed by the Company) shall be presumptively correct for
any computation made under this Section 4.
(e) If the Company shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive a dividend or
other distribution, and shall thereafter and before the distribution to
stockholders thereof legally abandon its plan to pay or deliver such
dividend or distribution, then, no adjustment in the number of shares of
Common Stock issuable upon exercise of the Warrants evidenced hereby
shall be required by reason of the taking of such record.
(f) There shall be no adjustment of the number of shares of
Common Stock issuable upon exercise of the Warrants evidenced hereby in
case of the issuance of any stock of the Company in a merger,
reorganization, acquisition or other similar transaction except as set
forth in Sections 4.1, 4.2 and 4.5.
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(g) Notwithstanding anything herein to the contrary, the Company
agrees not to enter into any transaction which, by reason of any
adjustment hereunder, would cause the Exercise Price to be less than the
par value per share of Common Stock.
(h) Upon each adjustment to the number of shares of Common Stock
issuable upon exercise of the Warrants pursuant to Sections 4.1, 4.2 or
4.3, the Exercise Price effective immediately prior to the making of
such adjustment shall thereafter be adjusted to be the amount obtained
by (i) multiplying (A) the applicable number of shares of Common Stock
issuable upon exercise of the Warrants immediately prior to such
adjustment by (B) the Exercise Price in effect immediately prior to such
adjustment and (ii) dividing the product so obtained by the number of
shares of Common Stock issuable upon exercise of the Warrants
immediately after such adjustment.
Section 4.5. Reorganization, Reclassification, Merger, Consolidation or
Disposition of Assets. In case of any reorganization or reclassification of
outstanding shares of Common Stock (other than a reclassification covered by
Section 4.1), or in case of any consolidation or merger of the Company with or
into another corporation, or in the case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety (each of the foregoing being referred to as a "Transaction"), each such
Warrant then outstanding shall thereafter be exercisable for, in lieu of the
Common Stock issuable upon such exercise prior to consummation of the
Transaction, the kind and amount of shares of stock and other securities and
property receivable (including cash) upon the consummation of the Transaction by
a holder of that number of shares of Common Stock issuable upon exercise of such
Warrant immediately prior to the Transaction (including, on a pro rata basis,
the cash, securities or property received by holders of Common Stock in any
tender or exchange offer that is a step in the Transaction).
Section 4.6. Notices to Warrantholders. In case at any time or from time
to time, prior to the Expiration Date, the Company shall pay any dividend or
make any other distribution to the holders of its Common Stock, or shall offer
for subscription pro rata to the holders of its Common Stock any additional
shares of stock of any class or any other right, or there shall be any capital
reorganization or reclassification of the Common Stock of the Company or
consolidation or merger of the Company with or into another corporation, or any
sale or conveyance to another corporation of the property of the Company as an
entirety or substantially as an entirety, or there shall be a voluntary or
involuntary dissolution, liquidation or winding up of the Company, then, in any
one or more of said cases the Company shall give at least 20 days' prior written
notice (the time of mailing of such notice shall be deemed to be the time of
giving thereof)
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to the registered holder of the Warrants evidenced hereby at its address as
shown on the books of the Company maintained by the Transfer Agent thereof of
the date on which (i) the books of the Company shall close or a record shall be
taken for such stock dividend, distribution or subscription rights or (ii) such
reorganization, reclassification, consolidation, merger, sale or conveyance,
dissolution, liquidation or winding up shall take place, as the case may be,
provided that in the case of any Transaction to which Section 4.5 applies the
Company shall give at least 30 days' prior written notice as aforesaid. Such
notice shall also specify the date as of which the holders of the Common Stock
of record shall participate in said dividend, distribution or subscription
rights or shall be entitled to exchange their Common Stock for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale or conveyance or participate in such dissolution,
liquidation or winding up, as the case may be. Failure to give such notice shall
not invalidate any action so taken.
Section 4.7. Certificates. Upon any adjustment of the number of shares
of Common Stock issuable upon exercise of the Warrants evidenced hereby or of
the Exercise Price, then, and in each such case, the Company shall promptly
deliver to the holders of the Warrants and the Common Stock, a certificate
signed by the President or a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the Company setting
forth in reasonable detail the event requiring the adjustment and the method by
which such adjustment was calculated and specifying the increased or decreased
number of shares of Common Stock issuable upon exercise of the Warrants
evidenced hereby and the Exercise Price then in effect following such
adjustment.
ARTICLE 5.
NO IMPAIRMENT
The Company shall not by any action including, without limitation,
amending its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such actions as may be necessary or appropriate to protect the rights of the
holder of the Warrant against impairment. Without limiting the generality of the
foregoing, the Company will (a) not increase the par value of any shares of
Common Stock receivable upon the exercise of this Warrant above the Exercise
Price immediately prior to such increase in par value, (b) take all such action
as may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and nonassessable shares of Common Stock, free and
clear of any liens, claims, encumbrances and restrictions (other than as
provided herein) upon the exercise of this
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Warrant, and (c) use its best efforts to obtain all such authorizations,
exemptions or consents from any public regulatory body having jurisdiction
thereof as may be necessary to enable the Company to perform its obligations
under this Warrant.
Upon the request of the holder of the Warrant, the Company will at any
time during the period this Warrant is outstanding acknowledge in writing, in
form satisfactory to the holder of this Warrant, the continuing validity of this
Warrant and the obligations of the Company hereunder.
ARTICLE 6.
RESERVATION AND AUTHORIZATION OF
COMMON STOCK; REGISTRATION WITH OR
APPROVAL OF ANY GOVERNMENTAL AUTHORITY
The Company covenants and agrees that, until the Expiration Date, the
Company shall at all times reserve and keep available for issue upon the
exercise of Warrants such number of its authorized but unissued shares of Common
Stock as will be sufficient to permit the exercise in full of all outstanding
Warrants. All shares of Common Stock which shall be so issuable, when issued
upon exercise of Warrants and payment therefor in accordance with the terms of
such Warrant, shall be duly and validly issued, fully paid and nonassessable and
free and clear of any liens, claims and restrictions (other than as provided
herein). No stockholder of the Company has or shall have any preemptive rights
to subscribe for such shares of Common Stock.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock for which this Warrant is exercisable or in the
Exercise Price, the Company shall obtain all such authorizations or exemptions
thereof, or consents thereto, as may be necessary from any public regulatory
body or bodies having jurisdiction thereof.
ARTICLE 7.
STOCK AND WARRANT TRANSFER BOOKS
The Company will not at any time, except upon dissolution, liquidation
or winding up of the Company, close its stock transfer books or Warrant transfer
books so as to result in preventing or delaying the exercise or transfer of any
Warrant.
ARTICLE 8.
RESTRICTIONS ON TRANSFERABILITY
The Warrants and the Warrant Stock shall not be transferred before
satisfaction of the conditions specified in this Section 8, which conditions are
intended to ensure compliance with the provisions of the Securities Act and
state securities laws with respect to the Transfer of any Warrant or any Warrant
Stock. The holder, by acceptance of this Warrant, agrees to be bound by the
provisions of this Section 8.
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Section 8.1. Restrictive Legend.
(a) Except as otherwise provided in this Section 8, each
certificate for Warrant Stock initially issued upon the exercise of this
Warrant, and each certificate for Warrant Stock issued to any subsequent
transferee of any such certificate, shall be stamped or otherwise
imprinted with a legend in substantially the following form:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or the
securities laws of any state and are subject to the conditions
specified in a certain Warrant dated February 10, 1999,
originally issued by Aames Financial Corporation. The shares
represented by this certificate may not be transferred in
violation of such Act and laws, the rules and regulations
thereunder or the provisions of the Warrant. A copy of the form
of said Warrant is on file with the Secretary of Aames Financial
Corporation. The holder of this certificate, by acceptance of
this certificate, agrees to be bound by the provisions of such
Warrant."
(b) Except as otherwise provided in this Section 8, each Warrant
shall be stamped or otherwise imprinted with a legend in substantially
the following form:
"This Warrant and the securities represented hereby have not
been registered under the Securities Act of 1933, as amended, or
the securities laws of any state and may not be sold or
otherwise transferred in the absence of such registration or an
exemption therefrom under such Act and under any such applicable
state laws, or in violation of the provisions of this Warrant."
Section 8.2. Transfers. Prior to any transfer or attempted transfer of
any Warrants or any shares of Restricted Common Stock, the holder of such
Warrants or Restricted Common Stock shall give notice (a "Transfer Notice") to
the Company of such holder's intention to effect such transfer, describing the
manner and circumstances of the proposed transfer, and obtain from counsel a
written opinion addressed and reasonably satisfactory to the Company that the
proposed transfer of such Warrants or such Restricted Common Stock may be
effected without registration under the Securities Act and applicable state
securities laws. After receipt of the Transfer Notice and written opinion, the
Company shall, within two Business Days thereof, so notify the holder of such
Warrants or such Restricted Common Stock and such holder shall thereupon be
entitled to transfer such warrants or such Restricted Common Stock, in
15
<PAGE> 65
accordance with the terms of the Transfer Notice. Each certificate, if any,
evidencing such shares of Restricted Common Stock issued upon such transfer
shall bear the restrictive legend set forth in Section 8.1(a), and each Warrant
issued upon such transfer shall bear the restrictive legend set forth in Section
8.1(b), unless in the written opinion of counsel addressed to the Company such
legend is not required in order to ensure compliance with the Securities Act.
Section 8.3. Termination of Restrictions. Notwithstanding the foregoing
provisions of Section 8, the restrictions imposed by this Section 8 upon the
transferability of the Warrants, the Warrant Stock and the Restricted Common
Stock (or Common Stock issuable upon the exercise of the Warrants) and the
legend requirements of Section 8.1 shall terminate as to any particular Warrant
or share of Warrant Stock or Restricted Common Stock (or Common Stock issuable
upon the exercise of the Warrants) (i) as to the Warrant Stock and Restricted
Common Stock, when and so long as the resale of such security shall have been
effectively registered under the Securities Act and disposed of pursuant
thereto, or (ii) as to the Warrant, Warrant Stock and Restricted Common Stock,
when the holder of the Warrant, Warrant Stock or Restricted Common Stock shall
have delivered to the Company the written opinion of counsel addressed and
reasonably satisfactory to the Company stating that such legend is not required
in order to ensure compliance with the Securities Act. Whenever the restrictions
imposed by this Section shall terminate as to any share of Restricted Common
Stock, as hereinabove provided, the holder thereof shall be entitled to receive
from the Company, at the Company's expense (except for any transfer taxes), a
new certificate representing such Common Stock not bearing the restrictive
legend set forth in Section 8.1(a).
ARTICLE 9.
SUPPLYING INFORMATION
The Company shall cooperate with the holder of the Warrant and the
holder of Restricted Common Stock in supplying such information as may be
reasonably requested by such holder or reasonably necessary for such holder to
complete and file any information reporting forms presently or hereafter
required by the Commission as a condition to the availability of an exemption
from the Securities Act for the sale of any Warrant or Restricted Common Stock.
ARTICLE 10.
LOSS OR MUTILATION
Upon receipt by the Company from any holder of evidence reasonably
satisfactory to the Company of the ownership of and the loss, theft, destruction
or mutilation of this Warrant and indemnity reasonably satisfactory to it and in
case of mutilation upon surrender and cancellation hereof, the Company will
execute
16
<PAGE> 66
and deliver in lieu hereof a new Warrant of like tenor to the holder; provided,
in the case of mutilation, no indemnity shall be required if this Warrant in
identifiable form is surrendered to the Company for cancellation.
ARTICLE 11.
OFFICE OF THE COMPANY
As long as any of the Warrants remain outstanding, the Company shall
maintain an office or agency (which may be the principal executive offices of
the Company) where the Warrants may be presented for exercise, registration of
transfer, division or combination as provided in this Warrant.
ARTICLE 12.
REGISTRATION RIGHTS
The Warrant Stock issuable upon exercise of this Warrant are entitled to
the benefits of the Registration Rights Agreement. The Company shall keep a copy
of the Registration Rights Agreement, and any amendments thereto, at the office
or agency designated by the Company pursuant to Section 11 and shall furnish
copies thereof to the holder upon request.
ARTICLE 13.
LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative action by the holder
to purchase shares of Common Stock, and no enumeration herein of the rights or
privileges of the holder hereof, shall give rise to any liability of the holder
for the purchase price of any Common Stock or as a stockholder of the Company,
whether such liability is asserted by the Company or by creditors of the
Company.
ARTICLE 14.
REPRESENTATION OF HOLDER
The holder represents that it is acquiring the Warrant and the Warrant
Stock for the purpose of investment and not with a view to the resale or
distribution hereof or thereof; provided, that the disposition of holder's
property shall at all times be and remain within its control.
ARTICLE 15.
MISCELLANEOUS
Section 15.1. Nonwaiver and Expenses. No course of dealing or any delay
or failure to exercise any right hereunder on the part of the parties shall
operate as a waiver of such right or otherwise prejudice the parties' rights,
powers or remedies. If the Company fails to comply with any provision of this
Warrant, the Company shall pay to the holder such amounts as
17
<PAGE> 67
shall be sufficient to cover any costs and expenses including, but not limited
to, reasonable attorneys' fees incurred by the holder in collecting any amounts
due pursuant hereto or in otherwise enforcing any of its rights, powers or
remedies hereunder.
Section 15.2. No Rights As Stockholder. The Person in whose name this
Warrant is registered shall be deemed the owner hereof and of the Warrants
evidenced hereby for all purposes. The registered holder of this Warrant shall
not be entitled to any rights whatsoever as a stockholder of the Company except
as herein provided.
Section 15.3. Notice Generally. Any notice, demand, request, consent,
approval, declaration, delivery or other communication hereunder to be made
pursuant to the provisions of this Warrant shall be sufficiently given or made
if in writing and either delivered in person with receipt acknowledged or sent
by registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
(a) If to the holder, at its last known address appearing on the
books of the Company maintained for such purpose.
(b) If to the Company:
Aames Financial Corporation
2 California Plaza
350 South Grand Avenue
Los Angeles, California 90071
Attention: Cary Thompson
Fax No.: (323) 210-4537
with a copy to:
Troop Steuber Pasich Reddick & Tobey
2029 Century Park East
Los Angeles, California 90067
Attention: C. N. Franklin Reddick, Esq.
Fax No.: (310) 728-2204
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration, delivery or other communication hereunder shall
be deemed to have been duly given or served on the date on which personally
delivered, with receipt acknowledged, or three (3) Business Days after the same
shall have been deposited in the United States mail.
18
<PAGE> 68
Section 15.4. Successors and Assigns. Subject to the provisions of
Sections 3.1 and 8, (i) this Warrant and the rights evidenced hereby shall inure
to the benefit of and be binding upon the successors of the Company and the
successors and assigns of the holder, and (ii) the provisions of this Warrant
are intended to be for the benefit of all holders from time to time of this
Warrant, and shall be enforceable by any such holders.
Section 15.5. Amendment. The Warrants may be modified or amended or the
provisions thereof waived with the written consent of the Company and the
holders of the majority of the portion of this Warrant then outstanding.
Section 15.6. Severability. Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Warrant.
Section 15.7. Headings. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
Section 15.8. Governing Law. This Warrant shall be governed by and
construed in accordance with the laws of the State of Delaware, without giving
effect to conflicts of law principles thereof.
Section 15.10. Mutual Waiver of Jury Trial. BECAUSE DISPUTES ARISING IN
CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY
RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE
STATE AND FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES
DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS.
THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL
SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY
IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO ENFORCE OR DEFEND ANY RIGHTS OR
REMEDIES UNDER THIS WARRANT.
19
<PAGE> 69
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer on _______________, 1998.
AAMES FINANCIAL CORPORATION
By:
--------------------------------------
Name:
Title:
20
<PAGE> 70
EXHIBIT A
SUBSCRIPTION FORM
[To be executed only upon exercise of Warrant]
The undersigned registered owner of this Warrant irrevocably exercises
this Warrant for the purchase of _____ Shares of Common Stock of AAMES FINANCIAL
CORPORATION and herewith makes payment therefor, all at the price and on the
terms and conditions specified in this Warrant and requests that certificates
for the shares of Common Stock hereby purchased (and any securities or other
property issuable upon such exercise) be issued in the name of and delivered to
__________________ whose address is ____________________ and, if such shares of
Common Stock shall not include all of the shares of Common Stock issuable as
provided in this Warrant, that a new Warrant of like tenor and date for the
balance of the shares of Common Stock issuable hereunder be delivered to the
undersigned.
(Name of Registered Owner)
- --------------------------------
(Signature of Registered owner)
- --------------------------------
(Street Address)
- --------------------------------
(City) (State) (Zip Code)
- --------------------------------
NOTICE: The signature on this subscription must correspond with the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
<PAGE> 71
EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under this Warrant, with respect to the number of
shares of Common Stock set forth below:
Name and Address of Assignee No. of Shares of Common Stock
- ---------------------------- -----------------------------
and does hereby irrevocably constitute and appoint ____________ attorney-in-fact
to register such transfer on the books of AAMES FINANCIAL CORPORATION maintained
for the purpose, with full power of substitution in the premises.
Dated:
------------------------------
Name:
-------------------------------
Signature:
--------------------------
Witness:
----------------------------
NOTICE: The signature on this assignment must correspond with the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
<PAGE> 1
EXHIBIT 10.29
AAMES FINANCIAL CORPORATION,
ISSUER
THE SUBSIDIARY GUARANTORS
AND
THE CHASE MANHATTAN BANK
TRUSTEE
SECOND SUPPLEMENTAL INDENTURE
DATED AS OF FEBRUARY 10, 1999
----------
$150,000,000
9.125% SENIOR NOTES DUE 2003
Supplementing the Indenture dated as of October 21, 1996
between Aames Financial Corporation, as Issuer,
and The Chase Manhattan Bank, as Trustee, as amended and supplemented to date
<PAGE> 2
THIS SECOND SUPPLEMENTAL INDENTURE (the "Second Supplemental
Indenture"), dated as of February 10, 1999 among AAMES FINANCIAL CORPORATION, a
Delaware corporation (the "Company"), the SUBSIDIARY GUARANTORS listed on the
signature page hereto (the "Subsidiary Guarantors") and THE CHASE MANHATTAN
BANK, a New York banking corporation, as Trustee (the "Trustee"), to the
Indenture dated as of October 21, 1996 (the "Original Indenture"), as amended
and supplemented by a First Supplemental Indenture dated as of October 21, 1996
(the "First Supplemental Indenture") (the Original Indenture as so amended and
supplemented by the First Supplemental Indenture, the "Indenture").
WITNESSETH:
WHEREAS, the Company has issued its 9.125% Senior Notes Due 2003 (the
"Securities") pursuant to the Indenture;
WHEREAS, the Company has entered into a Preferred Stock Purchase
Agreement dated as of December 23, 1998 (the "Preferred Stock Purchase
Agreement") with Capital Z Financial Services Fund II, L.P., a Bermuda limited
partnership ("Capital Z"), pursuant to which and subject to the terms and
conditions thereof, Capital Z will make an equity investment in the Company of
up to $100 million. The Preferred Stock Purchase Agreement provides, among other
things, for (i) the investment of $75 million through the purchase by Capital Z
or its designees of newly designated Series B Convertible Preferred Stock (the
"Series B Stock") of the Company and newly designated Series C Convertible
Preferred Stock of the Company (the "Series C Stock") in a private placement
transaction (the "Initial Closing"); (ii) after the Initial Closing and
completion of a recapitalization of the Company, an offering to the Company's
stockholders of non-transferable rights to purchase up to $25 million of Series
C Stock; and (iii) the sale to Capital Z or its designees of any and all shares
of Series C Stock not purchased by the Company's stockholders in such rights
offering (the transactions referred to in clauses (i), (ii) and (iii) are
collectively referred to as the "Preferred Stock Issuance").
WHEREAS, the Company has solicited the consent of the registered holders
(the "Holders") of the Securities as of January 11, 1999, the record date set by
the Company, to (i) waive the obligation of the Company upon the change of
control resulting from the Preferred Stock Issuance under Section 5.14 of the
Indenture to purchase any or all of the Securities at 101% of principal amount,
plus accrued and unpaid interest to the date of repurchase to facilitate the
Preferred Stock Issuance (the "Change of Control Waiver") and (ii) waive the
requirement in the definition thereof that "Consolidated Net Worth" be based on
the balance sheet for the most recent fiscal quarter to allow for immediate
recognition, when made at the Initial Closing, of the $75 million investment by
Capital Z under the Preferred Stock Purchase Agreement in Series B Stock and
Series C Stock as an addition to the Company's Consolidated Net Worth as of
December 31, 1998 (the "Net Worth Definition Waiver").
WHEREAS, the Trustee has received evidence satisfactory to it of the
consent of the Holders of at least a majority in principal amount of the
Securities outstanding which are not owned by the Company or its affiliates to
the Change of Control Waiver and to the Net Worth Definition Waiver pursuant to
Section 9.02 of the Indenture.
NOW, THEREFORE, intending to be legally bound hereby, the parties agree
as follows. Capitalized terms used herein and not otherwise defined shall have
the meanings assigned to them in the Indenture.
<PAGE> 3
ARTICLE I
CHANGE OF CONTROL WAIVER
All Holders and every subsequent holder of the Securities shall be bound
by the following waiver of the Indenture and the Securities:
Such persons expressly waive the applicability of Section 5.14 of the
Indenture to the change of control resulting from the Preferred Stock Issuance
under the Preferred Stock Purchase Agreement, including any obligation on the
part of the Company to offer to repurchase any or all of the Securities at 101%
of the principal amount, together with accrued and unpaid interest, as a result
of the change of control resulting from the Preferred Stock Issuance.
ARTICLE II
NET WORTH DEFINITION WAIVER
All Holders and every subsequent holder of the Securities shall be bound
by the following waiver of the Indenture and the Securities:
Such persons expressly waive the requirement in the definition thereof
that "Consolidated Net Worth" be based on the balance sheet for the most recent
fiscal quarter to allow for immediate recognition, when made at the Initial
Closing, of the $75 million investment in Series B Stock and Series C Stock
under the Preferred Stock Purchase Agreement as an addition to the Company's
Consolidated Net Worth as of December 31, 1998.
ARTICLE III
MISCELLANEOUS
Section 3.1 Except as waived hereby, all of the terms of the Indenture
shall remain and continue in full force and effect and are hereby confirmed in
all respects.
Section 3.2 This Second Supplemental Indenture and each and every
provision hereof shall be deemed to be a contract made under the laws of the
State of New York and for all purposes shall be construed in accordance with the
laws of such State.
Section 3.3 This Second Supplemental Indenture may be executed in any
number of counterparts, each of which shall be an original; but such
counterparts shall constitute but one and the same instrument.
Section 3.4 In entering into this Second Supplemental Indenture, the
Trustee shall be entitled to the benefit of every provision of the Indenture
relating to the conduct or affecting the liability of or affording protection to
the Trustee, whether or not elsewhere herein so provided.
[Signature page follows]
2
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Second
Supplemental Indenture to be duly executed, and their respective corporate seals
to be hereunto affixed and attested, all as of the date hereof.
AAMES FINANCIAL CORPORATION OXFORD AVIATION CORPORATION, INC.
By: /s/ Barbara S. Polsky By: /s/ Barbara S. Polsky
------------------------------- --------------------------------------
Name: Barbara S. Polsky Name: Barbara S. Polsky
Title: Executive Vice President Title: Executive Vice President
AAMES CAPITAL CORPORATION ROSSMORE FINANCIAL INSURANCE
SERVICES, INC.
By: /s/ Barbara S. Polsky By: /s/ Barbara S. Polsky
------------------------------- --------------------------------------
Name: Barbara S. Polsky Name: Barbara S. Polsky
Title: Executive Vice President Title: Executive Vice President
AAMES FUNDING CORPORATION SERRANO INSURANCE SERVICES, INC.
By: /s/ Barbara S. Polsky By: /s/ Barbara S. Polsky
------------------------------- --------------------------------------
Name: Barbara S. Polsky Name: Barbara S. Polsky
Title: Executive Vice President Title: Executive Vice President
ONE STOP MORTGAGE, INC. WINDSOR MANAGEMENT CO.
By: /s/ Barbara S. Polsky By: /s/ Barbara S. Polsky
------------------------------- --------------------------------------
Name: Barbara S. Polsky Name: Barbara S. Polsky
Title: Executive Vice President Title: Executive Vice President
THE CHASE MANHATTAN BANK, as trustee
By: /s/ Susan Lai
------------------------------
Name: Susan Lai
Title: Trust Officer
<PAGE> 1
EXHIBIT 11
AAMES FINANCIAL CORPORATION
COMPUTATION OF EARNINGS (LOSS) PER SHARE
FOR THE THREE MONTHS AND SIX MONTHS ENDED
DECEMBER 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ -------------------------------
1998 1997 1998 1997
------------- ------------ ------------- --------------
(Restated) (Restated) (Restated)
<S> <C> <C> <C> <C>
Basic earnings (loss) per common share:
Net income (loss) for calculating basic earnings (loss)
per common share ($ 195,745,000) $ 9,170,000 ($ 197,901,000) $ 19,103,000
============= ============ ============= ==============
Average common shares outstanding 31,007,000 27,799,000 30,992,000 27,784,000
------------- ------------ ------------- --------------
Basic earnings (loss) per common share ($6.31) $0.33 ($6.39) $0.69
============= ============ ============= ==============
Diluted earnings (loss) per common share:
Net income (loss) ($ 195,745,000) $ 9,170,000 ($ 197,901,000) $ 19,103,000
============= ============ ============= ==============
Adjust net income to add back the after-tax amount
of interest recognized in the period associated
with the convertible subordinated notes - 909,000 - 1,760,000
------------- ------------ ------------- --------------
Adjusted net income (loss) ($ 195,745,000) $ 10,079,000 ($ 197,901,000) $ 20,863,000
============= ============ ============= ==============
Average common shares outstanding 31,007,000 27,799,000 30,992,000 27,784,000
Add exercise of options and warrants 204,000 1,043,000 247,000 1,381,000
Convertible subordinated notes - 6,107,000 - 6,107,000
------------- ------------ ------------- --------------
Diluted shares outstanding 31,211,000 34,949,000 31,239,000 35,272,000
============= ============ ============= ==============
Diluted earnings (loss) per common
share ($6.27) $0.29 ($6.34) $0.59
============= ============ ============= ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,790,000
<SECURITIES> 0
<RECEIVABLES> 424,468,000
<ALLOWANCES> 664,000
<INVENTORY> 271,324,000
<CURRENT-ASSETS> 706,918,000
<PP&E> 27,279,000
<DEPRECIATION> 12,549,000
<TOTAL-ASSETS> 721,648,000
<CURRENT-LIABILITIES> 329,295,000
<BONDS> 286,990,000
0
0
<COMMON> 31,000
<OTHER-SE> 105,332,000
<TOTAL-LIABILITY-AND-EQUITY> 721,648,000
<SALES> (96,662,000)
<TOTAL-REVENUES> (96,662,000)
<CGS> 21,489,000
<TOTAL-COSTS> 21,489,000
<OTHER-EXPENSES> 70,873,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,285,000
<INCOME-PRETAX> (211,309,000)
<INCOME-TAX> 13,408,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (197,901,000)
<EPS-PRIMARY> (6.39)<F1>
<EPS-DILUTED> (6.34)
<FN>
<F1>For purposes of this exhibit, Primary means Basic.
</FN>
</TABLE>
