SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10/A
AMENDMENT NO. - 1
GENERAL FORM OF REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
APPROVED FINANCIAL CORP.
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(Exact Name of Registrant as Specified in its Charter)
VIRGINIA 52-0792752
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
3420 HOLLAND ROAD, SUITE 107, VIRGINIA BEACH, VIRGINIA 23452
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(Address of Principal Executive Office) (Zip Code)
757-430-1400 OR 800-486-5237
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(Registrant's Telephone Number, Including Area Code)
Securities to be Registered Pursuant to Section 12(g) of the Act:
Title of Each Class
to be so Registered
Common, $1.00 par value per share
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APPROVED FINANCIAL CORP.
GENERAL FORM OF REGISTRATION OF SECURITIES ON FORM 10/A AMENDMENT NO. - 1
JULY 6, 1998
INFORMATION REQUIRED IN REGISTRATION STATEMENT
TABLE OF CONTENTS
ITEM 1. BUSINESS.
General ................................................................6
Business Strategy..............................................................9
Purchase of the Assets of Funding Center of Georgia, Inc......................12
The Company's Borrowers and its Loan Products.................................12
Underwriting Guidelines.......................................................16
Mortgage Loan Servicing.......................................................20
Marketing ...............................................................22
Company's Sources of Funds and Liquidity......................................23
Savings Bank's Sources of Funds...............................................25
Taxation ...............................................................27
Employees ...............................................................28
Effect of Adverse Economic Conditions.........................................28
Service Marks ...............................................................28
Reliance on IMC Mortgage Company..............................................29
Concentration of Operations in Seven States...................................29
Future Risks Associated with Loan Sales through Securitizations...............29
Year 2000 Issues..............................................................30
Contingent Risks..............................................................30
Competition ...............................................................31
Regulation ...............................................................32
OTS Regulation of the Company.................................................34
Regulation of the Savings Bank................................................36
Legislative Risk..............................................................44
Environmental Factors.........................................................45
Dependence on Key Personnel...................................................45
Control by Certain Shareholders...............................................45
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ITEM 2. FINANCIAL INFORMATION.
Selected Historical Financial Data............................................46
Management's Discussion and Analysis of Financial Condition and
Results of Operations
General ...............................................................55
Results of Operations
Three- and Nine-Month Periods Ended September 30, 1997 and 1996.......55
Years Ended December 31, 1996, 1995 and 1994..........................68
Financial Condition
September 30, 1997, December 31, 1996 and September 30, 1996..........75
December 31, 1996, 1995 and 1994......................................80
New Accounting Standards......................................................82
Impact of Inflation and Changing Prices.......................................84
Market Risk Management - Asset/Liability Management...........................85
Interest Rate Risk............................................................87
Asset Quality ...............................................................89
Liquidity - Negative Cash Flow................................................92
ITEM 3. PROPERTIES.
Properties ...............................................................93
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Security Ownership of Certain Beneficial Owners...............................94
Security Ownership of Directors and Executive Officers........................95
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
Directors and Executive Officers..............................................96
Board of Directors............................................................99
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ITEM 6. EXECUTIVE COMPENSATION.
Summary of Cash and Other Compensation.......................................101
Stock Option/Stock Appreciation Right Grants in the Last Year................102
Aggregate Option Exercises and Period-End Values.............................103
1996 Incentive Stock Option Plan.............................................103
401(k) Retirement Plan.......................................................105
Employment Agreements........................................................106
Directors' Compensation......................................................108
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Agreement with IMC Mortgage Company..........................................109
Agreement with Mills Value Advisors, Inc.....................................110
Termination of Armada Residential Mortgage, LLC..............................110
Indebtedness of Management...................................................110
Promissory Notes.............................................................110
ITEM 8. LEGAL PROCEEDINGS.
Legal Proceedings............................................................111
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
Market Price of and Cash Dividends on Company's Common Equity................112
Absence of Active Public Trading Market and Volatility of Stock Price........113
Transfer Agent and Registrar.................................................113
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
Recent Sales of Unregistered Securities......................................114
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
Authorized Capital Stock.....................................................116
Common Stock ..............................................................116
Preferred Stock..............................................................116
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ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Liability and Indemnification of Directors and Officers of the Company.......117
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements and Supplementary Data..................................118
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure.......................................118
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
Financial Statements and Exhibits............................................118
Signatures ..............................................................120
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ITEM 1 - BUSINESS
GENERAL
Approved Financial Corp. (the "Company") is a Virginia-chartered financial
institution, principally involved in originating, purchasing, servicing and
selling loans secured primarily by first and junior liens on owner-occupied,
one- to four-family residential properties. The Company offers both fixed-rate
and adjustable-rate loans for debt consolidation, home improvements and other
purposes. The Company's specialty is lending to the "non-conforming" borrower
who does not meet traditional "conforming" or government agency credit
qualification guidelines. The Company focuses on lending to individuals whose
borrowing needs are generally not being served by traditional financial
institutions due to such individuals' impaired credit profiles and other
factors. For over forty-five years, the Company has helped its customers to
satisfy their financial needs and to improve their credit ratings.
Incorporated in 1952 as a subsidiary of Government Employees Insurance Co.
("GEICO"), the Company was acquired in September 1984 by, among others, several
members of current management. The Company, headquartered in Virginia Beach,
Virginia, holds a Virginia industrial loan association charter and is subject to
the supervision, regulation and examination of the Virginia State Corporation
Commission's Bureau of Financial Institutions. In September 1996 the Company
acquired Approved Federal Savings Bank (the "Savings Bank"), a
federally-chartered savings institution. The Savings Bank is subject to the
supervision, regulation and examination of the Office of Thrift Supervision (the
"OTS") and the Federal Deposit Insurance Corporation ("FDIC"). The Company is a
registered savings and loan holding company under the federal Home Owner's Loan
Act ("HOLA") because of its ownership of the Savings Bank. As such, the Company
is subject to the regulation, supervision and examination of the OTS. The
Savings Bank is also subject to the regulations of the Board of Governors of the
Federal Reserve System governing reserves required to be maintained against
deposits.
The Company derives its income from gains on loans sold through whole loan
sales to institutional purchasers, net warehouse interest earned on loans held
for sale, net interest income on loans held for investment, and origination and
other fees received as part of the loan application process. In future periods,
the Company may generate revenue from loans sold through securitizations and
non-real estate secured consumer finance lending.
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The Company utilizes broker and retail channels to originate loans. At the
broker level, an extensive network of independent mortgage brokers generates
referrals. This loan source has been a successful and profitable mainstay of the
business for many years. The Company began making residential mortgage loans
through retail offices during the fourth quarter of 1994. In the first nine
months of 1997, the dollar volume in the broker lending division accounted for
54.2% of total originations and the retail lending division accounted for 45.8%
of total originations. The Company is seeking to expand its broker network and
its direct consumer lending by opening branch offices and increasing its use of
advertising, direct mail and other marketing strategies, and through strategic
acquisitions. The Company is also committing resources to grow and improve the
profitability of each operating unit, and to enhance the corporate and
underwriting infrastructure.
Once loan applications are received from the broker and retail networks,
the underwriting process is completed and the loans are funded, the Company
typically packages the loans and sells them on a whole loan basis to
institutional investors, usually other mortgage and finance companies. The
proceeds from the sales release funds for additional lending.
The Company has two operating subsidiaries. Approved Residential Mortgage,
Inc. ("ARMI") was formed in April 1993 to originate non-conforming residential
mortgage loans through its broker network and retail outlets. ARMI initially
concentrated on continuing the Company's broker network business. During the
fourth quarter of 1994, the Company opened its first retail loan origination
center through a joint venture. The Company opened three retail centers in 1995,
seven retail centers in 1996 and twelve retail centers in 1997. ARMI operates
most of its retail offices under the service mark "Armada" Residential Mortgage.
The Company's other operating subsidiary is the Savings Bank. The Savings
Bank's principal business activities are attracting savings deposits from the
general public through its Virginia Beach banking office and originating,
investing in and selling loans secured by first and junior mortgage liens on
single-family dwellings, including condominium units. The Savings Bank employs
two mortgage loan broker account representatives in the state of Tennessee. In
future periods, the Savings Bank may also lend funds to banking customers by
means of home equity loans and also installment loans not secured by real estate
collateral, and may originate residential construction loans and loans secured
by manufactured housing units. The Savings Bank invests in certain U.S.
Government and agency obligations and other investments permitted by applicable
laws and regulations. The operating results of the Savings Bank are highly
dependent on net interest income, the difference between interest income earned
on loans and investments and the cost of savings deposits and borrowed funds.
The Savings Bank has one operating subsidiary, Global Title Insurance Agency,
Inc.
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Following its acquisition of the Savings Bank in September 1996, the
Company moved quickly to change the Savings Bank's profile and operations. The
Company installed new management and the Savings Bank's operations were moved to
Virginia Beach, Virginia, to be in close proximity to the Company's corporate
headquarters. During the first nine months of 1997, the Savings Bank's
operations consisted of making loans similar to those typically made by the
Company. The Savings Bank's charter gives it quick entry into new markets, with
reduced legal costs. By taking advantage of the flexible provisions of the
charter, the Savings Bank has been able to make non-conforming real
estate-secured loans in several states where the Company's retail or broker
units have not yet obtained licenses, or where the Company's current licenses
have restricted it from doing this type of business without expensive
application costs. In making these loans, the Savings Bank has utilized the
Company's existing network of brokers and retail branches, and has utilized on a
contract basis the processing, underwriting and closing capabilities of the
Company. The Company has agreed to purchase all of the loans made by the Savings
Bank during this period. The Company has sold in the secondary market most of
the loans it has purchased from the Savings Bank.
Deposit accounts of the Savings Bank up to $100,000 are insured by the
Savings Association Insurance Fund, administered by the FDIC. The Savings Bank
is a member of the Federal Home Loan Bank (the "FHLB") of Atlanta. The Company
and the Savings Bank are subject to the supervision, regulation and examination
of the OTS and the FDIC. The Savings Bank is also subject to the regulations of
the Board of Governors of the Federal Reserve System governing reserves required
to be maintained against deposits.
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BUSINESS STRATEGY
The Company's strategies are: (i) maintaining the strong commitment to loan
underwriting and servicing standards; (ii) expanding direct retail lending;
(iii) increasing the number of brokers in its network and increasing the amount
of loans originated from brokers; (iv) building on the Company's initial
investment in the Savings Bank; (v) prudent management of cash flow; (vi)
acquiring additional loan production capability through acquisitions and
strategic alliances; (vii) broadening its product offerings; and (viii)
diversifying loan sale strategies.
MAINTENANCE OF QUALITY UNDERWRITING AND LOAN SERVICING. The Company's
underwriting and servicing staff have experience in the non-conforming home
equity loan industry. The Company's management believes that the experience of
its underwriting and servicing staff provide the Company with the infrastructure
necessary to sustain its recent growth and maintain its commitment to high
standards in its underwriting and servicing of portfolio and warehouse loans.
EXPANSION OF RETAIL (DIRECT TO CONSUMER) LENDING. The Company intends to
expand its retail (direct to consumer) lending efforts by opening additional
retail branch offices in the next twelve months. The use of retail branch
offices allows the Company to focus on developing contacts with individual
borrowers and referral sources such as accountants, attorneys and financial
planners, with a view toward expanding its retail loan business.
The Company generally enters a new target market by way of the broker
network. The Company targets cities where the population density and economic
indicators are favorable for home equity lending, the foreclosure rate is within
normal ranges and the non-conforming loan market has been under-served. Before
establishing a branch office, the Company may test the target market, where
local regulations permit, via newspaper, radio and direct mail advertising and
through a toll-free telephone number which routes a borrower directly to a loan
officer in the Virginia Beach, Virginia office. The Company will generally
establish a small branch office, generally with an initial staff of one or two
business development representatives. These sales centers do not require heavy
investments which allows the Company to exit the market easily if the office
does not meet expectations. The branch office network is used for marketing and
meeting with the Company's local borrowers. The Company has also successfully
used targeted outbound telemarketing and direct mail to reach potential loan
customers.
The Company currently utilizes targeted out-bound telemarketing to obtain
leads for potential customers. Most of the telemarketing activity has previously
been performed in the retail branches. The Company is planning to centralize all
of its telemarketing activities in the Virginia Beach, Virginia area to achieve
economies of scale and to obtain greater quality control over this operation.
Also, in-bound telemarketing (customer responses to mailings and advertisements)
will be added.
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EXPANSION OF BROKER NETWORKS. In 1996 and the nine-month period ended
September 30, 1997, 62.9% and 54.2%, respectively, of the dollar volume of the
Company's loan production was originated through its broker network. The Company
intends to continue to increase its loan production brokers by expanding its
networks to include new brokers and increasing the efficiency and production of
the brokers that are a part of the Company's network. The Company plans to
implement this strategy of increasing its market share through geographic
expansion, tailored marketing strategies and a continued focus on servicing
smaller brokers in cities which have historically been under-served. The Company
believes that relationships with brokers are strengthened by providing
attractive products and responsive service in conjunction with consistent
underwriting, substantial funding sources and competitive prices.
BUILDING ON THE COMPANY'S INITIAL INVESTMENT IN THE SAVINGS BANK. The
principal reason for the acquisition of the Savings Bank was to allow the
Company to utilize the opportunities offered by the federal thrift charter to
compliment the products and services currently being offered by the Company. The
Savings Bank's ability to raise FDIC-insured deposits and to obtain FHLB
advances secured by its loan portfolio to finance its activities should serve
over time to reduce the cost of funds.
In future periods, the Company expects the Savings Bank to develop the
capability to originate loans in the "conforming" segment of the mortgage loan
market. Most of the Savings Bank's fixed rate conforming loans would be sold in
the secondary market, while its adjustable rate conforming loans could either be
sold or held in the Savings Bank's loan portfolio. As a FHLB member, the Savings
Bank will be able to pledge qualifying loans to obtain additional funds to
expand its lending operations.
On July 10, 1997, the Savings Bank formed a title insurance agency
subsidiary named Global Title Insurance Agency, Inc. ("Global"), and has
obtained regulatory approval to begin title policy sales operations. Global has
negotiated to issue title policies through First American Title Insurance
Company. It is expected that Global will eventually be offering title policies
to all of the Company's loan customers. However, in 1998 Global will focus its
sales efforts on the Company's retail customers in Virginia. The Company's
management believes that Global will be successful in gaining a substantial
portion of the title insurance business for the Company's retail customers whose
loans require such coverage, and should also be moderately successful in
penetrating the title insurance market for its originations through mortgage
brokers.
The Savings Bank is expected to introduce additional products that
compliment the Company's menu of offerings. Future product offerings by the
Savings Bank may include consumer installment loans. There is a secondary market
for consumer finance paper, and it is expected that the Savings Bank will sell a
substantial portion of these loans rather than hold them in its portfolio.
The Savings Bank may enter other lines of business that could provide
complimentary benefits, or synergies, with the Company's main strategic goals.
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At a time when banks and savings institutions are using branch networks to
attract deposits as a primary source of funding, the Savings Bank instead relies
primarily upon certificates of deposit obtained through direct solicitation of
institutional investors and brokered certificates of deposit obtained from
customers of Wall Street investment banks. The Savings Bank's management
believes that certificates of deposit raised in this manner are a more efficient
and cost effective approach to obtain funds as compared to a branch network with
its salaries and overhead costs.
PRUDENT MANAGEMENT OF FINANCIAL CASH FLOW. The Company intends to maximize
its financial flexibility in a number of ways, including maintaining a
significant quantity of mortgage loans for sale on its balance sheet.
Maintenance of a substantial amount of mortgage loans held for sale, which the
Company can sell when necessary or desirable, permits the Company to improve
management of its cash flow by increasing its net interest income and to reduce
its exposure to the volatility of the capital markets.
EXPANSION THROUGH ACQUISITIONS. The Company intends to strengthen its loan
production capabilities not only through internal growth, but from time to time
through acquisitions and the establishment of strategic alliances. The Company's
management believes that acquisitions not only accelerate the pace of growth,
but also are often the most cost-effective growth strategy, enabling the Company
to realize significant operational economies of scale. The Company will continue
to seek out candidates for acquisition which operate in geographic and product
areas that complement its existing businesses. These candidates may include both
brokers and retail offices of other non-conforming lenders, which exhibit
management styles compatable with the Company's management team.
The Company will also seek to develop additional business units that can
compliment the current business. The Company's recent acquisition of the Savings
Bank is an example of such a strategic acquisition.
See the discussion below regarding the January 26, 1998 acquisition of the
assets of a Georgia-based mortgage lender, Funding Center of Georgia, Inc.
The Company has no specific plans for additional acquisitions of ongoing
businesses.
EXPAND PRODUCT OFFERINGS. The Company frequently reviews its pricing and
loan offerings for competitiveness relative to the market. The Company
introduces new loan products to meet the needs of its brokers and borrowers and
to expand its market share to new customers who are not traditionally part of
the Company's market.
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DIVERSIFY LOAN SALE STRATEGIES. In future periods, the Company may sell a
portion of the loans it originates through a securitization program and retain
the rights to service the loans. The sale of loans through a securitization
program would be a significant departure from the Company's previous business
operations. The Company would apply the net proceeds of the securitizations to
pay down its warehouse credit facilities in order to make these facilities
available for future funding of mortgage loans. Recent operational improvements
allow the Company to efficiently originate, underwrite and service securitized
loans and meet the requirements of rating agencies, credit enhancers and
investors. In order to fund its securitization program, the Company would likely
have to obtain an additional line of credit facility and other residual
financing. To the extent that the Company is not successful in maintaining or
replacing existing financing, it would not be able to hold a large volume of
loans pending securitization and therefore would have to curtail its loan
production activities or sell loans either through whole loan sales or in
smaller securitizations, thereby having a material adverse effect on the
Company's results of operations.
PURCHASE OF THE ASSETS OF FUNDING CENTER OF GEORGIA, INC.
Effective January 26, 1998, ARMI purchased substantially all of the assets
of Funding Center of Georgia, Inc. ("FCGI"), a Georgia corporation. FCGI is
originating approximately $4,500,000 in mortgage loans per month. All of the
employees of FCGI have become employees of ARMI, and the business will be
conducted under the assumed name of "Funding Center of Georgia." The purchase
price for FCGI's assets was $3,300,000. ARMI paid $600,000 at closing, will pay
$300,000 in semi-monthly installments for a period of 36 months, and the balance
of $2,400,000 is payable in three annual installments on January 1, 1999, 2000
and 2001, with interest at 6%. The $2,400,000 in deferred payments is subject to
reduction in the event of a failure to meet agreed-upon pre-tax profit targets
each year. The two principal owners of FCGI entered into three-year employment
agreements with ARMI, and they will manage the office.
THE COMPANY'S BORROWERS AND ITS LOAN PRODUCTS
The Company has committed the majority of its resources to serving the
non-conforming residential mortgage market. The Company caters to individuals
who do not meet the strict qualification guidelines established by most
government insured lending programs. These customers usually have limited access
to sources of available credit, but their financial needs are none the less
real. By consolidating their debts with a loan from the Company, these customers
can often save several hundred dollars per month in cash flows, amounts that can
make a significant difference in a customer's financial situation and quality of
life. Personal circumstances including divorce, family illnesses or deaths and
temporary job loss due to layoffs and corporate downsizing will often impair an
applicant's credit record. Among the Company's specialties is the ability to
identify and assist this type of borrower in the establishment of improved
credit. In this segment of the mortgage loan business, the interest rate charged
on loans is not the overriding concern of customers, who are less rate-sensitive
than conforming loan customers. Rather, what differentiates lenders is the
level, quality and speed of service.
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Loans made to such credit-impaired borrowers generally entail a higher risk
of delinquency and possibly higher losses than loans made to more creditworthy
borrowers. No assurance can be given that the Company's underwriting policies
and collection procedures will substantially reduce such risks. In the event
that warehoused loans or pools of loans sold and serviced by the Company
experience higher delinquencies, foreclosures or losses than anticipated, the
Company's results of operations or financial condition would be adversely
affected.
Most loans made by the Company are used by the borrowers for debt
consolidation, property improvement, home purchase and other purposes. Borrowers
can gain income tax advantages of real estate-secured debt, instead of paying
higher-rate credit cards on which interest payments are generally not
tax-deductible. Most of the loans carry fixed interest rates and are usually
made for a 20- to 30-year term. The average loan size during the nine-month
period ended September 30, 1997 was approximately $55,000.
In evaluating loan requests, several risk management strategies are
employed. Currently, the Company limits its credit exposure by securing all
loans with real estate. The loans are usually for less than the unencumbered
appraised value of the real estate. The loan-to-value ratio will fluctuate in
accordance with borrower qualifications. Favorable credit and low risk factors
yield higher loan-to-value ratios and lower interest rates. The opposite is true
for poor credit and high risk factors. Occasionally, a loan secured by real
estate is made for an amount greater than the collateral value. These loans are
underwritten based on the borrower's creditworthiness according to underwriting
criteria of lenders who specialize in and purchase high loan-to-value loans.
Such loans are immediately sold in the secondary market on a whole loan basis.
In future periods, the Company intends to offer products not fully secured
by real estate collateral. This may include consumer installment debt. If
offered, these future products will be underwritten based on the borrower's
credit worthiness. As is the case with its other loan products, the Company
intends to sell these loans in the secondary market, to limit its exposure to
future losses.
In order to compensate the Company for the increased credit risks
associated with its borrowers, higher interest rates and more points are charged
than on conforming real estate loans. There is an active secondary market for
most types of mortgage loans originated by the Company. The majority of the
loans originated by the Company are sold to other mortgage and finance
companies. The loans are sold for cash as whole loans on a servicing-released
basis. Consistent with industry practices, the loans are sold with certain
representations and warranties. By originating loans for subsequent sale in the
secondary mortgage market, the Company is able to obtain funds which may be used
for lending and investment purposes. This practice frees funds for additional
lending and increases revenues. For the nine-month period ended September 30,
1997, the weighted-average premium realized by the Company on its loan sales was
6.45%.
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A smaller portion of the loans originated by the Company is retained for
the Company's loan portfolio. In future periods, the Savings Bank will be
building a portfolio of loans held for investment. The income generated by a
loan portfolio is used to help offset overhead and operational costs. Growing a
loan portfolio is an ongoing strategy and an important part of the Savings
Bank's long-term, income-producing plans. As the loan portfolio grows,
management will address the need to hedge against interest rate risk as deemed
prudent.
The Company has invested in technology to further streamline loan
processing and servicing procedures. New software has enhanced the Company's
ability to manage the loan portfolio and analyze pools of loans for sale in the
secondary market. Such investments in technology have supported growth
objectives including originating higher loan volumes, increasing profit margins
and reducing loan acquisition costs. The Company expects that it would have to
invest in additional capabilities if it enters the securitization business.
BROKER LOAN ORIGINATIONS. ARMI originates residential mortgage loans
through a network of independent mortgage brokers who offer the Company's
products to their clients.
During 1996 and 1997, the broker division increased the number of account
executives and the states of operations. The Company began doing business in
Illinois, Ohio, Michigan, Wisconsin, and Tennessee in 1996. These new additions
and increased performance from existing business helped increase 1996 broker
loan originations 165.4% from 1995. The Company began doing business in Kentucky
in the first nine months of 1997, and those new additions and increased
performance from existing business helped increase broker loan originations in
the first nine months of 1997 by 60.6% over the same period in the previous
year.
In cultivating this broker network, the Company stresses its superior
service, efficiency, flexibility and professionalism. Due to concentrated size
and centrally-organized operations, the Company offers one business day
turnaround on underwriting decisions and can close loans in as few as two
business days. A wide variety of loan products has been designed to assist
brokers in supporting a broader spectrum of borrowers. A team of regional sales
managers and account executives assist mortgage brokers in the field, but the
majority of the loans are currently underwritten at the Company's Virginia
Beach, Virginia headquarters.
The Company's geographic focus for broker operations includes the Southeast
and Midwest. Management intends to strengthen the broker origination channel in
these regions by developing new markets and capturing a greater share of
existing ones. The Company uses modern technology to accommodate its growing
service area. This minimizes overhead without compromising operations. It also
allows for easy expansion through the further development of the mortgage broker
network.
Management plans to continue to develop the broker sales force with ongoing
training programs. Management intends to continue to expand this division.
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RETAIL LOAN ORIGINATIONS. In December 1994, ARMI formed a joint venture to
originate mortgage loans through retail branches. The joint venture, Armada
Residential Mortgage, LLC ("Armada LLC "), opened its first office in Lanham,
Maryland. Armada LLC's senior officer was a 17% owner of the joint venture.
Armada LLC operated from December 1994 through December 1996. It generated
pretax income of $996,000 in 1996 and $664,000 in 1995. The Company's share of
income from the joint venture was $826,000 in 1996 and $598,000 in 1995. The
Armada LLC legal entity was folded into ARMI beginning in January 1997 so that
all of the Company's retail branches could be managed and accounted for in a
consistent manner. Concluding the joint venture structure reduced the costs of
separate accounting and eliminated the need to file federal and state
partnership returns. Armada LLC's senior officer has remained with the Company
in a management capacity.
Using the service mark "Armada" in most of its markets, ARMI expanded its
retail mortgage origination sources in 1996, opening seven new offices, which
brought the total retail branch network to twelve at the end of 1996. These new
additions and increased performance from existing business helped increase 1996
retail loan originations 91.4% over the previous year. In the first nine months
of 1997, ARMI opened retail locations, in South Carolina, Illinois, Indiana,
Virginia and Maryland. There are currently plans to open new retail centers in
Georgia, Indiana, Virginia, Kentucky and North Carolina. Management expects to
build the value of its franchise by increasing the "Armada" Residential Mortgage
name recognition in its markets.
The Company's retail offices are the result of developing successful
relationships with established industry professionals who want to work in an
entrepreneurial setting and can participate in the growth and profitability of
our retail business. The use of retail branch offices allows the Company to
focus on developing contacts with individual borrowers and referral sources such
as accountants, attorneys and financial planners, with a view toward expanding
its retail loan business.
To support the retail expansion, integrated marketing programs have been
designed to generate new business. Retail customer demand is generated through
targeted outbound telemarketing, direct mail and multimedia advertising. As
these programs are tested and refined, they will be implemented in all retail
locations. In future periods, the Company plans to market the Savings Bank's
loan products and other services through its retail loan network.
STRATEGIC ALLIANCES. In order to increase volume and to diversify its
sources of loan originations, the Company seeks to enter into strategic
alliances with selected mortgage lenders, pursuant to which the Company provides
working capital and financing arrangements and a commitment to purchase
qualifying loans. In return, the Company expects to receive a more predictable
flow of loans and, in some cases, an option or obligation to acquire an equity
interest in the related strategic participant.
To date, the Company has completed a strategic alliance with American
Family Services ("American Family"), a mortgage company based in Atlanta,
Georgia. From April 1, 1997 through April 30, 1998, the Company had a verbal
agreement with American Family to funds American Family's loans, place those
loans into the Company's loan sale pools, and pay American Family the loan sale
premium on those loans. In return, the Company received from American Family a
fee of 1.5% of American Family's total loan originations. Beginning May 1, 1998,
the verbal agreement between the Company and American Family was modified to
eliminate the 1.5% fee if American Family obtains its own credit line and ceases
to use the Company's credit facility. The new verbal agreement includes an
arrangement by which the
15
<PAGE>
President of American Family will continue to oversee the Company's loan sales
activities with certain investors in exchange for the continued ability to place
American Family's loans in the Company's loan sale pools and receive the loan
sale premium earned on those loans.
UNDERWRITING GUIDELINES
The following is a general description of the underwriting guidelines
currently employed by the Company with respect to mortgage loans it originates
or purchases from others. The Company revises such guidelines from time to time
in connection with changing economic and market conditions. The Company may make
exceptions to these guidelines for special types of loans, including loans with
loan-to-value ratios over 80%, and for other reasons. The Company relies on the
judgment of the underwriting staff in making these exceptions. Also, the Company
will substitute underwriting guidelines of other lenders to which the Company
anticipates it will sell such loans under an established buy-sell agreement.
Loan applications received from retail offices and brokers are classified
according to certain characteristics including available collateral, loan size,
debt ratio, loan-to-value ratio and the credit history of the applicant. Loan
applicants with less favorable credit ratings generally are offered loans with
higher interest rates and lower loan-to-value ratios than applicants with more
favorable credit ratings. The Company's underwriting standards are designed to
provide a program for all qualified applicants in an amount and for a period of
time consistent with each applicant's demonstrated willingness and ability to
repay. All of the Company's underwriting determinations are made without regard
to sex, marital status, race, color, religion, age or national origin. Each
application is evaluated on its individual merits, applying the guidelines set
forth below, to ensure that each application is considered on an equitable
basis.
A current credit report by an independent and nationally recognized credit
reporting agency reflecting the applicant's complete credit history is required.
The credit report will disclose whether any instances of adverse credit appear
on the applicant's record. Such information might include delinquencies,
repossessions, judgements, foreclosures, bankruptcies and similar instances of
adverse credit that can be discovered by a search of public records. An
applicant's recent credit performance weighs heavily in the evaluation of risk
by the Company. A lack of credit history will not necessarily preclude a loan if
the borrower has sufficient equity in the property. Slow payments on the
borrower's credit report must be satisfactorily explained and will normally
reduce the amount of the loan for which the applicant can be approved. The
Company maintains a staff of experienced underwriters, the majority of whom are
based in its Virginia Beach, Virginia office. The Company's loan application and
approval process generally is conducted via facsimile submission of the credit
application to the Company's underwriters. An underwriter reviews the
applicant's employment history and financial status as contained in the loan
application, current bureau reports and the real estate property characteristics
as presented on the application in order to determine if the loan is acceptable
under the Company's underwriting guidelines. Based on this review, the
underwriter assigns a preliminary rating to the application. The proposed terms
of the loan are then communicated to the retail loan officer or broker
responsible for the application who in turn discusses the proposal with the loan
applicant. When a potential borrower applies for a loan through a branch office,
the underwriter may discuss the proposal directly with the applicant. The
Company endeavors to respond with preliminary proposed loan terms, and in most
cases does respond, to the broker or borrower within one business day from when
the application is received. If the applicant accepts the proposed terms, the
underwriter will contact the broker or the loan applicant to gather additional
information necessary for the closing and funding of the loan.
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<PAGE>
All loan applicants must have an appraisal of their collateral property
prior to closing the loan. The Company requires loan officers and brokers to use
licensed appraisers that are listed on or qualify for the Company's approved
appraiser list. The Company approves appraisers based upon a review of sample
appraisals, professional experience, education, membership in related
professional organizations, client recommendations and review of the appraiser's
experience with the particular types of properties that typically secure the
Company's loans.
The decision to provide a loan to an applicant is based upon the value of
the underlying collateral, the applicant's creditworthiness and the Company's
evaluation of the applicant's willingness and ability to repay the loan. A
number of factors determine a loan applicant's creditworthiness, including debt
ratios (the borrower's average monthly expenses for debts, including fixed
monthly expenses for housing, taxes and installment debt, as a percentage of
gross monthly income), payment history on existing mortgages and the combined
loan-to-value ratio for all existing mortgages on a property.
Assessment of the applicant's demonstrated willingness and ability to pay
is one of the principal elements in distinguishing the Company's lending
specialty from methods employed by traditional lenders. All lenders utilize debt
ratios and loan-to-value ratios in the approval process. Many lenders simply use
software packages to score an applicant for loan approval and fund the loan
after auditing the data provided by the borrower. The Company primarily relies
upon experienced non-conforming mortgage loan underwriters to scrutinize an
applicant's credit profile and to evaluate whether an impaired credit history is
a result of previous adverse circumstances or a continuing inability or
unwillingness to meet credit obligations in a timely manner. Personal
circumstances including divorce, family illnesses or deaths and temporary job
loss due to layoffs and corporate downsizing will often impair an applicant's
credit record. The willingness to identify and assist this type of borrower in
establishing and improving their credit gives the Company access to a market
that has traditionally been under-served by the financial community.
Upon completion of the loan's underwriting and processing, the closing of
the loan is scheduled with a closing attorney or agent approved by the Company.
The closing attorney or agent is responsible for completing the loan transaction
in accordance with applicable law and the Company's operating procedures.
The Company requires title insurance coverage issued by an approved ALTA
title insurance company of all property securing mortgage loans it originates or
purchases. The Company and its assignees are generally named as the insured.
Title insurance policies indicate the lien position of the mortgage loan and
protect the Company against loss if the title or lien position is not as
indicated. The applicant is also required to secure hazard and, in certain
instances, flood insurance in an amount sufficient to cover the building
securing the loan for the entire term of the loan, for an amount that is at
least equal to the outstanding principal balance of the loan or the maximum
limit of coverage available under applicable law, whichever is less. Evidence of
adequate homeowner's insurance naming the Company as an additional insured is
required on all loans.
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<PAGE>
The Company has established classifications with respect to the credit
profiles of loans based on certain of the applicant's characteristics. Each loan
applicant is placed into one of four letter ratings "A" through "D," with
sub-ratings within those categories. Ratings are based upon a number of factors
including the applicant's credit history, the value of the property and the
applicant's employment status. The Company also relies on the judgment of its
underwriting staff, which may make exceptions to the general criteria and
upgrade a rating due to factors considered appropriate to the underwriting
staff. Terms of loans made by the Company, as well as the maximum loan-to-value
ratio and debt service-to-income coverage (calculated by dividing fixed monthly
debt payments by gross monthly income), vary depending upon the classification
of the borrower. Borrowers with lower credit ratings generally pay higher rates
and loan origination fees.
Subject to the judgment of the Company's underwriting staff to make
exceptions to the general criteria, the general criteria currently used by the
Company in classifying loan applicants are set forth below:
"A" Risk. Under the "A" risk category, a loan applicant must have generally
repaid installment or revolving debt according to its terms.
o Existing mortgage loans: required to be current at the time the
application is submitted, with a maximum of one (or two on a
case-by-case basis) 30-day late payment(s) within the last 12 months
being acceptable.
o Non-mortgage credit: minor derogatory items are allowed, but a letter
of explanation is required; any recent open collection accounts or
open charge-offs, judgements or liens would generally disqualify a
loan applicant from this category.
o Bankruptcy filings: must have been discharged more than four years
prior to closing with credit re-established.
o Maximum loan-to-value ratio: up to 80% (or 90% on an exception basis
with compensating factors) is permitted for a loan secured by an
owner-occupied one- to four-family residence; 80% for a loan secured
by an owner-occupied condominium; and 70% (or up to 80% on an
exception basis with compensating factors) for a loan secured by a
non-owner occupied one- to four-family residence.
o Debt service-to-income ratio: generally 45% or less.
"B" Risk. Under the "B" risk category, a loan applicant must have generally
repaid installment or revolving debt according to its terms.
o Existing mortgage loans: required to be current at the time the
application is submitted, with a maximum of three (or four on a
case-by-case basis) 30-day late payments within the last 12 months
being acceptable.
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<PAGE>
o Non-mortgage credit: some prior defaults may have occurred, but major
credit paid or installment debt paid as agreed may offset some
delinquency; any open charge-offs, judgements or liens would generally
disqualify a loan applicant from this category.
o Bankruptcy filings: must have been discharged more than two years
prior to closing with credit re-established.
o Maximum loan-to-value ratio: up to 80% (or 85% on an exception basis
with compensating factors) is permitted for a loan secured by an
owner-occupied one- to four-family residence; and 70% (or 80% on an
exception basis with compensating factors) for a loan secured by a
non-owner occupied one- to four-family residence.
o Debt service-to-income ratio: generally 45% or less (up to 50% on an
exception basis with compensating factors).
"C" Risk. Under the "C" risk category, a loan applicant may have
experienced significant credit problems in the past.
o Existing mortgage loans: must be brought current from loan proceeds;
applicant is allowed a maximum of four 30-day late payments and one
60-day late payment within the last 12 months.
o Non-mortgage credit: significant prior delinquencies may have
occurred, but major credit paid or installment debt as agreed may
offset some delinquency; all delinquent credit must be current or paid
off.
o Bankruptcy filings: must have been discharged, and a minimum one-year
of re-established credit is required.
o Maximum loan-to-value ratio: up to 75% (or 80% on an exception basis
with compensating factors for first liens only) is permitted for a
loan secured by an owner-occupied one- to four-family residence; 65%
for a loan secured by an owner-occupied condominium; and 65% for a
non-owner occupied one- to four- family residence.
o Debt service-to-income ratio: generally 50% or less.
"D" Risk. Under the "D" risk category a loan applicant may have experienced
significant credit problems in the past.
o Existing mortgage loans: must be brought current from loan proceeds
and no more than 149 days delinquent at closing; an explanation for
such delinquency is required.
o Non-mortgage credit: significant prior defaults may have occurred, but
the applicant must be able to demonstrate regularity in payment of
some credit obligations; all charge-offs, judgements, liens or
collection accounts must be paid off.
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<PAGE>
o Bankruptcy filings: open Chapter 13 bankruptcies will be considered
with evidence that the plan is being paid according to terms;
outstanding balance must be paid in full and discharged from loan
proceeds.
o Maximum loan-to-value ratio: generally 65% (or 70% on an exception
basis with compensating factors for first liens only) for a loan
secured by an owner-occupied one- to four-family residence; 60% for a
loan secured by an owner-occupied condominium; and 60% for a non-owner
occupied one- to four-family residence.
o Debt service-to-income ratio: generally 50% or less (up to 55% on an
exception basis with compensating factors).
The Company uses the foregoing categories and characteristics only as
guidelines. On a case-by-case basis, the underwriting staff may determine that
the prospective borrower warrants a risk category upgrade, a debt
service-to-income ratio exception, a pricing exception, a loan-to-value
exception or an exception from certain requirements of a particular risk
category. An upgrade or exception may generally be allowed if the application
reflects certain compensating factors, among others: low loan-to-value ratio;
stable employment or length of occupancy at the applicant's current residence.
For example, a higher debt ratio may be acceptable with a lower loan-to-value
ratio. An upgrade or exception may also be allowed if the applicant places a
down payment in escrow equal to at least 20% of the purchase price of the
mortgaged property, or if the new loan reduces the applicant's monthly aggregate
debt load. Accordingly, the Company may classify in a more favorable risk
category certain mortgage loans that, in the absence of such compensating
factors, would satisfy only the criteria of a less favorable risk category. The
foregoing examples of compensating factors are not exclusive. The underwriting
staff has discretion to make exceptions to the criteria and to upgrade ratings
on case-by-case basis.
In future periods the Company intends to offer products not fully secured
by real estate collateral, such as consumer installment debt. If offered, these
future products will nevertheless be underwritten based on the borrower's credit
worthiness. As is the case with its other loan products, the Company intends to
sell these loans in the secondary market, to limit its exposure to future
losses.
MORTGAGE LOAN SERVICING
The Company has been servicing its portfolio and warehouse loans for many
years. Since January 1, 1997, the Savings Bank's portfolio of loans for sale and
for investment has been serviced by the Company under a contractual arrangement.
The Company's loan servicing operation has two functions: collections and
customer service for borrowers. The servicing department monitors loans,
collects current payments due from borrowers. The collections specialists
furnish reports and enforce the holder's rights, including recovering delinquent
payments, instituting loan foreclosures and liquidating the underlying
collateral.
The Company closes loans throughout the month. Most of the Company's loans
require a first payment thirty to forty-five days after funding. Accordingly,
the Company's servicing portfolio consists of loans with payments due at varying
times each month. This system ameliorates the cyclical highs and lows that some
servicing companies experience as a result of heavily concentrated payment
dates.
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<PAGE>
The Company's collections policy is designed to identify payment problems
sufficiently early to permit the Company to address delinquency problems quickly
and, when necessary, to act to preserve equity before a property goes to
foreclosure. The Company believes that these policies, combined with the
experience level of independent appraisers engaged by the Company, help to
reduce the incidence of charge-offs on a first or second mortgage loan.
Collection procedures commence upon identification of a past due account by
the Company's automated servicing system. Five days before the first payment is
due on every loan, the borrower is contacted by telephone to welcome the
borrower, to remind the borrower of the payment date and to answer any questions
the borrower may have. If the first payment due is delinquent, a collector will
telephone to remind the borrower of the payment. Five days after any payment is
due, a written notice of delinquency is sent to the borrower. Eleven days after
payment is due, the account is automatically placed in the appropriate
collector's queue and the collector will send a late notice to the borrower.
During the delinquency period, the collector will continue to frequently contact
the borrower. Company collectors have computer access to telephone numbers,
payment histories, loan information and all past collection notes. All
collection activity, including the date collection letters were sent and
detailed notes on the substance of each collection telephone call, is entered
into a permanent collection history for each account. Additional guidance with
respect to the collection process is derived through frequent communication with
the Company's senior management.
The Company's loan servicing software also tracks and maintains homeowners'
insurance information. Expiration reports are generated weekly listing all
policies scheduled to expire within 30 days. When policies lapse, a letter is
issued advising the borrower of the lapse and that the Company will obtain
force-placed insurance at the borrower's expense. The Company also has an
insurance policy in place that provides coverage automatically for the Company
in the event the Company fails to obtain force-placed insurance.
Notwithstanding the above, there are occasions when a charge-off occurs.
Prior to a foreclosure sale, the Company performs a foreclosure analysis with
respect to the mortgaged property to determine the value of the mortgaged
property and the bid that the Company will make at the foreclosure sale. This
analysis includes: (i) a current valuation of the property obtained through a
drive-by appraisal conducted by an independent appraiser; (ii) an estimate of
the sales price of the mortgaged property by sending two local realtors to
inspect the property; (iii) an evaluation of the amount owed, if any, to a
senior mortgagee and for real estate taxes; and (iv) an analysis of the
marketing time, required repairs and other costs, such as for real estate broker
fees, that will be incurred in connection with the foreclosure sale.
All foreclosures are assigned to outside counsel located in the same state
as the secured property. Bankruptcies filed by borrowers are also assigned to
appropriate local counsel who are required to provide monthly reports on each
loan file.
At the present time the Company does not service mortgage loans for other
investors. However, in future periods the Company may securitize loans and
retain the servicing component on those securities. In this event, the Company
would need to enhance its servicing capabilities. The Company may engage one or
more companies to sub-service a portion of its servicing portfolio.
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<PAGE>
MARKETING
MARKETING TO BROKER NETWORKS. Marketing to brokers is conducted through the
Company's business development representatives, who establish and maintain
relationships with the Company's principal sources of loan purchases and
originations, including financial institutions and mortgage brokers. Loans made
through the broker networks amounted to 54.2% of total originations in the
nine-month period ended September 30, 1997, compared to 64.8% of total loan
originations in the nine-month period ended September 30, 1996. See the table on
page 62 for divisional loan originations by state. The business development
representatives provide various levels of information and assistance to brokers,
provide training to the loan originators regarding the Company's products and
non-traditional prospecting strategies, and are principally responsible for
maintaining the Company's relationships with its clients. Business development
representatives endeavor to increase the volume of loan originations from
brokers located within the geographic territory assigned to that representative.
The representatives and broker sales managers visit customers' offices, attend
trade shows and supervise advertisements in broker trade magazines. The
representatives also provide the Company with information relating to borrowers
and brokers, and products and pricing offered by competitors and new market
entrants, all of which assist the Company in refining its programs in order to
offer competitive products. The business development representatives are
compensated with a base salary and commissions based on the volume of loans that
are purchased or originated as a result of their efforts.
MARKETING OF RETAIL LENDING PRODUCTS. The Company markets its direct
consumer lending services through branch offices in several states. Loans made
through the retail lending division amounted to 45.8% of total originations in
the nine-month period ended September 30, 1997, compared to 35.2% of total loan
originations in the nine-month period ended September 30, 1996. See the table on
page 62 for divisional loan originations by state. The Company generally enters
a new target market by way of the broker network. The Company targets cities
where the population density and economic indicators are favorable for home
equity lending, the foreclosure rate is within normal ranges and the
non-conforming loan market has been under-served. When broker marketing efforts
are successful in a new geographic area, the Company will generally establish a
small branch office, generally with an initial staff of three to five business
development representatives. These sales centers do not require heavy
investments and allow the Company to exit the market easily if the office does
not meet expectations. The branch office network is used for marketing to and
meeting with the Company's local borrowers. The Company has also successfully
used targeted outbound telemarketing and direct mail to reach potential loan
customers. Occasionally, when a potential customer applies for a loan and does
not fall within the Company's underwriting guidelines, the Company may submit
the application to other lending institutions. If the loan is approved by
another lending institution, the Company will not fund the loan but will act as
a mortgage broker, receiving a broker fee at the time the loan is closed.
22
<PAGE>
COMPANY'S SOURCES OF FUNDS AND LIQUIDITY
WAREHOUSE LINES OF CREDIT. The Company funds substantially all of the loans
which it originates and purchases through borrowings under warehouse facilities,
secured by pledges of its loans and through internally generated funds. These
borrowings are in turn repaid with the proceeds received by the Company from
selling such loans through whole loan sales. In future periods, other loan sale
strategies including securitizations may be adopted to supplement the current
whole loan sale program.
On December 10, 1997, the Company obtained a $100,000,000 warehouse line of
credit from a commercial bank syndicate. The syndicate's lead bank is Chase Bank
of Texas. Other banks in the syndicate are BankBoston, National City Bank,
Comerica Bank and Compass Bank. The line is secured by loans originated by the
Company and bears interest at a rate of 1.5% over the one-month LIBOR rate. This
line of credit replaced three existing lines of credit. The line expires on
December 31, 1999 and is subject to renewal. The Company may receive warehouse
credit advances of 98% of the original principal balances on pledged mortgage
loans for a maximum period of 180 days after origination. As of December 31,
1997, $46,734,000 was outstanding under this facility. Also on December 10,
1997, the Company obtained a $25,000,000 seasoned loan line of credit from the
commercial bank syndicate. This line is secured by loans originated by the
Company. The seasoned loan line of credit bears interest at a rate of 2.5% over
the one-month LIBOR rate, and the Company may receive credit advances of 90% of
the current principal balances on pledged mortgage loans. As of December 31,
1997, $5,754,000 was outstanding under this facility.
As of September 30, 1997, the Company had three warehouse facilities. The
Company has a $70,000,000 warehouse and seasoned loan line of credit with a
commercial bank. The line is secured by loans originated by the Company and
bears interest at a rate of 1.75% over the one-month LIBOR rate. As of September
30, 1997, the outstanding balance on this line was $33,189,000 and the interest
rate was 7.41%. The Company may receive warehouse credit advances of 98% of the
original principal balances on pledged mortgage loans for a maximum period of
180 days after origination. If a mortgage loan is not sold within 180 days after
it is originated, it is transferred to the seasoned loan sublimit within the
line of credit. The seasoned loan sublimit has a maximum capacity of $15,000,000
and bears interest at a rate of 2.5% over the one-month LIBOR rate. As of
September 30, 1997, the outstanding balance on the seasoned loan sublimit was
$6,227,000 and the interest rate was 8.41%. The Company may receive advances
under the seasoned loan sublimit up to 90% of current principal balance, and
loans may be financed in this manner for an indefinite period. The line was due
to expire on January 28, 1998 and was subject to renewal. However, the Company
terminated this credit line and replaced it with the new credit line agreement,
effective December 10, 1997.
The Company also has a $25,000,000 warehouse line of credit with a
commercial bank. The line is secured by loans originated by the Company and
bears interest at a rate of 1.75% over the one-month LIBOR rate or the prime
interest rate. As of September 30, 1997, the outstanding balance on this line
was $3,788,000 and the interest rate was 7.41%. The Company may receive
warehouse credit advances of 98% of the original principal balances on pledged
mortgage loans for a maximum period of 120 days after origination. The line was
due to expire on July 17, 1998 and was subject to renewal. However, the Company
terminated this credit line and replaced it with the new credit line agreement,
effective December 10, 1997.
23
<PAGE>
The Company also has an $8,000,000 warehouse line of credit with IMC. The
line is secured by loans originated by the Company and bears interest at a rate
of 1.75% over the one-month LIBOR rate. There was no outstanding balance on this
line at September 30, 1997. The Company may receive warehouse credit advances of
100% of the original principal balances on pledged mortgage loans for a maximum
period of 30 days after origination. The line was due to expire on January 29,
1998 and was subject to renewal. However, the Company terminated this credit
line and replaced it with the new credit line agreement, effective December 10,
1997.
The Company draws on its revolving warehouse lines of credit as needed to
fund loan production. As of September 30, 1997, the Company had issued loan
funding checks totaling $11,833,000 which had not cleared the Company's checking
account and for which the Company had not drawn funds from its warehouse lines.
These checks cleared the Company's bank accounts in the first few business days
of October 1997 and most were funded with new warehouse line draws.
DEPENDENCE ON FUNDING SOURCES. As described in the previous section, the
Company is dependent upon a few lenders to provide the primary credit facilities
for its loan originations. At December 31, 1997, the Company had warehouse and
other credit facilities with five financial institutions with aggregate
commitments of $125,000,000. The Company's warehouse and other credit facilities
expire on December 31, 1999. In addition, the Company's growth strategies are
expected to require significant increases in the amount of the Company's
warehouse and other credit facilities. The Company expects to be able to
maintain existing warehouse and other credit facilities (or to obtain
replacement or additional financing) as current arrangements expire or become
fully utilized; however, there can be no assurance that such financing will be
obtainable on favorable terms. Any failure to renew or obtain adequate funding
under these warehouse facilities or other financings, or any substantial
reduction in the size of or pricing in the markets for the Company's loans,
could have a material adverse effect on the Company's operations.
The Company's management is currently considering the securitization of
some of its mortgage loan production. In order to fund its securitization
program, the Company would likely have to obtain an additional line of credit
facility and other residual financing. To the extent that the Company is not
successful in maintaining or replacing existing financing, it would not be able
to hold a large volume of loans pending securitization and therefore would have
to curtail its loan production activities or sell loans either through whole
loan sales or in smaller securitizations, thereby having a material adverse
effect on the Company's results of operations. While a possible securitization
program is being considered, no decision has been made whether to do so, and
management has no specific time frame for such a program.
24
<PAGE>
SAVINGS BANK SOURCES OF FUNDS
DEPOSITS. The primary source of deposits for the Savings Bank has been
brokered certificates of deposit obtained through national investment banking
firms, which, pursuant to agreements with the Savings Bank, solicit funds from
their customers for deposit with the Savings Bank ("brokered deposits"). Such
deposits amounted to $2,067,000, or 20.7%, of the Savings Bank's deposits at
September 30, 1997. The Savings Bank also solicits certificates of deposit from
institutional investors identified by the Savings Bank, several of which have
maintained deposits with the Savings Bank for a number of years. At September
30, 1997, $1,090,000, or 10.9%, of the Savings Bank's total deposits consisted
of deposits obtained by the Savings Bank from such efforts. The Savings Bank has
recently begun to solicit deposits via a computer bulletin board where the rates
of many other banks and savings institutions are advertised. The Savings Bank at
September 30, 1997 had deposits of $6,827,000, or 68.4%, of total deposits from
this source.
The fees paid to deposit brokers are amortized using the interest method
and included in interest expense on certificates of deposit.
The Savings Bank's management believes that the effective cost of brokered
and other wholesale deposits is more attractive than deposits obtained on a
retail basis from branch offices after the general and administrative expense
associated with the maintenance of branch offices is taken into account.
Moreover, brokered and other wholesale deposits generally give the Savings Bank
more flexibility than retail sources of funds in structuring the maturities of
its deposits and in matching liabilities with comparable maturing assets. At
September 30, 1997, $8,012,000 of the Savings Bank's certificates of deposit
were scheduled to mature within one year (80.2% of total deposits).
Although management of the Savings Bank believes that brokered and other
wholesale deposits are advantageous in certain respects, such funding sources,
when compared to retail deposits attracted through a branch network, are
generally more sensitive to changes in interest rates and volatility in the
capital markets and are more likely to be compared by the investor to competing
instruments. In addition, such funding sources may be more sensitive to
significant changes in the financial condition of the Savings Bank. There are
also various regulatory limitations on the ability of all but well-capitalized
insured financial institutions to obtained brokered deposits. See "Regulation of
the Savings Bank - Brokered Deposits." These limitations currently are not
applicable because the Savings Bank is a well-capitalized financial institution
under applicable laws and regulations. There can be no assurances, however, that
the Savings Bank will not become subject to such limitations in the future. In
addition, the Company's reliance on wholesale deposits effects its ability to
rollover deposits as they mature due to the fact that in general the wholesale
customer is highly interest rate-sensitive. Since the total deposit asset size
of the Savings Bank since it was acquired by the Company was under $4 million
prior to October of 1997, the rate at which the Savings Bank was able to
rollover maturing deposits does not represent a meaningful measurement, nor is
it useful in assessing the Company's ability or likelihood to do so in the
future. However, management is of the opinion that it will be able to readily
obtain funding from the wholesale deposit market in future periods at the then
current competitive interest rates being offered by other institutions.
25
<PAGE>
As a result of the Savings Bank's reliance on brokered and other
wholesale deposits, significant changes in the prevailing interest rate
environment, in the availability of alternative investments for individual and
institutional investors or in the Savings Bank's financial condition, among
other factors, could affect the Savings Bank's liquidity and results of
operations much more significantly than might be the case with an institution
that obtained a greater portion of its funds from retail or core deposits
attracted through a branch network.
The following table sets forth various interest rate categories for the
certificates of deposit of the Savings Bank as of the dates indicated.
26
<PAGE>
(In thousands)
September 30, 1997 December 31, 1996
------------------- ------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
-------- ------- -------- -------
5.24% or less -- $ -- 5.18% $ 396
5.25 - 5.49% 5.25% 198 5.34 495
5.50 - 5.74 5.58 398 5.65 288
5.75 - 5.99 5.91 5,541 5.93 397
6.00 - 6.24 6.15 3,451 -- --
6.25 - 6.49 6.35 396 -- --
----- ------- ----- -------
5.98% $ 9,984 5.50% $ 1,576
===== ======= ===== =======
The following table sets forth the amount and maturities of the
certificates of deposit of the Savings Bank at September 30, 1997 and December
31, 1996.
(In thousands)
<TABLE>
<CAPTION>
Over Six Months Over One Over
Six Months and Less than Year and Less Two
Or Less One Year Than Two Years Years Total
------- -------- -------------- ------- -------
September 30, 1997:
- -------------------
<S> <C> <C> <C> <C> <C>
5.25 - 5.49% $ 198 $ -- $ -- $ -- $ 198
5.50 - 5.74 398 -- -- -- 398
5.75 - 5.99 3,865 1,676 -- -- 5,541
6.00 - 6.24 -- 1,875 1,576 -- 3,451
6.25 - 6.49 -- -- 297 99 396
------- ------- ------- ------- -------
$ 4,461 $ 3,551 $ 1,873 $ 99 $ 9,984
======= ======= ======= ======= =======
December 31, 1996:
- ------------------
5.10 - 5.24% $ 396 $ -- $ -- $ -- $ 396
5.25 - 5.49 99 297 99 -- 495
5.50 - 5.74 288 -- -- -- 288
5.75 - 5.99 198 199 -- -- 397
------- ------- ------- ------- -------
$ 981 $ 496 $ 99 $ -- $ 1,576
======= ======= ======= ======= =======
</TABLE>
At September 30, 1997 and December 31, 1996, none of the certificates of
deposit were in amounts in excess of $100,000.
27
<PAGE>
BORROWINGS. The Savings Bank is able to obtain advances from the FHLB of
Atlanta upon the security of certain of its residential first mortgage loans,
and other assets, including FHLB stock, provided certain standards related to
the creditworthiness of the Savings Bank have been met. FHLB advances are
available to member institutions such as the Savings Bank for investment and
lending activities and other general business purposes. FHLB advances are made
pursuant to several different credit programs, each of which has its own
interest rate, which may be fixed or adjustable, and range of maturities. FHLB
members are required to hold shares of the capital stock of the regional FHLB in
which they are a member in an amount at least equal to the greater of 1% of the
member's home mortgage loans or 5% of the member's advances from the FHLB. The
Savings Bank did not obtain any advances from the FHLB of Atlanta during the
period September 12, 1996 through September 30, 1997. The Savings Bank held
$44,000 of the FHLB stock at September 30, 1997. Management expects to utilize
FHLB advances as the Savings Bank builds a portfolio of loans.
TAXATION
GENERAL. The Company and all of its subsidiaries currently file, and expect
to continue to file, a consolidated federal income tax return based on a
calendar year. Consolidated returns have the effect of eliminating inter-company
transactions, including dividends, from the computation of taxable income.
The Company's income is subject to tax in most of the states in which it is
making loans. The Company's taxable income in most states is determined based on
certain apportionment factors.
For taxable years beginning prior to January 1, 1996, a savings institution
such as the Savings Bank that met certain definitional tests relating to the
composition of its assets and the sources of its income (a "qualifying savings
institution") was permitted to establish reserves for bad debts and to claim
annual tax deductions for additions to such reserves. A qualifying savings
institution was permitted to make annual additions to such reserves based on the
institution's loss experience. Alternatively, a qualifying savings institution
could elect, on an annual basis, to use the "percentage of taxable income"
method to compute its addition to its bad debt reserve on qualifying real
property loans (generally, loans secured by an interest in improved real
estate). The percentage of taxable income method permitted the institution to
deduct a specified percentage of its taxable income before such deduction,
regardless of the institution's actual bad debt experience, subject to certain
limitations.
The Small Business Job Protection Act repealed the reserve method of
accounting for bad debts for savings institutions effective for taxable years
beginning after 1995 and provides for recapture of a portion of the reserves
existing at the close of the last taxable year beginning before January 1, 1996.
As of December 31, 1996, the retained earnings of the Savings Bank were deemed
to include $214,000 of bad debt reserves for income tax purposes for which
deferred taxes of $57,000 have been provided. The deferred taxes are payable
over a four-year period, or are subject to immediate tax if removed from such
bad debt reserve status for purposes other than absorbing losses. For its tax
years beginning on or after January 1, 1996, the Savings Bank is required to
account for its bad debts under the specific charge-off method. Under this
method, deductions may be claimed only as and to the extent that loans become
wholly or partially worthless.
28
<PAGE>
ALTERNATIVE MINIMUM TAX. In addition to the regular corporate income tax,
corporations, including qualifying savings institutions, can be subject to an
alternative minimum tax. The 20% tax is computed on Alternative Minimum Taxable
Income ("AMTI") and applies if it exceeds the regular tax liability. AMTI is
equal to regular taxable income with certain adjustments. For taxable years
beginning after 1989, AMTI includes an adjustment for 75% of the excess of
"adjusted current earnings" over regular taxable income. Net operating loss
carrybacks and carryforwards are permitted to offset only 90% of AMTI.
Alternative minimum tax paid can be credited against regular tax due in later
years. The Company is not currently subject to the AMT.
EMPLOYEES
As of September 30, 1997, the Company and its subsidiaries had a total of
468 full-time employees. None of the Company's employees were covered by a
collective bargaining agreement. The Company considers its relations with its
employees to be good. Several members of senior management have previously
worked as a team at other lending institutions. Many employees have been
associated with senior management in previous employment positions. The
Company's management believes that these long-term working relationships will
continue to contribute to its growth and success.
EFFECT OF ADVERSE ECONOMIC CONDITIONS
The Company's business may be adversely affected by periods of economic
slowdown or recession which 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 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 default. In addition, delinquencies, foreclosures and losses
generally increase during economic slowdowns or recessions.
SERVICE MARKS
The Company has two service marks that have become federally registered.
They are "Armada," which became registered on July 23, 1996, and "Approved
Residential Mortgage," which became registered on May 15, 1995. The Company also
has two service marks that are in the process of registration; they are
"Approved Financial Corp." and "Approved Federal Savings Bank."
29
<PAGE>
RELIANCE ON IMC MORTGAGE COMPANY
During 1996 and the nine-month period ended September 30, 1997, the Company
sold 43.7% and 55.7%, respectively, of its loans to IMC. The Company's contract
with IMC requires the Company to sell a minimum of $2.0 million of loans to IMC
each month subject to prevailing secondary market terms for pools of
non-conforming mortgage loans. Historically, these transactions have resulted in
the payment of a cash premium by IMC to the Company. From time to time, various
other purchasers purchase more than 10% of the Company's loan production. While
there are several other major purchasers of non-conforming mortgage loans as
large or larger than IMC, the Company maintains a good working relationship with
IMC. IMC offers to buy a wide range of the Company's loan products at
competitive prices. However, there can be no assurance that IMC will be in a
position to continue to purchase the Company's loan production at margins
favorable to the Company. The Company owned approximately 3.0% of the
outstanding common stock of IMC at September 30, 1997, and the Company's
Chairman and Chief Executive Officer, Allen D. Wykle, is a member of IMC's Board
of Directors. Mr. Wykle beneficially owns approximately 0.07% of IMC common
stock, including 12,992 issuable upon the exerise of stock options. Also, Jean
S. Schwindt, a member of the Company's Board of Directors and Executive
Committee, is an officer of IMC and owns 18,020 shares of IMC common stock
issuable upon the exercise of vested stock options. (See Item 7, "Certain
Relationships and Related Transactions - Agreement with IMC Mortgage Company").
CONCENTRATION OF OPERATIONS IN SEVEN STATES
For the nine-month period ended September 30, 1997, 81.4% of the aggregate
principal balance of the loans originated by the Company were secured by
properties located in seven states (Florida, Georgia, South Carolina, North
Carolina, Virginia, Maryland and Delaware). Although the Company has expanded
its wholesale and retail mortgage origination networks outside this region, the
Company's origination business is likely to remain concentrated in those states
for the foreseeable future. Consequently, the Company's results of operations
and financial condition are dependent upon general trends in the economy and the
residential real estate markets in those states.
FUTURE RISKS ASSOCIATED WITH LOAN SALES THROUGH SECURITIZATIONS
In future periods, the Company may sell a portion of the loans it
originates through a securitization program and retain the rights to service the
loans. The sale of loans through a securitization program would be a significant
departure from the Company's previous business operations. While a possible
securitization program is being considered, no decision has been made whether to
do so, and management has no specific time frame for such a program.
Adverse changes in the securitization market could impair the Company's
ability to originate and sell loans through securitizations on a favorable or
timely basis. Any such impairment could have a material adverse effect upon the
Company's results of operations and financial condition. Furthermore, the
Company's quarterly operating results in future periods may fluctuate
significantly as a result of the timing and level of securitizations. If
securitizations do not close when expected, the Company's results of operations
may be adversely affected for that period.
30
<PAGE>
YEAR 2000 ISSUES
The Company's management is aware of the Year 2000 issues and is currently
assessing how these issues will affect the Company. The Company's
"mission-critical" applications are supplied by outside vendors with which the
Company maintains current relationships. Most of the Company's mission-critical
systems already accommodate four-digit year values. The most recent release of
the mortgage loan origination and processing system is being used by the Company
and has been certified by the vendor as Year 2000 compliant. The Company is in
the process of implementing a new accounting system that has been certified by
the vendor as Year 2000 compliant. The Company is currently reviewing its
hardware systems, and will upgrade as needed for Year 2000 compliance. The cost
of compliance is not expected to exceed $100,000.
CONTINGENT RISKS
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, officers, and agents of the Company (including its appraisers),
incomplete documentation and failures by the Company to comply with various laws
and regulations applicable to its business. Management is not aware of any
material claims.
Although the Company sells substantially all loans that it originates and
purchases on a non-recourse basis, during the period of time that loans are held
pending sale, the Company is subject to the various business risks associated
with lending, including the risk of borrower default, loan foreclosure and loss,
and the risk that an increase in interest rates would result in a decline in the
value of loans to potential purchasers.
31
<PAGE>
COMPETITION
The Company faces intense competition from other mortgage banking
companies, commercial banks, credit unions, thrift institutions, credit card
issuers, and finance companies. Many of these competitors in the financial
services business are substantially larger and have more capital and financial
resources than the Company. Also, the larger national finance companies and
originators of conforming mortgage loans have been adapting their conforming
origination programs to expand into the non-conforming loan business and are
targeting the Company's prime customer base. There can be no assurance that the
Company will not face increased competition from such institutions. Further, a
number of the Company's competitors have recently increased their access to the
capital markets, which helps foster their growth and therefore increases
competition.
Competition can take on many forms, including convenience in obtaining a
loan, service, marketing and distribution channels and interest rates. The
current level of loan sale gains realized by the Company and its competitors is
attracting additional potential competitors, including at least one
quasi-governmental agency, to this market segment, and this additional
competition may lower the gains that the Company can realize in future periods.
The quantity and quality of competition for the Company may also be
affected by fluctuations in interest rates and general economic conditions.
During periods of rising rates, competitors which have "locked in" low borrowing
costs may have a competitive advantage. During periods of declining interest
rates, competitors may solicit the Company's borrowers to refinance their
mortgage loans. During an economic slowdown or recession, the Company's
borrowers may have new financial difficulties and may be receptive to offers by
the Company's competitors.
The Company depends largely on mortgage brokers, for purchases and
originations of new loans. The Company's competitors also seek to establish
relationships with the brokers with which the Company does business. The
Company's future results may become more exposed to fluctuations in the volume
and costs of its wholesale loans resulting from competition from other
purchasers of such loans, market conditions and other factors.
32
<PAGE>
REGULATION
The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local government authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. Regulated matters include loan
origination, credit activities, maximum interest rates and finance and other
charges, disclosure to customers, the terms of secured transactions, the
collection, repossession and claims-handling procedures utilized by the Company,
multiple qualification and licensing requirements for doing business in various
jurisdictions and other trade practices. The following discussion and other
references to and descriptions of the regulation of financial institutions
contained in this document constitute brief summaries of the regulations as
currently in effect. This discussion is not intended to constitute a complete
statement of all the legal restrictions and requirements applicable to the
Company and the Savings Bank and all such descriptions are qualified in their
entirety by reference to applicable statutes, regulations and other regulatory
pronouncements.
The Company's consumer lending activities are subject the federal
Truth-in-Lending Act ("TILA") and Regulation Z (including the Home Ownership and
Equity Protection Act of 1994); the federal Equal Credit Opportunity Act and
Regulation B, as amended (the "ECOA"); the Home Mortgage Disclosure Act and the
Fair Credit Reporting Act of 1970, as amended ("FCRA"); the federal Real Estate
Settlement Procedures Act ("RESPA") and Regulation X; the federal Home Mortgage
Disclosure Act; and the federal Fair Debt Collection Practices Act. The Company
is also subject to state statutes and regulations affecting its activities.
TILA and Regulation Z promulgated thereunder contain disclosure
requirements designed to provide consumers with uniform, understandable
information with respect to the terms and conditions of loans and credit
transactions in order to give them the ability to compare credit terms. TILA
also guarantees consumers a three-day right to cancel certain credit
transactions including loans of the type originated by the Company. Management
of the Company believes that it is in compliance with TILA in all material
respects.
33
<PAGE>
In September 1994, the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "Riegle Act") was enacted. Among other things, the
Riegle Act made certain amendments to TILA. The TILA Amendments, which became
effective in October 1995, generally apply to mortgage loans with (i) total
points and fees upon origination in excess of the greater of eight percent of
the loan amount or $424 or (ii) an annual percentage rate of more than ten
percentage points higher than comparable maturing U.S. Treasury securities.
Loans covered by the TILA Amendments are known as "Section 32 Loans."
The TILA Amendments impose additional disclosure requirements on lenders
originating Section 32 Loans and prohibit lenders from originating Section 32
Loans that are underwritten solely on the basis of the borrower's home equity
without regard to the borrower's ability to repay the loan. In accordance with
TILA Amendments, the Company applies underwriting criteria that take into
consideration the borrower's ability to repay all Section 32 Loans.
The TILA Amendments also prohibit lenders from including prepayment fee
clauses in Section 32 loans to borrowers with a debt-to-income ratio in excess
of 50%. In addition, a lender that refinances a Section 32 Loan previously made
by such lender will not be able to enforce any prepayment penalty clause
contained in such refinanced loan. The Company will continue to collect
prepayment fees on loans originated prior to the effectiveness of the TILA
Amendments and on non-Section 32 Loans as well as on Section 32 Loans in
permitted circumstances following the effectiveness of the TILA Amendments. The
TILA Amendments impose other restrictions on Section 32 Loans, including
restrictions on balloon payments and negative amortization features, which the
Company believes will not have a material impact on its operations.
The Company is also required to comply with the ECOA, which prohibits
creditors from discriminating against applicants on the basis of race, color,
sex, age or marital status. Regulation B promulgated under ECOA restricts
creditors from obtaining certain types of information from loan applicants. It
also requires certain disclosures by the lender regarding consumer rights and
requires lenders to advise applicants of the reasons for any credit denial. In
instances where the applicant is denied credit or the rate or charge for a loan
increases as a result of information obtained from a consumer credit agency,
another statute, the FCRA requires the lender to supply the applicant with a
name and address of the reporting agency. The Company is also subject to the
Real Estate Settlement Procedures Act and is required to file an annual report
with the Department of Housing and Urban Development pursuant to the Home
Mortgage Disclosure Act.
The Company is also subject to the rules and regulations of, and
examinations by, the U.S. Department of Housing and Urban Development and state
regulatory authorities with respect to originating, processing, underwriting,
selling and servicing loans. These rules and regulations, among other things,
impose licensing obligations on the Company, establish eligibility criteria for
mortgage loans, prohibit discrimination, provide for inspections and appraisals
of properties, require credit reports on loan applicants, regulate assessment,
collection, foreclosure and claims handling, investment and interest payments on
escrow balances and payment features, and mandate certain loan amounts.
34
<PAGE>
Failure to comply with these requirements can lead to loss of approved
status, termination or suspension of servicing contracts without compensation to
the servicer, demands for indemnifications or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions. There can be no assurance that the Company
will maintain compliance with these requirements in the future without
additional expenses, or that more restrictive federal, state or local laws,
rules and regulations will not be adopted that would make compliance more
difficult for the Company. Management believes that the Company is in compliance
in all material respects with applicable federal and state laws and regulations.
The Company is also subject to various other federal and state laws
regulating the issuance and sale of securities, relationships with entities
regulated by the Employee Retirement Income Security Act of 1974, as amended,
and other aspects of its business.
The laws, rules and regulations applicable to the Company are subject to
regular modification and change. There are currently proposed various laws,
rules and regulations which, if adopted, could impact the Company. There can be
no assurance that these proposed laws, rules and regulations, or other such
laws, rules or regulations, will not be adopted in the future which could make
compliance much more difficult or expensive, restrict the Company's ability to
originate, purchase, broker or sell loans, further limit or restrict the amount
of commissions, interest and other charges earned on loans originated or sold by
the Company, or otherwise adversely affect the business or prospects of the
Company.
OTS REGULATION OF THE COMPANY
GENERAL. The Company is a registered savings and loan holding company under
the federal Home Owner's Loan Act ("HOLA") because of its ownership of the
Savings Bank. As such, the Company is subject to the regulation, supervision and
examination of the OTS.
ACTIVITIES RESTRICTION. There are generally no restrictions on the
activities of a savings and loan holding company, such as the Company, which
holds only one subsidiary savings institution. However, if the Director of the
OTS determines that there is reasonable cause to believe that the continuation
by a savings and loan holding company of an activity constitutes a serious risk
to the financial safety, soundness or stability of its subsidiary savings
institution, the Director may impose such restrictions as deemed necessary to
address such risk, including limiting: (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the above
rules as to the permissible business activities of unitary savings and loan
holding companies, if the savings institution subsidiary of such a holding
company fails to meet a qualified thrift lender ("QTL") test set forth in OTS
regulations, then such unitary holding company shall become subject to the
activities and regulations applicable to multiple savings and loan holding
companies and, unless the savings institution requalifies as a QTL within one
year thereafter, shall register as, and become subject to the restriction
applicable to, a bank holding company. See "Regulation of the Savings Bank -
Qualified Thrift Lender Test."
35
<PAGE>
If the Company were to acquire control of another savings institution other
than through merger or other business combination with the Savings Bank, the
Company would become a multiple savings and loan holding company. Except where
such acquisition is pursuant to the authority to approve emergency thrift
acquisition and where each subsidiary savings institution meets the QTL test, as
set forth below, the activities of the Company and any of its subsidiaries
(other than the Savings Bank or other subsidiary savings institutions) would
thereafter be subject to further restrictions. Among other things, no multiple
savings and loan holding company or subsidiary thereof which is not a savings
institution generally shall commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary thereof
any business activity, other than: (i) furnishing or performing management
services for a subsidiary savings institution; (ii) conducting an insurance
agency or escrow business; (iii) holding, managing, or liquidating assets owned
by or acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) those activities authorized by regulation as
of March 5, 1987 to be engaged in by multiple savings and loan holding
companies; or (vii) unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies, those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies. Those activities described in clause (vii) above also must be
approved by the Directors of the OTS prior to being engaged in by a multiple
savings and loan holding company.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies such as the Company are prohibited from acquiring,
without prior approval of the Director of the OTS, (i) control of any other
savings institution or savings and loan holding company or substantially all the
assets thereof or (ii) more than 5% of the voting shares of a savings
institution or holding company thereof which is not a subsidiary. Except with
the proper approval of the Director of the OTS, no director or officer of a
savings and loan holding company or person owning or controlling by proxy or
otherwise more than 25% of such company's stock, may acquire control of any
savings institution, other than a subsidiary savings institution, or of any
other savings and loan holding company.
The Director of the OTS may approve acquisitions resulting in the formation
of a multiple savings and loan holding company which controls savings
institutions in more than one state only if (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office located in the state of the institution to be acquired as of March
5, 1987; (ii) the acquirer is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provision of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered savings institutions located in the state where the
acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions).
36
<PAGE>
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between the
Company or any of its non-bank subsidiaries and the Savings Bank are subject to
various restrictions, which are described under "Regulation of the Savings
Bank-Affiliate Transactions."
REGULATION OF THE SAVINGS BANK
GENERAL. The Savings Bank is a federally chartered savings bank organized
under the HOLA. As such, the Savings Bank is subject to regulation, supervision
and examination by the OTS. The deposit accounts of the Savings Bank are insured
up to applicable limits by the SAIF administered by the FDIC and, as a result,
the Savings Bank also is subject to regulation, supervision and examination by
the FDIC. The Savings Bank is also subject to the regulations of the Board of
Governors of the Federal Reserve System governing reserves required to be
maintained against deposits. The Savings Bank is a member of the FHLB of
Atlanta.
The business and affairs of the Savings Bank are regulated in a variety of
ways. Regulations apply to, among other things, insurance of deposit accounts,
capital ratios, payment of dividends, liquidity requirements, the nature and
amount of the investments that the Savings Bank may make, transactions with
affiliates, community and consumer lending laws, internal policies and controls,
reporting by and examination of the Savings Bank and changes in control of the
Savings Bank.
INSURANCE OF ACCOUNTS. Deposit accounts of the Savings Bank up to $100,000
are insured by the Savings Association Insurance Fund (the "SAIF"), administered
by the FDIC. Pursuant to legislation enacted in September 1996, a fee was paid
by all SAIF insured institutions at the rate of $0.657 per $100 of deposits held
by such institutions at March 31, 1995. The money collected recapitalized the
SAIF reserve to the level of 1.25% of insured deposits as required by law. In
September 1996, the Savings Bank recorded a pre-tax accrual of $23,000 for this
assessment, which was subsequently paid in November 1996.
The new legislation also provides for the merger, subject to certain
conditions, of the SAIF into the Bank Insurance Fund ("BIF") by 1999 and also
requires BIF-insured institutions to share in the payment of interest on the
bonds issued by a specially created government entity ("FICO"), the proceeds of
which were applied toward resolution of the thrift industry crisis in the 1980s.
Beginning on January 1, 1997, in addition to the insurance premium that is paid
by SAIF-insured institutions to maintain the SAIF reserve at its required level
pursuant to the current risk classification system, SAIF-insured institutions
pay deposit insurance premiums at the annual rate of 6.4 basis points of their
insured deposits and BIF-insured institutions will pay deposit insurance
premiums at the annual rate of 1.3 basis points of their insured deposits
towards the payment of interest on the FICO bonds. Under the current risk
classification system, institutions are assigned on one of three capital groups
which are based solely on the level of an institution's capital - "well
capitalized," "adequately capitalized" and "undercapitalized" - which are
defined in the same manner as the regulations establishing the prompt corrective
action system under Section 38 of the FDIA, as discussed below. These three
groups are then divided into three subgroups which are based on supervisory
evaluations by the institution's primary federal regulator, resulting in nine
assessment classifications. Assessment rates currently range from zero basis
points for well capitalized, healthy institutions to 27 basis points for
undercapitalized institutions with substantial supervisory concerns.
37
<PAGE>
The recapitalization of the SAIF is expected to result in lower deposit
insurance premiums in the future for most SAIF-insured financial institutions,
including the Savings Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Savings Bank, if it determines after a hearing that
the institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Savings Bank's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. Federally-insured savings associations are
required to maintain minimum levels of regulatory capital. These standards
generally must be as stringent as the comparable capital requirements imposed on
national banks. The OTS also is authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis. At
September 30, 1997, the Savings Bank's regulatory capital exceeded applicable
requirements for categorization as "well-capitalized."
Federally-insured savings associations are subject to three capital
requirements: a tangible capital requirement, a core or leverage capital
requirement and a risk-based capital requirement. All savings associations
currently are required to maintain tangible capital of at least 1.5% of adjusted
total assets (as defined in the regulations), core capital equal to 3% of
adjusted total assets and total capital (a combination of core and supplementary
capital) equal to 8% of risk-weighted assets (as defined in the regulations).
For purposes of the regulation, tangible capital is core capital less all
intangibles other than qualifying purchased mortgage servicing rights, of which
the Savings Bank had none at September 30, 1997. Core capital includes common
stockholders' equity, non-cumulative perpetual preferred stock and related
surplus, minority interest in the equity accounts of fully consolidated
subsidiaries and certain nonwithdrawable accounts and pledged deposits. Core
capital generally is reduced by the amount of a savings association's intangible
assets, other than qualifying mortgage servicing rights.
A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, provided that the amount of supplementary
capital included does not exceed the savings association's core capital.
Supplementary capital consists of certain capital instruments that do not
qualify as core capital, including subordinated debt which meets specified
requirements, and general valuation loan and lease loss allowances up to a
maximum of 1.25% of risk-weighted assets. In determining the required amount of
risk-based capital, total assets, including certain off-balance sheet items, are
multiplied by a risk weight based on the risks inherent in the type of assets.
The risk weights assigned by the OTS for principal categories of assets
currently range from 0% to 100%, depending on the type of asset.
38
<PAGE>
OTS policy imposes a limitation on the amount of net deferred tax assets
under SFAS No. 109 that may be included in regulatory capital. (Net deferred tax
assets represent deferred tax assets, reduced by any valuation allowances, in
excess of deferred tax liabilities.) Application of the limit depends on the
possible sources of taxable income available to an institution to realize
deferred tax assets. Deferred tax assets that can be realized from the following
generally are not limited: taxes paid in prior carryback years and future
reversals of existing taxable temporary differences. To the extent that the
realization of deferred tax assets depends on an institution's future taxable
income (exclusive of reversing temporary differences and carryforwards), or its
tax-planning strategies, such deferred tax assets are limited for regulatory
capital purposes to the lesser of the amount that can be realized within one
year of the quarter-end report date or 10% of core capital. The foregoing
considerations did not affect the calculation of the Savings Bank's regulatory
capital at September 30, 1997.
In August 1993, the OTS adopted a final rule incorporating an interest-rate
risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its inherent rate risk component from total capital
for purposes of calculating the risk-based capital requirement. As a result,
such an institution will be required to maintain additional capital in order to
comply with the risk-based capital requirement. Although the final rule was
originally scheduled to be effective as of January 1994, the OTS has indicated
that it will delay invoking its interest rate risk rule requiring institutions
with above normal interest rate risk exposure to adjust their regulatory capital
requirement until appeal procedures are implemented and evaluated. The OTS has
not yet established an effective date for the capital deduction. Management of
the Company does not believe that the OTS' adoption of an interest rate risk
component to the risk-based capital requirement will adversely affect the
Savings Bank if it becomes effective in its current form.
In April 1991, the OTS proposed to modify the 3% of adjusted total assets
core capital requirement in the same manner as was done by the Comptroller of
the Currency for national savings banks. Under the OTS proposal, only savings
associations rated composite 1 under the CAMEL rating system will be permitted
to operate at the regulatory minimum core capital ratio of 3%. For all other
savings associations, the minimum core capital ratio will be 3% plus at least an
additional 100 to 200 basis points, which will increase the 4% core capital
ratio requirement to 5% of adjusted total assets or more. In determining the
amount of additional capital, the OTS will assess both the quality of risk
management systems and the level of overall risk in each individual savings
association through the supervisory process on a case-by-case basis.
39
<PAGE>
PROMPT CORRECTIVE ACTION. Federal law provides the federal banking
regulators with broad power to take "prompt corrective action" to resolve the
problems of undercapitalized institutions. The extent of the regulators' powers
depends on whether the institution in question is "well capitalized,"
"adequately capitalized," "under-capitalized," "significantly undercapitalized"
or "critically undercapitalized." Under regulations adopted by the federal
banking regulators, an institution shall be deemed to be (i) "well capitalized"
if it has a total risk-based capital ratio of 10.0% or more, has a Tier I
risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of
5.0% or more and is not subject to specified requirements to meet and maintain a
specific capital level for any capital measure; (ii) "adequately capitalized" if
it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized," (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances), (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%, and (v) "critically undercapitalized" if it has a ratio of
tangible equity to adjusted total assets that is equal to or less than 2.0%. The
regulations also permit the appropriate federal Savings Banking regulator to
downgrade an institution to the next lower category (provided that a
significantly undercapitalized institution may not be downgraded to critically
undercapitalized) if the regulator determines (i) after notice and opportunity
for hearing or response, that the institution is an unsafe or unsound condition
or (ii) that the institution has received (and not corrected) a
less-than-satisfactory rating for any of the categories of asset quality,
management, earnings or liquidity in its most recent exam. At September 30,
1997, the Savings Bank was a "well capitalized" institution under the prompt
corrective action regulations of the OTS.
Depending upon the capital category to which an institution is assigned,
the regulators' corrective powers, many of which are mandatory in certain
circumstances, include prohibition on capital distributions; prohibition on
payment of management fees to controlling persons; requiring the submission of a
capital restoration plan; placing limits on asset growth; limiting acquisitions,
branching or new lines of business; requiring the institution to issue
additional capital stock (including additional voting stock) or to be acquired;
restricting transactions with affiliates; restricting the interest rates that
the institution may pay on deposits; ordering a new election of directors of the
institution; requiring that senior executive officers or directors be dismissed;
prohibiting the institution from accepting deposits from correspondent banks;
requiring the institution to divest certain subsidiaries; prohibiting the
payment of principal or interest on subordinated debt; and, ultimately,
appointing a receiver for the institution.
40
<PAGE>
QUALIFIED THRIFT LENDER TEST. All savings associations are required to meet
the QTL test set forth in the HOLA and regulations to avoid certain restrictions
on their operations. A savings association that does not meet the QTL test set
forth in the HOLA and implementing regulations must either convert to a bank
charter or comply with the following restrictions on its operations: (i) the
association may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank; (ii) the branching powers of the association shall be restricted
to those of a national bank; (iii) the association shall not be eligible to
obtain any advances from its FHLB; and (iv) payment of dividends by the
association shall be subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the association
ceases to be a QTL, it must cease any activity and not retain any investment not
permissible for a national bank and immediately repay any outstanding FHLB
advances (subject to safety and soundness considerations). The Savings Bank met
the QTL test throughout 1996 and the first nine months of 1997.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. The OTS has promulgated a regulation
governing capital distributions by savings associations, which include cash
dividends, stock redemption's or repurchases, cash-out mergers, interest
payments on certain convertible debt and other transactions charged to the
capital account of a savings association as a capital distribution. Generally,
the regulation creates three tiers of associations based on regulatory capital,
with the top two tiers providing a safe harbor for specified levels of capital
distributions from associations so long as such associations notify the OTS and
receive no objection to the distribution from the OTS. Associations that do not
qualify for the safe harbor provided for the top two tiers of associations are
required to obtain prior OTS approval before making any capital distributions.
Tier 1 associations may make the highest amount of capital distributions,
and are defined as savings associations that before and after the proposed
distribution meet or exceed their fully phased-in regulatory capital
requirements. Tier 1 associations may make capital distributions during any
calendar year equal to the greater of (i) 100% of net income for the calendar
year-to-date plus 50% of its "surplus capital ratio" at the beginning of the
calendar year and (ii) 75% of its net income over the most recent four-quarter
period. The "surplus capital ratio" is defined to mean the percentage by which
the association's ratio of total capital to assets exceeds the ratio of its
"fully phased-in capital requirement" to assets, and "fully phased-in capital
requirement" is defined to mean an association's capital requirement under the
statutory and regulatory standards applicable on December 31, 1994, as modified
to reflect any applicable individual minimum capital requirement imposed upon
the association. At September 30, 1997, the Savings Bank was a Tier 1
association under the OTS capital distribution regulation.
In December 1994, the OTS published a notice of proposed rulemaking to
amend its capital distribution regulation. Under the proposal, the three tiered
approach contained in existing regulations would be replaced and institutions
would be permitted to make capital distributions that would not result in their
capital being reduced below the level required to remain "adequately
capitalized," as defined above under "Prompt Corrective Action."
41
<PAGE>
LOAN-TO-ONE BORROWER. Under applicable laws and regulations the amount of
loans and extensions of credit which may be extended by a savings institution
such as the Savings Bank to any one borrower, including related entities,
generally may not exceed the greater of $500,000 or 15% of the unimpaired
capital and unimpaired surplus of the institution. Loans in an amount equal to
an additional 10% of unimpaired capital and unimpaired surplus also may be made
to a borrower if the loans are fully secured by readily marketable securities.
An institution's "unimpaired capital and unimpaired surplus" includes, among
other things, the amount of its core capital and supplementary capital included
in its total capital under OTS regulations.
At September 30, 1997, the Savings Bank's unimpaired capital and surplus
amounted to $3,129,000, resulting in a general loans-to-one borrower limitation
of $500,000 under applicable laws and regulations.
BROKERED DEPOSITS. Under applicable laws and regulations, an insured
depository institution may be restricted in obtaining, directly or indirectly,
funds by or through any "deposit broker," as defined, for deposit into one or
more deposit accounts at the institution. The term "deposit broker" generally
includes any person engaged in the business of placing deposits, or facilitating
the placement of deposits, of third parties with insured depository institutions
or the business of placing deposits with insured depository institutions for the
purpose of selling interest in those deposits to third parties. In addition, the
term "deposit broker" includes any insured depository institution, and any
employee of any insured depository institution, which engages, directly or
indirectly, in the solicitation of deposits by offering rates of interest (with
respect to such deposits) which are significantly higher than the prevailing
rates of interest on deposits offered by other insured depository institutions
have the same type of charter in such depository institution's normal market
area. As a result of the definition of "deposit broker," all of the Savings
Bank's brokered deposits, as well as possibly its deposits obtained through
customers of regional and local investment banking firms and the deposits
obtained from the Savings Bank's direct solicitation efforts of institutional
investors and high net worth individuals, are potentially subject to the
restrictions described below. Under FDIC regulations, well-capitalized
institutions are subject to no brokered deposit limitations, while
adequately-capitalized institutions are able to accept, renew or roll over
brokered deposits only (i) with a waiver from the FDIC and (ii) subject to the
limitation that they do not pay an effective yield on any such deposit which
exceeds by more than (a) 75 basis points the effective yield paid on deposits of
comparable size and maturity in such institution's normal market area for
deposits accepted in its normal market area or (b) by 120% for retail deposits
and 130% for wholesale deposits, respectively, of the current yield on
comparable maturity U.S. Treasury obligations for deposits accepted outside the
institution's normal market area. Undercapitalized institutions are not
permitted to accept brokered deposits and may not solicit deposits by offering
any effective yield that exceeds by more than 75 basis points, the prevailing
effective yields on insured deposits of comparable maturity in the institution's
normal market area or in the market area in which such deposits are being
solicited. At September 30, 1997, the Savings Bank was a well-capitalized
institution which was not subject to restrictions on brokered deposits. See
"Business of the Company-Savings Bank Sources of Funds-Deposits."
42
<PAGE>
LIQUIDITY REQUIREMENTS. All savings associations are required to maintain
an average daily balance of liquid assets, which include specified short-term
assets and certain long-term assets, equal to a certain percentage of the sum of
its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. The liquidity requirement may vary from time to
time (between 4% and 10%) depending upon economic conditions and savings flows
of all savings associations. At the present time, the required liquid asset
ratio is 4%. Historically, the Savings Bank has operated in compliance with
these requirements.
AFFILIATE TRANSACTIONS. Under federal law and regulation, transactions
between a savings association and its affiliates are subject to quantitative and
qualitative restrictions. Affiliates of a savings association include, among
other entities, companies that control, are controlled by or are under common
control with the savings association. As a result, the Company and its non-bank
subsidiaries are affiliates of the Savings Bank.
Savings associations are restricted in their ability to engage in "covered
transactions" with their affiliates. In addition, covered transactions between a
savings association and an affiliate, as well as certain other transactions with
or benefiting an affiliate, must be on terms and conditions at least as
favorable to the savings association as those prevailing at the time for
comparable transactions with non-affiliated companies. Savings associations are
required to make and retain detailed records of transactions with affiliates.
Notwithstanding the foregoing, a savings association is not permitted to
make a loan or extension of credit to any affiliate unless the affiliate is
engaged only in activities the Federal Reserve Board has determined to be
permissible for bank holding companies. Savings associations also are prohibited
from purchasing or investing in securities issued by an affiliate, other than
shares of a subsidiary of the savings association.
Savings associations are also subject to various limitations and reporting
requirements on loans to insiders. These limitations require, among other
things, that all loans or extensions of credit to insiders (generally executive
officers, directors or 10% stockholders of the institution) or their "related
interest" be made on substantially the same terms (including interest rates and
collateral) as, and follow credit underwriting procedures that are not less
stringent than, those prevailing for comparable transactions with the general
public and not involve more than the normal risk of repayment or present other
unfavorable features.
43
<PAGE>
COMMUNITY INVESTMENT AND CONSUMER PROTECTION LAWS. In connection with its
lending activities, the Savings Bank is subject to the same federal and state
laws applicable to the Company generally, laws designed to protect borrowers and
promote lending to various sectors of the economy and population. In addition,
the Savings Bank is subject to the federal Community Reinvestment Act ("CRA").
The CRA requires each bank or savings association to identify the communities it
serves and the types of credit or other financial services the bank or savings
association is prepared to extend to those communities. The CRA also requires
the OTS to assess a savings association's record of helping to meet the credit
needs of its community and to take the assessment into consideration when
evaluating applications for mergers, applications and other transactions. The
OTS may assign a rating of "outstanding," "satisfactory," "needs to improve," or
"substantial noncompliance." A less than satisfactory CRA rating may be the
basis for denying such applications. The OTS has not conducted a CRA review of
the Savings Bank since the Company acquired the Savings Bank on September 11,
1996. However, management believes the OTS will have a favorable view of the
Savings Bank's recent CRA record.
44
<PAGE>
Under the CRA and implementing OTS regulations, a savings association has a
continuing and affirmative obligation to help meet the credit needs of its local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of the institution. Until July 1, 1997, the OTS
implementing regulations required the board of directors of each savings
association to adopt a CRA statement for each delineated local community that,
among other things, describes its efforts to help meet community credit needs
and the specific types of credit that the institution is willing to extend.
Under new standards, the OTS will assign a CRA rating based on a Lending Test,
Investment Test and Service Test keyed to, respectively, the number of loans,
the number of investments, and the level of availability of retail banking
services in a savings association's assessment area. The Lending Test will be
the primary component of the assigned composite rating. An "outstanding" rating
on the Lending Test automatically will result in at least a "satisfactory"
rating in the composite, but an institution cannot receive a "satisfactory" or
better rating on the composite if it does not receive at least a "low
satisfactory" rating on the Lending Test. Alternatively, a savings association
may elect to be assessed by complying with a strategic plan approved by the OTS.
Evaluation under the new rules is mandatory after June 30, 1997; however, a
savings association could elect to be evaluated under the new rules beginning on
January 1, 1996, although the Savings Bank did not elect to do so. Data
collection requirements became effective January 1, 1996.
SAFETY AND SOUNDNESS. Other regulations which were recently adopted or are
currently proposed to be adopted pursuant to recent legislation include: (i)
real estate lending standards for insured institutions, which provide guidelines
concerning loan-to-value ratios for various types of real estate loans; (ii)
revisions to the risk-based capital rules to account for interest rate risk,
concentration of credit risk and the risks posed by "non-traditional
activities;" (iii) rules requiring depository institutions to develop and
implement internal procedures to evaluate and control credit and settlement
exposure to their correspondent banks; and (iv) rules addressing various "safety
and soundness" issues, including operations and managerial standards, standards
for asset quality, earnings and stock valuations, and compensation standards for
the officers, directors, employees and principal stockholders of the insured
institution.
LEGISLATIVE RISK
Members of Congress and government officials from time to time have
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.
45
<PAGE>
ENVIRONMENTAL FACTORS
To date, the Company has not been required to perform any investigation or
clean up activities, nor has it been subject to any environmental claims. There
can be no assurance, however, that this will remain the case in the future. In
the ordinary course of its business, the Company from time to time forecloses on
properties securing loans. Although the Company primarily lends to owners of
residential properties, there is a risk that the Company could be required to
investigate and clean up hazardous or toxic substances or chemical releases at
such properties after acquisition by the Company, and could be held liable to a
governmental entity or to third parties for property damage, personal injury,
and investigation and cleanup costs incurred by such parties in connection with
the contamination. The costs of investigation, remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate such property, may adversely affect the owner's
ability to sell or rent such property or to borrow using such property as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances also may be liable for the costs of removal or remediation of
such substances at the disposal or treatment facility, whether or not the
facility is owned or operated by such person. In addition, the owner or former
owners of a contaminated site may be subject to common law claims by third
parties based on damages and costs resulting from environmental contamination
emanating from such property.
In the course of its business, the Company may acquire properties as a
result of foreclosure. There is a risk that hazardous or toxic waste could be
found on such properties. In such event, the Company could be held responsible
for the cost of cleaning up or removing such waste, and such cost could exceed
the value of the underlying properties.
DEPENDENCE ON KEY PERSONNEL
The Company's growth and development to date have been largely dependent
upon the services of Allen D. Wykle, Chairman of the Board, President and Chief
Executive Officer, Neil W. Phelan, Executive Vice President in charge of the
broker lending division, and Barry C. Diggins, a key member of the retail
lending management team. The loss of Mr. Wykle's, Mr. Phelan's or Mr. Diggins'
services for any reason could have a material adverse effect on the Company.
Certain of the Company's principal credit agreements contain a provision which
permit the lender to accelerate the Company's obligations in the event that Mr.
Wykle were to leave the Company for any reason and not be replaced with an
executive acceptable to such lender.
CONTROL BY CERTAIN SHAREHOLDERS
As of January 15, 1998, Allen D. Wykle, Chairman of the Board, President
and Chief Executive Officer and Leon H. Perlin, Director, beneficially own an
aggregate of 50.1% of the outstanding shares of Common Stock of the Company.
Accordingly, such persons, if they were to act in concert, would have majority
control of the Company, with the ability to approve certain fundamental
corporate transactions and the election of the entire Board of Directors.
46
<PAGE>
ITEM 2 - FINANCIAL INFORMATION
SELECTED HISTORICAL FINANCIAL DATA
The historical consolidated financial data for the five years ended
December 31, 1996 (audited), the three- and nine-month periods ended September
30, 1997 and 1996 (unaudited), and the seven quarterly periods ended September
30, 1997 (unaudited), were derived from the consolidated financial statements of
the Company included elsewhere herein. In the opinion of management, the
historical consolidated financial data as of and for the three- and nine-month
periods ended September 30, 1997 and 1996, and the seven quarterly periods ended
September 30, 1997, include all adjusting entries (consisting only of normal
recurring adjustments) necessary to present fairly the information set forth
therein. The historical consolidated financial data are not necessarily
indicative of the results of operations for any future period. Furthermore, the
results of operations for the three- and nine-month periods ended September 30,
1997 and 1996 should not be regarded as indicative of the results that may be
expected for the full year. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical consolidated financial statements and notes
thereto included elsewhere herein. Unless otherwise indicated, all financial
data has been adjusted to reflect two-for-one stock splits which occurred on
August 30, 1996, December 16, 1996 and November 21, 1997.
47
<PAGE>
APPROVED FINANCIAL CORP.
SELECTED FINANCIAL STATISTICS
<TABLE>
<CAPTION>
(In thousands, except share and per share data)
Years Ended
December 31 1996 1995 1994 1993 1992
- ----------- ---------- ---------- ---------- ---------- ----------
Revenue:
<S> <C> <C> <C> <C> <C>
Gain on sale of loans $ 17,955 $ 7,298 $ 2,184 $ 2,641 $ 3,141
Interest income 4,520 3,065 2,556 3,338 3,090
Other fees and income 2,407 1,535 639 227 288
---------- ---------- ---------- ---------- ----------
Total revenue 24,882 11,898 5,379 6,206 6,519
---------- ---------- ---------- ---------- ----------
Expenses:
Compensation (1) 8,017 3,880 1,452 1,040 984
General and administrative 6,853 3,050 1,337 1,122 895
Interest expense 3,121 2,194 1,700 1,781 1,719
Provision for loan and
foreclosed property losses 1,308 731 191 426 1,454
---------- ---------- ---------- ---------- ----------
Total expenses 19,299 9,855 4,680 4,369 5,052
---------- ---------- ---------- ---------- ----------
Income before income taxes 5,583 2,043 699 1,837 1,467
Income taxes 2,259 876 328 761 584
---------- ---------- ---------- ---------- ----------
Net income $ 3,324 $ 1,167 $ 371 $ 1,076 $ 883
========== ========== ========== ========== ==========
Net income per share (2) $ 0.63 $ 0.23 $ 0.07 $ 0.21 $ 0.19
========== ========== ========== ========== ==========
Cash dividends per share (2) $ 0.04 $ 0.04 $ 0.04 $ 0.04 $ 0.04
========== ========== ========== ========== ==========
Dividend payout ratio 6.35% 17.39% 57.14% 19.05% 21.05%
========== ========== ========== ========== ==========
Weighted average number
of shares outstanding 5,294,894 5,075,362 5,035,350 5,077,440 4,545,184
========== ========== ========== ========== ==========
</TABLE>
=============
(1) This document reclassifies "minority interests in consolidated subsidiaries"
as "compensation."
(2) All per-share data has been adjusted to reflect two-for-one stock splits
which occurred on August 30, 1996, December 16, 1996 and November 21, 1997.
48
<PAGE>
APPROVED FINANCIAL CORP.
SELECTED FINANCIAL STATISTICS
<TABLE>
<CAPTION>
(In thousands, except per share data)
Years Ended
December 31 1996 1995 1994 1993 1992
- ----------- -------- -------- -------- -------- --------
SELECTED BALANCES AT YEAR END
<S> <C> <C> <C> <C> <C>
Loans receivable, net $ 45,423 $ 28,430 $ 18,021 $ 16,216 $ 21,390
Securities 20,140 -- -- -- --
Total assets 75,143 34,485 23,109 21,663 25,070
Revolving warehouse loans 34,177 19,566 7,727 5,790 9,948
Subordinated debt 9,183 6,905 8,546 9,561 8,934
FDIC-insured deposits 1,576 -- -- -- --
Total liabilities (1) 53,934 28,250 17,465 16,291 20,579
Shareholders' equity 21,209 6,236 5,645 5,372 4,492
SELECTED LOAN DATA
Loans originated $258,833 $111,505 $ 43,079 $ 56,972 $ 58,800
Loans sold 228,918 83,328 34,409 56,909 48,009
Amount of loans serviced
at year-end 48,785 29,249 18,482 16,434 22,151
Loans delinquent 31 days or
more as percent of
loans at year-end 6.61% 8.88% 7.03% 12.07% 7.56%
SELECTED RATIOS
Return on average assets 7.32% 4.06% 1.67% 4.61% 3.85%
Return on average
shareholders' equity 36.44% 19.86% 6.80% 21.83% 25.03%
Shareholders' equity
to assets 28.22% 18.08% 24.43% 24.80% 17.92%
Book value per share (2) $ 4.21 $ 1.28 $ 1.09 $ 1.06 $ 0.97
</TABLE>
=============
(1) Includes minority interests in subsidiaries.
(2) All per-share data has been adjusted to reflect two-for-one stock splits
which occurred on August 30, 1996, December 16, 1996 and November 21, 1997.
49
<PAGE>
APPROVED FINANCIAL CORP.
SELECTED FINANCIAL STATISTICS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(In thousands, except September 30, September 30,
share and per share data) ------------------------ ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
SUMMARY INCOME STATEMENTS
Revenue:
<S> <C> <C> <C> <C>
Gain on sale of loans $ 8,656 $ 4,819 $ 24,041 $ 11,176
Interest income 2,948 1,059 7,845 3,308
Gain on sale of securities 2,796 -- 2,796 --
Other fees and income 1,570 309 3,130 1,401
---------- ---------- ---------- ----------
Total revenue 15,970 6,187 37,812 15,885
---------- ---------- ---------- ----------
Expenses:
Compensation (1) 4,632 2,333 11,478 5,449
General and administrative 3,623 1,204 9,652 3,413
Interest expense 1,428 739 4,286 2,283
Provision for loan and
foreclosed property losses 435 585 1,133 1,341
---------- ---------- ---------- ----------
Total expenses 10,118 4,861 26,549 12,486
---------- ---------- ---------- ----------
Income before income taxes 5,852 1,326 11,263 3,399
Income taxes 2,416 556 4,613 1,357
---------- ---------- ---------- ----------
Net income $ 3,436 $ 770 $ 6,650 $ 2,042
========== ========== ========== ==========
Net income per share (2) $ 0.64 $ 0.15 $ 1.26 $ 0.41
========== ========== ========== ==========
Cash dividends per share (2) $ -- $ 0.01 $ -- $ 0.03
========== ========== ========== ==========
Dividend payout ratio -- 6.67% -- 7.32%
========== ========== ========== ==========
Weighted average number
of shares outstanding 5,392,408 5,049,180 5,281,393 4,950,304
========== ========== ========== ==========
</TABLE>
=============
(1) This document reclassifies "minority interests in consolidated subsidiaries"
as "compensation."
(2) All per-share data has been adjusted to reflect two-for-one stock splits
which occurred on August 30, 1996, December 16, 1996 and November 21, 1997.
50
<PAGE>
APPROVED FINANCIAL CORP.
SELECTED FINANCIAL STATISTICS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
(In thousands, except per share data) 1997 1996 1997 1996
-------- -------- -------- --------
SELECTED BALANCES AT PERIOD END
<S> <C> <C> <C> <C>
Loans receivable, net $ 73,587 $ 40,143
Securities 16,903 3,652
Total assets 108,414 50,972
Revolving warehouse loans 48,810 30,039
Subordinated debt 9,070 8,735
FDIC-insured deposits 9,984 1,378
Total liabilities (1) 83,120 42,403
Shareholders' equity 25,294 8,569
SELECTED LOAN DATA
Loans originated $119,164 $ 73,283 $341,915 $178,102
Loans sold 114,042 60,549 319,060 155,436
Amount of loans serviced
at period-end 76,024 40,143
Loans delinquent 31 days or
more as percent of
loans at period-end 5.52% 7.17%
SELECTED RATIOS
Annualized return on average assets 13.30% 7.01% 8.88% 6.73%
Annualized return on average
shareholders' equity 53.27% 37.03% 36.13% 37.72%
Shareholders' equity
to assets 23.33% 16.81%
Book value per share (2) $ 4.69 $ 1.70
</TABLE>
=============
(1) Includes minority interests in subsidiaries.
(2) All per-share data has been adjusted to reflect two-for-one stock splits
which occurred on August 30, 1996, December 16, 1996 and November 21, 1997.
51
<PAGE>
APPROVED FINANCIAL CORP.
SELECTED FINANCIAL STATISTICS
(In thousands, except
share and per share data)
<TABLE>
<CAPTION>
Three-Month Sept. 30, Jun. 30, Mar. 31, Dec. 31, Sept. 30,
Periods Ended 1997 1997 1997 1996 1996
- ------------- ---------- ---------- ---------- ---------- ----------
Revenue:
<S> <C> <C> <C> <C> <C>
Gain on sale of loans $ 8,656 $ 8,133 $ 7,252 $ 6,778 $ 4,819
Interest income 2,948 2,947 1,950 1,212 1,059
Gain on sale of securities 2,796 -- -- -- --
Other fees and income 1,570 772 788 1,006 309
---------- ---------- ---------- ---------- ----------
Total revenue 15,970 11,852 9,990 8,996 6,187
---------- ---------- ---------- ---------- ----------
Expenses:
Compensation (1) 4,632 3,698 3,148 2,568 2,333
General and administrative 3,623 3,370 2,659 3,440 1,204
Interest expense 1,428 1,521 1,337 838 739
Provision for loan and
foreclosed property losses 435 417 281 (33) 585
---------- ---------- ---------- ---------- ----------
Total expenses 10,118 9,006 7,425 6,813 4,861
---------- ---------- ---------- ---------- ----------
Income before income taxes 5,852 2,846 2,565 2,183 1,326
Income taxes 2,416 1,171 1,026 902 556
---------- ---------- ---------- ---------- ----------
Net income $ 3,436 $ 1,675 $ 1,539 $ 1,281 $ 770
========== ========== ========== ========== ==========
Net income per share (2) $ 0.64 $ 0.32 $ 0.30 $ 0.24 $ 0.15
========== ========== ========== ========== ==========
Cash dividends per share (2) $ -- $ -- $ -- $ 0.01 $ 0.01
========== ========== ========== ========== ==========
Dividend payout ratio -- -- -- 4.17% 6.67%
========== ========== ========== ========== ==========
Weighted average number
of shares outstanding 5,392,408 5,256,420 5,213,850 5,363,720 5,049,180
========== ========== ========== ========== ==========
</TABLE>
=============
(1) This document reclassifies "minority interests in consolidated subsidiaries"
as "compensation."
(2) All per-share data has been adjusted to reflect two-for-one stock splits
which occurred on August 30, 1996, December 16, 1996 and November 21, 1997.
52
<PAGE>
APPROVED FINANCIAL CORP.
SELECTED FINANCIAL STATISTICS
<TABLE>
<CAPTION>
(In thousands, except per share data)
Three-Month Sept. 30, Jun. 30, Mar. 31, Dec. 31, Sept. 30,
Periods Ended 1997 1997 1997 1996 1996
- ------------- -------- -------- -------- -------- --------
SELECTED BALANCES AT QUARTER END
<S> <C> <C> <C> <C> <C>
Loans receivable, net $ 73,587 $ 64,893 $ 62,161 $ 45,423 $ 40,143
Securities 16,903 19,693 17,740 20,140 3,652
Total assets 108,414 114,044 106,839 75,143 50,972
Revolving warehouse loans 48,810 67,697 69,813 34,177 30,039
Subordinated debt 9,070 9,344 9,470 9,183 8,735
FDIC-insured deposits 9,984 2,459 1,776 1,576 1,378
Total liabilities (1) 83,120 89,504 85,463 53,934 42,403
Shareholders' equity 25,294 24,541 21,376 21,209 8,569
SELECTED LOAN DATA
Loans originated $119,164 $111,774 $110,977 $ 80,731 $ 73,283
Loans sold 114,042 113,850 91,168 73,482 60,549
Amount of loans serviced
at period-end 76,024 66,772 63,877 46,761 40,143
Loans delinquent 31 days or
more as percent of
loans at period-end 5.52% 5.53% 4.57% 6.61% 7.17%
SELECTED RATIOS
Annualized return on average assets 13.30% 6.60% 6.65% 8.62% 7.01%
Annualized return on average
shareholders' equity 53.27% 30.04% 24.88% 37.57% 37.03%
Shareholders' equity
to assets 23.33% 21.52% 20.01% 28.22% 16.81%
Book value per share (2) $ 4.69 $ 4.55 $ 4.08 $ 4.21 $ 1.70
</TABLE>
=============
(1) Includes minority interests in subsidiaries.
(2) All per-share data has been adjusted to reflect two-for-one stock splits
which occurred on August 30, 1996, December 16, 1996 and November 21, 1997.
53
<PAGE>
APPROVED FINANCIAL CORP.
SELECTED FINANCIAL STATISTICS
(In thousands, except
share and per share data)
Three-Month Jun. 30, Mar. 31,
Periods Ended 1996 1996
- ------------- ---------- ----------
(unaudited) (unaudited)
Revenue:
Gain on sale of loans $ 3,881 $ 2,477
Interest income 1,128 1,121
Gain on sale of securities -- --
Other fees and income 711 381
---------- ----------
Total revenue 5,720 3,979
---------- ----------
Expenses:
Compensation (1) 1,661 1,455
General and administrative 1,257 952
Interest expense 860 684
Provision for loan and
foreclosed property losses 381 375
---------- ----------
Total expenses 4,159 3,466
---------- ----------
Income before income taxes 1,561 513
Income taxes 596 205
---------- ----------
Net income $ 965 $ 308
========== ==========
Net income per share (2) $ 0.18 $ 0.06
========== ==========
Cash dividends per share (2) $ 0.01 $ 0.01
========== ==========
Dividend payout ratio 5.56% 16.67%
========== ==========
Weighted average number
of shares outstanding 5,256,420 4,853,440
========== ==========
=============
(1) This document reclassifies "minority interests in consolidated subsidiaries"
as "compensation."
(2) All per-share data has been adjusted to reflect two-for-one stock splits
which occurred on August 30, 1996, December 16, 1996 and November 21, 1997.
54
<PAGE>
APPROVED FINANCIAL CORP.
SELECTED FINANCIAL STATISTICS
(In thousands, except per share data)
Three-Month Jun. 30, Mar. 31,
Periods Ended 1996 1996
- ------------- -------- --------
SELECTED BALANCES AT QUARTER END
Loans receivable, net $ 29,825 $ 33,666
Securities 856 740
Total assets 38,679 39,913
Revolving warehouse loans 18,674 25,767
Subordinated debt 8,417 5,525
FDIC-insured deposits -- --
Total liabilities (1) 30,971 33,427
Shareholders' equity 7,708 6,486
SELECTED LOAN DATA
Loans originated $ 57,710 $ 47,109
Loans sold 57,898 36,989
Amount of loans serviced
at period-end 31,769 34,970
Loans delinquent 31 days or
more as percent of
loans at period-end 9.27% 9.49%
SELECTED RATIOS
Annualized return on average assets 9.78% 3.28%
Annualized return on average
shareholders' equity 54.58% 19.79%
Shareholders' equity
to assets 19.93% 16.25%
Book value per share (2) $ 1.53 $ 1.34
=============
(1) Includes minority interests in subsidiaries.
(2) All per-share data has been adjusted to reflect two-for-one stock splits
which occurred on August 30, 1996, December 16, 1996 and November 21, 1997.
55
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following commentary discusses major components of the Company's
business and presents an overview of the Company's consolidated results of
operations during the three- and nine-month periods ended September 30, 1997 and
1996, and its consolidated financial position at September 30, 1997, December
31, 1996 and September 30, 1996. Also provided is commentary on the overview of
the Company's consolidated results of operations for the three-year period ended
December 31, 1996 and its consolidated financial position at December 31, 1996,
1995 and 1994. This discussion should be reviewed in conjunction with the
consolidated financial statements and accompanying notes and other statistical
information presented in the Company's 1996 audited financial statements.
RESULTS OF OPERATIONS
THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
NET INCOME. The Company's net income for the three-month period ended
September 30, 1997 was $3,436,000, compared to net income of $770,000 for the
three-month period ended September 30, 1996. On a per share basis, income for
the third quarter of 1997 was $.64, compared to $.15 for the third quarter of
1996.
The Company's net income for the nine-month period ended September 30, 1997
was $6,650,000, compared to net income of $2,042,000 for the nine-month period
ended September 30, 1996. On a per share basis, income for the first nine months
of 1997 was $1.26, compared to $.41 for the first nine months of 1996.
The per-share figures have been adjusted to reflect two-for-one stock splits
of the Company's common stock, which occurred on August 30, 1996, December 16,
1996 and November 21, 1997.
56
<PAGE>
The following table shows changes in earnings per share:
1997 1996
Versus 1996 Versus 1995
----------- -----------
Net earnings per share for nine-month
periods ended September 30, 1996
and 1995, respectively $ .41 $ .21
Increase (decrease) attributable to:
Gains on sale of loans 2.69 1.39
Net interest income .52 .08
Other income .93 (.03)
Compensation expense (1.26) (.69)
Other expenses (1.26) (.46)
Income taxes (.67) (.11)
Average shares outstanding (.10) .02
------ ------
Net increase .85 .20
------ ------
Net earnings per share for nine-month
periods ended September 30, 1997
and 1996, respectively $ 1.26 $ .41
====== ======
The annualized return on average assets increased to 8.88% in the first nine
months of 1997, compared to 6.73% in the first nine months of 1996. The
annualized return on average shareholders' equity was 36.13% in the first nine
months of 1997, compared to 37.72% in the first nine months of 1996.
57
<PAGE>
ORIGINATION OF MORTGAGE LOANS. Results of operations for the nine-month
periods ended September 30, 1997 and 1996 reflect the Company's focus on
expanding its mortgage lending operations. The following table shows the loan
originations in dollars and units for the Company's broker and retail units in
the three- and nine-month periods ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
(Dollars in thousands) 1997 1996 1997 1996
--------- --------- --------- ---------
Dollar Volume of Loan Originations:
<S> <C> <C> <C> <C>
Broker $ 60,481 $ 49,266 $ 185,408 $ 115,441
Retail 58,683 24,017 156,507 62,661
--------- --------- --------- ---------
Total $ 119,164 $ 73,283 $ 341,915 $ 178,102
========= ========= ========= =========
Number of Loans Originated:
Broker 1,037 854 3,183 1,902
Retail 1,134 438 2,968 980
--------- --------- --------- ---------
Total 2,171 1,292 6,151 2,882
========= ========= ========= =========
</TABLE>
The increases in dollar volume of loan originations of 62.6% and 92.0%,
respectively, in the three- and nine-month periods ended September 30, 1997
compared to the same periods in the previous year reflect the strong growth in
both the broker and retail lending operations.
The Company's broker lending division originated $185,408,000 of residential
loans during the first nine months of 1997, compared to $115,441,000 in the
first nine months of 1996. The 60.6% increase in originations in the first three
quarters of 1997 compared to the first three quarters of 1996 was due to
additional broker account representatives, and back-office capabilities. On a
unit basis, the Company originated 3,183 loans in its broker operation in the
first nine months of 1997, compared to 1,902 loans in the first nine months of
1996.
The Company's retail lending division originated $156,507,000 of residential
mortgage loans in the first nine months of 1997, compared to $62,661,000 in the
first nine months of 1996. The 149.8% increase in originations in the first
three quarters of 1997, compared to the first three quarters of 1996, is
attributed to additional retail loan offices and back-office capabilities. On a
unit basis, the Company originated 2,968 loans in its retail operation in the
first nine months of 1997, compared to 980 loans in the first nine months of
1996.
The following tables summarize mortgage loan originations, by state, for the
nine-month periods ended September 30, 1997 and 1996:
58
<PAGE>
(In thousands)
Nine-Month
Periods Ended
September 30 1997 1996
- ------------ ------------------ -----------------
Dollars Percent Dollars Percent
--------- ----- --------- -----
Broker Division:
Maryland $ 20,683 6.1% $ 7,391 4.1%
North and South Carolina 24,833 7.3 24,770 13.9
Georgia 44,547 13.0 40,669 22.8
Florida 43,314 12.7 24,151 13.6
Virginia 4,205 1.2 7,101 4.0
Ohio 18,574 5.4 2,015 1.1
Illinois 12,465 3.6 4,401 2.5
Indiana 8,474 2.5 2,466 1.4
Tennessee 4,848 1.4 40 --
Michigan 3,465 1.0 2,437 1.4
--------- ----- --------- -----
Total Broker Division $ 185,408 54.2% $ 115,441 64.8%
========= ===== ========= =====
Retail Division:
Maryland $ 49,961 14.6% $ 30,592 17.2%
North and South Carolina 41,234 12.0 7,869 4.4
Georgia 10,227 3.0 18,101 10.2
Florida 2,698 0.8 -- --
Virginia 24,963 7.3 6,099 3.4
Ohio 8,677 2.6 -- --
Illinois 3,353 1.0 -- --
Delaware 13,546 4.0 -- --
Indiana 1,848 0.5 -- --
--------- ----- --------- -----
Total Retail Division $ 156,507 45.8% $ 62,661 35.2%
========= ===== ========= =====
Total Originations:
Maryland $ 70,644 20.7% $ 37,983 21.3%
North and South Carolina 66,067 19.3 32,639 18.3
Georgia 54,774 16.0 58,770 33.0
Florida 46,012 13.5 24,151 13.6
Virginia 29,168 8.5 13,200 7.4
Ohio 27,251 8.0 2,015 1.1
Illinois 15,818 4.6 4,401 2.5
Delaware 13,546 4.0 -- --
Indiana 10,322 3.0 2,466 1.4
Tennessee 4,848 1.4 40 --
Michigan 3,465 1.0 2,437 1.4
--------- ----- --------- -----
Total originations $ 341,915 100.0% $ 178,102 100.0%
========= ===== ========= =====
59
<PAGE>
SALE OF MORTGAGE LOANS. The largest component of the Company's net income
is the gain from the sale of mortgage loans, which is the premium paid by
investors to purchase the loans and the origination fees and points received at
the time of origination on those loans. There is an active secondary market for
most types of mortgage loans originated by the Company. The majority of the
loans originated by the Company are sold to other mortgage and finance
companies. The loans are sold for cash as whole loans on a servicing-released
basis. Consistent with industry practices, the loans are sold with certain
representations and warranties. By originating loans for subsequent sale in the
secondary mortgage market, the Company is able to obtain funds which may be used
for lending and investment purposes.
The Company sold $114,042,000 of mortgage loans during the three-month
period ended September 30, 1997, compared to $60,549,000 during the three-month
period ended September 30, 1996. The Company sold $319,060,000 of mortgage loans
during the nine-month period ended September 30, 1997, compared to $155,436,000
during the nine-month period ended September 30, 1996. Sales volume increased by
105.3% in the first nine months of 1997 and by 114.0% in the first nine months
of 1996. The magnitudes of the period-to-period changes in loan sales are
consistent with and reflect the percentage changes in mortgage loan originations
in those periods.
For the three-month period ended September 30, 1997, gain on the sale of
loans was $8,656,000, which compares with $4,819,000 in the three-month period
ended September 30, 1996. For the nine-month period ended September 30, 1997,
gain on the sale of loans was $24,041,000, which compares with $11,176,000 in
the nine-month period ended September 30, 1996. The period-to-period increases
in the gain on loan sales were the direct result of increased loan originations,
which enabled the Company to sell more loans. Gain on the sale of mortgage loans
represented 63.6% of total revenue in the nine-month period ended September 30,
1997, compared to 70.4% of total revenue in the nine-month period ended
September 30, 1996.
The weighted-average premium realized by the Company on its loan sales
increased to 6.45% in the first nine months of 1997, compared to 6.00% in the
first nine months of 1996. These premiums do not include loan fees collected by
the Company at the time the loans are closed and included in the computation of
gain when the loans are sold.
A substantial portion of the Company's loan sales during the two-year
period ended September 30, 1997 were made to IMC Mortgage Company ("IMC"), a
non-conforming residential mortgage lender. The Company was the owner of
approximately 3.2% of the issued and outstanding stock of IMC at September 30,
1997. The Company sold IMC 2,852 loans totaling $177,795,000 in the first nine
months of 1997, compared to 845 loans totaling $55,322,000 in the first nine
months of 1996. The loans sold to IMC represented 55.7% and 35.6% of the dollar
volume of the Company's loan sales in the nine-month periods ended September 30,
1997 and 1996, respectively. The Company's Chairman and Chief Executive Officer,
Allen D. Wykle, is a member of IMC's Board of Directors. Also, Jean S. Schwindt,
a member of the Company's Board of Directors and Executive Committee, is an
officer of IMC.
60
<PAGE>
The Company defers fees it receives in loan origination, commitment and
purchase transactions. Loan origination fees are deferred and recognized over
the lives of the related loans as an adjustment of the loan's yield using the
level-yield method. Deferred income pertaining to loans held for sale is taken
into income at the time of sale of the loan.
NET INTEREST INCOME. The second largest component of revenue is interest
income. Interest income in the third quarter of 1997 was $2,948,000, compared
with $1,059,000 in the third quarter of 1996. Interest income in the first nine
months of 1997 was $7,845,000, compared with $3,308,000 in the first nine months
of 1996. The primary factor attributable to the growth in interest income is the
increase in average outstanding receivables, which are carried as mortgage
loans, net, on the Company's consolidated balance sheets.
Interest expense in the third quarter of 1997 was $1,428,000, compared with
$739,000 in the third quarter of 1996. Interest expense in the first nine months
of 1997 was $4,286,000, compared with $2,283,000 in the first nine months of
1996. The period-to-period increases in interest expense were the direct result
of increased borrowings under the Company's warehouse lines of credit, which
were used to fund the increase in loan origination volume.
The Company's net earnings are highly dependent on the difference, or
"spread," between the income it receives from its loan and investment portfolios
and its cost of funds, consisting principally of the interest paid on the
revolving warehouse loans and other borrowings and the Savings Bank's deposit
accounts. The Company's net interest income for the three-month period ended
September 30, 1997 was $1,520,000, compared to $320,000 for the three-month
period ended September 30, 1996. The Company's net interest for the nine-month
period ended September 30, 1997 was $3,559,000, compared to $1,025,000 for the
nine-month period ended September 30, 1996 and $639,000 for the nine-month
period ended September 30, 1995. Net interest income increased by $2,534,000, or
247.2%, in the first nine months of 1997 compared to the first nine months of
1996, and increased by $386,000, or 60.4%, in the first nine months of 1996
compared to the first nine months of 1995.
The average yield received on the Company's loan portfolio may not change
at the same pace as the interest rates it must pay on its revolving warehouse
loans and other borrowings and the Savings Bank's FDIC-insured deposits. As a
result, in times of rising interest rates, decreases in the difference between
the yield received on loans and other investments and the rate paid on
borrowings and the Savings Bank's deposits usually occur. However, interest
received on short-term investments and adjustable rate mortgage loans also
increase as a result of upward trends in short-term interest rates, which
enables the Company to partially compensate for increased borrowing and deposit
costs.
The following tables reflect the average yields earned and rates paid by
the Company during the nine-month periods ended September 30, 1997 and 1996. In
computing the average yields and rates, the accretion of loan fees is considered
an adjustment to yield. Information is based on average month-end balances
during the indicated periods.
61
<PAGE>
(In thousands)
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
Nine-Month Average Average
Periods Ended Average Yield/ Average Yield/
September 30 Balance Interest Rate Balance Interest Rate
- ------------ -------- ------- ----- -------- ------- -----
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable (1) $ 69,786 $ 7,697 14.70% $ 34,092 $ 3,292 12.87%
Cash and other interest-
earning assets 3,233 148 6.10 446 16 4.78
-------- ------- ----- -------- ------- -----
73,019 7,845 14.33 34,538 3,308 12.77
------- ----- ------- -----
Non-interest-earning assets:
Allowance for loan losses (1,345) (702)
Investment in IMC 18,572 941
Premises and equipment, net 3,083 1,563
Other 6,560 4,125
-------- --------
Total assets $ 99,889 $ 40,465
======== ========
Interest-bearing liabilities:
Revolving warehouse lines $ 58,581 3,442 7.83 $ 23,889 1,779 9.93
FDIC-insured deposits 3,049 123 5.38 138 5 4.83
Other interest-bearing
liabilities 10,221 721 9.41 8,379 499 7.94
-------- ------- ----- -------- ------- -----
71,851 4,286 7.95 32,406 2,283 9.39
------- ----- ------- -----
Non-interest-bearing liabilities 3,497 840
Total liabilities 75,348 33,246
Shareholders' equity 24,541 7,219
-------- --------
Total liabilities and equity $ 99,889 $ 40,465
======== ========
Average dollar difference between
interest-earning assets and interest-
bearing liabilities $ 1,168 $ 2,132
======== ========
Net interest income $ 3,559 $ 1,025
======= =======
Interest rate spread (2) 6.38% 3.38%
====== =====
Net annualized yield on average
interest-earning assets 6.50% 3.96%
====== =====
</TABLE>
=============
(1) Loans shown gross of allowance for loan losses, net of premiums/discounts.
(2) Average yield on total interest-earning assets less average rate paid on
total interest-bearing liabilities.
62
<PAGE>
The Company's net interest income is affected by changes in both average
interest rates and the average volumes of interest-earning assets and
interest-bearing liabilities. Total interest income increased by $4,537,000 in
the first nine months of 1997 compared to the same period in 1996. Total
interest expense increased by $2,003,000 in the first nine months of 1997
compared to the same period in 1996. The 1997 increases in both interest income
and interest expense are due primarily to increases in average interest-earning
assets and interest-bearing liabilities.
The following table shows the amounts of the changes in interest income and
expense which can be attributed to rate (change in rate multiplied by old
volume) and volume (change in volume multiplied by old rate) for the nine-month
period ended September 30, 1997. The changes in net interest income due to both
volume and rate changes have been allocated to volume and rate in proportion to
the relationship of absolute dollar amounts of the change of each. The table
demonstrates that the $2,534,000 increase in net interest income in the first
nine months of 1997 was the net result of a growing balance sheet positively
affected by lower rates on borrowed funds.
1997 Versus 1996
Increase (Decrease) Due to
-------------------------------
(in thousands) Volume Rate Total
------- ------- -------
Total interest-earning assets
Loans receivable $ 3,878 $ 527 $ 4,405
Cash and other
interest-earning assets 126 6 132
------- ------- -------
4,004 533 4,537
------- ------- -------
Total interest-bearing liabilities
Revolving warehouse loans 1,946 (283) 1,663
FDIC-insured deposits 117 1 118
Other 121 101 222
------- ------- -------
2,184 (181) 2,003
------- ------- -------
Net interest income $ 1,820 $ 714 $ 2,534
======= ======= =======
63
<PAGE>
PROVISION FOR LOAN AND FORECLOSED PROPERTY LOSSES. The Company provided
$435,000 during the third quarter of 1997 as additions to the allowances for
loan and foreclosed property losses, compared to $585,000 during the third
quarter of 1996. The Company provided $1,133,000 during the first nine months of
1997 as additions to the allowances for loan and foreclosed property losses,
compared to $1,341,000 during the first nine months of 1996.
The amount of the provision for loan losses is established based on
evaluations of the adequacy of the allowance for loan losses. Management charges
earnings by amounts necessary to maintain the overall allowance sufficient to
reasonably cover anticipated losses. In establishing the level of the allowance
for loan losses, the Company considers many factors, including general economic
conditions, loan loss experience, historical trends and other circumstances,
both internal and external. The Company considers the size and risk exposure of
each segment of the loan portfolio. For secured loans, management considers
estimates of the fair value of the collateral, considering the current and
currently anticipated future operating or sales conditions. Such estimates are
particularly susceptible to changes that could result in a material adjustment
to future results of operations. Factors such as independent appraisals, current
economic conditions and the financial condition of borrowers are continuously
evaluated to determine whether the Company's investment in such assets does not
exceed their estimated values.
The Company's acquisition of the Savings Bank in September 1996 included
$2,531,000 of mortgage loans subject to a $20,000 allowance for loan losses.
The amount of the provision for foreclosed property losses is established
based on evaluations of the adequacy of the allowance for foreclosed property
losses. It is the Company's policy to record allowances for estimated losses on
real estate owned when, based upon its evaluation of various factors such as
independent appraisals and current economic conditions, it determines that the
investment in such assets is greater than their fair values less cost to
dispose.
All charge-offs and recoveries related to mortgage loans, and writedowns of
foreclosed properties to appraised value at the time of repossession, are
recorded in the allowance for mortgage loan losses. In years prior to 1997, the
audited financial statements reflected writedowns at the time of loan
foreclosure against the allowance for foreclosed property losses.
Sales of real estate owned yielded net losses of $54,000 in the third
quarter of 1997 and $137,000 in the third quarter of 1996. Sales of real estate
owned yielded net losses of $407,000 in the first nine months 1997 and $166,000
in the first nine months of 1996.
The following table presents the activity in the Company's allowance for
loan and foreclosed property losses and selected loan loss and real estate owned
data for the nine-month periods ended September 30, 1997 and 1996:
64
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
Nine-Month Periods
Ended September 30 1997 1996
- ------------------ -------- --------
Allowance for loan losses:
<S> <C> <C>
Balance at beginning of period $ 945 $ 594
Provision charged to expense 933 497
Acquisition of the Savings Bank -- 20
Loans and foreclosed property charged off (549) (291)
Recoveries of loans and foreclosed
property previously charged off 115 28
-------- --------
Balance at end of period $ 1,444 $ 848
======== ========
Loans receivable at period-end, gross of
the allowance for loan losses $ 75,031 $ 40,991
Ratio of allowance for loan losses to gross
loans receivable at period-end 1.92% 2.07%
Allowance for foreclosed property losses:
Balance at beginning of period $ 529 $ 366
Net change in allowance 200 844
-------- --------
Balance at end of period $ 729 $ 1,210
======== ========
Real estate owned at period-end, gross of the
allowance for foreclosed property losses $ 3,476 $ 3,222
Ratio of allowance for foreclosed property losses
to gross real estate owned at period-end 20.96% 37.55%
</TABLE>
While the Company's management believes that its present allowances for
loan and foreclosed property losses are adequate, future adjustments may be
necessary.
65
<PAGE>
INCOME FROM THE IMC PARTNERSHIP AND IMC MORTGAGE COMPANY. The Company was
an original limited partner in Industry Mortgage Company, L.P. (the "IMC
Partnership"), a non-conforming residential mortgage company based in Tampa,
Florida. The Company's initial ownership interest represented approximately
9.09% of the IMC Partnership and was accounted for under the equity method of
accounting. Therefore, the Company recognized the portion of the IMC
Partnership's net income equal to its ownership percentage in the IMC
Partnership. In the six-month period ended June 30, 1996, the Company recognized
$480,000 of income from the IMC Partnership.
The IMC Partnership converted to a corporation, IMC Mortgage Company
("IMC"), immediately before its initial public offering on June 24, 1996. The
limited partners received common stock of IMC in exchange for their IMC
Partnership interests as of June 24, 1996. The Company was issued 1,199,768
shares of IMC common stock at that time. Shares of IMC common stock are traded
on the NASDAQ National Exchange under the trading symbol "IMCC." However, the
shares received by the Company have not been registered with the Securities and
Exchange Commission ("SEC") under the Securities Act of 1933. Sales of IMC stock
by the Company are subject to SEC Rule 144 and a lock-up agreement. The lock-up
agreement limits sales of IMC stock by the Company to approximately 96,000
shares per month between August 1997 and August 1998. The share figures above
reflect a two-for-one split of IMC shares on February 13, 1997.
Following the partnership's conversion to corporate form, the Company's
investment in IMC is accounted for as an investment security available for sale
under the provisions of Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities." Such
securities are reported on a fair value basis, with unrealized gains and losses
excluded from earnings but reported as a separate component of stockholders'
equity, net of any deferred tax provision. As of September 30, 1997, the Company
owned 975,592 shares of IMC stock. The Company's stock position represented
approximately 3.2% of IMC's outstanding stock at that date. The market value of
the Company's investment in IMC was $14,290,000 and the unrealized holding gain,
net of deferred income taxes, was $8,503,000. During 1997, the Company sold
233,241 shares of IMC stock for a pre-tax gain of $2,796,000. The Company is
likely to experience volatility in its capital account in future periods because
of market price fluctuation of this investment security. As of December 31,
1997, the market value of the Company's investment in 975,592 shares of IMC
common stock was $11,585,000 and the unrealized holding gain, net of deferred
income taxes, was $6,854,000.
OTHER INCOME. In addition to interest on the loan portfolio and gains from
the sale of loans and securities, the Company derives income from underwriting
service fees, prepayment penalties, and late charge fees for delinquent loan
payments. For the three-month period ended September 30, 1997, other income
totaled $1,570,000, compared to $309,000 in the three-month period ended
September 30, 1996. For the nine-month period ended September 30, 1997, other
income totaled $3,130,000, compared to $1,401,000 in the nine-month period ended
September 30, 1996. The period-to-period increases were primarily attributable
to increases in underwriting service fees due to higher loan origination volume.
66
<PAGE>
EXPENSES. The following table sets forth information regarding components
of the Company's non-interest expenses for the three- and nine-month periods
ended September 30, 1997 and 1996.
(In thousands)
Three-Month
Periods Ended
September 30 1997 1996
- ------------ ------- -------
Compensation and related $ 4,632 $ 2,333
General and administrative 3,623 1,204
------- -------
$ 8,255 $ 3,537
======= =======
(In thousands)
Nine-Month
Periods Ended
September 30 1997 1996
- ------------ ------- -------
Compensation and related $11,478 $ 5,449
General and administrative 9,652 3,413
------- -------
$21,130 $ 8,862
======= =======
Personnel and related employee benefits expense is the Company's largest
non-interest expense. The 110.6% increase in personnel expense in the first nine
months of 1997 compared to the first nine months of 1996, and the 183.1%
increase in the first nine months of 1996 compared to the first nine months of
1995, reflect the Company's growth and the growth in mortgage loan originations
and sales. The Company had 544 full-time equivalent employees at September 30,
1997 (468 full-time and 151 part-time employees), compared to 265 full-time
equivalent employees at September 30, 1996 and 65 at September 30, 1995.
The 182.8% increase in general and administrative expenses in the first
nine months of 1997 compared to the first nine months of 1996, and the 76.3%
increase in the first nine months of 1996 compared to the first nine months of
1995, are attributable to the opening of additional retail offices and increased
home office staff to support the increased loan volume. This includes increases
in utilities, postage, office supplies, travel & entertainment, and professional
fees.
67
<PAGE>
MINORITY INTEREST IN NET INCOME OF SUBSIDIARY. Contained in the
consolidated statement of income for 1996 was a minority interest in earnings of
a subsidiary. This portion of the subsidiary's earnings was an element of
compensation paid to an officer of the Company. In 1997, the Company has
recharacterized this item as compensation expense. See the discussion under Item
6, "Executive Compensation."
INCOME TAXES. Income tax expense for the three-month period ended September
30, 1997 was $2,416,000, resulting in an effective tax rate of 41.3%. By
comparison, the Company had income tax expense of $556,000 for an effective tax
rate of 41.9% in the three-month period ended September 30, 1996.
Income tax expense for the nine-month period ended September 30, 1997 was
$4,613,000, resulting in an effective tax rate of 41.0%. By comparison, the
Company had income tax expense of $1,357,000 for an effective tax rate of 39.9%
in the nine-month period ended September 30, 1996.
The effective tax rates differ from the statutory federal rates due
primarily to state income taxes.
68
<PAGE>
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NET INCOME. The Company's net income for 1996 was $3,324,000 compared to
net income of $1,167,000 in 1995 and $371,000 in 1994. On a per share basis,
income for 1996 was $.63, compared to $.23 for 1995 and $.07 for 1994.
The per-share figures have been adjusted to reflect two-for-one stock
splits of the Company's common stock, which occurred on August 30, 1996,
December 16, 1996 and November 21, 1997.
The following table shows changes in earnings per share:
1996 1995 1994
Versus 1995 Versus 1994 Versus 1993
----------- ----------- -----------
Net earnings per share for 1995,
1994 and 1993, respectively $ .23 $ .07 $ .21
Increase (decrease) attributable to:
Gains on sale of loans 2.09 1.02 (.14)
Net interest income .11 -- (.17)
Other income .17 .17 .08
Compensation expense (.81) (.48) (.07)
Other expenses (.86) (.45) (.06)
Income taxes (.28) (.11) .20
Average shares outstanding (.02) (.01) .02
------ ------ ------
Net increase .40 .16 (.14)
------ ------ ------
Net earnings per share for 1996,
1995 and 1994, respectively $ .63 $ .23 $ .07
====== ====== ======
The return on average assets increased to 7.32% in 1996, compared to 4.06%
in 1995 and 1.67% in 1994. Return on average shareholders' equity improved to
36.44% in 1996, compared to 19.86% in 1995 and 6.80% in 1994.
69
<PAGE>
ORIGINATION OF MORTGAGE LOANS. The following table shows the loan
originations in dollars and units for the Company's broker and retail units in
1996, 1995 and 1994:
(Dollars in thousands)
Years Ended
December 31 1996 1995 1994
- ----------- --------- --------- ---------
Dollar Volume of Loan Originations:
Broker $ 162,887 $ 61,378 $ 42,033
Retail 95,946 50,127 1,046
--------- --------- ---------
Total $ 258,833 $ 111,505 $ 43,079
========= ========= =========
Number of Loans Originated:
Broker 2,670 1,023 651
Retail 1,683 835 17
--------- --------- ---------
Total 4,353 1,858 668
========= ========= =========
The increases in the dollar volume of loan originations of 132.2% in 1996 and
158.8% in 1995 reflect strong growth in both broker and retail lending
operations.
The Company's broker lending division originated $162,887,000 of
residential mortgage loans during 1996, compared to $61,378,000 in 1995 and
$42,033,000 in 1994. The 165.4% increase in originations in 1996 compared to
1995 and the 46.0% increase in 1995 compared to 1994 were due to additional
broker account representatives, and back-office capabilities. On a unit basis,
the Company originated 2,670 loans in its broker operation in 1996, compared to
1,023 loans in 1995 and 651 in 1994.
The Company's retail lending division originated $95,946,000 of residential
mortgage loans in 1996, compared to $50,127,000 in 1995 and $1,046,000 in 1994.
The 91.4% increase in 1996, compared to 1995 is attributed to additional retail
loan offices and back-office capabilities. The retail division was started in
late 1994, and therefore 1994 volume was relatively low. On a unit basis, the
Company originated 1,683 loans in its retail operation in 1996, compared to 835
loans in 1995 and 17 in 1994.
In addition to originating residential mortgage loans, the Company
occasionally purchases loans to obtain geographic diversity and yields not
obtainable in the Company's normal lending areas. However, purchases during
1996, 1995 and 1994 were minimal and the Company has no current plans to expand
the activity of purchasing pools of loans.
70
<PAGE>
The following tables summarize mortgage loan originations, by state, for
the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
(In thousands)
Years Ended
December 31 1996 1995 1994
- ----------- -------------------- -------------------- --------------------
Dollars Percent Dollars Percent Dollars Percent
-------- ------- -------- ------- -------- -------
Broker Division:
<S> <C> <C> <C> <C> <C> <C>
Georgia $ 54,488 21.1% $ 26,831 24.1% $ 10,308 23.9%
Maryland 9,609 3.7 10,626 9.5 19,344 44.9
North and South Carolina 33,568 13.0 1,477 1.3 115 0.3
Florida 36,711 14.2 18,101 16.2 3,520 8.2
Virginia 9,405 3.6 2,320 2.1 8,746 20.3
Illinois 8,631 3.3 -- -- -- --
Michigan 3,514 1.4 -- -- -- --
Ohio 3,314 1.3 -- -- -- --
Indiana 2,761 1.1 2,023 1.8 -- --
Tennessee 886 0.3 -- -- -- --
-------- ----- -------- ----- -------- -----
Total Broker Division $162,887 63.0% $ 61,378 55.0% $ 42,033 97.6%
======== ===== ======== ===== ======== =====
Retail Division:
Georgia $ 25,599 9.9% $ 13,862 12.4% $ 327 0.8%
Maryland 45,089 17.3 30,444 27.4 654 1.5
North and South Carolina 12,353 4.8 2,020 1.8 -- --
Virginia 11,108 4.3 3,801 3.4 65 0.1
Ohio 61 -- -- -- -- --
Delaware 1,736 0.7 -- -- -- --
-------- ----- -------- ----- -------- -----
Total Retail Division $ 95,946 37.0% $ 50,127 45.0% $ 1,046 2.4%
======== ===== ======== ===== ======== =====
Total originations:
Georgia $ 80,087 31.0% $ 40,693 36.5% $ 10,635 24.7%
Maryland 54,698 21.0 41,070 36.9 19,998 46.4
North and South Carolina 45,921 17.8 3,497 3.1 115 0.3
Florida 36,711 14.2 18,101 16.2 3,520 8.2
Virginia 20,513 7.9 6,121 5.5 8,811 20.4
Illinois 8,631 3.3 -- -- -- --
Michigan 3,514 1.4 -- -- -- --
Ohio 3,375 1.3 -- -- -- --
Indiana 2,761 1.1 2,023 1.8 -- --
Delaware 1,736 0.7 -- -- -- --
Tennessee 886 0.3 -- -- -- --
-------- ----- -------- ----- -------- -----
Total originations $258,833 100.0% $111,505 100.0% $ 43,079 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
71
<PAGE>
SALE OF MORTGAGE LOANS. The Company sold $228,918,000 of mortgage loans
during 1996, compared to $83,328,000 in 1995 and $34,409,000 in 1994. Sales
volume increased by 174.7% in 1996 and by 142.2% in 1995. The magnitudes of the
period-to-period changes in loan sales are consistent with and reflect the
percentage changes in mortgage loan originations in those periods.
For 1996, gain on the sale of loans was $17,955,000, which compares with
$7,298,000 and $2,184,000 in 1995 and 1994, respectively. The year-to-year
increases in the gain on loan sales were the direct result of increased loan
originations, which enabled the Company to sell more loans. Gain on the sale of
mortgage loans represented 72.2% of total revenue in 1996, compared to 61.3% of
total revenue in 1995 and 40.6% in 1994.
The weighted-average premium realized by the Company on its loan sales
increased to 6.34% in 1996, compared to 6.15% in 1995 and 5.34% in 1994. These
premiums do not include loan fees collected by the Company at the time the loans
are closed and included in the computation of gain when the loans are sold.
A substantial portion of the Company's loan sales during the three-year
period ended December 31, 1996 were to IMC. The Company sold IMC 1,536 loans
totaling $100,095,000 in 1996, compared to 504 loans totaling $37,993,000 in
1995 and 116 loans totaling $10,411,000 in 1994. The loans sold to IMC
represented 43.7%, 45.6% and 30.3% of the dollar volume of the Company's loan
sales in 1996, 1995 and 1994, respectively.
NET INTEREST INCOME. The second largest component of revenue is interest
income. Interest income in 1996 was $4,520,000, compared with $3,065,000 and
$2,556,000 in 1995 and 1994 respectively. The primary factor attributable to the
growth in interest income is the volume increase in loan receivables
outstanding.
Interest expense in 1996 was $3,121,000, compared with $2,194,000 and
$1,700,000 in 1995 and 1994 respectively. The year-to-year increases in interest
expense were the direct result of increased borrowings under the Company's
warehouse lines of credit, which were used to fund the increase in loan
origination volume.
The Company's net interest income for 1996 was $1,399,000, compared to
$871,000 in 1995 and $856,000 in 1994. Net interest income increased by $528,000
or 60.7% in 1996 compared to 1995, and increased by $15,000 or 1.7% in 1995
compared to 1994.
72
<PAGE>
PROVISION FOR LOAN LOSSES. The Company provided $690,000 during 1996 as
additions to the allowance for loan losses, compared to $274,000 in 1995 and
$42,000 in 1994.
The following table presents the activity in the Company's allowance for
loan losses and selected loan loss data for 1996, 1995 and 1994:
<TABLE>
<CAPTION>
(In thousands)
Years Ended
December 31 1996 1995 1994
- ----------- -------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year $ 594 $ 567 $ 511
Provision charged to expense 690 274 42
Acquisition of the Savings Bank 20 -- --
Loans charged off (387) (307) (69)
Recoveries of loans previously charged off 28 60 83
-------- -------- --------
Balance at end of year $ 945 $ 594 $ 567
======== ======== ========
Loans receivable at year-end, gross
of allowance for losses $ 46,368 $ 29,024 $ 18,588
Ratio of allowance for loan losses to gross
loans receivable at year-end 2.04% 2.05% 3.05%
</TABLE>
The Company's acquisition of the Savings Bank in September 1996 included
$2,531,000 of mortgage loans subject to a $20,000 allowance for loan losses.
While the Company's management believes that its present allowance for loan
losses is adequate, future adjustments may be necessary.
73
<PAGE>
PROVISION FOR FORECLOSED PROPERTY LOSSES. The Company provided $618,000
during 1996 as additions to the allowance for foreclosed property losses,
compared to $457,000 in 1995 and $149,000 in 1994.
Sales of real estate owned yielded net losses of $192,000 in 1996 and
$129,000 in 1995. The Company had no gains or losses on sales of real estate
owned in 1994.
The following table presents the activity in the Company's allowance for
foreclosed property losses and selected real estate owned data for 1996, 1995
and 1994:
<TABLE>
<CAPTION>
(In thousands)
Years Ended
December 31 1996 1995 1994
- ----------- ------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $ 366 $ 265 $ 211
Provision charged to expense 618 457 149
Amounts charged off (455) (356) (95)
------- ------- -------
Balance at end of year $ 529 $ 366 $ 265
======= ======= =======
Real estate owned at year-end, gross
of allowance for losses $ 2,606 $ 1,509 $ 2,345
Ratio of allowance for foreclosed property losses
to gross real estate owned at year-end 20.30% 24.25% 11.30%
</TABLE>
While the Company's management believes that its present allowance for
foreclosed property losses is adequate, future adjustments may be necessary.
INCOME FROM IMC PARTNERSHIP. In 1996, the Company recognized $480,000 of
income from its investment in the IMC Partnership, compared to $596,000 in 1995
and $231,000 in 1994.
As of December 31, 1996, the market value of the Company's investment in
IMC was $20,096,000 and the unrealized holding gain, net of deferred income
taxes, was $11,401,000. The Company is likely to experience volatility in its
capital account in future periods because of market price fluctuations of this
investment security.
74
<PAGE>
OTHER INCOME. In addition to interest on the loan portfolio and gains from
the sale of loans, the Company derives income from underwriting service fees,
prepayment penalties, and late charge fees for delinquent loan payments. For
1996, other income totaled $1,927,000, compared to $939,000 in 1995 and $408,000
in 1994. The year-to-year increases were primarily attributable to increases in
underwriting service fees due to higher loan origination volume.
EXPENSES. The following table sets forth information regarding components
of the Company's non-interest expenses for 1996, 1995 and 1994:
(In thousands)
Years Ended
December 31 1996 1995 1994
- ----------- -------- -------- --------
Compensation and related $ 8,017 $ 3,880 $ 1,452
General and administrative 6,853 3,050 1,337
-------- -------- --------
$ 14,870 $ 6,930 $ 2,789
======== ======== ========
Personnel and related employee benefits expense is the Company's largest
non-interest expense. The 106.6% increase in personnel expense in 1996 compared
to 1995, and the 167.2% increase in 1995 compared to 1994, reflects the
Company's growth and the growth in mortgage loan originations and sales. The
Company had 287 full-time equivalent employees at December 31, 1996 (240
full-time and 92 part-time employees), compared to 84 at December 31, 1995 and
34 at December 31, 1994.
The 124.7% increase in general and administrative expenses in 1996 compared
to 1995, and the 128.1% increase in 1995 compared to 1994, are attributable to
the opening of additional retail offices and increased home office staff to
support the increased loan volume. This includes increases in utilities,
postage, office supplies, travel & entertainment, and professional fees.
MINORITY INTEREST IN NET INCOME OF SUBSIDIARY. Contained in the
consolidated statement of income for 1996 was a minority interest in earnings of
a subsidiary. This portion of the subsidiary's earnings was an element of
compensation paid to an officer of the Company. In 1997, the Company has
recharacterized this item as compensation expense. See the discussion under Item
6, "Executive Compensation."
INCOME TAXES. Income tax expense for 1996 was $2,259,000, resulting in an
effective tax rate of 40.5%. By comparison, the Company had income tax expense
of $876,000 for an effective tax rate of 42.9% in 1995 and an income tax expense
of $328,000 for an effective tax rate of 46.9% in 1994.
The effective tax rates differ from the statutory federal rates due
primarily to state income taxes.
75
<PAGE>
FINANCIAL CONDITION
SEPTEMBER 30, 1997, DECEMBER 31, 1996 AND SEPTEMBER 30, 1996
ASSETS. The total assets of the Company were $108,414,000 at September 30,
1997, compared to total assets of $75,143,000 at December 31, 1996 and
$50,947,000 at September 30, 1996.
The $33,271,000 increase in assets between December 31, 1996 and September
30, 1997 is primarily attributable to the $28,164,000 increase in net loans
receivable.
The primary uses of funds by the Company are funding of loan originations
and the expenses associated with loan production. Net mortgage loans receivable
totaled $73,587,000 at September 30, 1997, compared to $45,423,000 at December
31, 1996 and $40,143,000 at September 30, 1996. The 62.0% increase in the first
nine months of 1997 compared to the same period in 1996 reflects the Company's
aggressive growth during the period. Net mortgage loans receivable increased by
$14,942,000, or 59.3%, in the first nine months of 1996 compared to the same
period in 1995.
In 1994, the Company adopted SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The adoption of SFAS 115 had no
effect on the operations of the Company at that time. SFAS No. 115 addressed the
accounting and reporting of investments in equity securities that have readily
determinable fair values and for all investments in debt securities. Investments
in securities are classified under SFAS No. 115 as held to maturity, trading or
available-for-sale. Investments in debt and equity securities that the Company
has the positive intent and ability to hold to maturity are classified as "held
to maturity" securities and reported at amortized cost. Debt and equity
securities that are purchased and held principally for the purpose of selling
them in the near term are classified as trading securities and reported at fair
value, with unrealized gains and losses included in earnings. Debt and equity
securities not classified as either held to maturity or trading securities are
classified as available-for-sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders' equity. Following the conversion of the IMC
Partnership to corporate form, the Company's investment in IMC is treated as an
equity security by SFAS No. 115 and is carried at the market value of the stock.
The market value of this stock was $14,290,000 at September 30, 1997 and
$20,096,000 at December 31, 1996.
The assets of the Savings Bank totaled $13,402,000 at September 30, 1997,
which represented 12.4% of the Company's consolidated total assets. The
principal assets of the Savings Bank at that date were cash and cash equivalents
and short-term investments of $6,571,000 and mortgage loans of $6,278,000.
76
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES. The primary sources of funds for the
Company consist of liabilities such as revolving warehouse lines of credit,
promissory notes, certificates of indebtedness, and FDIC-insured deposits of the
Savings Bank. The Company sells mortgage loans in the secondary market and
re-deploys the sales proceeds in its lending operations. To a lesser extent, the
proceeds of periodic loan payments and loan payoffs provide funds for lending
operations.
The Company's most important capital resource for generating cash to fund
new loans and for making payments on its warehouse facilities has been its
ability to sell its loans in the secondary market. The market value of the
Company's loans is dependent on a number of factors, including general economic
conditions, market interest rates and governmental regulations. Adverse changes
in these conditions may affect the Company's ability to sell loans in the
secondary market for acceptable prices. The ability to sell loans in the
secondary market is essential to the continuation of the Company's loan
origination operations.
The Company's borrowings (revolving warehouse loans, mortgage loans,
subordinated debt and FDIC-insured deposits) at September 30, 1997 were 63.7% of
assets, compared to 60.4% of assets at December 31, 1996 and 77.1% at September
30, 1996.
Loan origination volume is expected to continue to grow in 1998. Management
anticipates that it will need additional capital to fund this growth. New debt
financing, equity financing, and lines of credit will be evaluated with
consideration for maximizing shareholder value. Management expects that the
Company and the industry will be challenged by competition and rising
delinquencies.
LIABILITIES - REVOLVING WAREHOUSE LOANS. Total revolving warehouse loans at
September 30, 1997 were $48,810,000, compared to $34,177,000 at December 31,
1996 and $30,039,000 at September 30, 1996. The increase of $14,633,000, or
42.8%, in the revolving warehouse loans in the first nine months of 1997 is
primarily attributable to the increase of loans receivable.
As of September 30, 1997, the Company had three warehouse facilities. The
Company has a $70,000,000 warehouse and seasoned loan line of credit with a
commercial bank. The line is secured by loans originated by the Company and
bears interest at a rate of 1.75% over the one-month LIBOR rate. As of September
30, 1997, the outstanding balance on this line was $33,189,000 and the interest
rate was 7.41%. The Company may receive warehouse credit advances of 98% of the
original principal balances on pledged mortgage loans for a maximum period of
180 days after origination. If a mortgage loan is not sold within 180 days after
it is originated, it is transferred to the seasoned loan sublimit within the
line of credit. The seasoned loan sublimit has a maximum capacity of $15,000,000
and bears interest at a rate of 2.5% over the one-month LIBOR rate. As of
September 30, 1997, the outstanding balance on the seasoned loan sublimit was
$6,227,000 and the interest rate was 8.41%. The Company may receive advances
under the seasoned loan sublimit up to 90% of current principal balance, and
loans may be financed in this manner for an indefinite period. The line was due
to expire on January 28, 1998 and was subject to renewal. However, the Company
terminated this credit line and replaced it with a new credit line agreement,
effective December 10, 1997.
77
<PAGE>
The Company also has a $25,000,000 warehouse line of credit with a
commercial bank. The line is secured by loans originated by the Company and
bears interest at a rate of 1.75% over the one-month LIBOR rate or the prime
interest rate. As of September 30, 1997, the outstanding balance on this line
was $3,788,000 and the interest rate was 7.41%. The Company may receive
warehouse credit advances of 98% of the original principal balances on pledged
mortgage loans for a maximum period of 120 days after origination. The line was
due to expire on July 17, 1998 and was subject to renewal. However, the Company
terminated this credit line and replaced it with a new credit line agreement,
effective December 10, 1997.
The Company also has an $8,000,000 warehouse line of credit with IMC. The
line is secured by loans originated by the Company and bears interest at a rate
of 1.75% over the one-month LIBOR rate. There was no outstanding balance on this
line at September 30, 1997. The Company may receive warehouse credit advances of
100% of the original principal balances on pledged mortgage loans for a maximum
period of 30 days after origination. The line was due to expire on January 29,
1998 and was subject to renewal. However, the Company terminated this credit
line and replaced it with a new credit line agreement, effective December 10,
1997.
The Company draws on its revolving warehouse lines of credit as needed to
fund loan production. As of September 30, 1997, the Company had issued loan
funding checks totaling $11,833,000 which had not cleared the Company's checking
account and for which the Company had not drawn funds from its warehouse lines.
These checks cleared the Company's bank accounts in the first few business days
of October 1997 and most were funded with new warehouse line draws.
On December 10, 1997, the Company obtained a $100,000,000 warehouse line of
credit from a commercial bank syndicate. The syndicate's lead bank is Chase Bank
of Texas. Other banks in the syndicate are BankBoston, National City Bank,
Comerica Bank and Compass Bank. The line is secured by loans originated by the
Company and bears interest at a rate of 1.5% over the one-month LIBOR rate. This
line of credit replaced the three existing lines of credit. The line expires on
December 31, 1999 and is subject to renewal. The Company may receive warehouse
credit advances of 98% of the original principal balances on pledged mortgage
loans for a maximum period of 180 days after origination. As of December 31,
1997, $46,734,000 was outstanding under this facility. Also on December 10,
1997, the Company obtained a $25,000,000 seasoned loan line of credit from the
commercial bank syndicate. This line is secured by loans originated by the
Company. The seasoned loan line of credit bears interest at a rate of 2.5% over
the one-month LIBOR rate, and the Company may receive credit advances of 90% of
the current principal balances on pledged mortgage loans. As of December 31,
1997, $5,754,000 was outstanding under this facility.
78
<PAGE>
LIABILITIES - OTHER BORROWINGS. The Company has utilized promissory notes
and certificates of indebtedness to help funds its operations. These borrowings
are subordinated to the Company's warehouse lines of credit. These notes and
certificates totaled $9,070,000 at September 30, 1997, compared to $9,183,000 at
December 31, 1996 and $8,735,000 at September 30, 1996. The promissory notes are
loans from insiders (shareholders, directors and employees) for periods of one
to five years and interest rates between 8.00% and 10.25%, with a
weighted-average rate of 9.62% at September 30, 1997. The certificates of
indebtedness are uninsured deposits authorized for financial institutions like
the Company which have Virginia industrial loan association charters. The
certificates of indebtedness are loans from Virginia residents for periods of
one to five years and interest rates between 6.50% and 10.00%, with a
weighted-average rate of 9.46% at September 30, 1997. The Company is not
currently soliciting new promissory notes or certificates of indebtedness.
The Savings Bank's deposits totaled $9,984,000 at September 30, 1997,
compared to $1,576,000 at December 31, 1996 and $1,379,000 at September 30,
1996. The weighted-average rate on the deposits was 5.98% at September 30, 1997.
During the period from September 11, 1996 to June 30, 1997, the Savings Bank did
not actively solicit new deposits, as it closed down its Annandale,
Virginia-based loan production operations, made its transition to Virginia
Beach, Virginia, and developed lending synergies with its new affiliates. The
Savings Bank raised $7,705,000 of net new deposits during the quarter ended
September 30, 1997, in anticipation of beginning new lending operations.
Certificate accounts totaling $8,012,000 will mature in the twelve-month period
ending September 30, 1998. The Company's management believes that most of the
maturing liabilities will be reinvested with the Company.
The Company's executive and administrative offices are located at 3420
Holland Road, Virginia Beach, Virginia. The building is owned by the Company. In
June, 1997 the Company purchased a second building adjacent to its headquarters
to accommodate its growth plans. The two buildings are subject to total mortgage
debt of $1,236,000 as of September 30, 1997, compared to $478,000 at December
31, 1996 and $494,000 at September 30, 1996. The weighted-average rate of the
loans at September 30, 1997 was 8.40%.
SHAREHOLDERS' EQUITY. Total shareholders' equity at September 30, 1997 was
$25,294,000, which compares to $21,209,000 at December 31, 1996 and $8,569,000
at September 30, 1996. The $4,085,000 net increase in the first nine months of
1997 is primarily due to net income of $6,650,000 and the reduction in the net
unrealized gain on the investment in IMC of $2,898,000.
Also during the first nine months of 1997, the Company issued 353,672
shares of common stock upon the exercise of stock warrants for $332,000. This
share figure has been adjusted for the two-for-one stock split which occurred on
November 21, 1997.
79
<PAGE>
SAVINGS BANK REGULATORY LIQUIDITY. Liquidity is the ability to meet present
and future financial obligations, either through the acquisition of additional
liabilities or from the sale or maturity of existing assets, with minimal loss.
Regulations of the OTS require thrift associations and/or savings banks to
maintain liquid assets at certain levels. At present, the required ratio of
liquid assets to withdrawable savings and borrowings due in one year or less is
5.0%. Penalties are assessed for noncompliance. In 1996 and the first nine
months of 1997, the Savings Bank maintained liquidity in excess of the required
amount, and management anticipates that it will continue to do so.
SAVINGS BANK REGULATORY CAPITAL. At September 30, 1997, the Savings Bank's
net worth under generally accepted accounting principles ("GAAP") was
$3,129,000. OTS Regulations require that savings institutions maintain the
following capital levels: (1) tangible capital of at least 1.5% of total
adjusted assets, (2) core capital of 4.0% of total adjusted assets, and (3)
overall risk-based capital of 8.0% of total risk-weighted assets. As of
September 30, 1997, the Savings Bank satisfied all of the regulatory capital
requirements, as shown in the following table reconciling the Savings Bank's
GAAP capital to regulatory capital:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
(In thousands) Capital Capital Capital
------- ------- -------
<S> <C> <C> <C>
GAAP capital $ 3,129 $ 3,129 $ 3,129
Less: unrealized gain on securities (2) (2) (2)
Nonallowable asset: goodwill (135) (135) (135)
Additional capital item: general allowance -- -- 51
------- ------- -------
Regulatory capital - computed 2,992 2,992 3,043
Minimum capital requirement 199 531 564
------- ------- -------
Excess regulatory capital $ 2,793 $ 2,461 $ 2,479
======= ======= =======
Ratios:
Regulatory capital - computed 22.56% 22.56% 43.14%
Minimum capital requirement 1.50 4.00 8.00
------- ------- -------
Excess regulatory capital 21.06% 18.56% 35.14%
======= ======= =======
</TABLE>
Management believes that the Savings Bank can remain in compliance with its
capital requirements.
The Company is not aware of any other trends, events or uncertainties which
will have or that are likely to have a material effect on the Company's or the
Savings Bank's liquidity, capital resources or operations. The Company is not
aware of any current recommendations by regulatory authorities which if they
were implemented would have such an effect.
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<PAGE>
DECEMBER 31, 1996, 1995 AND 1994
ASSETS. The total assets of the Company were $75,143,000 at December 31,
1996, compared to total assets of $34,485,000 at December 31, 1995 and
$23,109,000 at December 31, 1994.
The 117.9% increase in assets during 1996 is primarily attributable to the
increase in loans receivable, the increase in the carrying value of the
company's ownership interest in IMC, and the Company's purchase of the Savings
Bank, while the 49.2% increase in assets in 1995 is primarily attributable to
the increase in loans receivable.
The primary uses of funds by the Company is funding of loan originations
and the expenses associated with loan production. Net mortgage loans receivable
totaled $45,423,000 at December 31, 1996, compared to $28,430,000 at December
31, 1995 and $18,021,000 at December 31, 1994. The 59.8% increase in 1996 and
the 57.8% increase in 1995 reflect the Company's aggressive growth during the
past two years.
At December 31, 1995, the Company's investment in the Partnership was
carried at a cost of $713,000 because the entity was not an equity security and
therefore was not subject to SFAS No. 115. Following the conversion of the
Partnership to corporate form, the Company's investment in IMC is treated as an
equity security by SFAS No. 115 and is carried at the market value of the stock.
The market value of this stock was $20,096,000 at December 31, 1996.
The purchase of the Savings Bank resulted in an increase in cash and other
assets of $4,876,000 at December 31, 1996. The Company acquired 87.3% of the
common stock of the Savings Bank on September 11, 1996. The remaining 12.7% of
the Savings Bank's stock was acquired during the first six months of 1997. The
Company paid a premium of $150,000 over the Savings Bank's book value.
LIQUIDITY AND CAPITAL RESOURCES. The primary sources of funds for the
Company consist of liabilities such as revolving warehouse lines of credit,
promissory notes, certificates of indebtedness, and FDIC-insured deposits of the
Savings Bank, as well as mortgage loan sales, loan repayments, and funds
provided from operations.
The Company sells mortgage loans in the secondary market and re-deploys the
sales proceeds in its lending operations. To a lesser extent, the proceeds of
periodic loan payments and loan payoffs provide funds for lending operations.
The Company's borrowings (revolving warehouse loans, mortgage loans,
subordinated debt and FDIC-insured deposits) at December 31, 1996 were 60.4% of
assets, compared to 78.3% of assets at December 31, 1995 and 73.7% at December
31, 1994.
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<PAGE>
LIABILITIES. Total revolving warehouse loans at December 31, 1996 were
$34,177,000, compared to $19,566,000 at December 31, 1995 and $7,727,000 at
December 31, 1994. The 74.7% and 153.2% increases in the revolving warehouse
loans in 1996 and 1995, respectively, are primarily attributable to the increase
of loans receivable.
Promissory notes and certificates of indebtedness totaled $9,182,000 at
December 31, 1996, compared to $6,905,000 at December 31, 1995 and $8,546,000 at
December 31, 1994. The 1996 net increase of $2,277,000 is primarily due to the
issuance of a $1,500,000 promissory note issued to a single investor.
The Savings Bank's deposits totaled $1,576,000 at December 31, 1996,
compared to $1,379,000 at the September 11, 1996 acquisition date. During the
period from September 11, 1996 to December 31, 1996, the Savings Bank did not
actively solicit new deposits, as it was closing down its Annandale,
Virginia-based loan production operations and was making its transition to
Virginia Beach, Virginia. Of the certificate accounts as of December 31, 1996, a
total of $1,477,000 was scheduled to mature in the twelve-month period ending
December 31, 1997.
SHAREHOLDERS' EQUITY. Total shareholders' equity at December 31, 1996 was
$21,209,000, which compares to $6,236,000 at December 31, 1995. The $14,973,000
increase is primarily due to net income of $3,324,000 and the unrealized gain on
the investment in IMC of $11,401,000.
Also during 1996, the Company paid cash dividends of $199,000, sold 44,000
shares of common stock for proceeds of $440,000, and issued 9,296 shares of
common stock upon the exercise of stock warrants for $9,000. The share figures
have been adjusted for the two-for-one stock split which occurred on November
21, 1997.
82
<PAGE>
NEW ACCOUNTING STANDARDS
In March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", was issued. The Statement
became effective for fiscal years beginning after December 15, 1995, with
earlier adoption allowed. The Statement requires that long-lived assets and
certain identifiable intangibles to be held and used by a company to be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. In performing the review
for recoverability, the Company should estimate the future cash flows expected
to result for the use of the asset and its eventual disposition. An impairment
loss would be recognized if the sum of the expected future cash flows,
undiscounted, is less than the carrying amount of the asset. The Statement also
establishes standards for recording an impairment loss for certain assets that
are subject to disposal. SFAS 121 excludes financial instruments, long-term
customer relationships of financial institutions, mortgage and other servicing
rights, and deferred tax assets. The impact of SFAS 121 was immaterial to the
Company's consolidated financial statements.
In October 1995, SFAS No. 123, "Accounting for Stock Based Compensation,"
was issued, effective for fiscal years beginning after December 15, 1995. The
standard encourages, but does not require, companies to recognize compensation
expense for grants of stock, stock options, and other equity instruments to
employees based on the new fair value accounting rules. The Company is currently
following Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related Interpretations in accounting for employee
equity instruments. Prospectively, the Company has determined that it will not
adopt SFAS 123 for expense recognition purposes. The Company will continue to
follow the provisions of APB 25 and make the pro forma disclosures as required
by SFAS 123. Pro forma disclosures are not required for awards issued prior to
December 15, 1994. The Company does not expect that the statement will have a
material impact on results of operations or financial position.
In June 1996, SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities" was issued. This statement
supercedes SFAS No. 122, "Accounting for Mortgage Servicing Rights" and requires
that after a transfer of financial assets, an entity recognizes the financial
and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This Statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996. The Company adopted this statement on January
1, 1997 and has determined that it will not have a material effect on the
results of operations or financial position for the year ended December 31,
1997.
83
<PAGE>
Effective December 31, 1997, the Company will adopt SFAS No. 128, "Earnings
per Share," which will supersede Accounting Principles Board ("APB") Opinion No.
15, "Earnings per Share." This new statement requires that "basic earnings per
share" be computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period. "Diluted
earnings per share," if different, reflects potential dilution if stock options
or other contracts would result in the issue or exercise of additional shares of
common stock that shared in the earnings. "Basic earnings per share" and
"diluted earnings per share" will replace "primary earnings per share" and
"fully diluted earnings per share," respectively, as described under APB Opinion
No. 15, and must be reported on the income statement. SFAS No. 128 may not be
adopted for quarterly periods prior to December 31, 1997, but supplemental pro
forma disclosure of the impact of the new statement may be reported. Management
does not anticipate any material change in the earnings per share amounts as
presently computed as a result of adopting this new standard.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued,
effective for fiscal years beginning after December 15, 1997. The new statement
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
capital in the equity section of the statement of financial condition. The
Company is currently evaluating the effect this statement will have on the
financial statements.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," was issued, effective for fiscal years beginning after
December 15, 1997. The new statement requires that a public business enterprise
report financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. The Company is
currently evaluating the effect this statement will have on the financial
statements.
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<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES. The consolidated financial
statements and related data presented in this document have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of the financial position and operating results of the Company in
terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
Virtually all of the assets of the Company are monetary in nature. As a
result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or with the same
magnitude as the prices of goods and services. Inflation affects the Company
most significantly in the area of loan originations and can have a substantial
effect on interest rates. Interest rates normally increase during periods of
high inflation and decrease during periods of low inflation
Because the Company sells a significant portion of the loans it originates,
inflation and interest rates have a diminished effect on the Company's results
of operations. The Savings Bank is expected to continue to build its portfolio
of loans held for investment, and this portfolio will be more sensitive to the
effects of inflation and changes in interest rates.
Profitability may be directly affected by the level and fluctuation of
interest rates, which affect the Company's ability to earn a spread between
interest received on its loans and the costs of its borrowings. The
profitability of the Company is likely to be adversely affected during any
period of unexpected or rapid changes in interest rates. A substantial and
sustained increase in interest rates could adversely affect the ability of the
Company to originate and purchase loans and affect the mix of first and junior
lien mortgage loan products. Generally, first mortgage production increases
relative to junior lien mortgage production in response to low interest rates
and junior lien mortgage loan production increases relative to first mortgage
loan production during periods of high interest rates. A significant decline in
interest rates could decrease the size of the Company's future loan servicing
portfolio by increasing the level of loan prepayments. Additionally, to the
extent servicing rights and interest-only and residual classes of certificates
are capitalized on the Company's books from future loan sales through
securitization, higher than anticipated rates of loan prepayments or losses
could require the Company to write down the value of such servicing rights and
interest-only and residual certificates, adversely affecting earnings.
Conversely, lower than anticipated rates of loan prepayments or lower losses
could allow the Company to increase the value of interest-only and residual
certificates, which could have a favorable effect on the Company's results of
operations and financial condition. Fluctuating interest rates may also affect
the net interest income earned by the Company resulting from the difference
between the yield to the Company on loans held pending sales and the interest
paid by the Company for funds borrowed under the Company's warehouse facilities.
In addition, inverse or flattened interest yield curves could have an adverse
impact on the profitability of the Company because the loans pooled and sold by
the Company have long-term rates, while the senior interest in the related REMIC
trusts to be issued when the Company begins its securitization activities are
expected to be priced on the basis of intermediate-term rates.
The Company may enter into agreements with other financial institutions to
exchange for cash its interest-only and residual certificates, to provide a
source of cash flow to fund the Company's securitization program and other
liquidity needs. While the Company would prefer to use other sources to meet its
cash flow needs, no assurance can be given that such transactions will not be
necessary.
85
<PAGE>
MARKET RISK MANAGEMENT - ASSET/LIABILITY MANAGEMENT
The Company's primary market risk exposure is interest rate risk.
Fluctuations in interest rates will impact both the level of interest income and
interest expense and the market value of the Company's interest-earning assets
and interest-bearing liabilities.
Management strives to manage the maturity or repricing match between assets
and liabilities. The degree to which the Company is "mismatched" in its
maturities is a primary measure of interest rate risk. In periods of stable
interest rates, net interest income can be increased by financing higher
yielding long-term mortgage loan assets with lower cost short-term Savings Bank
deposits and borrowings. Although such a strategy may increase profits in the
short run, it increases the risk of exposure to rising interest rates and can
result in funding costs rising faster than asset yields. The Company attempts to
limit its interest rate risk by selling a majority of the fixed rate mortgage
loans that it originates.
Contractual principal repayments of loans do not necessarily reflect the
actual term of the Company's loan portfolio. The average lives of mortgage loans
are substantially less than their contractual terms because of loan prepayments
and because of enforcement of due-on-sale clauses, which gives the Company the
right to declare a loan immediately due and payable in the event, among other
things, the borrower sells the real property subject to the mortgage and the
loan is not repaid. In addition, certain borrowers increase their equity in the
security property by making payments in excess of those required under the terms
of the mortgage.
The majority of the loans originated by the Company are sold through the
Company's loan sale strategies in an attempt to limit its exposure to interest
rate risk in addition to generating cash revenues. The Company sold
approximately 90% and 88% of the total loans originated during the years ended
December 31,1996 and 1997, respectively, and expects to sell the majority of its
loan originations during the same twelve month period in which they are funded
by the Company in future periods. As a result, loans are held on average for
less than 12 months in the Company's portfolio of Loans Held for Sale. The "gap
position", defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing in one year or less, was
negative at December 31, 1997, as anticipated, and is expected to remain
negative in future periods. The Company has no quantitative target range for
past gap positions, nor any anticipated ranges for future periods due to the
fact that the Company sells the majority of its loans within a twelve month
period while the gap position is a static illustration of the contractual
repayment schedule for loans. The Company's one-year gap was a negative 50.51%
of total assets at December 31, 1997, as illustrated in the table on the
following page:
86
<PAGE>
(In thousands)
<TABLE>
<CAPTION>
One Year Three to More Than
Total or Less Two Years Four Years Four Years
---------- ---------- ---------- ---------- ----------
Interest-earning assets:
<S> <C> <C> <C> <C> <C>
Loans receivable (1) $ 82,383 $ 1,656 $ 970 $ 2,307 $ 77,399
Cash and other interest-
earning assets 7,565 7,565 -- -- --
---------- ---------- ---------- ---------- ----------
89,948 $ 9,221 $ 970 $ 2,307 $ 77,399
========== ========== ========== ==========
Non-interest-earning assets:
Allowance for loan losses (1,687)
Investment in IMC 11,585
Premises and equipment, net 4,530
Other 13,749
----------
Total assets $ 118,125
==========
Interest-bearing liabilities:
Revolving warehouse lines $ 52,488 $ 52,488 $ -- $ -- $ --
FDIC-insured deposits 17,815 13,268 4,349 198 --
Other interest-
bearing liabilities 11,296 3,133 3,467 2,627 2,069
---------- ---------- ---------- ---------- ----------
81,599 $ 68,889 $ 7,816 $ 2,825 $ 2,069
========== ========== ========== ==========
Non-interest-bearing liabilities 11,471
----------
Total liabilities 93,070
Shareholders' equity 25,055
----------
Total liabilities and equity $ 118,125
==========
Maturity/repricing gap $ (59,688) $ (6,846) $ (468) $ 75,330
========== ========== ========== ==========
Cumulative gap $ (59,688) $ (66,513) $ (66,981) $ 8,349
========== ========== ========== ==========
As percent of total assets - 50.51% - 56.31% - 56.70% 7.07%
========== ========== ========== ==========
As percent of total interest earning assets - 66.36% - 73.95% - 74.47% 9.28%
========== ========== ========== ==========
Ratio of Cumulative Interest Earning Assets to
Cumulative Interest Earning Liabilities .13x .12x .81x 37x
========== ========== ========== ==========
</TABLE>
=============
(3) Loans shown gross of allowance for loan losses, net of premiums/discounts.
87
<PAGE>
The majority of the loans currently being held by the Company are expected
to be sold through the Company's loan sale strategies, although in future
periods the Savings Bank is expected to build a portfolio of loans for
investment.
INTEREST RATE RISK
The principal quantitative disclosure of the Company's market risks is the
gap table in the previous section. The gap table shows that the Company's
one-year gap was a negative 50.51% of total assets at December 31, 1997. The
Company originates fixed-rate, fixed-term mortgage loans for sale in the
secondary market. While most of these loans are sold within a month or two of
origination, for purposes of the gap table the loans are shown based on their
contractual scheduled maturities. As of December 31, 1997, 86.0% of the
principal on the loans was expected to be received more than four years from
that date. However, the Company's activities are financed with short-term loans
and credit lines, 84.4% of which reprice within one year of December 31, 1997.
The Company attempts to limit its interest rate risk by selling a majority of
the fixed rate loans that it originates. If the Company's ability to sell such
fixed-rate, fixed-term mortgage loans on a timely basis were to be limited, the
Company could be subject to substantial interest rate risk.
Profitability may be directly affected by the levels of and fluctuations in
interest rates, which affect the Company's ability to earn a spread between
interest received on its loans and the costs of borrowings. The profitability of
the Company is likely to be adversely affected during any period of unexpected
or rapid changes in interest rates. For example, a substantial or sustained
increase in interest rates could adversely affect the ability of the Company to
purchase and originate loans and would reduce the value of loans held for sale.
A significant decline in interest rates could decrease the size of the Company's
loan servicing portfolio by increasing the level of loan prepayments.
Additionally, to the extent mortgage loan servicing rights in future periods
have been capitalized on the books of the Company, higher than anticipated rates
of loan prepayments or losses could require the Company to write down the value
of these assets, adversely affecting earnings.
In an environment of stable interest rates, the Company's gains on the sale
of mortgage loans would generally be limited to those gains resulting from the
yield differential between mortgage loan interest rates and rates required by
secondary market purchasers. A loss from the sale of a loan may occur if
interest rates increase between the time the Company establishes the interest
rate on a loan and the time the loan is sold. Fluctuating interest rates also
may affect the net interest income earned by the Company, resulting from the
difference between the yield to the Company on loans held pending sale and the
interest paid by the Company for funds borrowed, including the Company's
warehouse facilities and the Savings Bank's FHLB advances and FDIC-insured
customer deposits. Because of the uncertainty of future loan origination volume
and the future level of interest rates, there can be no assurance that the
Company will realize gains on the sale of financial assets in future periods.
88
<PAGE>
The Savings Bank is building a portfolio of loans to be held for
investment. The sale of fixed rate product is intended to protect the Savings
Bank from precipitous changes in the general level of interest rates. The
valuation of adjustable rate mortgage loans is not as directly dependent on the
level of interest rates as is the value of fixed rate loans. Decisions to hold
or sell adjustable rate mortgage loans are based on the need for such loans in
the Savings Bank's portfolio, which is influenced by the level of market
interest rates and the Savings Bank's asset/liability management strategy. As
with other investments, the Savings Bank regularly monitors the appropriateness
of the level of adjustable rate mortgage loans in its portfolio and may decide
from time to time to sell such loans and reinvest the proceeds in other
adjustable rate investments.
89
<PAGE>
ASSET QUALITY
The following table summarizes all of the Company's delinquent loans at
September 30, 1997, and 1996:
(In thousands) 1997 1996
-------- --------
Delinquent 31 to 60 days $ 1,293 $ 1,099
Delinquent 61 to 90 days 733 586
Delinquent 91 to 120 days 933 166
Delinquent 121 days or more 1,186 1,088
-------- --------
Total delinquent loans $ 4,145 $ 2,939
======== ========
Total loans receivable outstanding, gross of
the allowance for loan losses $ 75,031 $ 40,991
======== ========
Delinquent loans as a percentage of
total loans outstanding:
Delinquent 31 to 60 days 1.72% 2.68%
Delinquent 61 to 90 days 0.98 1.43
Delinquent 91 to 120 days 1.24 0.41
Delinquent 121 days or more 1.58 2.65
-------- --------
Total delinquent loans as a percentage
of total loans outstanding (1) 5.52% 7.17%
======== ========
=============
(1) Includes loans in foreclosure proceedings and delinquent loans to borrowers
in bankruptcy proceedings, but excludes real estate owned.
Interest on most loans is accrued until they become 31 days or more past
due. Interest on loans held for investment by the Savings Bank is accrued until
the loans become 90 days or more past due. The amount of additional interest
that would have been recorded had the loans not been placed on nonaccrual status
was approximately $126,000 and $93,000 in the nine-month periods ended September
30, 1997 and 1996, respectively.
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<PAGE>
The following table summarizes all of the Company's delinquent loans at
December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Delinquent 31 to 60 days $ 1,519 $ 1,039 $ 751
Delinquent 61 to 90 days 390 670 141
Delinquent 91 to 120 days 363 245 89
Delinquent 121 days or more 794 624 326
-------- -------- --------
Total delinquent loans $ 3,066 $ 2,578 $ 1,307
======== ======== ========
Total loans receivable outstanding, gross of
the allowance for loan losses $ 46,368 $ 29,024 $ 18,588
======== ======== ========
Delinquent loans as a percentage of
total loans outstanding:
Delinquent 31 to 60 days 3.28% 3.58% 4.04%
Delinquent 61 to 90 days 0.84 2.31 0.76
Delinquent 91 to 120 days 0.78 0.84 0.48
Delinquent 121 days or more 1.71 2.15 1.75
-------- -------- --------
Total delinquent loans as a percentage
of total loans outstanding 6.61% 8.88% 7.03%
======== ======== ========
</TABLE>
The amount of additional interest that would have been recorded had the
loans not been placed on nonaccrual status was approximately $91,000, $69,000,
and $39,000 in 1996, 1995 and 1994, respectively.
91
<PAGE>
Effective January 1, 1995, the Company adopted the provisions of SFAS No.
114, "Accounting by Creditors for Impairment of a Loan." The Statement was
issued in May 1993 and is effective for fiscal years beginning after December
15, 1994. Statement 114 was further amended in October 1994 by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan Income Recognition and
Disclosures." Statement 114, as amended by SFAS 118, requires that an impaired
loan be measured based on the present value of expected future cash flows
discounted at the effective interest rate of the loan, or at fair value of the
loan's collateral for "collateral dependent" loans. A loan is considered
impaired when it is probable that a creditor will be unable to collect all
interest and principal payments as scheduled in the loan agreement. A loan is
not considered impaired during a period of delay in payment if the ultimate
collectibility of all amounts due is expected. A valuation allowance is required
to the extent that the measure of the impaired loans is less than the recorded
investment.
SFAS 114 does not apply to larger groups of homogeneous loans such as
consumer installment and real estate mortgage loans, which are collectively
evaluated for impairment. Impaired loans are therefore primarily business loans,
which include commercial loans and income property and construction real estate
loans. Most of the Company's loans are collectively evaluated for impairment.
The Company's impaired loans are nonaccrual loans, as generally loans are placed
on nonaccrual status on the earlier of the date that principal or interest
amounts are 30 days or more past due (90 days or more in the case of loan held
by the Savings Bank) or the date that collection of such amounts is judged
uncertain based on an evaluation of the net realizable value of the collateral
and the financial strength of the borrower.
The adoption of SFAS 114 and 118 did not result in any additional provision
for credit losses at January 1, 1995. At December 31, 1996 and 1995, the
recorded investment in loans for which impairment has been determined in
accordance with SFAS 114 totaled $1,157,000 and $869,000. The average recorded
investment in impaired loans for the years ended December 31, 1996 and 1995 was
approximately $64,000 and $86,000, respectively.
SFAS 118 allows a creditor to use existing methods for recognizing interest
income on an impaired loan. Consistent with the Company's method for nonaccrual
loans, interest receipts for impaired loans are recognized as interest income or
are applied to principal when the ultimate collectibility of principal is in
doubt. Interest income recognized related to these loans was approximately
$13,000 and $10,000 during 1996 and 1995, respectively. Due to the homogenous
nature and the collateral securing these loans, there is no corresponding
valuation allowance.
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<PAGE>
LIQUIDITY - NEGATIVE CASH FLOW
The Company's consolidated statement of cash flows has three components:
opertaing activities, investing activities and financing activities. As a result
of its increased volume of loan originations, the Company has operated, and
expects to continue to operate, on a negative cash flow basis. During 1996, 1995
and 1994, the Company used $10,553,000, $7,872,000 and $370,000 respectively, in
its operating activities,due primarily to an increase in mortgage loans
originated. Similarily, the Company operated on a negative cash flow basis
during the nine-month periods ended September 30, 1997 and 1996, using
$19,158,000 and $10,911,000, respectively, more than was generated by
operations. While the sale of loans through whole loan sales generates immediate
cash flows on the date of sale, the increases in originations have been
outpacing its sales. Net cash of $17,726,000, $9,600,000 and $700,000 was
provided by financing activities in 1996, 1995 and 1994, respectively. Net cash
of $24,020,000 and $12,563,000 was provided by financing activities in the
nine-month periods ended September 30, 1997 and 1996, respectively. If the
available capital sources of the Company were to decrease significantly, the
rate of growth of the Company would be negatively affected.
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<PAGE>
ITEM 3 - PROPERTIES
PROPERTIES
The Company's executive and administrative offices are located at 3420
Holland Road, Virginia Beach, Virginia. The building consists of approximately
15,000 square feet and is owned by the Company. In June 1997, the Company
purchased a building adjacent to its headquarters to accommodate its growth
plans. The purchase price of the building was $1,060,000 and it was financed
with a mortgage loan of $800,000. The second building consists of approximately
20,000 square feet. The Company occupies approximately 17,000 square feet in
this building, and the remainder is leased to third-party tenants. The two
buildings are subject to total mortgage debt of $1,236,000 as of September 30,
1997.
As of September 30, 1997 the Company had leases for regional broker lending
offices, retail lending offices, and the Savings Bank's administrative office.
These facilities aggregate approximately 57,000 square feet and are leased under
terms which vary as to duration. In general, the leases expire between January
1998 and October 2002, and provide rent escalations tied to either increases in
the lessor's operating expenses or fluctuations in the consumer price index in
the relevant geographic area.
Lease expense was $955,000, $317,000 and $142,000 in 1997, 1996 and 1995,
respectively. Total minimum lease payments under noncancelable operating leases
with remaining terms in excess of one year as of December 31, 1997 were as
follows (in thousands):
1998 $ 1,173
1999 856
2000 433
2001 211
2002 113
Thereafter 16
--------
$ 2,802
========
The Company anticipates that in the normal course of business it will lease
additional office space as it opens new retail loan origination locations. The
Company is also considering relocating the Virginia Beach, Virginia headquarters
to a new facility, which would house all home office operations in one building.
Currently, the Company has no specific plan to make this change in the home
office facility.
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ITEM 4 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Persons who were beneficial owners of 5% or more of the issued and
outstanding Common Stock of the Company as of January 15, 1998 are shown in the
following table. Beneficial ownership includes shares, if any, held in the name
of the spouse, minor children or other relatives of the nominee living in such
person's home, as well as shares, if any, held in the name of another person
under an arrangement whereby the director or executive officer can vest title in
himself at once or at some future time.
Name and Address Amount and Nature Percent of
of Beneficial Owner Beneficial Ownership Common Stock
-------------------------- -------------------- ------------
Allen D. Wykle (1)(2) 1,822,357 33.06%
1062 Normandy Trace Road
Tampa, Florida 33602
Leon H. Perlin (3) 938,256 17.02
3360 South Ocean Boulevard
Apartment 5H2
Palm Beach, Florida 33480
JAM Partners, L.P. (4)
One Fifth Avenue
New York, New York 10003 290,800 5.28
- ---------------------
(1) Mr. Wykle's shares exclude 4,000 shares registered to his adult children and
his grandchildren, as to which Mr. Wykle disclaims beneficial ownership.
Also includes beneficial ownership of 333 shares issuable upon the exercise
of stock options exercisable within 60 days of January 15, 1998, and
excludes 667 shares subject to stock options that cannot be exercised within
60 days of January 15, 1998.
(2) Mr. Wykle and Mr. Stanley W. Broaddus are Co-Trustees of the Company's
Profit-Sharing Plan, which owns 39,680 of the Company's Common Stock. They
share voting power. Mr. Wykle's ownership interest is 65%. Mr. Broaddus'
share is 15%. All of the 39,680 shares owned by the Profit-Sharing Plan are
included under Mr. Wykle's shares for the purposes of this disclosure,
except for the 15% owned by Mr. Broaddus. Mr. Wykle disclaims beneficial
ownership of all but the 65% he owns in the Profit-Sharing Plan.
(3) Mr. Perlin's shares include 594,000 shares owned by his wife.
(4) JAM Partners, L.P. is a Delaware limited partnership. It is an investment
partnership managed by Jacobs Asset Management LLC. The General Partner is
JAM Managers, LLC. The capital of JAM Partners, L.P. at January 1, 1998 was
approximately $35,500,000. JAM Partners, L.P.'s shares include 260,000 it
owns directly. Also included are 20,000 shares owned directly by Sy Jacobs
and 10,800 shares owned directly by Bernard Sucher and his wife. Mr. Jacobs
and Mr. Sucher are general partners in JAM Managers LLC.
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SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as of January 15, 1998 regarding
the number of shares of Common Stock beneficially owned by all directors and
executive officers:
Common Stock Percentage of
Name Beneficially Owned Class
---- ------------------ -----
Directors:
Allen D. Wykle (1)(2)(6) 1,822,357 33.06%
Leon H. Perlin (3) 938,256 17.02
Oscar S. Warner (4) 64,000 1.16
Arthur Peregoff (5) 81,800 1.48
Stanley W. Broaddus (1)(6) 133,805 2.31
Robert M. Salter 4,464 *
Jean S. Schwindt (7) 62,400 1.13
Neil W. Phelan (1) 10,453 *
Barry C. Diggins 111,034 2.01
Executive officers who are
not directors:
Eric S. Yeakel (1) 333 *
Gregory W. Gleason 1,000 *
All present executive
officers and directors
as a group (11 persons) (1) 3,229,902 55.58%
- ---------------------
* Owns less than 1% of class.
(1) Includes beneficial ownership of 333 shares issuable upon the exercise of
stock options exercisable within 60 days of January 15, 1998, and excludes
667 shares subject to stock options that cannot be exercised within 60 days
of January 15, 1998.
(2) Mr. Wykle's shares excludes 4,000 shares registered to his adult children
and his grandchildren, as to which Mr. Wykle disclaims beneficial ownership.
(3) Mr. Perlin's shares include 594,000 shares owned by his wife.
(4) Mr. Warner's shares include 4,000 shares owned by his wife, and excludes
30,000 shares registered to his adult children and his grandchildren, as to
which Mr. Warner disclaims beneficial ownership.
(5) Mr. Peregoff's shares are held jointly with his wife. The shares exclude
4,648 shares registered to Mr. Pergoff's adult children and his
grandchildren, as to which Mr. Peregoff disclaims beneficial ownership.
(6) Mr. Wykle and Mr. Broaddus are Co-Trustees of the Company's Profit-Sharing
Plan, which owns 39,680 of the Company's Common Stock. They share voting
power. Mr. Wykle's ownership interest is 65%. Mr. Broaddus' share is 15%.
All of the 39,680 shares owned by the Profit-Sharing Plan are included under
Mr. Wykle's shares for the purposes of this disclosure, except for the 5,952
shares owned by Mr. Broaddus. Mr. Wykle disclaims beneficial ownership of
all but the 65% he owns in the Profit-Sharing Plan
(7) Ms. Schwindt also has stock appreciation rights on 16,000 shares. Excluded
are 8,000 shares owned by her parents to which Ms. Schwindt disclaims
beneficial ownership.
(8) Mr. Diggins' shares include 4,888 shares owned jointly with his wife.
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<PAGE>
ITEM 5 - DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
Position(s) and Offices Presently
Name Age Held with the Company
------------------- --- -----------------------------------------
Allen D. Wykle 51 Chairman of the Board, President
and Chief Executive Officer, and member
of Executive and Compensation Committees
Leon H. Perlin 69 Director, member of the Executive,
Audit, Compensation and Option Committees
Oscar S. Warner 80 Director, member of the Audit,
Compensation and Option Committees
Arthur Peregoff 78 Director
Stanley W. Broaddus 48 Director, Vice President and Secretary,
and member of the Executive Committee
Robert M. Salter 49 Director, member of the Compensation and
Option Committees
Jean S. Schwindt 42 Director, member of the Executive and
Audit Committees
Neil W. Phelan 40 Director, Executive Vice President
Barry C. Diggins 34 Director, President of a retail lending
division of ARMI
Eric S. Yeakel 33 Treasurer and Chief Financial Officer
Gregory W. Gleason 45 President, Approved Federal Savings Bank
Except for Allen D. Wykle, who is a director of IMC, none of the directors
of the Company hold other directorships in a company, or have any been nominated
to become a director in a company, with a class of securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange
Act, or any company registered as an investment company under the Investment
Company Act of 1940.
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<PAGE>
The following table sets forth the principal occupations and business
experience for the directors and executive officers. The date shown for first
election as a director in the information below represents the year in which the
director was first elected to the Board of Directors of the Company. Unless
otherwise indicated, the business experience and principal occupations shown for
each director or executive officer has extended for five or more years.
ALLEN D. WYKLE, 51, has been a director since 1984. Mr. Wykle has served as
Chairman of the Board, President and Chief Executive Officer of the
Company since September 1984.
LEON H. PERLIN, 69, has been a director since 1984. Mr. Perlin has served
as President and Chief Executive Officer of Leon H. Perlin Company,
Inc., a commercial construction concern, for over 30 years.
OSCAR S. WARNER, 80, has been a director since 1984. Mr. Warner has been
retired for the past five years. Previously, he was owner and operator
of Oscar Warner Corporation, an import company.
ARTHUR PEREGOFF, 78, has been a director since 1985. Mr. Peregoff has
served as Chief Executive Officer of Globe Iron Construction Company,
Inc., a commercial construction company, for over 25 years.
STANLEY W. BROADDUS, 48, has been a director since 1985. Mr. Broaddus has
served as Secretary and Vice President of the Company since April
1987. Previous experience includes fourteen years as Regional Sales
Manager with the building products unit of Atlantic Richfield Co.
ROBERT M. SALTER, 49, has been a director since 1989. Mr. Salter has served
as President of Salter and Hall, P.C. since 1979. Mr. Salter is a
Certified Public Accountant and a Certified Financial Planner.
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<PAGE>
JEAN S. SCHWINDT, 42, has been a director since 1992. Ms. Schwindt has been
Vice President and Director of Investor Relations and Strategic
Planning for IMC Mortgage Company since March 1996. From April 1989 to
March 1996 she served as Senior Vice President/Director and Secretary
of Anderson and Strudwick, Inc., a member of the New York Stock
Exchange. Ms. Schwindt is a Chartered Financial Analyst and is a
Registered Investment Advisor affiliated with the firm of Mills Value
Adviser, Inc. since January 1995.
NEIL W. PHELAN, 40, has been a director since 1997. Mr. Phelan is Executive
Vice President and has been with the Company since April 1995. He
manages the Company's wholesale lending unit, Approved Residential
Mortgage. Immediately prior to joining the Company, Mr. Phelan served
on the senior management team of ITT Financial Services for 17 years.
BARRY C. DIGGINS, 34, has been a director since 1997. Mr. Diggins oversees
a large portion of the Company's retail lending unit, Armada
Residential Mortgage. Mr. Diggins has been with the Company since
October 1994. He was Regional Marketing Director of ITT Financial
Services from September 1985 to October 1994.
ERIC S. YEAKEL, 33, is Treasurer and Chief Financial Officer. Mr. Yeakel
has been with the Company since June 1994. He served as Assistant
Controller with Office Warehouse, Inc. from October 1989 to August
1992. Mr. Yeakel is a Certified Public Accountant who worked with
Ernst & Young from July 1987 to October 1989.
GREGORY W. GLEASON, 45, is President of Approved Federal Savings Bank. Mr.
Gleason joined the Company in November 1996 with more than 20 years of
savings institution management. Mr. Gleason was Senior Vice President
with Virginia First Savings Bank from February 1984 through June 1996,
and was on the management team of BankAtlantic from May 1977 to
January 1984.
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<PAGE>
BOARD OF DIRECTORS
The Company has nine directors as of December 1, 1997. The directors held
an organizational meeting following the Annual Meeting of the Company's
Stockholders on July 25, 1997. At the organizational meeting, the Board of
Directors ratified the Company's Amended and Restated Articles of Incorporation,
which provides that the Board of Directors shall consist of at least five
directors. The Company's Amended and Restated Bylaws, also ratified by the Board
at its meeting of July 25, 1997, provides that the number of Directors shall be
no less than five and not more than fifteen, as shall be fixed for the ensuing
year by the shareholders at the annual election. The Directors are elected by
the shareholders at the Annual Meeting for a term of one year and until his
successor is duly elected and qualified. A Director may be removed at any time,
with or without cause, at a special meeting of shareholders called for that
purpose, by a vote of a majority of the shares of stock represented and entitled
to vote at such meeting. At any such meeting, a successor to such Director may
be elected for his unexpired term. In the event of any vacancy caused by death,
resignation, retirement, disqualification or removal from office of a Director,
or by failure of the shareholders to elect a successor to a Director who has
been removed, or otherwise, the Board of Directors may fill such vacancy by vote
of a majority of all the Directors then in office, though less than a quorum.
Directors so elected shall serve for the unexpired term of their predecessors,
and until their successor is duly elected and qualified, unless sooner
displaced.
Meetings of the Board of Directors are held regularly, and there is also an
organizational meeting following the conclusion of the Annual Meeting of
Shareholders. The Board of Directors held nine meetings in 1996 and has held
four meetings in 1997. For 1996 and 1997, none of the Company's directors
attended fewer than 75% of the aggregate of the total number of meetings of the
Board of Directors and the total number of meetings of committees on which the
respective directors served.
COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors has four
committees: the Executive Committee, the Audit Committee, the Compensation
Committee and the Option Committee.
The Executive Committee consists of Mr. Wykle, as Chairman, Mr. Perlin, Ms.
Schwindt and Mr. Broaddus. The Executive Committee acts for the Board when the
Board is not in session.
The Audit Committee consists of Ms. Schwindt, as Chairman, Mr. Perlin and
Mr. Warner. The Audit Commitee makes recommendations concerning the engagements
of independent public accountants, reviews with the independent public
accountants the plans and results of the audit engagement, approves professional
services provided by the independent public accountants, reviews the
independence of the independent public accountants, considers the range of audit
and non-audit fees and reviews the adequacy of the Company's internal accounting
controls. It also reviews and accepts the reports of the Company's regulatory
examiners.
100
<PAGE>
The Compensation Committee, which determines the compensation of the
Company's senior management, and reviews and sets guidelines for compensation
for all employees, consists of Mr. Warner, Chairman, Mr. Wykle, Mr. Perlin and
Mr. Salter. Mr. Wykle abstains from voting on his own compensation.
The Option Committee, which administers the Company's stock option plans
and grants options under those plans, consists of Mr. Warner, Chairman, Mr.
Perlin and Mr. Salter.
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<PAGE>
ITEM 6 - EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION
The following table sets forth the compensation paid to the Company's Chief
Executive Officer and the three most highly-compensated Executive Officers other
than the Chief Executive Officer whose 1996 compensation exceeded $100,000
(collectively, the "Named Executive Officers") during the three years ended
December 31, 1996:
SUMMARY COMPENSATION TABLE
Annual Compensation (1)
---------------------------- All Other
Name and Principal Position Year Salary Bonus Compensation (2)
- --------------------------- ---- -------- -------- ----------------
Allen D. Wykle 1996 $300,000 $400,000 $ 4,750
President and Chief 1995 200,000 -- 49,062
Executive Officer 1994 175,000 -- 56,000
Barry C. Diggins (3) 1996 75,000 175,092 --
Retail Lending 1995 75,000 64,415 --
1994 12,500 -- --
Neil W. Phelan 1996 100,000 75,000 1,500
Executive Vice President, 1995 75,000 -- 10,000
Marketing and Broker Lending
Stanley W. Broaddus 1996 85,000 45,000 2,100
Secretary and 1995 58,000 -- 6,072
Vice President 1994 56,000 -- 10,000
- -----------------------
(1) All benefits that might be considered of a personal nature did not exceed
the lesser of $50,000 or 10% of total annual salary and bonus for the
officer named in the table.
(2) Amounts reflect the Company's matching contribution under its 401(k)
retirement plan. The table also includes contributions to the Company's
non-qualified retirement plan of $56,000 in 1994 and $47,000 in 1995 for Mr.
Wykle and $10,000 in 1994 and $5,000 in 1995 for Mr. Broaddus. The table
also reflects $10,000 paid to reimburse Mr. Phelan in 1995 for moving
expenses.
(3) Mr. Diggins was paid an annualized base salary of $75,000 in 1996, 1996 and
1994 (2 months only in 1994). In addition, Mr. Diggins was paid an incentive
based on the earnings of the retail lending division. His incentive amounts
were $175,092 in 1996 and $64,415 in 1995.
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<PAGE>
STOCK OPTION/STOCK APPRECIATION RIGHT GRANTS IN THE LAST YEAR
The Company did not grant any stock options or stock appreciation rights in
1996, other than the stock appreciation rights issued to Ms. Schwindt. See
"Board of Directors - Directors' Compensation."
On January 27, 1997, the Company issued options to key employees to purchase
up to 9,200 shares of the Company's common stock. The employees have a ten-year
period to exercise the options at an exercise price of $9.75 per share. The
number of shares and exercise price for these options have been adjusted for the
November 21, 1997 two-for-one stock split.
The following table contains information regarding options to purchase the
Company's common stock granted to three Named Executive Officers. Mr. Diggins
did not receive an option grant. No stock appreciation rights were granted to
Named Executive Officers during 1996 or the first eleven months of 1997.
<TABLE>
<CAPTION>
Individual Grant Potential Realizable
------------------------------------- Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Options Price Appreciation for
Underlying Granted to Per Share Option Term (2)
Options Employees Exercise Expiration -------------------------------
Name Granted in Year Price (1) Date 0% 5% 10%
- -------------------- ------- ---------- --------- ---------- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Allen D. Wykle 1,000 10.9% $9.75 1-27-2007 $ -- $ 6,132 $15,538
Neil W. Phelan 1,000 10.9% $9.75 1-27-2007 -- 6,132 15,538
Stanley W. Broaddus 1,000 10.9% $9.75 1-27-2007 -- 6,132 15,538
</TABLE>
- -------------------
(1) These shares are based on $9.75, the closing price of Common Stock on
January 26, 1997 (as adjusted for the November 21, 1997 two-for-one stock
split). The exercise price may be paid in cash, in shares of Common Stock
valued at fair market value on the date of exercise or pursuant to a
cash-less exercise involving the same-day sale of the purchased shares.
(2) The 5% and 10% assumed annual rates of compounded stock price appreciation
are permitted by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the
10-year option term will be at the assumed 5% and 10% levels or at any other
defined level. Unless the market price of the Common Stock appreciates over
the option term, no value will be realized from the option grants to
executive officers.
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<PAGE>
AGGREGATE OPTION EXERCISES AND PERIOD-END VALUES
The following table sets forth information concerning the value of
unexercised options held by three of the Company's Named Executive Officers at
August 1, 1997. No options of stock appreciation rights were exercised during
1996 or the first eleven months of 1997, and no stock appreciation rights were
outstanding at December 1, 1997.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
Fiscal Year End Fiscal Year End (1)
--------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Allen D. Wykle 333 667 -- --
Neil W. Phelan 333 667 -- --
Stanley W. Broaddus 333 667 -- --
</TABLE>
- ------------------
(1) Based on the closing price of $14.75 per share, for the Common Stock on
December 29, 1997.
1996 INCENTIVE STOCK OPTION PLAN
On June 28, 1996, the Company adopted the 1996 Incentive Stock Option Plan
(the "Incentive Plan"), pursuant to which key employees of the Company are
eligible for awards of stock options. The following sections summarize some of
the principle features of the Incentive Plan, a copy of which is attached to
this Registration Statement as Appendix C.
PURPOSE. The Board of Directors believes that long-term incentive
compensation is one of the fundamental components of compensation for the
Company's key employees and that stock options under the Incentive Plan will
play an important role in encouraging employees to have a greater financial
investment in the Company. The Board of Directors believes that the Incentive
Plan will help promote long-term growth and profitability by further aligning
stockholder and employee interests.
The purpose of the Incentive Plan is to promote the interests of the
Company and its shareholders by affording participants an opportunity to acquire
a proprietary interest in the Company and by providing participants with
long-term financial incentives for outstanding performance. Under the terms of
the Incentive Plan, the Option Committee of the Board of Directors has a great
deal of flexibility in the types and amounts of awards that can be made and the
terms and conditions applicable to those awards.
DESCRIPTION OF THE INCENTIVE PLAN. The aggregate number of shares of Common
Stock that are available for grants under the Incentive Plan is 126,000 shares,
as adjusted for the two-for-one stock splits of December 16, 1996 and November
21, 1997. All shares allocated to awards under the Incentive Plan that are
cancelled or forfeited are available for subsequent awards.
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<PAGE>
ADMINISTRATION. The Incentive Plan is administered by the Option Committee
of the Board of Directors. The members of the Option Committee are not eligible
to receive awards under the Incentive Plan. The Option Committee has the full
power to: (a) designate the key employees to receive awards from time to time;
(b) determine the sizes and types of awards; (c) determine the terms and
provisions of awards as it deems appropriate; (d) construe and interpret the
Incentive Plan and establish, amend or waive rules and regulations relating to
the administration of the Incentive Plan; (e) amend the terms and provisions of
any outstanding award to the extent such terms and provisions are within the
discretion of the Option Committee; and (f) make all other decisions and
determinations necessary or advisable for the administration of the Incentive
Plan. All determinations and decisions made by the Option Committee pursuant to
the Incentive Plan are final, conclusive and binding.
ELIGIBLE PARTICIPANTS. Only "key employees" of the Company and its
subsidiaries are eligible to participate in the Incentive Plan. An employee who
is a director is eligible for an award unless he or she is a member of the
Option Committee. The selection of the key employees is entirely within the
discretion of the Option Committee. The concept of a "key employee" is, however,
somewhat flexible and it is anticipated that such factors as the duties and
responsibilities of employees, the value of their services, their present and
potential contributions to the success of the Company and other relevant factors
will be considered. Accordingly, the number of persons who ultimately may be
eligible to participate in the Incentive Plan cannot presently be determined.
OPTION PRICE OF STOCK. The Incentive Plan provides for the grant of options
to purchase shares of Common Stock at option prices to be determined by the
Option Committee as of the date of grant. The option price may not be less than
the fair market value (or in the case of a 10% stockholder not less than 110% of
the fair market value) of the shares of Common Stock on the date of grant. For
such purpose "fair market value" means the average of the bid and asked price
per share of the Common Stock as reported by the NASDAQ Stock Market or the OTC
Bulletin Board, whichever is applicable at the time, on the date on which the
fair market value is determined or, if Common Stock is not traded on such
exchange or system on such date, then on the immediately preceding date on which
Common Stock was traded on such exchange or system. Each grant of options is to
be evidenced by an option agreement which is to specify the option price, the
term of the option, the number of shares subject to the option and such other
provisions as the Committee may determine.
EXERCISE OF OPTIONS. The shares subject to an option may be purchased as
follows: none in the first year after the grant of option; one-third in each of
the second, third and fourth years. Options granted under the Incentive Plan
will expire not more than ten years (or in the case of a 10% stockholder not
more than five years) from the date of grant.
AWARDS OF OPTIONS. Awards of options under the Incentive Plan are to be
determined by the Option Committee in its discretion. Notwithstanding the
foregoing, the Option Committee may not grant options to any participant that,
in the aggregate, are first exercisable during any one calendar year to the
extent that the aggregate fair market value of the shares subject to such
options, at the time of grant, exceeds $100,000.
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<PAGE>
Payments for shares issued pursuant to the exercise of any option may be
made either in cash or by tendering shares of Common Stock of the Company with a
fair market value at the date of the exercise equal to the portion of the
exercise price which is not paid in cash.
NO RIGHTS AS STOCKHOLDER. A participant granted an option under the
Incentive Plan will have no rights as a stockholder of the Company with respect
to the shares subject to such option except to the extent shares are actually
issued.
NON-TRANSFERABILITY. Options may not be sold, transferred, pledged or
assigned, except as otherwise provided by law or in an option agreement. The
Option Committee may impose restrictions on the transfer of shares acquired
pursuant to the exercise of options as it may deem advisable.
TERMINATION OF EMPLOYMENT. Except for termination for cause, death or
disability, options terminate three months after the employment terminates or on
such earlier date as the participant's option agreement specifies. In the event
of termination for cause as defined in the Incentive Plan, the option terminates
upon termination (subject to the Option Committee's right to reinstate for 30
days). In the event of death, the option will terminate six months after death,
and in the event of disability one year after disability (unless the option
period in the participant's option agreement expires earlier).
AMENDMENT AND TERMINATION OF THE INCENTIVE PLAN. The Board of Directors may
alter, amend, discontinue, suspend or terminate the Incentive Plan at any time
in whole or in part. Notwithstanding the foregoing, stockholder approval is
required for any change to the material terms of the Incentive Plan and no
amendment or modification of the Incentive Plan may materially and adversely
affect any award previously granted without the consent of the participant.
401(K) RETIREMENT PLAN
On January 1, 1995, the Company implemented a 401(k) Retirement Plan (the
"401(k) Plan"). The 401(k) Plan is a defined contribution plan covering all
employees who have completed at least one year of service. The 401(k) Plan is
subject to the provisions of the Employee Retirement Income Security Act of
1974. The Company contributes an amount equal to 50% of a participant's payroll
savings contribution up to 6% of a participant's annual compensation. The
Company's contributions to the 401(k) Plan in 1996 and 1995 were $33,000 and
$15,000, respectively.
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<PAGE>
EMPLOYMENT AGREEMENTS
The Company has no employment agreement with Allen D. Wykle. Mr. Wykle's
salary and bonus are determined by the Compensation Committee.
The Company has employment agreements with three executive officers.
NEIL W. PHELAN. The Employment Agreement which commenced April 1, 1995 was
for a two year initial term and will automatically renew for additional one-year
terms absent six months written notice by either party prior to the end of a
term of nonrenewal. He currently receives an annual salary of $110,000. It
provides for a bonus of up to 75% of base compensation depending on specified
pre-tax net profit goals. He also is entitled to all group employee benefits and
a car allowance.
The Employment Agreement provides for termination "for cause" as defined in
the Agreement. Under the Employment Agreement he has agreed not to compete with
the Company for a period of two years after termination within a prescribed
geographic area and not to solicit or employ Company employees for two years
after termination. These restrictive covenants apply upon termination by Mr.
Phelan or termination for cause by the Company.
STANLEY W. BROADDUS. The Employment Agreement which commenced January 1,
1997 was for a one year initial term and will automatically renew for additional
one-year terms absent ninety day written notice by either party prior to the end
of a term of nonrenewal. It provides for an annual salary of $85,000 with an
annual 6% increase during the initial term. He is entitled to a Company car and
all group employee benefits. He is entitled to a quarterly bonus based on 1 1/2%
of net profits after taxes not to exceed $100,000. He is also entitled to one
year's annual salary in the event that following a change in control of the
Company (i.e. Mr. Wykle and Mr. Perlin own less than 51% of the voting stock)
Allen D. Wykle is no longer employed and the Company terminates him without
cause.
The Employment Agreement provides for termination "for cause" as defined in
the Agreement with notice and for termination upon 90 days prior written notice
without cause.
Under the Employment Agreement he has agreed not to compete with the
company for a period of one (1) year after termination within a prescribed
geographic area and not to solicit or employ Company employees for two (2) years
after termination. These restrictive covenants apply upon termination by either
party, with or without cause and upon expiration of the Agreement.
107
<PAGE>
BARRY C. DIGGINS. The Employment Agreement which commenced September 15,
1997 was for a two year initial term and will automatically renew for additional
one-year terms absent 90 day written notice by either party prior to the end of
a term of nonrenewal. It provides for an annual salary of $130,000 with an
annual 6% increase during the initial term. It provides for a bonus of up to
100% of annual salary if he makes a specified "Profit Target" (net after tax
profits) for offices under his supervision. If he meets at least 75% of the
Profit Target, he earns a bonus computed by multiplying the percentage of the
Profit Target reached times 100% of salary. In addition he is entitled to
incentive compensation of 5% of annual after tax net profit attributable to the
offices supervised by him. Any such incentive compensation in excess of $150,000
per year may within the discretion of the Company be converted to nonstatutory
stock options. He is also entitled to 5% of gross written life insurance
premiums as well as the group benefits of other employees.
The Employment Agreement provides for termination "for cause" as defined in
the Agreement. If he terminates his employment or it is terminated for cause as
defined in the Agreement or either party elects not to renew at the end of any
term with the required notice, the contract ceases, and no further compensation
or benefits are paid. If the Employment Agreement is terminated by Company
without cause during the initial term, then in lieu of any other damages or
compensation is entitled to severance pay in the amount equal to $300,000
multiplied by a percentage equal to the number of days left at termination in
the initial term divided by 730. If terminated without cause in a renewal term,
the severance pay shall be equal to the base compensation for that renewal term
multiplied by a percentage equal to the number of days remaining in the renewal
term at termination divided by 365.
Under the Employment Agreement he has agreed not to compete with the
company for a period of one year after termination within a prescribed
geographic area and not to solicit or employ Company employees for two years
after termination. These restrictive covenants apply upon termination by either
party, with or without cause and upon expiration of the Agreement.
108
<PAGE>
DIRECTORS' COMPENSATION.
Directors who are compensated as employees of the Company receive no
additional compensation for service as directors.
Each director who is not an employee of the Company receives an annual
retainer of $9,000, payable in cash in quarterly installments of $2,250. All
directors receive reimbursement of reasonable out-of-pocket expenses incurred in
connection with meetings of the Board of Directors. For 1997, the outside
directors were paid an additional $5,000 for their services.
During 1996, the Board of Directors approved the grant of stock
appreciation rights ("SARs") to Ms. Schwindt. The SARs are for a period of three
years entitle the holder to the appreciated value of 16,000 shares of common
stock, which represents the difference between the grant price and the fair
market value of the shares at the time of exercise. The grant price is $2.63.
The compensation expense associated with issuance of the SARs was approximately
$94,000 during 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. No
interlocking relationships exist between the Company's Board of Directors or
officers responsible for compensation decisions and the board of directors or
compensation committee of any company, nor has any such interlocking
relationship existed in the past.
109
<PAGE>
ITEM 7 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has maintained business relationships and engaged in certain
transactions with affiliated companies and the parties as described below. It is
the policy of the Company to engage in transactions with related parties only on
terms that, in the opinion of the Company, are no less favorable to the Company
than could be obtained from unrelated parties and each of the transactions
described below conforms to that policy.
AGREEMENT WITH IMC MORTGAGE COMPANY
The Company has an agreement for the sale of mortgage loans to IMC Mortgage
Company ("IMC"). The terms of the mortgage loan sale agreement are set forth in
the Pre-IPO Agreement between the Company and IMC dated March 30, 1996. The
Company's contract with IMC requires the Company to sell a minimum of $2.0
million of loans to IMC each month. subject to prevailing secondary market terms
for pools of non-conforming mortgage loans for a five year period commencing on
June 25, 1996 (the date of IMC's Initial Public Offering). In the event the
Company fails to sell $2.0 million of loans at prevailing secondary market terms
to IMC in any month, IMC could sue the Company for breech of contract. During
1997 and 1996, the Company sold 55.9% and 43.7%, respectively, of its loans to
IMC. These these transactions have resulted in the payment of a cash premium by
IMC to the Company. From time to time, various other purchasers purchase more
than 10% of the Company's loan production. While there are several other major
purchasers of non-conforming mortgage loans as large or larger than IMC, the
Company maintains a good working relationship with IMC. Historically, IMC has
offered to buy a wide range of the Company's loan products at competitive
prices. However, there can be no assurance that IMC will be in a position to
continue to purchase the Company's loan production at margins favorable to the
Company. The Company owned approximately 3.2% of the outstanding common stock of
IMC at September 30, 1997. The Company has had since January 1996 a warehouse
financing facility under which IMC agreed to lend the Company $8,000,000 secured
by the Company's mortgage loans. Borrowings under the facility bore interest at
a rate of LIBOR plus 1.75%. There was no outstanding balance on this line at
September 30, 1997. The line was due to expire on January 29, 1998 and was
subject to renewal. However, the Company terminated this credit line and
replaced it with a new credit line agreement with another party, effective
December 10, 1997. The Company's Chairman and Chief Executive Officer, Allen D.
Wykle, is a member of IMC's Board of Directors. Mr. Wykle beneficially owns
approximately 0.07% of IMC common stock, including 12,992 issuable upon the
exerise of stock options. Also, Jean S. Schwindt, a member of the Company's
Board of Directors and Executive Committee, is an officer of IMC and owns 18,020
shares of IMC common stock issuable upon the exercise of vested stock options.
110
<PAGE>
The following table shows the monthly volume of loans sold to IMC Mortgage
Company for the years 1996 and 1997:
(Dollars in Thousands)
AMOUNT OF LOANS SOLD
----------------------
MONTH 1996 1997
--------- ---- ----
January $ 3,491 $ 11,798
February 4,858 11,465
March 10,862 34,676
April 11,208 9,728
May 5,310 19,813
June 5,780 34,594
July 3,927 18,459
August 6,386 17,229
September 6,304 20,032
October 11,246 13,325
November 19,011 21,385
December 11,712 22,724
-------- --------
Total $100,095 $235,228
111
<PAGE>
AGREEMENT WITH MILLS VALUE ADVISER, INC.
The Company entered into an investment management agreement on March 28,
1996, with Mills Value Adviser, Inc. ("MVAI"), a registered investment advisor.
Under the agreement, MVAI manages a portion of the Company's non-qualified
Profit-Sharing Plan. The Plan's trustees retain all proxy voting rights for
securities managed by MVAI. During 1997, the Company paid $3,436 in advisory
fees to MVAI. Jean S. Schwindt, a member of the Company's Board of Directors and
Executive Committee, is a portfolio manager for MVAI.
TERMINATION OF ARMADA RESIDENTIAL MORTGAGE, LLC
Since December 1994, the Company had conducted a portion of its retail
lending business through Armada Residential Mortgage, LLC ("Armada LLC"), which
was owned 17% by Barry C. Diggins, 1% by the Company and 82% by ARMI. In
connection with terminating Armada LLC in September 1997, the Company issued
106,146 shares of its Common Stock to Mr. Diggins to purchase his ownership
interest in Armada LLC. Mr. Diggins terminated his employment with Armada LLC
and became an employee of ARMI. Mr. Diggins is also a Director of the Company.
The shares have been adjusted for the two-for-one split of the Company's Common
Stock, which occurred on November 21, 1997.
INDEBTEDNESS OF MANAGEMENT
The Company and the Savings Bank have no outstanding extensions of credit
to members of the Board of Directors or management at December 31, 1997. On June
30, 1994, the Company made a loan to Director Leon H. Perlin. The original
principal balance on the loan was $300,000 and the loan bore an interest rate of
9.50% . Mr. Perlin paid the loan off in full on September 2, 1997. During 1997,
the Company made a loan to Stanley W. Broaddus consisting of three promissory
notes totaling $165,000. These notes bore interest rates ranging from 9% to 12%.
All notes were paid off in full on August 29, 1997.
PROMISSORY NOTES
The Company has, from time to time, issued promissory notes to assist in
cash flow. The notes are callable on 30 days notice from the holder and may be
prepaid by the Company. The notes are usually issued to Directors, officers or
shareholders. As of September 30, 1997, the following Directors and Executive
Officers were holders of promissory notes in the amounts and interest rates
specified below:
Allen D. Wykle $539,220 10.00%
Stanley W. Broaddus 231,830 9.00
Stanley W. Broaddus 75,378 8.25
Leon H. Perlin 257,891 9.00
Oscar S. Warner 54,124 8.00
Arthur Peregoff 397,236 9.00
112
<PAGE>
ITEM 8 - LEGAL PROCEEDINGS
The Company is a party to various routine legal proceedings arising out of
the ordinary course of its business. Management believes that none of these
actions, individually or in the aggregate, will have a material adverse effect
on the results of operations or financial condition of the Company.
113
<PAGE>
ITEM 9 - MARKET PRICE OF DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF AND CASH DIVIDENDS ON THE COMPANY'S COMMON EQUITY
The following table shows the quarterly high, low and closing prices of the
Company's common stock for 1997, 1996 and the second six months of 1995 and cash
dividends paid per share. Stock prices for the first six months of 1995 are not
available. All stock price and dividend data has been adjusted to reflect
two-for-one stock splits which occurred on August 30, 1996, December 16, 1996
and November 21, 1997.
Stock Prices
-------------------------------- Cash
High Low Close Dividends
-------- ------- ------- ---------
1997:
Fourth Quarter $ 17.00 $ 12.75 $ 14.75 $ --
Third Quarter 17.00 8.00 15.00 --
Second Quarter 10.00 6.00 8.25 --
First Quarter 13.50 8.50 9.75 --
1996:
Fourth Quarter 11.50 8.00 8.50 .01
Third Quarter 9.13 3.75 9.00 .01
Second Quarter 4.75 2.13 3.88 .01
First Quarter 2.25 2.06 2.19 .01
1995:
Fourth Quarter 2.14 1.84 2.14 .01
Third Quarter 1.78 1.46 1.71 .01
The Company did not pay any cash dividends on its Common Stock in 1997. The
Company intends to retain all of its earnings to finance its operations and does
not anticipate paying cash dividends for the foreseeable future. Any decision
made by the Board of Directors to declare dividends in the future will depend on
the Company's future earnings, capital requirements, financial condition and
other factors deemed relevant by the Board.
114
<PAGE>
ABSENCE OF ACTIVE PUBLIC TRADING MARKET AND VOLATILITY OF STOCK PRICE
The Company's Common Stock is traded on the National Quotation Bureau, Inc.
OTC Bulletin Board under the symbol "APFN." Historically, there has been a
limited market for the Company's Common Stock. As a result, the prices reported
for the Company's Common Stock reflect the relative lack of liquidity and may
not be reliable indicators of market value. There can be no assurance that an
active public trading market for the Company's Common Stock will be created in
the future.
As soon as possible after the filing of this Form 10 Registration
Statement, the Company intends to file an application with the National
Association of Securities Dealers in Washington, D.C. to request a listing on
the NASDAQ National Market.
The market price of the Common Stock may experience fluctuations that are
unrelated to the operating performance of the Company. In particular, the price
of the Common Stock may be affected by general market price movements as well as
developments specifically related to the residential mortgage lending industry
such as, among other things, interest rate movements, delinquencies, loan
payment speeds, and loss trends.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent for the Company's Common Stock is First Union National
Bank, 230 South Tryon Street, 11th Floor, Charlotte, North Carolina 28288-1153.
115
<PAGE>
ITEM 10 - RECENT SALES OF UNREGISTERED SECURITIES
In connection with the offering of 225,000 new shares of Common Stock in
the State of Virginia, pursuant to Section 3(a)(11) of the Securities Act of
1933 and Rule 147 issued thereunder, the Company in 1992 also issued warrants to
its existing eleven shareholders, also in Virginia, to purchase 47,601 shares of
Common Stock for $7.50 per share. The warrants were convertible for a five year
period expiring April 20, 1997. Nine of the eleven shareholders exercised the
warrants prior to their expiration. Taking into account all prior stock splits,
362,968 shares were issued at $0.935 per share for an aggregate price of
$339,375.
Of the 362,968 shares issued, 305,712 were purchased by the two largest
shareholders of the Company: Allen D. Wykle, President and Chief Executive
Officer, and Leon H. Perlin. Both are directors. Three other shareholders who
purchased shares upon the exercise of the warrants were also directors, and one
shareholder was the spouse of a director. Most were accredited investors at the
time of exercise. The Company relied on a private exemption from registration
under Section 4(2) of the Securities Act of 1933, and the regulations issued
thereunder. The stock bears a restrictive legend, is subject to an
administrative stop, may not be resold without an opinion of the Company's legal
counsel, and is subject to the resale requirements of Rule 144.
Since December 1994, the Company had conducted a portion of its retail
lending business through Armada Residential Mortgage, LLC (Armada LLC"), which
was owned 17% by Barry C. Diggins, 1% by the Company and 82% by ARMI. In
connection with terminating Armada LLC, in September 1997 the Company issued
106,146 shares of its Common Stock to Mr. Diggins to purchase his ownership
interest in Armada LLC. Mr. Diggins terminated his employment with Armada LLC
and became an employee of ARMI. Mr. Diggins is also a Director of the Company.
The Company also issued 6,780 shares to Scott E. Thomas. Mr. Thomas terminated
his employment with Armada LLC and became an employee of ARMI. The stock bears a
restrictive legend, is subject to an administrative stop, may not be resold
without an opinion of the Company's legal counsel, and is subject to the resale
requirements of Rule 144. No broker or general solicitation was involved. The
Company relied on an exemption from registration under Section 4(2) of the
Securities Act of 1933, and the regulations issued thereunder, and Rule 701. The
share figures have been adjusted for the two-for-one split of the Company's
Common Stock, which occurred on November 21, 1997.
116
<PAGE>
To supplement its cash flows, the Company has from time to time issued
Promissory Notes (the "Notes") to insiders, including, directors, executive
officers, shareholders and employees. Most holders of the Notes are accredited
investors. The Notes are callable on thirty days notice from the holder, and can
be prepaid by the Company. The Notes vary from several thousand dollars to
$3,000,000. The Notes bear interest at rates ranging from 8.00% to 10.25%. The
Notes are privately arranged without any broker or general solicitation. As of
September 30, 1997, the total outstanding balance of Notes originally issued in
the past three years was $4,331,000, and seven persons (of which three persons
held more than 90%) were holding such Notes. The Company relied upon an
exemption under Section 4(2) of the Securities Act of 1933, and the regulations
issued thereunder.
In June 1995, the Company made an intrastate offering of Certificates of
Indebtedness (the "Certificates"). The Certificates were offered to Virginia
residents only with a minimum investment of $5,000 and terms to maturity of one
to five years from date of issue. As of September 30, 1997, the outstanding
balance of the Certificates issued pursuant to that offering was $114,000. The
Certificates are legended, advising purchasers that they cannot be sold,
transferred, conveyed or pledged to any person or entity other than a Virginia
resident without the consent of the Company. The Company relied on an exemption
from registration under Section 3(a)(11) of the Securities Act of 1933 and Rule
147 issued thereunder.
In April 1996, the Company sold 22,000 shares of its Common Stock to
Gregory J. Witherspoon in a privately-negotiated transaction for $440,800 cash.
He was an accredited investor. The stock bears a restrictive legend, is subject
to an administrative stop, may not be resold without an opinion of the Company's
legal counsel, and is subject to the resale requirements of Rule 144. The
Company relied on an exemption from registration under Section 4(2) of the
Securities Act of 1933, and the regulations issued thereunder. No broker or
general solicitation was involved. Adjusting the 22,000 shares sold to Mr.
Witherspoon in April 1996 for the two-for-one stock splits which occurred on
August 30, 1996, December 16, 1996 and November 21, 1997, the current number of
shares is 176,000.
117
<PAGE>
ITEM 11 - DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
AUTHORIZED CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares
of Common Stock, par value $1.00 per share, 100 shares of Preferred Stock Series
A (the "Preferred Stock Series A"), par value of $10.00 per share, and 50,000
shares of Preferred Stock Series B (the "Preferred Stock Series B"), par value
$10.00 per share. As of January 15, 1998, there were 5,512,114 shares of Common
Stock held by approximately 516 holders of record, 90 shares of Preferred Stock
Series A held by 9 holders of record, and no shares of Preferred Stock Series B
were outstanding.
The following description is qualified in its entirety by reference to the
Company's Articles of Incorporation and Bylaws, which are filed as exhibits to
this Registration Statement.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders. Cumulative voting
in the election of directors is not permitted, which means that holders of more
than one-half of the sum of outstanding shares of Common Stock and Preferred
Stock Series A can elect all the directors of the Company. Subject to
preferences that may be granted to holders of Preferred Stock Series A or
Preferred Stock Series B, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of the Company, holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and the liquidation preference, if
any, which may be payable to holders of Preferred Stock Series A or Preferred
Stock Series B. Holders of Common Stock have no conversion, preemptive or other
rights to subscribe for additional shares or other securities, and there are no
redemption or sinking fund provisions with respect to such shares. The issued
and outstanding shares of Common Stock are validly issued, fully paid and
non-assessable.
PREFERRED STOCK
The holders of Preferred Stock Series A are entitled to one vote for each
share held of record on all matters submitted to a vote of the shareholders. The
holders of Preferred Stock Series B are not entitled to vote in a merger or
consolidation, for voluntary dissolution, for change of name, or for the
election of directors, or in any other proceeding or upon any matter or question
at any shareholders' meeting except to the extent Virginia law expressly confers
a right to vote regardless of any provision to the contrary in the Company's
Articles of Incorporation or other articles filed pursuant to law.
118
<PAGE>
ITEM 12 - INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Virginia Stock Corporation Act (the "Corporation Act") provides that
the Company's Articles of Incorporation may eliminate or limit the liability of
Officers and Directors to the company or its shareholders for money damages for
any action taken or any failure to take any action as an Officer or Director,
except liability for (a) unlawful misconduct or (b) a knowing violation of the
criminal law or of any federal or state law including, without limitation, any
claim of unlawful insider trading or manipulation of the market for any
security. The effect of this provision is to limit or eliminate the rights of
the Company and its shareholders (through shareholders' derivative suits on
behalf of the Company) to recover money damages from an officer or director for
all actions or omissions as an officer or director (including breaches resulting
from negligent or grossly negligent behavior) except in the situations described
in clauses (a) and (b) above. This provision does not limit or eliminate the
rights of the Company or any shareholder to seek non-monetary relief, such as an
injunction or rescission, in the event of a breach of a director's duty of care.
The Company's Articles of Incorporation do set forth such a provision
eliminating director liability for monetary damages.
Under the Corporation Act, indemnification is mandatory unless limited by
its Articles of Incorporation for Officers or Directors who entirely prevail in
the defense of any proceeding to which he was a party because of being an
Officer or Director, for reasonable expense incurred in connection with the
proceeding. In addition, the Company may, in its sole discretion, indemnify and
advance expenses, to the fullest extent allowed by the Corporation Act, to any
person who incurs liability or expense by reasons of such person acting as an
officer, employee, or agent of the Company, except where indemnification is
mandatory pursuant to the Business Corporation Act, in which case the Company is
required to indemnify to the fullest extent required by the Corporation Act.
The Company's Articles of Incorporation, subject to the requirements of the
Corporation Act, provide that all Directors and Officers may, by action of the
Board of Directors, be indemnified by the Corporation against liabilities,
fines, penalties and claims imposed upon or asserted against him (including
amounts paid in settlement) by reason of having been such a Director or Officer,
whether or not then continuing so to be, and against all expenses (including
counsel fees) reasonably incurred by him in connection therewith, except in
relation to matters as to which he shall have been finally adjudged to be liable
by reason of having been guilty of gross negligence or willful misconduct in the
performance of his duty as such Director or Officer. In the event of any other
judgment against such Director or Officer or in the event of a settlement, the
indemnification shall be made only if the Corporation shall be advised, in case
none of the persons involved shall be or have been a Director of the
Corporation, by the Board of Directors, and otherwise by independent counsel to
be appointed by the Board of Directors, that in its or his opinion such Director
or Officer was not guilty of gross negligence or willful misconduct in the
performance of his duty, and, in the event of a settlement, that such settlement
was, or if still to be made is, in the best interest of the Corporation. If the
determination is to be made by the Board of Directors, it may rely, as to all
questions of law, on the advice of independent counsel.
119
<PAGE>
ITEM 13 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the report thereon, the
notes thereon and the supplementary data commencing on page F-1 of this report,
which financial statements, report, notes and data are incorporated by
reference.
ITEM 14 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 15 - FINANCIAL STATEMENTS AND EXHIBITS
UNAUDITED INTERIM FINANCIAL STATEMENTS
The following unaudited Interim Consolidated Financial Statements of
Approved Financial Corp. and Subsidiaries, for the nine-month periods ended
September 30, 1997 and 1996, are included:
- Consolidated Balance Sheets..................................F - 2
- Consolidated Statements of Income............................F - 3
- Consolidated Statements of Cash Flows....................F - 4 - F - 5
- Notes to Consolidated Financial Statements...................F - 6
AUDITED FINANCIAL STATEMENTS
The following 1996 Consolidated Financial Statements of Approved Financial
Corp. and Subsidiaries are included:
- Report of Independent Public Accountants.....................F - 8
- Consolidated Balance Sheets..................................F - 9
- Consolidated Statements of Income............................F - 10
- Consolidated Statements of Shareholders' Equity.........F - 11 - F - 12
- Consolidated Statements of Cash Flows...................F - 13 - F - 14
- Notes to Consolidated Financial Statements..............F - 15 - F - 36
120
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation of the Company
(Appendix A)
3.2 Bylaws of the Company (Appendix B)
10.1 Approved Financial Corp. Incentive Stock Option Plan (Appendix C)
10.2 Employment Agreement between the Company and Neil W. Phelan
(Appendix D)
10.3 Employment Agreement between the Company and Stanley W. Broaddus
(Appendix E)
10.4 Employment Agreement between the Company and Barry C. Diggins
(Appendix F)
10.5 Purchase Agreement of Barry C. Diggins' Interest in Armada
Residential Mortgage, LLC, and related Nonqualified Stock Option
Agreement (Appendix G)
10.6 Employment Agreement between the Company and Eric S. Yeakel
(Appendix H)
10.7 Mills Value Adviser, Inc, Investment Management Agreement/Contract
with the Company (Appendix I)
10.8 Share Purchase Agreement for Purchase of Controlling Interest in
Approved Federal Savings Bank (Formerly First Security Federal
Savings Bank, Inc.) (Appendix J)
10.9 Stock Appreciation Rights Agreement with Jean S. Schwindt (Appendix
K)
10.10 Asset Purchase Agreement with Funding Center of Georgia, Inc.
(Appendix L)
10.11 Gregory J. Witherspoon Registration Rights Agreement (Appendix M)
10.12 Pre-IPO Agreement between the Company and Industry Mortgage
Company, L.P., dated March 30, 1996 (Appendix N)
21 Subsidiaries of the Company (Appendix O)
27 Financial Data Schedule
121
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this Amendment No. - 1 on Form 10/A to
be signed on its behalf by the undersigned, thereunto duly authorized.
APPROVED FINANCIAL CORP.
(Registrant)
Date: April 28, 1998 By: /s/ Eric S. Yeakel
------------------------
Eric S. Yeakel
Treasurer and
Chief Financial Officer
122
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE- AND NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
-----------
Pages
-----
Consolidated Financial Statements:
Consolidated Balance Sheets, September 30, 1997,
December 31, 1996, and September 30, 1996............... F - 2
Consolidated Statements of Income for the three-
and nine-month periods ended September 30,
1997 and 1996........................................... F - 3
Consolidated Statements of Cash Flows for the
three- and nine-month periods ended
September 30, 1997 and 1996............................. F - 4 - F - 5
Selected Notes to Consolidated Financial Statements.......... F - 6
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
September 30, 1997, December 31, 1996 and September 30, 1996
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Sept. 30, December 31, Sept. 30,
1997 1996 1996
-------- -------- --------
ASSETS (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash $ 8,916 $ 3,440 $ --
Mortgage loans, net 73,587 45,423 40,143
Real estate owned, net 2,747 2,077 2,012
Securities 16,860 20,140 3,608
Premises and equipment, net 4,311 2,224 1,904
Other assets 1,993 1,839 3,305
-------- -------- --------
Total assets $108,414 $ 75,143 $ 50,972
======== ======== ========
LIABILITIES AND EQUITY
Liabilities:
Revolving warehouse loan $ 48,810 $ 34,177 $ 30,039
Mortgage note payable 1,236 478 494
Notes payable - related parties 6,703 6,839 6,758
Certificates of indebtedness 2,367 2,343 1,977
Certificates of deposit 9,984 1,576 1,378
Accrued and other liabilities 8,378 1,499 361
Deferred income 67 71 174
Income taxes payable 3,061 985 1,222
Deferred tax liability 2,514 5,966 --
-------- -------- --------
Total liabilities 83,120 53,934 42,403
-------- -------- --------
Shareholders' equity:
Preferred stock - Series A, $10 par value 1 1 1
Preferred stock - Series B, $10 par value -- -- --
Common stock, par value - $1.00. Authorized 40,000,000
shares: Issued and outstanding 5,392,408 shares at
September 30, 1997, 5,038,736 shares at December 31,
1996 and 4,853,440 shares at September 30, 1996 5,392 630 629
Unrealized gain on securities available for sale,
net of deferred taxes 8,503 11,401 --
Additional capital 1,773 1,485 1,362
Retained earnings 9,625 7,692 6,577
-------- -------- --------
Total shareholders' equity 25,294 21,209 8,569
-------- -------- --------
Total liabilities and equity $108,414 $ 75,143 $ 50,972
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 2
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
for the three- and nine-month periods ended September 30, 1997 and 1996 (Dollars
in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three-Month Period Nine-Month Period
Ended September 30, Ended September 30,
------------------------ ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue:
<S> <C> <C> <C> <C>
Gain on sale of loans $ 8,656 $ 4,819 $ 24,041 $ 11,176
Interest income 2,948 1,059 7,845 3,308
Income from limited partnership -- -- -- 480
Gain on sale of securities 2,796 -- 2,796 --
Other fees and income 1,570 309 3,130 921
---------- ---------- ---------- ----------
Total revenue 15,970 6,187 37,812 15,885
---------- ---------- ---------- ----------
Expenses:
Compensation and related 4,632 2,333 11,478 5,449
General and administrative 3,623 1,204 9,652 3,413
Interest expense 1,428 739 4,286 2,283
Provision for loan and
foreclosed property losses 435 585 1,133 1,341
---------- ---------- ---------- ----------
Total expenses 10,118 4,861 26,549 12,486
---------- ---------- ---------- ----------
Income before income taxes 5,852 1,326 11,263 3,399
Provision for income taxes 2,416 556 4,613 1,357
---------- ---------- ---------- ----------
Net income $ 3,436 $ 770 $ 6,650 $ 2,042
========== ========== ========== ==========
Net income per share $ 0.64 $ 0.15 $ 1.26 $ 0.41
========== ========== ========== ==========
Weighted average number of
shares outstanding 5,392,408 5,049,180 5,281,393 4,950,304
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 3
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three- and nine-month periods ended September 30, 1997 and 1996
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three-Month Period Nine-Month Period
Ended September 30, Ended September 30,
----------------------- -----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Operating activities:
<S> <C> <C> <C> <C>
Net income $ 3,436 $ 770 $ 6,650 $ 2,042
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 207 (50) 348 54
Provision for loan losses 557 64 1,043 213
Provision for losses on real estate owned 1 290 201 844
Loss on sale of real estate owned 54 97 407 166
Income from limited partnership -- -- -- (480)
Gain on sale of securities (2,796) -- (2,796) --
Gain on sale of loans (8,656) (4,819) (24,041) (11,176)
Proceeds from sale and prepayments of loans 124,028 69,303 346,131 177,256
Loan originations (125,510) (73,283) (354,417) (178,102)
Changes in operating assets and liabilities:
Other assets 17,770 369 (155) 468
Accrued and other liabilities 5,077 (3,856) 6,248 (1,792)
Deferred income (132) 85 (4) 17
Income taxes payable 2,050 552 2,077 680
Deferred income taxes (991) (756) (850) (1,101)
--------- --------- --------- ---------
Net cash provided by (used in) operating activities 15,095 (11,234) (19,158) (10,911)
--------- --------- --------- ---------
Investing activities:
Purchases of securities (1,517) (2,708) (2,522) (2,373)
Sales of securities 3,729 -- 3,729 --
Proceeds from sales of real estate owned 813 433 1,841 727
Purchases of premises and equipment (555) (198) (2,434) (546)
Net cash paid for acquisition of Savings Bank -- (244) -- (244)
--------- --------- --------- ---------
Net cash provided by (used in) investing activities 2,470 (2,717) 614 (2,436)
--------- --------- --------- ---------
</TABLE>
F - 4
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
for the three- and nine-month periods ended September 30, 1997 and 1996
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three-Month Period Nine-Month Period
Ended September 30, Ended September 30,
----------------------- -----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Financing activities:
<S> <C> <C> <C> <C>
Proceeds from revolving warehouse loans 112,012 72,550 356,569 174,802
Principal payments on revolving warehouse loans (130,898) (61,185) (341,936) (164,329)
Net change in certificates of deposit 7,525 (1) 8,408 (1)
Proceeds from mortgage loans payable -- -- 800 --
Principal payments on mortgages payable (18) (8) (42) (30)
Net increase (decrease) in:
Notes payable - related parties (302) 266 (135) 1,886
Certificates of indebtedness 29 52 24 (56)
Reissuance of common stock -- 141 -- 440
Redemption of common stock warrants -- -- 332 --
Cash dividends paid -- (50) -- (149)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities (11,652) 11,765 24,020 12,563
--------- --------- --------- ---------
Increase (decrease) in cash 5,913 (2,186) 5,476 (784)
Cash at beginning of period 3,003 2,186 3,440 784
--------- --------- --------- ---------
Cash at end of period $ 8,916 $ -- $ 8,916 $ --
========= ========= ========= =========
Supplemental cash flow information:
Cash paid for interest $ 1,492 $ 556 $ 4,154 $ 2,111
Cash paid for income taxes 366 536 2,536 1,740
Supplemental noncash information:
Net increase in real estate owned $ 888 $ 929 $ 3,119 $ 2,607
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 5
<PAGE>
APPROVED FINANCIAL CORP.
SELECTED NOTES TO CONSOLIDATED STATEMENTS
for the three- and nine-month periods ended September 30, 1997 and 1996
Note 1:
- -------
The interim condensed consolidated financial statements are unaudited but,
in the opinion of management, reflect all adjustments necessary for a fair
presentation of results for such periods. All such adjustments are of a normal,
recurring nature. The results of operations for any interim period are not
necessarily indicative of results for the full year. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's audited
financial statements for the year ended December 31, 1996. The accompanying
consolidated financial statements for prior periods reflect certain
reclassifications in order to conform to the 1997 presentation.
Note 2:
- -------
For purposes of computing net earnings per share, the weighted average
number of shares outstanding for the quarters ended September 30, 1997 and 1996
were 5,392,408 and 5,049,180 respectively. The number of shares has been
adjusted to reflect two-for-one splits of the Company's common stock, which
occurred on August 30, 1996, December 16, 1996 and November 21, 1997. The
Company paid no dividends in 1997. The Company paid cash dividends of $.01 per
share per quarter in 1996.
F - 6
<PAGE>
APPROVED FINANCIAL CORP.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Pages
-----
Report of Independent Accountants.................................... F - 8
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 1996 and 1995......... F - 9
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994........................... F - 10
Consolidated Statements of Shareholders' Equity
for the years ended December 31,
1996, 1995 and 1994................................... F - 11 - F - 12
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994.......... F - 13 - F - 14
Notes to Consolidated Financial Statements................. F - 15 - F - 36
F - 7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Approved Financial Corporation
We have audited the accompanying consolidated balance sheets of Approved
Financial Corporation and Subsidiaries, formerly American Industrial Loan
Association, as of December 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Approved Financial Corporation and Subsidiaries at December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand, L.L.P.
Virginia Beach, Virginia
April 18, 1997
F - 8
<PAGE>
APPROVED FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Cash $ 3,440,106 $ 784,126
Mortgage loans, net 45,422,875 28,430,230
Real estate owned, net 2,076,649 1,142,382
Securities 20,139,714 712,528
Premises and equipment, net 2,224,527 1,411,108
Other assets 1,839,555 2,005,070
------------ ------------
Total assets $ 75,143,426 $ 34,485,444
============ ============
LIABILITIES AND EQUITY
Liabilities:
Revolving warehouse loan $ 34,177,070 $ 19,566,171
Mortgage payable 478,250 524,254
Notes payable - related parties 6,838,551 4,872,500
Certificates of indebtedness 2,343,550 2,032,300
Certificates of deposit 1,576,337 --
Accrued and other liabilities 1,498,415 488,762
Deferred income 70,522 156,539
Income taxes payable 984,780 542,265
Deferred tax liability 5,335,445 --
------------ ------------
Total liabilities 53,302,920 28,182,791
------------ ------------
Minority interests in subsidiaries 631,293 67,003
Shareholders' equity:
Preferred stock - Series A, $10 par value; noncumulative, voting:
Authorized 100 shares, 90 shares issued and outstanding 900 900
Preferred stock - Series B, $10 par value; noncumulative, voting:
Authorized 50,000 shares, none issued and outstanding -- --
Common stock, par value - $.25: Authorized 20,000,000 shares,
Issued and outstanding 2,519,368 shares in 1996
and 2,426,720 in 1995 629,842 606,680
Unrealized gain on securities available for sale,
net of deferred taxes 11,400,755 --
Additional capital 1,485,473 1,142,420
Retained earnings 7,692,243 4,485,650
------------ ------------
Total equity 21,209,213 6,235,650
------------ ------------
Total liabilities and equity $ 75,143,426 $ 34,485,444
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 9
<PAGE>
APPROVED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
Revenue:
<S> <C> <C> <C>
Gain on sale of loans $ 17,954,451 $ 7,298,459 $ 2,183,668
Interest income 4,520,348 3,065,043 2,555,735
Income from limited partnership 479,843 595,818 231,027
Other fees and income 1,927,113 939,184 408,007
------------ ------------ ------------
24,881,755 11,898,504 5,378,437
------------ ------------ ------------
Expenses:
Compensation and related 7,890,069 3,814,211 1,454,920
General and administrative 6,853,093 3,050,167 1,336,594
Interest expense 3,120,708 2,194,190 1,700,169
Provision for loan and foreclosed property losses 1,307,690 730,494 190,662
------------ ------------ ------------
19,171,560 9,789,062 4,682,345
------------ ------------ ------------
Income before minority interests
and income taxes 5,710,195 2,109,442 696,092
Minority interests in net income (loss) of subsidiaries 126,891 66,396 (3,002)
------------ ------------ ------------
Income before income taxes 5,583,304 2,043,046 699,094
Provision for income taxes 2,259,794 876,306 327,737
------------ ------------ ------------
Net income $ 3,323,510 $ 1,166,740 $ 371,357
============ ============ ============
Net income per share:
Primary $ 1.26 $ 0.46 $ 0.15
============ ============ ============
Fully diluted $ 1.26 $ 0.46 $ 0.15
============ ============ ============
Weighted average number of shares outstanding:
Primary 2,636,446 2,522,681 2,517,675
============ ============ ============
Fully diluted 2,647,447 2,537,681 2,517,675
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 10
<PAGE>
APPROVED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Preferred Stock
Series A Common Stock
---------------- ------------------------
Shares Amount Shares Amount
------ ------ ---------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 90 $ 900 634,680 $ 634,680
Repurchase of common stock -- -- (3,000) (3,000)
Net income -- -- -- --
Dividends on common stock -- -- -- --
------ ------ ---------- ---------
Balance at December 31, 1994 90 900 631,680 631,680
Repurchase of common stock -- -- (25,000) (25,000)
Net income -- -- -- --
Transfer -- -- -- --
Dividends on common stock -- -- -- --
------ ------ ---------- ---------
Balance at December 31, 1995 90 900 606,680 606,680
Reissuance of common stock -- -- 22,000 22,000
2:1 stock split -- -- 628,680 --
2:1 stock split -- -- 1,257,360 --
Net income -- -- -- --
Redemption of warrants -- -- 4,648 1,162
Change in net unrealized gain on
securities available for sale
(net of tax of $7,600,504) -- -- -- --
Dividends on common stock -- -- -- --
------ ------ ---------- ---------
Balance at December 31, 1996 90 $ 900 2,519,368 $ 629,842
====== ====== ========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 11
<PAGE>
APPROVED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, CONTINUED
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Unrealized
Gain in
Securities
Additional Available Retained
Capital for Sale, Net Earnings Total
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $ 614,420 $ -- $ 4,121,559 $ 5,371,559
Repurchase of common stock (15,750) -- (5,762) (24,512)
Net income -- -- 371,357 371,357
Dividends on common stock -- -- (203,107) (203,107)
------------ ------------ ------------ ------------
Balance at December 31, 1994 598,670 -- 4,284,047 5,515,297
Repurchase of common stock (131,250) -- (93,750) (250,000)
Net income -- -- 1,166,740 1,166,740
Transfer 675,000 -- (675,000) --
Dividends on common stock -- -- (196,387) (196,387)
------------ ------------ ------------ ------------
Balance at December 31, 1995 1,142,420 -- 4,485,650 6,235,650
Reissuance of common stock 335,500 -- 82,500 440,000
2:1 stock split -- -- -- --
2:1 stock split -- -- -- --
Net income -- -- 3,323,510 3,323,510
Redemption of warrants 7,533 -- -- 8,715
Change in net unrealized gain on
securities available for sale
(net of tax of $7,600,504) -- 11,400,755 -- 11,400,755
Dividends on common stock -- -- (199,417) (199,417)
------------ ------------ ------------ ------------
Balance at December 31, 1996 $ 1,485,473 $ 11,400,755 $ 7,692,243 $ 21,209,213
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 12
<PAGE>
APPROVED FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
Operating activities:
<S> <C> <C> <C>
Net income $ 3,323,510 $ 1,166,740 $ 371,357
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation 132,506 130,787 82,003
Provision for loan losses 689,615 273,630 41,765
Provision for losses on real estate owned 618,075 456,864 148,897
Loss on sale of real estate owned 191,835 129,286 --
Share of limited partnership income (479,843) (595,818) (231,027)
Proceeds from sale and prepayments of loans 253,520,453 97,229,139 43,415,402
Loans held for sale originations (249,056,934) (98,989,300) (42,204,500)
Gain on sale of loans (17,954,451) (7,298,459) (2,183,668)
Minority interests in net income (loss)
of subsidiaries 126,891 66,396 (3,002)
Changes in operating assets and liabilities:
Refundable income taxes -- -- 312,919
Other assets (1,433,254) (1,113,402) (368,363)
Other liabilities (588,084) 342,007 19,502
Income taxes payable 442,515 332,068 210,197
Deferred income (86,017) (1,794) 18,829
------------- ------------- -------------
Net cash used in operating activities (10,553,183) (7,871,856) (369,689)
Investing activities:
Loans held for investment originations, net (1,680,280) (1,623,856) (874,221)
Purchase of premises and equipment (945,925) (505,593) (119,164)
Increase (decrease) in real estate owned (1,744,177) 351,553 (195,840)
Net change in limited partnership interest 97,516 428,193 (134,198)
Net cash paid for acquisition of Savings Bank (244,208) -- --
------------- ------------- -------------
Net cash used in investing activities (4,517,074) (1,349,703) (1,323,423)
</TABLE>
F - 13
<PAGE>
APPROVED FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
Financing activities:
<S> <C> <C> <C>
Proceeds from note payable $ 262,853,459 $ 109,270,497 $ 38,160,940
Principal payments on note payable (248,242,560) (97,430,862) (36,224,268)
Net increase (decrease) in notes
payable - related parties 1,966,051 (1,369,256) (1,039,015)
Principal payments on mortgages payable (46,004) (145,013) (4,484)
Net increase (decrease) in certificates
of indebtedness 311,250 (272,356) 24,500
Net increase in certificates of deposit 197,344 -- --
Contributions from minority interests 437,399 (6,393) 10,002
Reissuance of common stock 440,000 -- --
Redemption of common stock warrants 8,715 -- --
Repurchase of common stock -- (250,000) (24,512)
Dividends paid (199,417) (196,387) (203,107)
------------- ------------- -------------
Net cash provided by financing activities 17,726,237 9,600,230 700,056
------------- ------------- -------------
Increase (decrease) in cash 2,655,980 378,671 (993,056)
Cash at beginning of year 784,126 405,455 1,398,511
------------- ------------- -------------
Cash at end of year $ 3,440,106 $ 784,126 $ 405,455
============= ============= =============
Supplemental cash flow information:
Cash paid for interest $ 3,069,596 $ 2,143,478 $ 1,602,872
Cash paid for income taxes 2,879,978 1,264,954 392,700
Supplemental noncash information:
Net increase (decrease) in real estate owned $ 1,096,882 $ (1,770,919) $ (1,896,567)
Conversion of and recognition of unrealized gains of
partnership interest to common stock 19,001,258 -- --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 14
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 1. LINE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of Approved Financial Corporation,
formerly American Industrial Loan Association, and Subsidiaries ("Approved" or
the "Company") follow generally accepted accounting principles. The following is
a summary of the more significant policies.
The Company is licensed as an industrial loan association in Virginia, and as a
mortgage lender in the state of Maryland. The Company is primarily engaged in
the consumer finance business of originating, servicing and selling home equity
loans secured primarily by first and second liens on one-to-four family
residential properties. The Company conducts most of its activities through its
two subsidiaries, Approved Residential Mortgage, Incorporated ("Approved
Residential") and Armada Residential Mortgage, L.L.C. ("Armada Residential").
The Company's wholly-owned subsidiary, Approved Residential, formerly American
Residential Equity Corporation, is licensed as a mortgage lender in the states
of Maryland, Georgia, Florida, North Carolina, Illinois, Indiana and Wisconsin.
Additionally, Approved Residential is able to and is originating first lien
mortgages in Ohio without having to obtain a license and first and second lien
mortgages (where the APR is below 12 percent) in South Carolina without having
to obtain a license. Finally, Approved Residential is authorized to do business
as a foreign corporation in Maryland, Colorado, the District of Columbia,
Georgia, Florida, Illinois, Indiana, Minnesota, Michigan, North Carolina,
Tennessee, Wisconsin and Utah.
During 1994, Approved Residential Mortgage formed a joint venture, Armada
Residential Mortgage, LLC. Armada Residential is authorized to conduct business
in the state of Maryland and the District of Columbia. Armada Residential was
established to originate non-conforming residential mortgages at retail
locations. Approved Residential owns 82 percent and Approved Financial
Corporation owns one percent of the joint venture.
During 1996, the Company purchased 87.3 percent of First Security Federal
Savings Bank, Inc., (the "Savings Bank"). The Savings Bank is a federally
chartered institution and is authorized to originate conforming first mortgage
loans collateralized by real estate in Virginia, Maryland, and the District of
Columbia.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company, its wholly-owned subsidiary, its 87.3 percent owned
Savings Bank, and its 83 percent owned joint venture. All significant
intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
F - 15
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 1. LINE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
LOANS HELD FOR SALE AND INVESTMENT: Loans held for sale are carried at the lower
of aggregate cost or market value less net deferred net fees and an allowance
for loan losses. Loans held for investment are stated at the amount of unpaid
principal less deferred net fees and an allowance for loan losses.
Effective January 1, 1995, the Company adopted SFAS 114 and 118. The adoption of
SFAS 114 and 118 did not result in any additional provision for credit losses at
January 1, 1995. At December 31, 1996 and 1995, the recorded investment in loans
for which impairment has been determined in accordance with SFAS 114 totaled
$1,157,000 and $869,000. The average recorded investment in impaired loans for
the years ended December 31, 1996 and 1995 was approximately $64,000 and
$86,000, respectively. Interest income recognized related to these loans was
approximately $13,000 and $10,000 during 1996 and 1995, respectively. Due to the
homogenous nature and the collateral securing these loans, there is no
corresponding valuation allowance.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained at a
level believed adequate by management to absorb potential losses in the loan
portfolio. Management's determination of the adequacy of the allowance is based
on an evaluation of current economic conditions, volume, growth, debt covenants,
and other relevant factors. The allowance is increased by provisions for loan
losses charged against income. Loan losses are charged against the allowance
when Management believes collectibility is unlikely.
In May, 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights." This statement amends SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities" and requires that a mortgage banking enterprise recognize as
a separate asset rights to service mortgage loans for others however these
servicing rights are acquired. Loans classified as for sale by the Company are
originated in house and are usually sold within three months, without retention
of the servicing rights. The Company adopted this statement on January 1, 1996.
SFAS No. 122 did not have a material impact on the results of operations or
financial position for the year ended December 31, 1996.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities." This statement
supercedes SFAS No. 122, "Accounting for Mortgage Servicing Rights" and requires
that after a transfer of financial assets, an entity recognizes the financial
and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This Statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996. The Company adopted this statement on January
1, 1997 and has determined that it will not have a material effect on the
results of operations or financial position for the year ended December 31,
1997.
F - 16
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 1. LINE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
REAL ESTATE OWNED: Real estate owned is valued at the lower of cost or fair
market value, net of estimated disposal costs. Cost includes loan principal and
certain capitalized expenses. Any excess of cost over the estimated fair market
value at the time of acquisition is charged to the allowance for loan losses.
The estimated fair market value is reviewed periodically by management and any
write-downs are charged against current earnings using a valuation account which
has been netted against real estate owned in the financial statements. Income
from temporary rental of the properties is credited against the investment when
collected. Capital improvements are capitalized to the extent of net realizable
value. Additional carrying costs, including taxes, utilities and insurance, are
recognized as expenses when incurred.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight line
method over the estimated useful lives of the related assets. Useful lives range
from five to ten years for furniture and equipment and up to thirty years for
the building. The cost of leasehold improvements is amortized using the
straight-line method over the lesser of the lives of the improvements or the
terms of the leases. Repairs and maintenance are charged to expense as incurred.
SECURITIES: Securities are classified in three categories and accounted for as
follows:
a. Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as "held to maturity" securities and
reported at amortized cost.
b. Debt and equity securities that are purchased and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
c. Debt and equity securities not classified as either held to maturity or
trading securities are classified as available-for-sale securities and
reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of shareholders' equity.
All investment securities as of December 31, 1996 are classified as
available-for-sale.
Realized gains and losses on sales of securities are computed using the specific
identification method.
INCOME RECOGNITION: Interest on loans is credited to income based upon the
principal amount outstanding. Loan fees, net of origination costs, are deferred
and amortized by methods that generally result in level yields over the
estimated life of the loan. Interest is accrued on loans until they become 30
days or more past due.
F - 17
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 1. LINE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
INCOME TAXES: Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to temporary differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income tax
expense in the period that includes the enactment date.
EARNINGS PER SHARE: Earnings per share is based on the weighted average number
of shares of common stock and common stock equivalents of stock warrants
outstanding during the period using the treasury stock method.
On August 30, 1996 and December 16, 1996, the Board of Directors of the Company
declared 2-for-1 stock splits. The earnings per share, dividends per share, and
book values per share for years prior to 1996 have been adjusted to reflect
these transactions
Effective December 31, 1997, the Company will adopt Financial Accounting
Standards Board ("FASB") Statement No. 128, "Earnings Per Share," which will
supersede Accounting Principles Board ("APB") Opinion No. 15, "Earnings per
Share." This new statement requires that "basic earnings per share" be computed
by dividing income available to common shareholders by the weighted average
number of common shares outstanding for the period. "Diluted earnings per
share," if different, reflects potential dilution if stock options or other
contracts would result in the issue or exercise of additional shares of common
stock that shared in the earnings. "Basic earnings per share" and "diluted
earnings per share" will replace "primary earnings per share" and "fully diluted
earnings per share," respectively, as described under APB Opinion No. 15, and
must be reported on the income statement.
FASB Statement No. 128 may not be adopted for quarterly periods prior to
December 31, 1997, but supplemental pro forma disclosure of the impact FASB
Statement No. 128 may be reported.
Management does not anticipate any material change in the earnings per share
amounts as presently computed as a result of adopting this new standard.
USES OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the periods presented. Actual results could differ
from those estimates.
RECLASSIFICATIONS: Certain reclassifications have been made to amounts
previously reported in 1995 and 1994 to conform with the 1996 presentation.
F - 18
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 2. COMPENSATING BALANCE AGREEMENT:
The Company is required to maintain average deposit balances of $100,000 in
connection with one of its line of credit arrangements.
NOTE 3. SECURITIES:
The Company was a limited partner in Industry Mortgage Company, L.P. ("Industry
Mortgage") until June 24, 1996. The Company's partnership percentage was 9.0909
percent as of December 31, 1995. The Company accounted for this investment under
the equity method of accounting. Industry Mortgage Company is a mortgage banking
firm whose primary activity consists of the acquisition and sale of
nonconforming residential mortgage loans.
On June 24, 1996, with its initial public offering, Industry Mortgage changed
its corporate structure from a limited partnership to a C-Corporation. Common
stock was issued to the limited partners in exchange for their partnership
interest based on their ownership percentages and the value of their investment
as of June 24, 1996. An independent appraisal valuation of Industry Mortgage was
performed which determined the value of the partners' interest. As a result,
Approved's partnership interest was converted into 544,328 shares of common
stock. Also, during the year, the Company purchased an additional 55,556 shares
for $1 million.
As of December 31, 1996, the market value of the investment was $20,096,114 and
the unrealized holding gain, net of deferred income taxes, was $11,400,755.
During 1996, the Company acquired stock in the Federal Home Loan Bank of Atlanta
as part of the acquisition of the Savings Bank. This investment, totaling
$43,600, is stated at cost which approximates fair value.
F - 19
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 4. LOANS AND NONPERFORMING ASSETS:
Loans held for investment and loans held for sale at December 31, 1996 and 1995
were:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net interest deferred loans $ 419,283 $ 574,940
Interest-bearing loans held for investment 5,683,583 5,313,708
Loans to related parties 456,352 459,683
----------- -----------
Total gross loans held for investment 6,559,218 6,348,331
Allowance for loan losses 110,151 128,246
----------- -----------
Total net loans held for investment $ 6,449,067 $ 6,220,085
=========== ===========
Interest-bearing loans held for sale $39,788,475 $22,676,079
Allowance for loan losses 814,667 465,934
----------- -----------
Total net loans held for sale $38,973,808 $22,210,145
=========== ===========
</TABLE>
The above loan amounts have been reduced by net deferred loan fees and unearned
discounts on purchased loans totaling $869,875 and $691,104 as of December 31,
1996 and 1995, respectively.
The Company's loans are primarily nonconforming residential mortgage loans that
are collateralized by first or second deeds of trust on real estate, primarily
residential properties. The properties collateralizing these loans are primarily
located in Virginia, Maryland, Georgia, Indiana, Florida, Illinois, South
Carolina, Michigan, Ohio, Tennessee, Delaware, Wisconsin and North Carolina.
Interest deferred loans and interest-bearing loans include single family
residential first and second mortgage loans, with maturities of up to 360
months. Loans to related parties include three demand loans to a shareholder
collateralized by certain notes payable to related parties of the Company, and a
demand note collateralized by Company stock. These related party loans bear
interest at or above market rates when the loans were originated and are made on
substantially the same terms as loans to other borrowers. Interest income on
related party loans was $35,630, $38,000 and $42,000 in 1996, 1995 and 1994,
respectively.
F - 20
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 4. LOANS AND NONPERFORMING ASSETS, CONTINUED:
Changes in the allowance for loan losses for the years ended December 31, 1996,
1995 and 1994 were:
1996 1995 1994
--------- --------- ---------
Balance at beginning of year $ 594,180 $ 567,190 $ 511,255
Charge-offs (387,069) (307,067) (69,347)
Recoveries 28,092 60,427 83,517
Provision 689,615 273,630 41,765
--------- --------- ---------
Balance at end of year $ 924,818 $ 594,180 $ 567,190
========= ========= =========
Nonaccrual loans were $3,042,497 and $2,578,421 at December 31, 1996 and 1995,
respectively. The amount of additional interest that would have been recorded
had these loans not been placed on nonaccrual status was approximately $91,000,
$69,000, and $39,000 in 1996, 1995 and 1994, respectively.
Changes in the foreclosed properties valuation allowance for the years ended
December 31, 1996, 1995 and 1994 were:
1996 1995 1994
--------- --------- ---------
Balance at beginning of year $ 366,295 $ 265,156 $ 210,825
Charge-offs (455,480) (355,725) (94,566)
Provision 618,075 456,864 148,897
--------- --------- ---------
Balance at end of year $ 528,890 $ 366,295 $ 265,156
========= ========= =========
The Company sold to Industry Mortgage Company 1,536, 504, and 116 loans totaling
$100,095,152, $37,992,966, and $10,411,000 and recognized gains on the sale of
these loans of $6,647,774, $2,372,406, and $342,000 during the years ended
December 31, 1996, 1995 and 1994, respectively.
F - 21
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 5. PREMISES AND EQUIPMENT:
Premises and equipment at December 31, 1996 and 1995 were summarized as follows:
1996 1995
---------- ----------
Land $ 240,036 $ 240,036
Building 389,319 389,319
Building improvements 344,309 239,676
Furniture, fixtures and equipment 1,621,455 830,799
Vehicles 222,252 171,614
---------- ----------
2,817,371 1,871,444
Less accumulated depreciation 592,844 460,336
---------- ----------
Premises and equipment, net $2,224,527 $1,411,108
========== ==========
NOTE 6. LEASES:
The Company leases some of its office facilities and equipment under operating
leases which expire at various times through 2001. Lease expense was $317,373,
$141,750 and $10,866 in 1996, 1995 and 1994, respectively. Total minimum lease
payments under noncancelable operating leases with remaining terms in excess of
one year as of December 31, 1996 were as follows:
1997 $ 475,801
1998 404,458
1999 276,341
2000 69,393
2001 30,823
----------
$1,256,816
==========
F - 22
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 7. REVOLVING WAREHOUSE FACILITIES:
Amounts outstanding under revolving warehouse facilities at December 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Warehouse facility with commercial bank collateralized by
mortgages/deeds of trust; expires July 17, 1997 with
interest at 1.75% over applicable LIBOR rate (5.6875%
at December 31, 1996); total credit available $25
million $17,146,703 $ 3,534,746
Warehouse facility with commercial bank collateralized by
assets of the Company; expires September 30, 1997 with
interest at .75% over applicable prime rate (8.0% at
December 31, 1996); total credit available $25 million 13,515,648 16,031,425
Warehouse facility with investor collateralized by
mortgages/deeds of trust; expires January 29, 1998 with
interest at 1.75% over applicable LIBOR rate (5.6875%
at December 31, 1996); total credit available $8
million 3,514,719 --
----------- -----------
$34,177,070 $19,566,171
=========== ===========
</TABLE>
The weighted-average interest rate paid on the revolving warehouse facilities in
1996 was 9.19%.
During the first quarter of 1997, the Company entered into a $60,000,000
warehouse line of credit agreement with a commercial bank. This warehouse line
of credit is collateralized by mortgage notes kept in the lenders' warehouse.
Interest on the warehouse line of credit is the applicable LIBOR rate plus
1.75%. The Company can keep notes in the warehouse for a maximum of 120 days.
The line of credit expires on January 31, 1998.
Also, during the first quarter of 1997, the Company terminated one of its
$25,000,000 lines of credit. The warehouse line canceled had an interest rate of
prime plus .75%.
F - 23
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 8. NOTES PAYABLE - RELATED PARTIES:
Notes payable - related parties are amounts due to shareholders, officers and
others related to the Company. These notes are subordinate to the line of credit
and all other collateralized indebtedness of the Company. Interest expense on
notes payable - related parties was $547,473, $530,120 and $577,155 in 1996,
1995 and 1994, respectively. The interest rates on the notes range from 8.00% to
10.25% and the notes mature as follows:
1997 $ 456,501
1998 1,782,244
1999 3,272,893
2000 741,763
2001 585,150
----------
$6,838,551
==========
NOTE 9. CERTIFICATES OF INDEBTEDNESS:
Certificates of indebtedness are subordinate to the lines of credit and all
other collateralized indebtedness of the Company and are summarized as follows
at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
One year certificates bearing interest at 6.75% $ 50,000 $ 68,000
Three year certificates bearing interest from 8% to 10% 776,250 366,300
Five year certificates bearing interest from 8.5% to 10% 1,517,300 1,598,000
---------- ----------
$2,343,550 $2,032,300
========== ==========
</TABLE>
Certificates of indebtedness maturities were as follows as of December 31, 1996:
1997 $ 492,324
1998 262,800
1999 130,000
2000 817,600
2001 640,826
----------
$2,343,550
==========
F - 24
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 10. MORTGAGE NOTE PAYABLE:
Mortgage note payable at December 31, 1996 and 1995 was:
1996 1995
--------- ---------
Mortgage note payable - premises and equipment $ 478,250 $ 524,254
========= =========
The mortgage note payable, which is collateralized by the Company's office
building, is due in monthly installments of $7,186, including interest at 7.99%,
and matures in May 2004.
Aggregate maturities for mortgages payable are as follows as of December 31,
1996:
1997 $ 49,818
1998 53,948
1999 58,420
2000 63,273
2001 68,508
Thereafter 184,283
--------
$478,250
========
NOTE 11. RENTAL INCOME:
The Company has one lease agreement with a tenant of its building which expires
on November 14, 1997. Rental income related to this lease was $9,600, $9,000 and
$8,400 in 1996, 1995 and 1994, respectively, and is included in other income.
The minimum future lease income from this noncancelable lease for 1997 is
$8,800.
F - 25
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 12. SHAREHOLDERS' EQUITY:
Prior to its stock offering in 1992, the Company issued warrants to purchase
190,404 shares of common stock at $1.87 per share to its then existing
shareholders. The warrants expire on April 20, 1997. The Company has reserved
shares of its authorized stock for possible issuance upon exercise of the
warrants. Subsequent to December 31, 1996, all but 8,920 warrants were exercised
by April 18, 1997.
The Company has 50,000 shares of Series B Preferred Stock authorized for future
issuance. The stock has a stated par value of $10 per share and is
noncumulative, nonvoting. There were no shares issued or outstanding at December
31, 1996 or 1995.
In 1995, the Company's Board of Directors approved a transfer of $675,000 from
retained earnings to additional paid-in capital. After the transfer, the Company
cannot make loans in excess of $350,000 under existing regulations.
During 1996, the Board of Directors approved the grant of stock appreciation
rights ("SARs") to one board member. The SARs expire in three years and upon
expiration of the SARs for 8,000 shares of common stock, the holder shall
receive cash in an amount equivalent to the difference between the grant price
and the fair market value of the shares at the time of expiration. The grant
price is $5.25. The compensation expense associated with issuance of the SARs
was approximately $94,000 during 1996.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation," effective for fiscal years beginning after December 15, 1995. The
standard encourages, but does not require, companies to recognize compensation
expense for grants of stock, stock options, and other equity instruments to
employees based on the new fair value accounting rules. The Company is currently
following Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related Interpretations in accounting for employee
equity instruments.
Prospectively, the Company has determined that it will not adopt SFAS 123 for
expense recognition purposes. The Company will continue to follow the provisions
of APB 25 and make the pro forma disclosures as required by SFAS 123. Pro forma
disclosures are not required for awards issued prior to December 15, 1994. The
Company does not expect that the statement will have a material impact on
results of operations or financial position.
The Company's shareholders approved the formation of an incentive stock option
plan at their annual shareholder's meeting in 1996. On January 27, 1997, the
Company issued stock options to key employees to purchase up to 4,600 shares of
the Company's common stock. The employees have a ten-year period to exercise
their options at an exercise price of $19.50 per share.
F - 26
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 13. INCOME TAXES:
The components of income tax expense for the years ended December 31, 1996, 1995
and 1994 were as follows:
1996 1995 1994
----------- ----------- ---------
Current $ 3,147,059 $ 1,628,951 $ 660,069
Deferred (887,265) (752,645) (332,332)
----------- ----------- ---------
$ 2,259,794 $ 876,306 $ 327,737
=========== =========== =========
The provision for income taxes for financial reporting purposes differs from the
amount computed by applying the statutory federal tax rate to income before
taxes. The principal reasons for these differences for the years ended December
31, 1996, 1995 and 1994 were:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Provision for income taxes at
statutory federal rate $1,898,323 $ 694,636 $ 237,692
State income taxes, net of federal benefit 331,648 121,357 41,526
Nondeductible expenses 29,394 28,297 21,611
Other, net 429 32,016 26,908
---------- ---------- ----------
$2,259,794 $ 876,306 $ 327,737
========== ========== ==========
</TABLE>
F - 27
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 13. INCOME TAXES, CONTINUED:
Significant components of the Company's deferred tax assets and liabilities at
December 31, 1996 and 1995 were:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
Deferred tax assets:
<S> <C> <C>
Allowance for loan and real estate owned losses $ 579,910 $ 383,230
Deferred loan fees 443,012 226,564
Mark to market on loans held for sale 964,048 460,833
Deferred income 68,038 129,363
Partnership temporary differences 239,400 187,925
Deferred compensation -- 24,799
----------- -----------
Total deferred tax assets 2,294,408 1,412,714
Deferred tax liabilities:
Market value of securities 7,600,504 --
Other 29,349 --
----------- -----------
Total deferred tax liabilities 7,629,853 --
----------- -----------
Net deferred tax asset (liability) $(5,335,445) $ 1,412,714
=========== ===========
</TABLE>
The Company believes that a valuation allowance with respect to the realization
of the gross total deferred tax assets is not necessary. Based on the Company's
historical earnings, future expectations of taxable income and potential net
operating loss carrybacks, management believes it is more likely than not that
the Company will realize the gross deferred tax assets existing at December 31,
1996. However, there can be no assurances that the Company will generate taxable
income in any future period.
NOTE 14. RETIREMENT PLAN:
The employees of the Company participate in a defined contribution profit
sharing plan which is administered by officers of the Company. Company
contributions to the plan are discretionary, as authorized by the Board of
Directors. There were no contributions for 1996, 1995 and 1994. Participants are
also eligible to make voluntary contributions to the plan, at the discretion of
the administrator. There were no voluntary contributions to the plan for the
years ended December 31, 1996, 1995 and 1994.
F - 28
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 14. RETIREMENT PLAN, CONTINUED:
During 1994, the Company established a nonqualified retirement plan for several
key members of management. The plan allows participants to defer compensation
from the current year. Company contributions to the plan are discretionary, as
authorized by the Board of Directors. Contributions for the years ended December
31, 1996, 1995 and 1994 were $0, $56,000 and $71,500, respectively.
On January 1, 1995, the Company implemented a 401(k) Retirement Plan. The Plan
is a defined contribution plan covering all employees who have completed at
least one year of service. The Plan is subject to the provisions of the Employee
Retirement Income Security Act of 1974. The Company contributes an amount equal
to 50 percent of a participant's payroll savings contribution up to 6 percent of
a participant's annual compensation. The Company's contributions to the plan in
1996 and 1995 were $33,000 and $15,000, respectively.
NOTE 15. EMPLOYMENT AGREEMENTS:
The Company has employment agreements with various employees. The agreements
expire at various times throughout 1997. Among other things, the agreements
provide for severance benefits payable to the officers upon termination of
employment following a change of control in the Company.
NOTE 16. ACQUISITION:
Effective September 11, 1996, the Company purchased 87.3 percent of the common
stock (11,300 of the total 12,941 total issued and outstanding shares) of First
Security Federal Savings Bank, Incorporated (the "Savings Bank") for $2,776,000.
The Company acquired substantially all of the remaining outstanding shares of
the Savings Bank's stock in April 1997 for $382,000. The total purchase price of
$3,158,000 represented the Savings Bank's book value at the acquisition date
plus $150,000. The Company also incurred $94,208 of capitalized legal and other
costs in connection with the acquisition. The transaction has been accounted for
under the purchase method of accounting and the associated intangible of
$150,000 is being amortized over a period of 10 years by the Savings Bank.
Prior to the acquisition, the Savings Bank was a privately owned, federally
chartered thrift institution located in Annandale, Virginia with assets of
$5,489,698 consisting primarily of cash, loans and other assets totaling
$2,268,760, $2,511,048 and $709,890, respectively. Total liabilities were
$1,909,960 and consisted predominately of certificates of deposits totaling
$1,378,993 as of the acquisition date. The primary focus of the Savings Bank was
the origination of conforming residential mortgage loans in Maryland,
Washington, D.C. and northern Virginia. The Savings Bank sold most of its loans
to investors without retention of the servicing rights. Its primary funding
source was the issuance of certificates of deposit insured up to $100,000 by the
Federal Deposit Insurance Corporation.
F - 29
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 16. ACQUISITION, CONTINUED:
The Company acquired the Savings Bank to complement its nonconforming
residential mortgage business. After the acquisition, the Company began the
process of winding down the Savings Bank's operations. The Company installed a
new management team at the Savings Bank, and has moved the institution to leased
space in Virginia Beach, Virginia. The long-term lease for the Annandale
operations center expired in February 1997 and was not renewed. As of November
1, 1996, the Savings Bank discontinued its mortgage banking operations and most
of the mortgage personnel were terminated. Estimated costs and related
expenditures to move the operations to Virginia Beach were approximately
$25,000. Mortgage loans in process but not closed as of that date were closed by
other lenders. The Savings Bank's management also terminated all lease
agreements for space used in the mortgage banking operations.
The Savings Bank's management is starting a Virginia Beach-based mortgage
banking operation, with emphasis on the origination of conforming home mortgage
loans. The Savings Bank will also offer conforming loan products elsewhere in
Virginia and in other states. The Savings Bank's growth will be funded primarily
with insured customer deposits and advances from the Federal Home Loan Bank of
Atlanta collateralized by mortgage loans held by the Savings Bank.
At December 31, 1996, the Savings Bank had total assets of $4.9 million,
consisting primarily of $2.9 million of cash and $1.1 million of mortgage loans
receivable. The Savings Bank had $1.8 million of liabilities, consisting
primarily of $1.6 million in FDIC-insured customer deposits. The Savings Bank
incurred a loss of $61,434 for the period from the date of acquisition by
Approved through December 31, 1996. The financial condition and results of
operations, since acquisition of the Savings Bank are reflected in the
consolidated financial statements. On a pro forma basis, the net loss incurred
by the Savings Bank for the period January 1, 1996 through December 31, 1996 was
approximately $646,000 (unaudited). As previously noted, on November 1, 1996,
the Savings Bank terminated its mortgage banking operations in Northern
Virginia, and relocated its mortgage banking operations to Virginia Beach,
Virginia. Subsequent to December 31, 1996 and the relocation of its mortgage
banking operations, the Savings Bank's results of operations have become
profitable again (unaudited).
On January 27, 1997, the Board of Directors of the Savings Bank changed the name
of the institution to Approved Federal Savings Bank, pending approval by the
Office of Thrift Supervision.
F - 30
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 17. REGULATORY CAPITAL:
Savings institutions, such as the Savings Bank, must maintain specific capital
standards that are no less stringent than the capital standards applicable to
national banks. Regulations of the OTS currently maintain three capital
standards: a tangible capital requirement, a core capital requirement, and a
risk-based capital requirement.
The tangible capital standard requires the Bank to maintain tangible capital of
not less than 1.5% of total adjusted assets. As it applies to the Bank,
"tangible capital" means core capital (as defined below).
The core capital standard requires the Bank to maintain "core capital" of not
less than 4.0%. Core capital includes the Bank's common stockholders' equity,
adjusted for certain nonallowable assets.
The risk-based standard requires the Bank to maintain capital equal to 8.0% of
risk-weighted assets. The rules provide that the capital ratio applicable to an
asset will be adjusted to reflect the degree of credit risk associated with such
asset, and the asset base used for computing the capital requirement includes
off-balance sheet assets.
At December 31, 1996, the Bank was classified as a "well-capitalized"
institution (financial institutions that maintain total risk based capital in
excess of 10%) as determined by the OTS and satisfied all regulatory capital
requirements, as shown in the following table reconciling the Bank's capital to
regulatory capital:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
----------- ----------- -----------
<S> <C> <C> <C>
GAAP capital $ 3,026,629 $ 3,026,629 $ 3,026,629
Nonallowable asset: goodwill (146,250) (146,250) (146,250)
Additional capital item: general allowance -- -- 24,500
----------- ----------- -----------
Regulatory capital - computed 2,880,379 2,880,379 2,904,879
Minimum capital requirement 70,916 189,108 156,344
----------- ----------- -----------
Excess regulatory capital $ 2,809,463 $ 2,691,271 $ 2,748,535
=========== =========== ===========
Ratios:
Regulatory capital - computed 60.93 % 60.93 % 148.64 %
Minimum capital requirement 1.50 4.00 8.00
----------- ----------- -----------
Excess regulatory capital 59.43 % 56.93 % 140.64 %
=========== =========== ===========
</TABLE>
F - 31
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 17. REGULATORY CAPITAL, CONTINUED:
The payment of cash dividends by the Savings Bank is subject to regulation by
the OTS. The OTS measures an institution's ability to make capital
distributions, which includes the payment of dividends, according to the
institution's capital position. For institutions, such as the Savings Bank, that
meet their fully phased-in capital requirements, the OTS has established "safe
harbor" amounts of capital distributions that institutions can make after
providing notice to the OTS, but without needing prior approval. Institutions
can distribute amounts in excess of the safe harbor amount with the prior
approval of the OTS. The Savings Bank did not pay cash dividends to Approved in
1996.
NOTE 18. IMPACT OF DEPOSIT INSURANCE FUNDS ACT OF 1996:
The Savings Bank is a member of the Savings Association Insurance Fund ("SAIF").
On September 30, 1996, President Clinton signed into law the Deposit Insurance
Funds Act of 1996, which included provisions recapitalizing the SAIF, provides
for the eventual merger of the thrift fund with the Bank Insurance Fund ("BIF"),
and reallocates payment of the annual Financing Corp. ("FICO") bond obligation.
As part of the package, the Federal Deposit Insurance Corp. imposed a special
one-time assessment of 65.7 basis points to be applied against all
SAIF-assessable deposits as of March 31, 1995, which will bring the SAIF up to
the statutorily prescribed 1.25 percent designated reserve ratio. The special
assessment, which was paid in November 1996, was included as a $22,500 pretax
charge to the Savings Bank's operations in September 1996.
Effective January 1, 1997, SAIF members will have the same risk-based assessment
schedule as BIF members. The Savings Bank will effectively pay no assessment for
deposit insurance coverage beginning on January 1, 1997. However, all SAIF and
BIF institutions including the Savings Bank will be responsible for sharing the
cost of interest payments on the FICO bonds. The cost will be an annualized
charge of 1.3 basis points for BIF deposits and 6.4 basis points for SAIF
deposits. The annual cost of insurance payments for the Savings Bank is
estimated at $900.
As a result of the Deposit Insurance Funds Act of 1996, the Secretary of the
Treasury is to review recommendations in 1997 for the establishment of a common
charter for banks and savings associations. Accordingly, the Savings Bank may be
required to convert its federal savings bank charter to either a national bank
charter, a state depository institution charter, or a newly designed charter.
The Savings Bank may also become regulated at the holding company level by the
Board of Governors of the Federal Reserve System ("Federal Reserve") rather than
by the OTS. Regulation by the Federal Reserve could subject the Savings Bank to
capital requirements that are not currently applicable to the Savings Bank as a
holding company under OTS regulation and may result in statutory limitations on
the type of business activities in which the Savings Bank may engage at the
holding company level, which business activities currently are not restricted.
The Savings Bank is unable to predict whether such initiatives will result in
enacted legislation requiring a charter change and if so whether the charter
change would significantly impact the Savings Bank's operations.
F - 32
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
Effective January 1, 1995, the Company adopted SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments." SFAS No. 107 requires the Company to
disclose the estimated fair value for each class of financial instrument. Fair
value estimates are made at a specific point in time, based on relevant market
information about the financial instrument. These valuations, where applicable,
do not reflect any premium or discount that could result from offering for sale
at one time the Company's entire holdings of a particular financial instrument.
Fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment, and
changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. SFAS 107 specifically excludes certain items that do not
meet the definition of a financial instrument. These items include such things
as the Company's deferred tax assets, property, plant and equipment and
investments. In addition, the tax ramifications related to the realization of
the unrealized gains and losses may have a significant effect on fair value and
have not been considered in the estimates. Accordingly, the fair value
information presented does not purport to represent any underlying "market
value" of the Company taken as a whole.
The following methods and assumptions were used to estimate the fair value of
the Company's financial instruments.
CASH AND CASH EQUIVALENTS: Cash consists of currency and coin, cash items in
process of collection, and their carrying amounts approximate fair value.
SECURITIES: Fair values are based on quoted market prices or dealer quotes.
MORTGAGE LOANS: The fair value of the Company's nonconforming residential
mortgage loans held for investment is estimated by discounting the future cash
flows using interest rates currently being offered for loans with similar terms
to borrowers of similar credit quality.
The fair value of the Company's nonconforming residential mortgage loans held
for sale is estimated based on the expected holding period and the premium to be
received on the sale of the loan.
For nonperforming loans and certain loans where the credit quality of the
borrower has deteriorated significantly, fair values are estimated by
discounting expected cash flows at a rate commensurate with the risk associated
with the estimated cash flows, or recent appraisals of the underlying
collateral.
F - 33
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
INTEREST RECEIVABLE AND INTEREST PAYABLE: The carrying amount approximates fair
value.
REVOLVING WAREHOUSE LINES: The fair value of revolving warehouse lines are
estimated using the discounted value of expected cash flows. The discount rate
used is estimated using the rates currently in effect for similar borrowings.
MORTGAGE AND NOTES PAYABLE: The fair value of notes payable with contractual
maturities is based on the discounted value of expected cash flows. The discount
rates used are those currently offered for notes with similar remaining
maturities and terms.
CERTIFICATES OF INDEBTEDNESS: The fair value of the certificates of indebtedness
is calculated by discounting the future cash flows using an incremental rate of
borrowing that would be currently available to the Company for new debt of
similar remaining maturity and terms.
CERTIFICATES OF DEPOSIT: The fair values for certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated contractual
maturities on such time deposits.
F - 34
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
The estimated fair value of the Company's financial instruments at December 31,
1996 and 1995 required to be disclosed under SFAS 107 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- ----------- -----------
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 3,440,106 $ 3,440,106 $ 784,126 $ 784,126
Loans held for sale and loans
held for investment 45,422,875 44,898,254 28,430,230 28,954,709
Securities 20,139,714 20,139,714 712,528 712,528
Financial liabilities:
Notes payable and revolving
warehouse lines 41,015,621 40,118,119 24,438,671 24,255,826
Certificates of indebtedness 2,343,550 2,287,274 2,032,300 1,953,400
Mortgages payable 478,250 446,140 524,254 485,797
Certificates of deposit 1,576,337 1,573,371 -- --
</TABLE>
F - 35
<PAGE>
APPROVED FINANCIAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
for the years ended December 31, 1996, 1995 and 1994
NOTE 20. MINORITY INTERESTS:
Minority interests relate to a 17 percent partnership interest in the joint
venture Armada Residential and the 12.7 percent interest of shareholders in the
Savings Bank. The balances were as follows as of December 31, 1996:
Armada Residential Mortgage, LLC $ 169,840
Approved Federal Savings Bank 461,453
-----------
Total minority interests $ 631,293
===========
NOTE 21. SUBSEQUENT EVENT:
On January 22, 1997, the Company entered into an agreement to purchase an office
building in Virginia Beach, Virginia. The purchase price of the building is
$1,060,000. The Company is expected to finance this transaction with a mortgage
note.
F - 36
Appendix A
ARTICLES OF RESTATEMENT
OF THE
ARTICLES OF INCORPORATION
OF
APPROVED FINANCIAL CORP.
ARTICLE I - NAME
The name of this corporation is APPROVED FINANCIAL CORP.
ARTICLE II - DURATION
The Corporation shall have perpetual succession and duration.
ARTICLE III - REGISTERED AND BUSINESS OFFICE
The registered office of the Corporation in the Commonwealth of Virginia
is located, at the time of the Restatement of the Articles of Incorporation, at
Dominion Tower, 999 Waterside Drive, Suite 1515, Norfolk, Virginia 23510. The
registered agent at the time of the Amendment and Restatement of the Articles is
Ronald M. Gates, Esq., a member of the Virginia State Bar, who is a resident of
Virginia and whose business address is the same as the address of the registered
office.
ARTICLE IV - OBJECTS AND PURPOSES
The purpose for which the Corporation is formed is to conduct the
business of an industrial loan association and all other lawful business not
required to be specifically stated herein and not otherwise prohibited by law.
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<PAGE>
ARTICLE V - POWERS
The Corporation shall have and may exercise the following powers:
Section 1. To sue and be sued, complain and defend, in the corporate
name.
Section 2. To have and use a corporate seal, which the Corporation may
alter at its pleasure.
Section 3. To lend money for its corporate purposes, invest and reinvest
its funds and take and hold real and personal property as security for the
payment of funds so loaned or invested.
Section 4. To sell certificates of investment or similar obligations upon
either the fully paid or partial payment system, and to pay thereon such rate of
interest as may be prescribed in the By-Laws of the Corporation.
Section 5. To purchase, take by gift, devise or bequest, receive, lease
or otherwise acquire, own, hold, improve, use and otherwise deal in and with,
real or personal property, or any interest therein, wherever situated.
Section 6. To sell, convey, mortgage, pledge, lease, exchange, transfer
and otherwise dispose of all or any part of its property and assets.
Section 7. To lend money to its employees, officers and directors, and
otherwise assist them.
Section 8. To make contracts and guarantees and incur liabilities, borrow
money at such rates of interest as the Corporation may determine, issue its
notes, bonds and other obligations, and secure any of its obligations by
mortgage or pledge of all or any of its property, franchises and income.
Section 9. To purchase, take, receive, subscribe for, or otherwise
acquire, own, hold, vote, use, employ, sell, mortgage, lend, pledge, or
otherwise dispose of, and otherwise use and deal in and with, stock, securities
or other interests in, or obligations of, other domestic or foreign corporations
organized for any purpose, associations, partnerships or individuals, or direct
or indirect obligations of the United States or of any other government, state,
territory, governmental district or municipality or of any instrumentality
thereof.
Section 10. To elect or appoint officers and agents of the Corporation,
and define their duties and fix their compensation.
Section 11. To make and alter By-Laws, not inconsistent with the laws of
the Commonwealth of Virginia or these articles of incorporation, fixing and
altering the number of directors of the Corporation, the division of the same,
if desired, into classes, their authority and powers, the duration of the terms
of office of its officers and directors; for the certification and transfer of
its stock; for the calling and holding of meetings of its members; for the
government and management of its business and estates; for the administration
and regulation of its affairs; and generally for the government of all under its
authority.
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<PAGE>
Section 12. To conduct its business in the Commonwealth of Virginia, in
other States, in the District of Columbia, in the territories and colonies of
the United States, and in foreign countries; to hold meetings of its Directors
within and without the Commonwealth of Virginia; to have offices within the
Commonwealth of Virginia; and to hold, purchase, mortgage and convey real and
personal property within and without the Commonwealth of Virginia.
Section 13. To cease its corporate articles and surrender its corporate
franchise.
Section 14. To have and to exercise any and all other powers now or
hereafter conferred upon industrial loan associations by the laws of the
Commonwealth of Virginia, to this Company, and such other powers as are
necessary or convenient to effect any or all of the purposes for which the
Corporation is organized.
Section 15. Unless otherwise provided by resolution of the stockholders
within any limits so prescribed, to make by action of the Board of Directors
donations for the public welfare or for religious, charitable, scientific,
literary or educational purposes.
Section 16. To pay pensions and establish pension plans, pension trusts,
profit-sharing plans, stock option plans, stock purchase plans, and other
incentive and compensation plans for any or all directors, officers and
employees of the Corporation.
Section 17. To pay compensation, or to pay additional compensation, to
any or all directors, officers and employees on account of services previously
rendered to the Corporation, whether or not an agreement to pay such
compensation was made before such services were rendered.
Section 18. To insure for its benefit the life of any of its directors,
officers or employees, to insure the life of any stockholder for the purpose of
acquiring at his death shares of its stock owned by such stockholder and to
continue such insurance after the relationship terminates.
The provisions of this Article V shall be construed both as objects and
powers; and the foregoing enumeration thereof shall not be held to limit or
restrict in any manner the general powers conferred on this Corporation by the
laws of the Commonwealth of Virginia.
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<PAGE>
ARTICLE VI - CAPITAL STOCK
Section 1. The capital stock of the Corporation shall consist of
20,000,000 shares of Common Stock having a par value of $1.00 per share, 100
shares of Preferred Stock Series A having par value of $10.00 per share, and
50,000 shares of Preferred Stock Series B having a par value of $10.00 per
share. Common Stock and Preferred Stock Series A shall have voting powers, with
each share of stock having an equal vote with every other share. The holders of
Preferred Stock Series B shall not be entitled to vote in a proceeding for
merger or consolidation, for voluntary dissolution, for change of name, or for
the election of directors, or in any other proceeding or upon any matter or
question at any shareholders' meeting except to the extent Virginia law
expressly confers a right to vote regardless of any provision to the contrary in
Articles of Incorporation or other articles filed pursuant to law.
Section 2. The Board of Directors is authorized by resolution or
resolutions adopted by a majority of the whole Board of Directors, to provide
for the issue of common stock, Preferred Stock Series A and Preferred Stock
Series B at such time or times as shall be stated in said resolution or
resolutions.
Section 3. The Preferred Stock Series A shall be subject to redemption at
any time or times at a price of $10.20 per share. The Preferred Stock Series B
shall be subject to redemption at any time or times at a price equal to its par
value. The holders of Preferred Stock Series A and Preferred Stock Series B
shall not be entitled to receive and the Corporation shall not be bound to pay
thereon, dividends, except as and when declared payable by the Board of
Directors. Such dividends, if and when declared, shall be noncumulative. The
holders of Preferred Stock Series A and Preferred Stock Series B shall be
entitled to be paid in full, upon any distribution of the assets of the
Corporation, first the amount of their Preferred Stock Series B at par and then
the amount of their Preferred Stock Series A at par, before any payment upon
dissolution or upon any distribution is made to the holders of the common stock.
4
<PAGE>
ARTICLE VII - PREEMPTIVE RIGHTS
No stockholder of the Corporation shall have any preemptive or
preferential right of subscription to any share or shares of any class of stock
of the Corporation, whether now or hereafter authorized, or to any notes,
debentures, bonds, obligations, or other securities convertible into or carrying
options or warrants to purchase stock of the Corporation issued, optioned or
sold by it after its incorporation, including shares or other securities which
may have been acquired by and may be held in the treasury of the Corporation;
and all such holders shall have only such right, if any, so to subscribe for or
purchase the same as the Board of Directors in its discretion may from time to
time determine, and then only at such prices and on such terms and conditions,
and to such extent as the Board of Directors in its discretion may from time to
time fix. The Board of Directors may at any time and at its discretion offer to
any holder or holders of any security issued by the Corporation, whether for
subscription or for purchase, any shares of its stock, including the stock now
authorized, or any stock of the same or any other class of stock which may
hereafter be authorized, or of any other issue of securities, without making any
offer of any such stock or of any of such issue of securities to the other
holder or holders of any stock or of any securities issued by the Corporation.
ARTICLE VIII - BOARD OF DIRECTORS
The business of the Corporation shall be managed by a Board of Directors,
consisting of at least five Directors, who shall hold office, unless sooner
removed by the stockholders, for the term of one year and until their successors
are respectively elected and qualified.
ARTICLE IX - POWERS OF DIRECTORS
In furtherance and not in limitation of the powers conferred by statute,
and subject to provisions of law, the Board of Directors is expressly authorized
and empowered:
Section 1. To make, alter, amend or repeal the By-Laws of the
Corporation.
Section 2. To authorize and cause to be executed mortgages and liens upon
the real and personal property of the Corporation.
Section 3. From time to time, to fix the consideration for which the
stock of the Corporation may be issued, repurchased by the Corporation, and
reissued.
5
<PAGE>
Section 4. By resolution or resolutions passed by a majority of the whole
Board of Directors, to designate two or more of their number to constitute an
Executive Committee, who, to the extent provided by the By-Laws, shall have and
exercise the power of the Board of Directors in the management of the business
and affairs of the Corporation, and may have power to authorize the seal of the
Corporation to be affixed to all papers which require it. And the Board of
Directors may, by like action, appoint such other committees, agents and
representative as may be necessary and convenient for the conduct of the
management of the business of the Corporation. Such committee or committees
shall have such name or names as may be determined from time to time by
resolution adopted by the Board of Directors.
Section 5. If the By-Laws so provide, to hold their meetings, to have one
or more offices, and to keep the books of the Corporation (subject to provisions
of law) outside of the Commonwealth of Virginia, at such place or places as may
from time to time be designated by the By-Laws or by resolution of the Board of
Directors.
Section 6. In addition to the powers and authorities expressly conferred
upon them herein, to exercise such other powers as may be granted to them by the
By-Laws or by the laws of the Commonwealth of Virginia.
ARTICLE X - INDEMNITY OF OFFICERS AND DIRECTORS
All Directors and Officers may, by action of the Board of Directors, be
indemnified by the Corporation against liabilities, fines, penalties and claims
imposed upon or asserted against him (including amounts paid in settlement) by
reason of having been such a Director or Officer, whether or not then continuing
so to be, and against all expenses (including counsel fees) reasonably incurred
by him in connection therewith, except in relation to matters as to which he
shall have been finally adjudged to be liable by reason of having been guilty of
gross negligence or willful misconduct in the performance of his duty as such
Director or Officer. In the event of any other judgment against such Director or
Officer or in the event of a settlement, the indemnification shall be made only
if the Corporation shall be advised, in case none of the persons involved shall
be or have been a Director of the Corporation, by the Board of Directors, and
otherwise by independent counsel to be appointed by the Board of Directors, that
in its or his opinion such Director or Officer was not guilty of gross
negligence or willful misconduct in the performance of his duty, and, in the
event of a settlement, that such settlement was, or if still to be made is, in
the best interests of the Corporation. If the determination is to be made by the
Board of Directors, it may rely, as to all questions of law, on the advice of
independent counsel. Every reference herein to Director or Officer shall include
every Director or Officer or former Director or Officer of the Corporation and
every person who may have served at its request as a Director or Officer of
another corporation which the Corporation owns shares of stock or of which it is
a creditor or, in case of nonstock corporation, to which the Corporation
contributes and, in all such cases, his executors and administrators. The
indemnification hereby provided shall not be exclusive of any other rights to
which any Director or Officer may be entitled.
6
<PAGE>
ARTICLE XI - DIRECTOR AND OFFICER LIMITATION ON DAMAGES
To the full extent that the Virginia Stock Corporation Act, as it exists
on the date hereof or may hereafter be amended, permits the limitation or
elimination of the liability of directors or officers, a director or officer of
the Corporation shall not be liable to the Corporation or its shareholders for
any monetary damages.
ARTICLE XII - REAL ESTATE
The amount of real estate, to which the holdings of the Corporation at
any time are to be limited, shall be 100 acres.
ARTICLE XIII - LIABILITY OF STOCKHOLDERS
The private property of the stockholders shall not be subject to the
payment of the corporate debts to any extent whatever.
ARTICLE XIV - VIRGINIA CODE REQUIREMENTS
These Articles of Restatement of the Articles of Incorporation, which do
not contain amendments requiring shareholder approval, were approved by the
Corporation's Board of Directors on the 25th day of July, 1997.
These Articles of Restatement shall become effective upon issuance of a
Certificate of Restatement by the State Corporation Commission.
Executed this 25th day of July, 1997, in the name of the Corporation by
the President and Chairman of the Board, who represents that the facts stated
therein are true.
APPROVED FINANCIAL CORP.
By: /s/ Allen D. Wykle
------------------------------
Allen D. Wykle, President and
Chairman of the Board
7
Appendix B
AMENDED AND RESTATED BYLAWS
OF
APPROVED FINANCIAL CORP.
(EFFECTIVE JULY 25, 1997)
SECTION I - BUSINESS OFFICE
The business office of the Corporation in the Commonwealth of Virginia
shall be located at 3420 Holland Road, Suite 107, Virginia Beach, Virginia
23452.
SECTION II - SEAL
The Corporation shall have a Corporate Seal which shall be circular in
form and shall have inscribed thereon the name of the Corporation, the year
"1952," and the words "Corporate Seal, Virginia." Said seal may be used by
causing it or a facsimile thereof to be impressed, affixed or reproduced.
SECTION III - MEETING OF SHAREHOLDERS
1. Annual Meetings. The Annual Meeting of the shareholders for the
election of Directors and for the transaction of such other business as may
properly come before the meeting shall be held at such place (within or without
the Commonwealth of Virginia), date and hour as shall be designated in the
notice thereof.
2. Special Meetings. Special meetings of the shareholders for any
purpose or purposes may be called at any time by the President in his
discretion, and shall be called by the President or Secretary either (a) at the
request in writing or by vote of a majority of all the Directors, or (b) at the
request in writing of shareholders of record owning at least Twenty-five
percentum (25%) of all the shares of capital stock of the Corporation
outstanding and entitled to be voted at the time of the request. Such request or
vote shall state the purpose or purposes of the proposed meeting.
3. Place of Meeting. All meetings of shareholders shall be held at the
business office of the Corporation in the City of Virginia Beach, Virginia, or
at such other place or places within or without the Commonwealth of Virginia as
the Board of Directors may designate for any annual meeting, or as the Board of
Directors or the President may designate for any special meeting. Any meeting of
the shareholders, after being convened at the designated time and place, may by
majority vote be adjourned to a more convenient place within or without the
Commonwealth of Virginia.
4. Notice of Meetings.
(a) Written notice of every meeting of shareholders, annual or
special, stating the time, place and purpose or purposes thereof, shall be given
by the Secretary to each shareholder of record entitled to vote thereat, by
mailing a copy thereof to said shareholder at his address as it appears on the
books of the Corporation at least ten (10) days and not more than fifty (50)
days in advance of said meeting.
1
<PAGE>
(b) No change of the time or place of a meeting for the
election of Directors as fixed by these Bylaws shall be made within sixty (60)
days preceding the day on which such election is to be held. In the event of any
change in such time or place for such election of Directors, notice thereof as
aforesaid shall be given to each shareholder at least twenty (20) days before
the election is held.
(c) To the extent permitted by Virginia law, attendance at a
meeting of shareholders except to protect the failure to receive notice shall be
deemed a waiver of these notice requirements by the shareholder.
5. Quorum. At any meeting of shareholders, the holders of a majority of
the stock outstanding and entitled to be voted thereat, present in person or
represented by proxy, shall be requisite and shall constitute a quorum for the
transaction of business, except as otherwise provided by law, or by the
Certificate of Incorporation. In the absence of a quorum, the shareholders
present in person or by proxy and entitled to vote thereat may adjourn the
meeting from time to time, without further notice other than announcement at the
meeting, until a quorum shall be secured, whereupon any business may be
transacted which might have been transacted at the meeting as originally
notified or fixed. At any meeting of shareholders for the election of Directors,
the election shall be made by such of the shareholders as shall attend for that
purpose, either in person or by proxy.
6. Voting. At every meeting of shareholders, each shareholder entitled
to vote thereat shall have one vote for each full share of stock having voting
power registered in his name on the books of the Corporation on the record date
of said meeting. Except as otherwise provided by law, all questions before any
meeting of shareholders shall be decided by vote of the holders of a majority of
the shares present or represented thereat and entitled to vote. Voting for
Directors shall be by ballot, and voting on any other matter may be by ballot or
voice vote.
7. Record Date. The Board of Directors may close the transfer books of
the Corporation or fix a record date for the determination of shareholders
entitled to vote at any annual or special meeting, as provided in Section XII of
these Bylaws. Except where the transfer books shall have been so closed or a
record date for voting shareholders shall have been so fixed, no share of stock
shall be voted on at any election for Directors which shall have been
transferred on the books of the Corporation within twenty (20) days next
preceding such election. In the absence of designation of a record date, the
record date shall be the twentieth (20th) day before an annual meeting, or the
tenth (10th) day before any special meeting. Only shareholders of record on the
record date designated by the Board of Directors, or by these Bylaws in the
absence of such designation, shall be entitled to notice of, and to vote at, any
meeting or adjournment thereof, notwithstanding the transfer of any stock on the
books of the Corporation after such record date.
8. Proxies. All proxies must be in writing, signed by the shareholder,
and in order to be effective, must be filed with the Secretary no later than the
opening of the meeting. Proxies used at a meeting shall be attached as exhibits
to the minutes of the meeting, or referred to therein and preserved in the files
of the Corporation. All proxies used in the election of Directors shall be valid
for a period of not exceeding one (1) year from the election for which they were
signed and in which they were authorized to be voted.
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<PAGE>
9. Shareholder List. At least ten (10) days before every election of
Directors, the Secretary shall prepare and make a complete list of shareholders
entitled to vote at said election, arranged in alphabetical order (with the
residence of each and the number of voting shares held by each). Such list shall
be open for said ten (10) days to the examination of any Shareholder at the
place where said election is to be held, and shall be produced at the time and
place of election and kept open during the whole time thereof for the inspection
of any shareholder who may be present. The original or duplicate stock ledger of
the Corporation shall be the only evidence as to the shareholders entitled to
examine such list.
10. Waiver of Meeting. Whenever the vote of shareholders at a meeting
thereof is required or permitted to be taken in connection with any corporate
action by any provisions of the statutes or of the Certificate of Incorporation
or of these Bylaws, the meeting and vote of shareholders may be dispensed with,
if all the shareholders who would have been entitled to vote upon the action if
such meeting were held, shall consent in writing to such corporate action being
taken.
SECTION IV - DIRECTORS
1. Number. The number of Directors which shall constitute the whole
Board shall be not less than five (5) and not more than fifteen (15), as shall
be fixed for the ensuing year by the shareholders at the annual election. The
directors shall be elected at the annual meeting of the shareholders, except as
provided in paragraph 4 of this Section.
2. Term of Office. Each Director elected by the shareholders at any
annual meeting shall hold office for one (1) year and until his successor is
duly elected and qualified, unless sooner removed pursuant to paragraph 3 of
this Section.
3. Removal of Directors. A Director may be removed at any time, with or
without cause, at a special meeting of shareholders called for that purpose, by
a vote of a majority of the shares of stock represented and entitled to be voted
at such meeting. At any such meeting, a successor to such Director may be
elected for his unexpired term.
4. Vacancies. In the event of any vacancy caused by death, resignation,
retirement, disqualification or removal from office of a Director, or by failure
of the shareholders to elect a successor to a Director who has been removed, or
otherwise, the Board of Directors may fill such vacancy by vote of a majority of
all the Directors then in office, though less than a quorum. Directors so
elected shall serve for the unexpired term of their predecessors, and until
their successor is duly elected and qualified, unless sooner displaced.
5. Powers. The Board of Directors shall have and may exercise all
powers of the Corporation, including the power to do all lawful acts and things
in behalf of the Corporation which are not by statute or by the Certificate of
Incorporation or by these Bylaws required to be exercised or done by the
shareholders. Without limiting the generality of the foregoing, the Board of
Directors shall have the powers:
3
<PAGE>
(a) To purchase or otherwise acquire for the Corporation any
property, rights or privileges, which the Corporation has the power to take, at
such prices and upon such terms as the Board of Directors may deem proper;
(b) To pay for such property, rights or privileges in whole or
in part with money, services, stocks, bonds, debentures, or other securities of
the Corporation, or by the delivery of other property of the Corporation;
(c) To create, make, and issue mortgages, bonds, deeds of
trust, trust agreements, and negotiable or transferable instruments and
securities, secured by mortgages or otherwise, and to do every act and thing
necessary to effectuate the same;
(d) To appoint agents, clerks, assistants, employees and
trustees, and to dismiss them at the discretion of the Board; to fix their
duties, functions and emoluments, and to change them from time to time; and to
require security as it may deem proper;
(e) To confer upon the President or any other Officer of the
Corporation the power of selecting, discharging or suspending agents, clerks,
assistants and employees;
(f) To determine by whom and in what manner the Corporation's
bills, notes, checks, acceptances, endorsements, receipts, releases, contracts,
or other documents shall be signed; and to authorized the execution of any such
documents; and
(g) To exercise any and all other powers conferred upon them
by law, by the Certificate of Incorporation or by these Bylaws, subject to the
terms and conditions thereof.
6. Chairman of the Board. The Chairman of the Board shall be selected
from the Board of Directors and shall preside at all meetings of the
shareholders and of the Board of Directors. In the absence or disability of the
Chairman of the Board and Vice Chairman of the Board, the Board of Directors
shall designate one of its members to preside at all such meetings.
7. Vice Chairman of the Board. A Vice Chairman of the Board may also be
selected from the Board of Directors. The Vice Chairman of the Board shall
preside at all meeting of shareholders and of the Board of Directors during the
absence or disability of the Chairman of the Board and shall perform such other
functions and duties as may be prescribed by the Board of Directors.
4
<PAGE>
SECTION V - MEETINGS OF DIRECTORS
1. Regular Meetings. As soon as practicable after each annual election
of Directors at a meeting of shareholders, the newly elected Directors shall
meet for the purpose of organization and the transaction of other business. At
the organizational meeting, the Board of Directors shall designated the date or
dates on which regular meetings of the Board of Directors shall be held for the
ensuing year and until the next regularly scheduled meeting of shareholders. Any
action required or permitted to be taken by the Board of Directors may be taken
without a meeting, if all members of the Board shall individually or
collectively consent in writing to such action. Such written consent or consents
shall be filed with the minutes of the proceedings of the Board, and such action
by written consent shall have the same force and effect as a unanimous vote of
such Directors. The Board of Directors may, by resolution, or by written waiver
of all the Directors, fix some other time for any meeting in lieu of the date
specified at the organizational meeting.
2. Special Meetings. Special meetings of the Board of Directors may be
called by the President upon written notice of not less than four (4) days, or
telegraphic notice of not less than two (2) days, to all the Directors, fixing
the time and place thereof; and a special meeting shall be called by the
President or the Secretary in like manner upon the written request of two (2) or
more Directors.
3. Place of Meeting. All meetings of the Board of Directors shall be
held at the office of the Corporation in Virginia Beach, Virginia, or at such
other place or places within or without the State of Virginia, as the Board of
Directors may designate, or as the President or the Secretary may designate in
the case of meetings called pursuant to paragraph 2 of this Section.
4. Quorum. At all meetings of the Board of Directors, a majority of the
Directors then in office shall constitute a quorum for the transaction of
business, but a smaller number may adjourn from time to time without further
notice other than announcement at the meeting, until a quorum is secured. The
act of a majority of the Directors present at any meeting at which there is a
quorum shall be the act of the Board of Directors, except as may otherwise be
provided by law, by the Certificate of Incorporation, or these Bylaws.
5. Notice. To the extent permitted by Virginia law attendance at a
meeting of directors except to protest the failure to receive notice shall be
deemed to be a waiver of these notice requirements by the director.
6. Telephonic Meetings. Directors may participate in any meeting of the
Board by means of a conference telephone or similar communications equipment
whereby all persons participating can hear each other. Participation in any
meeting in this manner shall constitute presence by the person at such meeting.
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SECTION VI - COMMITTEES
1. Executive Committee.
(a) There may be an Executive Committee consisting of the
Chairman of the Board, Chief Executive Officer and one or more additional
Directors as may be elected by vote of a majority of the entire Board of
Directors.
(b) The Executive Committee shall exercise all powers of the
Board of Directors when the Board is not in session in all cases in which
specified directions shall not have been given by the Board of Directors,
including the power to authorize the Corporate Seal to be affixed to all papers
which may require it; but the Committee shall not have the power to make, alter,
amend or repeal the Bylaws, nor to fill any vacancies on the Board of Directors
or the Committee. Vacancies in the membership of the Executive Committee shall
be filled by the Board of Directors. The Executive Committee shall advise with
and aid the Officers of the Corporation in all matters concerning its interests
and the management of its business, and shall perform such duties and exercise
such powers as may be directed or delegated by the Board of Directors from time
to time. The Executive Committee may appoint one or more Assistant Secretaries,
Assistant Treasurers, and such other subordinate Officers as it may deem
appropriate, and all such appointments shall be reported to the Board of
Directors for ratification.
(c) On all matters relating to the purchase or sale by the
Corporation of stocks, bonds or other securities, the Executive Committee shall
act by unanimous consent of all its members expressed by vote at a meeting of
the Committee, or by unanimous agreement reached orally or in writing, but all
such action shall be reported in writing to the Board of Directors at the next
meeting of the Board.
2. Other Committees. The Board of Directors may designate one or more
other committees, each consisting of two or more Directors, which shall have
such powers as may be specified by resolution of the Board.
3. Meetings. The Executive Committee and any other committees shall
meet at stated times or at the call of any of its members. Each committee shall
keep regular minutes of its proceedings, shall report the same to the Board of
Directors, and shall fix its rules of procedure. Except as provided in paragraph
1(c) of this Section VI, an affirmative vote of a majority of the whole
committee shall be necessary for the action of the committee.
SECTION VII - COMPENSATION OF OFFICERS AND EMPLOYEES
The salary, compensation, allowances, and emoluments of Officers,
Directors, agents and employees of the Corporation shall be fixed by the Board
of Directors or the Executive committee, or by the President or other Officer
pursuant to authorization of the Board or the Committee.
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SECTION VIII - OFFICERS
1. Number and Title. The Officers of the Corporation shall be a
President, one or more Vice Presidents as may be designated by the Board of
Directors, a Secretary and a Treasurer. There also may be elected an Executive
Vice President, one or more Senior Vice Presidents and such other Officers,
associates, and assistants under appropriate titles as may be necessary or
advisable in the judgment of the Board of Directors. The Officers shall be
elected by the Board of Directors at the first meeting of the Board held after
the annual election of Directors, or at some adjourned meeting thereof. The
President shall be selected from the Board of Directors. All Officers shall hold
office at the pleasure of the Board of Directors. Any two offices may be held by
the same person. An election of Officers shall be by a majority vote of the
Directors present. If any Office becomes vacant for any reason, the vacancy may
be filled for the unexpired portion of the term by the Board of Directors at
their next meeting, regular or special.
2. The President. The President shall be the Chief Executive Officer of
the Corporation with the following powers, functions and duties:
(a) Under the direction of the Board of Directors, he shall
have general supervision and management of the property, affairs and business of
the Corporation;
(b) He shall have the general supervision and direction of the
staff and operating Officers of the Corporation, and he shall see that their
duties are properly performed;
(c) He shall see that all orders and resolutions of the Board
of Directors are carried into effect;
(d) He shall execute and acknowledge all contracts,
agreements, deeds, bonds and mortgages and other obligations and instruments in
the name of the Corporation when so authorized by the Board of Directors, and
all other papers and documents necessary and proper to be executed in the
performance of his duties;
(e) With the Chairman of the Board, he shall submit an annual
report of the operations of the Corporation for the year to the shareholders at
their annual meeting, and also to the Board of Directors;
(f) He shall be ex-officio a member of all standing
committees:
(g) He shall be vested with such other powers of supervision
and management and he shall perform such other duties as may be delegated to him
by the Board of Directors, or as may devolve upon the Chief Executive Officer of
like companies; and
(h) In the absence or disability of the President, his
authority and duties shall be vested in such Officer as may be designated by the
Board of Directors or the President, before or after the event.
3. Executive Vice President. The Executive Vice President, in addition
to his other duties as Vice President, shall assist the Chief Executive Officer
and the President in supervising and administering the Corporation's business
and affairs.
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4. Senior Vice President. The Senior Vice President(s), in addition to
his (their) other duties as Vice President(s), shall assist the Chief Executive
Officer, the President and/or Executive Vice President in supervising and
administering the line and staff organizational functions of the Corporation.
5. Vice Presidents. The Vice Presidents shall perform such duties as
may, from time to time, be assigned to them by the Board of Directors or by the
President.
6. Secretary. The Secretary shall have the following duties:
(a) He shall attend all meetings of shareholders and of the
Board of Directors; and, upon request, he shall also attend meetings of the
Executive Committee or standing committees. He shall act as clerk of all
meetings of shareholders or Directors, and shall record all notes and
proceedings thereof in a minute book to be kept for that purpose; and, upon
request, he shall also perform such duties in respect of meetings of the
Executive Committee and standing committees.
(b) He shall attend to the giving and serving of all notices
to the shareholders or Directors or other notices required by law, by the
Articles of Incorporation, or by these Bylaws.
(c) He shall have custody of the Corporate Seal, and shall
affix the same to contracts, agreements, deeds, bonds, mortgages, and other
obligations and instruments of the Corporation requiring a seal, when so
authorized by the Board of Directors; and when the seal is so affixed, it shall
be attested by his signature, or by the signature of the Treasurer. The
Secretary shall execute documents certifying to the authenticity of the Bylaws
of the Corporation, resolutions and orders adopted or other action taken by the
Board of Directors, the Executive Committee, or Officers of the Corporation, and
as to the names and identity of the Directors and the Officers of the
Corporation: Provided, that the Board of Directors may authorize any officer of
the Corporation to certify to the authenticity of resolutions and orders adopted
or other action taken by the Board of Directors or by such Committee.
(d) He shall have charge of the capital stock books, and such
other books and papers as the Board of Directors may prescribe. He shall keep an
account of stock registered and transferred in such manner and subject to such
regulations as the Board of Directors may prescribe.
(e) The Secretary shall perform all other functions incident
to the office of Secretary, and such other functions as the Board of Directors
or the President may prescribe.
7. Treasurer. The Treasurer shall have the following powers and duties:
(a) He shall have custody of the funds and securities of the
Corporation, shall keep full and accurate accounts of the receipt and
disbursements in books belonging to the Corporation, and shall deposit all
monies and other valuable effects belonging to the Corporation in the name to
the credit of the Corporation, in such depositories as may be designated by the
Board of Directors.
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(b) He shall disburse the funds of the Corporation as may be
ordered by the Board of Directors or the President, taking proper vouchers for
such disbursements, and shall render to the President and Directors, whenever
they may require it, an account of all his transactions as Treasurer and of the
financial condition of the Corporation, and at the regular meeting of the Board
of Directors next preceding the annual shareholders' meeting, he shall make a
like report for the preceding year.
(c) If required by the Board of Directors he shall give the
Corporation a bond in sum and form and with security satisfactory to the Board
of Directors, for the faithful performance of the duties of his office and the
restoration of the Corporation, in case of his death, resignation or removal
from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession, belonging to the Corporation.
(d) He shall perform such other functions as the Board of
Directors may from time to time prescribe.
8. Assistant and Associate Officers. The Board of Directors may
designate and appoint such assistant or associate officers as may be deemed
desirable who shall aid the superior officer in his functions and duties, and
perform such other duties as may be prescribed by the Board of Directors, the
President or the superior officer. In the absence or disability of the superior
officer, his associate or assistant shall perform his functions, but the Board
of Directors may delegate any or all of the functions of the office to any other
officer or Director.
9. Execution of Instruments. All contracts, deeds, agreements,
releases, assignments, transfers, and other instruments in the name of the
Corporation shall be executed by such officer or officers as the Board of
Directors may designate, but in the absence of such designation, they shall be
signed by the President or Vice President, and by the Secretary or Treasurer.
SECTION IX - BANK AND CUSTODIAN ACCOUNTS
1. Bank Accounts. All monies belonging to the Corporation shall be
deposited to the credit of the Corporation in such depositories as may be
designated from time to time by the Board of Directors or as may be designated
by the President under delegation from the Board of Directors. All checks,
drafts and orders for the payment of money from any such depository shall be
signed by such persons as the Board may designate, or as the President may
designate under delegation from the Board of Directors. All checks shall be made
payable to the order of the person or persons entitled to receive the money, and
no check shall be signed in blank.
2. Securities. The stocks, bonds, debentures, mortgages and any other
securities of the Corporation shall be deposited for safekeeping in a custodian
account with such banking institution as the Board of Directors may designate,
and shall be withdrawn only upon the signed order or direction of such officer
or officers as may be designated by the Board of Directors.
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SECTION X - CAPITAL STOCK
1. Stock Certificates. The certificates for the capital stock of the
Corporation shall be numbered consecutively and shall be entered in the books of
the Corporation as they are issued. Each certificate shall exhibit the holder's
name and shall certify the number of shares of stock owned by him and
represented thereby. Each certificate shall be signed in the name of the
Corporation by the President or a Vice President, and by the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary, and the
Corporate Seal shall be affixed thereto. If a transfer agent is appointed, the
certificates shall be countersigned by such transfer agent and if authorized by
the Board of Directors, the facsimile signatures of the corporate officers and
the facsimile Corporate Seal may be used.
2. Transfer Agent. The Board may appoint a transfer agent for the
capital stock of the Corporation who shall keep a record of the issuance,
transfer and ownership of such stock, countersign the stock certificates and
perform such other duties as are normally performed by the transfer agent or
like companies. All transfers of stock shall be made upon the books of the
Corporation by the holder of the shares in person or by his lawfully constituted
representative, upon surrender of the certificate of stock for cancellation.
3. Lost Certificate. If a certificate of stock be lost or destroyed,
another may be issued in its stead upon proof of such loss or destruction and
the giving of a satisfactory bond of indemnity, in an amount sufficient to
indemnify the Corporation against any claim. A new certificate may be issued
without requiring bond when (a) in the judgment of the Board of Directors, it is
proper to do so, or (b) upon authorization by the President, provided a properly
executed indemnification agreement is obtained from the transfer agent. Any such
certificate shall be plainly marked "Duplicate" upon its face.
4. Transfer of Stock. The capital stock of the Corporation shall be
transferable only upon the books of the Corporation, by the holder of the shares
in person or by his lawfully constituted representative, upon endorsement and
surrender of the certificate to the Corporation or to its transfer agent for
cancellation. Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares fully endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
5. Partly Paid Shares. Certificates may be issued for partly paid
shares and in such case upon the face or back of the certificates issued to
represent any such partly paid shares, the total amount of the consideration to
be paid therefor, and the amount paid thereon shall be specified.
SECTION XI - FRACTIONAL SHARES AND SCRIP
1. Fractional Shares. Fractional shares of stock may be issued if
authorized by the Board of Directors. A fractional share of stock shall not be
entitled to any vote nor to receive dividends, unless the Board of Directors
expressly so provides.
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2. Fractional Scrip. The Board of Directors may, in its discretion,
authorize the issuance of certificates for fractional scrip or other evidence of
ownership in lieu of a fractional share, which shall entitle the holder thereof
to receive a certificate for a full share upon the surrender of such scrip or
evidence of ownership aggregating a full share, but which shall not, unless
otherwise provided by the Board of Directors, entitle the holder to vote or to
receive dividends. The Board of Directors may cause such scrip or evidence of
ownership to be issued subject to the condition that it shall become void if not
exchanged for certificates of full shares before a specified date, or subject to
the condition that the shares for which such scrip or evidence of ownership is
exchangeable may be sold by the Corporation and the proceeds thereof distributed
to the holders of such script or evidence of ownership, or subject to any other
conditions that the Board of Directors shall deem advisable.
SECTION XII - SHAREHOLDERS OF RECORD
1. Record Owners. The Corporation shall be entitled to treat the holder
of record of any share or shares of stock as the holder in fact thereof, and
accordingly shall not be bound to recognize any equitable or other claim to or
interest in such share on the part of any other person whether or not it shall
have express or other notice thereof, save as expressly provided by law.
2. Closing Transfer Books. The Board of Directors may, in its
discretion, close the stock transfer books of the Corporation for a period not
exceeding fifty (50) days preceding the date of any meeting of the shareholders,
or the date for payment of any dividend, or the date for the allotment of
rights, or the date when any change, conversion, or exchange of capital stock
shall go into effect, or a date for obtaining the consent of the shareholders
for any purpose.
3. Record Date for Shareholders. In lieu of closing the stock transfer
books as aforesaid, the Board of Directors may fix in advance a date not
exceeding fifty (50) days preceding the date of any meeting of shareholders, or
the date for the payment of any dividend, or the date for the allotment of
rights, or the date when any change, conversion, or exchange of capital stock
shall go into effect, or a date in connection with obtaining the consent of
shareholders for any purpose, as a record date for the determination of the
shareholders entitled to notice of, and to vote at, any such meeting and any
adjournment thereof, or entitled to receive and exercise the other rights and
privileges referred to herein. In such case only shareholders of record on the
date so fixed shall be entitled to the notice, voting rights, dividends and
other rights and privileges referred to hereinabove, notwithstanding the
transfer of any stock on the books of the Corporation after such date.
SECTION XIII - DIVIDENDS AND RESERVES
Dividends upon the capital stock may be declared by the Board of
Directors at any regular or special meeting, and may be paid in cash or in
property or in shares of the capital stock.
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SECTION XIV - FISCAL YEAR: BOOKS AND RECORDS
1. Fiscal Year. The fiscal year of the Corporation shall begin on the
first day of January and end on the thirty-first day of the succeeding December.
2. Books and Records. The books, records and accounts of the
Corporation shall be kept at its office in the City of Virginia Beach, Virginia.
3. Stock Book. The Secretary shall keep a book containing the names of
all persons, alphabetically arranged, who are or shall within six (6) years have
been shareholders of the Corporation, and showing their place of residence, the
number of shares of capital stock held by them, respectively, the time when they
became owners of such shares, and the amount of capital stock actually paid in.
4. Inspection.
(a) The stock book described in paragraph 3 of this Section
XIV shall, during the usual business hours of the day, on every business day, be
kept open for inspection at the principal office of the Corporation, by
shareholders and creditors of the Corporation and their personal
representatives, who may make extracts from such book.
(b) In respect to all other accounts and books of the
Corporation, the Board of Directors shall determine from time to time the
conditions and regulations governing inspection by shareholders, subject to such
right of inspection as may be granted by law.
SECTION XV - NOTICES
1. Form. Whenever under the provisions of the statutes, the Certificate
of Incorporation or these Bylaws notice is required to be given to any
shareholder, Director, or officer, it shall not be construed to require personal
notice, but such notice may be given:
(a) In writing by mail, by depositing the same in the post
office or letter-box in a postpaid, sealed wrapper, addressed to such
shareholder, Director or Officer at such address as appears for him on the books
of the Corporation, or if there be no such address, then at his last known
address; or
(b) By telegram addressed as aforesaid and sent prepaid in the
customary manner.
Any such notice shall be deemed to be given at the time that the same
shall be thus mailed or telegraphed.
2. Waiver. Wherever any notice is required to be given under the
provisions of the statutes or of the Certificate of Incorporation, or of these
Bylaws, a waiver whereof in writing signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
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SECTION XVI - INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Corporation may, in the sole discretion of the Board, purchase and
maintain insurance on behalf of any person who is or was a Director or Officer
of the Corporation, or is or was serving at the request of the Corporation as a
Director or Officer of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity or arising out of his status as such.
SECTION XVII - AMENDMENT OF BYLAWS
These Bylaws may be supplemented, amended, altered, or repealed (1) by
the affirmative vote of the holders of a majority of the stock entitled to vote
thereat at any regular meeting of the shareholders, or at any special meeting of
the shareholders if notice of the proposed action in respect of the Bylaws be
contained in the notice of the meeting; or (2) by the affirmative vote of a
majority of the whole Board of Directors at a regular or special meeting.
Appendix C
APPROVED FINANCIAL CORP.
------------------------
1996 INCENTIVE STOCK OPTION PLAN
--------------------------------
SECTION 1 - DEFINITIONS
- -----------------------
a. AFFILIATE means any "subsidiary" or "parent" corporation (within the
meaning of Section 422A of the Code) of the Company. "Subsidiary" means a
corporation, of which not less than 50% of the voting control is held by the
Company or a Subsidiary whether now existing or hereinafter organized or
acquired by the Company or a Subsidiary.
b. AGREEMENT means a written agreement (including any amendment or
supplement thereto) between the Company and an Optionee specifying the terms and
conditions of an Option granted to such Optionee.
c. BOARD means the Board of Directors of the Company.
d. CODE means the Internal Revenue Code of 1954, as amended, and the
Internal Revenue Code of 1986, and any amendments thereto.
e. COMMITTEE means the Plan Committee of the Board of Directors as
specified in Section 4. Only members of the Board of Directors who qualify as
"disinterested persons" under this Plan pursuant to the provisions of Rule
16b-3(c)(2)(i) as promulgated by the Securities and Exchange Commission under
the Securities Exchange Act of 1934 may be appointed as members of the Committee
of the Board of Directors. The Board of Directors of the Company shall have the
right, in its sole and absolute discretion, to remove or replace any person from
or on the Committee at any time for any reason whatsoever.
f. COMMON STOCK means the common stock of the Company.
g. COMPANY means Approved Financial Corp.
h. DIRECTOR means a member of the Board.
i. ELIGIBLE PARTICIPANTS means all employees (whether or not they are also
officers or directors) of the Company or any Subsidiary.
j. FAIR MARKET VALUE means, on any given date the arithmetical average
between the bid and asked price of the Common Stock on the Bulletin Board of the
over-the-counter market (or if trading on the NASDAQ, then on the NASDAQ) on
such date, or if the stock market is closed on such date, the next preceding
date on which it was open.
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k. INCENTIVE STOCK OPTION means a Stock Option which is an "incentive stock
option" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended.
l. OPTION means a stock option that entitles the holder to purchase from
the Company a stated number of shares of Common Stock at the price set forth in
an Agreement.
m. OPTIONEE means any Eligible Participant to whom a Stock Option has been
granted pursuant to this Plan, provided that at least part of the Stock Option
is outstanding and unexercised.
n. OPTION SHARES means Common Stock covered by and subject to any
outstanding unexercised Stock Option granted pursuant to this Plan.
o. PLAN means the Approved Financial Corp. 1996 Incentive Stock Option
Plan.
p. TEN PERCENT SHAREHOLDER means any individual owning more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or of an Affiliate. An individual shall be considered to own any voting
stock owned (directly or indirectly) by or for brothers, sisters, spouse,
ancestors or lineal descendants and shall be considered to own proportionately
any voting stock owned (directly or indirectly) by or for a corporation,
partnership, estate or trust of which such individual is a shareholder, partner
or beneficiary.
SECTION 2 - PURPOSE
- -------------------
The purpose of this Incentive Stock Option Plan (the "Plan") is to
promote the interest of Approved Financial Corp. (the "Company") and its
shareholders by providing additional incentive to those key individuals of the
Company whose judgment, initiative and efforts will be largely responsible for
the Company's successful operation. By encouraging such individuals to purchase
shares of Common Stock of the Company, the Company seeks to motivate these key
individuals by giving them an increased proprietary interest in the Company and
its success.
SECTION 3 - ELIGIBILITY AND GRANTS
- ----------------------------------
Any employee (including officers and directors who are employees) of
the Company or of any Affiliate who, in the judgment of the Committee, has
contributed or can be expected to contribute to the profits or growth of the
Company or an Affiliate and who is not a member of the Committee may be granted
one or more Options.
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The Committee will designate individuals to whom Options are to be
granted and will specify the number of shares of Common Stock subject to each
grant. All Options granted under the Plan shall be evidenced by Agreements that
shall be subject to applicable provisions of the Plan and to such other
provisions as the Committee may adopt. No Eligible Participant may be granted
Incentive Stock Options (under all incentive stock option plans of the Company
and Affiliates) which are first exercisable in any calendar year for stock
having an aggregate fair market value (determined as of the date an Option is
granted) exceeding $100,000.
SECTION 4 - ADMINISTRATION OF THE PLAN
- --------------------------------------
The Plan shall be administered by a committee of two or three members
(provided it is not less than the minimum number of persons from time to time
required by both Rule 16b-3 and Section 162(m) of the Code) of the Board of
Directors of the Company (hereinafter called the "Committee"). The Committee's
members shall be appointed by the Board of Directors of the Company and all
members of the Committee shall serve at the pleasure of the Board. The Committee
shall hold meetings at such times and places as it may determine. If the
Committee has two members then all actions must be unanimous. If the Committee
has three members all three shall be required for a quorum but a majority vote
will be binding. The Committee may act by unanimous written consent of all
members without a meeting. The Committee shall from time to time at its
discretion determine which key individuals shall be granted Options and the
amount of stock covered by such Options. No director while a member of the
Committee shall be eligible to receive an Option under the Plan.
The Committee shall have the sole authority and power, subject to the
express provisions and limitations of the Plan, to construe the Plan and
Agreements granted hereunder, and to adopt, prescribe, amend, and rescind rules
and regulations relating to the Plan, and to make all determinations necessary
or advisable for administering the Plan. The interpretation by the Committee of
any provision of the Plan or of any Agreement entered into hereunder shall be in
accordance with Section 422A of the Internal Revenue Code of 1954, as amended,
and the Regulations issued thereunder, as such Section or Regulations may be
amended from time to time, in order that the rights granted hereunder and under
said Agreements shall constitute "Incentive Stock Options" within the meaning of
such Section. Such interpretation shall also be in compliance with Rule 16b-3 of
the Securities Exchange Act of 1934 and regulations thereunder. The
interpretation and construction by the Committee of any provisions of the Plan
or of any option granted hereunder shall be final and conclusive, unless
otherwise determined by the Board. No member of the Board or the Committee shall
be liable for any action or determination made in good faith with respect to the
Plan or any option granted under it.
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SECTION 5 - STOCK SUBJECT TO OPTIONS
- ------------------------------------
The maximum aggregate number of shares of Common Stock that may be
issued pursuant to Options granted under the Plan is 31,500, subject to
adjustment as provided in Section 16. If an Option is terminated, in whole or in
part, for any reason other than its exercise, the number of shares of Common
Stock allocated to the Option or portion thereof may be reallocated to other
Options to be granted under the Plan. The shares may be authorized but unissued
shares.
SECTION 6 - OPTION PRICE
- ------------------------
A. The price per share for Common Stock purchased by the exercise of
any Option granted under the Plan shall be determined by the Committee on the
date the Option is granted; provided, however, that the price per share shall
not be less than the Fair Market Value on the date of grant.
B. An Option granted hereunder to an Eligible Participant who is a Ten
Percent Shareholder at the date of the grant of the Option shall not qualify as
an Incentive Stock Option unless: (i) the purchase price of the Option Shares
subject to said Option is at least one hundred and ten percent (110%) of the
Fair Market Value of the Option Shares, determined as of the date said Option is
granted. The attribution rules of Section 425(d) of the Internal Revenue Code of
1986 as amended, shall apply in the determination of indirect ownership of
stock.
SECTION 7 - MAXIMUM OPTION PERIOD
- ---------------------------------
No Option shall be exercisable after the expiration of ten years from
the date the Option was granted. For Ten Percent Shareholders no Option shall be
exercisable after five (5) years from the date it is granted. The terms of any
Option may provide that it is exercisable for a period less than such maximum
period.
SECTION 8 - WRITTEN AGREEMENT
- -----------------------------
The details of each grant of Options shall be evidenced by an Agreement
covering terms and conditions, not inconsistent with the Plan, as the Committee
shall approve. Such Agreement shall be signed by each Optionee.
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SECTION 9 - NONTRANSFERABILITY
- ------------------------------
Any Option granted under the Plan shall be nontransferable except by
will or by the laws of descent and distribution and, during the lifetime of the
Optionee to whom the Option is granted, may be exercised only by the Optionee.
No right or interest of an Optionee in any Option shall be liable for, or
subject to, any lien, obligation, or liability of such Optionee.
SECTION 10 - EXERCISE OF STOCK OPTIONS
- --------------------------------------
(a) Exercise. Except as otherwise provided elsewhere herein, if an
Optionee shall not in any given period exercise any part of an Option which has
become exercisable during that period, the Optionee's right to exercise such
part of the Option shall continue until expiration of the Option or any part
thereof as may be provided in the related Agreement. No Option shall, except as
provided in Section 23 hereof, become exercisable until one (1) year following
the date of grant, and an Option first becomes exercisable as to one-third (1/3)
of the Option Shares called for thereby during the second year following the
date of the grant, as to an additional one-third (1/3) during the third year and
as to the remaining one-third (1/3) during the fourth year. No Option or part
thereof shall be exercisable except with respect to whole shares of Common
Stock, and fractional share interests shall be disregarded except that they may
be accumulated.
(b) Notice and Payment. Options granted hereunder shall be exercised by
written notice delivered to the Company specifying the number of Option Shares
with respect to which the Option is being exercised, together with concurrent
payment in full of the exercise price as hereinafter provided.
(c) Payment of Exercise Price. The exercise price of any Option Shares
purchased upon the proper exercise of an Option shall be paid in full at the
time of each exercise of an Option in cash or check and/or in Common Stock of
the Company which, when added to the cash payment, if any, has an aggregate fair
market value equal to the full amount of the exercise price of the Option, or
part thereof, then being exercised. Payment by an Optionee as provided herein
shall be made in full concurrently with the Optionee's notification to the
Company of his intention to exercise all or part of an Option. If all or any
part of a payment is made in shares of Common Stock as heretofore provided, such
payment shall be deemed to have been made only upon receipt by the Company of
all required share certificates,and all stock powers and all other required
transfer documents necessary to transfer the shares of Common Stock to the
Company. In addition, Options may be exercised and payment made by delivering a
properly executed exercise notice together with irrevocable instructions to a
broker or bank to promptly deliver to the Company the amount of sale proceeds
necessary to pay the exercise price and any applicable tax withholding. The date
of exercise shall be deemed to be the date the Company receives the notice
subject to execution of the Agreement and Company counsel's satisfaction of
compliance with all laws and regulations.
5
<PAGE>
(d) Minimum Exercise. Not less than ten (10) Option Shares may be
purchased at any one time upon exercise of a Option unless the number of shares
purchased is the total number which remains to be purchased under the Option.
SECTION 11 - EFFECTIVE DATE OF PLAN
- -----------------------------------
This Plan shall become effective upon adoption by the Board of
Directors of the Corporation; provided that the Plan shall be submitted for
approval by the stockholders of the Corporation no later than twelve (12) months
after the date of adoption of the Plan by the Board of Directors. Should the
stockholders of the Corporation fail to approve the Plan within such
twelve-month period, all Options granted hereunder shall be and become null and
void. The Board of Directors approved the Plan on June 19, 1996.
SECTION 12 - TERMINATION
- ------------------------
Unless previously terminated as aforesaid, the Plan shall automatically
terminate on June 18, 2006. No Options shall be granted under the Plan
thereafter, but such termination shall not affect any Option granted before such
date.
SECTION 13 - COMPLIANCE WITH LAW AND REPRESENTATIONS OF OPTIONEE
- ----------------------------------------------------------------
No shares of Common Stock shall be issued upon exercise of any Option,
and an Optionee shall have no right or claim to such shares,unless and until:
(i) payment in full has been received by the Company with respect to the
exercise of any Option; (ii) in the opinion of the counsel for the Company, all
applicable requirements of law and of regulatory bodies having jurisdiction over
such issuance and delivery have been fully complied with; (iii) if required by
federal or state law or regulation, the Optionee shall have paid to the Company
the amount, if any, required to be withheld on the amount deemed to be
compensation to the Optionee as a result of the exercise of his or her Option,
or made other arrangements satisfactory to the Company, in its sole discretion,
to satisfy applicable income tax withholding requirements, and (iv) execution by
Optionee and the Company of the Agreement and compliance with all requirements
in the Agreement, including but not limited to required notices,
representations, warranties and covenants contained therein or as may be
requested by the Committee or counsel for the Company.
6
<PAGE>
Unless the shares of Common Stock covered by this Plan have been
registered with the Securities and Exchange Commission pursuant to the
registration requirements under the Securities Act of 1933, each Optionee shall:
(i) by and upon accepting shares or an Option, represent and agree in writing,
that the Common Stock will be acquired for investment purposes and not for
resale or distribution; and (ii) by and upon the exercise of an Option, or a
part thereof, furnish evidence satisfactory to counsel for the Company,
including written and signed representations to the effect that the Common Stock
is being acquired for investment purposes and not for resale or distribution,
and that the Common Stock being acquired shall not be sold or otherwise
transferred by the Optionee except in compliance with the registration
provisions under the Securities Act of 1933, as amended, or an applicable
exemption therefrom. Furthermore, the Company, at its sole discretion, to assure
itself that any sale or distribution by the Optionee complies with this Plan and
any applicable federal or state securities law, may take all reasonable steps,
including placing stop transfer instructions with the Company's transfer agent
prohibiting transfers in violation of the Plan and affixing the following legend
(and/or such other legend or legends as the Committee shall require) on
certificates evidencing the shares:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED OR OFFERED FOR SALE IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO
THEM UNDER THE ACT OR A WRITTEN OPINION OF COUNSEL FOR THE HOLDER
THEREOF, WHICH OPINION SHALL BE ACCEPTABLE TO APPROVED FINANCIAL
CORP., THAT REGISTRATION IS NOT REQUIRED."
SECTION 14 - EXCULPATION AND INDEMNIFICATION OF THE COMMITTEE
- -------------------------------------------------------------
The present, former and future members of the Committee, and each of
them, who is or was a director, officer or employee of the Company shall be
indemnified by the Company to the extent authorized in and permitted by the
Company's Certificate of Incorporation, and/or Bylaws in connection with all
actions, suits and proceedings to which they or any of them may be a party by
reason of any act or omission of any member of the Committee under or in
connection with the Plan or any Option granted thereunder.
SECTION 15 - COSTS AND EXPENSES
- -------------------------------
All costs and expenses involved in administrating this Plan, direct and
indirect, shall be borne by the Company.
7
<PAGE>
SECTION 16 - ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
- -------------------------------------------------------
In the event of any change in the number of issued and outstanding
shares of stock of the Company which results from a stock split, reverse stock
split, the payment of a stock dividend or any other change in the capital
structure of the Company such as merger, consolidation, reorganization or
recapitalization, the Committee shall appropriately adjust (a) the maximum
number of shares which may be issued under the Plan, (b) the number of shares
subject to each outstanding Option, and (c) the price per share thereof (but not
the total price), so that upon exercise of the Option, the Optionee shall
receive the same number of shares he would have received had he been holder of
all shares subject to his outstanding Options immediately before the effective
date of such change in the number of issued shares of stock of the Company. Such
adjustment shall not result in the issuance of fractional shares.
The foregoing adjustments shall be made by the Committee, subject to
approval by the Board of Directors. No Option granted pursuant to this Plan
shall be adjusted in a manner that causes the Option to fail to continue to
qualify as an "Incentive Option" within the meaning of Section 422A of the
Internal Revenue Code or to fail to comply with Rule 16b-3 of the Securities
Exchange Act of 1934 or regulations thereunder. The grant of an Option pursuant
to the Plan shall not affect in any way the right or power of the Company to
make adjustments, reclassifications, reorganizations or changes in its capital
or business structure or to merge or consolidate or dissolve, liquidate or sell,
or transfer all or any part of its business or assets.
SECTION 17 - RIGHTS AS SHAREHOLDER
- ----------------------------------
An Optionee of an Option shall have no rights with respect to any
shares covered by an Option until the date of the issuance of a stock
certificate for such shares. No adjustment shall be made for dividends (ordinary
or extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the date
such stock certificate is issued, except as provided in Section 16 hereof.
8
<PAGE>
SECTION 18 - TERMINATION OR AMENDMENT OF THE PLAN
- -------------------------------------------------
The Board of Directors may without the consent of the shareholders, at
any time, suspend, amend, or terminate this Plan, provided that except as set
forth in Section 16 hereof, no amendment may be adopted that will: (a) increase
the number of shares reserved for Options under the Plan; (b) change the Option
price or the method of determining the Option price; (c) change the provisions
required for compliance with Section 422A of the Internal Revenue Code and
Regulations issued thereunder; or (d) cause noncompliance with Rule 16b-3. The
Board of Directors may amend the Plan to the extent permitted by law if they
deem it advisable in order to comply with the applicable Internal Revenue Code
provisions and with Rule 16b-3. The Board of Directors may amend the Plan to the
extent permitted by law if they deem it advisable in order to comply with the
applicable Internal Revenue Code provision and with Rule 16b-3. The Board shall
not amend the Plan so as to materially increase the benefits accruing to
participants under the Plan or materially modify the requirements for
eligibility for participation in the Plan without the approval of the
shareholders of the Company. The amendment or termination of this Plan shall
not, without the consent of the Optionee, alter or impair any rights or
obligations under any Option previously granted hereunder.
SECTION 19 - AFFILIATION
- ------------------------
Except as provided in Section 20 hereof, if, for any reason other than
disability or death, an Optionee ceases to be affiliated with the Company or a
Subsidiary as an employee, the Options granted to such Optionee shall expire on
the expiration dates specified for said Options at the time of their grant, or
three (3) months after the Optionee ceases to be employed, whichever is earlier.
During such period after cessation of affiliation, such Options shall be
exercisable only as to those increments, if any which had become exercisable as
of the date on which such Optionee ceased to be so affiliated with the Company
or the Subsidiary, and any Options or increments which had not become
exercisable as of such date shall expire automatically on such date.
9
<PAGE>
SECTION 20 - TERMINATION FOR CAUSE
- ----------------------------------
If an Optionee's employment with the Company or a Subsidiary is
terminated for cause, the Options granted to such Optionee shall automatically
expire and terminate in their entirety immediately upon such termination;
provided, however, that the Committee may, in its sole discretion, within thirty
(30) days of such termination, reinstate such Options by giving written notice
of such reinstatement to the Optionee. In the event of such reinstatement, the
Optionee may exercise the Options only to such extent, for such time, and upon
such terms and conditions as if the Optionee had ceased to be employed by or
affiliated with the Company or a Subsidiary upon the date of such termination
for a reason other than cause, disability or death. The Committee shall within
its sole discretion determine whether termination was for cause. The
determination of the Committee with respect thereto shall be final and
conclusive. For the purpose of this Section 20 "cause" shall include but not be
limited to: (i) a breach of any employment agreement or any policy, rule,
instruction, or order of the Company; (ii) any act or omission by Optionee which
involves moral turpitude, gross negligence, dishonesty, bad faith, conflict of
interest, intentionally lying to the Company, taking action prohibited by the
Company, or breach of fiduciary duty; (iii) violation of any law or regulation
applicable to the business of the Company; (iv) repeated neglect of duties; or
(v) failure to follow any lawful directive from the President or Board of
Directors.
SECTION 21 - DEATH OF OPTIONEE
- ------------------------------
If an Optionee dies while employed by the Company or a Subsidiary, or
during the three-month period referred to in Section 19 hereof, the Options
granted to such Optionee shall expire on the expiration dates specified for said
Options at the time of their grant, or six (6) months after the date of such
death, whichever is earlier. After such death, but before such expiration,
subject to the terms and provisions of the Plan and the related Agreements, the
person or persons to whom such Optionee's rights under the Options shall have
passed by will or by the applicable laws of descent and distribution, or the
executor of administrator of the Optionee's estate, shall have the right to
exercise such Options to the extent that increments, if any, had become
exercisable as of the date on which the Optionee died.
10
<PAGE>
SECTION 22 - DISABILITY OF OPTIONEE
- -----------------------------------
If an Optionee is disabled while employed by the Company or a
Subsidiary, the Options granted to such Optionee shall expire on the expiration
dates specified for said Options at the time of their grant, or one (1) year
after the date such disability occurred, whichever is earlier. After such
disability occurs, but before such expiration, the Optionee or the guardian or
conservator of the Optionee's estate, as duly appointed by a court of competent
jurisdiction, shall have the right to exercise such Options to the extent that
increments, if any, had become exercisable as of the date on which the Optionee
became disabled or ceased to be employed by or affiliated with the Company or a
Subsidiary as a result of the disability. An Optionee shall be deemed to be
"disabled" if it shall appear to the Committee, upon written certification
delivered to the Company of a qualified licensed physician, that the Optionee
has become permanently and totally unable to engage in any substantial gainful
activity by reason of a medically determinable physical or mental impairment
which can be expected to result in the Optionee's death, or which has lasted or
can be expected to last for a continuous period of not less than 12 months. The
Committee shall have the right (but not the obligation) to obtain and to rely
solely upon the opinion of a duly licensed medical doctor appointed by the
Committee. The Committee shall have the right to require any other proof deemed
appropriate to the Committee.
SECTION 23 - EFFECT OF CERTAIN CHANGES
- --------------------------------------
A. LIQUIDATING EVENT. In the event of the proposed dissolution or
liquidation of the Company, or in the event of any corporate separation or
division, including, but not limited to, split-up, split-off or spin-off (each,
a "Liquidating Event"), the Committee may provide that the holder of any Stock
Options then exercisable shall have the right to exercise such Stock Options (at
the price provided in the agreement evidencing the Stock Options) subsequent to
the Liquidating Event, and for the balance of its term, solely for the kind and
amount of shares of Stock and other securities, property, cash or any
combination thereof receivable upon such Liquidating Event by a holder of the
number of shares of Stock for or with respect to which such Stock Options might
have been exercised immediately prior to such Liquidating Event; or the
Committee may provide, in the alternative, that each Stock Option granted under
the Plan shall terminate as of a date to be fixed by the Board; provided,
however, that not less than 30 days written notice of the date so fixed shall be
given to each Optionee and if such notice is given, each Optionee shall have the
right, during the period of 30 days preceding such termination, to exercise his
or her Stock Options as to all or any part of the shares of Stock covered
thereby, without regard to any installment or vesting provisions in his or her
Stock Options agreement, on the condition, however, that the Liquidating Event
actually occurs; and if the Liquidating Event actually occurs, such exercise
shall be deemed effective (and, if applicable, the Optionee shall be deemed a
shareholder with respect to the Stock Options exercised) immediately preceding
the occurrence of the Liquidating Event (or the date of record for shareholders
entitled to share in such Liquidating Event, if a record date is set).
11
<PAGE>
B. MERGER OR CONSOLIDATION. In the case of any capital reorganization,
any reclassification of the Stock (other than a change in par value or
recapitalization described in Section 16 of the Plan), or the consolidation of
the Company with, or a sale of substantially all of the assets of the Company to
(which sale is followed by a liquidation or dissolution of the Company), or
merger of the Company with another person (a "Reorganization Event"), the
Committee may provide in the Stock Option Agreement, or if not provided in the
Stock Option Agreement, may determine, in its sole and absolute discretion, to
accelerate the vesting of outstanding Stock Options (a "Liquidity Event") in
which case the Company shall deliver to the Optionees at least 15 days prior to
such Reorganization Event (or at least 15 days prior to the date of record for
shareholders entitled to share in the securities or property distributed in the
Reorganization Event, if a record date is set) a notice which shall (i) indicate
whether the Reorganization Event shall be considered a Liquidity Event and (ii)
advise the Optionee of his or her rights pursuant to the agreement evidencing
such Stock Options. If the Reorganization Event is determined to be a Liquidity
Event, (i) the Surviving Corporation may, but shall not be obligated to, tender
stock options or stock appreciation rights to the Optionee with respect to the
Surviving Corporation, and such new options and rights shall contain terms and
provisions that substantially preserve the rights and benefits of the applicable
Stock Options then outstanding under the Plan, or (ii) in the event that no
stock options or stock appreciation rights have been tendered by the Surviving
Corporation pursuant to the terms of item (i) immediately above, the Optionee
shall have the right, exercisable during a 10 day period ending on the fifth day
prior to the Reorganization Event (or ending on the fifth day prior to the date
of record for shareholders entitled to share in the securities or property
distributed in the Reorganization Event, if a record date is set), to exercise
his or her rights as to all or any part of the shares of Stock covered thereby,
without regard to any installment or vesting provisions in his or her Stock
Options agreement, on the condition, however, that the Reorganization Event is
actually effected; and if the Reorganization Event is actually effected, such
exercise shall be deemed effective (and, if applicable, the Optionee shall be
deemed a shareholder with respect to the Stock Options exercised) immediately
preceding the effective time of the Reorganization Event (or on the date of
record for shareholders entitled to share in the securities or property
distributed in the Reorganization Event, if a record date is set). If the
Reorganization Event is not determined to be a Liquidity Event, the Optionee
shall thereafter be entitled upon exercise of the Stock Options to purchase the
kind and number of shares of stock or other securities or property of the
Surviving Corporation receivable upon such event by a holder of the number of
shares of the Stock which the Stock Options would have entitled the Optionee to
purchase from the Company if the Reorganization Event had not occurred, and in
any such case, appropriate adjustment shall be made in the application of the
provisions set forth in this Plan with respect to the Optionee's rights and
interests thereafter, to the end that the provisions set forth in the agreement
applicable to such Stock Options (including the specified changes and other
adjustments to the Exercise Price) shall thereafter be applicable in relation to
any shares or other property thereafter purchasable upon exercise of the Stock
Options.
D. DECISION OF COMMITTEE FINAL. To the extent that the foregoing
adjustments relate to stock or securities of the Company, such adjustments shall
be made by the Committee, whose determination in that respect shall be final,
binding and conclusive; provided, however, that each Incentive Stock Option
granted pursuant to the Plan shall not be adjusted without the prior consent of
the holder thereof in a manner that causes such Stock Option to fail to continue
to qualify as an Incentive Stock Option.
12
<PAGE>
E. NO OTHER RIGHTS. Except as expressly provided in this Section 23, no
Optionee shall have any rights by reason of any subdivision or consolidation of
shares of Stock or the payment of any dividend or any other increase or decrease
in the number of shares of Stock of any class or by reason of any Liquidating
Event, merger, or consolidation of assets or stock of another corporation, or
any other issued by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class; and except as provided in this
Section 23, none of the foregoing events shall affect, and no adjustment by
reason thereof shall be made with respect to, the number of price or shares of
Stock subject to Stock Options. The grant of Stock Options pursuant to the Plan
shall not affect in any way the right or power of the Company to make
adjustments, reclassification, reorganizations or changes of its capital or
business structures or to merge or to consolidate or to dissolve, liquidate or
sell, or transfer all or part of its business or assets.
SECTION 24 - EFFECT ON EMPLOYMENT
- ---------------------------------
Neither the adoption of the Plan, its operation, nor any documents
describing or referring to the Plan (or any part thereof) shall confer upon any
employee any right to continue in the employ of the Company or an Affiliate or
in any way affect any right and power of the Company or an Affiliate to
terminate the employment of any employee at any time with or without assigning a
reason therefor.
SECTION 25 - UNFUNDED PLAN
- --------------------------
The Plan, insofar as it provides for grants, shall be unfunded, and the
Company shall not be required to segregate any assets that may at any time be
represented by granted under the Plan. Any liability of the Company to any
person with respect to any grant under the Plan shall be based solely upon any
contractual obligations that may be created pursuant to the Plan. No such
obligation of the Company shall be deemed to be secured by any pledge of, or
other encumbrance on, any property of the Company.
SECTION 26 - DISQUALIFYING DISPOSITION; WITHHOLDING TAXES
- ---------------------------------------------------------
(a) DISQUALIFYING DISPOSITION. Optionees who make a "disposition" (as
defined in the Code) of all or any of the Stock acquired through the exercise of
Stock Options within two years from the date of grant of the Stock Option, or
within one year after the issuance of Stock relating thereto, must immediately
advise the Company in writing as to the occurrence of the sale and the price
realized upon the sale of such Stock; and each Optionee agrees that he or she
shall maintain all such Stock in his or her name so long as he or she maintains
beneficial ownership of such Stock. A "disposition" within two years from the
date of grant of the stock option or within one year after the issuance of the
stock upon exercise of the option, will cause Employee to recognize income in
the year of the disqualifying disposition.
13
<PAGE>
(b) WITHHOLDING REQUIRED. Each Optionee shall, no later than the date
as of which the value derived from Stock Options first becomes includable in the
gross income of the Optionee for income tax purposes, pay to the Company, or
make arrangements satisfactory to the Committee regarding payment of, any
federal, state or local taxes of any kind required by law to be withheld with
respect to the Stock Options or their exercise. The obligations of the Company
under the Plan shall be conditioned upon such payment or arrangements and the
Optionee shall, to the extent permitted by law, have the right to request that
the Company deduct any such taxes from any payment of any kind otherwise due to
the Optionee.
(c) WITHHOLDING RIGHT. The Committee may, in its discretion, grant to
an Optionee the right (a "Withholding Right") to elect to make such payment by
irrevocably requiring the Company to withhold from shares issuable upon exercise
of the Stock Options that number of full shares of Stock having a Fair Market
Value on the Tax Date (as defined below) equal to the amount (or portion of the
amount) required to be withheld. The Withholding Right may be granted with
respect to all or any portion of the Stock Options.
(d) EXERCISE OF WITHHOLDING RIGHT. To exercise a Withholding Right, the
Optionee must follow the election procedures set forth below, together with such
additional procedures and conditions as may be set forth in the related Stock
Option Agreement or otherwise adopted by the Committee.
(i) The Optionee must deliver to the Company his or her written
notice of election (the "Election") to have the Withholding
Right apply to all (or a designated portion) of his or her
Stock Options prior to the date of exercise of the Right to
which it relates.
(ii) Unless disapproved by the Committee as provided in
Subsection (iii) below, the Election once made will be
irrevocable.
(iii) No Election is valid unless the Committee consents to the
Election; the Committee has the right and power, in its sole
discretion, with or without cause or reason therefor, to
consent to the Election, to refuse to consent to the
Election, or to disapprove the Election; and if the
Committee has not consented to the Election on or prior to
the date that the amount of tax to be withheld is, under
applicable federal income tax laws, fixed and determined by
the Company (the "Tax Date"), the Election will be deemed
approved.
(iv) If the Optionee on the date of delivery of the Election to
the Company is a person subject to Section 16(b) of the
Securities Exchange Act of 1934, as amended ("Exchange
Act"), the following additional provisions will apply:
(A) the Election cannot be made during the six calendar
month period commencing with the date of the grant of
the Withholding Right (even if the Stock Options to
which such Withholding Right relates have been granted
prior to such date); provided, that this Subsection (A)
is not applicable to any Optionee at any time
subsequent to the death, Disability or Retirement of
the Optionee;
14
<PAGE>
(B) the Election (and the exercise of the related Stock
Option) can only be made during the specific period
expressly provided in Rule 16b-3(e)(3); and
(C) notwithstanding any other provision of this Section, no
person subject to Section 16(b) of the Exchange Act
shall have the right to make any Election unless the
Company has been subject to the reporting requirements
of Section 13(a) of the Exchange Act for at least a
year prior to the transaction and has filed all reports
and statements required to be filed pursuant to that
Section for that year.
(e) EFFECT. If the Committee consents to an Election of a Withholding
Right:
(i) upon the exercise of the Stock Options (or any portion
thereof) to which the Withholding Right relates, the Company
will withhold from the shares otherwise issuable that number
of full shares of Stock having an actual Fair Market Value
equal to the amount (or portion of the amount, as
applicable) required to be withheld under applicable
federal, state and/or local income tax laws as a result of
the exercise; and
(ii) if the Optionee is then a person subject to Section 16(b) of
the Exchange Act who has made an Election, the related Stock
Options may not be exercised, nor may any shares of Stock
issued pursuant thereto be sold, exchanged or otherwise
transferred, unless such exercise, or such transaction,
complies with an exemption from Section 16(b) provided under
Rule 16b-3.
SECTION 27 - NOTICES
- --------------------
All notices and demands of any kind which the Committee, or any
Optionee, or other person may be required or desires to give under the terms of
this Plan shall be in writing and shall be delivered in hand to the person or
persons to whom addressed (in the case of the Committee, with the Chief
Executive Officer or Chief Financial Officer, or Secretary of the Corporation),
or by mailing a copy thereof, properly addressed, by certified or registered
mail, postage prepaid, with return receipt requested. Notice to Optionee, if
mailed, shall be mailed to the last known address of Optionee. No notice will be
effective without compliance with all requirements in the written Agreement.
15
<PAGE>
SECTION 28 - LIMITATION ON OBLIGATIONS OF THE COMPANY
- -----------------------------------------------------
All obligations of the Company arising under or as a result of this
Plan or Options granted hereunder shall constitute the general unsecured
obligations of the Company, and not of the Board of Directors of the Company,
any member thereof, the Committee, any member thereof, any officer of the
Company, or any other person or any Subsidiary, and none of the foregoing,
except the Company, shall be liable for any debt, obligation, cost or expense
hereunder.
SECTION 29 - LIMITATION OF RIGHTS
- ---------------------------------
Except as otherwise provided by the terms of the Plan, the Committee,
in its sole and absolute discretion, is entitled to determine who, if anyone, is
an Eligible Optionee under this Plan, and which, if any, Eligible Optionee shall
receive any grant. No oral or written agreement by any other person not acting
on behalf of the Committee relating to this Plan is authorized, and such may not
bind the Company or the Committee to make any grant to any person.
SECTION 30 - SEVERABILITY
- -------------------------
If any provision of this Plan is applied to any person or to any
circumstance shall be adjudged by a court of competent jurisdiction to be void,
invalid, or unenforceable, the same shall in no way affect any other provision
hereof, the application of any such provision in any other circumstances, or the
validity or enforceability hereof.
SECTION 31 - CONSTRUCTION
- -------------------------
Where the context or construction requires, all words applied int he
plural herein shall be deemed to have been used in the singular and vice versa,
and the masculine gender shall include the feminine and the neuter and vice
versa.
SECTION 32 - HEADINGS
- ---------------------
The headings of the several paragraphs herein are inserted solely for
convenience of reference and are not intended to form a part of and are not
intended to govern, limit or aid in the construction of any term or provision
hereof.
16
<PAGE>
SECTION 33 - SUCCESSORS
- -----------------------
This Plan shall be binding upon the respective successors, assigns,
heirs, executors, administrators, guardians and personal representatives of the
Company and Optionees.
SECTION 34 - GOVERNING LAW
- --------------------------
The provisions of this Plan shall be construed in accordance with the
laws of the State of Virginia.
17
Appendix D
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made as of April 1, 1995, by and between AMERICAN
INDUSTRIAL LOAN ASSOCIATION, ("Employer") and NEIL W. PHELAN ("Employee"), who,
in consideration of the mutual promises of the parties and other good and
valuable consideration, the receipt and adequacy of which are acknowledged, the
parties have agreed as follows:
1. Definitions. Whenever the following words or phrases are used in this
Agreement, they shall have the meanings given in this Section, unless otherwise
indicated.
a. "Affiliated means any person owned by, (greater than 10%),
owning (greater than 10%), under common ownership with, controlling, controlled
by, or under common control with, another person, and includes subsidiary and
parent organizations.
b. "Cause," for purposes of a termination for cause, means any
termination due to Employee's conviction of a crime involving dishonesty or
moral turpitude, gross negligence or willful misconduct.
c. "Compete" shall mean in any way being in contest with or
rivalry with Employer, including directly or indirectly working with, being
employed by, or having any interest or involvement in any other person which is
directly or indirectly employed in selling, marketing or otherwise providing any
of the services or products which are provided or performed as part of the
primary business operation of Employer.
d. "Disability" shall mean Employee being continuously unable,
unwilling, or failing to perform Employee's duties for a total period of six (6)
months during any twelve (12) month period.
e. "Immediate family" shall include any of the following: a
spouse, a parent, a stepparent, a sibling, a step-sibling, a child, a
grand-child, a grandparent, an uncle, an aunt, a first cousin, or any person
occupying the same household as Employee.
f. "Person" shall include both natural persons and entities.
g. "Primary business operation" shall mean providing mortgage
banking, insurance, financial, and related services and products.
h. "Territory" shall mean the metropolitan area surrounding any
city where the Employer has an office or is "doing
page 1
Employee: /s/ NWP
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<PAGE>
business", such that it would have to register as a foreign corporation.
2. Employment. Employer employs Employee for the position of SENIOR VICE
PRESIDENT, Chief Operating Officer of American Industrial Loan Association and
President, Chief Operating Officer of its subsidiary, Approved Residential
Mortgage, Inc. Employee agrees to perform the duties described in this
Agreement, subject to the general supervision and policies of Employer and
pursuant to the orders, advice, and direction of the Chief Executive Officer of
American industrial Loan Association.
3. Duties. Employee shall perform the duties customarily performed by one
holding Employee' s position in similar businesses, and shall also perform such
other duties as may be assigned to him by this Agreement or from time to time by
Employer. Employee shall specifically perform the following duties on behalf of
Employer:
Responsible for the general management of the mortgage banking business,
including sales and marketing, loan processing, underwriting, quality
control, servicing, secondary marketing, business planning and social
projects.
More specifically, responsible to recruit, hire, develop, train and if
necessary, terminate the necessary people to effectively run the mortgage
banking business.
Further, Employee shall make available to Employer all information of
which Employee shall have any knowledge, and shall make all suggestions and
recommendations that will be of benefit to Employer or mutual benefit to
Employer and himself.
4. Best Efforts of Employee. Employee will at all times faithfully
industriously, and to the best of Employee's ability, perform all of Employee's
duties, to the satisfaction of Employer.
5. Term. This Agreement is for an initial term of two years, renewable
thereafter on a year to year basis.
Further, either party must give six (6) months written notice if the
contract is not going to be renewed. Upon failure to give such notice at the end
of the term, this Agreement will automatically renew for a period of twelve (12)
months. Such six (6) month notice requirement shall continue for all subsequent
renewal periods.
6. Compensation. Employer shall pay Employee in full payment for
Employee's services, compensation in accordance with the Compensation Schedule
attached to this Agreement, which shall remain in effect until supplemented or
replaced by a new Agreement between Employer and Employee.
Employee: /s/ NWP page 2
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<PAGE>
7. Other Activities. Employee shall devote all business time, attention,
knowledge, and skills solely to the business and interest of Employer, and
Employer shall be entitled to all of the benefits, profits or other issues
arising from or incident to all work, services, and advice of Employee. Employee
shall not, during the term of this Agreement, be employed by or contract to
provide services to any other person or engage in any other business or trade,
nor shall Employee use or take for Employee's personal benefit any position
which conflicts with or is contrary to any position which would be beneficial to
Employer. Nothing in this Agreement, however, shall limit Employee's right to
invest in publicly traded securities, to engage in any business with the written
consent of Employer, or to engage in civic and charitable activities.
8. Authority to Contract Employee shall have the authority to contract on
behalf of Employer on contracts involving less than $100,000 without first
obtaining the written consent of Employer. Prior to entering into any contract
on behalf of Employer which involves more than $50,000, Employee shall consult
with and obtain the approval of the president of Employer. Employee shall have
the authority to approve loans in accordance with the policies adopted from time
to time by Employer.
9. Benefits. Employee shall be entitled to benefits according to
Employer's policy, as amended from time to time, for employees holding similar
positions and tenure.
10. Termination. Employer may terminate this Agreement at any time for
cause. Furthermore, this Agreement shall terminate immediately upon Employee's
death or disability, but such termination shall not affect any previously vested
right of Employee to receive disability payments in accordance with any
applicable plan for a disability which arises while this Agreement is in effect.
11. Trade Secrets and Business Information. In the course of this
employment, Employee will be exposed to certain confidential and proprietary
information of Employer and its customers. Employee shall not reproduce or
remove from any premises any such information without the express written
consent of Employer. Any such information acquired by Employee shall be promptly
delivered to Employer if in tangible form, unless specific written consent is
received from Employer. Employee shall not at any time or in any manner,
disclose to any person, nor any way use to his benefit or that of any immediate
family member, any information concerning any matters affecting or relating to
the business of Employer, including any of its customers, the prices it obtains
or at which it offers its products or services, or the sources of and/or prices
it pays for any supplies, material, services or technical assistance, or any
other information concerning the finances or business of Employer or any of its
customers or clients, without
Employee: /s/ NWP page 3
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<PAGE>
regard to whether any of the foregoing matters would otherwise be considered
confidential or material, the parties agreeing that these matters are important,
material, and confidential and gravely affect the effective and successful
conduct of Employer's business and goodwill, and that any breach of the terms of
this Section shall be a material breach of this Agreement and result in
irreparable harm to Employer. Employee further agrees that upon termination of
this Agreement for any reason, Employee shall immediately deliver to Employer
any and all information, documents, agreements, data, work product, customer
lists, notes, and the like of Employer or relating to Employer's business. The
duties and restrictions on Employee in this Section shall survive the term of
this Agreement and remain in full force and effect for so long as Employer
continues in business.
Employee: /s/ NWP page 4
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12. Covenant Not to Compete.
a. Covenant. In consideration of the employment obtained by
Employee and other valuable consideration, and as an inducement for Employer to
employ Employee, Employee agrees that, during the term of this Agreement and if
this Agreement is terminated by Employer for cause or if Employee voluntarily
terminates this Agreement, then also for a period of two (2) years after the
date of termination, Employee shall not compete with Employer relative to
Employer's primary business operations within the geographical limits of the
territory. Employee further shall not, during the term of this noncompetition
covenant, solicit or contact any of the customers or clients or potential
customers or clients of Employer within the territory, nor utilize or allow the
utilization of any customer or client list by any person engaging in the primary
business operation, nor will Employee hire or employ, or attempt to hire or
employ any employee or independent contractor of Employer, or encourage any such
employee or independent contractor to terminate his or her relationship with
Employer. The intent of this covenant is to prohibit any activity by Employee
which would be likely to adversely affect the primary business operation of
Employer.
b. Notice to Prospective Employers. During the term of the
noncompetition covenant, Employee shall give all of Employee's actual and
prospective employers written notice of the requirements of the noncompetition
covenant. If Employer believes that Employee has failed to provide any actual or
prospective employer such notice, Employer may provide such notice, including
providing a copy of any or all of this Agreement.
c. Employee Acknowledgments. Employee acknowledges that (i) there
was no duress involved in signing this Agreement; (ii) other employment options
were available to Employee at the time of signing this Agreement; (iii)
Employee's covenant not to compete was a material and necessary inducement to
Employer to employ Employee; (iv) Employee has been advised of the policy of the
Commonwealth of Virginia regarding restrictive covenants and agrees that the
restrictions imposed upon Employee by this Agreement are reasonable in scope and
duration and are necessary to serve a legitimate business interest of Employer;
and (v) Employee has had an opportunity to have this Agreement reviewed by legal
counsel of Employee's choice.
Employee: /s/ NWP page 5
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<PAGE>
13. Intellectual Property Rights. Employee acknowledges that the
propriety rights to any original works, concepts, software, manuals, programs,
routines, inventions, trademarks, servicemarks, and tradenames made, developed,
or conceived by Employee, whether singularly or in conjunction with another
person, during the term of this Agreement (collectively "Inventions") shall be
the property of Employer. Accordingly, Employee agrees as follows:
a. Employee hereby assigns, and shall assign in the future, any
and all of Employee's rights in or to all Inventions.
b. Employee shall promptly disclose in writing to Employer any
Invention. If requested by Employer, Employee will execute, file, and prosecute
any and all applications and assignments necessary or proper to vest in Employer
the complete rights in and to any Inventions.
c. If Employer chooses to pursue any patent or other application
for any Invention, Employer shall bear all costs and fees in connection with the
application.
d. If Employer declines in writing to pursue any patent or other
application for an Invention, Employee may pursue the application in Employee's
own name and at Employee's own expense, provided that Employer shall have a
perpetual, world-wide, royalty-free license and right to use, or to adapt and
develop in any way, any and all Inventions, whether or not protectable under any
applicable law.
e. Upon the termination of this Agreement for any reason, Employee
shall deliver to Employer any and all notes, records, documents and other
material relating to any completed or incomplete Inventions which Employee
worked on prior to such termination.
f. Except as set forth in an exhibit to this Agreement, Employee
shall not assert any rights to any Inventions as having been made or acquired by
Employee prior to being employed by Employer, or since then and not covered by
this Agreement.
g. Employee need not assign to Employer any rights to any
invention, etc. wholly conceived and developed by Employee after the termination
of this Agreement, unless the conception or development of such invention, etc.
involves the use of confidential or proprietary information obtained by Employee
while employed by Employer.
Employee: /s/ NWP page 6
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h. Employee represents and warrants that his employment by
Employer does not and will not breach any agreement or duty which Employee has
to any other person to keep in confidence any confidential information belonging
to others. Employee shall not disclose to Employer or use on its behalf any
confidential information belonging to others.
14. Governing Law and Forum. All questions regarding this Agreement shall
be governed by the laws of Virginia, excluding its choice of law rules. Any suit
relating to this Agreement shall be brought in the Circuit or General District
Courts of the City of Virginia Beach, Virginia.
15. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their heirs, personal representatives,
successors and assigns.
16. Assignability. The rights and obligations of Employee under this
Agreement may not be assigned or delegated. The rights and obligations of
Employer may be assigned or delegated without the consent of Employee.
17. Offsets Against Compensation. Upon termination of this Agreement
Employee authorizes Employer to offset against any compensation or other amounts
owing to Employee any sums that Employee owes to Employer, evidenced in writing.
18. Notices. Any notice or other communication required or permitted by
this Agreement shall be in writing and shall be considered given when hand
delivered or deposited in the United States mail, postage prepaid, via first
class or certified mail, and addressed to Employer at its administrative
headquarters and to Employee at his residence, as indicated by the records of
the Employer.
19. Headings. The headings in this Agreement are for convenience only and
are not a part of the substantive agreement of the parties, nor shall the
headings be used in the interpretation or construction of this Agreement.
20. Number and Gender. Whenever used in this Agreement, the singular
shall include the plural, and the plural shall include the singular.
21. Severability. If any provision of this Agreement is determined to be
unenforceable, the remainder of this Agreement shall be construed and enforced
as if the unenforceable provision had not been contained in this Agreement, and
each provision of this Agreement shall be valid and enforceable to the fullest
extent permitted by law.
22. Entire Agreement. This Agreement is intended to be a
Employee: /s/ NWP page 7
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<PAGE>
complete, exclusive, and final expression of the parties' agreements concerning
Employee's employment, merging and replacing all prior negotiations, offers,
representations, warranties and agreements. To the extent that Employee was
employed by Employer prior to the date of this Agreement, this Agreement is in
confirmation of the Agreements previously reached and under which the parties
have been working. No course of prior dealing between the parties, no usage of
trade, and no parole or extrinsic evidence of any nature shall be used to
supplement or modify any of the terms of this Agreement.
23. Modification and Waiver. The provisions of this Agreement may not be
modified or waived, including the waiver of the provisions of this Section,
except by a written instrument, signed by the party against whom such
modification or waiver is sought to be enforced.
24. Survival. Any provision of this Agreement which imposes an obligation
upon Employee which may extend beyond the term of this Agreement shall survive
the termination of this Agreement.
25. Third Party Beneficiaries. The Provisions of this Agreement are
intended to benefit only the parties to this Agreement. No person not a party to
this Agreement shall be deemed to be a third party beneficiary of this
Agreement, nor shall any such person be empowered to enforce the provisions of
this Agreement, except to the extent such a person becomes a permitted assignee
of one of the parties.
WITNESS the following signatures and seals:
Employer:
American Industrial Loan Association
By /s/ Allen D. Wykle
-------------------------------
Title:
Employee:
/s/ Neil W. Phelan
----------------------------------
Neil W. Phelan
Employee: /s/ NWP page 8
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<PAGE>
NEIL W. PHELAN
COMPENSATION SCHEDULE
1) Base Compensation: $100,000 annually, payable in arrears in twenty-four (24)
equal semi-monthly payments, payable on the 15th and 30th of each month.
2) Additional Compensation. Additional compensation shall be determined by Allen
D. Wykle, if he is then employed by the Employer, and if he is not so employed,
by the President of Employer. The determination shall be made after consultation
with the Employee and after consideration of the previous year's audited
financial statements and future volume, expense and profit targets. During 1995,
Employer will pay Employee a performance bonus based on Employer achieving
profit goals set by the President with Employee's input. Employee must be
employed at the end of the calendar year to be eligible for this bonus. The
profit goal for year ending 12/31/95 is as follows:
Profit Goal A If Employer earns at least $1,500,000 but less than $1,666,667 -
earnings before income taxes in accordance with G.A.A.P.
excluding any income or loss attributable to Industry Mortgage
Corporation LP, a Delaware Partnership.
1) Employee's bonus will be 25% of Employee's salary ($25,000).
Profit Goal B If Employer earns at least $1,666,667 but less than $1,833,333 -
earnings before income taxes in accordance with G.A.A.P.
excluding any income or loss attributable to Industry Mortgage
Corporation LP, a Delaware Partnership.
1) Employee's bonus will be 50% of Employee's salary ($50,000).
Profit Goal C If Employer earns at least $1,833,333 or more - earnings before
income taxes in accordance with G.A.A.P. excluding any income or
loss attributable to Industry Mortgage Corporation LP, a Delaware
Partnership.
1) Employee's bonus will be 75% of Employee's salary ($75,000).
In addition, if any salary bonus is paid, Employee will be issued options
to purchase common stock of American Industrial Loan Association for a period of
two (2) years at book price. See the following guidelines:
Employee: /s/ NWP Compensation Schedule
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<PAGE>
Profit Goal A - $2,500 worth of stock allowed to purchase at book
price.
Profit Goal B - $5,000 worth of stock allowed to purchase at book
price.
Profit Goal C - $7,500 worth of stock allowed to purchase at book
price.
3) 401K available subject to plan rules
4) $500.00 monthly car allowance
5) Documented moving expenses up to $20,000 will be reimbursed. This consists
of moving expenses, temporary living expenses, food, closing costs and real
estate fees on sale of home, any rentals of house, auto, moving truck etc.,
and all costs associated with moving.
6) Appointment to advisory board
7) Nomination, after review, to Board of Directors of American Industrial Loan
Association.
8) Full medical and dental plan per group plan at a cost to Employee of $50 -
100.00 depending on the plan Employee chooses.
9) 3 weeks paid vacation
10) If Employee's employment is terminated prior to 4/1/96 due to a sale of
Employer and not due to any cause, Employer will pay Employee severance pay
of $50,000.
April 1, 1995
Employee: /s/ SWB Compensation Schedule
-------- Page 2
Appendix E
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made as of January 1, 1997, by and between APPROVED
FINANCIAL CORP. ("Employer") and its successors and assigns, and STANLEY W.
BROADDUS ("Employee"), who, in consideration of the mutual promises of the
parties and other good and valuable consideration, the receipt and adequacy of
which are acknowledged, the parties have agreed as follows:
1. DEFINITIONS. Whenever the following words or phrases are used in the
Agreement, they shall have the meanings given in this Section, unless otherwise
indicated.
(a) "Affiliate" means any Person owned by (greater than 10%),
owning (greater than 10%), under common ownership with, controlling, controlled
by, or under common control with, another Person, which includes subsidiary and
parent organizations.
(b) "Compete" shall mean in any way being in contest with or
rivalry with Employer, including directly or indirectly working with, being
employed by, or having any interest or involvement in any other Person which in
involved in selling marketing or otherwise providing any of the services or
products which are provided or performed as part of the Primary Business
Operation of Employer during Employee's employment with Employee.
(c) "Customer" shall mean individual borrowers, mortgage brokers
or other sources of referrals of business to Employer.
(d) "NonConforming Loans" means all residential real property
loans, regardless of lien position, that do not conform to all applicable
Federal National Mortgage Association guidelines.
(e) "Primary Business Operation" shall mean wholesale and retail
origination and sale of NonConforming Loans.
(f) "Person" shall include both natural persons and entities.
(g) "Territory" shall mean the area encompassed in a 35 mile
radius around any officer of Employer or its Affiliates which are in the same
Primary Business Operation.
2. EMPLOYMENT. Employer employs Employee for the position of Vice
President and Underwriting Supervisor. Employee agrees to perform the duties
assigned to Employee, and to comply with the general supervision and policies of
Employer and the orders, advice, and direction of the Chief Executive Officer of
Employer.
3. DUTIES. Employee shall perform the duties customarily performed by
one holding Employee's position in similar business, and such duties as may be
assigned by this
<PAGE>
Agreement as specified in Schedule A attached to and incorporated herein, and
such other duties as may be assigned from time to time by Employer, Employee
shall make available to Employer all information of which Employee shall have
any knowledge, and shall make all suggestions and recommendations that will be
of benefit to Employer.
4. BEST EFFORTS OF EMPLOYEE. Employee will at all times faithfully,
industriously, and to the best of Employee's ability, perform all of Employee's
duties, to the satisfaction of Employer.
5. TERM AND RENEWAL. This Agreement is for an initial term of one (a)
year, renewable thereafter on a year to year basis. Either party must give
ninety (90) days written notice if the contract is not going to be renewed. Upon
failure to give such notice, this Agreement will automatically renew for a
period of twelve (12) months on the same terms. This notice requirement shall
continue for all subsequent renewal periods.
6. COMPENSATION.
(a) Employer shall pay Employee in full payment for Employee's
services, compensation in accordance with the Compensation Schedule attached to
this Agreement as Schedule B and incorporated as part of this Agreement, which
shall remain in effect until supplemented or replaced by a new Agreement between
Employer and Employee.
(b) It is mutually agreed that the Employer shall pay to Employee
one year's annual base compensation as provided in Schedule B of this Agreement
in the event that following a change of control (more than 50% of the voting
stock) of Employer the present Chairman and President of the Employer, Allen D.
Wykle, is no longer employed by the Employer, and Employer chooses to terminate
Employee without cause.
7. OTHER ACTIVITIES. Employee shall devote all business time, attention,
knowledge, and skills solely to the business and interest of Employer, and
Employer shall be entitled to all of the benefits, profits or other issues
arising from or incident to all work, services, and advice of Employee. Employee
shall not, during the term of this Agreement, be employed by or contract to
provide services to any other person or engage in any other business or trade,
nor shall Employee use or take for Employee's personal benefit any position
which conflicts with or is contrary to any position which would be beneficial to
Employer. Nothing in this Agreement, however, shall limit Employee's right to
invest in publicly traded securities, to engage in any business with the written
consent of Employer, or to engage in civic and charitable activities.
8. BENEFITS. Employee shall be entitled to benefits according to
Employer's stated policy, as amended from time to time.
9. TERMINATION. Employer may terminate this Agreement at any time
without advance notice for cause. For the purpose of this Agreement "cause" is
defined as: (i) a
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<PAGE>
breach of this Agreement or any policy, rule, instruction, or order of Employer;
(ii) any act or omission by Employee which involves moral turpitude, gross
negligence, dishonesty, bad faith, conflict of interest, intentionally lying to
Employer, taking action prohibited by Employer, or breach of fiduciary duty;
(iii) violation of any law or regulation applicable to the business of the
Employer; (iv) repeated neglect of duties; or (v) failure to follow any lawful
directive from the Chief Executive Officer or Board of Directors. Furthermore,
this Agreement shall terminate immediately upon Employee's death or disability,
but such termination shall not affect any previously vested right of Employee to
receive disability payments in accordance with any applicable plan for a
disability which arises while this Agreement is in effect. Either party may upon
ninety (90) days prior written notice terminate this Agreement without cause. If
Employer terminates without cause, the decision shall be made either by Allen D.
Wykle, personally, or Employer's Board of Directors.
10. CONFIDENTIAL AND PROPRIETARY INFORMATION. In the course of this
employment, Employee will be exposed to certain confidential and proprietary
information of Employer and its Customers. Employee shall not reproduce or
remove from any premises any such information without the express written
consent of Employer. Any such information acquired by Employee shall be promptly
delivered to Employer if in tangible form, unless specific written consent is
received from Employer. Employee shall not at any time or in any manner,
disclose to any Person, nor in any way use to his benefit or that of any other
person, any information concerning any matters affecting or relating to the
business of Employer, including any of its Customers, the prices it obtains or
at which it offers its products or services, or the sources of and/or prices it
pays for any supplies, material, services or technical assistance, or any other
information concerning the finances or business of Employer or any of its
Customers, without regard to whether any of the foregoing matters would
otherwise be considered confidential or trade secrets, the parties agreeing that
these matters are important, material, and confidential and gravely affect the
successful conduct of Employer's business and goodwill, and that any breach of
the terms of this Section shall be a material breach of this Agreement and
result in irreparable harm to Employer. Employee further agrees that upon
termination or expiration of this Agreement for any reason, Employee shall
immediately deliver to Employer any and all information, documents, agreements,
data, work product, customer lists, notes, and the like of Employer or relating
to Employer's business. The duties and restrictions on Employee in this Section
shall survive the expiration or termination of this Agreement and remain in full
force and effect for so long as Employer continues in business.
11. COVENANT NOT TO COMPETE. In consideration of the employment of
Employee or in the event Employee is entering into this Agreement after having
been an employee, either with a prior contract or no contract, then in
consideration of continued employment, the benefits of this Agreement and other
good and valuable consideration, the Employee' independently covenants and
agrees with Employer, each of which said covenants shall be independent of and
severable from each other and each of which shall continue in force for the
specified duration irrespective of the completion and performance of all other
obligations between the parties hereto, that:
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<PAGE>
(a) Employee will NOT during the term of Employee's employment,
nor one (1) year immediately following the termination of employment, compete
with Employer within the geographical limits of the Territory.
(b) Employee will NOT, during the term of Employee's employment
nor one (1) year immediately following the termination thereof, directly or
indirectly, for Employee, or in conjunction with any other Person, (by
disparagement of Employer's business or otherwise), do business with, divert,
take away or cause to leave any of the Customers of Employer.
(c) Employee will NOT, during the term of Employee's employment
nor two (2) years immediately following the termination thereof, directly or
indirectly, for Employee, or in conjunction with any other Person (by
disparagement of Employer's business or otherwise), employ, solicit, divert or
take away any of the employees of Employer.
(d) If any of the preceding limitations on the Employee imposed
by the preceding subsection "(a)" through "(c)" exceed the maximum limitation
permissible under the statutes, laws or precedents of any state wherein it is
sought to be enforced against the Employee, then the parties hereto agree that
such limitation may and shall be deemed to be amended to conform to the maximum
limitation permissible under such statutes, laws or precedents, or in the
absence thereof, to such limitations deemed appropriate, by any court of record
in the state wherein it is sought to be enforced.
(e) The Employee acknowledges that a violation on Employee's part
of any covenants of this Section and its Subsections or Section 10 or 12 will
cause such damage to the Employer as will be irreparable and the exact amount of
which will be impossible to ascertain, and for that reason, the Employee further
acknowledges that the Employer shall be entitled, as a matter of course, to an
injunction out of any Court of competent jurisdiction, restraining any further
violation of the covenant by the Employee, and, pending the hearing and decision
on the application for such injunction, the Employer shall be entitled to a
Temporary Restraining Order, and waives any request for a bond, or the
equivalent thereof, without prejudice to any other remedies available to it. The
Employee particularly agrees to the immediate issuance of such Temporary
Restraining Order and hereby waives any requirements of notice or objection
whatsoever to the issuance of such an Order.
(f) It is mutually agreed that regardless of whether the Employee
leaves the employ of the Employer by Employee's own request or the request of
the Employer, or regardless of how or by what manner the employment relationship
is terminated (including whether with or without cause), or this contract is
terminated or expires, the independent covenants herein contained in this
Section and in Sections 10 and 12 shall survive and remain in full force and
effect as INDEPENDENT COVENANTS. Should any provision or covenant, in this
Agreement be breached by Employer, or be declared void or
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<PAGE>
unenforceable by a court of competent jurisdiction, the remaining covenants and
provisions including those in this Section 11 and Sections 10 and 12 shall
nevertheless remain in full force and effect, each being independent and
severable.
(g) During the term of the noncompetition covenant, Employee
shall give all of Employee's actual and prospective employers written notice of
the requirements of the noncompetition covenant. If Employer believes that
Employee has failed to provide any actual or prospective employer such notice,
Employer may provide such notice, including providing a copy of any or all of
this Agreement.
(h) Employee acknowledges that (i) there was no duress involved
in signing this Agreement; (ii) other employment options were available to
Employee at the time of signing this Agreement; (iii) Employee's covenant not to
compete was a material and necessary inducement to Employer to employ or
continue the employment of Employee; (iv) Employee understands the policy of
reasonableness regarding restrictive covenants and agrees that the restrictions
imposed upon Employee by this Agreement are reasonable in scope and duration and
are necessary to serve a legitimate business interest of Employer; (v) Employee
acknowledges that the NonConforming Loan business is only a part of the overall
mortgage loan industry and therefore a restrictive covenant limited to the
Primary Business Operation as defined herein would not prevent Employee from
earning a livelihood in the overall mortgage loan industry; and (vi) Employee
has had an opportunity to have this Agreement reviewed by legal counsel of
Employee's choice.
(i) Employee represents and warrants that his employment by
Employer does not and will not breach any agreement or duty which Employee has
to any other Person to keep in confidence any confidential information belonging
to others or not to compete with others. Employee shall not disclose to Employer
or use on its behalf any confidential information belonging to others.
12. INTELLECTUAL PROPERTY RIGHTS. Employee acknowledges that the
proprietary rights to any original works, concepts, software, manuals, programs,
routines, inventions, trademarks, servicemarks, and tradenames made, developed,
or conceived by Employee, whether singularly or in conjunction with another
Person, during the term of this Agreement (collectively "Inventions") shall be
the property of Employer. Accordingly, Employee agrees as follows:
(a) Employee hereby assigns, and shall assign in the future, any
and all of Employee's rights in or to all Inventions.
(b) Employee shall promptly disclose in writing to Employer any
Invention. If requested by Employer, Employee will execute, file, and prosecute
any and all applications and assignments necessary or proper to vest in Employer
the complete rights in and to any Inventions.
-5-
<PAGE>
(c) If Employer chooses to pursue any patent or other application
for any Invention, Employer shall bear all costs and fees in connection with the
application.
(d) If Employer declines in writing to pursue any patent or other
application for an Invention, Employee may with the written consent of Employer
pursue the application in Employee's own name and at Employee's own expense,
provided that Employer shall have a perpetual, world-wide, royalty-free license
and right to us, or to adapt and develop in any way, any and all Inventions,
whether or not protectable under any applicable law.
(e) Upon the termination of this Agreement for, any reason,
Employee shall deliver to Employer any and all notes, records, documents and
other material relating to any completed or incomplete Inventions which Employee
worked on prior to such termination.
(f) Except as set forth on Schedule C attached to and
incorporated in this Agreement, Employee shall not assert any rights to any
Inventions as having been made or acquired by Employee prior to being employed
by Employer, or since then and not covered by this Agreement.
(g) Employee need not assign to Employer any rights to any
invention, etc. wholly conceived and developed by Employee after the termination
of this Agreement, unless the conception or development of such invention, etc.
involves the use of confidential or proprietary information obtained by Employee
while employed by Employer.
13. GOVERNING LAW AND FORUM. All questions regarding this Agreement
shall be governed by the laws of Virginia, except that in the case of an issue
regarding the reasonableness of any restrictive covenants in Sections 10, 11 or
12 of this Agreement, the parties agree to apply the law of the state wherein
Employer files legal action to enforce any restrictive covenants. Any suit
relating to this Agreement must be brought in the Circuit or General District
Courts of the City of Virginia Beach, Virginia, provided, however, Employer may
file legal action in connection with the enforcement of any of the restrictive
covenants contained in this Agreement in any state or federal court where
Employer in its discretion deems it appropriate for its protection.
14. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties and their heirs, personal representatives,
successors and assigns.
15. ASSIGNABILITY. The rights and obligations of Employee under this
Agreement may not be assigned or delegated. The rights and obligations of
Employer may be assigned or delegated without the consent of Employee.
16. OFFSETS AGAINST COMPENSATION. Upon termination of this Agreement
Employee authorizes Employer to offset against any compensation or other amounts
owing to Employee any sums that Employee owes to Employer, evidenced in writing.
-6-
<PAGE>
17. NOTICES. Any notice or other communication required or permitted by
this Agreement shall be in writing and shall be considered given when hand
delivered or deposited in the United States mail, postage prepaid, via first
class or certified mail, and addressed to Employer at its administrative
headquarters and to Employee at his residence, as indicated by the records of
the Employer.
18. HEADINGS. The headings in this Agreement are for convenience only
and are not a part of the substantive agreement of the parties, nor shall the
headings be used in the interpretation or construction of this Agreement.
19. NUMBER AND GENDER. Whenever used in this Agreement, the singular
shall include the plural, and the plural shall include the singular.
20. SEVERABILITY. If any provision of this Agreement is determined to be
unenforceable, the remainder of this Agreement shall be construed and enforced
as if the unenforceable provision had not been contained in this Agreement, and
each provision of this Agreement shall be valid and enforceable to the fullest
extent permitted by law.
21. ENTIRE AGREEMENT. This Agreement is intended to be a complete,
exclusive, and final expression of the parties' agreements concerning Employee's
employment, merging and replacing all prior negotiations, offers,
representations, warranties and agreements. To the extent that Employee was
employed by Employer prior to the date of this Agreement, this Agreement is in
confirmation of the agreements previously reached and under which the parties
have been working. No course of prior dealing between the parties, no usage of
trade, and no parole or extrinsic evidence of any nature shall be used to
supplement or modify any of the terms of this Agreement.
22. MODIFICATION AND WAIVER. The provisions of this Agreement may not be
modified or waived, including the waiver of the provisions of this Section,
except by a written instrument, signed by the party against whom such
modification or waiver is sought to be enforced.
23. SURVIVAL. Any provision of this Agreement which imposes any
obligation upon Employee which may extend beyond the term of this Agreement
shall survive the termination of this Agreement.
24. THIRD PARTY BENEFICIARIES. The provisions of this Agreement are
intended to benefit only the parties to this Agreement. No person not a party to
this Agreement shall be deemed to be a third party beneficiary of this
Agreement, nor shall any such person be empowered to enforce the provisions of
this Agreement, except to the extent such a person becomes a permitted assignee
of one of the parties.
25. COST OF ENFORCEMENT. In the event of a dispute or litigation
relating to this Agreement, each party shall pay their own costs and expenses,
including legal fees.
-7-
<PAGE>
26. Change of Position. The parties hereto acknowledge that during the
course of employment of Employee, the Employee's job, location, classification,
or pay may from time to time change by mutual agreement. It is understood and
agreed that such change shall not cause this Agreement to be terminated unless
such termination is agreed to in writing by Employer; and it is further agreed
that the independent covenants contained in Sections 10, 11 and 12 shall survive
any such changes and remain in full force and effect unless and until Employer,
in writing, expressly consents or agrees to terminate them.
27. Non-Waiver. The failure of the Employer at any time to require the
performance by the Employee of any of the provisions, covenants and conditions
hereof shall in no way affect its right thereafter to enforce the same; nor
shall the waiver by the Employer of any breach of this Agreement, term,
provision, covenant or condition hereof be taken or held to be a waiver of any
succeeding breach of any agreement, term, provision, covenant or condition. The
failure by Employer to require performance by any other employee of any
provision, covenant or condition in that employee's employment agreement shall
in no way affect Employer's right to enforce this Agreement or any covenant
herein.
WITNESS the following signatures and seals:
EMPLOYER:
APPROVED FINANCIAL CORP.
By: /s/ Allen D. Wykle
-----------------------------
Allen D. Wykle
Title: Chairman and President
EMPLOYEE:
/s/ Stanley W. Broaddus
------------------------------
Stanley W. Broaddus
-8-
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE A
ADDITIONAL SPEICIFIC DUTIES ASSIGNED
UPON EXECUTION OF EMPLOYMENT AGREEMENT
--------------------------------------
The parties acknowledge that Employer may assign new duties and revise
existing duties from time to time without the need to amend this Schedule or the
Employment Agreement. If additional specific duties are assigned upon execution
of this Agreement, they are set forth below. If no additional specific duties
are assigned upon execution of this Agreement, then nothing shall be specified
below.
(1) It is mutually agreed that Employee shall serve as a Director and/or
Officer of the Employer or its Affiliates as elected to such position(s) by that
entity's Shareholders, Members and/or Directors.
<PAGE>
SCHEDULE B
COMPENSATION SCHEDULE
---------------------
1. BASE COMPENSATION: Ninety-five thousand dollars ($95,000.00) annually
payable in arrears in twenty-four (24) equal semi-monthly payments.
2. GROUP BENEFITS: Employee shall be entitled to group benefits as
contained in the stated written policy of the Corporation, which may from time
to time be revised.
3. STOCK OPTIONS: To the extent the Corporation adopts any management
incentive plan involving the Corporation's stock or options, a committee of the
Board of Directors or the Board itself will determine the participants pursuant
to its authority and the requirements of any plan.
4. OTHER:
(a) COMPANY CAR: Employee shall be entitled to the exclusive use
of a Company Car for the term of the Agreement, subject to the mutual agreement
of the parties as to make and model. The Employer shall at all times retain
title to the Company Car provided for the Employee's exclusive use.
(b) DEFERRED COMPENSATION PLAN: In the event the Company is sold
in part or whole or the two Existing majority stock holders, Mr. Allen Wykle and
Mr. Leon Perlin sell their ownership below 51% of the voting stock, the vesting
period will be waived and the Employee will be entitled to the complete
Compensation plan including all Interest Earned.
(c) QUARTERLY BONUS: Employee shall be entitled to a quarterly
bonus based on 1.50 (1 1/2%) of net profit after taxes to be paid at the end of
the month following the quarter. The Bonus is not to exceed $100,000.00.
<PAGE>
SCHEDULE C
----------
Employee has no inventions which Employee claims to have an interest in,
except those expressly listed below. if there are none, then specify "none."
NONE
Appendix F
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made as of September 15, 1997, by and between
APPROVED RESBDENTIAL MORTGAGE, INC., t/a ARMADA RESIDENTIAL MORTGAGE
("Employer") and its successors and assigns, and BARRY C. DIGGINS ("Employee"),
who, in consideration of the mutual promises of the parties and other good and
valuable consideration, the receipt and adequacy of which are acknowledged, the
parties have agreed as follows:
1. DEFINITIONS. Whenever the following words or phrases are used in the
Agreement, they shall have the meanings given in this Section, unless otherwise
indicated.
(a) "Affiliate" means any Person owned by (greater than 10%),
owning (greater than 10%), under common ownership with, controlling, controlled
by, or under common control with, another Person, which includes subsidiary and
parent organizations.
(b) "Compete" shall mean in any way being in contest with or
rivalry with Employer, including directly or indirectly working with, being
employed by, or having any interest or involvement in any other Person which is
involved in selling, marketing or otherwise providing any of the services or
products which are provided or performed as part of the Primary Business
Operation of Employer during Employee's employment with Employer.
(c) "Customer" shall mean individual borrowers, mortgage brokers
or other sources of referrals of business to Employer.
(d) "Nonconforming Loans" means all residential real property
loans, regardless of lien position, that do not conform to all applicable
Federal National Mortgage Association guidelines.
(e) "Primary Business Operation" shall mean wholesale and retail
origination and sale of Nonconforming Loans.
(f) "Person" shall include both natural persons and entities.
(g) "Territory" shall mean the area encompassed in a 35 mile
radius around any office of Employer or its Affiliates which are in the same
Primary Business Operation.
2. EMPLOYMENT. Employer employs Employee for the position of President
of the division of retail offices specified on Schedule A. Employee agrees to
perform the duties assigned to Employee, and to comply with the general
supervision and policies of Employer and the orders, advice, and direction of
the Board of Directors. Employee shall be under the direct supervision of Allan
D. Wykle, the President and Chief Executive Officer of Employer.
<PAGE>
3. DUTIES. Employee shall perform such duties as may be assigned by this
Agreement as specified in Schedule A attached to and incorporated herein, and
such other duties as may be assigned from time to time by Employer. Employee
shall make available to Employer all information of which Employee shall have
any knowledge, and shall make all suggestions and recommendations that will be
of benefit to Employer.
4. BEST EFFORTS OF EMPLOYEE. Employee will at all times faithfully,
industriously, and to the best of Employee's ability, perform all of Employee's
duties, to the satisfaction of Employer.
5. TERM AND RENEWAL. This Agreement is for an initial term of two (2)
years commencing January 1, 1997, renewable thereafter on a year to year basis.
Either party must give ninety (90) days written notice if the contract is not
going to be renewed. Upon failure to give such notice, this Agreement will
automatically renew for a period of twelve (12) months on the same terms. This
notice requirement shall continue for all subsequent renewal periods.
6. COMPENSATION. Employer shall pay Employee in fall payment for
Employee's services, compensation in accordance with the Compensation Schedule
attached to this Agreement as Schedule B and incorporated as part of this
Agreement, which shall remain in effect until supplemented or replaced by a new
Agreement between Employer and Employee.
7. OTHER ACTIVITIES. Employee shall devote all business time, attention,
knowledge, and skills solely to the business and interest of Employer, and
Employer shall be entitled to all of the benefits, profits or other issues
arising from or incident to all work, services, and advice of Employee. Employee
shall not, during the term of this Agreement, be employed by or contract to
provide services to any other person or engage in any other business or trade,
nor shall Employee use or take for Employee's personal benefit any position
which conflicts with or is contrary to any position which would be beneficial to
Employer. Nothing in this Agreement, however, shall limit Employee's right to
invest in publicly traded securities, to engage in any business with the written
consent of Employer, or to engage in civic and charitable activities.
8. BENEFITS. Employee shall be entitled to benefits according to
Employer's stated policy, as amended from time to time.
9. TERMINATION. Employer may terminate this Agreement at any time
without advance notice for cause. For the purpose of this Agreement "cause" is
defined as: (i) a breach of this Agreement or any policy, rule, instruction, or
order of Employer; (fi) any act or omission by Employee which involves moral
turpitude, gross negligence, dishonesty, bad faith, fraud, conflict of interest,
intentionally lying to Employer, taking action prohibited by Employer, or breach
of fiduciary duty, (iii) violation of any law or regulation applicable to the
business of the Employer; (iv) repeated neglect of duties; (v) failure to follow
any lawful directive from the Chairman of the Board or Board of Directors; (vi)
the failure to make 50% of the Profit Target in any year after tax. Employee
shall have the right to review the financial records relating to failure to meet
50% of the Profit Target. Furthermore, this Agreement shall terminate
immediately upon Employee's death or disability, but
2
<PAGE>
such termination shall not affect any previously vested right of Employee to
receive disability payments in accordance with any applicable plan for a
disability which arises while this Agreement is in effect.
10. CONFIDENTIAL AND PROPRIETARY INFORMATION. In the course of this
employment, Employee will be exposed to certain confidential and proprietary
information of Employer and its Customers. Employee shall not reproduce or
remove from any premises any such information without the express written
consent of Employer. Any such information acquired by Employee shall be promptly
delivered to Employer if in tangible form, unless specific written consent is
received from Employer. Employee shall not at any time or in any manner,
disclose to any Person, nor in any way use to his benefit or that of any other
person, any information concerning any matters affecting or relating to the
business of employer, including any of its Customers, the prices it obtains or
at which it offers its products or services, or the sources of and/or prices it
pays for any supplies, material, services or technical assistance, or any other
information concerning the finances or business of Employer or any of its
Customers, without regard to whether any of the foregoing matters would
otherwise be considered confidential or trade secrets, the parties agreeing that
these matters are important, material and confidential and gravely affect the
successful conduct of Employer's business and goodwill, and that any breach of
the terms of this Section shall be a material breach of this Agreement and
result in irreparable harm to Employer. Employee further agrees that upon
termination or expiration of this Agreement for any reason, Employee shall
immediately deliver to Employer any and all information, documents, agreements,
data, work product, customer lists, notes, and the like of Employer or relating
to Employee's business. The duties and restrictions on Employee in this Section
shall survive the expiration or termination of this Agreement and remain in full
force and effect for so long as Employer continues in business.
11. COVENANT NOT TO COMPETE. In consideration of the employment of
Employee or in the event Employee is entering into this Agreement after having
been an employee, either with a prior contract or no contract, then in
consideration of continued employment, the benefits of this Agreement and other
good and valuable consideration, the Employee independently covenants and agrees
with Employer, each of which said covenants shall be independent of and
severable from each other and each of which shall continue in force for the
specified duration irrespective of the completion and performance of all other
obligations between the parties hereto, that:
(a) Employee will NOT during the term of Employee's employment,
nor one (1) year immediately following the termination of employment, Compete
with Employer within the geographical limits of the Territory.
(b) Employee will NOT during the term of Employee's employment,
nor for one (1) year immediately following termination of employment, Compete
with Employer within a 35-mile radius of any office supervised by Employee
during his employment with Employer.
(c) Employee will NOT, during the term of Employee's employment
nor one (1) year immediately following the termination thereof, directly or
indirectly, for Employee, or in
3
<PAGE>
conjunction with any other Person, (by disparagement of Employer's business or
otherwise), do business with, divert, take away or cause to leave any of the
Customers of Employer.
(d) Employee will NOT, during the term of Employee's employment
nor two (2) years immediately following the termination thereof, directly or
indirectly, for Employee, or in conjunction with any other Person (by
disparagement of Employer's business or otherwise), employ, solicit, divert or
take away any of the employees of Employer.
(e) If any of the preceding limitations on the Employee imposed
by the preceding subsection "(a)" through "(d)" exceed the maximum limitation
permissible under the statutes, laws or precedents of any state wherein it is
sought to be enforced against the Employee, then the parties hereto agree that
such limitation may and shall be deemed to be amended to conform to the maximum
limitation permissible under such statutes, laws or precedents, or in the
absence thereof, to such limitations deemed appropriate by any court of record
in the state wherein it is sought to be enforced.
(f) The Employee acknowledges that a violation on Employee's part
of any covenants of this Section and its Subsections or Section 10 or 12 will
cause such damage to the Employer as will be irreparable and the exact amount of
which will be impossible to ascertain, and for that reason, the Employee further
acknowledges that the Employer shall be entitled, as a matter of course, to an
injunction out of any Court of competent jurisdiction, restraining any further
violation of the covenant by the Employee, and, pending the hearing and decision
on the application for such injunction, the Employer shall be entitled to a
Temporary Restraining Order, and waives any request for a bond, or the
equivalent thereof without prejudice to any other remedies available to it.
(g) It is mutually agreed that regardless of whether the Employee
leaves the employ of the Employer by Employee's own request or the request of
the Employer, or regardless of how or by what manner the employment relationship
is terminated (including whether with or without cause), or this contract is
terminated or expires, the "independent covenants herein contained in this
Section and in Sections 10 and 12 shall survive and remain in full force and
effect as INDEPENDENT COVENANTS. Should any provision or covenant in this
Agreement be breached by Employer, or be declared void or unenforceable by a
court of competent jurisdiction, the remaining covenants and provisions
including those in this Section 11 and Sections 10 and 12 shall nevertheless
remain in full force and effect, each being independent and severable.
(h) During the term of the noncompetition covenant, Employee
shall give all of Employee's actual and prospective employers written notice of
the requirements of the noncompetition covenant. If Employer believes that
Employee has failed to provide any actual or prospective employer such notice,
Employer may provide such notice, including providing a copy of any or all of
this Agreement.
(i) Employee acknowledges that (i) there was no duress involved
in signing this Agreement; (ii) other employment options were available to
Employee at the time of signing this Agreement; (iii) Employee's covenant not to
compete was a material and necessary inducement to Employer to employ or
continue the employment of Employee; (iv) Employee understands the policy
4
<PAGE>
of reasonableness regarding restrictive covenants and agrees that the
restrictions imposed upon Employee by this Agreement are reasonable in scope and
duration and are necessary to serve a legitimate business interest of Employer;
(v) Employee acknowledges that the Nonconforming Loan business is only a part of
the overall mortgage loan industry and therefore a restrictive covenant limited
to the Primary Business Operation as defined herein would not prevent Employee
from earning a livelihood in the overall mortgage loan industry, and (vi)
Employee has had an opportunity to have this Agreement reviewed by legal counsel
of Employee's choice.
(j) Employee represents and warrant that his employment by
Employer does not and will not breach any agreement or duty which Employee has
to any other Person to keep in confidence any confidential information belonging
to others or not to compete with others. Employee shall not disclose to Employer
or use on its behalf any confidential information belonging to others.
12. INTELLECTUAL PROPERTY RIGHTS. Employee acknowledges that the
proprietary rights to any original works, concepts, software, manuals, programs,
routines, inventions, trademarks, servicemarks, and tradenames made, developed,
or conceived by Employee, whether singularly or in conjunction with another
Person, during the term of this Agreement (collectively "Inventions") shall be
the property of Employer. Accordingly, Employee agrees as follows:
(a) Employee hereby assigns, and shall assign in the future, any
and all of Employee's rights in or to all Inventions.
(b) Employee shall promptly disclose in writing to Employer any
Invention. If requested by Employer, Employee will execute, file, and prosecute
any and all applications and assignments necessary or proper to vest in Employer
the complete rights in and to any Inventions.
(c) If Employer chooses to pursue any patent or other application
for any Invention, Employer shall bear all costs and fees in connection with the
application.
(d) If Employer declines in writing to pursue any patent or other
application for an Invention, Employee may with the written consent of Employer
pursue the application in Employee's own name and at Employee's own expense,
provided that Employer shall have a perpetual world-wide, royalty-free license
and right to use, or to adapt and develop in any way, any and all Inventions,
whether or not protectable under any applicable law.
(e) Upon the termination of this Agreement for any reason,
Employee shall deliver to Employer any and all notes, records, documents and
other material relating to any completed or incomplete Inventions which Employee
worked on prior to such termination.
(f) Except as set forth on Schedule C attached to and
incorporated in this Agreement, Employee shall not assert any rights to any
Inventions as having been made or acquired by Employee prior to being employed
by Employer, or since then and not covered by this Agreement.
5
<PAGE>
(g) Employee need not assign to Employer any rights to any
invention, etc. wholly conceived and developed by Employee after the termination
of this Agreement, unless the conception or development of such invention, etc.
involves the use of confidential or proprietary information obtained by Employee
while employed by Employer.
13. GOVERNING LAW AND FORUM. All questions regarding this Agreement
shall be governed by the laws of Virginia, except that in the case of an issue
regarding the reasonableness of any restrictive covenants in Sections 10, 11 or
12 of this Agreement, the parties agree to apply the law of the state wherein
Employer files legal action to enforce any restrictive covenant. Any suit
relating to this Agreement must be brought in the Circuit or General District
Courts of the City of Virginia Beach, Virginia, provided, however, Employer may
file legal action in connection with the enforcement of any of the restrictive
covenants contained in this Agreement in any state or federal court where
Employer in its discretion deems it appropriate for its protection.
14. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties and their heirs, personal representatives,
successors and assigns.
15. ASSIGNABILITY. The rights and obligations of Employee under this
Agreement may not be assigned or delegated. The rights and obligations of
Employer may be assigned or delegated without the consent of Employee.
16. OFFSETS AGAINST COMPENSATION. Upon termination of this Agreement
Employee authorizes Employer to offset against any compensation or other amounts
owing to Employee any sums that Employee owes to Employer, evidenced in writing.
17. NOTICES. Any notice or other communication required or permitted by
this Agreement shall be in writing and shall be considered given when hand
delivered or deposited in the United States mail postage prepaid, via first
class or certified mail, and addressed to Employer at its administrative
headquarters and to Employee at his residence, as indicated by the records of
the Employer.
18. HEADINGS. The headings in this Agreement are for convenience only
and are not a part of the substantive agreement of the parties, nor shall the
headings be used in the interpretation or construction of this Agreement.
19. NUMBER AND GENDER. Whenever used in this Agreement, the singular
shall include the plural and the plural shall include the singular. The
masculine gender shall include the feminine and the neuter.
20. SEVERABILITY. If any provision of this Agreement is determined to be
unenforceable, the remainder of this Agreement shall be construed and enforced
as if the unenforceable provision had not been contained in this Agreement, and
each provision of this Agreement shall be valid and enforceable to the fullest
extent permitted by law.
6
<PAGE>
21. ENTIRE AGREEMENT. This Agreement is intended to be a complete,
exclusive, and final expression of the parties' agreements concerning Employee's
employment, merging and replacing all prior negotiations, offers,
representations, warranties and agreements. To the extent that Employee was
employed by Employer prior to the date of this Agreement, this Agreement is in
confirmation of the agreements previously reached and under which the parties
have been working. No course of prior dealing between the parties, no usage of
trade, and no parole or extrinsic evidence of any nature shall be used to
supplement or modify any of the terms of this Agreement.
22. MODIFICATION AND WAIVER. The provisions of this Agreement may not be
modified or waived, including the waiver of the provisions of this Section,
except by a written instrument, signed by the party against whom such
modification or waiver is sought to be enforced.
23. SURVIVAL. Any provision of this Agreement which imposes any
obligation upon Employee which may extend beyond the term of this Agreement
shall survive the termination of this Agreement.
24. THIRD PARTY BENEFICIARIES. The provisions of this Agreement are
intended to benefit only the parties to this Agreement. No person not a party to
this Agreement shall be deemed to be a third party beneficiary of this
Agreement, nor shall any such person be empowered to enforce the provisions of
this Agreement, except to the extent such a person becomes a permitted assignee
of one of the parties.
25. COST OF ENFORCEMENT. In the event of the enforcement of any of the
terms of this Agreement by Employer, due to a breach or noncompliance by
Employee, Employee agrees to pay all expenses including legal fees, incurred by
Employer in the enforcement of this Agreement and the pursuit of any other
remedies afforded Employer by law for damages or otherwise.
26. NON-WAIVER. The failure of the Employer at any time to require the
performance by the Employee of any of the provisions, covenants and conditions
hereof shall in no way affect its right thereafter to enforce the same; nor
shall the waiver by the Employer of any breach of this Agreement, term,
provision, covenant or condition hereof be taken or held to be a waiver of any
succeeding breach of any agreement, term provision, covenant or condition. The
failure by Employer to require performance by any other employee of any
provision, covenant or condition in that employees employment agreement shall in
no way affect Employer's right to enforce this Agreement or any covenant herein.
7
<PAGE>
WITNESS the following signatures and seals:
EMPLOYER:
APPROVED RESIDENTIAL MORTGAGE, INC.,
t/a ARMADA RESIDENTIAL MORTGAGE
By: /s/ Allen d. Wykle
-----------------------------
Title: President
-------------------------
EMPLOYEE:
/s/ Barry C. Diggins
--------------------------------
Barry C. Diggins
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE A
ADDITIONAL SPECIFIC DUTIES ASSIGNED
UPON EXECUTION OF EMPLOYMENT AGREEMENT
--------------------------------------
Barry C. Diggins shall be in charge of sales for the following existing
offices and such new offices as assigned to him in writing by the Board of
Directors or the President/Chairman of the Board of Employer by amending this
Schedule A pursuant to Schedule A-1 attached to this Schedule A:
1. Columbia, S.C.
2. Columbia, MD
3. Raleigh, NC
4. Richmond, VA
5. Cincinnati, OH
6. Lanham, MD
7. Baltimore, MD
8. Charlotte, NC
9. Newark, DE
10. Greensboro, NC
11. Wilmington, NC
12. Chesapeake, VA
13. Columbus, OH
14. Tucker, GA
15. Orlando, FL
<PAGE>
SCHEDULE A-1
AMENDMENT TO SCHEDULE A OF THE EMPLOYMENT AGREEMENT BETWEEN
BARRY C. DIGGINS AND APPROVED RESIDENTIAL MORTGAGE, INC., t/a/
ARMADA RESEDENTIAL MORTGAGE, DATED ____________ 1997
This following additional branch office of Approved Residential Mortgage, Inc.
t/a Armada Residential Mortgage is hereby added to those other branch offices
under the sales supervision of Barry C. Diggins:
---------------------------
Office Name
---------------------------
Office Address
---------------------------
---------------------------
The office is hereby deemed a part of Schedule A of Barry C. Diggins'
Employment Contract as of the date set forth above.
APPROVED RESIDENTIAL MORTGAGE,
INC., t/a ARMADA RESIDENTIAL
MORTGAGE
By
------------------------
<PAGE>
SCHEDULE B
COMPENSATION SCHEDULE
---------------------
1. BASE COMPENSATION. $130,000.00 annually, payable in arrears in
twenty-four (24) equal semi-monthly payments subject to an annual increase of
six (6%) percent during the initial term.
2. GROUP BENEFITS. Employee shall be entitled to group benefits as
contained in the stated written policy of the Corporation or Approved Financial
Corp. its parent, which may from time to time be revised.
3. VACATION. Employee shall be entitled to three (3) weeks paid
vacation. After five (5) years of service this shall increase to four (4) weeks.
4. BONUS. In each year when Employer reaches the "Profit Target" for
offices under his supervision, Employee shall be eligible for a bonus of up to
100% of his Base Compensation. The Profit in the Profit Target is defined to
mean the net after tax profit attributable to the offices supervised by
Employee. The Profit Target for the second half of 1997 is $1,375,000. If
employee reaches at least 75% of the Profit Target, he shall earn a bonus
computed by multiplying the percentage of the "Profit Target" reached times 100%
of his Base compensation. If Employee reaches less than 75% of the Profit
Target, there will be no bonus for that year.
For 1998 and each subsequent year the Profit Target will be determined
by Employer and provided to Employee in the form of Schedule B-1 attached
hereto.
5. INCENTIVE COMPENSATION. Employee shall be entitled to 5% of annual
after tax net profit (determined in accordance with Generally Accepted
Accounting Principles except for the calculation of the loan sale premium
attributed to the offices supervised by Employee, which is to be calculated
based on a previously determined formula attached hereto as Schedule B-2)
attributable to the offices supervised by Employee as specified in Schedule A as
amended to the Employment Agreement. Estimated payments will be made quarterly
with adjustments at year-end after audited financials are finalized. Any such
incentive compensation in excess of $150,000 per year may within the discretion
of Employer be converted to nonstatutory stock options pursuant to a separate
Nonstatutory Stock Option Agreement of even date with this Employment Agreement.
6. INCENTIVE FOR LIFE INSURANCE PREMIUM. Employee shall be entitled to
5% of gross written life insurance premiums of Employer payable quarterly.
7. COMPENSATION AFTER TERMINATION. If Employee terminates his employment
or is terminated for cause as defined in the Agreement or either party elects
not to renew at the end of any term with the required notice, this contract
shall cease, and no further compensation or benefits in any form shall be paid
Employee. If this Agreement is terminated by Employer without cause during the
initial term, then Employee in lieu of any other damages or compensation shall
be entitled to severance pay in an amount equal to $300,000 multiplied by a
percentage equal to the number of days left at termination in the initial term
divided by 730. If terminated without cause in a renewal term, the severance pay
shall be equal to the base compensation for that renewal term multiplied by a
percentage equal to the number of days remaining in the renewal term at
termination divided by 365.
<PAGE>
SCHEDULE B-1
ANNUAL NET AFTER TAX PROFIT TARGET FOR BARRY C. DIGGINS
-------------------------------------------------------
The Profit Target pursuant to Schedule B of the Employment Contract of
Barry C. Diggins shall for the year _____ for all offices listed on Schedule A
as amended to his Employment Contract, as of the commencement of the above
specified year be $_____ plus an amount equal to the following:
(a) For each new full-service office opened during the above
specified year:
$300,000 multiplied by a fraction, the numerator of which shall
be the number of days during the year that the office was opened
(after the 90-day initial probation period) and the denominator
of which is 365.
(b) For each new executive sales center (satellite office reporting
to branch office) opened during the above specified year:
220,000 multiplied by a fraction, the numerator of which shall
be the number of days during the year that the office was opened
(after the 90-day initial probation period) and the denominator
of which is 365.
APPROVED RESIDENTIAL MORTGAGE,
INC., t/a ARMADA RESIDENTIAL
MORTGAGE
By
--------------------------
<PAGE>
SCHEDULE B-2
PROFIT & LOSS
-------------
EXAMPLE
-------
(This is an example only. It is understood that the Buy Rate may change
quarterly. The Buy Rate is the rate at which Buyer will buy at par. The Buy Rate
used will be a blend of Approved Financial Corp.'s two largest purchasers.)
BRANCH "A"
*January 1997 Total Volume = $1,000,000
"A" through "D" grades = $800,000.......... WAC = 12.25%
"A+" grades = $200,000.......... WAC = 9.75%
BACK END CALCULATION
INDEX #1
"A" through "D" = 12.25% ---- 10.00% = 2.25% or 225 BPTS
(wac) minus (index) = Premium upsell
225 BPTS divided by 35 BPTS = 6.42%
6.42% x $800,000 = $51,360
-------
(Premium) x (Volume) = Back End Premium
INDEX #2
"A+" = 9.75% ------ 8.75% = 1.50% OR 150 PBTS
(wac) minus (index) = Premium Upsell
150 BPTS divided by 35 BPTS = 4.28%
3.125% x $200,000 = $8,560
------
(Premium) x (Volume) Back end Premium
END OF MONTH PROFIT CALCULATION
Front end Points = $50,000 (5%)
+ Insurance income $6,250 (45% x $15,000 GWP)
+ Back end premium $59,920
-------
Total Revenue = $116,170
Total Expenses = $ 60,000
--------
TOTAL PRETAX PROFIT= $56,170
<PAGE>
PROFITABILITY CALCULATION FORMULA
FRONT end Revenue
+ Insurance Income
+ Back end Revenue
------------------
= TOTAL REVENUE
- Total Expenses (Actual Expenses)
----------------
= PRETAX INCOME
DEFINITIONS
A) Front end Revenue = Total points - Underwriting/processing fees
B) Insurance income = Total GWP (Gross Written Premiums) X 45%
C) Back end Premiums: Back end premiums will be calculated by using 2 separate
indexes. The first index will apply to loans graded "A" through "D". The second
index will apply to loans graded "A+". Back end premiums will be calculated
using a ratio of 35 Bpts to 1.
INDEX #1
A--D GRADES = Prime + 1.75% = Blended Par Rate
INDEX#2
A+ GRADES = Prime + 0% = Blended par rate
* Each branch will be able to track total revenue at the close of each business
month. The only piece of the profit picture that will be delayed are the
expenses of the branch.
Page 2 of Schedule B-2
<PAGE>
SCHEDULE C
----------
Employee has no inventions which Employee claims to have an interest in, except
those expressly listed below. If there are none, then specify "none."
NONE
Appendix G
PURCHASE AND SALE AGREEMENT
---------------------------
THIS PURCHASE AND SALE AGREEMENT (this "Agreement"), dated as of the 15th
day of September, 1997, is between Approved Financial Corp., a Virginia
Corporation ("Buyer"), and Barry C. Diggins ("Seller").
Introductory Statements
Buyer desires to acquire Seller's Seventeen (17%) percent ownership
interest (the "Interest") in Armada Residential Mortgage, LLC ("Armada"). Buyer
and Seller desire to effect the purchase and sale of such Interest pursuant to
the terms of this Agreement.
Accordingly, for and in consideration of the foregoing and the mutual
agreements, representations, warranties, covenants and conditions set forth in
this Agreement, and other good, valid and binding consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties to this Agreement,
intending to be legally bound, hereby agree as follows:
ARTICLE I
PURCHASE AND SALE OF THE INTEREST
1.1 Purchase and Sale. Upon the terms and subject to the conditions set
forth in this Agreement, Seller shall sell to Buyer, free and clear of all
liens, security interests, pledges, charges, claims, options, rights, demands
and restrictions of every kind, character and description whatsoever
(collectively, "Encumbrances"), and buyer shall purchase from Seller on such
date, all of Seller's Interest in Armada.
1.2 Date and Place of Closing. Upon the terms and subject to the
conditions set forth in this Agreement, the purchase and sale of the Shares
provided for herein shall be consummated at a closing to be held (i) at the
offices of Payne, Gates, Farthing & Radd, P.C., 15th Floor Dominion Tower, 999
Waterside Drive, Norfolk, Virginia 23510-3309 at 10:00 a.m., local time, Sept.
23, 1997, or (ii) at such other place, time and date as Seller and Buyer shall
mutually agree upon. The date and event of such purchase and sale are,
respectively, herein referred to as the "Closing Date" and the "Closing".
1.3 Purchase Price. The consideration to be paid by Buyer (the "Purchase
Price") to Seller for the Interest shall be Fifty Three Thousand and Seventy
Three (53,073.00) Shares of unissued common stock of Buyer (the "Shares") which
shall be delivered as follows: 1,000 Shares to be delivered at Closing and the
balance of 52,073 Shares to be delivered on January 5, 1998.
1.4 Deliveries at Closing. Subject to the conditions set forth in this
Agreement, at Closing.
(a) Seller shall deliver to Buyer:
<PAGE>
(i) a certificate evidencing and representing the Interest in the
name of Buyer;
(ii) written approval by Armada for the transfer; and
(iii) all other previously undelivered documents, instruments and
writings required to be delivered by Seller at or prior to the
Closing pursuant to this Agreement or otherwise required in
connection herewith.
(b) Buyer shall deliver to Seller:
(i) 1,000 Shares as required and in the manner contemplated by
Section 1.3 hereof; and
(ii) all other previously undelivered documents, instruments and
writings required to be delivered by Buyer at or prior to the
Closing pursuant to this Agreement or otherwise required in
connection herewith.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer as follows:
2.1 Organization and Qualification. Armada is (i) a limited liability
company validly existing and in good standing under the laws of the State of
Virginia; and (ii) duly qualified to do business as a foreign corporation and in
good standing in each jurisdiction in which the character of the properties and
assets now owned or leased by it or the nature of the business transacted by it
requires it to be so qualified.
2.2 Authority. Seller has all requisite power and authority to enter
into, execute and deliver this Agreement and perform its obligations hereunder.
This Agreement has been duly executed and delivered by Seller and is a valid and
binding obligation of Seller enforceable against Seller in accordance with its
terms. The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby by Seller will not result
in a violation or breach of or and binding obligation of Seller enforceable
against Seller in accordance with its terms.
2.3 No Conflicts. The execution, delivery and performance of this
Agreement by Seller and consummation of the transactions contemplated hereby
will not
(a) result in the creation or imposition of any Encumbrance upon the
Interest, with or without the giving of notice and/or the
passage of time, or
(b) violate, conflict with, effect acceleration of, or result in
termination, cancellation or modification of, or constitute a
default under (i) any contract,
2
<PAGE>
agreement or other instrument to which Seller is a party or by
which either of it or its respective assets is bound or (ii) any
note, bond, mortgage, indenture, deed of trust, license, lease,
contract, commitment, understanding, arrangement, agreement or
restriction of any kind or character to which Seller is a party
or by which Seller may be bound or affected or to which any of
its respective assets may be subject, or
(c) violate any statute or law or any judgment, decree, order, writ,
injunction, regulation or rule of any court or local, state or
federal governmental or regulatory authority.
2.4 Consents and Approvals. Seller has obtained any necessary consent or
approval to transfer the Interest.
2.5 No Undisclosed or Contingent Liabilities. To the best of Seller's
knowledge there is no basis for the assertion against Armada of any liability or
obligation of any nature whatsoever (whether fixed, contingent or otherwise
inchoate) that may encumber or affect Seller, its assets or the transactions
contemplated hereby, other than obligations of Seller set forth on the balance
sheet.
2.6 Litigation. There are no material open and unresolved claims,
actions, suits, proceedings, investigations or inquiries pending against Armada
or to the best knowledge of Seller, threatened by or against, or otherwise
affecting or that would adversely affect Armada, its assets or the transactions
contemplated hereby at law or in equity or before or by any federal, state,
local, foregoing or other governmental department, commission, board, agency,
instrumentality or authority. To the best knowledge of Seller, there exists no
valid basis for any such claim, action, suit, proceeding, inquiry or
investigation.
2.7 Compliance with Law. Armada, to the best of Seller's knowledge, is
in substantial compliance with all federal state, foreign and local laws
(whether statutory or otherwise), ordinances, rules, regulations, orders,
judgments, decrees, writs and injunctions of any governmental authority
(collectively, "Laws") applicable to Armada.
2.8 Accredited Investor Status. Seller is an Accredited Investor under
Regulation D of the Securities Act of 1933.
2.9 Sophisticated Investor Status. Seller has such knowledge and
experience in financial and business maters that he is capable of evaluating the
merits and risks of this transaction and of an investment.
2.10 Investor Suitability; Illiquidity, Ability to Bear Loss. The
overall commitment of Seller to securities which are not readily marketable is
not disproportionate to his net worth and his investment in the Shares will not
cause his overall commitment to become excessive. Seller has adequate means of
providing for his current needs and personal contingencies, has no need for
3
<PAGE>
liquidity in his investment in the Shares, and can sustain a complete loss of
his investment in the Shares. Seller understands that this purchase is illiquid
and involves a high degree of speculative risk.
2.11 No Governmental Recommendation or Approval. Seller understands that
no federal or state agency has passed on or made any recommendation or
endorsement of the Shares.
2.12 Shares Not Registered, Indefinite Holding. Seller has been advised
by Buyer and understands, that he must bear the economic risk of an investment
in the Shares for an indefinite period of time because the Shares have not been
registered under the Securities Act. Therefore, the Shares must be held by the
buyer unless they are subsequently registered under the Securities Act or an
exemption from such registration is available for the transfer of the Shares.
Seller is familiar with Rule 144 of the Securities Act and the restrictions and
requirements thereunder as they relate to a public resale.
2.13 Shares Acquired for Own Account. Seller represents that the Shares
are being acquired solely for his own account for investment and not with a view
toward, or for resale in connection with, any "distribution" (as that term is
used in the Securities Act and the Rules and Regulations thereunder) of all or
any portion thereof.
2.14 No Disposition of Shares Without Securities Law Compliance. Seller
agrees not to offer, sell, pledge, hypothecate or otherwise transfer or dispose
of any of the Shares in the absence of an effective registration statement (or
an exemption from the requirements of registration) under the Securities Act
covering such disposition.
2.15 Stop-Transfer and Legends on Certificates. Seller further
understands that a stop-transfer order will be placed on the stock-transfer
books respecting the certificates evidencing the Shares, and such certificates
shall bear, until such time as the Shares shall have been registered under the
Securities Act or shall have been transferred in accordance with such an opinion
of counsel, the following legend or one substantially similar thereto
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
SAID AT, OR AN AVAILABLE EXEMPTION THEREUNDER.
plus any legend that may be required under any applicable state law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller as follows:
4
<PAGE>
3.1 Authority. Buyer has all requisite power and authority to enter
into, execute and deliver this Agreement and perform his obligations hereunder.
This Agreement has been duly executed and delivered by Buyer and is a valid and
binding obligation of Buyer enforceable against Buyer in accordance with its
terms.
3.2 Consents and Approvals. Buyer is not required to obtain, transfer or
cause to be transferred any consent, approval, license, permit or authorization,
or make any declaration, filing or registration with any third party or any
public body or authority in connection with (a) the execution and delivery by
Buyer of this Agreement of (b) the consummation of the transactions contemplated
hereby.
ARTICLE IV
INDEMNIFICATION
4.1 Representations and Warranties. The representations and warranties
of the parties contained in this Agreement and in any related agreements shall
be true and correct in all material respects as of the date of this agreement.
Each representation and warranty made hereunder shall survive any investigation
made by or on behalf of any party hereto and shall survive the Closing
hereunder.
4.2 Agreement to Indemnify. Subject to the terms and conditions of this
Article IV, the parties mutually agree to forever indemnify, defend and hold
harmless the other, at any time after the Closing, from and against all demands,
claims, actions or causes of action, assessments, losses, damages, liabilities,
costs and expenses including, without limitation, interest, penalties and
reasonable attorneys' fees and expenses asserted against the other by reason of
or resulting from a breach of any representation, warranty or agreement of the
other contained in or made pursuant to this Agreement or other documents
prepared or delivered in connection with this Agreement, or any facts or
circumstances constituting such a breach.
ARTICLE V
MISCELLANEOUS
5.1 Commissions. Neither Buyer nor Seller has employed any investment
banker, broker, finder, or similar agent in connection with any transaction
contemplated by this Agreement.
5.2 Expenses, Taxes, Etc. Except as otherwise provided herein, each of
the parties hereto shall pay all fees, expenses and taxes incurred by it or any
of its affiliates in connection with the transactions contemplated by this
Agreement.
5.3 Further Assurances.
(a) From time to time (including after the Closing Date), at Buyer's
request and without further consideration, Seller shall execute and
deliver to Buyer such
5
<PAGE>
documents and take such other action as Buyer may reasonably request
in order to consummate or more effectively evidence the transactions
contemplated hereby.
(b) From time to time (including after the Closing Date), at Seller's
request and without further consideration, Buyer shall execute and
deliver such documents and take such other action as Seller may
reasonably request in order to consummate or more effectively
evidence the transactions contemplated hereby.
5.4 Successors and Assigns. No party shall have the right to assign all
or any part of its interest in this Agreement without the prior written consent
of the other parties, and any attempted transfer without such consent shall be
null and void. This Agreement shall be binding upon and shall inure to the
benefit of the parties and their respective successors and permitted assigns.
5.5 Definition of Knowledge. For the purpose of this Agreement, the
phrases "the best knowledge" of any party and "known" and words of like effect
shall mean to the knowledge of such party and any officer, director or manager
of any such party, as such knowledge has been obtained in the performance of
their duties in the ordinary course of business in a prudent and diligent
manner, which knowledge shall also include information existing in the files of
such party.
5.6 No Third-Party Benefit. Nothing in this Agreement shall be deemed to
create any right or obligation in any person or entity not a party hereto and
this Agreement shall not be construed in any respect to be a contract or
agreement in whole or in part for the benefit of or binding upon any person or
entity not a party hereto.
5.7 Entire Agreement: Amendment. This Agreement and the Schedules hereto
constitute the entire agreement among the parties hereto with respect to the
transactions contemplated herein and supersede all prior oral and written
agreements, memoranda, understandings and undertakings between the parties
hereto relating to the subject matter hereof. This Agreement may not be
modified, amended, altered or supplemented except by a written instrument
executed and delivered by each of the parties hereto.
5.8 Reformation and Severability. If any provision of this Agreement is
held to be illegal, invalid or unenforceable under present or future laws
effective during the term hereof:
(a) in lieu of such illegal, invalid or unenforceable provision, there
shall be added automatically as a part of this Agreement a provision
as similar in terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable;
and
(b) the legality, validity and enforceability of the remaining
provisions hereof shall not in any way be affected or impaired
thereby.
6
<PAGE>
5.9 Notices. All notices, claims, certificates, requests, demands and
other communications hereunder shall be in writing and shall be deemed to have
been duly given if delivered personally or mailed (registered or certified mail,
postage prepaid, return receipt requested) as follows:
If to Seller: Barry C. Diggins
8222 Glenmar Road
Ellicott City, Maryland 21043
If to Buyer: Approved Financial Corp.
3420 Holland Road, Suite 107
Virginia Beach, Virginia 23452
with a copy to: Ronald M. Gates, Esquire
Payne, Gates, Farthing & Radd, P.C.
15th Floor Dominion Tower
999 Waterside Drive
Norfolk, Virginia 23510-3309
or to such other address as the person to whom notice is to be given may have
previously furnished to the other in writing in the manner set forth above,
provided that notice of a change of address shall be deemed given only upon
receipt.
5.10 Governing Law. This Agreement was executed and accepted in the
state of Virginia and shall be governed by, and construed and enforced in
accordance with, the laws of the state of Virginia, without regard to its
conflicts of law rules.
5.11 Release. In consideration of this Agreement and the Employment
Agreement of even date herewith, Seller hereby releases Approved Financial
Corp., Approved Residential Mortgage, Inc., and Armada Residential Mortgage, LLC
(and all of those officers, directors, and employees of the foregoing entities)
from all debts, obligations or liabilities to Seller as of the date hereof,
except for those obligations contained in this Agreement, Seller's Employment
Agreement of even date herewith, and the Nonqualified Stock Option Agreement of
even date herewith.
5.12 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the parties hereto on the date first above written.
SELLER:
/s/ Barry C. Diggins
---------------------------------
Barry C. Diggins
BUYER:
APPROVED FINANCIAL CORP.
By: /s/ Allen D. Wykle, President
------------------------------
8
<PAGE>
NONQUALIFIED STOCK OPTION AGREEMENT
AGREEMENT, dated this 15th day of September 1997 between APPROVED FINANCIAL
CORP. (the Company) and BARRY C. DIGGINS (the Optionee).
WHEREAS, the Optionee is now affiliated with the Company as an employee of
a subsidiary of the Company and the Company desires to have the Optionee
continue to be to be so affiliated and to afford the Optionee the opportunity to
acquire stock ownership in the Company so that the Optionee may have a direct
proprietary interest in the Company's success; and
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements hereinafter set forth, the parties hereto hereby
mutually covenant and agree as follows:
1. GRANT OF OPTION
(a) Subject to the terms and conditions set forth herein, the Company
may grant to Optionee at the end of each Company year and within
30 days after audited financials are prepared for the most recent
completed year, Nonqualified Stock Options to purchase from the
Company, shares of the Company's common stock (the "Stock") in
the amount and at the price specified on Exhibit A attached
hereto and incorporated herein.
2. EXERCISE OF OPTION. The Options granted in Paragraph 1 of this
Agreement shall be vested and exercisable upon issuance, subject to
compliance with all applicable securities laws during the Option
Period. The "Option Period" is defined herein to mean the period
commencing with the date of this Agreement and ending on the earlier
of the applicable date specified in Section 4 or the date 10 years
from the date of this Agreement unless such period is extended by the
written consent of all parties. No less than 100 shares may be
purchased upon any one exercise of the option granted hereby unless
the number of shares purchased at such time is the total number of
shares in respect of which the Option hereby granted is then
exercisable. In no event shall any Option granted hereby be
exercisable for a fractional share. From time to time, in its
discretion, the Board of Directors (the "Board") may offer the
Optionee the right to cancel any Options granted hereunder in exchange
for such consideration as the Board shall determine.
3. METHOD OF EXERCISING OPTION AND PAYMENT OF OPTION PRICE.
(a) The Option hereby granted shall be exercised by the Optionee by
delivering to the Secretary of the Company, from time to time, on
any business day (the Exercise Date), written notice specifying
the number of shares the Optionee then desires to purchase (the
Notice), and cash, certified check, bank draft, or
<PAGE>
postal money order to the order of the Company for an amount in
United States Dollars equal to the option price for the number of
shares specified in the Notice (the total option Price), such
payment to be delivered with the notice. The Total Option Price
shall be delivered to the Secretary of the Company not later than
the end of the first business day after the Exercise Date. In
lieu of cash, the Option Price may be paid by the Company
reducing the amount of stock by the Option price, or by Optionee
paying with Company stock he already owns, subject to compliance
with all applicable securities, tax and other laws.
(b) The Notice shall be in the form of Exhibit B attached hereto.
(c) Within a reasonable time after the Exercise Date, the Company
shall, subject to the receipt of withholding tax, if any, issue
to the Optionee the number of shares with respect to which such
option shall be so exercised, and shall deliver to the Optionee a
certificate (or certificates) therefor. The certificate shall
bear the following legends:
(i) "THIS COMMON STOCK HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE ACT), OR APPLICABLE
STATE SECURITIES LAW AND MAY BE OFFERED, SOLD, OR
TRANSFERRED ONLY IF REGISTERED PURSUANT TO THE PROVISIONS OF
THE ACT OR APPLICABLE STATE SECURITIES LAW OR IF IN THE
OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE."
(ii) "THE COMMON STOCK REPRESENTED BY THIS CERTIFICATE IS SUBJECT
TO CERTAIN RESTRICTIONS ON TRANSFER AND RIGHTS OF PURCHASE
AND CERTAIN OTHER REQUIREMENTS THAT ARE FULLY SET FORTH IN
AN AGREEMENT BETWEEN THE SHAREHOLDER AND THE CORPORATION
AND, IF ANY, IN THE SHAREHOLDERS' AGREEMENT AMONG THE
CORPORATION AND ITS SHAREHOLDERS. ANY SUCH TRANSFER OR
ACQUISITION IN VIOLATION OF SUCH AGREEMENT(S) IS NULL AND
VOID, AND SUCH LATTER AGREEMENT IS AUTOMATICALLY BINDING ON
ANY PERSON WHO ACQUIRES THE SHARES. COPIES OF THE
AGREEMENT(S) ARE ON FILE AND MAY BE INSPECTED AT THE
PRINCIPAL BUSINESS OFFICE OF APPROVED FINANCIAL CORP."
2
<PAGE>
4. AFFILIATION. If for any reason, Optionee ceases to be affiliated with
the Company or a Subsidiary as an employee, the Options granted to
such Optionee shall expire on the earlier of the expiration dates
specified for said Options at the time of their grant, or three (3)
months after the Board of Directors notifies Optionee that it has
elected to accelerate its Option Period to three (3) months from such
notice.
5. OPTIONEE. 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 estate, personal representative, or
beneficiary to whom this Option may be transferred by will or by the
laws of descent and distribution, the word Optionee shall be deemed to
include such person.
6. RIGHTS AS A STOCKHOLDER. The Optionee shall not be deemed for any
purpose to be a stockholder of the Company with respect to the shares
represented by this Option until this Option shall have been
exercised, payment and issue has been made as herein provided, and the
Optionee's name has been entered as a stockholder of record on the
books of the Company.
7. THE COMPANY'S RIGHTS. The existence of this Option shall not affect in
any way the right or power of the Company or it 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 bonds, debentures, preferred or other stocks with preference
ahead of or convertible into, or otherwise affecting the Common Stock
of the Company or the rights thereof or the dissolution or liquidation
of the Company, or any sale or transfer of all or any part of the
Company's assets or business, or any other corporate act or
proceeding, whether of a similar character or otherwise.
8. RECAPITALIZATION; MERGER AND CONSOLIDATION. If the shares of the
Company's Stock as a whole are increased, decreased, or changed into
or exchanged for a different number or kind of shares or securities of
the Company, whether through merger, consolidation, reorganization,
recapitalization, reclassification, stock dividend, stock split,
combination of shares, exchange of shares, change in corporate
structure, or the like, and appropriate and proportionate adjustment
shall be made in the number and kinds of shares of Stock subject to
the system and in the number, kinds, and per share exercise price of
shares subject to unexercised options or portions thereof granted
prior to any such change. Any such adjustment in an outstanding
Option, however, shall be made without a change in the total price
applicable to the unexercised portion of the Option, but with a
corresponding adjustment in the price for each share of stock covered
by the option, not fractional shares shall be issued as a result of
any such adjustment.
3
<PAGE>
9. PREEMPTION BY APPLICABLE LAWS OR REGULATIONS. Anything in this
Agreement to the contrary notwithstanding it at any time specified
herein for the issuance of shares to the Optionee, any law,
regulation, or requirements of any governmental authority having
appropriate jurisdiction shall require either the Company or the
Optionee to take any action prior to or in connection with the shares
of Stock then to be issued, sold or repurchased, the issue, sale, or
repurchase of such shares of Stock shall be deferred until such action
shall have been taken.
10. RESOLUTION OF DISPUTES. Any dispute or disagreement that shall arise
under, or as a result of, or pursuant to, this Agreement shall be
determined by the Board in its absolute and uncontrolled discretion,
and any such determination or any other determination by the Board
under or pursuant to this Agreement and any interpretation by the
Board of the terms of this Agreement shall be final, binding, and
conclusive on all persons affected thereby.
11. TAX WITHHOLDING. The company shall have the right to deduct from any
payment hereunder any federal state, local or employment taxes that it
deems are required by law to be withheld. At the request of the
Optionee, or as required by law, such sums as may be required for the
payment of any estimated or accrued income tax liability may be
withheld and paid over to the governmental entity entitled to receive
the same. The Company shall have the right to satisfy the withholding
obligation by reducing the amount of options in an amount equal to the
withholding and simultaneously paying in cash the amount due in
withholding.
12. FRACTIONAL SHARES. Any fractional shares concerning this Option shall
be eliminated at the time of exercise by rounding down for fractions
of less than one half (1/2) and rounding up for fractions of equal to
or more than one half (1/2). No cash settlements shall be made with
respect to fractional shares eliminated by rounding.
13. GOVERNING LAW. All matters relating to this Agreement shall be
governed by the laws of the state of Virginia, without regard to the
principles of the conflict of laws, except to the extent preempted by
the laws of the United States.
14. CONSTRUCTION. This Agreement has been entered into in accordance with
the terms of the Plan, and wherever a conflict may arise between the
terms of this Agreement and the terms of the plan, the terms of the
plan shall control.
15. QUALIFIED NATURE OF AGREEMENT. This Agreement is intended to be an
agreement concerning a stock option arrangement that is not qualified
under Section 422 of the Internal Revenue Code, and this Agreement
shall be so construed.
4
<PAGE>
16. REGULATORY COMPLIANCE. No Stock shall be issued hereunder until the
Company has received all necessary regulatory approvals and has taken
all necessary steps to assure compliance with federal and state
securities laws or has determined to its satisfaction and the
satisfaction of its counsel that an exemption from the requirements of
the federal and applicable state securities laws are available.
17. NOTICES. All notices and demands of any kind which the Company,
Optionee, or other person may be required or desires to give shall be
in writing and shall be delivered in hand to the person or persons to
whom addressed (in the case of the Company, with the chief Executive
officer or Chief Financial officer, or Secretary of the Company), or
by mailing a copy thereof properly addressed by certified or
registered mail postage prepaid, with return receipt requested. Notice
to Optionee, if mailed, shall be mailed to the last known address of
Optionee.
18. LIMITATION ON OBLIGATIONS OF THE COMPANY. All obligations of the
Company arising under or as a result of the Options granted hereunder
shall constitute the general unsecured obligations of the Company, and
not of the Board of Directors of the Company, any member thereof, the
Committee, any member thereof, any officer of the Company, or any
other person or any Subsidiary, and none of the foregoing, except the
Company, shall be liable for any debt, obligation, cost or expense
hereunder.
19. SEVERABILITY. If any provision of this Plan is applied to any person
or to any circumstance shall be adjudged by a court of competent
jurisdiction to be void, invalid, or unenforceable, the same shall in
no way affect any other provision hereof, the application of any such
provision in any other circumstances, or the validity or
enforceability hereof.
20. HEADINGS. The headings of the several paragraphs herein are inserted
solely for convenience of reference and are not intended to form a
part of and are not intended to govern, limit or aid in the
construction of any term or provision hereof.
21. SUCCESSORS. This Plan shall be binding upon the respective successors,
assigns, heirs, executors, administrators, guardians and personal
representatives of the Company and Optionee.
5
<PAGE>
IN WITNESS WHEREOF, the parties have attached their signatures as follows:
APPROVED FINANCIAL CORP.
By: /s/ Allen D. Wykle
------------------------
OPTIONEE:
/s/ Barry C. Diggins
----------------------------
Barry C. Diggins
6
<PAGE>
EXHIBIT A
to Nonqualified Stock Option Agreement
between Approved Financial Corp. and Barry C. Diggins
Barry C. Diggins employment contract with Approved Residential Mortgage,
Inc. dated September 15, 1997, provides for an incentive payment of 5% of all
after-tax net profits for specified offices which are under the responsibility
of Barry C. Diggins. To the extent that the amount under this provision to which
Barry C. Diggins would be entitled exceeds annually $150,000 (herein called the
"Excess"), the Company may, in lieu of cash, issue Nonqualified Stock Options to
purchase a number of shares of the common stock of the Company which number
annually shall be equal to that number arrived at by dividing the Excess by one
half of the Average Fair Market Value per share of common stock of the Company
as of the close of business on the last trading day prior to the end of each
quarter during the year. Factional shares shall be rounded to the nearest whole
share.
The price per share shall be one half of the Average Fair Market Value. For
purposes of this exhibit the term Fair Market Value shall mean, on any given
date the arithmetical average between the bid and asked price of the common
Stock on the Bulletin Board of the over-the-counter market (or if trading on the
NASDAQ, then on the NASDAQ) on such date, or if the stock market is closed on
such date, the next preceding date on which it was open.
<PAGE>
Exhibit B
NOTICE OF EXERCISE OF OPTION
----------------------------
The undersigned ("Optionee") hereby exercises his option for _____shares of
common stock of APPROVED FINANCIAL CORP. The Optionee hereby agrees to pay the
sum of $_______ per share.
The Optionee hereby represents and warrants that he is executing his option
and making the contribution provided herein for his own account for investment
purposes and not with any view toward or intention of resale or redistribution
of any part of the stock acquired in the Company.
The Optionee hereby acknowledges that he is acquiring an investment which
is not now nor anticipated to be registered under any federal or state
securities law and agrees that he shall not transfer, sell, assign, pledge or
otherwise dispose of his stock interest (or any rights under this Agreement)
unless the common stock is registered under the Securities Act of 1933 and
applicable state Blue Sky Laws, or, in the opinion of counsel for the Company,
prepared at the expense of the Optionee and the Optionee's future transferee,
there is available an exemption from such registration with respect to the
proposed transfer. The Optionee further acknowledges that there shall be no
obligation on the part of any Officer or Director to permit or cause such state
or federal registration.
The Optionee hereby consents to the following actions of the Company:
1. A legend shall be palced on any certificate issued referring to or
evidencing the stock interest stating that the common stock has not been
registered under the Securities Act of 1933 or any state Blue Sky Law and
setting forth the limitations on resale;
2. Appropriate records of the Company shall contain stop transfer
instructions reflecting the restrictions on transfer; and
3. The same actions shall be taken in connection with any cetificates
evidencing a stock interest issued in replacement of the Optionee's interest or
issued to any transferee of the Optionee.
The Optionee represents and warrants that he:
1. Has received and reviewed the most recent annual report of the Company;
2. Has executed his option relying solely on the information set forth in
the most recent annual report and information furnished by the Company pursuant
to Optionee's own request;
3. Is aware that with respect to such information, the Company warrants
only that it was assembled by it in good faith from sources which it deemed
reliable and it has no knowledge which would lead it to believe that any such
information is incorrect or misleading;
<PAGE>
4. Is aware that the Company is willing upon request to provide to the
Optionee any additional information which the Company has access to in respect
to the Company and to answer any questions of Optionee;
5. Is aware that there is no public market for this investment and it may
not be possible to liquidate this investment.
6. Understands and acknowledges that under current interpretations of
relevant securities laws that an exemption from registration whereby the
Optionee could resell his shares does not exist but may only come into being
after the Optionee has held the investment for at least several years and the
potential for any exemption can change if applicable laws, regualtions or court
interpretations change;
7. Understands and acknowledges that no registration under federal or state
securities laws is planned, or assured, and that the Company has no intention of
ever attempting to register the common stock now or in the future;
8. Understands that counsel for the Comapny may file relevant forms with
the Securities and Exchange Commission within a specified time after receipt of
this letter and will cooperate in providing any necessary information to the
Company in that regard, promptly and that the Company shall have the absolute
right to defer the date of exercise until counsel for Company determines that
all laws and regulations are complied with including sufficient time to file the
appropriate forms or any other required filings or notices.
OPTIONEE INFORMATION (Type or Print):
Name of Optionee
----------------------------------------------------------------
Address
-------------------------------------------------------------------------
Zip
- --------------------------------------------- --------------------------------
Social Security/Fed. ID#
--------------------------------------------------------
Telephone No. ( )
------------------------------------------------------------------
Date Executed:
--------------------------- -----------------------------------
(Signature of Optionee)
Appendix H
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made as of June 1, 1997, by and between APPROVED
FINANCIAL CORPORATION ("Employer") and its successors and assigns, and Eric S.
Yeakel ("Employee"), who, in consideration of the mutual promises of the parties
and other good and valuable consideration, the receipt and adequacy of which are
acknowledged, the parties have agreed as follows:
1. Definitions. Whenever the following words or phrases are used in the
Agreement, they shall have the meanings given in this Section, unless
otherwise indicated.
(a) "Affiliate" means any Person owned by (greater than 10%), owning
(greater than 10%), under common ownership with, controlling,
controlled by, or under common control with, another Person, which
includes subsidiary and parent organizations.
(b) "Compete" shall mean in any way being in, contest with or rivalry
with Employer, including directly or indirectly working with, being
employed by, or having any interest or involvement in any other
Person which is involved in selling, marketing or otherwise
providing any of the services or products which are provided or
performed as part of the Primary Business Operation of Employer
during Employee's employment with Employer.
(c) "Customer" shall mean individual borrowers, mortgage brokers or
other sources of referrals of business to Employer.
(d) "Non-Conforming Loans" means all residential real property loans,
regardless of lien position, that do not conform to all applicable
Federal National Mortgage Association guidelines.
(e) "Primary Business Operation" shall mean wholesale and retail
origination and sale of Non-Conforming Loans.
(f) "Person" shall include both natural persons and entities.
(g) "Territory" shall mean the area encompassed in a 35 mile radius
around any office of Employer or its Affiliates which are in the
same Primary Business Operation
2. Employment. Employer employs Employee for the position of Chief Financial
Officer. Employee agrees to perform the duties assigned to Employee, and
to comply with the general supervision and policies of Employer and the
orders, advice and direction of the Chief Executive Officer of Employer.
1
<PAGE>
3. DUTIES. Employee shall perform the duties customarily performed by one
holding Employee's position in similar businesses, and such duties as may
be assigned by this Agreement as specified in Schedule A attached to and
incorporated herein, and such other duties as may be assigned from time to
time by Employer. Employee shall make available to Employer all
information of which Employee shall have any knowledge, and shall make all
suggestions and recommendations that will be of benefit to Employer.
4. BEST EFFORTS OF EMPLOYEE. Employee will at all times faithfully,
industriously, and to the best of Employee's ability, perform all of
Employee's duties, to the satisfaction of Employer.
5. TERM AND RENEWAL. This Agreement is for an initial term of one (1) year,
renewable thereafter on a year to year basis. Either party must give
ninety (90) days written notice if the contract is not going to be
renewed. Upon failure to give such notice, this Agreement will
automatically renew for a period of twelve (12) months on the same terms.
This notice requirement shall continue for all subsequent renewal periods.
6. COMPENSATION:
(a) Employer shall pay Employee in full payment for Employee's services,
compensation in accordance with the Compensation Schedule attached
to this Agreement as Schedule B and incorporated as part of this
Agreement, which shall remain in effect until supplemented or
replaced by a new Agreement between Employer and Employee.
(b) It is mutually agreed that the Employer shall pay to Employee one
year's annual base compensation as provided in Schedule B of this
Agreement in the event that following a change of control (more than
50% of the voting stock) of Employer the present President and Chief
Executive Officer of the Employer, Allen D. Wykle, is no longer
employed by the Employer, and Employer chooses to terminate Employee
without cause.
7. OTHER ACTIVITIES. Employee shall devote all business time, attention,
knowledge and skills solely to the business and interest of Employer, and
Employer shall be entitled to all of the benefits, profits or other issues
arising from or incident to all work, services and advice of Employee.
Employee shall not, during the term of this Agreement be employed by or
contract to provide services to any other person or engage in any other
business or trade, nor shall employee use or take for Employee's person
benefit any position which conflicts with or is contrary to any position
which would be beneficial to Employer. Nothing in this Agreement, however,
shall limit Employee's right to invest in publicly traded securities, to
engage in any business with the written consent of Employer, or to engage
in civic and charitable activities.
8. BENEFITS. Employee shall be entitled to benefits according to Employer's
stated policy, as amended from time to time.
2
<PAGE>
9. TERMINATION. Employer may terminate this Agreement at any time without
advance notice for cause. For the purpose of this Agreement "cause" is
defined as:
(i) a breach of this Agreement or any policy, rule, instruction,
or order of Employer; any act or omission by Employee, which
involves moral turpitude, gross negligence, dishonesty, bad
faith, conflict of interest, intentionally lying to Employer,
taking action prohibited by Employer, or breach of fiduciary
duty:
(ii) violation of any law or regulation applicable to the business
of the Employer;
(iii) repeated neglect of duties; or
(iv) failure to follow any lawful directive from the Chief
Executive Officer or Board of Directors.
Furthermore, this Agreement shall terminate immediately upon
Employee's death or disability, but such termination shall not
affect any previously vested right of Employee to receive disability
payments in accordance with any applicable plan for a disability
which arises while this Agreement is in effect. Either party may
upon ninety (90) days prior written notice terminate this Agreement
without cause. If Employer terminates without cause, the decision
shall be made either by Allen D. Wykle, personally, or Employer's
Board of Directors.
10. CONFIDENTIAL AND PROPRIETARY INFORMATION. In the course of this
employment, Employee will be exposed to certain confidential and
proprietary information of Employer and its Customers. Employee shall not
reproduce or remove from any premises any such information without the
express written consent of Employer. Any such information acquired by
Employee shall be promptly delivered to Employer if in tangible form,
unless specific written consent is received from Employer. Employee shall
not at any time or in any manner, disclose to any Person, nor in any way
use to his benefit or that of any other person, any information concerning
any matters affecting or relating to the business of Employer, including
any of its Customers, the prices it obtains or at which it offers its
products or services, or the sources of and/or prices it pays for any
supplies, material, services or technical assistance, or any other
information concerning the finances or business of Employer or any of its
Customers, without regard to whether any of foregoing matters would
otherwise be considered confidential or trade secrets, the parties
agreeing that these matters are important, material and confidential and
gravely affect the successful conduct of Employee's business and goodwill,
and that any breach of the terms of this Section shall be a material
breach of this Agreement and result in irreparable harm to Employer.
Employee further agrees that upon termination or expiration of this
Agreement for any reason, Employer shall immediately deliver to Employer
any and all information, documents, agreements, data, work product,
customer lists, notes and the like of Employer or relating to Employer's
business. The duties and restrictions on Employee in this Section shall
survive the expiration or termination of this Agreement and remain in full
force and effect for so long as Employer continues in business.
11. COVENANT NOT TO COMPETE. In consideration of the employment of Employee or
in the event Employee is entering into this Agreement after having been an
employee, either with a prior contract or no contract, then in
consideration of continued employment, the benefits of this Agreement and
other good and valuable consideration, the Employee independently
convenants and agrees with Employer, each of which said convenants shall
be independent of any severable from each other and each of which shall
continue in force for the specified
3
<PAGE>
duration irrespective of the completion and performance of all other
obligations between the parties hereto, that:
(a) Employee will NOT during the term of Employee's employment, not one
(1) year immediately following the termination of employment,
compete with Employer within the geographical limits of the
Territory.
(b) Employee will NOT, during the term of Employee's employment nor (1)
year immediately following the termination thereof, directly or
indirectly, for Employee, or in conjunction with any other Person,
(by disparagement of Employer's business or otherwise), do business
with, divert, take away or cause to leave any of the Customers of
Employer.
(c) Employee will NOT, during the term of Employee's employment nor one
(1) year immediately following the termination thereof, directly or
indirectly, for Employee, or in conjunction with any other Person
(by disparagement of Employer's business or otherwise), employ,
solicit, divert or take away any of the Employees of Employer.
(d) If any of the preceding limitations on the Employee imposed by the
preceding subsection "(a)" through "(c)" exceed the maximum
limitation permissible under the statutes, laws or precedents of any
state wherein it is sought to be enforced against the Employee, then
the parties hereto agree that such limitation may and shall be
deemed to be amended to conform to the maximum limitation
permissible under such statutes, laws or precedents, or in the
absence thereof, to such limitations deemed appropriate by any Court
of record in the state wherein it is sought to be enforced.
(e) The Employee acknowledges that a violation on Employee's part of any
convenants of this Section and its Subsections or Section 10 or 12,
will cause such damage to the Employer as will be irreparable and
the exact amount, of which will be impossible to ascertain, and for
that reason, the Employee further acknowledges that the Employer
shall be entitled, as a matter of course, to an injunction out of
any Court of competent jurisdiction, restraining any further
violations of the covenant by the Employee, and, pending the hearing
and decision on the application for such injunction, the Employer
shall be entitled to a Temporary Restraining Order, and waives any
request for a bond, or the equivalent thereof, without prejudice to
any other remedies available to it. The Employee particularly agrees
to the immediate issuance of such Temporary Restraining Order and
hereby waives any requirements of notice or objection whatsoever to
the issuance of such an Order.
(f) It is mutually agreed that regardless of whether the Employee leaves
the employ of the Employer by Employee's own request or the request
of the Employer, or regardless of how or by what manner the
employment relationship is terminated (including whether with or
without cause), or this contract is terminated or expires, the
independent covenants herein contained in this Section and in
Sections 10 and 12 shall survive and remain in full force and effect
as INDEPENDENT CONVENANTS. Should any provision or covenant in this
Agreement be breached by Employer, or be declared void or
enforceable by a Court of competent jurisdiction, the remaining
covenants remain in full force and effect, each being independent
and severable.
4
<PAGE>
(g) During the term of the non-competition covenant, Employee shall give
all of Employee's actual and prospective employers written notice of
the requirements of the noncompetition covenant. If Employer
believes that Employee has failed to provide any actual or
prospective employer such notice, Employer may provide such notice,
including providing a copy of any or all of this Agreement.
(h) Employee acknowledges that:
(i.) there was no duress involved in signing this Agreement;
(ii.) other employment options were available to Employee at the
time of signing this Agreement;
(iii.)Employee's covenant not to compete was a material and
necessary inducement to Employer to employ or continue the
employment of Employee;
(iv.) agrees that the restrictions imposed upon Employee by this
Agreement are reasonable in scope and duration and are
necessary to serve a legitimate business interest of Employer;
(v.) Employee acknowledges that the non-conforming loan business is
only a part of the overall mortgage loan industry and
therefore a restrictive covenant limited to the primary
business operation as defined herein would not prevent
Employee from earning a livelihood in the overall mortgage
loan industry; and
(vi.) Employee has had an opportunity to have this Agreement
reviewed by legal counsel of Employee's choice.
(i) Employee represents and warrants that his employment by Employer
does not and will not breach any agreement or duty which Employee
has to any other Person to keep in confidence any confidential
information belonging to others or not to compete with others.
12. INTELLECTUAL PROPERTY RIGHTS. Employee acknowledges that the proprietary
rights to any original works, concepts, software, manuals, programs,
routines, inventions, trademarks, service marks, and trade names made,
developed, or conceived by Employee, whether singularly or in conjunction
with another Person, during the term of this Agreement (collectively
"inventions") shall be the property of Employer. Accordingly, Employee
agrees as follows:
(a) Employee hereby assigns, and shall assign in the future, any and all
of Employee's rights in order to all inventions.
(b) Employee shall promptly disclose in writing to Employer any
invention. If requested by Employer, Employee will execute, file and
prosecute any and all applications and assignments necessary or
proper to vest in Employer the complete rights in and to any
inventions.
(c) If Employer chooses to pursue any patent or other application for
any invention, Employer shall bear all costs and fees in connection
with the application.
5
<PAGE>
(d) If Employer declines in writing to pursue any patent or other
application for an invention, Employee may with the written consent
of Employer pursue the application in Employee's own name and at
Employee's own expense, provided that Employer shall have A
perpetual, world-wide, royalty-free license and right to use, or to
adapt and develop in any way, any and all inventions, whether or not
protectable under any applicable law.
(e) Upon the termination of this Agreement for any reason, Employee
shall deliver to Employer any and all notes, records, documents and
other material relating to any completed or incomplete inventions
which Employee worked on prior to such termination.
(f) Except as set forth on Schedule C attached to and incorporated in
this Agreement, Employee shall not assert any rights to any
inventions as having been made or acquired by Employee prior to
being employed by Employer, or since then and not covered by this
Agreement.
(g) Employee need not assign to Employer any rights to any invention,
etc. Wholly conceived and developed by Employee after the
termination of this Agreement, unless the conception or development
of such invention, etc. involves the use of confidential or
proprietary information obtained by Employee while employed by
Employer.
13. GOVERNING LAW AND FORUM. All questions regarding this Agreement shall be
governed by the laws of Virginia, except that in the case of an issue
regarding the reasonableness of any restrictive covenants in Sections 10,
11 or 12 of this Agreement, the parties agree to apply the law of the
state wherein Employer files legal action to enforce any restrictive
covenant. Any suit relating to this Agreement must be brought in the
Circuit or General District Courts of the City of Virginia Beach,
Virginia, provided, however, Employer may file legal action in connection
with the enforcement of any of the restrictive convenants contained in
this Agreement in any state or federal court where Employer in its
discretion deems it appropriate for its protection.
14. SUCCESSORS AND ASSIGNS. This agreement shall be finding upon and inure to
the benefit of the parties and their heirs, personal representatives,
successors and assigns.
15. ASSIGNABILITY. The rights and obligations of the Employee under this
Agreement may not be assigned or delegated. The rights and obligations of
the Employer may be assigned or delegated without the consent of Employee.
16. OFFSETS AGAINST COMPENSATION. Upon termination of this Agreement, Employee
authorizes Employer to offset against any compensation or other amounts
owning to Employee any sums that Employee owes to Employer, evidenced in
writing.
17. NOTICES. Any notice or other communication required or permitted by this
Agreement shall be in writing and shall be considered given when hand
delivered or deposited in the United States mail, postage prepaid, via
first class or certified mail, and addressed to Employer at its
administrative headquarters and to Employee at his residence, as indicated
by the records of the Employer.
6
<PAGE>
19. NUMBER AND GENDER. Whenever used in this Agreement, the singular shall
include the plural, and the plural shall include the singular.
20. SEVERABILITY. If any provision of this Agreement is determined to be
unenforceable, the remainder of this Agreement shall be construed and
enforced as if the unenforceable provision had not been contained in this
Agreement, and each provision of this Agreement shall be valid and
enforceable to the fullest extent permitted by law.
21. ENTIRE AGREEMENT. This Agreement is intended to be a complete, exclusive
and final expression of the parties' agreement concerning Employee's
employment, merging and replacing all prior negotiations, offers,
representations, warranties and agreements. To the extent that Employee
was employed by Employer prior to the date of this Agreement this
Agreement is in confirmation of the agreements previously reached and
under which the parties have been working. No course of prior dealing
between the parties, no usage of trade, and no parole or extrinsic
evidence of any nature shall be used to supplement or modify any of the
term of this Agreement.
22. MODIFICATION AND WAIVER. The provisions of this Agreement may not be
modified for waived, including the waiver of the provisions of this
Section, except by a written instrument, signed by the party against whom
such modification or waiver is sought to be enforced.
23. SURVIVAL. Any provision of this Agreement which imposes any obligation
upon Employee which may extend beyond the term of this Agreement shall
survive the termination of this Agreement.
24. THIRD PARTY BENEFICIARIES. The provisions of this Agreement are intended
to benefit only the parties to this Agreement. No person not a party to
this Agreement shall be deemed to be a third party beneficiary of this
Agreement, nor shall any such person be empowered to enforce the
provisions of this Agreement, except to the extent such a person becomes a
permitted assignee of one of the parties.
25. COST OF ENFORCEMENT. In the event of a dispute or litigation relating to
this Agreement, each party shall pay their own costs and expenses,
including legal fees.
26. CHANGE OF POSITION. The parties hereto acknowledge that during the course
of employment of Employee, the Employee's job, location, classification,
or pay may from time to time change by mutual agreement. It is understood
and agreed, that such change shall not cause this Agreement to be
terminated unless such termination is agreed to in writing by Employer;
and it is further agreed that the independent covenants contained in
Sections 10, 11 and 12 shall survive any such changes and remain in fall
force and effect unless and until Employer, in writing by Employer, in
writing, expressly consents or agrees to terminate them.
26. NON-WAIVER. The failure of the Employer at any time to require, the
performance by the Employee of any of the provisions, covenants and
conditions hereof shall in no way affect its right thereafter to
enforce the same, nor shall the waiver by the Employer of any breach of
this Agreement, term, provision, covenant or condition hereof be taken
or held to be a waiver of any succeeding breach of any agreement, term,
provision, covenant or condition. The
7
<PAGE>
failure by Employer to performance by any other employee of any provision,
covenant or condition in that employee's employment shall in no way affect
Employer's right to enforce this Agreement or any covenant herein.
WITNESS the following signatures and seals:
EMPLOYER:
APPROVED FINANCIAL CORPORATION
By: /s/ Allen D. Wykle
-----------------------------------
Allen D. Wykle
Title: President and Chief Executive Officer
EMPLOYEE:
/s/ Eric S. Yeakel
---------------------------------------
Eric S. Yeakel
8
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULES
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE A
SPECIFIC DUTIES ASSIGNED
UPON EXECUTION OF EMPLOYMENT AGREEMENT
--------------------------------------
The parties acknowledge that Employer may assign new duties and revise
existing duties from time to time without the need to amend this Schedule or the
Employment Agreement. If additional specific duties are assigned upon execution
of this Agreement, execution of this they are set forth below. If no additional
specific duties are assigned upon execution of this Agreement, then nothing
shall be specified below.
(1) It is mutually agreed that Employee shall serve as a Director and/or
Officer of the Employer or its Affiliates as elected to such position(s) by that
entity's Shareholders, Members and/or Directors.
<PAGE>
SCHEDULE B
COMPENSATION SCHEDULE
---------------------
1. BASE COMPENSATION: Eighty-five thousand dollars ($85,000.00) annually,
payable in arrears in twenty-four (24) equal semi-monthly payments.
2. GROUP BENEFITS: Employee shall be entitled to group benefits as contained
in the stated written policy of the Corporation, which may from time to
time be revised.
3. STOCK OPTIONS: To the extent the Corporation adopts any management
incentive plan involving the Corporation's stock or options, a committee
of the Board of Directors or the Board itself will determine the
participants pursuant to its authority and the requirements of any plan.
4. OTHER:
(a) QUARTERLY BONUS: Employee shall be entitled to a quarterly bonus
based on .50 (1/2%) of net profit after taxes to be paid at the end
of the month following the quarter. The Bonus is not to exceed
$35,000.00.
Appendix I
MILLS VALUE ADVISER
INCORPORATED
1108 East Main Street
Charles A. Mills, III
President
MILLS VALUE ADVISER, INC.
INVESTMENT MANAGEMENT AGREEMENT/CONTRACT
AND POWER OF ATTORNEY
This will confirm our agreement, and respective rights and obligations,
as to the terms upon which Mills Value Adviser, Inc., a Virginia corporation
("ADVISER" or "MVA") will advise American Industrial Loan ("CLIENT") and manage
funds of said undersigned CLIENT. These funds will be held in an investment
management account at Newbridge Securities, Inc. This investment advisory
account is titled American Industrial Loan Profit Sharing Plan (the "ACCOUNT").
I. Appointment and Status as Investment Manager. The CLIENT hereby appoints the
ADVISER as an "Investment Manager" to manage CLIENT'S investment portfolio. In
connection with this engagement, MVA will have with full power and authority
for, and on behalf of, CLIENT to buy and sell (including short sales) and to
trade in stocks, bonds, notes, options, warrants, rights, or any other
securities - listed or unlisted, of domestic or foreign companies or governments
(wherever located), foreign exchange or any kind, on margin or otherwise, with
authority to convert the foregoing to, or remain in, cash or cash equivalents.
The ADVISER hereby accepts said appointment and by execution of this Agreement
the ADVISER represents that it is registered as an investment adviser under the
Investment Advisors Act of 1940. The ADVISER also acknowledges that it is a
fiduciary and assumes the duties, responsibilities and obligations of such
fiduciary.
ADVISER'S objective is to increase CLIENT'S assets over the long term by
investing in "undervalued securities with market strength" and other securities
deemed appropriate for the account. If the CLIENT wishes any other objective
than this, or places any limitations on this objective, s/he should note it in
this Agreement.
As attorney-in-fact, MVA is authorized to execute in CLIENT'S name all
written documents, perform all acts and take all measures which it deems
necessary to effectuate the authority set forth in this Contract or to
accomplish the purpose herein set forth; provided, however, that, except for
MVA's management fee, none of CLIENT'S assets may be directed to be delivered to
ADVISER for any purpose.
<PAGE>
II. Management Services. The ADVISER shall be responsible for the investment and
reinvestment of those assets of the CLIENT designated by the CLIENT as subject
to the ADVISER'S management (which assets, together with all additions,
substitutions and alterations thereto are hereafter called "ASSETS"). The CLIENT
does hereby delegate to the ADVISER all of its powers, duties and
responsibilities with regard to such investment and reinvestment. In deciding on
a proper investment of ASSETS, the ADVISER shall consider, among others, the
following factors: time, purpose of ACCOUNT, CLIENT'S financial needs such as
liquidity and applicable laws.
III. Custodian. The ASSETS shall be held at Newbridge Securities, and the
ADVISER is authorized to give instructions to the custodian with respect to
all investment decisions regarding the ASSETS.
IV. Confidential Information. All information regarding the operations
and investments of the ACCOUNT shall be regarded as confidential by the
ADVISER.
V. Liabilities of the ADVISER and CLIENT. The CLIENT, acting in good faith,
shall not be liable for any act or omission on part of the ADVISER in connection
with the ADVISER'S discharge of its duties. The ADVISER, acting in good faith,
shall not be liable for any action, omission, information or recommendation in
connection with the Agreement or investment of the ASSETS, except in the case of
the ADVISER'S negligence or malfeasance or violation of any applicable statute.
The federal securities laws impose liabilities under certain circumstances on
persons who act in good faith, and therefore nothing herein in any way shall
constitute waiver or limitation of rights which CLIENT may have under federal
securities laws.
VI. Directions to the ADVISER. All directions by or on behalf of the CLIENT to
the ADVISER shall be in writing signed by the CLIENT.
The ADVISER shall be fully protected in acting upon any instrument,
certificate or paper believed by it to be genuine and to be signed or presented
by proper person/s, and the ADVISER shall be under no duty to make any
investigation or inquiry as to any statement contained in any such writing but
may accept the same as conclusive evidence to the truth and accuracy for the
statements therein contained.
2
<PAGE>
VII. Account Management Restrictions. The ADVISER may invest, without
restriction, in the following:
a. United States government securities.
b. Corporate debt securities.
c. Commercial paper.
d. Certificates of Deposit.
e. Municipal securities.
f. Equity Securities (Exchange-listed securities, securities
traded over-the-counter, foreign issuers).
g. Warrants.
h. Mutual fund shares.
i. Other securities upon which the CLIENT and the ADVISER may, from
time to time, agree.
VIII. Statements and Reports. The ADVISER will provide the CLIENT with quarterly
investment reports showing the ASSETS, and market values for each security
included in the ASSETS, and a computation of fees billed shortly after the end
of each calendar quarter. The bill shall show the amount of the fee, the method
of calculating the fee and the value of the ASSETS on which the bill is based.
The custodian shall notify CLIENT at least quarterly of the amount of the fees
paid to the ADVISER.
IX. Fee Schedule. CLIENT will pay ADVISER and ADVISER agrees to accept, as full
compensation for all services rendered, a quarterly fee of .25% of the assets at
the end of said quarter (1% annual fee), which will be payable after the end of
each calendar quarter - with the first payment (prorated for a partial quarter
beginning the date of this contract and ending at the end of this calendar
quarter) due in the first month following the end of such quarter. Unless prior
payment is received from the CLIENT, the CLIENT authorizes the ADVISER to
appropriately bill the CLIENT'S account through the Broker (with a copy to the
CLIENT) for these quarterly fees, which fees shall be paid directly to the
ADVISER on the 15th day of the month following the end of the quarter.
X. Non-Exclusive Management. The CLIENT understands that the ADVISER will
continue to furnish investment management and advisory services to others, and
that the ADVISER shall be at all times free, in its discretion, to make
recommendations to others which may be the same as or may be different from
those made to the CLIENT. The CLIENT further understands that the ADVISER, its
employees, or members of their families may or may not have an interest in the
securities whose purchase and sale the ADVISER may from time to time recommend
under this Agreement. The CLIENT agrees that the ADVISER may recommend actions
with respect to
3
<PAGE>
securities of the same kind which the ADVISER, or any of its affiliates, or any
officer, director, stockholder, employee or any member of their families, or
other investors may take with respect thereto.
XI. Brokerage. Unless CLIENT makes a specific recommendation, s/he hereby
delegates to the ADVISER authority to designate the Broker or Brokers through
whom all purchases and sales on behalf of the ACCOUNT will be made, including
Anderson & Strudwick, Inc. (A&S), an affiliate of the ADVISER. As a result,
if/when the ADVISER chooses to utilize the affiliated broker dealer for
brokerage services, the affiliate relationship may cause a conflict of interest
in negotiating brokerage commissions on CLIENT'S behalf. Regarding this
potential conflict of interest, the brokerage commissions charged on all
purchases and sales of securities executed by Anderson & Strudwick, Inc. on
behalf of the CLIENT will be discounted no less than 50% from the standard A&S
rates.
The ADVISER will determine the rate or rates to be paid for brokerage
services to the CLIENT. The CLIENT understands that rates charged by brokerage
firms providing research and/or other services may at times be higher than those
charged by other brokers who may offer more limited services or who may be
considered to provide different quality or execution services. All purchases and
sales shall be reported promptly.
XII. Potential Conflict of Interest. The CLIENT agrees that the ADVISER may
refrain from rendering any advice or services concerning securities of companies
for which any are/may be associated in some way with ADVISER, or affiliates of
the ADVISER; are/may be officers, directors, or employees of companies of which
the ADVISER or any of the ADVISER'S affiliates may act as financial
adviser/consultant; or are/may be deemed to be confidential in any way by the
ADVISER - unless the ADVISER determines by its sole discretion that it may waive
this provision.
Where the ADVISER places orders for the execution of portfolio
transactions for the ACCOUNT, the ADVISER may allocate such transactions to such
brokers and dealers for execution on such markets, at such prices and at such
commission rates, as in the good faith judgement of the ADVISER, will be in the
best interest of the ACCOUNT. This decision will take into consideration in the
selection of brokers and dealers, not only relevant factors (such as, with
limitation, execution capabilities, research and other services provided by such
brokers or dealers which are expected to enhance the general portfolio
management capabilities of the ADVISER, and the value
4
<PAGE>
of an ongoing ADVISER relationship with such brokers and dealers (without having
to demonstrate that such factors are of a direct benefit to the Account.)
XIII. Cross Transactions. There may be some circumstances in which the ADVISER
deems it is in the best interest of the CLIENT to effect cross transactions with
its clients or with the affiliated broker dealer. This provides an inherent
conflict of interest, however in all such instances best execution for the
CLIENT shall remain the goal of the ADVISER.
When an agency cross transaction occurs, the CLIENT will receive a
written confirmation outlining the nature/date of the transaction, and offer to
provide the time of the transaction and source/amount of any remuneration the
ADVISER received.
The ADVISER will send an annual disclosure to the CLIENT stating the
number of agency cross transactions, and total amount of commissions received by
the ADVISER during that period.
The ADVISER will effect no agency cross transactions in which a trade is
recommended to both the buyer and seller.
This Agreement gives consent to the ADVISER to transact agency cross
transactions when ADVISER deems it is in the best interest of the CLIENT to do
so. The consent may be revoked by the CLIENT at any time by written notice.
Because of the inherent potential for conflict of interest, the ADVISER
will not effect principal cross transactions in any Accounts.
XIV. Beneficial Ownership of Client ASSETS. The CLIENT represents that s/he is
the beneficial owner of any securities or other ASSETS placed, from time to
time, with the ACCOUNT to be managed by the ADVISER. The CLIENT further
represents that there are no restrictions on the transfer, sale and/or public
distribution of said ASSETS, and that neither CLIENT nor any associate is an
officer, director, or controlling person of any corporation whose securities are
included in the managed portfolio; however, that if any such restrictions exist,
CLIENT shall inform ADVISER of the extent of the restrictions in writing in a
letter accompanying the agreement of the transfer of ASSETS.
XV. Agreement. This Agreement constitutes the entire agreement between the
parties for the management of the CLIENT'S portfolio. It may be amended at any
time by action of the CLIENT
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<PAGE>
and/or ADVISER. Any modification shall be made in writing and signed by both
parties. The Agreement shall become effective on the date at the bottom of the
contract, and shall constitute the full and complete agreement between the
parties relative to the transactions herein contemplated.
CLIENT acknowledges receipt of Part II of ADVISER'S Form ADV, entitled
"the Brochure", 48 hours prior to entering into this Advisory Agreement.
XVI. Termination. This Agreement is not assignable without written permission of
the CLIENT. It may be terminated in writing by either party, without penalty, at
any time and is effective on receipt of such notice by the other party.
XVII. Approval. The ADVISER warrants that this Agreement has been approved by
the Board of Directors of Mills Value Adviser, Inc.
XVIII. Governing Law. The Agreement shall be governed by the laws of the
Commonwealth of Virginia and the United States of America.
Witness the following signatures this 28th day of March, 1994.
ADVISER
MILLS VALUE ADVISER, INC.
BY /s/ Charles A. Mills, III
---------------------------
Charles A. Mills, III
President and
Chairman of the Board
/s/ Blair J. Frantzen
- ---------------------------
Blair J. Frantzen, Secretary
CLIENT
-----------------------
CLIENT /s/ Allen Wykle
-----------------------
Signature /s/ [illegible]
Witness
6
Appendix J
SHARE PURCHASE AGREEMENT
INTRODUCTION
------------
This SHARE PURCHASE AGREEMENT is dated as of December 19, 1995, by and
between Edwin Rector or assigns ("Rector") being the owner of 11,300 of the
issued and outstanding shares of capital stock of First Security Federal Savings
Bank ("First Security"), and American Industrial Loan Association or its assigns
(the "Buyer") First Security is a federal savings bank, and the Buyer is a
Virginia corporation.
BACKGROUND
----------
Rector owns approximately eighty-seven percent (87%) of the issued and
outstanding shares of capital stock of First Security (the "Shares"). (Rector
owns 11,300 of the 12,941 total issued and outstanding shares of First
Security.) The Buyer desires to purchase from Rector, and Rector desires to sell
to the Buyer, his Shares in exchange for the Purchase Price in accordance with
the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the respective covenants,
representations and warranties herein contained, and intending to be legally
bound hereby, the parties hereto agree as follows:
ARTICLE I
TERMS AND CONDITIONS
1. Definitions.
For convenience and brevity, certain terms used in various parts of this
Agreement are listed in alphabetical order and defined or referred to below
(such terms to be equally applicable to both singular and plural forms of the
terms defined).
"Acquisition" means the acquisition of all of Rector's Shares by the Buyer
including all related transactions provided for in or contemplated by this
Agreement or any Schedule hereto.
"Agreement" means this Share Purchase Agreement.
"Assets" means all of First Security's and each Subsidiary's assets,
properties, business, goodwill and rights of every kind and description, real
and personal, tangible and intangible, wherever situated and whether or not
reflected on the latest year-end balance sheet or any interim balance sheet.
"Business" means the existing and prospective business, operations,
facilities and other Assets, financial condition, results of operations,
finances, markets, products, competitive
<PAGE>
position, customers and customer relations and personnel of First Security and
each Subsidiary.
"Buyer" means American Industrial Loan Association.
"Deposit" means the $50,000.00 deposit by Buyer to be paid to Escrow Agent
upon execution of this Agreement.
"Employee Benefit Plans" means "employee benefit plans" as defined in
section 3(3) of ERISA and any other plan, policy, program, practice or
arrangement providing compensation or other benefits to any current or former
officer or employee of First Security or any Subsidiary, or any affiliate or
under which First Security or any affiliate has any obligation or liability,
whether actual or contingent, including, without limitation, all incentive,
bonus, deferred compensation, vacation, holiday, medical, disability, share
purchase or other similar plans, policies, programs, practices or arrangements.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Agent" means Michael J. Shelton, Esq.
"Escrow Agreement" means an escrow agreement among Rector, the Buyer and
the Escrow Agent substantially in the form of Schedule 2.2.
"First Security" means First Security Federal Savings Bank and its
subsidiary.
"GAAP" means generally accepted accounting principles consistently
applied.
"Shareholder" means Rector.
"Shares" means shares owned by Rector of the Common Stock of First
Security which constitutes approximately eighty-seven percent (87%) (11,300 of
the 12,941 issued and outstanding shares) of all of the issued and outstanding
capital stock of First Security.
ARTICLE II
SALE AND PURCHASE OF THE SHARES
2.1. Sale and Purchase of the Shares. Subject to the post-Closing
adjustment set forth in Section 2.3 hereof and subject to the terms and
conditions hereinafter set forth and on the basis of and in reliance upon the
representations, warranties, obligations and agreements set forth herein, at the
Closing Rector shall sell to the Buyer and the Buyer shall purchase from Rector
all of the
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<PAGE>
Shares owned by Rector in exchange for the payment to Rector of an amount equal
to the Purchase Price as adjusted.
2.2. Purchase Price. The Purchase Price prior to adjustments is Three
Million Four Hundred Forty-Nine Thousand One Hundred Fifteen Dollars
($3,449,115.00), which includes:
A. Three Million One Hundred Eighty-Nine Thousand One Hundred
Fifteen Dollars ($3,189,115.00) in cash, cashier's check or verified wire
transfer at Closing (subject to the escrow and adjustment provisions of Sections
2.2.2 and 2.3, respectively), which total amount includes a Fifty Thousand
Dollars ($50,000.00) Deposit placed with Escrow Agent pursuant to the terms of
Escrow Agreement Number One attached hereto as Schedule 2.2.A.
B. Shares of American Industrial Loan Association ("AILA") valued at
Two Hundred Sixty Thousand Dollars ($260,000.00) based on the closing bid price
on the last trading day. Any fractional share shall be paid in cash.
2.2.1. Re-Purchase Option. Rector grants AILA the option to repurchase the
AILA shares within three (3) years at the greater of (i) the fair market value
(closing bid price the last trading day prior to repurchase) or (ii) an amount
which will reflect an eight percent (8%) return per annum including dividends.
2.2.2. Closing Escrow. Twenty percent (20%) of the Purchase Price
specified in paragraph 2.2 (prior to adjustments) shall be placed in escrow at
Closing pursuant to the terms of Escrow Agreement Number Two attached hereto as
Schedule 2.2.2, which Rector will execute at Closing.
2.3. Post-Closing Adjustment.
(A) Preparation of Closing Date Balance Sheet. Within ninety (90) to
one hundred twenty (120) days after the Closing Date, First Security shall cause
a balance sheet to be prepared for First Security as of the Closing Date (the
"Closing Date Balance Sheet"). The Closing Date Balance Sheet shall be prepared
in accordance with GAAP and audited by Coopers & Lybrand, the cost to be borne
by First Security and shall present fairly First Security's financial position
as of the Closing Date. Upon completion of the Closing Date Balance Sheet,
copies thereof shall promptly be provided to Buyer and Rector.
(B) Determination of Closing Net Book Value. Closing Net Book value
shall mean that value determined by the Closing Date Balance Sheet as being (1)
the total assets of First Security as of the Closing Date, over (2) the total
liabilities of First Security as of the Closing Date. As used herein, the terms
"total assets" and "total liabilities" shall mean the aggregate amount of all
assets or liabilities, respectively, of First Security (whether
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<PAGE>
classifiable in accordance with GAAP as current or long-term) determined in
accordance with GAAP.
(C) Adjustment of Purchase Price; Payment. The Purchase Price shall
be adjusted by multiplying the Closing Net Book Value plus One Hundred Fifty
Thousand Dollars ($150,000.00) by Rector's proportionate share of all
outstanding shares in First Security. By way of example:
Assuming Closing Net Book Value is
the same as the end of March, 1995 $3,800,000.00
Premium Over Book +150,000.00
-------------
$3,950,000.00
Rector's Proportionate Share 87.31937%
-------------
Adjusted Purchase Price
(including deposit) $3,449,115.00
2.4. Closing Date. The closing (the "Closing") of the sale and purchase of
the Shares shall take place on February 29, 1996, or as soon thereafter as all
regulatory approvals have been obtained, at the offices of Payne, Gates,
Farthing & Radd, P. C., at 1515 Dominion Tower, 999 Waterside Drive, Norfolk,
Virginia 23510, at 10:00 A.M. local time, or at such other time or place or on
such earlier date as the Buyer and Rector may agree to in writing. The actual
date of the Closing is herein sometimes referred to as the "Closing Date." The
parties agree that if through no fault of Rector the actual closing has not
taken place on or before the expiration of a period of seven (7) months
following the tenth (10th) day after the date of this Share Purchase Agreement,
then Rector may for a period of thirty (30) days thereafter terminate this
Agreement by giving written notice to Buyer and neither party will have any
further liability or obligation to the other.
2.5. Deliveries. At the Closing, subject to the provisions of this
Agreement, Rector shall deliver to the Buyer, free and clear of all Liens, the
certificates for the Shares in negotiable form, duly endorsed in blank, or with
separate notarized stock transfer powers attached thereto and signed in blank,
in exchange for Purchase Price less the escrow at Closing. At the Closing,
Rector will make available to the Buyer the written resignations of all the
directors and officers of First Security effective as of the Closing Date except
for such directors and officers as the Buyer shall designate in writing, and
shall cause to be made available to the successor directors and officers all
minute books, stock record books, books of account, corporate seals, current
written contracts and other documents, instruments and papers belonging to First
Security and shall cause full possession and control of all of the Assets and of
all other things and matters pertaining to the
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<PAGE>
operation of the Business to be transferred and delivered to the directors and
officers elected to succeed the resigned directors and officers of First
Security.
2.6. Default by Rector at the Closing. If Rector shall fail or refuse to
deliver any of the Shares as provided in Section 2.1, the Buyer, at its option
and without prejudice to its rights against Rector may refuse to make the
Acquisition and thereby, terminate all of its obligations hereunder without
liability. Rector acknowledges that the Shares are unique and otherwise not
available and agrees that in addition to any other remedies, including damages,
the Buyer may invoke any equitable remedies to enforce delivery of the Shares
hereunder, including, without limitation, an action or suit for specific
performance. Rector agrees to use his best efforts to get the other shareholders
to sell their shares to Buyer.
2.7. Intentional Refusal to Close. In the event that after receiving OTS
approval, Buyer should intentionally without justification refuse to close the
transaction after having all conditions precedent to closing satisfied, and in
the absence of any misrepresentation, breach of contract or termination by
Rector, then Rector may bring a lawsuit against Buyer under this paragraph for
material breach of contract. If the courts after expiration of further appellate
rights have finally ruled that there was a material breach by Buyer under this
paragraph, then Rector shall be entitled to a sum of liquidated damages in the
amount of $300,000.00 including the $50,000.00 deposit, which amount shall be in
lieu of any other damages or remedies of Rector. If a court enters a judgment in
favor of Rector under this paragraph, then Buyer will pay interest from the date
of judgment (at NationsBank prime) on the $300,000.00 if Buyer appeals the
judgment. Also, the non-prevailing party will, pursuant to paragraph 8.14, be
required to pay costs and expenses including reasonable attorneys' fees of the
prevailing party.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER
Rector represents and warrants to Buyer as follows:
3.1. Organization. First Security Federal Savings Bank is a federally
chartered savings bank duly organized, validly existing and in good standing
under the laws of the United States. The deposits of First Security Federal
Savings Bank are insured pursuant to the Federal Deposit Insurance Act, as
amended, to the fullest extent permitted by law. First Security Mortgage
Bankers, Inc. is a Virginia corporation duly organized, validly existing and in
good standing under the laws of Virginia. First Security Mortgage Bankers, Inc.
is wholly owned by First Security Federal Savings Bank. First Security has full
power and authority (including all licenses, franchises, permits and other
governmental
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<PAGE>
authorizations which are legally required) to own or lease its properties, and
to engage in the business and activities now conducted. First Security Mortgage
Bankers, Inc. is not licensed by any regulatory authorities.
Schedule 3.1 sets forth true and complete copies of the Charter and Bylaws
of First Security and its subsidiary as amended to date and expressly designates
any amendments that have been proposed and are pending. First Security (i) does
not have any subsidiaries or affiliates, (except for First Security Mortgage
Bankers, Inc., a Virginia corporation), (ii) is not a general partner or owner
in any joint venture, general partnership, limited partnership, trust or other
non-corporate entity, and (iii) does not know of any arrangement pursuant to
which the stock of any corporation is or has been held in trust (whether
express, constructive, resulting or otherwise) for the benefit of all
shareholders of First Security.
3.2. Capitalization. The authorized capital stock of First Security
Federal Savings Bank consists of 1,000,000 shares of which 1,000,000 shares are
common stock, par value $2.50 per share and 0 shares are preferred stock, no par
value per share. As of the date of this Agreement, 12,941 shares of First
Security common stock and no shares of preferred stock were issued and
outstanding. All of the issued and outstanding shares of First Security Federal
Savings Bank common stock are validly issued, fully paid and nonassessable. The
Shares are free and clear of any liens, encumbrances, charges, restrictions or
rights of third parties. There are no shares of First Security Federal Savings
Bank common stock issuable upon exercise of outstanding stock options, warrants
or otherwise.
The authorized capital stock of First Security Mortgage Bankers, Inc.
consists of 1,000 shares of which 1,000 shares are common stock, par value $5.00
per share and 0 shares are preferred stock. As of the date of this Agreement,
135 shares of First Security Mortgage Bankers, Inc. common stock and 0 shares of
Preferred stock were issued and outstanding. All of the issued and outstanding
shares of First Security Mortgage Bankers, Inc. common stock are validly issued,
fully paid and nonassessable. The Shares are free and clear of any liens,
encumbrances, charges, restrictions or rights of third parties. There are no
shares of First Security Mortgage Bankers, Inc. common stock issuable upon
exercise of outstanding stock options, warrants or otherwise.
Except as set forth in this Agreement, First Security is not bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the transfer, purchase or issuance of any shares of
capital stock of First Security or any securities representing the right to
purchase or otherwise receive any shares of such capital stock or any securities
convertible into or representing the right to purchase or subscribe for any such
shares, and there are no agreements or
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<PAGE>
understandings with respect to voting of any of Rector's shares. Except as set
forth in this Agreement, First Security has no outstanding commitment or
obligation to repurchase, reacquire or redeem any of its outstanding capital
stock. Except as disclosed on Schedule 3.2, there are no voting trusts, voting
agreements, buy-sell agreements or other similar arrangements affecting the
shares.
3.3. Authority; No Violation.
(a) Rector has full power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby in accordance
with the terms hereof. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have to the extent required
been duly and validly approved by the Board of Directors and requisite number of
shareholders of First Security in accordance with the Charter and Bylaws of
First Security and applicable laws and regulations. Except for such approvals,
no other corporate proceedings on the part of First Security are necessary to
consummate the transactions so contemplated. This Agreement has been duly and
validly executed and delivered by Rector and constitutes a valid and binding
obligation of Rector, enforceable against him in accordance with its terms,
except to the extent that enforceability may be limited by (i) bankruptcy,
insolvency, moratorium, liquidation, reorganization or similar laws affecting
creditors' rights generally, regardless of whether such enforceability is
considered in equity or at law, and (ii) general equity principles.
(b) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby in accordance with the
terms hereof, nor compliance by First Security with any of the terms or
provisions hereof, will (i) violate any provision of First Security's Charter or
Bylaws, (ii) violate any statute, code, ordinance, rule, regulation, judgment,
order, writ, decree or injunction applicable to First Security or any of its
properties or assets, or (iii) except as set forth in Schedule 3.3, violate or
conflict with, result in a breach of any provisions of, constitute a default (or
any event which, with notice or lapse of time, or both, would constitute a
default) under, result in the termination of, accelerate the performance
required by, or result in the creation of any lien, security interest, charge or
other encumbrance upon any of the respective properties or assets of First
Security under, any of the terms, conditions or provisions of any material note,
bond, mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which First Security is a party, or by which it or
any of its respective material properties or assets may be bound or affected,
except, with respect to (ii) and (iii) above, such as individually or in the
aggregate will not have a material adverse effect on the business, operations,
assets or financial condition of First
-7-
<PAGE>
Security taken as a whole and which will not prevent or materially delay the
consummation of the transactions contemplated hereby. Except for consents and
approvals of or filings or registrations with or notices to the Office of Thrift
Supervision of the Department of Treasury ("OTS"), no consents or approvals of
or filings or registrations with or notices to any third party or any public
body or authority are necessary on behalf of First Security in connection with
(a) the execution and delivery of this Agreement and (b) the consummation of the
other transactions contemplated hereby.
3.4. Financial Statements.
(a) Schedule 3.4(a) sets forth true and complete copies of First
Security's balance sheets on a consolidated basis, income statements, changes in
stockholders' equity, together with the notes thereto, as of and for the nine
(9) months ended June 30, 1995 and for the years 1992, 1993 and 1994, (the
"First Security Financial Statements"). The First Security Financial Statements
(including the related notes) have been prepared in accordance with generally
accepted accounting principles and fairly present the consolidated financial
condition of First Security as of the dates set forth therein, and the related
consolidated statements of income and stockholders, equity fairly present the
results of the consolidated operations and stockholders' equity of First
Security for the respective periods set forth therein.
(b) Schedule 3.4(b) sets forth a copy of the Thrift Financial
Reports filed by First Security as of and for the three months ended June 30,
1995 and as of and for the year ended September 30, 1994 (the "First Security
Reports"). The First Security Financial Reports fairly present the financial
position of First Security and the results of its respective operations at the
dates and for the periods indicated in conformity with agreed upon selected
procedures applied on a consistent basis with previous accounting periods.
(c) The books and records of First Security are being maintained in
material compliance with applicable legal, regulatory and accounting
requirements, and reflect only actual transactions (subject to accrual items in
compliance with GAAP).
(d) Except as and to the extent reflected, disclosed or reserved
against in the First Security Financial Statements or the First Security
Reports, as of June 30, 1995, First Security did not have any liabilities,
whether absolute, accrued, contingent or otherwise material to the business,
operations, assets or financial condition of First Security, taken as a whole.
Since June 30, 1995, First Security has not incurred any liabilities except in
the ordinary course of business and consistent with prudent banking practice and
there have not been any material adverse changes, subject to normal business
fluctuations.
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<PAGE>
3.5. Real Property. Schedule 3.5 lists all real property owned or leased
by First Security and all mortgages, deeds of trust and security agreements to
which such property is subject. Copies of all leases are attached to Schedule
3.5, and there are no breaches or defaults under any of the leases, and there
will be none as of Closing (except for matters which First Security may in good
faith dispute with its respective Landlord as disclosed on Schedule 3.5). All
lease agreements will be current as of Closing, except for matters which First
Security may in good faith dispute with its respective Landlord, which shall be
disclosed on Schedule 3.5.
3.6. Subleases. Schedule 3.6 lists all subleases under which First
Security as a lessee subleases to another lessee. Copies of all subleases are
attached to Schedule 3.6 and there are no breaches or defaults under any of the
subleases. All subleases will be current at Closing.
3.7. Environmental Laws. Except as set forth on Schedule 3.7, (i) First
Security has not received written notice of any violation of, or claim,
citation, assessment, proposed assessment or demand for abatement in connection
with any applicable federal and state environmental laws and permits required
thereunder (such laws and permits being "Environmental Laws"), or generated,
stored, or disposed of any materials designated as hazardous materials or
substances under any Environmental Laws (such materials or substances being
"Hazardous Materials,") and to the actual knowledge of First Security and
Rector, none are subject to any claim or lien under any Environmental Laws; and
(ii) no real estate currently owned, operated, or leased by First Security has
been designated in writing addressed to First Security as requiring any
environmental cleanup or response action to comply with Environmental Laws, or
to the actual knowledge of First Security or Rector, has been the site of
release of any Hazardous Materials.
3.8. Litigation and Other Proceedings. Except as set forth in Schedule
3.8, there are no legal, quasi-judicial or administrative proceedings of any
kind or nature now pending or, to the actual knowledge of First Security,
threatened, before any court or administrative body in any manner against First
Security, or any of its properties or capital stock, which could have a material
adverse effect, taken as a whole, on First Security, or its financial condition,
assets, operations or earnings or the transactions proposed by this Agreement.
First Security and Rector do not know of any basis on which any litigation or
proceeding could be brought which could have a materially adverse effect, taken
as a whole, on the business, operations, assets or financial condition of First
Security or which could question the validity of any action taken or to be taken
in connection with this Agreement and the transactions contemplated hereby.
First Security is not in material default with respect to any judgment, order,
writ,
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injunction, decree, award, rule or regulation of any court, arbitrator or
governmental agency or instrumentality.
3.9. Taxes. First Security has filed with the appropriate federal, state
and local governmental agencies, or have filed applications for extension with
respect to, all tax returns and reports required to be filed, and have paid all
taxes and assessments shown or claimed to be due on filed returns or reports.
First Security has not executed or filed with the Internal Revenue Service
("IRS") any agreement extending the period for assessment and collection of any
federal tax nor is First Security a party to any action or proceeding by any
governmental authority for assessment or collection of taxes, nor has any claim
for assessment or collection of taxes been asserted in writing against First
Security. First Security has not waived any statute of limitations with respect
to any tax or other assessment or levy, and all such taxes and other assessments
and levies which First Security is required by law to withhold or to collect
have been duly withheld and collected and have been paid over to the proper
governmental agency, domestic and foreign, or segregated and set aside for such
payment and, if so segregated and set aside, will be so paid by First Security
as required by law.
First Security has established (and until the Closing Date will establish)
on their books accrued amounts that are adequate for the payment of all federal,
state and local taxes (including, but not limited to, income (including
alternative minimum tax), FICA, FUTA, backup withholding, SUTA, personal
property and franchise taxes) not yet due and payable, but incurred in respect
of First Security through such date. Except as set forth in Schedule 3.9, the
federal income tax returns of First Security have been filed with the IRS, and
no deficiencies were asserted which have not been resolved and paid in full.
Except as set forth in Schedule 3.9, any applicable state franchise tax returns
of First Security have been examined by the applicable authorities (or are
closed to examination due to the expiration of the statute of limitations) and
no deficiencies were asserted as a result of such examinations which have not
been resolved and paid in full. To the actual knowledge of First Security, there
are no audits or other administrative or court proceedings presently pending nor
any other disputes pending, or claims asserted for, taxes or assessments upon
First Security. Schedule 3.9 sets forth true and complete copies of the federal
and state income tax returns of First Security as filed for the years ended
1992, 1993 and 1994.
3.10. Contracts. Except as otherwise noted in Schedule 3.10, First
Security is not a party to or bound by any (i) employment contract (including
without limitation any collective bargaining contract or union agreement) which
is not terminable by First Security on less than sixty (60) days notice without
payment of any amount on account of such termination; (ii) bonus, stock option,
deferred compensation or profit-sharing, pension or retirement plan
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or other employee benefit arrangement; (iii) lease or license with respect to
any property, real or personal, whether as landlord, tenant, licensor or
licensee; (iv) contract or commitment for capital expenditures; (v) contract or
commitment made in the ordinary course of business for the purchase of materials
or supplies or for the performance of services over a period of more than sixty
(60) days from the date of this Agreement, (vi) contract or option to purchase
or sell any real or personal property; (vii) contract, agreement or letter with
respect to the management of First Security imposed by any bank regulatory
authority having supervisory jurisdiction over First Security, (viii) agreement,
contract or indenture related to the borrowing by First Security of money other
than those entered into in the ordinary course of business; (ix) guaranty of any
obligation for the borrowing of money, excluding endorsements made for
collection, repurchase or resell agreements, letters of credit and guaranties
made in the ordinary course of business; (x) agreement with or extension of
credit to any executive officer or director of First Security or holder of more
than ten percent (10) of the First Security Common Stock, or any affiliate of
such person, which is not on substantially the same terms (including, without
limitation, in the case of lending transactions, interest rates and collateral)
as, and following credit underwriting practices that are not less stringent
than, those prevailing at the time for comparable transactions with unrelated
parties or which involve more than the normal risk of collectibility or other
unfavorable features; (xi) applications or contracts with respect to branching
or site location or relocation; (xii) contracts limiting or restraining it from
engaging or competing in any line of business with any person or entity; or
(xiii) material contracts, other than the foregoing, and not made in the
ordinary course of business and not otherwise disclosed in this Agreement, in
any schedule attached hereto.
3.11. Insurance. Attached hereto as Schedule 3.11 is a list of all
insurance policies owned or held by or on behalf of First Security all of which
are valid, binding and enforceable policies, or bonds issued by insurers of
recognized responsibility. Copies of each policy is attached to Schedule 3.11.
In the judgment of the Boards of Directors of First Security, such insurance
policies are adequate for the business conducted by First Security in respect of
amounts, types and risks insured. As of the date hereof, First Security has not
received any notice of cancellation or notice of a material amendment of any
such insurance policy or bond or is in default under such policy or bond, no
coverage thereunder is being disputed and all material claims thereunder have
been filed in a timely fashion.
3.12. Laws. Except as otherwise noted on Schedule 3.12, First Security is
in compliance with all applicable federal, state and local laws, rules,
regulations and orders, except where a failure to comply will not result in a
material adverse effect on the business, operations, assets or financial
condition of First
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Security taken as a whole. First Security has filed all reports (except for a
three-year business plan), registrations and statements, together with any
amendments required to be made thereto, that are required to be filed with the
OTS or any other regulatory authority having jurisdiction over First Security,
and such reports, registrations and statements are true and correct in all
material respects. Schedule 3.12 lists all examinations of First Security
conducted by the OTS since their organization and the dates of any responses
thereto submitted by First Security. Schedule 3.12 discloses and contains copies
of any supervisory agreement, corrective action agreement or any other similar
directive by the OTS relating to First Security and the current status of each
as of execution of this Agreement, which status will be updated immediately
prior to closing.
3.13. Conduct. Since June 30, 1995, First Security has not (i) issued,
sold or purchased any of its capital stock or corporate debt obligations; (ii)
declared or set aside or paid any dividend, or issued or granted any option,
warrant, call commitment, right to purchase or agreement of any character
regarding the authorized or issued common stock of First Security, or made any
other distribution in respect of or, directly or indirectly, purchased, redeemed
or otherwise acquired any shares of its issued and outstanding capital stock;
(iii) incurred any material obligations or liabilities (fixed or contingent),
except obligations or liabilities incurred in the ordinary course of business,
or mortgaged, pledged or subjected any of its assets to a lien or encumbrance,
other than in the ordinary course of business and other than statutory liens not
yet delinquent; (iv) discharged or satisfied any lien or encumbrance or paid any
obligation or liability (fixed or contingent), other than accruals, accounts and
notes payable included in the balance sheet, accruals, accounts and notes
payable incurred since the date of the balance sheet in the ordinary course of
business and accruals, accounts and notes payable incurred in connection with
the transactions contemplated by this Agreement; (v) sold, exchanged or
otherwise disposed of any of its capital assets other than in the ordinary
course of business; (vi) except as set forth in Schedule 3.13 made any general
or individual wage or salary increase, paid any bonus or instituted any employee
welfare, retirement or similar plan or arrangement; (vii) suffered any damage,
destruction or casualty loss, whether or not covered by insurance; or (viii)
except in the ordinary course of business, entered or agreed to enter into any
agreement or arrangement granting any preferential rights to purchase any of its
assets, properties or rights or requiring the consent of any party to the
transfer and assignment of any such assets, properties or rights.
3.14. Reserve for Possible Loan Losses. The reserve for possible loan
losses of First Security has been calculated in accordance with all applicable
rules and regulations. As of the date hereof, the reserve for possible loan
losses in the First
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Security Financial Statements and in the First Security Reports is adequate
based upon past loan loss experiences and potential losses in the current
portfolio to cover all known or anticipated loan losses. On the date hereof and
on the Closing Date, no material facts relevant to the adequacy of the reserve
for possible loan losses shall have been withheld from Buyer.
3.15. Employment Relations. The relations of First Security with their
respective employees are satisfactory, and First Security has not received any
notice of any controversies with, or organizational efforts or other pending
actions by, representatives of its employees. First Security has materially
complied with all laws relating to the employment of labor with respect to its
respective employees, including any provisions thereof relating to wages, hours,
collective bargaining and the payment of workman's compensation insurance and
social security and similar taxes, and, except as disclosed in Schedule 3.15, no
person has asserted in writing that First Security is liable for any arrearage
of wages, workman's compensation insurance premiums or any taxes or penalties
for failure to comply with any of the foregoing. Attached on Schedule 3.15 is a
list of employees with a general job description, current salary rates or hourly
wages and the commencement date of employment for each. Shareholder has no
knowledge that any employees do not intend to remain with First Security after
the Acquisition except as expressly disclosed on Schedule 3.15.
3.16. Employee Benefit Plans. (a) Except for a 401(k) plan attached hereto
as Schedule 3.16(a), First Security does not maintain or contribute to any
"employee pension benefit plan" (the "First Security Pension Plans"), as such
term is defined in Section 3 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), "employee welfare benefit plan" (the "First Security
Welfare Plans"), as such term is defined in Section 3 of ERISA, a stock option
plan, stock purchase plan, deferred compensation plan, severance plan, bonus
plan, employment agreement or other similar plan, program or arrangement. The
First Security Pension Plans and the First Security Welfare Plans are herein
referred to as the First Security Plans".
(b) The 401(k) plan which is currently in effect at First Security
has been operated in all material respects in compliance with ERISA and any
other applicable laws or regulations.
3.17. Reports to Shareholders. Schedule 3.17 sets forth a complete copy of
each annual, quarterly or special report and definitive proxy statement or other
communication (other than general advertising material) provided by First
Security to its stockholders since September 30, 1994, and each such annual,
quarterly or special report, definitive proxy statement or communication, as of
its date, complied in all material respects with any applicable statutes, rules
and regulations enforced or
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promulgated by any applicable regulatory agency, and did not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading; provided
that information as of a later date shall be deemed to modify information as of
an earlier date.
3.18. Minute Books. The minute book of First Security contains accurate
records of all meetings and other corporate action held of their respective
stockholders and Board of Directors (including committees of the Board of
Directors), except where the failure to so maintain such records would not have
a material adverse effect on the business, operations, assets or financial
condition of First Security, as the case may be. The Minute Books shall be
provided to buyer for review prior to closing and shall be transferred to Buyer
at Closing.
3.19. Broker's and Other Fees. Except as set forth in Schedule 3.19,
neither First Security nor any of its directors or officers has employed any
broker or finder or incurred any liability for any broker's or finder's fees or
commissions in connection with any of the transactions contemplated by this
Agreement.
3.20. Absence of Certain Changes or Events. Except for normal business
fluctuations, there has not been any material adverse change in the business,
operations, assets or financial condition of First Security since June 30, 1995,
and to the best of Rector's knowledge, no facts or condition exists which he
believes will cause such a material adverse change in the future.
3.21. Disclosure. Except for normal business fluctuations, there are no
material facts concerning the business, operations, assets or financial
condition of First Security, which have not been disclosed to Buyer which could
have a material adverse effect on the business, operations, assets or financial
condition of First Security. No representation or warranty of Rector or First
Security contained in this Agreement contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements herein
not misleading.
3.22. Mortgages. All representations set forth in Schedule 3.22 relating
to mortgages owned by First Security as part of its assets are now and shall be
true and accurate and will be updated on the Closing Date.
3.23. Counsel Opinion. Rector shall cause his counsel to issue a legal
opinion in the form of Schedule 3.23 to be delivered at closing.
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3.24. Representations Accurate at Closing. All representations and
warranties shall be accurate and unchanged as of closing (except for changes in
the ordinary course of business that have no material adverse effect), and
Rector will certify the accuracy in a certificate at Closing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
4.1. Organization. Buyer is a corporation duly organized, validly
subsisting and in good standing under the laws of the State of Virginia. Buyer
has full power and authority (including all licenses, franchises, permits and
other governmental authorizations which are legally required) to own or lease
its respective properties, and to engage in the business and activities now
conducted by Buyer.
4.2. Authority; No Violation. (a) Buyer has full corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby and thereby in accordance with the terms hereof
and thereof. The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly and validly approved by
the Board of Directors of Buyer. This Agreement has been duly and validly
executed and delivered by Buyer and constitutes a valid and binding obligation,
in accordance with its terms, except to the extent that enforceability may be
limited by (i) bankruptcy, insolvency, moratorium, liquidation, reorganization
or similar laws affecting creditors' rights generally, regardless of whether
such enforceability is considered in equity or at law, and (ii) general equity
principles.
(b) Neither the execution and delivery of this Agreement by, nor the
consummation by, Buyer of the transactions contemplated hereby in accordance
with the terms hereof and thereof will violate any provision of the Articles of
Incorporation or Bylaws of Buyer.
4.3. Class Stock. The Buyer has issued and outstanding only one class of
common voting stock such that Rector will receive the same class of common stock
of the Buyer as is currently publicly traded. Buyer has only one other
outstanding class of stock, which is Series A preferred, with 70 shares held by
existing directors.
4.4. Regulation Application and Approval. Buyer will use best efforts to
obtain OTS approval of Buyer's application as expeditiously as possible and any
other necessary permits, consents, approvals, and authorizations of third
parties and governmental bodies necessary to consummate the transactions
contemplated by this Agreement.
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ARTICLE V
COVENANTS OF THE PARTIES
5.1. Conduct of the Business of First Security. (a) From and after the
date of this Agreement to the Closing Date, First Security shall (i) conduct its
businesses in substantially the same manner as they have been conducted and in
accordance with prudent business and banking practices, (ii) maintain and keep
its properties in as good repair and condition as at present, except for
deterioration due to ordinary wear and tear and damage due to casualty, (iii)
maintain in full force and effect insurance comparable in amount and scope of
coverage to that currently maintained, (iv) substantially perform all its
obligations under material contracts, leases and documents relating to or
affecting its assets, properties, and business, except such obligations as it
may in good faith reasonably dispute, (v) use its best efforts to maintain and
preserve its business organization and present employees and relationships with
depositors and customers of First Security, as the case may be, and (vi)
materially comply with and perform all obligations and duties imposed upon it by
all federal, state and local laws, and all rules, regulations and orders imposed
by federal, state or local governmental authorities, except with respect to
(iii) and (iv) above, such as individually or in the aggregate will not have a
materially adverse effect, taken as a whole, on the business, operations, assets
or financial condition of Buyer or First Security, as the case may be.
(b) First Security will not without the prior written consent of
Buyer, (i) permit any amendment or change to be made in the Charter or Bylaws of
First Security; (ii) take, or allow First Security to take, any action described
or do any of the things listed in Section 3.13 hereof; (iii) enter into or
amend, or allow First Security to enter into or amend, any contract, agreement
or other instrument of any of the types listed in Section 3.10 hereof; (iv) make
any material change in its accounting methods or practices other than changes
required in accordance with generally accepted accounting principles; (v) take
any action that would result in any of its representations and warranties
contained in Article III of this Agreement not being true and correct in any
material respect at the Effective Date; (vi) increase the rate of interest being
paid on its deposit products prior to the Closing Date to an amount which is
greater than any rate being paid on a similar product by a direct competitor in
First Security's local market; (vii) waive any right of substantial value;
(viii) introduce any new products or services; (ix) make any change in policies;
(xi) change securities portfolio policies; (xii) make any loans to any
directors, officers, employees or affiliates of First Security; (xiii) make any
unsecured loan or any non-single family residential mortgage loan; (xiv) approve
any loan, the underwriting of which varies from the written credit policies of
First Security; (xv) propose or take any action with respect to the closing of
any branches; (xvi) except in the ordinary course, make, or permit
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First Security to make, any changes in the titles, salaries, bonuses or other
compensation of any employee, officer or director, or (xvii) agree to do any of
the foregoing. First Security further agrees that, between the date of this
Agreement and the Effective Date, it will consult and cooperate with Buyer
regarding (i) loan portfolio management, including management and work-out of
nonperforming assets, and credit review and approval procedures and (ii)
securities portfolio and funds management, including management of interest rate
risk.
5.3. Access to Properties and Records. (a) First Security has afforded
since August 4, 1995 and will afford the executive officers, employees and
authorized representatives (including legal counsel, accountants and
consultants) of the Buyer, reasonable access to their properties, books and
records including, but not limited to, all books of account (including the
general ledger), tax records, minute books of directors' and stockholders'
meetings, organizational documents, bylaws, material contracts and agreements,
filings with any regulatory authority, accountants' work papers, litigation
files, plans affecting employees, and any other business activities or prospects
in which such party and its designated representatives may have a reasonable
interest and shall make their directors, officers, employees, agents,
representatives and accountants available to confer with the other parties and
their designated representatives; provided, however, that such investigations
shall be conducted with reasonable prior notice in a manner so as not to
unreasonably interfere with the operations of the affected party. The officers
of First Security will furnish the Buyer and its designated representatives with
such additional financial and operating data and other information as to their
business and properties as the other shall, from time to time, reasonably
request.
(b) All information furnished by the parties hereto previously in
connection with transactions contemplated by this Agreement or pursuant hereto
shall be used solely for the purpose of evaluating the Acquisition contemplated
hereby and shall be treated as the sole property of the party delivering the
information until consummation of the acquisition contemplated hereby and, if
such acquisition shall not occur, each party and each party's advisors shall
return to the other party all documents or other materials containing,
reflecting or referring to such information, will not retain any copies of such
information, shall use its best efforts to keep confidential all such
information, and shall not directly or indirectly use such information for any
competitive or other commercial purposes. In the event that the Acquisition
contemplated hereby does not occur, all documents, notes and other writings
prepared by a party hereto or its advisors based on information furnished by the
other party shall be promptly destroyed. The obligation to keep such information
confidential shall continue for five years from the date the proposed
acquisition is abandoned but shall not apply to (i) any information
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which (A) the party receiving the information can establish by convincing
evidence was already in its possession prior to the disclosure thereof to it by
the other party; (B) was then generally known to the public; (C) became known to
the public through no fault of the party receiving such information; or (D) was
disclosed to the party receiving such information by a third party not bound by
an obligation of confidentiality; or (ii) disclosures pursuant to a legal
requirement or in accordance with an order of a court of competent jurisdiction.
5.4. Regulatory Applications. (a) The parties hereto will cooperate with
each other and use their best efforts to obtain OTS approval to Buyer's
application and any other necessary permits, consents, approvals and
authorizations of third parties and governmental bodies necessary to consummate
the transactions contemplated by this Agreement.
(b) First Security will promptly furnish Buyer with copies of all
material filings with governmental bodies and material written communications
received by it from any governmental body including the OTS.
5.5. Further Assistance. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its reasonable best efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
satisfy the conditions to Closing and to consummate and make effective the
transactions contemplated by this Agreement, including, without limitation,
using reasonable efforts to lift or rescind any injunction or restraining order
or other order adversely affecting the ability of the parties to consummate the
transactions contemplated by this Agreement and using its best efforts to
prevent the breach of any representation, warranty, covenant or agreement of
such party contained or referred to in this Agreement and to promptly remedy the
same. In case at any time after the Effective Date any further action is
necessary or desirable to carry out the purposes of this Agreement, the proper
officers and directors of each party to this Agreement shall take all such
necessary action. Nothing in this section shall be construed to require any
party to participate in any threatened or actual legal, administrative or other
proceedings (other than proceedings, actions or investigations to which it is a
party or subject or threatened to be made a party or subject) in connection with
the consummation of the transactions contemplated by this Agreement unless such
party shall consent in advance and in writing to such participation and the
other party agrees to reimburse and indemnify such party for and against any and
all costs and damages related thereto.
5.6. Public Announcements. The parties hereto shall cooperate with each
other in the development and distribution of all news
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releases and other public disclosures with respect to this Agreement or any of
the transactions contemplated hereby, except as may be otherwise required by law
or regulation or as to which the party releasing such information has used its
best efforts to discuss with the other party in advance.
5.7. Disclosure Supplements. From time to time prior to the Closing Date,
each party hereto will promptly supplement or amend (by written notice to the
other) its respective Schedules delivered pursuant hereto with respect to any
matter hereafter arising which, if existing, occurring or known at the date of
this Agreement, would have been required to be set forth or described in such
Schedule or which is necessary to correct any information in such Schedules
which has been rendered materially inaccurate thereby. For the purpose of
determining satisfaction of the conditions set forth in Article III, no
supplement or amendment to such Schedule shall correct or cure any warranty
which was untrue when made, but shall enable the disclosure of subsequent facts
or events to maintain the truthfulness of any warranty.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE BUYER
6.1. Representations True at Closing. The representations and warranties
of the Shareholder shall be true and correct on the Closing Date with the same
effect as if made at that time.
6.2. Regulatory Compliance and Approvals. The Acquisition shall not be
violative of any applicable laws or regulations. All approvals, consents and
authorizations of third parties required to carry out the Acquisition, including
OTS unconditional approval of Buyer's application as submitted, shall have been
obtained.
ARTICLE VII
TERMINATION
7.1. Termination.
This Agreement may be terminated by action of the Board of Directors of
Buyer or by Rector at any time prior to the Closing Date if any application for
regulatory or governmental approval or proposal by Buyer necessary to consummate
the transaction contemplated hereby shall have been denied or withdrawn at the
request or recommendation of the applicable regulatory agency or governmental
authority or by Buyer. This Agreement may be terminated if any condition
precedent to the obligations of the terminating party to close is not satisfied.
7.2. Effect of Termination. In the event of termination of this Agreement
pursuant to Section 7.1, this Agreement shall become void and have no effect,
without any liability on the part of any
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party or its directors, officers or shareholders. Nothing contained in this
Section 7.2 shall relieve any party hereto of any liability for a breach of this
Agreement.
ARTICLE VIII
MISCELLANEOUS
8.1. Noncompetition. From the Closing Date until the end of the fifth year
following the closing Date (the "Noncompete Period"), Rector, unless acting in
accordance with the Buyer's prior written consent, will not (directly or
indirectly), own, manage, operate, join, control, finance or participate in the
ownership, management, operation, control or financing of, or be connected as an
officer, director, employee, principal, agent, representative, consultant,
investor, owner, partner, manager, joint venturer or otherwise with, or permit
his name to be used by or in connection with, or lease, sell or permit to use
any real property or interest therein owned by Rector to any business or
enterprise engaged in providing banking services or products competitive to
those provided by First Security in the geographical area served by First
Security at any time within twelve (12) months preceding Closing; provided,
however, that the provisions of this Section shall not be deemed to prohibit the
ownership by Rector of not more than one percent of any class of securities of
any corporation having a class of securities registered pursuant to the
Securities Exchange Act of 1934. Rector acknowledges that (1) the provisions of
this Section are reasonable and necessary to protect the legitimate interests of
the buyer, (2) any violation of this Section will result in irreparable injury
to the Buyer and First Security and that damages at law would not be reasonable
or adequate compensation to the buyer and First Security shall be entitled to
have the provisions of this Section specifically enforced by preliminary and
permanent injunctive relief without the necessity of proving actual damages and
without posting bond or other security as well as to an equitable accounting of
all earnings, profits and other benefits arising out of any violation of this
Section. In the event that the provisions of this Section 8.1 should ever be
deemed to exceed the time, geographic, product or any other limitations
permitted by applicable law, then such provisions shall be deemed reformed to
the maximum permitted by applicable law. Notwithstanding anything to the
contrary, Rector may, on his own account or as a part of any entity in which
Rector owns at least twenty percent (20%), make mortgage loans not to exceed Two
Million Dollars ($2,000,000.00) in any one year.
8.2. Nonsolicitation. Rector agrees that, for the Noncompete Period, he
will not (directly or indirectly), without first offering the opportunity to
Buyer, call on, solicit, divert or take away from First Security the business of
any person, firm, corporation or other entity who or which at the Closing Date
was, or at any time during the three years preceding the Closing Date had been,
a customer of First Security or whose identity is known
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to Rector at the Closing Date as one whom First Security intends to solicit
within the succeeding year. Nothing contained in this Section 8.2 shall be
deemed to limit or impair, or be limited or impaired by, the provisions of
Section 8.1. Sections 8.1, 8.2 are 8.3 are each independent and severable.
8.3. Hiring of the Company's Employees. Without prior written consent of
Buyer, during the Noncompete Period, Rector will not (directly or indirectly)
hire or offer employment to any employee of First Security whose employment is
continued by First Security or the Buyer after the Closing Date unless First
Security or the Buyer first terminates the employment of such employee. Nothing
contained in this Section 8.3 shall affect or be deemed to affect in any manner
any other provision of this Agreement.
8.4. "No Shop" Provision. Shareholder agrees that during the period
commencing with the date on which this Agreement is executed until Closing,
Shareholder shall neither, directly or indirectly, through brokers, agents or
otherwise, sell, transfer or otherwise encumber nor offer to sell, transfer or
otherwise encumber nor solicit, discuss, accept or take any other action with
respect to any offer from any other potential purchaser to acquire any of the
business of First Security whether by asset purchases, stock purchase or
otherwise, except for the sale of products or services in the ordinary course of
business.
8.5. Confidentiality. All parties agree that they (and their agents,
advisors and employees) shall at all times keep all information regarding the
transaction contemplated hereby strictly confidential, except to the extent such
information is required to be disclosed or submitted for licensing approval to
the appropriate authorities, for the purpose of obtaining financing or to its
financial and legal advisors or Board of Directors or other shareholders of
First Security. Announcements regarding the transaction contemplated hereby
shall be made only with the prior written consent of Rector and Buyer.
8.6. Board of Directors. If this matter is consummated, Buyer will use its
best efforts to provide Rector with a seat on the Board of Directors of First
Security.
8.7. Brokers' and Finders' Fees. Rector and the Buyer each to the other
represents and warrants that all negotiations relative to this Agreement have
been carried on by them directly without the intervention of any person, firm,
corporation or other entity who or which may be entitled to any brokerage fee or
other commission in respect of the execution of this Agreement or the
consummation of the transactions contemplated hereby, and each of them shall
indemnify and hold the other or any affiliate of them harmless against any and
all claims, losses, liabilities or expenses which may be asserted against any of
them as a result of any dealings,
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<PAGE>
arrangements or agreements by the indemnifying party with any such personal
firm, corporation or other entity.
8.8. Schedules. All Schedules referred to herein are intended to be and
hereby are specifically made a part of this Agreement. Attached as Schedule 8.8
is a list of all Schedules herein.
8.9. Investment Intent of Rector. Rector is acquiring the stock of AILA
for his own account for investment purposes only and not with a view to, or for
resale in connection with, any distribution within the meaning of the United
States Securities Act of 1933, as amended, and it does not presently intend to
resell, distribute, assign, or otherwise dispose of all or any part of the stock
(except as provided in this Agreement). Rector is fully capable of bearing the
risk of this investment and is a sophisticated investor having invested in and
having current substantial holdings in numerous marketable and unmarketable
stocks, bonds and real estate. Rector represents that he is an Accredited
Investor within the meaning of Regulation D of the Securities Act of 1933.
Rector represents that he has received information and documents from AILA
equivalent to that which would be contained in a registration statement
including but not limited to annual reports, financial statements, and other
material matters which he has requested to review. Rector acknowledges that the
shares being purchased are restricted within the meaning of Rule 144 of the
Securities Act and that he understands the resale limitations of Rule 144
including the volume limitations and holding period. Rector further acknowledges
that certificates representing the Shares will contain a legend indicating that
said Shares are issued in reliance on exemptions from registration under
relevant securities laws, which legend will prohibit further transfer, sale or
conveyance of such securities until such securities may be transferred, sold or
conveyed without a violation of any state or federal securities law.
8.10. Survival of Representations and Warranties. The representations,
warranties, covenants, and indemnities of the parties hereto contained in this
Agreement shall survive the Closing Date.
8.11. Amendments. This Agreement may be amended only by a writing signed
by the parties hereto, at any time prior to the Closing Date with respect to any
of the terms contained herein.
8.12. Expenses. Whether or not the transactions provided for herein are
consummated, each party to this Agreement will pay its respective expenses
incurred in connection with the preparation and performance of its obligations
under this Agreement, including legal, filing fees, publication expense and
accounting fees and expenses.
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<PAGE>
8.13. Time of the Essence. Time is of the essence in this Agreement.
8.14. Attorneys' Fees. In the event of any action at law or equity between
the parties in relation to this Agreement, the nonprevailing party shall be
required to pay to the prevailing party all costs and expenses of such
litigation, including reasonable attorneys' fees.
8.15. Notices. Any notice given hereunder shall be in writing and shall be
delivered in person or mailed by first class mail, postage prepaid or sent by
facsimile, courier or personal delivery to the parties at the following
addresses unless by such notice a different address shall have been designated:
IF TO BUYER:
American Industrial Loan Association
3420 Holland Road, Suite 107
Virginia Beach, Virginia 23452
Attention: Allen D. Wykle
With a copy to:
Payne, Gates, Farthing & Radd, P.C.
999 Waterside Drive
15th Floor, Dominion Tower
Norfolk, Virginia 23510
Attention: Ronald M. Gates, Esq.
IF TO EDWIN RECTOR:
Mr. Edwin Rector
c/o First Security Federal Savings Bank
7620 Little River Turnpike, Suite 400
Annandale, Virginia 22003
With a copy to:
Maddox & Shelton
1335 Rockville Pike
Rockville, Maryland 20852
Attention: Michael J. Shelton, Esq.
All notices sent by mail as provided above shall be deemed delivered five (5)
days after deposit in the mail. All notices
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<PAGE>
sent by facsimile or courier as provided above shall be deemed delivered one day
after being sent. All other notice shall be deemed delivered when actually
received. Any party to this Agreement may change its address for the giving of
notice specified above by giving notice as herein provided.
8.16. Controlling Law. All questions concerning the validity, operation
and interpretation of this Agreement and the performance of the obligations
imposed upon the parties hereunder shall be governed by the laws of the State of
Virginia and, to the extent applicable, by the laws of the United States.
8.17. Headings. The headings and titles to the sections of this Agreement
are inserted for convenience only and shall not be deemed a part hereof of
affect the construction or interpretation of any provision hereof.
8.18. Modifications or Waiver. The parties may, at any time prior to the
Effective Date, (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto; (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto; or (iii) waive compliance with any of the
agreements or conditions contained herein. However, no termination,
cancellation, modification, amendment deletion, addition or other change in this
Agreement, or any provision hereof, or waiver of any right or remedy herein
provided, shall be effective for any purpose unless specifically set forth in a
writing signed by the party or parties to be bound thereby. The waiver of any
right or remedy in respect to any occurrence or event on one occasion shall not
be deemed a waiver of such right or remedy in respect to such occurrence or
event on any other occasion.
8.19. Severability. Any provision hereof prohibited by or unlawful or
unenforceable under any applicable law or any jurisdiction shall as to such
jurisdiction be ineffective, without affecting any other provision of this
Agreement, or shall be deemed to be severed or modified to conform with such
law, and the remaining provisions of this Agreement shall remain in force,
provided that the purpose of this Agreement can be effected. To the full extent,
however, that the provisions of such applicable law may be waived, they are
hereby waived, to the end that this Agreement be deemed to be a valid and
binding agreement enforceable in accordance with its terms.
8.20. Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns, but
shall not be assigned by any party without the prior written consent of the
other party.
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<PAGE>
8.21. Consolidation of Agreements. All understandings and agreements
heretofore made between the parties hereto are merged in this Agreement, which
includes the Schedules hereto and the other documents, agreements and
instruments executed and delivered pursuant to or in connection with this
Agreement. This Agreement shall be the sole expression of the agreement of the
parties respecting the Transaction.
8.22. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which shall
be deemed to constitute one and the same instrument.
8.23. Gender. Any pronoun used herein shall refer to any gender, either
masculine, feminine or neuter, as the context requires.
8.24. Rector Assistance After Closing. Rector agrees that he will remain
as an employee of First Security for a period of up to six (6) months after
Closing at his current salary within the sole discretion of Buyer. Rector agrees
that if Buyer obtains a new CEO prior to Closing that person may come to work at
First Security prior to Closing for training so long as Buyer pays the salary
and benefits; however, the new CEO will be under the direction of Rector until
closing.
8.25. Section 338 IRC ELECTION. The parties agree that Buyer may under
Section 338 of the Internal Revenue Code treat this Acquisition as an asset
purchase.
IN WITNESS WHEREOF, the parties hereto set forth below their signatures
and seals:
/s/ Edwin Rector (SEAL)
-----------------------------
Edwin Rector
AMERICAN INDUSTRIAL LOAN ASSOCIATION
By /s/ Allen Wykle (SEAL)
--------------------------
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Appendix K
STOCK APPRECIATION RIGHTS AGREEMENT
This Agreement made and entered into on the 26th day of April, 1996, by
and between AMERICAN INDUSTRIAL LOAN ASSOCIATION (the "Corporation"), a
Virginia corporation, and JEAN SCHWINDT ("Schwindt").
RECITALS
1. Schwindt, who is a Director of the Corporation, has provided consulting
services in addition to her services as Director, which consulting services have
resulted in substantial benefit to the Corporation.
2. The Corporation desires to provide to Schwindt Stock Appreciation
Rights for the exceptional services rendered by Schwindt.
I
GRANT OF STOCK APPRECIATION RIGHTS
The Corporation grants to Schwindt, on the terms and conditions stated
below, Stock Appreciation Rights covering two thousand (2,000) shares of common
stock of the Corporation (subject to adjustment as provided in Article III of
this Agreement). Except as otherwise provided in Article III of this Agreement,
a Stock Appreciation Right is a right to receive One Hundred percent (100%) of
the excess of the fair market value of a share of common stock on the date on
which an appreciation right is exercised over the fair market value on the date
of this Agreement. That amount is referred to herein as the "Spread." The fair
market value as of the date of this Agreement is $21.00 per share.
II
FAIR MARKET VALUE
For the purpose of this Agreement, the fair market value of a share of
common stock on any date subsequent to the date of this Agreement, shall be the
mean of the closing bid and asked price of the common stock in the
over-the-counter market on such subsequent date, as reported by NASDAQ, or the
Bulletin Board, or if no report is available on that date, the next preceding
date for which a report is available. If the common stock is subsequently listed
on a stock exchange or exchanges, fair market value thereafter shall be the
highest closing price on any exchange for that date, or, if that date is not a
trading date, the trading date next preceding that date.
III
SHARES AFFECTED; ADJUSTMENTS
The number of shares of common stock covered by the Stock Appreciation
Rights awarded by this Agreement shall be proportionately adjusted for any
increase or decrease in the number
<PAGE>
of issued and outstanding shares of common stock which causes the number of
shares of common stock covered by this Agreement to be so adjusted.
If this Corporation shall be the surviving corporation in any merger or
consolidation, the Stock Appreciation Rights granted under this Agreement (to
the extent that they are still outstanding) shall pertain to and apply to the
securities to which a holder of the same number of shares of common stock would
have been entitled. A dissolution or liquidation of this Corporation or a merger
or consolidation in which this Corporation is not the surviving corporation,
shall cause the stock Appreciation Rights granted under this Agreement to
terminate, unless the agreement of merger or consolidation shall otherwise
provide, provided that Schwindt shall in that event have the right immediately
prior to a dissolution, liquidation, merger, or consolidation in which this
Corporation is not the surviving corporation, to exercise the Stock Appreciation
Rights granted under this Agreement without regard to any limitations on
exercisability.
The grant of Stock Appreciation Rights under this Agreement shall not
affect in any way the right or power of this Corporation to make adjustments,
reclassifications, reorganizations, or changes of its capital or business
structure or to merge, consolidate, or dissolve, or to liquidate, sell, or
transfer all or any part of its business or assets.
IV
EXERCISE OF RIGHTS GRANTED
Subject to the terms of this Agreement a Stock Appreciation Right may be
exercised by written notice to the Corporation at any time within a period of
three (3) years from the date of this Agreement. Partial exercises of the Stock
Appreciation Rights granted under this Agreement shall be permitted subject to
the right of the Board of Directors to reasonably limit the number of partial
exercises and the minimum amount of any partial exercises.
V
PAYMENT ON EXERCISE OF RIGHTS
On the exercise of a Stock Appreciation Right, this Corporation shall
deliver an amount equivalent to the spread in cash.
VI
EXERCISE OF RIGHTS; DESCENT ON DEATH
The Stock Appreciation Rights granted under this Agreement shall be
exercisable during Schwindt's lifetime only by Schwindt. The rights shall be
nontransferable by Schwindt otherwise than by will or the laws of descent and
distribution.
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<PAGE>
VII
METHOD OF EXERCISING RIGHTS
The Stock Appreciation Rights under this Agreement may be exercised by the
person then entitled to do so to the extent that the right to exercise has then
accrued by giving written notice of exercise to the Corporation.
VIII
RIGHTS AND PRIVILEGES AS STOCKHOLDER
Neither Schwindt nor any person claiming under or through Schwindt shall
be or have any of the rights or privileges of a shareholder of the corporation
in respect of any of the Stock Appreciation Rights granted under this Agreement.
IX
NOTICE
Any notice to be given to the Corporation under the terms of this
Agreement shall be addressed to the Corporation, in care of its President, at
American Industrial Loan Association, 3420 Holland Road, Suite 107, Virginia
Beach, Virginia 23452, or at such other address as the Corporation may designate
in writing. Any notice to be given to Schwindt shall be addressed to Schwindt at
the address set forth beneath her signature below, or at any other address as
Schwindt may designate in writing. Notice shall be deemed to have been duly
given if and when enclosed in a properly sealed envelope, addressed as stated
above, registered and deposited, postage and registry fee prepaid, in a post
office or branch post office regularly maintained by the United States
Government.
X
TRANSFERABILITY OF STOCK APPRECIATION RIGHTS
Except as otherwise provided in this Agreement, the rights and privileges
conferred by this Agreement shall not be transferred, assigned, pledged, or
hypothecated in any way (whether by operation of law or otherwise) and shall not
be subject to sale under execution, attachment, or similar process. Any attempt
to transfer, assign, pledge, or otherwise dispose of the rights and privileges,
contrary to the provisions of this Agreement, or on attempted sale under any
execution, attachment, or similar process on the rights and privileges, the
rights and privileges shall immediately become null and void.
XI
TERMINATION OF STOCK APPRECIATION RIGHTS
Each Stock Appreciation Right and all rights and obligations thereunder
shall terminate and may no longer be exercised after the 24th day of April,
1999.
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<PAGE>
XII
BINDING EFFECT OF AGREEMENT
Subject to the limitations on transferability stated above, this Agreement
shall be binding on and inure to the benefit of the heirs, legal
representatives, successors, and assignors of the parties.
XIII
PAYMENT OF TAXES ON EXERCISE OF RIGHTS
Whenever shares of common stock are to be issued in satisfaction or
payment of the rights conferred by this Agreement, the Corporation shall have
the right to require the grantee to remit the Corporation an amount sufficient
to satisfy federal, state, and local withholding tax requirements prior to the
delivery of any certificate or certificates for the shares. Whenever payments
are to be made in cash, the payments shall be net of an amount sufficient to
satisfy federal, state, and local withholding tax requirements.
XIV
LIMITATION ON OBLIGATIONS OF THE COMPANY
All obligations of the Corporation arising under or as a result of this
Plan or options granted hereunder shall constitute the general unsecured
obligations of the Corporation, any member thereof, the committee, any member
thereof, any officer of the Corporation, or any other person or any Subsidiary,
and none of the foregoing, except the Corporation, shall be liable for any debt,
obligation, cost or expense hereunder.
XV
SEVERABILITY
If any provision of this Agreement is applied to any person or to any
circumstance shall be adjudged by a court of competent jurisdiction to be void,
invalid, or unenforceable, the same shall in no way affect any other provision
hereof, the application of any such provision in any other circumstances, or the
validity or enforceability hereof.
XVI
CONSTRUCTION
Where the context or construction requires, all words applied in the
plural herein shall be deemed to have been used in the singular and vice versa,
and the masculine gender shall include the feminine and the neuter and vice
versa.
4
<PAGE>
XVII
HEADINGS
The headings of the several paragraphs herein are inserted solely for
convenience of reference and are not intended to form a part of and are not
intended to govern, limit or aid in the construction of any term or provision
hereof.
XVIII
SUCCESSORS
This Plan shall be binding upon the respective successors, assigns, heirs,
executors, administrators, guardians and personal representatives of the Company
and Optionee.
XX
GOVERNING LAW
The provisions of this Plan shall be construed in accordance with the Laws
of the State of Virginia.
IN WITNESS WHEREOF, the parties have attached their signatures as follows:
AMERICAN INDUSTRIAL LOAN ASSOCIATION
3420 Holland Road, Suite 107
Virginia Beach, Virginia 23452
By: /s/ Allen D. Wykle, President
-----------------------------
/s/ Jean Schwindt
---------------------------------
Jean Schwindt
Appendix L
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT is dated as of January 23, 1998, (this
"Agreement") by and between APPROVED RESIDENTIAL MORTGAGE, INC., a Virginia
Corporation having its corporate address in Virginia (the "Buyer"), and FUNDING
CENTER OF GEORGIA, INC., a Georgia Corporation, having its corporate address in
Georgia (the "Seller"), and PRESTON TUNIS and DAVID TALESNICK, the sole owners
of Seller (the "Shareholders").
INTRODUCTION
------------
The Seller is engaged in the business of brokering mortgage loans (the
"Business"). In the past the Seller has not been involved in funding loans or
purchasing or selling loans.
The Seller desires to sell to the Buyer, and the Buyer desires to purchase
from the Seller, substantially all of the assets used by or usable in the
operations of the Business on a going concern basis, upon the terms and subject
to the conditions set forth in this Agreement.
To accomplish such purpose and in consideration for the agreements and
understandings set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
ARTICLE I
DEFINITIONS
-----------
For convenience and brevity, certain terms used in various parts of this
Agreement are listed in alphabetical order and defined or referred to below
(such terms to be equally applicable to both singular and plural forms of the
terms defined).
"ACQUISITION" means the acquisition of Seller's Purchased Assets by
the Buyer, including all related transactions provided for in or contemplated by
this Agreement or any Schedule hereto.
"AFFILIATE" of a Person shall mean a person or entity controlling,
controlled by or under common control with such Person.
"AGREEMENT" shall mean this Asset Purchase Agreement, as the same
may be hereafter amended, including all schedules and exhibits hereto.
"BUSINESS" means the existing business of brokering mortgage loans
including operations, facilities, assets, financial condition, results of
operations, finances, markets, products, competitive position, customers and
customer relations and personnel of the Seller.
"BUYER" means Approved Residential Mortgage, Inc.
<PAGE>
"CLOSING" shall mean the consummation of the transactions
contemplated by this Agreement.
"CLOSING DATE" shall have the meaning set forth in Section 8.1
hereof.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"ENVIRONMENTAL LAWS" shall mean any and all federal, state and local
statutes, codes, rules, regulations, ordinances and orders of any governmental
authority relating to the prevention, remediation or regulation of contamination
of the air, water or soil, or regulation or restrictions of the contaminants,
including those relating to Hazardous Substances.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"EMPLOYEE BENEFIT PLAN" means "employee benefit plans" as defined in
section 3(3) of ERISA and any other plan, policy, program, practice or
arrangement providing compensation or other benefits to any current or former
officer or employee of the Seller or any subsidiary, or any affiliate or under
which the Seller or any affiliate has any obligation or liability, whether
actual or contingent, including, without limitations all incentive, bonus,
deferred compensation, vacation, holiday, medical, disability, share purchase or
other similar plans, policies, programs, practices or arrangements.
"GAAP" shall mean generally accepted accounting principles in effect
in the United States of America, as applied in a manner consistent with the
application by Seller in the preparation of its historical financial statements.
"HAZARDOUS SUBSTANCES" shall mean any substance, material, waste,
gas or particular matter which has been determined to be a health danger, soil,
water or air contaminate or which is regulated by any state or local
governmental authority or the United States Government, including, but not
limited to, any material or substance which is (i) defined as a "hazardous
waste", "hazardous material", "hazardous substance", "extremely hazardous
waste", or "restricted hazardous waste", under any provision of Federal, state
or local law or rule or regulation thereunder; (ii) composed of petroleum or has
petroleum base (except where used or present in strict compliance with the
Environmental Laws and not released into the environment); (iii) composed of
friable asbestos or materials containing friable asbestos; (iv) polychlorinated
biphenyls; (v) radioactive material; (vi) designated as a toxic pollutant
pursuant to federal law including Section 311 of the Clean Water Act, 33 U.S.C.
[Section] 1251, et seq., (33 U.S.C. [Section] 1317); (vii) defined as a
"hazardous waste" pursuant to Section 1003 of the Resource Conservation and
Recovery Act, 42 U.S.C. [Section] 6901, et seq., (42 U.S.C. [Section] 6903); or
(viii) defined as a "hazardous substance" pursuant to section 101 of CERCLA.
"LIEN" shall mean any lien, mortgage, pledge, conditional sale
agreement, security interest, restriction, claim, option, encumbrance or right
of a third party of any kind or nature.
2
<PAGE>
"MATERIAL AGREEMENT" shall mean any written or oral contract,
agreement, undertaking or commitment relating to the Business, the Purchased
Assets, or the Assumed Liabilities, with or to any Person whatsoever, other than
any such agreement which (a) may be terminated on not more than fifteen (15)
days notice without fixed or contingent liability or obligation (present, past
or future) to the Seller or the Business.
"PERSON" shall mean any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, federal, foreign, state, local or
municipal governmental unit, instrumentality or agency or any other entity.
"PURCHASE PRICE" shall have the meaning given set forth in Section
2.4 hereof.
"SELLER" shall mean Funding Center of Georgia, Inc., a Georgia
corporation.
"SHAREHOLDER" shall mean Preston Tunis and David Talesnick.
ARTICLE II
PURCHASE AND SALE OF ASSETS
---------------------------
2.1 Purchase and Sale of Assets.
(a) Purchased Assets. Subject to the terms and conditions of this
Agreement, on the Closing Date, Buyer shall purchase, and Seller shall transfer
and deliver to Buyer, free and clear of all Liens (except for liens disclosed on
the Creditor and Liens Schedule) by appropriate deeds, bills of sale,
assignments and other instruments satisfactory to Buyer and its counsel, all
assets, properties, rights, titles and interests of every kind and nature owned
or leased by Seller (including indirect and other forms of beneficial ownership)
as of the Closing Date, which are used in or associated with the Business,
whether tangible, intangible, real or personal and wherever located and by
whomever possessed (the "Purchased Assets"), including, without limitation, all
of the following assets but excluding all Excluded Assets:
(1) Cash and cash equivalents net of outstanding checks;
(2) Accounts receivable;
(3) Prepayments and prepaid expenses;
(4) Interests in real estate (including, without limitation,
land, buildings, fixtures, fittings and improvements thereon, and easements,
licenses, rights of way, permits, and the other appurtenances thereto, including
appurtenant rights in and to public streets, whether or not vacated), whether
owned, leased, subleased or otherwise;
3
<PAGE>
(5) Raw materials, inventories and supplies;
(6) Machinery, equipment, vehicles, tools, molds, furniture,
spare parts and supplies, computers, software, telephone and all equipment and
supplies relating to the foregoing, and all other tangible personal property;
(7) Sale and purchase agreements and orders, and all rights
existing under supply and distribution agreements and arrangements, and other
contract rights;
(8) Distribution systems and networks (including, without
limitations all rights to employ sales representatives) and all rights to hire
employees and to any noncompetition agreement signed by Seller's employees;
(9) All lists and records pertaining to customer accounts
(whether past or current), suppliers, distributors, personnel and agents and all
other books, ledgers, files, documents, correspondence and business records;
(10) All claims, deposits, prepayments, warranties,
guarantees, refunds, causes of action, rights of recovery, rights of set-off and
rights of recoupment of every kind and nature, other than those relating
exclusively to Excluded Assets or Excluded Liabilities;
(11) Patents, patent rights, applications, disclosures and
inventions (whether or not patentable and whether or not reduced to practice);
all registered and unregistered copyrights; all registrations, applications and
renewals for any of the foregoing; all trademarks/servicemarks and tradenames,
including the name "Funding Center of Georgia" and all goodwill associated
therewith; all trade secrets, confidential information, ideas, formulas,
compositions, know-how, manufacturing and production processes and techniques,
research and development information, drawings, specifications, designs, plans,
improvements, proposals, technical and computer data, financial, business and
marketing plans, and customer and supplier lists and related information; all
license agreements and sublicense agreements to and from third parties relating
to any of the foregoing; all other proprietary rights (including, without
limitation, all computer software and documentation); and all copies and
tangible embodiments of the foregoing (in whatever form or medium) (all of the
foregoing other than items constituting Excluded Assets are referred to herein
as the "Proprietary Rights"); all income, royalties, damages and payments due at
Closing or thereafter with respect to the Proprietary Rights and all other
rights thereunder including, without limitation, damages and payments for past,
present or future infringements or misappropriations thereof, the right to sue
and recover for past, present or future infringements or misappropriations
thereof; all rights to use all of the foregoing forever and all other rights in,
to, and under the foregoing in all countries;
(12) Permits, licenses, franchises, orders, registrations,
certificates, variances, approvals and similar rights obtained from governments
and governmental agencies,
4
<PAGE>
including, without limitation, those listed on the attached "Licenses Schedule"
(Schedule 3.25) and all data and records pertaining thereto;
(13) Insurance, warranty and condemnation proceeds received
after the Closing Date with respect to damage, nonconformance of or loss to the
Purchased Assets;
(14) Rights to receive and relating to the Business or the
Purchased Assets including, without limitation, Accounts Receivable receivable
payments;
(15) Books, records, ledgers, files, documents,
correspondence, lists, studies and reports and other printed or written
materials; and
(16) All of the goodwill associated with the Business,
including the name "Funding Center of Georgia" and logo, and to the extent that
it can be used by the Buyer, the exclusive right to use telephone numbers, and
all lists of present vendors and addresses and the past procurement history on
each, records of Seller's prices and customers, sales literature, catalogs or
promotional material, and all other records, contracts, invoices, books, files
and various documents, including any and all rights, licenses, permits,
consents, authorizations and approvals that are transferable, customer files
including lists and contact data, past order records and sales history, payable
records, receivable records; vendor records including payable records, receiving
records, vendor list and contact data, purchase history if available and aged
trial balance; employee records including payroll, payroll deduction and
employee history
(b) Excluded Assets. Notwithstanding the foregoing, those assets
specified on Schedule 2.1(b) are expressly excluded from the purchase and sale
contemplated hereby (the "Excluded Assets") and, as such, are not included in
the Purchased Assets.
2.2 Limited Assumption of Liabilities.
(a) Limited Assumed Liabilities. Buyer will not assume or in any
way be responsible for any liabilities or obligations of Seller or any other
liabilities or obligations whatsoever related to the operation of the Seller's
Business or condition of the Purchased Assets at any time, whether or not
disclosed, except those liabilities as specifically provided in Schedule 2.2(a)
("Assumed Liabilities").
(b) Excluded Liabilities. Except as and only to the extent expressly
set forth in Schedule 2.2(a), the Assumed Liabilities Schedule, Buyer shall not
assume or be liable for any liabilities or obligations of Seller, including,
without limitation, the following:
(1) Any liability, obligation or duty which results from any
contract, promise, representation or warranty of Seller or Shareholders, any
wrong (whether intentional or negligent, and whether of commission or omission)
by the Seller or Shareholders, occurring at any
5
<PAGE>
time, and any liability or obligation imposed by any federal, state or local
law, ordinance, rule or regulation (including tax laws, rules and regulations)
relating to the Seller, its business activities and operations, or relating to
the Shareholders prior to or on the date of Closing;
(2) Any liability or obligation of Seller to or for the
benefit of any of its employees or any collective bargaining agent representing
any such employees;
(3) Any liabilities or obligations arising under or relating
to any Employee Benefit Plan (including, but not limited to, any claim of any
governmental agency, any trustee, any fiduciary, any plan administrator, any
person dealing with an Plan, any employee or any beneficiary);
(4) Any accrued vacation pay, sick pay, severance pay or other
form of compensation or bonus of the Seller's employees as of the Closing Date;
(5) Fees, costs and expenses incurred or to be incurred by the
Seller for legal, accounting or other services in connection with the
transactions contemplated by this Agreement;
(6) Any and all sales or transfer taxes incurred in connection
with the consummation of the transactions contemplated by this Agreement; and
(7) Any liability under any applicable Bulk Sales law
2.3 Employees.
(a) Buyer agrees to employ "at will" (except to the extent Buyer
enters a written employment contract to the contrary with that employee) current
employees of Seller as listed on Schedule 3.15(b) following the Closing.
(b) Buyer shall grant all employees of Seller hired by Buyer within
30 days after the Closing Date credit for service with Seller prior to the
Closing Date for purposes of documenting such employees' eligibility and vesting
under Buyer's employee benefits plans.
(c) Buyer will provide group health coverage to the Employees hired,
will give credit for time with Seller, and will cover preexisting conditions to
the extent they are covered under Seller's policy.
2.4 Purchase Price. Subject to the conditions contained in this Agreement,
and subject to the adjustments hereafter set forth, the consideration for the
Purchased Assets (the "Purchase Price") shall be the sum of THREE MILLION THREE
HUNDRED THOUSAND DOLLARS ($3,300,000). The price will be paid as follows:
(a) Six Hundred Thousand ($600,000) Dollars in cash at Closing;
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(b) Three Hundred Thousand ($300,000) Dollars in equal semi-monthly
installments during each of the 36 months following the Closing Date;
(c) Subject to subsections (d) and (e) below, the balance of Two
Million Four Hundred Thousand ($2,400,000) Dollars will be deferred with three
(3) principal payments of Eight Hundred Thousand ($800,000) Dollars each on
January 1, 1999, January 1, 2000, and January 1, 2001, with interest at six
percent (6%) per annum, payable on the principal payment dates. Buyer shall have
the right and option within its sole discretion to pay fifty percent (50%) of
the deferred purchase price in common stock of Approved Financial Corp.,
("Approved Common Stock"), with the number of shares being determined by
dividing the applicable portion of the deferred price by the "Average Price."
The "Average Price" of one share of Approved Common Stock shall mean the average
closing price of Approved Common Stock on the NASD electronic bulletin board
market (or the market on which the Approved Common Stock is then traded) for the
ten (10) trading days preceding the deferred purchase price payment date;
(d) If the annual pre-tax net profits for the Funding Center of
Georgia offices is less than Two Million Six Hundred Thousand ($2,600,000)
Dollars in 1998, or less than Two Million Nine Hundred Thousand ($2,900,000.00)
Dollars in 1999 or 2000, then the annual deferred payment of principal of Eight
Hundred Thousand ($800,000) Dollars for that year will be reduced by the same
percentage. For example, if the pre-tax net profits are five percent (5%) less
than Two Million Six Hundred Thousand ($2,600,000.00) Dollars in 1998, then the
Eight Hundred Thousand ($800,000) Dollars principal will be reduced by five
percent (5%) (and the interest will be calculated on the reduced principal).
(e) Purchase Price Adjustment. If, during the period prior to the
payment in full of the deferred purchase price in subsection 2.4(c), either
Shareholder's employment with Buyer should be terminated without cause, the
reduction formula in Section 2.4(d) shall not be applicable to that Shareholder
as to any remaining unpaid balance of deferred purchase price.
If, prior to the payment in full of the deferred purchase
price in subsections 2.4(b) and (c), either Shareholder should terminate
employment with Buyer or be terminated for cause as defined in their respective
Employment Agreements other than for failure to meet the Profit Target, then the
remaining unpaid portion of the deferred purchase price shall be adjusted as
follows:
(i) any portion already paid at the time of termination will
not be affected;
(ii) no further payments will be made under subsection 2.4(b);
(iii) the annual payment that would be made for the calendar
year in which the termination of employment occurred will be prorated by
multiplying the next annual payment that would have become due as determined in
Section 2.4(c) and 2.4(d) by a fraction, the numerator of which shall be the
number of days during that calendar year that Shareholder was employed and
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the denominator of which is 365, and the product shall be the amount of adjusted
deferred purchase price paid for that calendar year; and
(iv) the amount paid pursuant to subsections (i) through (iii)
above shall be in lieu of any further obligation of Buyer to pay any purchase
price under subsections 2.4(a), (b) and (c).
(f) In determining net profit for December at the end of each
applicable year, Shareholders will be given credit for loans that have closed
but not been sold by applying the average percentage of loans sold for the prior
eleven (11) months and the average premium on sales for the prior eleven (11)
months. When the financials are subsequently audited, adjustments will be made
with appropriate additional credits or debits.
(g) For purposes of determining net profit (no charge will be made
for acquisition amortization or depreciation), the percentage of total G&A
expense allocated to the Funding Center of Georgia offices shall be that
percentage arrived at by dividing the number of loans closed in the relevant
year in the Funding Center of Georgia offices by the total number of loans
closed by Approved Financial Corp., and its subsidiaries, including the Funding
Center of Georgia offices. For example, if one thousand (1,000) loans were
closed throughout Approved Financial Corp., and all its subsidiaries, and one
hundred (100) loans are closed by the Funding Center of Georgia offices, then
ten percent (10%) of the total G&A of Approved Financial Corp., and all its
subsidiaries shall be allocated to the Funding Center of Georgia offices in
determining net profit;
(h) For purposes of determining net profit, Buyer represents that
(i) it will use its best efforts (i.e. the same efforts it uses to sell loans
generated by Buyer) to sell the loans generated by the Shareholders and (ii)
that in 1997 it earned an average of 6.33% on the loans sold, (future gain on
loan sales may be more or less depending on interest rate changes and other
factors outside Buyer's control); and (iii) the G&A expense per loan in 1997 and
1996 were $1,277.00 and $1,264.00, respectively.
(i) Buyer will provide Shareholders with monthly G&A expense reports
and on the deferred purchase price payment dates with a schedule showing in
reasonable detail how the amount of the deferred purchase price was calculated.
2.5 Prorations. The expenses and obligations set forth below shall be
prorated as of the specified Closing time on the Closing Date, with Seller being
responsible for that portion arising prior thereto. The following expenses and
obligations shall be prorated: Obligations of Seller for Bell South listed on
Contracts Schedule and leases listed on the Leases Schedule; utilities,
telephone, dumpster rental, pagers and real estate and personal property taxes
relating to the Purchased Assets.
2.6 Nonassignable Contracts. Seller shall obtain all consents and
approvals necessary to assign to Buyer any asset included in the Purchased
Assets. To the extent that the assignment is
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not permitted or is not permitted without the consent of any other person, this
Agreement shall not constitute an assignment of any such asset if assignment
without consent would constitute a breach of, or cause a loss of contractual or
other benefits of such asset, and Buyer shall assume no obligations or
liabilities thereunder. Seller shall advise Buyer promptly in writing with
respect to any Contact under which it knows or has reason to believe it shall
not receive the required consent. Seller shall take all actions requested by
Buyer and cooperate with Buyer to obtain any new Contract (if necessary) on
substantially similar terms and conditions as those under the existing
Contracts. If any required consent is not previously obtained and the Closing is
consummated, Seller shall continue to use its best efforts to obtain such
consents and shall cooperate with Buyer in any arrangement designed to provide
Buyer with the rights and benefits (subject to the obligations) under the
Contracts. Seller will notify Buyer in writing prior to Closing if Seller has
not obtained written consent on any contract or lease or other agreement that
requires consent to transfer.
2.7 Allocation of Purchase Price. It is specifically agreed by the parties
hereto that the purchase price payable for the assets and properties sold shall
be allocated to and among the assets and properties of the Seller sold under
this Agreement, as set forth in IRS Form 8594 attached hereto as Schedule 2.7.
Seller will not take any position contrary thereto in any federal or state tax
returns. Both Seller and Buyer will file IRS Form 8594 as specified and as
completed in Schedule 2.7.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER AND SHAREHOLDERS
---------------------------------------------------------
Seller and Shareholders jointly and severally represent and warrant to
Buyer as of the date of this Agreement and as of Closing as follows:
3.1. Organization.
(a) The Seller is duly organized, validly existing and in good
standing under the laws of the State of Georgia. The Seller has full power and
authority (including all licenses, franchises, permits and other governmental
authorizations which are legally required) to own or lease its properties, and
to engage in the Business and activities now conducted.
(b) Schedule 3.1(b) sets forth true and complete copies of the
Articles of Incorporation and Bylaws of the Seller as amended to date and
expressly designates any amendments that have been proposed and are pending.
(c) The Seller (i) does not have any subsidiaries; and (ii) is not a
general partner or owner in any joint venture, general partnership, limited
partnership, trust or other non-corporate entity, except as expressly set forth
in Schedule 3.1(c).
3.2. Capitalization. There is only one class of authorized stock which is
common. As of the date of this Agreement and Closing, all shares of the Seller
stock (which is common) were issued and outstanding to Shareholders. No other
Person, including members of Shareholders'
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families, own any stock of the Seller or have any other right or valid claim to
ownership of any part of the Seller.
3.3. Authority; No Violation.
(a) Seller has full corporate power and authority, and Shareholders
have fall power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby in accordance with the terms
hereof. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have to the extent required been duly and
validly approved by the Board of Directors and all shareholders of the Seller in
accordance with the Articles of Incorporation and Bylaws of the Seller and
applicable laws and regulations. Except for such approvals, no other corporate
proceedings on the part of the Seller are necessary to consummate the
transactions so contemplated. This Agreement has been duly and validly executed
and delivered by Seller and Shareholders and constitutes a valid and binding
obligation of Seller and Shareholders, enforceable against them in accordance
with its terms, except to the extent that enforceability may be limited by (i)
bankruptcy, insolvency, moratorium, liquidation, reorganization or similar laws
affecting creditors' rights generally, regardless of whether such enforceability
is considered in equity or at law; and (ii) general equity principles.
(b) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby in accordance with the
terms hereof, nor compliance by the Seller with any of the terms or provisions
hereof, will (i) violate any provision of the Seller's Articles of Incorporation
or Bylaws; (ii) violate any statute, code, ordinance, rule, regulation,
judgment, order, writ, decree or injunction applicable to the Seller or any of
its properties or assets; or (iii) except as set forth in Schedule 3.3, violate
or conflict with, result in a breach of any provisions of, constitute a default
(or any event which, with notice or lapse of time, or both, would constitute a
default) under, result in the termination of, accelerate the performance
required by, or result in the creation of any lien, security interest, charge or
other encumbrance upon any of the respective properties or assets of the Seller
under, any of the terms, conditions or provisions of any material note, bond,
mortgage, contract, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which the Seller is a party, or by which it or any
of its respective material properties or assets may be bound or affected. No
consents or approvals of or filings or registrations with or notices to any
third party or any public body or authority are necessary on behalf of the
Seller in connection with (a) the execution and delivery of this Agreement and
(b) the consummation of the other transactions contemplated hereby.
3.4. Financial Statements.
(a) Schedule 3.4(a) sets forth true and complete copies of the
Seller's complete financial statements (the "Financial Statements"). The
Seller's Financial Statements have been prepared in accordance with GAAP and
fairly present the consolidated financial condition of the Seller as of the
dates set forth therein, and the related consolidated statements of income and
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stockholders' equity fairly present the results of the operations and
stockholders' equity of the Seller for the respective periods set forth therein.
(b) The books and records of the Seller are being maintained in
material compliance with all applicable legal, regulatory and accounting
requirements, and reflect only actual transactions (subject to accrual items in
compliance with GAAP).
(c) Except as and to the extent reflected, disclosed or reserved
against in the Seller's most recent Financial Statement dated as of November 30,
1997 attached hereto as part of Schedule 3.4(a), the Seller did not have any
liabilities, whether absolute, accrued, contingent or otherwise material to the
Business, operations, assets or financial condition of the Seller, taken as a
whole. Since the date of the most recent financial statement attached as part of
Schedule 3.4(a), the Seller has not incurred any liabilities except in the
ordinary course of business and there have not been any material adverse
changes.
3.5. Assets and Liens.
(a) Assets. Schedule 3.5(a) and Schedule 3.6(a) sets forth a true,
correct and complete list of all interests of Seller in all tangible personal
property and in real property (including, but not limited to, machinery,
equipment, office equipment, vehicles, inventory and supplies) owned or leased
by the Seller and used in connection with the Business, indicating whether such
property is owned or leased and the location of such property. As of the Closing
Date, there shall have been no material changes to such listing except for sales
or purchases of inventory in the ordinary course of business.
(b) Liens on Purchased Assets. The Seller has good and marketable
title to all the Purchased Assets, free and clear of any and all Liens except
those Liens, security interests or encumbrances of any kind disclosed in
Schedule 3.5(b) hereto.
3.6 Leases and Subleases.
(a) Leases. All leases are valid and in full force and effect; no
default or event of default, or event which, with the giving of notice or
passage of time or both would constitute a default or event of default, under
any of such leases has occurred and is continuing; and none of such leases is
terminable as a result of the transactions contemplated by this Agreement.
Attached as Schedule 3.6(a) is a complete list of all real property and personal
property leases to which the Seller is a party, along with true, correct and
complete copies of all such leases as of the date hereof and any amendments as
of Closing.
(b) Subleases. Schedule 3.6(b) lists all subleases, if any, under
which the Seller as a lessee subleases to another lessee. Copies of all
subleases are attached to Schedule 3.6 and there are no breaches or defaults
under any of the subleases. All subleases will be current at Closing.
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3.7. Environmental Matters. To the knowledge of the Seller, except that
which not would result in a material liability or as set forth on Schedule 3.7
attached hereto:
(a) Seller has duly complied with, and its Business, operations,
assets, equipment, property, leaseholds or other facilities are in compliance
with, the provisions of all Environmental Laws. Seller has been issued and will
maintain all required federal, state and local permits, licenses, certificates
and approvals relating to (i) air emissions; (ii) discharges to surface water or
groundwater or public sewer systems; (iii) noise emissions; (iv) solid or liquid
waste disposal; (v) the use, generation, storage, transportation or disposal of
Hazardous Substance; or (vi) other environmental, health or safety matters.
(b) Seller has not received notice of, and does not know of, or
suspect facts which might constitute any violations of any Environmental Law,
with respect to its businesses, operations, assets, equipment, property,
leaseholds, or other facilities.
(c) Except in accordance with a valid governmental permit, license,
certificate or approval, there has been no emission, spill, release or discharge
into or upon (i) the air; (ii) soils, or any improvements located thereon; (iii)
surface water or groundwater; or (iv) the sewer, septic system or waste
treatment, storage or disposal system servicing the premises, of any Hazardous
Substances at or from the premises; an accordingly the premises of Seller are
free from all such toxic or Hazardous Substances.
(d) There has been no complaint, order, directive, claim, citation
or notice by any governmental authority or any person or entity with respect to
(i) air emissions; (ii) spills, releases or discharges to soils or improvements
located thereon, surface water, groundwater or the sewer, septic system or waste
treatment, storage or disposal system servicing the premises; (iii) noise
emissions; (iv) solid or liquid waste disposal; (v) the use, generation,
storage, transformation or disposal of Hazardous Substances; or (vi) other
environmental, health or safety matters affecting Seller or its Business,
operations, assets, equipment, property, leaseholds or other facilities.
(e) Seller does not have any indebtedness, obligation or liability
(absolute or contingent, matured or not matured), with respect to the storage,
treatment, cleanup or disposal of any solid wastes, or other toxic or Hazardous
Substances (including without limitation any such indebtedness, obligation, or
liability with respect to any current regulation, law or statute regarding such
storage, treatment, cleanup or disposal).
(f) Seller has no knowledge of any failure of the Business or its
Purchased Assets to comply with all applicable local, state and federal
environmental, health or safety laws, regulations, rules, guidelines, ordinances
and administrative and judicial orders and rulings relating to the generation,
recycling, use, reuse, sale, storage, handling, transport, treatment and
disposal of any Hazardous Substances, or safety or health and the publications,
rules and regulations adopted and/or promulgated pursuant to applicable
Environmental Laws.
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(g) There have been no environmental inspections, investigation,
studies, audits, tests, reviews or other analysis conducted in connection with
the Business or any of its owned or leased assets.
3.8. Litigation and Other Proceedings. Except as set forth in Schedule
3.8, there are no legal quasi-judicial or administrative proceedings of any kind
or nature now pending or, to the actual knowledge of the Seller or Shareholders,
threatened, before any court or administrative body in any manner against the
Seller, Shareholders, Seller's employees or any of its properties or capital
stock, which could have a material adverse effect, taken as a whole, on the
Seller, or its financial condition, assets, operations or earnings or the
transactions proposed by this Agreement. The Seller and Shareholders do not know
of any basis on which any litigation or proceeding could be brought which could
have a materially adverse effect, taken as a whole, on the Business, operations,
assets or financial condition of the Seller or which could question the validity
of any action taken or to be taken in connection with this Agreement and the
transactions contemplated hereby. The Seller is not in material default with
respect to any judgment, order, writ, injunction, decree, award, rule or
regulation of any court arbitrator or governmental agency or instrumentality.
3.9. Taxes. The Seller has filed with the appropriate federal, state and
local governmental agencies, or has filed applications for extension with
respect to, all tax returns and reports required to be filed, and has paid all
taxes and assessments due. The Seller has not executed or filed with the
Internal Revenue Service ("IRS") any agreement extending the period for
assessment and collection of any federal tax nor is the Seller a party to any
action or proceeding by any governmental authority for assessment or collection
of taxes, nor has any claim for assessment or collection of taxes been asserted
in writing against the Seller. The Seller has not waived any statute of
limitations with respect to any tax or other assessment or levy, and all such
taxes and other assessments and levies which the Seller is required by law to
withhold or to collect have been duly withheld and collected and have been paid
over to the proper governmental agency, domestic and foreign, or segregated and
set aside for such payment and, if so segregated and set aside, will be so paid
by the Seller as required by law.
The Seller has established (and until the Closing Date will establish) on
its books, including the Financial Statements attached as Schedule 3.4(a),
accrued amounts that are adequate for the payment of all federal, state and
local taxes (including, but not limited to, income (including alternative
minimum tax), FICA, FUTA, backup withholding, SUTA, personal property and
franchise taxes) not yet due and payable, but incurred in respect of the Seller
through such date. Except as set forth in Schedule 3.9, all tax obligations of
the Seller have been paid in full. Except as set forth in Schedule 3.9, any
applicable state franchise tax returns of the Seller have been examined by the
applicable authorities (or are closed to examination due to the expiration of
the statute of limitations) and no deficiencies were asserted as a result of
such examinations which have not been resolved and paid in full. There are no
audits or other administrative or court proceedings presently pending nor any
other disputes pending, or claims asserted for, taxes or assessments upon the
Seller. Schedule 3.9 sets forth true and complete copies of the federal and
state income tax return of the Seller as filed for the years ended 1994-1996 and
all information in the tax return is accurate.
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3.10. Contracts. Except as otherwise listed in Schedule 3.10 or in
Schedule 3.6 (leases) or Schedule 3.6.1 (subleases) or Schedule 3.11
(insurance), and except as otherwise set forth in the Financial Statements
attached as Schedule 3.4(a), the Seller is not a party to or bound by any (i)
employment contract (including without limitation any collective bargaining
contract or union agreement) which is not terminable by the Seller on less than
thirty (30) days notice without payment of any amount on account of such
termination; (ii) bonus, stock option, deferred compensation or profit-sharing,
pension or retirement plan obligation or other employee benefit arrangement;
(iii) lease or license with respect to any property, real or personal, whether
as landlord, tenant, licensor or licensee; (iv) contract or commitment for
capital expenditures; (v) contract or commitment made in the ordinary course of
business for the purchase of materials or supplies or for the performance of
services over a period of more than sixty (60) days from the date of this
Agreement; (vi) contract or option to purchase or sell any real or personal
property; (vii) contract, agreement or letter with respect to the purchase or
sale of stock of the Seller including but not limited to options, restrictions,
buy/sell agreements, etc.; (viii) agreement or contract related to the borrowing
by the Seller of money; (ix) guaranty of any obligation for the borrowing of
money; (x) agreement with or extension of credit to any executive officer or
director or stockholder of the Seller, or any Affiliate of such person; (xi)
contracts with respect to licensing, franchising or distributing; (xii)
contracts limiting or restraining it from engaging or competing in any line of
business with any person or entity; (xiii) contracts or agreements relating to
mortgage loan brokering, origination, servicing or sales and/or purchases; or
(xiv) Material Agreements (verbal or written), other than the foregoing, not
otherwise disclosed in this Agreement or in any schedule attached hereto.
Except as disclosed in Schedule 3.10, (i) each contract is in full
force and effect and is a valid and binding obligation of the Seller and the
other parties thereto, enforceable against the Seller and such other parties in
accordance with its terms, (ii) the Seller and each such other party are in
compliance with their obligations under the contracts and no default, event of
default, or event, which with giving of notice or passage of time or both, would
constitute a default or event of default on the part of the Seller or any other
party thereunder, have occurred and/or is now continuing thereunder, except for
such noncompliance or default which would not have a material adverse effect,
taken as a whole, on the Seller or its financial condition, assets, operations
or earnings or the transactions proposed by this Agreement, (iii) the Seller and
Shareholders have not received any notice, written or oral, or otherwise have
any knowledge that any party has canceled or determined not to renew or has
indicated any intent to cancel or not renew, any of the contracts or renegotiate
the terms thereof, and (iv) the Seller and Shareholders have no knowledge of any
notice of any dispute or disagreement relating to any of the contracts.
3.11. Insurance. Attached hereto as Schedule 3.11 is a list of all
insurance policies owned or held by or on behalf of the Seller all of which are
valid, binding and enforceable policies or bonds issued by insurers of
recognized responsibility. Copies of each policy are attached to Schedule 3.11.
In the judgment of the Board of Directors of the Seller, such insurance policies
are adequate for the business conducted by the Seller in respect of amounts,
types and risks insured. As of the date hereof, the Seller has not received any
notice of cancellation or notice of a material amendment of
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any such insurance policy or bond or is in default under such policy or bond, no
coverage thereunder is being disputed and all material claims thereunder have
been filed in a timely fashion.
3.12. Laws.
(a) Except as otherwise noted on Schedule 3.12, the Seller is in
compliance with all applicable federal, state and local laws, rules, regulations
and orders, except for any noncompliance which would not have a material adverse
effect, taken as a whole, on the Seller, or its financial condition, assets,
operations or earnings or the transactions proposed by this Agreement. The
Seller has filed all reports that are required to be filed with any regulatory
authority having jurisdiction over the Seller, except where the failure to file
would not have a material adverse effect, taken as a whole, on the Seller, or
its financial condition, assets, operations or earnings or the transactions
proposed by this Agreement and such reports, registrations and statements are
true and correct in all material respects.
(b) All of the contracts (including all customer contracts) to which
the Seller is party or by which it or any of the Purchased Assets is bound or
affected are valid, binding and enforceable in accordance with their terms. The
Seller has fulfilled, or taken all action necessary to enable it to fulfill when
due, all of their obligations under each of such contracts. All parties to such
contracts have complied in all material respects with the provisions thereof, no
party is in default thereunder and no notice of any claim of default has been
given to the Seller. There are no provisions of, or developments materially
affecting, any such contract which might prevent the Seller from realizing the
benefits thereof whether before or after the completion of the Acquisition. With
respect to any of such contracts that are leases, the Seller has not received
any notice of cancellation or termination under any option or right reserved to
the lessor, or any notice of default, thereunder.
3.13. Conduct. Since the date of the most recent financial statement
attached as part of Schedule 3.4(a), the Seller has not (i) issued, sold or
purchased any of its capital stock or corporate debt obligations; (ii) declared
or set aside or paid any dividend, or issued or granted any option, warrant,
call commitment, right to purchase or agreement of any character regarding the
authorized or issued common stock of the Seller, or made any other distribution
in respect of or, directly or indirectly, purchased, redeemed or otherwise
acquired any shares of its issued and outstanding capital stock; (iii) incurred
any material obligations or liabilities (fixed or contingent), except
obligations or liabilities incurred in the ordinary course of business, or
mortgaged, pledged or subjected any of its assets to a lien or encumbrance,
other than in the ordinary course of business; (iv) discharged or satisfied any
lien or encumbrance or paid any obligation or liability (fixed or contingent),
other than accruals, accounts and notes payable included in the balance sheet,
accruals, accounts and notes payable incurred since the date of the balance
sheet in the ordinary course of business and accruals, accounts and notes
payable incurred in connection with the transactions contemplated by this
Agreement; (v) sold, exchanged or otherwise disposed of any of its capital
assets other than in the ordinary course of business; (vi) except as set forth
in Schedule 3.13 made any general or individual wage or salary increase, paid
any bonus instituted any employee welfare,
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retirement or similar plan or arrangement; (vii) suffered any damage,
destruction or casualty loss, whether or not covered by insurance; or (viii)
except in the ordinary course of business, entered or agreed to enter into any
agreement or arrangement granting any preferential rights to purchase any of its
assets, properties or rights or requiring the consent of any party to the
transfer and assignment of any such assets, properties or rights.
3.14. Undisclosed Liabilities. The Seller has no liabilities except for
those liabilities:
(a) adequately and specifically set forth or reserved for on the
Financial Statements and not heretofore paid or discharged;
(b) arising in the ordinary course of its business consistent with
good business practice under any contract specifically disclosed on Schedule
3.10; and
(c) specified on Schedule 3.14.
3.15. Employment Relations.
(a) The relations of the Seller with its respective employees are
satisfactory, and the Seller has not received any notice of any controversies
with, or organizational efforts or other pending actions by, representatives of
its employees. The Seller has materially complied with all laws relating to the
employment of labor with respect to its employees, including any provisions
thereof relating to wages, hours, collective bargaining and the payment of
workman's compensation insurance and social security withholding and similar
taxes, except as disclosed in Schedule 3.15(a). No person has asserted that the
Seller is liable for any arrearage of wages, overtime, severance, benefits,
workman's compensation, insurance premiums or any taxes or penalties for failure
to comply with any of the foregoing.
(b) Attached as Schedule 3.15(b) is a list of employees with a
general job description, current salary rates or hourly wages and the
commencement date of employment for each and a copy of any written employment or
other agreement with any such employee. Seller has no knowledge that any
employee does not intend to remain with the Seller after this sale except as
expressly disclosed on Schedule 3.15(b).
3.16. Employee Benefit Plans
(a) All employee benefit plans or benefits are specified in Schedule
3.16(a). The Seller has never maintained any employee benefit plan subject to
Title IV of the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
(b) The Seller has complied in all respects with all applicable
federal, state and local laws, rules and regulations relating to employees'
employment and/or employment relationships, including, without limitation, wage
related laws, anti-discrimination laws and
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employee safety laws, except for any noncompliance which would not have a
material adverse effect, taken as a whole, on the Seller, or its financial
condition, assets, operations or earnings or the transactions proposed by this
Agreement.
(c) Except as set forth in Schedule 3.16(c), the Seller is not a
party to any contract or agreement which would require Buyer to hire, or subject
Buyer to liability if it did not hire, any employee of Seller or which would
require Buyer to pay or provide, or subject Buyer to liability if it did not pay
or provide, any employee benefits to any employee of Seller for periods prior to
or after the Closing Date (including any and all employee benefits and any
compensatory, overtime, vacation, sick, severance or holiday pay).
(d) Other Employee Benefit Plans and Arrangements. Except as set
forth in Schedule 3.16(a), neither the Seller nor any subsidiary sponsors,
maintains, supports, is otherwise a party to, or has any liability or contingent
liability under any plan, program, fund, arrangement or contractual undertaking,
whether for the benefit of a single individual or for more than one individual,
and whether or not funded, which is in the nature of (i) an employee pension
benefit plan, (ii) an employee welfare benefit plan (as defined in Section 391)
of ERISA) or (iii) any incentive or other benefit arrangement for employees,
their dependents and/or their beneficiaries or (iv) any of the types of plans
identified in the following list, or plans similar in nature or intent thereto:
(1) cash bonus or incentive pay arrangements (current or
deferred, earned or contingent);
(2) debt forgiveness or low-interest (or interest-free)
loans;
(3) stock bonus plan arrangements (including, but not
limited to, arrangements known as ESOPs and /or
TRASOPS);
(4) employee stock purchase plans;
(5) employee stock warrants, rights, options, or put
options.
(6) shadow or phantom stock arrangements;
(7) stock appreciation rights, whether separate from or
associated with stock options;
(8) performance share plans;
(9) individual life insurance policies (including but not
limited to, "key man" and "split dollar" arrangements);
(10) group life insurance programs;
(11) retired life reserve programs;
(12) surviving spouse's or survivor's benefits;
(13) wage or salary continuation programs;
(14) severance benefit plans;
(15) travel insurance coverage;
(16) accidental death and/or dismemberment benefits;
(17) medical expense reimbursement plans (insured or
self-insured);
(18) medical/surgical insurance;
(19) major medical expense programs;
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(20) health maintenance organization benefits;
(21) capital accumulation arrangements;
(22) optical and/or dental care benefits;
(23) prepaid legal services;
(24) section 501(c)(9) "voluntary employee beneficial
associations";
(25) day care centers;
(26) apprenticeship training centers;
(27) educational expense benefit plans or tuition subsidies;
(28) layoff and/or vacation pay plans, or time banks;
(29) furnishing goods or services or services on a discount
or subsidized basis;
(30) non-cash incentive programs (such as trading stamp,
travel or merchandise award programs);
(31) uniform or clothing allowances, eyeglass allowances,
safety equipment allowances, tool allowances, etc.;
(32) "cafeteria plans"
(33) recreation programs at total or partial employer
expense;
(34) contributions to simplified employee pensions,
individual retirement accounts or individual retirement
annuities;
(35) early retirement incentive or social Security supplement
payments;
(36) retiree payments and bonuses (gratuitous, traditional or
contractual);
(37) other benefits or policies in the nature of compensation
or otherwise of economic value to employees, their
dependents or their survivors; or
(38) "golden parachute" arrangements.
3.17. Minute Books. The minute book of the Seller contains accurate
records of all meetings and other corporate action held of their respective
stockholders and Board of Directors (including committees of the Board of
Directors), except where the failure to so maintain such records would not have
a material adverse effect on the business, operations, assets or financial
condition of the Seller, as the case may be. The Minute Books shall be provided
to buyer for review prior to Closing.
3.18. Reserved.
3.19. Absence of Certain Changes or Events. Except for normal business
fluctuations, there has not been any material adverse change in the Business,
operations, assets or financial condition of the Seller since the date of the
most recent financial statement attached as part of Schedule 3.4(a), and to the
best of Seller's knowledge, no facts or condition exists which Seller believes
will cause such a material adverse change in the future.
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3.20. Disclosure. Except for normal business fluctuations, there are no
material facts concerning the Business, operations, assets or financial
condition of the Seller, which have not been disclosed to Buyer which could have
a material adverse effect on the Business, operations, assets or financial
condition of the Seller. No representation or warranty of Seller or Shareholders
contained in this Agreement contains any untrue statement of a material fact or
omits to state a material fact necessary to make the statements herein not
misleading.
3.21. Seller's Counsel's Opinion. Seller shall cause its counsel to issue
a legal opinion in the form of Schedule 3.21 to be delivered at Closing.
3.22. Representations Accurate at Closing. All representations and
warranties made by Seller and the Shareholders shall be deemed made upon
execution of this Agreement and at Closing and shall be accurate and unchanged
as of Closing (except for changes in the or course of business that have no
material adverse effect).
3.23. Accounts Receivable. All accounts receivable as reflected in the
Financial Statements or arising since then (1) have arisen only in the ordinary
course of business consistent with past practice for goods sold and delivered or
services performed and (2) are collectible in full at the recorded amounts
thereof (free of any, and subject to no, defenses, setoffs or counterclaims) in
the ordinary course of business (without resort to Litigation or assignment to a
collection agency), but in no event later than 90 days after the Closing Date,
net of any allowance for doubtful accounts reflected in the Financial
Statements.
3.24. Mortgage Loan Related Obligations. Seller has no fixed or contingent
obligations or liabilities of any kind in connection with mortgage loans that
have closed to either repurchase the loan, refund any fee or portion thereof,
receive a reduced fee or incur any other liability, obligation or offset as a
result of any action, inaction, events, facts or circumstances that occur or
arise or have occurred or arisen in connection with or in relation to any
mortgage loan except as expressly set forth in Schedule 3.24.
3.25. Licenses. Schedule 3.25 contains a list of the government permits,
licenses, registrations and other governmental consents which the Seller has
obtained in connection with the ownership of the Purchased Assets and the
operation of the Business and no others are required. Except as set forth in
Schedule 3.25, all such permits, licenses, registrations and consents are in
full force and effect and in good standing, freely transferable to the Buyer and
the continued validity thereof shall not be adversely affected by this Agreement
or the consummation of the transactions contemplated hereby. The Seller has not
received any written notice of any claim of revocation of any such permit,
license, registration or other consent nor do the Seller have knowledge of any
event which might give rise to such a claim.
3.26. Patents, Trademarks and Copyrights. Except as set forth in Schedule
3.26, Seller owns no patent relating to any product which it manufacturers or
sells or any process used in the manufacturer of any such product, nor has any
license under any patent been issued to any of them
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relating to any such product or any such process, and there is no patent which
would cover any such product or any such process; and the Seller owns no
copyright, registered trademark or trade name, nor has any license to use any
copyright, trademark or trade name been issued to it, nor does the Seller use
any copyright, registered trademark or trade name in its operations or business.
Each of the patents, registered trademarks, trade names and copyrights listed in
Schedule 3.26 has been validly issued and is owned by the Seller, and the Seller
has the exclusive rights to use all such patents, copyrights, registered
trademarks and trade names in its businesses and operations. Except as set forth
in Schedule 3.26, the Seller owns all patents, copyrights, trademarks, trade
names, know-how, trade secrets and other proprietary rights necessary to
manufacture and sell its products and to conduct its operations and businesses
and Seller does not know of any claim, or any basis of any claim, that it has
infringed any patent, copyright, trademark, trade name, know-how, trade secret
or other proprietary right of any other person. Seller does not know of any
potential claim of infringement of any patent, copyright, trademarks trade name,
know-how, trade secret or other proprietary right of any other person that has
not been asserted but that, if asserted, would materially and adversely affect
the financial condition, Business or operations of the Seller.
3.27. Condition of Assets. All tangible assets and properties which are
part of the Purchased Assets are in good operating condition and repair and are
usable in the ordinary course of the Business consistent with past practice and
conform in all material respects to all applicable regulations relating to their
construction, use and operation. There are no developments materially affecting
any such Asset which might curtail the present or future use thereof for the
purpose for which it was acquired. Except for Excluded Assets or pursuant to
leases described on the attached schedules, no person other than the Seller owns
any vehicles, equipment or other tangible Assets situated on the facilities used
by the Seller in the Business (other than immaterial items of personal property
owned by the Seller's employees) or necessary to the operation of the Business.
3.28. Creditors. Attached to this Agreement as Schedule 3.28 is a true and
correct list of all business creditors of Seller, including the names, addresses
and amounts owed as of the date of this Agreement, and any collateral or
security applicable to the indebtedness owed to each of these creditors and
copies of any liens granted and/or perfected including copies of Uniform
Commercial Code filings. As of the date of this Agreement, Seller had no liens,
whether absolute, accrued or contingent, and whether due or to become due that
are not reflected on Schedule 3.28, and neither Seller nor Shareholders knows of
any basis for the assertion against the Seller of any Liens.
3.29. Certain Transactions. Except as set forth in Schedule 3.29, there is
no transaction, and no transaction now proposed, to which the Seller was or is
to be a party and in which any director or officer of the Seller or any
subsidiary or any person owning of record or beneficially any of the outstanding
capital stock of any class of the Seller or any subsidiary or any associate of
any such person had or has a direct or indirect material interest.
3.30. Foreign Corrupt Practices Act. Neither the Seller or any subsidiary
nor any director, officer, agent, employee or other person associated with or
acting on behalf of the Seller or any subsidiary has used any corporate funds
for any unlawful contribution, gift, entertainment or other
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expense relating to political activity or made any direct or indirect unlawful
payment to any United States or foreign government official or employee from
corporate funds or violated or is a violation of any provision of the Foreign
Corrupt Practices Act of 1977, which violation would have a material adverse
effect, taken as a whole, on the Seller, or its financial condition, assets,
Operations or earnings or the transactions proposed by this Agreement, or paid
or made any bribe, rebate, payoff, influence payment, kickback, or other
unlawful payment.
3.31. Bank Accounts; Powers of Attorney. Schedule 3.31 sets forth (i) the
name of each bank in which the Seller has an account or safe deposit box and the
names of all persons authorized to draw thereon or to have access thereto, and
(ii) the names of all persons, if any, holding powers of attorney from the
Seller and a summary statement of the terms thereof
3.32. Proceedings Involving Officers, Directors, Shareholders or
Employees. Except as set forth in Schedule 3.32 none of the Officers, Directors,
or Shareholders or, to the knowledge of the Shareholders, Employees has been
involved in any criminal proceedings or regulatory proceedings in which any of
them was the subject of any alleged violation of laws or regulations or rules.
3.33. Mortgage Lenders. Schedule 3.33 sets forth a true, correct and
complete list (with copies of all written agreements) of all lenders or other
sources of funding for mortgage loans of the Business as of the Closing Date.
The Seller and Shareholders are unaware of any loss or threatened loss of any
lender or other source of loan funding of the Business. Except as disclosed on
Schedule 3.33, no lender accounts for more than five (5%) percent of the fees of
the Business.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
4.1. Organization. Buyer is a corporation duly organized, validly existing
and in good standing under the laws of the State of Virginia. Buyer has full
power and authority (including all licenses, franchises, permits and other
governmental authorizations which are legally required) to own or lease its
properties, and to engage in the business and activities now conducted by Buyer.
4.2. Authority; No Violation.
(a) Buyer has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby
and thereby in accordance with the terms hereof. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly approved by the Board of Directors of Buyer. This
Agreement has been duly and validly executed and delivered by Buyer and
constitutes a valid and binding obligation of Buyer, enforceable against Buyer
in accordance with its terms, except to the extent that enforceability may be
limited by (i) bankruptcy, insolvency, moratorium, liquidation, reorganization
or similar laws affecting creditors' rights generally,
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regardless of whether such enforceability is considered in equity or at law; and
(ii) general equity principles.
(b) Neither the execution and delivery of this Agreement by, nor the
consummation by, Buyer of the transactions contemplated hereby in accordance
with the terms hereof will (i) violate any provision of the Articles of
Incorporation or Bylaws of Buyer
4.3. Attached hereto as Schedule 4.3 is a Certificate of additional
representations which representations will not survive Closing.
ARTICLE V
COVENANTS OF THE PARTIES
------------------------
5.1. Conduct of the Business of the Seller.
(a) From and after the date of this Agreement to the Closing Date,
the Seller shall (i) conduct its Business in substantially the same manner as in
the past and in accordance with prudent business practices; (ii) maintain and
keep its properties in good repair and condition; (iii) maintain in full force
and effect insurance comparable in amount and scope of coverage to that
currently maintained; (iv) substantially perform all its obligations under
material contracts, leases and documents relating to or affecting its assets,
properties, and business, except such obligations as it may in good faith
reasonably dispute; (v) use its best efforts to maintain and preserve its
business organization and present employees and relationships with suppliers and
customers of the Seller, as the case may be; and (vi) materially comply with and
perform all obligations and duties imposed upon it by all federal, state and
local laws, and all rules, regulations and orders imposed by federal, state or
local governmental authorities.
(b) The Seller will not without the prior written consent of Buyer,
(i) permit any amendment or change to be made in the Articles of Incorporation
or Bylaws of the Seller; (ii) take, or allow the Seller to take, any action
described or do any of the things listed in Section 3.13 hereof; (iii) enter
into or amend, or allow the Seller to enter into or amend, any contract,
agreement or other instrument of any of the types listed in Section 3.10
hereof; (iv) make any material change in its accounting methods or practices
other than changes required in accordance with generally accepted accounting
principles; (v) take any action that would result in any of its representations
and warranties contained in this Agreement not being true and correct in any
material respect at the Closing Date; (vi) waive any right of substantial value;
(vii) introduce any new products or services; (viii) make any change in
policies; (ix) make any loans to any directors, officers, employees or
affiliates of the Seller; (x) approve any loan, the underwriting of which varies
from the written credit policies of the Seller; (xi) propose or take any action
with respect to the closing of any branches; (xii) increase the salaries of, or
make any bonus or similar payments to or establish or modify any Employment
Contracts or Employee Benefit Plans for any of the Seller's directors,
shareholders, officers or employees or enter into or modify any employment,
consulting or similar Contracts with
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any such persons or agree to do any of the foregoing; (xiii) issue, repurchase
or redeem or commit to issue, repurchase or redeem, any shares of its capital
stock, any options or other rights to acquire such stock or any securities
convertible into or exchangeable for such stock; (xiv) declare or pay any
dividend on, or make any other distribution; (xv) merge with or into any other
corporation or sell, assign, transfer, pledge or encumber any part of the
Purchased Assets or agree to do any of the foregoing; (xvi) waive any rights of
value or rights that would otherwise accrue to the Seller after the Closing
Date; (xvii) take any action or omit to take any action, the primary purpose of
which is to benefit Seller at Purchaser's expense. The Seller further agrees
that, between the date of this Agreement and the Effective Date, it will consult
and cooperate with Buyer.
5.2. Access to Properties and Records.
(a) The Seller will afford the executive officers, employees and
authorized representatives (including legal counsel, accountants and
consultants) of the Buyer, reasonable access to its properties, books and
records including, but not limited to, all books of account (including the
general ledger), tax records, minute books of directors' and stockholders'
meetings, organizational documents, bylaws, material contracts and agreements,
filings with any regulatory authority, accountants' work papers, litigation
files, plans affecting employees, and any other business activities or prospects
in which such party and its designated representatives may have a reasonable
interest and shall make their directors, officers, employees, agents,
representatives and accountants available to confer with the other parties and
their designated representatives; provided, however, that such investigations
shall be conducted with reasonable prior notice in a manner so as not to
unreasonably interfere with the operations of the affected party. The officers
of the Seller will furnish the Buyer and its designated representatives with
such additional financial and operating data and other information as to their
business and properties as the other shall, from time to time, reasonably
request.
(b) All information furnished by the parties hereto previously in
connection with transactions contemplated by this Agreement or pursuant hereto
shall be used solely for the purpose of evaluating the Acquisition contemplated
hereby and shall be treated as the sole property of the party delivering the
information until consummation of the Acquisition contemplated hereby and, if
such Acquisition shall not occur, each party and each party's advisors shall
return to the other party all documents or other materials containing,
reflecting or referring to such information, will not retain any copies of such
information, shall use its best efforts to keep confidential all such
information, and shall not directly or indirectly use such information for any
competitive or other commercial purposes. In the event that the Acquisition
contemplated hereby does not occur, all documents, notes and other writings
prepared by a party hereto or its advisors based on information furnished by the
other party shall be promptly destroyed. The obligation to keep such information
confidential shall continue for five years from the date the proposed
Acquisition is abandoned but shall not apply to (i) any information which (A)
the party receiving the information can establish by convincing evidence was
already in its possession prior to the disclosure thereof to it by the other
party; (B) was then generally known to the public; (C) became known to the
public through no fault of the party receiving such information; or (D) was
disclosed to the party receiving such information
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by a third party not bound by an obligation of confidentiality; or (ii)
disclosures pursuant to a legal requirement or in accordance with an order of a
court of competent jurisdiction.
5.3. Further Assistance. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its reasonable best efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
satisfy the conditions to Closing and to consummate and make effective the
transactions contemplated by this Agreement, including, without limitations
using reasonable efforts to lift or rescind any injunction or restraining order
or other order adversely affecting the ability of the parties to consummate the
transactions contemplated by this Agreement and using its best efforts to
prevent the breach of any representation, warranty, covenant or agreement of
such party contained or referred to in this Agreement and to promptly remedy the
same. In case at any time after the Closing Date any further action is necessary
or desirable to carry out the purposes of this Agreement parties to this
Agreement shall take all such necessary action. Nothing in this section shall be
construed to require any party to participate in any threatened or actual legal,
administrative or other proceedings (other than proceedings, actions or
investigations to which it is a party or subject or threatened to be made a
party or subject) in connection with the consummation of the transactions
contemplated by this Agreement unless such party shall consent in advance and in
writing to such participation and the other party agrees to reimburse and
indemnify such party for and against any and all costs and damages related
thereto.
5.4. Public Announcements. The parties hereto shall cooperate with each
other in the development and distribution of all news releases and other public
disclosures with respect to this Agreement or any of the transactions
contemplated hereby, except as may be otherwise required by law or regulation or
as to which the party releasing such information has used its best efforts to
discuss with the other party in advance.
5.5. Disclosure Supplements. From time to time prior to the Closing Date,
each party hereto will promptly supplement or amend (by written notice to the
other) its respective Schedules delivered pursuant hereto with respect to any
matter hereafter arising which, if existing, occurring or known at the date of
this Agreement, would have been required to be set forth or described in such
Schedule or which is necessary to correct any information in such Schedules
which has been rendered materially inaccurate thereby. For the purpose of
determining satisfaction of the conditions set forth in Article VI, no
supplement or amendment to such Schedule shall correct or cure any warranty
which was untrue when made.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS
-----------------------------------
6.1 The obligation of Buyer to consummate this Agreement is subject to the
fulfillment (or waiver in writing by the Buyer) before or at the Closing of each
of the following conditions:
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(a) Accuracy of Representations. There shall be no inaccuracy in the
representations and warranties of Seller or Shareholders set forth in this
Agreement and all representations and warranties shall be true and correct in
all respects as of the Closing Date as though made on and as of that date, and
Buyer shall have received a certificate dated the Closing Date from Seller to
that effect in the form of Schedule 6.1(a).
(b) Performance of Covenants. Seller and Shareholders shall have
performed all obligations required to be performed by them under this Agreement
prior to the date of Closing, and Buyer shall have received from Seller a
certificate dated the date of Closing to that effect in the form of Schedule
6.1(b).
(c) Employment of Key Personnel. Buyer shall have reached agreement,
on terms satisfactory to Buyer including written agreements, if desired by Buyer
with non-compete clauses, with such key personnel as it deems necessary to
consult with Buyer or to operate the Business from and after the Closing Date.
Buyer shall be reasonably satisfied that no employees of the Business will
voluntary resign as a result of the transaction.
(d) Leases. Buyer shall have reviewed the existing leases and if
necessary received written consent for assignment or subletting to Buyer on
terms acceptable to Buyer and/or Buyer shall have entered into any new lease
arrangements for necessary space as Buyer deems necessary in Buyer's sole
discretion.
(e) No Adverse Proceedings. No action or proceeding against Buyer or
Seller shall have been instituted or threatened that, if successful, could
prohibit consummation or require substantial revision of the transactions
contemplated under this Agreement.
(f) No Adverse Change. There shall have been no adverse change to
the Business since the date of the most recent financial statement attached as
part of Schedule 3.4(a), except for such change which would not have a material
adverse effect, taken as a whole, on the Seller, or its financial condition,
assets, operations or earnings or the transactions proposed by this Agreement.
(g) Legal Matters. All legal matters in connection with the
transaction contemplated by this Agreement shall have been completed to the
reasonable satisfaction of counsel to the Buyer.
(h) Due Diligence. Buyer shall have completed due diligence and the
results shall be satisfactory to Buyer within Buyer's sole discretion.
6.2 The obligation of Seller to consummate this Agreement is subject to
the fulfillment (or waiver in writing by the Seller) before or at the Closing of
each of the following conditions:
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(a) Accuracy of Representations. There shall be no inaccuracy in the
representations and warranties of Buyer set forth in this Agreement and all
representations and warranties shall be true and correct in all respects as of
the Closing Date as though made on and as of that date, and Seller shall have
received a certificate dated the Closing Date from Buyer to that effect in the
form of Schedule 6.2(a).
(b) Performance of Covenants. Buyer shall have performed all
obligations required to be performed by it under the Agreement prior to the date
of Closing, and Seller shall have received from Buyer a certificate dated the
date of the Closing to that effect in the form of Schedule 6.2(b).
(c) No Adverse Proceedings. No action or proceeding against Buyer or
Seller shall have been instituted or threatened that if successful, could
prohibit consummation or require substantial revision of the transactions
contemplated by this Agreement.
(d) No Adverse Change. There shall have been no adverse change to
the business of the Buyer since the date of the most recent financial statement
attached as part of Schedule 4.3(a), which change would have a material adverse
effect, taken as a whole, on the Buyer, or its financial condition, assets,
operations or earnings or the transactions proposed by this Agreement.
ARTICLE VII
TERMINATION
-----------
7.1. Grounds for Termination. This Agreement and any related agreements
may be terminated by Buyer at any time prior to Closing upon written notice to
Seller upon the occurrence of any of the following:
(a) If a material adverse change, after the date of this Agreement
but prior to Closing, in the financial condition or Business of Seller shall
have occurred, or Seller shall have suffered a material loss or damage to any of
the assets to be purchased pursuant to this Agreement or the Business, which
change, loss or damage materially affects or impairs the ability of Buyer to
conduct the business upon consummation of this Agreement;
(b) If any of the representations and warranties made by Seller or
Shareholders to Buyer were false or misleading as of the date given or as of the
Closing Date, and these false or misleading representations or warranties shall
not have been waived in writing by Buyer; or
(c) If the terms, covenants or conditions of this Agreement to be
complied with or to be performed by Seller at or before the Closing Date
including conditions precedent to Buyers obligation to close shall not have been
complied with or performed and this noncompliance shall not have been waived in
writing by the Buyer.
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ARTICLE VIII
CLOSING DATE AND PLACE OF CLOSING;
CERTAIN TRANSACTIONS TO BE EFFECTED AT CLOSING
----------------------------------------------
8.1. Closing Date. The Closing of the transactions contemplated by this
Agreement (the "Closing") shall take place on January 26, 1998 (the "Closing
Date") or at such other time on such other date as the Seller and the Buyer may
mutually agree upon in writing.
8.2. Place of Closing. The Closing shall take place at the offices of
Payne, Gates, Farthing & Radd, P.C., counsel for the Buyer, Dominion Tower, 999
Waterside Drive, Suite 1515, Norfolk, Virginia 23510-3309, or at such other
place as the Seller and the Buyer mutually agree upon in writing.
8.3. Certain Transactions to be Effected at Closing. Subject in each case
to the terms and conditions contained in this Agreement, the following steps
shall be taken concurrently at the Closing, except as otherwise expressly
stated:
8.3.1 The Seller shall deliver, or cause to be delivered, to the
Buyer the following:
(a) All bills of sale, certificates of title, assignments and
instruments of transfer as shall be necessary and requested by the Purchaser in
order to assign and transfer, or to evidence the assignment and transfer of, the
Purchased Assets to the Buyer (including, without limitation, assignments of any
licenses, patents or trademarks in a form suitable for recording in the United
States Patent and Trademark office, if applicable);
(b) All consents, estoppels and authorizations from all Persons
whose consent or authorization is required for the consummation of the
transactions contemplated by this Agreement;
(c) All financial, bookkeeping and accounting records, and all
other books and records of or relating to the Business, certified by the Seller
to be true, correct and complete as of the Closing Date;
(d) A schedule of all accounts receivable of the Business existing
as of the Closing Date;
(e) Resolutions duly adopted by the stockholders and the Board of
Directors of the Seller, authorizing the execution, delivery and performance of
this Agreement and the other documents contemplated by this Agreement to be
executed and delivered by the Seller, duly certified by the Secretary or an
Assistant Secretary of the Seller, and an incumbency certificate, certifying the
names and true signatures of the officers of the Seller executing and delivering
this Agreement and the other documents contemplated by this Agreement;
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(f) An opinion of counsel for the Seller, dated the Closing Date, in
the form of Schedule 3.21 annexed hereto;
(g) A copy of the Articles of Incorporation of the Seller, certified
by the Secretary of State of the State of its incorporation as of a date no more
than thirty (30) days prior to the Closing Date;
(h) A copy of the Bylaws of the Seller, certified by an officer of
the Seller to be true, correct and complete as of the Closing Date;
(i) A certificate of good standing for the Seller as of a date not
more than (30) days prior to the Closing Date issued by the Secretary of State
of the State of its incorporation and every other state in which the Seller is
authorized to do business;
(j) A clearance certificates or similar document that may be
required by any taxing authority of any jurisdiction in order to relieve the
Buyer of any obligation to withhold any portion of the Purchase Price;
(k) The compliance certificates required pursuant to Section 6.1 and
Section 6.2 hereof;
(1) An amendment to the Seller's Articles of Incorporation, in form
suitable for filing with appropriate state authorities, changing the name of the
Seller to a name which does not resemble "Funding Center of Georgia, Inc.";
(m) An employment contract, in the form of Schedule 9.23, duly
executed by each Shareholder, and
(n) Such other documents as shall reasonably be requested by the
Buyer in order effectively to carry out the transactions contemplated by this
Agreement, duly executed by the Seller where appropriate.
8.3.2 The Buyer shall deliver, or cause to be delivered, to the Seller the
following:
(a) A wire transfer in the amount of the cash to be paid at Closing
to the Seller or to an account or accounts designated by the Seller;
(b) Resolutions duly adopted by the Board of Directors of the Buyer
authorizing the execution, delivery and performance by the Purchaser of this
Agreement and the other documents contemplated by this Agreement to be executed
and delivered by Purchaser, duly certified by the Secretary or an Assistant
Secretary of the Purchaser, and an incumbency certificate, certifying the names
and true signatures of the officers certifying the names and true signatures of
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the officers of the Purchaser executing and delivering this Agreement and the
other documents contemplated by this Agreement;
(c) The compliance certificates required pursuant to Section 6.2(a)
and Section 6.2(b) hereof;
(d) An employment contract, in the form of Schedule 9.23, for each
Shareholder, duly executed by the Buyer; and
(e) Such other documents as shall reasonably be requested by the
Seller in order to effectively carry out the transactions contemplated by this
Agreement, duly executed by the Buyer where appropriate.
ARTICLE IX
MISCELLANEOUS
-------------
9.1. "No Shop" Provision. Seller and Shareholders agree that during the
period commencing with the date on which this Agreement is executed until
Closing, Seller shall neither, directly or indirectly, through brokers, agents
or otherwise, sell, transfer or otherwise encumber nor offer to sell transfer or
otherwise encumber nor solicit, discuss, accept or take any other action with
respect to any offer from any other potential buyer to acquire any of the
Business of the Seller whether by asset purchases, stock purchase or otherwise,
except for the sale of products or services in the ordinary course of business.
9.2. Confidentiality. From and after the Closing, the Seller shall not
disclose or furnish to any other person, firm or entity other than the Buyer:
(a) any information relating to any processes, technique or procedure used in
connection with the Business or any other information proprietary to the
Business or the Assets; or (b) any information relating to the Assets, the
Assumed Liabilities or the operations or financial status of the Business
(including, without limitations all financial data and sources of financing)
which is not specifically a matter of public record; (c) any information of a
confidential nature obtained as a result of any prior, present or future
relationship with the Business, which is not specifically a matter or public
record; or (d) the name, address or other information relating to any customer
or any supplier of the Business or other Person who is doing or has done
business with the Seller (collectively, "Confidential information").
9.3. Brokers' and Finders' Fees. Seller and the Buyer each to the other
represents and warrants that all negotiations relative to this Agreement have
been carried on by them directly without the intervention of any person, firm,
corporation or other entity who or which may be entitled to any brokerage fee or
other commission in respect of the execution of this Agreement or the
consummation of the transactions contemplated hereby, and each of them shall
indemnify and hold the other or any affiliate of them harmless against any and
all claims, losses, liabilities or expenses which may be asserted against any of
them as a result of any dealings, arrangements or agreements by the indemnifying
party with any such person, firm, corporation or other entity.
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9.4. Survival of Representations and Warranties. The representations,
warranties, covenants, and indemnities of the parties hereto contained in this
Agreement shall survive the Closing Date until the expiration of the applicable
statute of limitation.
9.5. Amendments. This Agreement may be amended only by a writing signed by
the parties hereto, at any time prior to the Closing Date with respect to any of
the terms contained herein.
9.6. Expenses. Whether or not the transactions provided for herein are
consummated, each party to this Agreement will pay its respective expenses
incurred in connection with the preparation and performance of its obligations
under this Agreement, including legal, filing fees, publication expense and
accounting fees and expenses.
9.7. Time of the Essence. Time is of the essence in this Agreement.
9.8. Attorneys' Fees. In the event of any action at law or equity between
the parties in relation to this Agreement, the non-prevailing party shall be
required to pay to the prevailing party all costs and expenses of such
litigation, including reasonable attorneys' fees.
9.9. Indemnification.
(a) By Seller and Shareholders. Subject to Section 9.9(d), Seller
and each Shareholder shall, jointly and severally, from and after the Closing,
indemnify and save Buyer harmless on an after-tax basis from and against any and
all claims, costs, damages, liability or expense, including reasonable
attorneys' fees, actually incurred, net of any resulting income tax benefits
realized by Buyer, arising out of (i) any nonfulfillment, breach, default or
inaccuracy of any agreement, covenant, representation, warranty or obligation of
Seller or Shareholders under this Agreement, or any schedule, certificate or
exhibit or other instrument furnished to Buyer; (ii) any liabilities or
obligations of Seller not expressly assumed by Buyer in Schedule 2.2(a); (iii)
all liabilities and obligations of or claims against Seller not expressly
disclosed by Seller in this Agreement or its Schedules, including any liability
under any applicable bulk sales law; and (iv) all actions, suits, proceedings,
demands, assessments, judgments, costs and expenses incident to any of the
foregoing. Buyer shall have the right of offset against obligations to Seller
and/or Shareholders to the extent Sellers and/or Shareholders are required to
indemnify.
(b) By Buyer. Subject to Section 9.(d), Buyer shall, from and after
the Closing, indemnify and save Seller and the Shareholders harmless on an
after-tax basis from any and all claims, costs, damages, liability or expense,
including reasonable attorneys' fees, actually incurred, net of any resulting
income tax benefit realized by Seller or the Shareholders, arising out of (i)
any nonfulfillment, breach, default or inaccuracy of any agreement, covenant,
representation, warranty or obligation of the Buyer under this Agreement, or any
schedule, certificate or exhibit or other instrument furnished to Seller and to
Shareholders; and (ii) all actions, suits, proceedings, demands, assessments,
judgments, costs and expenses incident to any of the foregoing.
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(c) Procedures. The obligations and liabilities of each indemnifying
party hereunder with respect to claims resulting from the assertion of liability
by the other party shall be subject to the following terms and conditions:
(i) The indemnified party shall give prompt (so as not to
materially prejudice the position of the indemnifying party) written notice
(which in no event shall exceed 30 days from the date on which the indemnified
party first became aware of such claim or assertion) to the indemnifying party
of any claim which might give rise to a claim by the indemnified party against
the indemnifying party based on the indemnity agreements contained in Section
9.9(a) or Section 9.9(b) hereof, stating the nature and basis of said claims and
the amounts thereof, to the extent known.
(ii) If any action, suit or proceeding is brought against the
indemnified party with respect to which the indemnifying party may have
liability under the indemnity agreements contained in Section 9.9(a) or Section
9.9(b) hereof the action, suit or proceeding shall, at the election of the
indemnifying party, be defended (including all proceedings on appeal or for
review which counsel for the indemnified party shall deem appropriate) by the
indemnifying party. The indemnified party shall have the right to employ its own
counsel in any such case, but the fees and expenses of such counsel shall be at
the indemnified party's own expense unless the employment of such counsel and
the payment of such fees and expenses both shall have been specifically
authorized in writing by the indemnifying party in connection with the defense
of such action, suit or proceeding. Notwithstanding the foregoing, (A) if there
are defenses available to the indemnified party which are inconsistent with
those available to the indemnifying party to any such extent as to create a
conflict of interest between the indemnifying party and the indemnified party,
the indemnified party shall have the right to direct the defense of such action,
suit or proceeding insofar as it relates to such inconsistent defenses, and the
indemnifying party shall be responsible for the reasonable fees and expenses of
the indemnified party's counsel insofar as they relate to such inconsistent
defenses, and (B) if such action, suit or proceeding involves or could have an
effect on matters beyond the scope of the indemnity agreements contained in
Section 9.9(a) and Section 9.9(b) hereof, the indemnified party shall have the
right to direct (at its own expense) the defense of such action, suit or
proceeding insofar as it relates to such other matters. The indemnified party
shall be kept fully informed of such action, suit or proceeding at all stages
thereof, whether or not it is represented by separate counsel.
(iii) The indemnified party shall make available to the
indemnifying party and its attorneys and accountants all books and records of
the indemnified party relating to such proceedings or litigation and the parties
hereto agree to render to each other such assistance as they may reasonably
require of each other in order to ensure the proper and adequate defense of any
such action, suit or proceeding. Whether or not the indemnifying party chooses
to defend or prosecute any claim involving a third party, all parties hereto
shall cooperate in the defense or prosecution thereof and shall furnish such
records, information and testimony and attend such conferences, discovery
proceedings, hearings, trials and appeals as may be reasonably requested in
connection therewith.
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(iv) The indemnified party shall not make any settlement of
any claims without the written consent of the indemnifying party.
(d) Limits on Indemnification. Notwithstanding anything in Section
9.9(a) and Section 9.9(b) to the contrary or in conflict:
(i) Neither the Seller, the Shareholders nor the Buyer shall
be liable under the indemnity provisions of Section 9.9(a) or Section 9.9(b), as
applicable, in any instance until such time as the aggregate liability under
such section exceeds $10,000 (the "Basket"), in which event the Seller, the
Shareholders or the Buyer, as applicable, shall be liable to the full extent of
such liability, including the Basket.
(ii) In no event shall the total obligation of the Seller and
the Shareholders under Section 9.9(a) for all losses, costs, claims, damages,
liabilities and expenses of any type or description exceed, in the aggregate,
the Purchase Price paid to Seller.
(iii) In no event shall the total obligation of the Buyer
under Section 9.9(b) for all losses, costs, claims, damages, liabilities and
expenses of any type or description exceed the Purchase Price paid to Seller.
9.10. Schedules. All Schedules are expressly made a part of this
Agreement. Specified below is a list of Schedules:
2.1(b) Excluded Assets
2.2(a) Assumed Liabilities
2.7 Allocation of Purchase Price
3.1(b) Articles of Incorporation and Bylaws
3.1(c) Subsidiaries and/or Joint Ventures
3.3 Disclosure of Violations of Agreements
3.4(a) Financial Statements
3.5(a) Assets
3.5(b) Liens on Purchased Assets
3.6(a) Leases
3.6(b) Subleases
3.7 Environmental Matters
3.8 Litigation and Other Proceedings
3.9 Taxes and Tax Returns
3.10 Contracts
3.11 Insurance Policies in Effect
3.12 Noncompliance with Laws
3.13 Compensation Increases and Bonuses
3.14 Other Liabilities
3.15(a) Noncompliance with Employment Laws
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3.15(b) Employee List with Employment Contracts
3.16(a) Employee Benefit Plans
3.16(c) Disclosures Required by Section 3.16(c)
3.21 Seller's Counsel's Opinion
3.24 Mortgage Loan Related Obligations
3.25 Licenses
3.26 Patents, Trademarks and Copyrights
3.28 Creditors and Liens
3.29 Certain Transactions
3.31 Bank Accounts
3.32 Proceedings Involving Officers, Directors, Shareholders
or Employees
3.33 Mortgage Lenders
4.3 Certificate of Additional Buyer Representations
6.1(a) Seller Certificate per Section 6.1(a) (Accuracy of
Representations)
6.1(b) Seller Certificate per Section 6.2(b) (Performance of
Covenants)
6.2(a) Buyer Certificate per Section 6.1(a) (Accuracy of
Representations)
6.2(b) Buyer Certificate per Section 6.2(b) (Performance of
Covenants)
9.23 Employment Agreements
9.11. Notices. All notices required herein shall be in writing and shall
be deemed to have been given, made and received only:
(a) upon delivery, if personally delivered to a party;
(b) one business day after the date of dispatch, if by facsimile
transmission;
(c) one business day after deposit, if delivered by a nationally
recognized courier service offering guaranteed, overnight delivery; or
(d) three business days after deposit in the United States mail,
certified mail, postage prepaid, return receipt requested at the addressees
appearing below.
Notices shall be sent to the following addresses unless by such notice a
different address shall have been designated:
IF TO BUYER: Approved Residential Mortgage, Inc.
3420 Holland Road, Suite 107
Virginia Beach, Virginia 23452
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Attention: Allen D. Wykle
WITH A COPY TO: Payne, Gates, Farthing & Radd, P.C.
Dominion Tower
999 Waterside Drive, Suite 1515
Norfolk, Virginia 23510-3309
Attention: Ronald M. Gates, Esq.
IF TO SELLER:
Taltun, Inc.
2970 Brandywine Road, #135
Atlanta, Georgia 30341
Attention: David J. Talesnick
Personal & Confidential
WITH A COPY TO: Kathryn L. Knudson, Esquire
Powell, Goldstein, Frazier & Murphy LLP
191 Peachtree Street, NE
Atlanta, Georgia 30303
9.12. Controlling Law. All questions concerning the validity, operation
and interpretation of this Agreement and the performance of the obligations
imposed upon the parties hereunder shall be governed by the laws of the State of
Virginia and, to the extent applicable, by the laws of the United States.
9.12. Controlling Law. All questions concerning the validity, operation
and interpretation of this Agreement and the performance of the obligations
imposed upon the parties hereunder shall be governed by the laws of the State of
Virginia and, to the extent applicable, by the laws of the United States.
9.13. Readings. The headings and titles to the sections of this Agreement
are inserted for convenience only and shall not be deemed a part hereof of
affect the construction or interpretation of any provision hereof.
9.14. Modifications or Waiver. The parties may, at any time prior to the
Closing Date, (i) extend the time for the performance of any of the obligations
or other acts of the other parties hereto; (ii) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto; or (iii) waive compliance with any of the agreements or
conditions contained herein. However, no termination, cancellation,
modification, amendment deletion, addition or other change in this Agreement, or
any provision hereof, or waiver of any right or remedy herein provided, shall be
effective for any purpose unless specifically set forth in a writing signed by
the party or parties to be bound thereby. The waiver of any right or remedy in
respect to
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any occurrence or event on one occasion shall not be deemed a waiver of such
right or remedy in respect to such occurrence or event on any other occasion.
9.15. Severability. Any provision hereof prohibited by or unlawful or
unenforceable under any applicable law or any jurisdiction shall as to such
jurisdiction be ineffective, without affecting any other provision of this
Agreement, or shall be deemed to be severed or modified to conform with such
law, and the remaining provisions of this Agreement shall remain in force,
provided that the purpose of this Agreement can be effected. To the full extent,
however, that the provisions of such applicable law may be waived, they are
hereby waived, to the end that this Agreement be deemed to be a valid and
binding agreement enforceable in accordance with its terms.
9.16. Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns, but
shall not be assigned by any party without the prior written consent of the
other party.
9.17. Consolidation of Agreements. All understandings and agreements
heretofore made between the parties hereto are merged in this Agreement which
includes the Schedules hereto and the other documents, agreements and
instruments executed and delivered pursuant to or in connection with this
Agreement. This Agreement shall be the sole expression of the agreement of the
parties respecting the Acquisition.
9.18. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which shall
be deemed to constitute one and the same instrument.
9.19. Gender. Any pronoun used herein shall refer to any gender, either
masculine, feminine or neuter, as the context requires.
9.20. Remedies Cumulative. The remedies provided in this Agreement shall
be cumulative and shall not preclude assertion by any party hereto of any other
rights or the seeking of any other remedies against the other party hereto.
9.21. Facsimile Signatures. The parties agree that all facsimile
signatures shall be deemed original signatures in connection with this Agreement
and all Schedules and related documents.
9.22. Discharge of Liabilities, Bulk Sales Laws. The Seller shall pay or
cause to be paid at or prior to Closing all liabilities and obligations of the
Seller with respect to the Business which are not Assumed Liabilities. To the
extent that any such liabilities or obligations cannot be so paid because they
are not then capable of calculation, at Closing the Seller shall provide for
payment in a manner satisfactory to the Buyer. The Seller shall comply at or
prior to Closing with any applicable bulk sales or similar statute and shall pay
all transfers and/or sales taxes in connection with the transaction.
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9.23 Employment Agreements. The Shareholders of Seller who own all of the
outstanding stock of Seller will enter into employment contracts, with
non-competes, in the form of Schedule 9.23, with an annual salary of One Hundred
Ten Thousand ($110,000) each.
Each Owner will be entitled to a bonus as follows:
o Zero percent (0%) for less than Seven Hundred Fifty Thousand
($750,000) Dollars after tax net profit for the offices
supervised by them.
o Five percent (5%) of after tax net profit if after tax net
profit is Seven Hundred Fifty Thousand ($750,000) Dollars or
more but under One Million ($1,000,000) Dollars.
o Seven percent (7%) of after tax net profit if after tax net
profit is One Million ($1,000,000) Dollars or more.
The Owners will manage the current offices and any expanded
operations generated by them with the consent of Buyer.
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IN WITNESS WHEREOF, the parties hereto set forth below their signatures
and seals:
APPROVED RESIDENTIAL MORTGAGE, INC.
By: /s/ Allen D. Wykle, President (SEAL)
---------------------------------
FUNDING CENTER OF GEORGIA, INC.
By: /s/ David J. Talesnick (SEAL)
---------------------------------
David Talesnick, President
/s/ Preston Tunis (SEAL)
------------------------------------
Preston Tunis, Shareholder
/s/ David J. Talesnick (SEAL)
------------------------------------
David Talesnick, Shareholder
37
Appendix M
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is entered into as of
April 22, 1996, by and between American Industrial Loan Association (the
"Company"), and Gregory J. Witherspoon ("Witherspoon").
PRELIMINARY STATEMENTS
The Company has agreed to sell and Witherspoon has agreed to purchase
22,000 shares of the Common Stock, par value $.01 per share, of the Company (the
"Common Stock"), pursuant to the terms of a Stock Purchase Agreement (the "AILA
Purchase Agreement") dated as of even date herewith between the Company and
Witherspoon.
Certain shareholders of the Company have agreed to sell and Witherspoon has
agreed to purchase 4,000 shares of the Common Stock pursuant to the terms of a
Stock Purchase Agreement (the "Shareholder Purchase Agreement") dated as of even
date herewith between Allen D. Wykle, Leon Perlin and Lizstan, Ltd. and
Witherspoon.
Pursuant to the terms and conditions of this Agreement, the Company has
agreed to provide certain registration rights to Witherspoon regarding his stock
in the Company.
AGREEMENT
In consideration of the foregoing, the mutual covenants and conditions set
forth in this Agreement and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties, intending to
become legally bound, hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
<PAGE>
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
or any successor federal statute, and the rules and regulations of the
Commission thereunder, all as in effect from time to time.
"Holder" or "Holders" shall mean (a) Witherspoon, to the extent that he
holds Registrable Securities, and (b) any person holding Registrable Securities
as a transferee of Witherspoon (directly or indirectly, including subsequent
transfers).
The terms "register," "registered" and "registration" shall refer to a
registration effected by preparing and filing with the Commission a registration
statement covering Registrable Securities in compliance with the Securities Act
that is declared or ordered effective by the Commission.
"Registrable Securities" shall mean the Shares; provided, however, that
such securities shall cease to be Registrable Securities when (a) a registration
statement with respect to such securities shall have been declared effective
under the Securities Act and such securities shall have been disposed of
pursuant to the registration statement, (b) such securities are distributed to
the public pursuant to Rule 144(k) (or any successor provisions) promulgated
under the Securities Act or (c) such securities shall have ceased to be
outstanding.
"Registration Expenses" shall mean all expenses incurred in order to comply
with Article II hereof, including, without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel for the
Company, reasonable fees and disbursements of one (1) counsel for the Holders,
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
excluding Selling Expenses.
"Restricted Securities" shall mean Registrable Securities that are
"restricted securities" as defined in Rule 144 under the Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations of the Commission
thereunder, all as in effect from time to time.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions incurred in connection with the sale of securities pursuant to a
registration effected hereunder.
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<PAGE>
"Shares" shall mean the 22,000 shares of Common Stock initially purchased
by Witherspoon under the AILA Purchase Agreement and the 4,000 shares of Common
Stock initially purchased by Witherspoon under the Shareholder Purchase
Agreement. This Agreement shall continue to apply to such Shares notwithstanding
any recapitalization, exchange or other change in form of the Shares (whether as
a result of a merger or recapitalization of the Company or otherwise).
ARTICLE II
REGISTRATION RIGHTS
Section 2.1 Company Registration.
(a) If, within three (3) years from the date of this Agreement, the
Company shall determine to register any of its Common Stock (or other
security into which the Common Stock has in any way been recapitalized or
for which the Common Stock has been exchanged), for its own account or for
the account of others (other than (i) a registration relating solely to
employee benefit plans, (ii) a registration relating solely to a
transaction pursuant to Rule 145 under the Securities Act or (iii) a
registration statement on Form S-4 (or any successor form)), the Company
will:
(i) promptly give to each Holder written notice thereof (which
shall include a list of the jurisdictions in which the Company intends
to attempt to qualify such securities under the applicable Blue Sky or
other state securities laws); and
(ii) include in such registration (and any related qualification
under Blue Sky or other state securities laws or other compliance),
and in any underwriting involved therein, all of the Registrable
Securities specified in written requests by any Holders, provided such
written requests are received by the Company within 20 days following
receipt by such Holders of notice of the proposed registration from
the Company.
(b) If, at any time after giving written notice of its intentions to
register any of its securities and prior to the effective date of the
registration statement filed in connection with such registration, the
Company shall determine for any reason not to register such securities, the
Company may, at its election, give written notice of such determination to
the Holders and thereupon shall be relieved of its
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<PAGE>
obligation to register any Registrable Securities in connection with such
registration (but not from its obligation to pay the Registration Expenses
in connection therewith as provided in Section 2.2).
(c) If the Company intends to distribute the securities subject to the
registration referenced above by means of an underwriting, the Company
shall so advise the Holders as a part of such written notice. In such
event, the rights of the Holders to registration pursuant to this Section
2.1 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. All Holders proposing to
distribute their securities through such underwriting shall (together with
the Company and any other holders distributing their securities through
such underwriting) enter into an underwriting agreement in customary form
with the underwriter selected for such underwriting by the Company.
Notwithstanding any other provision of this Section 2.1, if the Company
and the underwriter determine that marketing factors (taking into account
the proposed price range or price per share) require limitation of the
number of shares to be underwritten, the underwriter may exclude from such
underwriting all or some of the shares proposed for registration on the
following basis:
(i) shares held by any person who does not have contractual
rights to cause the Company to register such shares and who is not
included in clause (ii) below shall first be excluded;
(ii) shares held by an officer or director or the Holders will
next be excluded, such reductions to be allocated as nearly as
practicable among each in the proportion that the number of shares of
Common Stock held by each such individual for which registration is
sought bears to the total number of shares of Common Stock held by all
such individuals for which registration is sought; and
(iii) if further reductions are required, such reductions shall
be allocated to the Company.
Except as provided in the last sentence of this paragraph, no shares excluded
from the underwriting by reason of the underwriter's marketing limitation shall
be included in such registration. If any Holders disapprove of the terms of any
such underwriting, such persons may elect to withdraw therefrom by written
notice to the Company and the underwriter. The Registrable Securities and/or
other securities so withdrawn from such
4
<PAGE>
underwriting shall also be withdrawn from such registration; provided, however,
that if, by the withdrawal of such shares, a greater number of shares may be
included in such registration (up to a maximum of any marketing limitation
imposed by the underwriter), then the Company shall offer to all Holders and
other holders who have included shares in the registration the right to include
additional shares in the same proportion used above in determining the
underwriter's marketing limitation.
Section 2.2 Expenses of Registration. All Registration Expenses incurred in
connection with any registration, qualification, or compliance pursuant to
Section 2.1 shall be borne by the Company; and all Selling Expenses in
connection with such registration, qualification or compliance shall be borne by
the holders of the securities so registered pro rata on the basis of the number
of shares so registered.
Section 2.3 Registration Procedures. In the case of each registration,
qualification, or compliance effected by the Company pursuant to this Article
II, the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense, the Company will:
(a) Keep such registration, qualification or compliance effective for
a period of 180 days or until the Holders have completed the distribution
described in the registration statement relating thereto, whichever first
occurs;
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply
with the provisions of the Securities Act with respect to the disposition
of all securities covered by such registration statement;
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirement of
the Securities Act, and such other documents as they may reasonably request
(including a conformed copy of the Registration Statement filed with the
Commission and any amendments thereto and an original executed underwriting
agreement entered into in connection with such registration) in order to
facilitate the disposition of Registrable Securities owned by them;
(d) Use reasonable efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue
Sky laws of one
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<PAGE>
(1) jurisdiction (in addition to those jurisdictions in which the Company
has otherwise agreed to so register and qualify such securities) as shall
be reasonably requested by the Holders, provided that the Company shall not
be required in connection therewith or as a condition thereto to qualify to
do business or to file a general consent to service of process in any such
states or jurisdictions;
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement with the managing
underwriter(s) of such offering. Each Holder participating in such
underwriting shall also enter into and perform its obligations under such
underwriting agreement;
(f) Notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing; and
(g) Furnish, at the request of any Holder requesting registration of
Registrable Securities pursuant to this Article II, on the date that such
Registrable Securities are delivered to the underwriters for sale in
connection with registration pursuant to this Article II, if such
securities are being sold through underwriters, or on the date that the
registration statement with respect to such securities becomes effective,
if such securities are not being sold through underwriters, (i) a copy of
any opinion, dated such date, of the counsel representing the Company for
the purposes of such registration, addressed to the underwriters of the
Company, and (ii) a copy of any letter, dated such date, from the
independent accountants of the Company, addressed to the underwriters of
the Company.
Each Holder of Registrable Securities agrees that upon receipt of any
notice from the Company of the happening of any event of the kind described in
clause (f) of this Section 2.3, such Holder will forthwith discontinue
disposition of Registrable Securities pursuant to the registration statement
covering such Registrable Securities until such Holder's receipt of the copies
of a supplemented or amended prospectus and, if so directed by the Company, such
Holder will deliver to the Company (at the Company's expense), all copies, other
than permanent file copies then in such Holder's possession, of the prospectus
covering such Registrable Securities that was in effect prior to such
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amendment or supplement. In the event the Company shall give any such notice,
the period set forth in clause (a) of this Section 2.3 shall be extended by the
number of days during the period from and including the date of the giving of
such notice pursuant to clause (f) of this Section 2.3 to and including the date
when each seller of Registrable Securities covered by such registration
statement shall have received the copies of a supplemented or amended
prospectus.
Section 2.4 Indemnification.
(a) The Company will indemnify each Holder, each Holder's officers,
directors and partners, and each person controlling such Holder
(collectively, "Holder's Parties"), participating in any registration,
qualification, or compliance effected pursuant to this Article II with
respect to Registrable Securities held by such Holder and each
underwriter, if any, and each person who controls any underwriter, against
all claims, losses, damages, and liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, to which they may become subject under
the Securities Act, the Exchange Act, or other federal or state law,
arising out of or based on (i) any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus, offering
circular or other similar document (including any related registration
statement, notification, or the like) 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 (ii) any violation by the
Company of any federal, state, or common law rule or regulation applicable
to the Company in connection with any such registration, qualification, or
compliance, and will reimburse each such Holder's Parties each such
underwriter, and each person who controls any such underwriter, for any
legal and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability, or
action, as incurred, 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, made
in reliance on and in conformity with written information furnished to the
Company by such Holder's Parties or underwriter or person controlling such
underwriter specifically for use in the preparation thereof.
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration,
qualification, or compliance is being effected, severally and not jointly,
indemnify the Company,
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each of its directors and officers, each underwriter, if any, of the
Company securities covered by such a registration statement, and each
person who controls the Company or such underwriter within the meaning of
the Securities Act, against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on (i) any untrue
statement (or alleged untrue statement) of a material fact contained in any
such registration statement, prospectus, offering circular, or other
similar document, or 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, and will reimburse the Company, such
directors, officers, 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, as incurred, in each case to the 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 the written information furnished to the Company by such Holder
specifically for use in the preparation thereof, or (ii) any violation by
any such Holder of any federal, state, or common law rule or regulation
applicable to such Holder in connection with the distribution of securities
pursuant to a registration statement, and will reimburse the Company, such
Holders, such directors, officers, persons, underwriters, or control
persons for any legal any other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability, or
action, as incurred; provided, however, that the obligations of each such
Holder hereunder shall be limited to an amount equal to the aggregate
proceeds received by such Holder in such offering.
(c) Each party entitled to indemnification under this Section 2.4 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has received written notice 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
litigation, shall be approved by the Indemnified Party (whose approval
shall not unreasonably be withheld). The Indemnified Party may participate
in such defense at such party's expense; provided, however, that the
Indemnifying Party shall bear the expense of such defense of one counsel
representing the Indemnified Party if representation of both parties by the
same counsel would be inappropriate due to actual or potential conflicts of
interest. The failure of any Indemnified Party to give notice as
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provided herein shall not relieve the Indemnifying Party of its obligations
under this Section 2.4, except to the extent such failure to give notice
shall materially and adversely prejudice the Indemnifying Party in the
defense of any such claim or any such litigation. 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 that 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.
(d) (i) If the indemnification provided for in this Section 2.4 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 hereunder shall contribute to the
amount paid or payable by such Indemnified Party as a result 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
the Indemnified Party on the other hand 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. 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 to state a
material fact relates to information supplied by the Indemnifying Party or
by the Indemnified Party and the parties' relevant intent, knowledge,
access to information and opportunities to correct or prevent such
statement or omission.
(ii) The parties agree that it would not be just and equitable if
contribution pursuant to this Section 2.4 were determined by pro rata
allocation or by any other method of allocation that does not take
account of the equitable considerations referred to above. The amount
paid or payable by an Indemnified Party as a result of the claims,
losses, damages, and liabilities referred to above shall be deemed to
include, subject to the limitations set forth above, any legal or
other expenses reasonably incurred by such Indemnified Party in
connection with investigating or defending any such action or claim.
(iii) No Holder that is a seller of Registrable Stock covered by
such registration statement or person controlling such seller other
than the
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Company shall be obligated to make contribution hereunder that in the
aggregate exceeds the total public offering price of the Registrable
Stock sold by such Holder, less the aggregate amount of any damages
that such Holder and its controlling persons have otherwise been
required to pay pursuant to this Section 2.4. The obligations of such
Holders to contribute are several in proportion to their respective
ownership of the securities covered by such registration statement and
not joint.
(iv) The indemnity and contribution provided herein shall be in
addition to, and not in lieu of, any other liability that one party
may have to another.
Section 2.5 Information by Holder. Each Holder of Registrable 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 request in writing and as shall be required in connection with any
registration, qualification or compliance referred to in this Article II.
Section 2.6 Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission that may at any time
permit the sale of the Restricted Securities to the public without registration,
the Company agrees to:
(a) Use its best efforts to facilitate the sale of the Restricted
Securities to the public without registration under the Securities Act,
pursuant to Rule 144 under the Securities Act.
(b) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times
after the effective date of the first registration statement filed by the
Company for an offering of its securities to the general public.
(c) 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 (at any time after it has become subject to such reporting
requirements);
(d) So long as a Holder owns any Restricted Securities to furnish to
the Holder forthwith upon request a written statement by the Company as to
its compliance with the public information requirements of said Rule 144,
and the reporting requirements of the Securities Act and the Exchange Act,
a copy of the
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most recent annual or quarterly report of the Company, and such other
reports and documents so filed by the Company as a Holder may reasonably
request in availing itself of any rule or regulation of the Commission
allowing a Holder to sell any such securities without registration.
Section 2.7 Transfer of Registration Rights. The rights granted under this
Article II may be assigned or otherwise conveyed by any Holder of Registrable
Securities to any transferee, subject to compliance with all applicable
securities laws and regulations.
Section 2.8 Certain Limitations in Connection with Future Grants of
Registration Rights.
From and after the date of this Agreement, the Company shall not enter into
any agreement with any holder or prospective holder of any securities of the
Company providing for the granting to such holder of registration rights unless
such agreement contains provisions consistent with those contained in Section
2.1(c) with respect to the allocation of Registrable Securities to be included
in an underwritten public offering if marketing factors require a limitation on
the number of such securities to be included; provided that, from and after the
date of this Agreement, without the prior written consent of the Holders of a
majority of the Registrable Securities, the Company shall not enter into any
agreement with any person or persons providing for the granting to such holder
of registration rights which would be superior to those granted to Holders
pursuant to Section 2.1.
Section 2.9 Restrictions on Market Manipulation. In the event any shares of
Common Stock are offered or sold by any Holder in a registration, each such
Holder will:
(a) advise the Company in writing of any offer, sale or other
disposition by it of any Common Stock in any manner other than as set forth
in the registration statement or any prospectus included therein on or for
the 30 day period prior to the filing of such registration statement until
the distribution under the registration statement has been completed;
(b) not effect any stabilization activity in connection with the
Company's Common Stock;
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(c) not bid or purchase, for any account in which it has a beneficial
interest, any Common Stock except as may be permitted pursuant to Rule
l0b-6 under the Exchange Act (if applicable);
(d) not until it has sold all of such shares of Common Stock, attempt
to induce any person to purchase any Common Stock except as may be
permitted pursuant to Rule 10b-6; and
(e) not until it has sold all such shares of Common Stock, pay any
compensation for soliciting another to purchase any securities of the
Company, except as may be permitted pursuant to Rule 10b-6.
ARTICLE III
MISCELLANEOUS
Section 3.1 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF VIRGINIA WITHOUT TAKING
INTO ACCOUNT THE PRINCIPLES THEREOF GOVERNING CONFLICTS OF LAWS.
Section 3.2 Successors and Assignees. Except as otherwise provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assignees, heirs, executors, and administrators (as the case may be)
of the parties hereto.
Section 3.3 Entire Agreement. This Agreement constitutes the full and
entire understanding and agreement between the parties with regard to the
subject matter hereof.
Section 3.4 Notices, etc, All notices and other communications required or
permitted hereunder shall be in writing and shall be effective four days after
mailed by first-class mail, postage prepaid, or otherwise delivered by hand or
by messenger, addressed (a) if to Witherspoon, at 3731 Wilshire Boulevard, 10th
Floor, Los Angeles, California 90010, or (b) if to any other Holder of
Registrable Securities, at such address as such Holder shall have furnished the
Company in writing, or, until any such Holder so furnishes an address to the
Company, then to and at the address of the last Holder of such Registrable
Securities who has so furnished an address to the Company, or (c) if to the
Company, at P.O. Box 2179, Virginia Beach, Virginia 23450, Attention: Allen D.
Wykle.
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Section 3.5 Delays or Omissions. No delay or omission to exercise any
right, power or remedy accruing to any Holder of any Registrable Securities,
upon any breach or default of the Company under this Agreement, shall impair any
such right, power or remedy of such Holder nor shall it be construed to be a
waiver of any such breach or default or an acquiescence therein or of or in any
similar breach or default thereunder occurring nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
theretofore or thereafter occurring. Any waiver, permit, consent or approval of
any kind or character on the part of any Holder of any breach or default under
this Agreement or any waiver on the part of any holder of any provisions or
conditions of this Agreement must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to any holder shall be cumulative
and not alternative.
Section 3.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which may be executed by less than all of the parties
hereto, each of which shall be enforceable against the parties actually
executing such counterparts and all of which together shall constitute one
instrument.
Section 3.7 Severability. In the event any provision of this Agreement
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
Section 3.8 Amendments. The provisions of this Agreement may be amended at
any time and from time to time, and particular provisions of this Agreement may
be waived, with and only with, an agreement or consent in writing signed by the
Company and by the Holders of a majority of the Registrable Securities voting as
a single class.
[SIGNATURES FOLLOW]
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The parties have executed this Registration Rights Agreement as of the date
first written above.
AMERICAN INDUSTRIAL LOAN ASSOCIATION
By: /s/ Allen D. Wykle
--------------------------------
Name: Allen D. Wykle
Title: President
/s/ Gregory J. Witherspoon
------------------------------------
Gregory J. Witherspoon
Signature Page
Appendix N
PRE-IPO AGREEMENT
THIS AGREEMENT, made as of March 30, 1996 by and between INDUSTRY MORTGAGE
COMPANY, L.P., a Delaware Limited Partnership (the "Partnership") and each of
the persons identified on the signature page hereof as Limited Partners (the
"Limited Partners");
WITNESSETH:
The following facts constitute the background for this Agreement:
A. The Partnership is in need of raising additional working capital for its
general business needs and has determined that it will have access to capital on
the most efficient basis if it conducts an initial public offering ("IPO") of
equity interest in the Partnership or its successor organization which is
registered under the Securities Act of 1933 (the "Act").
B. Prior to effecting an IPO, the Partnership will engage in a conversion
(the "Roll-Up") as a result of which all persons owning an equity interest in
the Partnership will exchange their partnership interests for shares of common
stock ("Shares") of IMC Mortgage Company, a Florida corporation (the "Holding
Company").
C. Each of the Limited Partners (or an affiliate of such Limited Partner,
called "Related Commitment Party") has an obligation under Section 10.5(a) of
the Third Amended and Restated Agreement of Limited Partnership of the
Partnership dated November 1, 1995, as amended (the "Partnership Agreement") to
sell to the Partnership a minimum dollar amount of Partnership has determined
that the ability to achieve a fair value for the sale of the Shares will be
materially enhanced if the Limited Partners or Related Commitment Parties double
their Mortgage Loan sale Commitments to the Partnership, and the Partnership
wishes to provide their Mortgage Loan Sale Commitments to the Partnership, and
the Partnership wishes to provide an incentive for such parties to do so by
creating an option pool in which those Limited partners which (or the Related
Commitment Parties which) double their Mortgage Loan Sale Commitment will be
eligible to participate.
D. The Partnership wishes to provide a mechanism for those partners (and
ContiTrade Service Corporation, "Conti") who wish to sell a portion of the
Shares which they receive in the Roll-up in the IPO and a mechanism for those
partners wishing to increase the number of Shares held by them to do so. The
Partnership also wishes to obtain a "lock-up" agreement limiting the sales of
Shares by the Limited Partners after the IPO.
NOW, THEREFORE, in consideration of the mutual benefits to be derived
herefrom, the parties hereto agree that the background facts set forth above are
true and correct and do further agree as follows:
<PAGE>
1. Roll-Up. Prior to the IPO, each of the Limited Partners hereby agrees to
contribute all of such Limited Partners interests in the Partnership to the
Holding company in a transaction which is intended to qualify as a tax-free
exchange pursuant to Section 351 of the Internal Revenue Code of 1986, as
amended, in exchange for which each Limited Partner shall receive a number of
Shares of the Holding Company which is equivalent to the interest of such
Limited Partner in the Partnership prior to the Roll-Up. An approximation of the
Shares of the Holding Company to be issued in the Roll-Up is shown on Exhibit A
hereto. Each Limited partner acknowledges that the Shares may not be transferred
except (a) pursuant to an effective registration statement under the Act and any
applicable state securities laws, or (b) upon receipt by the Holding Company of
an opinion of counsel, which counsel and opinion of counsel shall be reasonable
satisfactory to the Holding Company, to the effect that such transfers are
exempt from registration under the Act and such state securities laws.
2. Commitment. Each Limited Partner or Related commitment Party, as the
case may be, does hereby agree that effective upon the IPO and continuing for a
period of five years thereafter, (I) such person's Mortgage Loan Sale Commitment
shall run in favor of the Holding Company and, (ii) unless otherwise expressly
indicated to the contrary on the applicable signature page attached hereto,
shall be double the monthly amount of such person's Mortgage Loan Sale
Commitment as of this date. Each Limited Partner, or Related commitment Party,
as the case may be, acknowledges that that person's Mortgage Loan Sale
Commitment is of material value to the Holding Company and the failure to meet
that commitment will give rise to damages in favor of the Holding Company. At
the expiration of the five-year period applicable to such person's Mortgage Loan
Sale Commitment, the Mortgage Loan Sale Commitment shall terminate and be of no
further force and effect unless extended by the express agreement of such
perosn. The Related Commitment Parties, by signing this Agreement, agree to be
bound by all provisions hereof relating to them.
3. Incentive Options.
(a) Eligible Shareholders. Each Limited Partner, or Related Commitment
Party, as the case may be, which agrees to double that person's Mortgage Loan
Sale Commitment, and only those Limited Partners, or Related Commitment Parties,
as the case may be, so agreeing, will be eligible to participate in the Holding
Company's "Incentive Option Pool" (as hereafter defined) (the "Eligible
Shareholders").
(b) Incentive Options Pool. The "Incentive Option Pool" shall consist
of options to acquires 200,000 Share at the price paid for Shares by the public
in the IPO (the "Share Price"). Each calendar quarter beginning with calendar
quarter ending September 30, 1996, and continuing for each consecutive calendar
quarter thereafter in which the Mortgage Loan Sale Commitments are in effect,
the Holding Company will make available to Eligible
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Shareholders, options to acquire 10,000 Shares (the "Incentive Options") at the
Share Price. The Incentive Options shall be granted to such eligible
Shareholders which exceed their Mortgage Loan Sale Commitments for each month
during the quarter then ending ("Qualifying Eligible Shareholder") in proportion
to the dollar amount by which each such Qualifying Eligible Shareholder has
exceeded its Mortgage Loan Sale Commitment. The number of Incentive Options
granted to each Qualifying Eligible Shareholder each calendar quarter shall be
determined by multiplying 10,000 Incentive Options by a formula, the numerator
of which is the dollar amount of loans sold by such Qualifying Eligible
Shareholder to the Holding Company in excess of such Qualifying Eligible
Shareholder's Mortgage Loan Sale Commitment for that calendar quarter, and the
denominator of which is the aggregate of the amounts sold by all Qualifying
Eligible Shareholders in that calendar quarter to the Holding company in excess
of their respective Mortgage Loan Sale Commitments. By way of example, if only
one Qualifying Eligible Shareholder exceeded that Qualifying Eligible
Shareholder's Mortgage Loan Sale Commitment to the Partnership, that Qualifying
Eligible Shareholder would receive all 10,000 Incentive Options for the quarter
in question. By way of further example, if ten Qualifying Eligible Shareholder
(whether their Mortgage Loan Sale Commitments were $1 million per month or $2
million per month), each exceeded their respective Mortgage Loan Sale Commitment
by an equal amount, then each would receive 1,000 Incentive Options for the
calendar quarter in question. Each party herein agrees to the establishment of
the Incentive Option Pool on the terms set forth in this Agreement.
(c) Exercise of Incentive Options. Upon, and subject to the conditions
set forth herein, each Incentive Option may be exercised in whole or in part by
the holder thereof ("Option Holder") at any time for from time to time on or
after the date of the grant of such Incentive Option until five years after such
grant by written request for the issuance of Shares pursuant to that Incentive
Option executed by the Option Holder and delivered to the Holding Company
together with payment of an amount equal to the Share Price multiplied by the
number of Shares as to which Incentive Options are then being exercised by such
Option Holder. Any transfer of an Incentive Option and any transfer of any Share
obtained by an Option Holder in exercise of that Option Holder's Incentive
Option is subject to the requirement that such Incentive Options, or Shares, as
the case may be, be registered under the Act and applicable state securities
laws or that the Holding Company has received an opinion of counsel, which
counsel and option must be satisfactory to Holding Company, that such transfer
is exempt from registration under such laws. All certificates evidencing Shares
obtained in exercise of an Incentive Option shall bear an appropriate legend
reflecting such restrictions on its transfer.
4. Restriction on Sale of Shares.
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(a) Lock-Up. Each Limited Partner agrees that all shares received by
such Limited Partner in the roll-Up and all shares received by such Limited
Partner in exercise of an Incentive Option shall be restricted so that each
Limited Partner agrees that except with the Holding Company's prior written
consent, such Limited Partner will not offer for sale, sell, or grant any
options, rights or warrants with respect to any shares held by such Limited
Partner or of any other capital stock, securities or instruments convertible
into or exchangeable for shares, such other capital stock or other securities,
instruments, options or rights convertible into or exchangeable for or otherwise
exercisable for Shares (collectively called, "Restricted Transfers") for a
period of five years following the IPO except as follows:
(i) such Shares as are sold in the IPO with the permission of the
Holding company which, as to all Limited Partners and ContiTrade
Services Corporation ("Conti") (which holds an option to acquire
Shares), in the aggregate will not exceed $10 million worth of
such Shares or such other amount as is acceptable to the
underwriters in such IPO;
(ii) such Shares as are permitted by the Holding Company to be sold in
a secondary offering; and
(iii)each Limited Partner and Conti may sell such Shares as are
permitted to be sold under SEC Rule 144 without registration
after the expiration of two (2) years following the Roll-Up,
provided, however, that the right to engage in Restricted
Transfers pursuant to this subclause (iii) shall be suspended
following any secondary offering during such lock-up period as is
required by the underwriters in connection with any such
secondary offering.
Notwithstanding the foregoing, Restricted Transfers shall not include charitable
contributions or transfers to family members or trusts without consideration for
estate planning purposes of such common stock and other capital stock,
securities and instruments during the restricted period.
(b) Priority. all parties hereto agree that the needs of the Holding
Company to raise funds in the IPO are paramount to the needs of any Limited
Partner to sell shares in the IPO. Accordingly, to the extent the managing
underwriter for the IPO advises the Holding Company in writing that, in its
opinion, the number of Shares requested to be included in such registration by
the holders hereof exceeds the number of such Shares which can be sold in an
orderly manner in such offering within a price range acceptable to the Holding
company (the "Sale Number"), the Holding Company will include (i) first all
securities of the Holding
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Company that the Holding company proposes to register for its own account; and
(ii) second, to the extent the number of securities of the Holding company to be
included by the Holding company is less than the Sale Number, a number of
additional Shares equal to such difference with such difference being allocated
among all Limited Partners and others wishing to sell Shares through such
registration pro rata.
(c) First Refusal. If any Limited Partner receives a bona fide offer
from a proposed purchaser of such Limited Partner's Shares ("Proposed
Purchaser") in connection with the proposed sale of such Limited Partner's
Shares in a private placement, then such Limited Partner will give the company
written notice (the "First Refusal Notice") of the identity of the Proposed
Purchaser and the terms of the proposed purchase providing a copy of the offer
in writing. The Company shall have ten (10) business days from the receipt of
the First Refusal Notice (the "Response Period") to advise such Limited partner
if the Company (or its designee) wishes to acquire such Shares on the same terms
as set forth in the First Refusal Notice. If the Company (or is designee),
elects to acquire the Shares, then such Limited Partner shall sell to the
Company (or is designee), and the Company (or its designee) shall purchase from
such Limited Partner within thirty (30) days of responding to such Limited
Partner such Shares on such terms. If the Company (or its designee) does not
elect to purchase such Shares as described above, then such Limited Partner may
sell such Shares to the person on the terms provided in the first Refusal Notice
at any time for ninety (90) days after the expiration of the Response Period. If
the transaction does not occur within such ninety-day period, then any sale
thereafter shall again be subject to the right of the first refusal provided for
herein.
5. Exchange of Shares: Sale on IPO.
(a) Exchange of Shares. The Partnership wishes to arrange a mechanism
for those Limited Partners wishing to increase or decrease their holdings in
shares to be able to do so up to ten percent (10%) of each Limited Partner's (or
Conti's) interest. Accordingly, prior to the IPO, the Holding Company will
contact each Limited Partner to obtain from each a statement as to whether that
person wishes to (i) buy more interests in the Holding Company, (ii) sell 10% of
its interests, or (iii) do neither. Any purchase or sale would be at a price per
share equal to the net amount to be received by the Holding Company in the IPO
(approximately 93% of the price at which such Shares are sold to the public). To
the extent possible, the Holding company will seek to cross-match Limited
Partners wishing to acquire more shares with those Limited Partners seeking to
sell Shares.
(b) Net Shares Sought. In the event there are more Shares sought to be
acquired by Limited Partners than sought to be sold by Limited Partners and
Conti, then those partners seeking to acquire more Shares will receive a pro
rata portion (calculated based upon the dollar amount each such partner sought
to acquire) of all Shares being sold by Limited Partners.
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(c) Net Shares to be Sold. In the event there are more Shares sought
to be sold by Limited Partners and Conti than other Limited Partners wish to
purchase, then the net amount of such excess ("Excess Shares") shall be offered
for sale in the IPO, provided, however, that the maximum aggregate dollar amount
of such Excess Shares to be registered and sold in the IPO shall not exceed $10
million or such other amount as shall be specified by the underwriters in such
IPO (the "Secondary Share IPO Sale Amount"). In the event the total Excess
Shares exceed the amount which can be sold in the IPO described above, then each
Limited Partner (and Conti) shall be permitted to sell in the IPO its pro rata
portion of the Shares sold in the IPO calculated by multiplying the dollar
amount each Limited Partner (and Conti) wishing to sell Shares in the IPO has
offered for sale by a formula, the numerator of which is the dollar amount of
the Shares being offered by all Limited Partners (and Conti) who have expressed
a desire to sell Shares in the IPO. If each Limited Partner wishing to sell ten
percent (10%) of such person's Shares is able to do so through exchange with
other Limited Partners or sale in the IPO, or both, than any remaining Secondary
Share IPO Sale Amount may be made up by sales by Conti.
6. Power of Attorney. For the purposes of facilitating the Roll-Up and the
IPO, each Limited Partner is simultaneously herewith executing and delivering to
the Partnership the Power of Attorney attached hereto as Exhibit A ("Power of
Attorney") which Power of Attorney shall be coupled with an interest and
irrevocable during the term of this Agreement.
7. Agreement Term. This Agreement shall be effective on the date hereof and
shall terminate on the first to occur of (i) five years from March, 1996, or
(ii) the occurrence of December 31, 1996 without a closing of the sale of the
Shares pursuant to an IPO having previously occurred.
8. Miscellaneous.
(a) Captions. Section titles or captions contained in this Agreement
are inserted for convenience only. They shall not be deemed part of this
Agreement and in no way define, limit, extend or describe the scope or intent of
any provision hereof.
(b) Governing Law. This Agreement and the rights of the parties
hereunder shall be governed and interpreted in accordance with the laws
(excluding conflicts of law provisions) of the State of Florida.
(c) Binding Effect. Except as otherwise provided, this Agreement shall
be binding upon and inure to the benefit of the parties hereto, their legal
representatives, heirs, administrators, executors, successors and assigns.
(d) Indemnification. Wherever from the context it appears appropriate,
each term stated in either the singular or the plural shall include the singular
and the plural and all
6
<PAGE>
pronouns stated in either the masculine or neuter gender shall include the
masculine, the feminine and the neuter.
(e) Separability. If any provision of this Agreement, or the
application of such provision to any persons or circumstance shall be held
invalid, the remainder of this Agreement, or the application of such provision
to persons or circumstances other than those as to which it is held invalid,
shall not be affected thereby and shall continue to be binding and in force.
(f) Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument. In addition, this Agreement may contain
more than one counterpart of each signature page, and this Agreement may be
executed by the affixing of the signature of the parties hereto to one or more
of such counterpart signature pages and all of such counterpart signature pages
shall be read as though one, and they shall have the same force and effect as
though all of the signers had signed a single signature page.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written to be effective such date.
GENERAL PARTNER:
----------------
INDUSTRY MORTGAGE COMPANY,
L.P.
By:____________________________________
George Nicholas,
Chief Executive Officer
Limited Partners:
-----------------
_______________________________________
George Nicholas
_______________________________________
Kenneth J. Reilly
_______________________________________
Timothy W. Griffin
7
<PAGE>
_______________________________________
Thomas G. Middleton
_______________________________________
Norman D. Perry
_______________________________________
Susan W. McCarthy
BRANCHVIEW, INC.
By:____________________________________
Print Name:_________________________
Its_________________________________
JRJ ASSOCIATES
By:____________________________________
Print Name:_________________________
Its_________________________________
The foregoing Limited Partner
agrees to double its Mortgage
Loan Sale Commitment unless this
sentence is struck through and
initialed by such Limited
Partner
CITYSCAPE CORP.
By:____________________________________
Print Name:_________________________
Its_________________________________
The foregoing Limited Partner
agrees to double its Mortgage
Loan Sale Commitment unless this
sentence is struck through and
initialed by such Limited
Partner
8
<PAGE>
INVESTAID CORPORATION
By:____________________________________
Print Name:_________________________
Its_________________________________
The foregoing Limited Partner
agrees to double its Mortgage
Loan Sale Commitment unless this
sentence is struck through and
initialed by such Limited
Partner
MORTGAGE AMERICA
By:____________________________________
Print Name:_________________________
Its_________________________________
The foregoing Limited Partner
agrees to double its Mortgage
Loan Sale Commitment unless this
sentence is struck through and
initialed by such Limited
Partner
INVESTORS MORTGAGE, a
Washington Limited Partnership
By:____________________________________
Print Name:_________________________
Its_________________________________
The foregoing Limited Partner
agrees to double its Mortgage
Loan Sale Commitment unless this
sentence is struck through and
initialed by such Limited
Partner
AMERICAN INDUSTRIAL LOAN
ASSOCIATION
By:____________________________________
Print Name:_________________________
Its_________________________________
The foregoing Limited Partner
agrees to double its Mortgage
Loan Sale Commitment unless this
sentence is struck through and
initialed by such Limited
Partner
9
<PAGE>
EQUITYSAFE, a Rhode Island General
Partnership: By Its General Partner:
By:____________________________________
Print Name:_________________________
Its_________________________________
The foregoing Limited Partner
agrees to double its Mortgage
Loan Sale Commitment unless this
sentence is struck through and
initialed by such Limited
Partner
TMS MORTGAGE, INC.
By:____________________________________
Print Name:_________________________
Its_________________________________
The foregoing Limited Partner
agrees to double its Mortgage
Loan Sale Commitment unless this
sentence is struck through and
initialed by such Limited
Partner
EQUITY MORTGAGE, a Maryland
Limited Partnership
By:____________________________________
Print Name:_________________________
Its_________________________________
The foregoing Limited Partner
agrees to double its Mortgage
Loan Sale Commitment unless this
sentence is struck through and
initialed by such Limited
Partner
10
<PAGE>
PORTFOLIO PLACEMENT PARTNERS
By:____________________________________
Print Name:_________________________
Its_________________________________
The foregoing Limited Partner
agrees to double its Mortgage
Loan Sale Commitment unless this
sentence is struck through and
initialed by such Limited
Partner
_______________________________________
GERALD S. LILIENFIELD
and his Related Commitment Party:
FIRST GOVERNMENT MORTGAGE
AND INVESTORS CORPORATION
By:____________________________________
Print Name:_________________________
Its_________________________________
The foregoing Limited Partner
agrees to double its Mortgage
Loan Sale Commitment unless this
sentence is struck through and
initialed by such Limited
Partner
_______________________________________
JOEL E. FURST
_______________________________________
STAN L. FURST
and their Related Commitment party:
11
<PAGE>
NEW JERSEY MORTGAGE &
INVESTMENT CORP.
By:____________________________________
Print Name:_________________________
Its_________________________________
The foregoing Limited Partner
agrees to double its Mortgage
Loan Sale Commitment unless this
sentence is struck through and
initialed by such Limited
Partner
12
<PAGE>
EXHIBIT A
POWER OF ATTORNEY
-----------------
The Undersigned is a Limited Partner (the "Limited Partner') of Industry
Mortgage Company, L.P., a Delaware Limited Partnership (the "Partnership"). The
Partnership proposes to go public through (i) the transfer by its partners of
all their interests in the Partnership to Industry Mortgage Company, Inc.), a
Florida corporation (the "Company") (the "Reorganization"), and (ii) an initial
public offering by the Company (the "IPO") of shares of its common stock (the
"Common Stock"), all as described in that certain Pre-IPO Agreement (the
"Agreement") among the partners dated as of March _, 1996. In order to
facilitate the consummation of the transactions described in the Agreement, the
Limited Partner hereby appoints Industry Mortgage Corporation, a Delaware
corporation and the general partner of the Partnership (the "Attorney-in-Fact"),
as the Limited Partner's true and lawful attorney-in-fact, with full power of
substitution, to act in the name and on behalf of the Limited Partner:
(a) To execute any and all consents and exercise any and all voting rights
of the Limited Partner as a partner of the Partnership that may be
necessary or advisable in order to consummate the Reorganization and
the IPO,
(b) To execute such assignments and other instruments that may be
necessary or advisable in order to effect the transfer by the Limited
Partner in the Reorganization of all its right, title and interest as
a Limited Partner in the Partnership to the Company in exchange for
shares of Common Stock of the Company that immediately following
issuance constitute the same percentage interest in the Company as the
Limited Partner's total ownership interest in the Partnership
immediately prior to such transfer; and
(c) To execute such other documents and take such other actions as the
Attorney-in-Fact may determine, on the advice of counsel, are
necessary or advisable in order to consummate the Reorganization and
the IPO.
In the event that the Limited Partner intends to sell in the IPO a portion
of the shares of Common Stock that it receives from the Company in the
Reorganization, in the amount agreed to by the Limited Partner and the Company
(the "Sale Shares"), the Limited Partner (hereinafter referred to as a "Selling
Security Holder") hereby appoints the Attorney-iii-Fact as the Selling Security
Holder's true and lawful attorney-in-fact, with full power of substitution, to
act in the name and on behalf of the Selling Security Holder and to execute a
custody agreement in favor of such custodian as is acceptable to the
Attorney-in-Fact, to authorize such custodian to act in the name of and on
behalf of the Selling Security Holder:
(a) To negotiate, execute, deliver and cause the performance of such
agreements with the underwriters for the IPO, custodians,
attorneys-in-fact or others as are customarily entered into by persons
who are selling shareholders in a public
<PAGE>
offering, including without limitation an underwriting agreement (the"
Underwriting Agreement") providing for the sale of the Sale Shares
pursuant to the Form S-1 registration statement as part of the IPO at
the same price as the Company agrees in such Underwriting Agreement to
sell shares of newly issued Common Stock in the IPO;
(b) To receive on behalf of the Selling Security Holder the stock
certificates for the Common Stock issued to the Selling Security
Holder in the Reorganization, to hold such certificates pending the
closing of the IPO and to endorse certificates or execute and deliver
stock powers, assignments or other documents together with such
certificates in order to effect the sale of the Sale Shares to the
underwriters pursuant to the Underwriting Agreement;
(c) To receive payment for the Sale Shares, together with stock
certificates representing the shares of Common Stock which the Selling
Security Holder will retain following the IPO, for transmission to the
Selling Security Holder or to authorize a custodian to transmit the
same directly to the Selling Security Holder, in either case promptly
following the receipt thereof; and
(d) To execute such other documents and take such other actions as the
Attorney-in-Fact may determine, on the advice of counsel, are
necessary or advisable in order to consummate the sale of the Sale
Shares pursuant to the Underwriting Agreement.
The Selling Security Holder hereby represents and warrants, and authorizes
the Attorney-in-Fact to represent and warrant to the underwriters in the
Underwriting Agreement that:
(a) The Selling Security Holder has fall right, power and authority to
execute and deliver this Power of Attorney,
(b) The Selling Security Holder has good and valid title to its Limited
Partnership interest in the Partnership, free and clear of all liens,
claims and encumbrances, and upon delivery of and payment for the Sale
Shares pursuant to the Underwriting Agreement, the Underwriters will
receive good and valid title thereto free and clear of all liens,
claims and encumbrances.
The Attorney-in-Fact is hereby empowered to determine in its sole
discretion the times when, and the purposes for and the manner in which any
power granted herein shall be exercised and the terms and conditions of any
document which it may execute pursuant hereto. The Attorney-in-Fact may act upon
any writing believed by it to be genuine. This Power of Attorney shall be
construed in accordance with the internal laws of the State of New York,
This Power of Attorney is coupled with an interest, is irrevocable and
shall survive the death, incapacity or dissolution of the undersigned, provided,
however, that if the Reorganization
2
<PAGE>
and the IPO are not consummated by December 31, 1996, this Power of Attorney
shall terminate automatically.
IN WITNESS WHEREOF, this Power of Attorney has been executed this _ DAY of
March, 1996.
[PLEASE SIGN IN APPROPRIATE 'INDIVIDUAL" OR "CORPORATION' SIGNATURE BLOCK BELOW]
IF AN INDIVIDUAL:
-----------------
_______________________________________
Print Name:____________________________
as Limited Partner, and if applicable,
as Selling Security Holder
STATE OF________________
COUNTY OF_______________
The foregoing instrument was acknowledged before me this ________ day of
________________1996, by ______________________________ who did not take an oath
and who: (notary MUST check applicable box)
[ ] is/are personally known to me.
[ ] produced a current state driver's license as identification.
[ ] produced _______________________ as identification.
(NOTARY SEAL] MUST BE AFFIXED)
______________________________________________
Signature of Notary
______________________________________________
Name of Notary Typed, Printer or Stamped
______________________________________________
Commission Number (if not legible on seal)
______________________________________________
My Commission Expires (if not legible on seal)
3
<PAGE>
IF A CORPORATION:
-----------------
________________________________________
[corporate name]
By:_____________________________________
Its:____________________________________
ATTEST:
By:_____________________________________
Its:____________________________________
STATE OF________________
COUNTY OF_______________
The foregoing instrument was acknowledged before me this _________ day of
___________ 1996, by ______________________ the ____________________ of _______,
a ___________ corporation, on behalf of the corporation. Such person did not
take an oath and: (notary MUST check applicable box)
[ ] is/are personally known to me.
[ ] produced a current state driver's license as identification.
[ ] produced _____________________________ as identification.
(Notary Seal must be affixed)
______________________________________________
Signature of Notary
______________________________________________
Name of Notary Typed, Printer or Stamped
______________________________________________
Commission Number (if not legible on seal)
______________________________________________
My Commission Expires (if not legible on seal)
Appendix O
APPROVED FINANCIAL CORP.
EXHIBIT 21 - SUBSIDIARIES OF THE COMPANY
100% OWNED SUBSIDIARIES OF APPROVED FINANCIAL CORP.:
- ----------------------------------------------------
Approved Residential Mortgage, Inc.
3420 Holland Road
Suite 107
Virginia Beach, Virginia 23452
State of incorporation: Virginia.
Names used in business: Approved Residential Mortgage, Inc.
Approved Residential Mortgage, Inc.
DBA Armada Residential
Mortgage, Inc.
Approved Federal Savings Bank
2380 Court Plaza Drive
Suite 200
Virginia Beach, Virginia 23456
State of incorporation: Federal savings bank charter.
Names used in business: Approved Federal Savings Bank.
100% OWNED SUBSIDIARIES OF APPROVED FEDERAL SAVINGS BANK:
- ---------------------------------------------------------
Global Title Insurance Agency, Inc.
2380 Court Plaza Drive
Suite 200
Virginia Beach, Virginia 23456
State of incorporation: Virginia.
Names used in business: Global Title Insurance Agency, Inc.
First Security Mortgage Bankers, Inc.
2380 Court Plaza Drive
Suite 200
Virginia Beach, Virginia 23456
State of incorporation: Virginia.
Names used in business: First Security Mortgage Bankers, Inc.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,636
<INT-BEARING-DEPOSITS> 250
<FED-FUNDS-SOLD> 4,030
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,816
<INVESTMENTS-CARRYING> 44
<INVESTMENTS-MARKET> 44
<LOANS> 75,031
<ALLOWANCE> 1,444
<TOTAL-ASSETS> 108,414
<DEPOSITS> 9,984
<SHORT-TERM> 48,810
<LIABILITIES-OTHER> 14,020
<LONG-TERM> 10,306
0
1
<COMMON> 7,165
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 108,414
<INTEREST-LOAN> 7,697
<INTEREST-INVEST> 148
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,845
<INTEREST-DEPOSIT> 123
<INTEREST-EXPENSE> 4,286
<INTEREST-INCOME-NET> 3,559
<LOAN-LOSSES> 933
<SECURITIES-GAINS> 2,796
<EXPENSE-OTHER> 21,130
<INCOME-PRETAX> 11,263
<INCOME-PRE-EXTRAORDINARY> 6,650
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,650
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.28
<YIELD-ACTUAL> 6.50
<LOANS-NON> 4,145
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 945
<CHARGE-OFFS> 549
<RECOVERIES> 115
<ALLOWANCE-CLOSE> 1,444
<ALLOWANCE-DOMESTIC> 1,444
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
